201718 EC BUDGET OUTCOME PRESENTATION TO SELECT COMMITTEE

2017/18 EC BUDGET OUTCOME PRESENTATION TO SELECT COMMITTEE ON FINANCE 15 MAY 2018 1

PRESENTATION OUTLINE v Responses on the recommendations made by the Committee in its 2016/17 report (A separate Report Attached) v Progress made on implementation of the Provincial Economic Growth and Development Strategies v Fiscal position covering bank balances, cash-low statements debt accruals v Provincial Own Revenue Collection and challenges v 2017/18 Expenditure Preliminary Outcome and Departmental analysis v Infrastructure Spending on economic and social infrastructure v Conclusions 2

RESPONSES ON THE RECOMMENDATIONS MADE BY THE COMMITTEE IN ITS 2016/17 REPORT Report has been prepared separately for this section 3

Progress made on implementation of the Provincial Economic Growth and Development Strategies 4

CONTEXT: AN IMPROVING GLOBAL ECONOMIC GROWTH OUTLOOK Source: World Economic Outlook, International Monetary Fund (IMF), 2018 5

EC PROVINCIAL ECONOMY Source: Stats SA and Quantec, 2017 Provincial GDP Estimates Economic growth in the Eastern Cape has remained weak due to a combination of cyclical and structural factors: • Recently weak domestic and global demand has constrained output growth in key sectors, especially provincial manufacturing. • Long term growth trends have also remained historically low in the province owing to: o Backlogs in fixed capital formation - especially economic infrastructure, o Inadequate skilling and investment in human capital. The few that are skilled tend to move out of the province. 6

EC PROVINCIAL ECONOMY • Low and stagnant growth responsible for the persistently high levels of unemployment especially in the two metros in the province. • Burden of unemployment unevenly distributed affecting certain population groups (youth and women most affected). • Lack of adequate skilling remains key structural impediment to employment creation in the province. Unemployment Rate (%) by Province and Metro Oct - Dec 2016 Oct-Dec 2017 RSA 26, 5 26, 7 WC 20, 5 19, 5 EC 28, 4 35, 1 EC - Non Metro 26, 3 36, 1 EC - BCM 33, 4 29, 0 EC- NMB 29, 6 36, 9 NC 32, 0 27, 1 FS 34, 7 32, 6 KZN 23, 9 24, 1 NW 26, 5 23, 9 GP 28, 6 29, 1 MP 31, 0 28, 9 LP 19, 3 19, 6 Source: Stats SA, Quarterly Labour Force Survey, Q 4 2017 EC Unemplyoment rates, age and gender, 2017 70% 64% 56% 50% 43% 40% 44% 40% 36% 30% 20% 10% 0% 20 -24 25 -29 Male 30 -34 20 -24 25 -29 30 -34 Female 7

PROVINCIAL ECONOMIC COMPETITIVENESS – CHALLENGES § Declining manufacturing output growth points to possible erosion of competitiveness of this key sector in the province. § Moving forward targeted and focused government interventions will be necessary in identifying and diversifying into new sectors beyond the auto sector which continues to receive significant support from government. § Whilst developing new sectors and their associated value chains government will be mindful of addressing critical issues around beneficiation and local supplier development. § Agriculture: EC commercial agriculture experienced significant growth uptick in 2017 partly due to favourable weather conditions. But more still needs to be done in terms of supporting emerging agriculture towards full commercialisation focusing on livestock, grain and horticulture development § Construction sector one of the critical sectors in the province in terms of its jobs creation potential has been underperforming. This sector will continue to receive government support through government preferential procurement and other emerging contractor support programmes. 8

MAJOR TRADING PARTNERS WITH OUR PROVINCE (e. g. Transport equipment) (e. g. Transport equipment, textiles, chemical products, electrical household appliances) (e. g. Transport equipment, agriculture products) (e. g. metal products, machinery and household appliances) (e. g. agriculture products, transport equipment, and furniture) (e. g. Metal products and machinery) (e. g. Transport equipment, electrical household appliances) (e. g. agriculture products, and furniture products) (e. g. Chemical, rubber, and metal products; transport equipment) 9

ISSUES FACING THE PROVINCE – LOW FIXED PRIVATE INVESTMENT Source: Ti. Ps and DTI § Despite attracting a few noteworthy private sector investment flows in recent years, fixed investment in the province remains low, averaging about 7% of domestic fixed investment, despite the fact that corporate SA is holding in excess of R 1. 4 trillion in cash reserves in their balance sheets (Dti, 2017). § Why are they not investing? - Concern by private sector is that of policy and regulatory uncertainty on the part of government. 10

