Presentation to Select Committee on Finance: KZN’s Provincial Expenditure

1. Presentation to Select Committee on Finance: KZN’s Provincial Expenditure 19 June 2015

2. Overall Provincial Budget Performance by Department

3. Provincial Own Revenue - 2014/15 Preliminary Outcome

4. 2014/15 Preliminary Outcome • The bulk of KZN’s own revenue is derived from 4 main sources - Motor vehicle licences by Transport, Casino and Horse racing taxes and Interest, dividends and rent on land by Provincial Treasury, as well as Health patient fees by Health • The aggregated preliminary revenue collected amounted to R3.148bn compared to the Final Appropriation of R2.784bn, resulting in a substantial over-collection of R364.422m or 13.1% • The departments largely responsible for the over-collection are Economic Development, Tourism and Environmental Affairs, Transport, followed by Health, Human Settlements, Education, COGTA, Provincial Treasury, Public Works and Agriculture and Rural Development

5. Comparative Analysis

6. Revenue Issues KwaZulu-Natal • Transport • Migration of motor vehicles (esp. heavy trucks) to cheaper provinces • KZN’s tariffs are high hence the deliberate reduction in the inflation of MVL fees to reduce leakages to other provinces • Provincial Treasury • The slow down economic activity is directly related to gaming and betting activities • Health • Manual revenue collection system • Backlogs in submission of accounts to RAF • Economic Development, Tourism and Enviro. Affairs • Delays in the implementation of new tariffs due to delays in promulgating the KZN Liquor Licensing Act

7. Revenue - Recent Developments/Initiatives • Casino and Horse racing taxes,with effect from April 2014, fall under Provincial Treasury • Transport and Provincial Treasury are the two largest generators of own revenue for the province • Development of Revenue Enhancement Strategy for Health • Incl. a revenue retention incentive for over-collections on patient fees • Revenue forums and bi-lateral meetings with departments to share best practices • Health engaged a service provider to assist with submission of accounts to the RAF • All departments are now charging for Tender Document fees • Closer collaborative efforts between PT and departments • Closer monitoring of staff debt growth

8. Expenditure - 2014/15 Preliminary Outcome

9. 2014/15 Preliminary Outcome • As at the end of 14/15, the aggregated expenditure for the year amounts to R97.400bn, compared to the Final Appropriation of R97.453bn, resulting in under-spending of R52.758m or 0.1% • The Final Appropriation contains all additions to the budget which were formalised in the 14/15 Adjustments Estimate, as well as the R236m additional funding for the HSDG and other provincial allocations which were formalised in the Second Adjustments Estimate, and the post-Adjustments Estimate virements undertaken thus far • However, Education did not include the additional funding of R355m in their preliminary March IYM, which means that, if this is included, KZN is actually under-spent by R407.758m

11. Conditional Grants - 2014/15 Preliminary Outcome • Table 3 shows the Preliminary Actual expenditure incurred in 14/15 on national conditional grants by department and grant • It is noted that the Final Appropriation takes into account the increase of the HSDG by R236m that was tabled and formalised in the Second Adjustments Estimate (moved from Limpopo to various provinces) • The conditional grant allocation was over-spent by R14.894m, with the main contributor to this over-spending being Transport • The spending at year-end is 100.1% of the annual conditional grant budget

12. Infrastructure - 2014/15 Preliminary Outcome

13. 2014/15 Preliminary Outcome • The table indicates actual infrastructure expenditure at 103.3% of the annual budget, showing an over-spending of R380.497m. This amount is made up of various over- and under-spending in departments, as indicated below: • Education over-spent by R354.570m. The department stopped various infrastructure projects as a result of the budget reprioritisation undertaken during the Adjustments Estimate. However, the R860m budget reprioritisation undertaken in the Adjustments Estimate to ease spending pressures against Compensation of employees included projects that were already committed and contracted. As mentioned, the department was allocated an additional R355m in the 14/15 Second Adjustments Estimate to assist with outstanding payments relating to projects which were already committed and could therefore not be easily stopped. The department did not include this amount in their budget column in the IYM. Once this additional funding is taken into account, the department will reflect minor under-spending of R430 000 • Health over-spent by R21.530m due to higher than anticipated maintenance and repair of health facilities • Human Settlements over-spent by R75.669m due to higher than anticipated spending on the maintenance and repair of housing stock

14. Fiscal Sustainability

15. Analysis of spending from 2009/10 to 2014/15

16. Analysis of spending from 2009/10 to 2014/15 • Cost-cutting has been in place in KZN since 2009/10 when the Provincial Recovery Plan was first implemented as the province was projecting over-expenditure of some R5.6bn in that year • Since 11/12, KZN has had a less than 1% variance in terms of provincial over- or under-spending • Province has remained cash positive since May 2010 • Figure 1 shows the provincial cash position since March 2007 and up to December 2014. It also shows the year that cost-cutting started • KZN reports on its spending trends to the Provincial Executive Council on a monthly basis • Allows for immediate corrective action to be undertaken if there is projected over-expenditure • KZN also reports mid-year and close-out spending to the provincial Finance Portfolio Committee • Good team work exists in terms of oversight between Provincial Legislature and PT • Have formal bilaterals with all departments 3 times a year to look at budget and spending • Informal engagements on a nearly daily basis

17. Effectiveness of cost-cutting Cost-cutting

18. Effectiveness of cost-cutting • As can be seen in the graph, KZN was in overdraft from about March 2008, with the overdraft reaching concerning levels from December 2008 • The Provincial Recovery Plan was implemented from October 2009, and this included the implementation of a number of cost-cutting measures • These cost-cutting measures are reviewed annually to see if they are still applicable or to see if they can be strengthened • Cost-cutting remains in place in KZN for the foreseeable future and are viewed as elements of good governance rather than a once-off initiative to contain costs • KZN turned the corner very quickly when it comes to repaying the overdraft with the province being in the black since May 2010 • KZN Treasury has recently undertaken an assessment on just 4 of the spending items that were targeted for cost-cutting, and these include catering, leave gratuities and travel claims. The aggregate savings over the period under review (i.e. from 09/10 to the end of 14/15) was in the region of R2bn

19. Fiscal Position • This table is included as a reminder of the amounts KZN lost when the 2011 Census was used to update the ES formula and when NT imposed 1, 2 and 3% cuts to lower the expenditure ceiling • Was dealt with by cutting all departments’ budgets proportionately • This comes after all departments’ Goods and services budgets were cut by 7.5%, as part of the Provincial Recovery Plan (from 09/10)

20. Fiscal Position

21. Fiscal Position • Table 7 shows changes to KZN’s allocation over the 15/16 MTEF made by NT: • Phasing in of the data that informs the ES formula results in a decrease over the MTEF of R159.360m, R87.769m and R271.402m • Buffer funding was supposed to fall away in 16/17. NT has agreed to leave this for a further year due to fiscal consolidation cuts and R321.958m is given in 16/17 • Various function shifts in Education result in R280.136m, R295.547m and R310.123m being moved from the provincial to the national sphere • Various function shifts in Health result in R92.387m, R96.885m and R101.663m being moved from the provincial to the national sphere • Fiscal consolidation cuts result in KZN’s ES being cut by R561.725m in 15/16 and R843.789m in 16/17 • Unlike other years, NO ADDITIONAL funding was given by NT

22. Fiscal Position • The fiscal consolidation cuts and data updates to the ES budget reductions are, once again, quite significant for KZN • Considering that significant cuts had already been effected against all departments’ budgets in 09/10 during provincial recovery plan period, and again when the Census data cuts were implemented in 13/14, it was felt that the departments would be unable to cope with another major cut • Had to think differently in terms of funding this cut • Besides this, it was felt that, despite NT not funding any portion of the 2014 wage agreement shortfall, Education and Health should at least receive a portion of the carry-through costs of the 2014 wage agreement (funded from the provincial fiscus) • Provincial fiscus therefore provides 40% of the required amount to these 2 depts, with the balance having to be sourced from within their baselines • As NT was not funding this, the 40% also had to be sourced from within the provincial budget