REMAINING BINDING CONSTRAINTS TO INVESTMENT AND GROWTH § Economic Infrastructure and production costs • High logistics costs (relating to the province’s peripheral geographic position and rural nature). • High municipal charges (electricity, water, rates) and deteriorating delivery quality. § Lack of Skilled Workforce • Limited learning at Primary and Secondary school level (Maths and Science) which undermines base for skills development. • Further training (especially TVET colleges): Need to be aligned to industry skills needs; with greater emphasis on-the-job training. § Land water resources • Institutional arrangements that provide long-term, secure access to land water critical for agriculture development. 11

ECONONOMIC DEVELOPMENT STRATEGY: STRATEGIC APPROACH 12

TARGETING LOW HANGING FRUITS 13

PROVINCIAL ECONOMIC DEVELOPMENT STRATEGY: BOOSTING INVESTMENTS AND CREATING JOBS § Economic Sector (DEDEAT, DRDAR, DRPW, and Do. T) allocated R 10. 629 billion in the 2018/19 financial year and a total of R 32. 628 billion over the 2018 MTEF. This budget will among other things fund the Provincial Economic Development Strategy (PEDS) focusing on the six economic sectors where the province has comparative advantage namely: § • Agriculture Development. • Tourism. • Automotive industry. • Light Manufacturing. • Renewable Energy (e. g. Electricity from wind, solar and biofuel). • Oceans Economy. Overarching vision of PEDS – create an enabling economic infrastructure across key sectors for rapid modernization of provincial economic centres whilst attracting new investors into remote rural areas where people live. 14

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT Agriculture Sector Development q In 2018/19, the Department of Rural Development and Agrarian Reform (DRDAR) will continue with the implementation of the Agricultural Economic Transformation Strategy which seeks to enable black smallholder and communal farmers access and be commercially viable participants throughout the agricultural value chain. RED-HUB programme has been implemented successfully in Mnqanduli, Mbizana, Ncora and Emalahleni to stimulate agro-processing value chains in the province. q Planned increase in crop production will prioritize areas located in and around the four RED Hubs in Mqanduli, Ncora, Emalahleni and Mbizana) so as to catalyst and develop local maize value chains with deeper links to local smallholder producers. q Magwa and Majola Tea Estates: An additional R 47. 961 million has been allocated in 2018/19 to support the resuscitation of tea production including green tea and retail packed tea. 15

PROVINCIAL AGRI NODES FOR DEVELOPMENT RESOURCE POTENTIAL : RAINFALL & COMMODITY SUITABILITY > 700 mm 500 mm Deciduous Dryland Cropping (Maize) Beef Cattle Livestock ( Cattle, sheep. Goats) < 300 mm Livestock (sheep, Goats game) Citrus Deciduous Dairy Poultry Sub-trop. Frt. Veg & Potat. Chicory Pineapples Macadamia 16

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT Economic and Social Infrastructure Development Social Infrastructure q The Provincial Government will commence with Phase 2 of the Rural Access Roads programme mainly targeting prioritized service delivery centres i. e. schools, health facilities, farms and tourism centres. q A total of 726 kilometres is planned in Alfred Nzo, Amathole, Sarah Baartman, and OR Tambo District Municipalities for which the province has allocated a budget of R 402 million over the 2018 MTEF. q R 34. 524 million has been allocated to Coega Development Cooperation to further facilitate delivery of social infrastructure in 2018/19. Economic Infrastructure q Roads Infrastructure § R 2. 184 billion and R 6. 423 billion over the 2018 MTEF has been allocated for the re-gravelling of 450 km of roads and 13 000 km of roads will be graded. Furthermore, 43 km of roads will be upgraded to surfaced roads. 17

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT q SEZ and Industrial Parks Development § In 2018/19 the two zones (ELIDZ & CDC) aim to attract 14 new investors worth approximately R 2. 2 billion and by so doing create 27 554 jobs. § To ensure that Coega transitions from an IDZ to become a full-fledged SEZ an amount totalling R 94. 947 million will be made available over the 2018 MTEF. q Youth Development § R 4. 705 billion over the 2018 MTEF period will be prioritised to continue efforts to enhance youth development through skills training, learnerships / internships and entrepreneurial support. q Broadband Development § Importance and economic relevance of broadband is becoming increasingly clear. § Access to broadband networks and to high-speed Internet with its next generation of information services is considered a necessary precondition for economic growth and competitiveness. § The current baseline budget for the project is R 735 million. Further funding for the project will be provided in the 2018/19 Adjustment Budget pending legal advise and public acceptance. 18