23. Fiscal Position • Some tough choices had to be made, but this is a natural consequence of a period of fiscal consolidation. The following were then identified as areas where KZN sourced the required funding to cover these shortfalls: • The Strategic Cabinet Initiatives fund of R100m per annum was put on hold during this period of fiscal consolidation • The government office precinct project for which R600m had been allocated, was put on hold during this period of fiscal consolidation • KZN has continued to budget for a Contingency Reserve, with this being set at just above R1bn per annum over the 14/15 MTEF. This Contingency Reserve is now capped at R750m per annum over the 15/16 MTEF, and this released some funding to finance the budget cuts • R240m is carried forward from the 14/15 Net Financial Position to fund parts of the 15/16 MTEF equitable share reductions • This financing plan therefore meant that none of the dept’s equitable share budgets were cut and service delivery spending was protected

24. Provincial Fiscal Framework

25. Provincial Fiscal Framework • Table 8 shows KZN’s fiscal framework, taking into account the baseline cuts, function shifts, changes to conditional grants, own revenue updates and the provincial cash resources used to fund various provincial priorities • Line 1 shows: • ES decreases in 15/16 by R1.094bn, R1.002bn in 16/17 and R683.189m in 17/18. This is the effect of the period of fiscal consolidation, due to the decrease in the PES, as well as various function shifts including, among others, Port Health (to NDOH), FET and AET functions (to DHET) and aspects of the NHLS costs (to NDOH) • There are a number of changes to the CG over the 15/16 MTEF, with these decreasing by R443.018m in 15/16, but increasing by R1.986bn in 16/17 and R3.319bn in 17/18 • Minor revision to provincial own receipts with an increase of R867 000 in 15/16 and R572 000 in 16/17 and a decrease of R5.850m in 17/18 • Provincial cash resources indicates the amounts the province allocated to various priorities, but with these funded through previous years’ Net Financial Position calculations • Line 2 shows that deptsare planning on spending R101.961bn, R106.882bn and R112.773bn over the MTEF • Line 3 shows that KZN is budgeting for a Contingency Reserve of R750m per annum over the MTEF

26. Provincial Fiscal Framework • The Contingency Reserve is being kept for a number of reasons: • The outcome of the 2015 wage negotiations were not known when the 2015/16 MTEF was tabled. If NT does not fund any portion of this, the province will have to fund this from within its baseline • The negotiations regarding the amount that the province owes to NHLS are still ongoing. This debt could place a significant demand on the provincial fiscus • It is therefore prudent to keep a Contingency Reserve that will act as a buffer in the event that these potential cost pressures become reality

27. Provincial Fiscal Framework • As mentioned, KZN’s conditional grant allocations are also being affected by the fiscal consolidation • National Treasury indicated that all provincial conditional grants will be reduced by the same proportion, with the exception of a few grants that are linked to essential service delivery programmes or are smaller grants that fund important operational expenditure • The baselines of the Comprehensive HIV and AIDS grant and the NSNP grant were protected from the cut • The Further Education and Training (FET) Colleges grant and the Occupational Specific Dispensation (OSD) for Education Sector Therapists grant were also protected from the cut • Budgets of KZN’s departments are presented in the next slide • Despite various cuts, there is still growth in departments’ budgets

28. Provincial Budget – 2015/16 MTEF

29. Macroeconomic Framework

30. Macroeconomic Scene Nationally • Eskom capacity constraints • Poor economic growth outlook • Lower taxes (PIT, VAT and CIT) • Recently ended mining strike in the platinum belt • Lower corporate and income taxes • SA downgraded to one level above junk status • Increased borrowing costs • Less FDI, lower employment potential • Exponential growth in COE • Crowding out of service delivery • 2011 Census data of Provincial Equitable Share

31. Population distribution in KZN Darker shaded = bigger population • In 2011 when the Census was undertaken, KZN was proportionately less populous when calculated as a % of the national population. Of significance is that we did not have fewer people living in KZN, but that our proportion of the national total had dropped – resulted in cuts in our ES. Therefore have less money, but our service delivery needs have not decreased • In terms of the change in the Age Cohort, there has been a significant increase in the no. of males between the ages of 20-29, a smaller increase in this age cohort in females. There has also been a decline in males and females in the 0-19 age cohort, while there is growth in the 60-80+ age cohort • Urbanisation continues with more than 50% of the KZN province expected to live in urban areas by 2024 • The unemployment rate (expanded definition) has increased from 38.53% in Q2 of 2011, to 40.42% in Q1 of 2015

32. Gross Domestic Product

34. Sector Performance

35. Economic Performance • Growth positive short-term • Government spending booms • Agriculture on downward slope • Mining slowing down • Manufacturing declined • Electricity down • Construction’s outlook bleak • Transport and communication does not disappoint • Lower business confidence hampers Trade index growth • Finance, real estate and business services boosted by property market

36. Transport equipment boosted by local projects • Building investment supported by non-residential and commercial buildings • Civil construction down • Transfers investment surprises with double-digit growth • Machinery investment looking up • ICT equipment investment growth slowing down

38. The economic outlook for KZN is somewhat less optimistic than last year and earlier (January 2015) expectations, despite the lower oil price, which has already and will continue to put pressure on inflation which in turn will keep interest rates lower for longer • The lower oil price has also, to some degree, improved the current depressed levels of consumer confidence and has given consumers some debt breathing space • The weaker exchange rate and moderate improvement in global economic conditions should also support the KZN manufacturing and transport sectors • Unfortunately, continued electricity constraints, labour concerns, logistical bottlenecks, digital un-competitiveness and economic policy divide will hamper the growth prospects for 2015 • Provincial economic growth is therefore estimated at 1.8 per cent for 2015 compared to 2.1 per cent estimated in January 2015 Summary of KZN’s economic outlook

39. Provincial Growth and Development Strategy and Plan(and Poverty Eradication Master Plan)

40. Macro Policy Focus on Eradication of Poverty firmly embedded in the National Development Plan and the 2014- 19 MTSF Working Together For A Secure and Prosperous Future.

41. Six pillars of the National Development Plan • The objectives of the plan are the elimination of poverty and the reduction of inequality through: • Uniting South Africans of all races and classes around a common programme to eliminate poverty and reduce inequality; • Encouraging citizens to be active in their own development, in strengthening democracy and in holding their government accountable; • Raising economic growth, promoting exports and making the economy more labour absorbing; • Focusing on key capabilities of both people and the country with focus on skills, infrastructure, social security, strong institutions and partnerships both within the country and with key international partners; • Building a capable and developmental state; and • Strong leadership throughout society that work together to solve our problems Providing leadership towards achieving KZN Vision 2030.

42. 14 MTSF Outcomes as implementation framework of the NDP: Education Health Safety Employment Skilled work force Economic infrastructure Rural development Human settlements Developmental local government Environmental assets and natural resources Better South Africa Development oriented public service Social protection Transforming society and uniting the country 2030 Vision Working Together For A Secure and Prosperous Future.

43. Macro Policy Focus on Eradication of Poverty firmly embedded in the Provincial Growth and Development Strategy and Plan Working Together For A Secure and Prosperous Future.

44. NDP/ MTSF / PGDP Alignment and positioning of OSS Education Health Safety Employment Skilled work force Economic infrastructure Rural development Human settlements Developmental local government Environmental assets and natural resources Better South Africa Development oriented public service Social protection Transforming society and uniting the country Job creation Human resource development Human and communitydevelopment Strategic infrastructure Environmental sustainability Policy and governance Spatial equity • 1. Unleashing the Agricultural Sector • 2. Industrial Development through Trade, Investment & Exports • 3. Government-led job creation • 4. SMME, Entrepreneurial and Youth Development • Enhance the Knowledge Economy • Early Childhood Development, Primary and Secondary Education • 7. Skills alignment to Economic Growth • Youth Skills Dev & Life-Long Learning • Poverty Alleviation & Social Welfare • Health of Communities and Citizens • Sustainable Household Food Security • Promote Sustainable Human Settlement • Enhance Safety & Security • Advance Social Capital • Development of Harbours • Development of Ports • Development of Road & Rail Networks • Development of ICT Infrastructure • Improve Water Resource Management • Develop Energy Production and Supply • Productive Use of Land • Alternative Energy Generation • Manage pressures on Biodiversity • Adaptation to Climate Change • Policy and Strategy Co-ordination & IGR • Building Government Capacity • Eradicating Fraud & Corruption • Participative Governance • Promoting Spatial Concentration • Integrated Land Man & Spatial Planning 1 4 MT S F OUT COME S 30 PGDP OB J E CT I VE S 7 PGDP G O A L S