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT 19

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT q Leveraging on National Government’s Operation Phakisa - Ocean Economy Initiatives § Port development and Ship Repairs Capacity in Port Elizabeth. § Establishing a Maritime Resource Centre in partnership with the Port St’ Johns Local Municipality. § Fish Farming and Aquaculture Development across the province. q Tourism Development § Province is home to a diverse tourism offering, providing a unique competitive tourism bouquet. § Future development of the provincial tourism industry hinges critically upon improved transport infrastructure, improved hospitality infrastructure, improved management of tourism “packages” and improved marketing of the province’s unique assets, such as the Wild Coast and the Baviaanskloof World Heritage Site. § Key sector initiatives include: ü Heritage tourism. ü Cultural observatory. ü Tourism events. ü Tourism roads development. 20

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT Tourism Development 21

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT q SMME and local industrial business development § Local Economic Development Procurement Framework has been approved and will be adopted by all provincial departments. § 46 284 EC Small Medium and Micro-sized enterprise (SMMEs) were registered on the Central Supplier Databse (CSD) enabling them to do business with government. Programme for township economies will receive an amount of R 7 million in 2018/19 for the revitalisation of the Mdantsane Mall and R 7 million for Queenindustria electrification. § Conditional allocation of R 45 million based on credible business plans will be made available in the 2018/19 adjustments estimate budget. These funds will be utilised for the construction of Informal trade facilities at Mt. Ayliff, Libode and Ngqeleni. § 300 SMMEs with non-financial support such as business training, development of business and marketing plans and furthermore provide support to 6 incubation programmes based at the ELIDZ to enhance entrepreneurship and job creation. § Through the LRED programme, 10 projects will be funded at a local and regional level while supporting 17 projects in agro-processing, manufacturing and sustainable energy sectors as part of PEDS implementation to improve skills development, infrastructure development and youth empowerment. § R 50 million will be availed to reignite SMME’s to deal with development for specific targeted commodities. 22

EFFORTS TO PROMOTE REGIONAL ECONOMIC GROWTH AND EMPLOYMENT q Public Infrastructure Development § Introduction and the rollout of the Strategic Framework for Improved Infrastructure Service Delivery and Rapid Response Team (collaborative effort between Office of the Premier, Provincial Treasury and Provincial Roads and Public Works). q Improving Governance and the Role of Provincial Public Entities § The province will benefit more from improved effectiveness and efficiencies in public entities through: ü Rationalization of entities and streamline objectives for impact; ü Manage the high payment to both senior managers and non-executive boards (National Treasury have developed guidelines on the remuneration of Boards and senior managers in entities (awaiting signature by the Minister of Finance). National treasury undertaking a national review of the value of spend on DFI’s; ü Reduction of number of board members; and ü Finalize the transition of the IDZs to SEZs to lure investors through increased incentives. 23

Fiscal position covering bank balances, cash-low statements debt accruals 24

PROVINCIAL EQUITABLE SHARE • The table below reflects the 6 components of the equitable share and how they were distributed to provinces from 2012/13 to the 2018/19 financial years, taking into consideration the Census 2011 and budget cuts implemented at National. Shared Weighted average decreased from 14. 9% to 13. 7% or R 13. 9 billion in monetary terms over the period. 25

PROVINCIAL EQUITABLE SHARE Implications of Budget Cuts on the Province 26

CHANGES TO PROVINCIAL FISCAL FRAMEWORK Table 1: Provincial Fiscal Envelope 27

2018 NATIONAL ALLOCATION 2018 MTEF Conditional Grants Allocation • The table above shows the revised national allocation for conditional grants over the 2018 MTEF is reduced. • As a result of the fiscal consolidation, conditional grant allocations were reduced by R 407. 579 million to R 11. 263 billion in 2018/19, by R 972. 876 million to R 11. 386 billion in 2019/20 and by R 753. 556 million to R 12. 285 billion in 2020/21. Therefore, the province’s conditional grant baseline is reduced by R 2. 134 billion over the 2018 MTEF. 28

FISCAL POSITION FOR 2017/18 (1 – 2) Bank Balances 29

FISCAL POSITION FOR 2017/18 (2 – 2) Bank Balances • The overall bank balances at the end of 2016/17 and 2017/18 financial years are R 8. 398 billion and R 9. 077 billion respectively. • The table above show the breakdown of the 2017/18 overall balance and how it is allocated over the 2018 MTEF to address pressing priorities of province listed below amongst others which the equitable share from National Treasury does not fully cater for. • Note: Of the R 2. 9 billion surplus funds indicated in the table above, the following are some known obligations and contingencies that are likely to be addressed: § R 16. 658 billion for medico legal claims against the department of Health. § Broadband estimated to be between R 6 billion to R 12 billion. § Capped leave estimated at R 6. 2 billion (mostly Health and Education). § Health accruals (affected by price fluctuations). § Provincial infrastructure backlogs R 151. 103 billion. 30