45. Alignment of Strategic Plans NATIONAL DEVELOPMENT PLAN & MTSF PROVINCIAL DEVELOPMENT PLAN DISTRICT DEVELOPMENT PLAN Municipal IDPs 20 Year Term 5 Year Term 20 Year Term 20 Year Term WARD BASED PLANS

46. KZN PGDS STRATEGIC FRAMEWORK STRATEGIC GOALS STRATEGIC OBJECTIVES 1. Unleashing the Agricultural Sector 2. Enhance Industrial Development through Trade, Investment & Exports 3. Expansion of Government-led job creation programmes 4. Promoting SMME, Entrepreneurial and Youth Development 5. Enhance the Knowledge Economy JOB CREATION 1 Aspire to … • Gateway • Human & Natural Resources • Safe, Healthy & Sustainable Living Environments • Healthy Educated Communities • employable people are employed • Equitable society • Basic Services • More equitable Society • World Class Infrastructure • Investors Confidence • Skilled Labour Force • Focus on People centred-ness. • Strong & Decisive Leadership • Foster Social Compacts HUMAN RESOURCE DEVELOPMENT 2 6. Early Childhood Development, Primary and Secondary Education 7. Skills alignment to Economic Growth 8. Youth Skills Development & Life-Long Learning HUMAN & COMMUNITY DEVELOPMENT 30 9. Poverty Alleviation & Social Welfare 10. Enhancing Health of Communities and Citizens 11. Enhance Sustainable Household Food Security 12. Promote Sustainable Human Settlements 13. Enhance Safety & Security 14. Advance Social Capital 3 7 STRATEGIC INFRASTRUCTURE 4 15. Development of Harbours 16. Development of Ports 17. Development of Road & Rail Networks 18. Development of ICT Infrastructure 19. Improve Water Resource Management & Supply 20. Develop Energy Production and Supply ENVIRONMENTAL SUSTAINABILITY 5 21. Increase Productive Use of Land 22. Advance Alternative Energy Generation 23. Manage pressures on Biodiversity 24. Adaptation to Climate Change Vision 2030 GOVERNANCE AND POLICY 6 25. Strengthen Policy and Strategy Co-ordination & IGR 26. Building Government Capacity 27. Eradicating Fraud & Corruption 28. Promote Participative, Facilitative & Accountable Governance SPATIAL EQUITY 29. Actively Promoting Spatial Concentration 30. Facilitate Integrated Land Management & Spatial Planning 7 46

47. Poverty Eradication Master Plan prepared through an Operation Phakisa Labs approach, adopted by the Provincial Executive Council and now ready for IMPLEMENTATION Working Together For A Secure and Prosperous Future.

48. PEMP 5 Pillars and 29 Game Changers Working Together For A Secure and Prosperous Future.

49. PGDP STRATEGIC GOALS Poverty Eradication Game Changers JOB CREATION 1 Aspire to … Game Changer 1 Social Protection HUMAN RESOURCE DEVELOPMENT 2 Game Changer 2 Agriculture Deepened HUMAN & COMMUNITY DEVELOPMENT 5 3 7 Game Changer 3 Enterprise Development STRATEGIC INFRASTRUCTURE 4 Game Changer 4 Employment Creation ENVIRONMENTAL SUSTAINABILITY 5 Game Changer 5 Skills Development Vision 2030 GOVERNANCE AND POLICY 6 SPATIAL EQUITY 7 49

50. PEMP 5 Pillars and 29 Game Changers AWG 8 AWG 1 AWG 16 AWG 12 +14 AWG 10 AWG 6 AWG 1 AWG 12 + 14 AWG 6 AWG 3 AWG 7 AWG 1 AWG 8 AWG 2 AWG 2 AWG 7 AWG 1 AWG 8 AWG 15 AWG 1 AWG 7 AWG 8 AWG 1 AWG 4 AWG 2 AWG 8 AWG 2 AWG 1 AWG 7 Working Together For A Secure and Prosperous Future.