ACCRUALS – END MARCH 2018 (1 – 2) 31

PAYABLES – END MARCH 2018 (2 – 2) 32

PROVINCIAL TREASURY INTERVENTIONS (1 - 1) • Conducting quarterly Creditor Management Forums with provincial departments on best practice of paying suppliers within 30 days; • Enforce provincial departments to pay the outstanding accruals and payables within the first quarter of the new financial year; and • Continue with the submitting of statistic of all invoices not paid exceeded 30 days payment period by provincial departments to National Treasury. 33

DEBTORS BALANCES AS AT MARCH 2018 (1 – 2) 34

DEBTORS BALANCES AS AT MARCH 2018 (2 – 2) Challenges for Debt Management Interventions by Provincial Treasury • Increase in employee debts-overpayment of • Provide advise on compilation of debt recovery benefits to employees (about 90% are employees debt). • The debtors balance as at 31 st March 2018 is at R 199 million (Preliminary). • Very low instalments approved for deduction from employees. • Delay in clearance of salary related suspense accounts. plans. • Quarterly Debt Management Forums targeting all Provincial Departments. • Monitor and evaluate review of debtor instalments. • Periodic working sessions with individual Provincial Departments. • Write to departments to raise non compliance issues. • Facilitate interaction between Human Resources, Salaries and Debt Management to ensure speedy debt recovery. 35

Provincial Own Revenue Collection And Challenges 36

OWN REVENUE COLLECTION – 2017/18 PRELIMINARY OUTCOME (1 – 2) 37

OWN REVENUE COLLECTION ESTIMATES OVER THE 2018 MTEF Amounts in R’ 000 38

2017/18 EXPENDITURE PRELIMINARY OUTCOME 39

SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (1 – 2) 40

SUMMARY OF PROVINCIAL EXPENDITURE BY VOTE (2 – 2) • Province preliminary spent R 74. 594 billion or 99. 0 per cent of its adjusted budget of R 75. 344 billion with under spending amounting to R 750. 274 million when comparing total spending against adjusted budget. • All departments have under spent of which the following are the main contributors: o Education by R 214. 063 million; o Social Development by R 130. 397 million; o Health by R 102. 754 million; o Office of the Premier by R 91. 019 million; o Roads and Public Works by R 60. 662 million; o Economic Development, Environmental Affairs and Tourism by R 39. 219 million; o Human Settlements by R 33. 229 million; o Provincial Legislature by R 21. 206 million; and o Cooperative Governance and Traditional affairs by R 20. 487 million. 41

SUMMARY OF PROVINCIAL EXPENDITURE BY ECONOMIC CLASSIFICATION (1 – 2) Table 3: Eastern Cape Payments by Economic Classification, March 2018 42

SUMMARY OF PROVINCIAL EXPENDITURE BY ECONOMIC CLASSIFICATION (2 – 2) • The bulk of preliminary under spending of R 750. 274 million was on: o Compensation of Employees by R 305. 698 million and is mainly on Health at R 106. 667 million, Education at R 61. 747 million, Social Development at R 48. 727 million and Roads and Public Works (DRPW) at R 16. 979 million; o Goods and Services by R 701. 189 million and is mainly on Health at R 267. 835 million, Roads and Public Works at R 219. 849 million, Education at R 73. 126 million, Office of the Premier at R 62. 747 million and Social Development at R 28. 553 million; and o Payment for Capital Assets by R 348. 096 million and is mainly on Education at R 213. 350 million, Health at R 140. 076 million and Social Development at R 33. 328 million. • The following items exceeded their allocations: o Transfers and Subsidies by R 591. 073 million and is mainly on Health at R 407. 351 million, Education at R 134. 172 million and DRPW at R 113. 778 million. 43

DEPARTMENTAL EXPENDITURE ANALYSIS 44

EDUCATION (1 – 2) • Overall, the department has spent R 32. 806 billion or 99. 4 per cent of its adjusted budget of R 33. 021 billion resulting in an under expenditure of R 214. 063 million for the year. Even though the under expenditure is below the 2 per cent threshold, it is above R 100 million and therefore becomes material to discuss the underlying reasons. • Goods and Services : The under expenditure of R 73. 126 is million mainly attributable to the following items: o Property Payments due to most schools being moved to a prepaid system where the department is purchasing on behalf of the schools, resulting in reduced costs; and o Computer services (data lines, software licences) and Minor Assets (laptops, desktops) due to delays with centralisation of procurement processes after bulk services were implemented at Head Office through the Vodacom Contract. Furthermore, it is due to ECD centre not receiving the Jungle Gyms for Pre Grade R from the service provider. 45

EDUCATION (2 – 2) • Transfers and subsidies: The over expenditure of R 134. 172 million is due to payments made to schools in respect of Norms and Standards. According to the department, the original planning for transfers did not provide for learners without Identity Documents (ID’s) whilst the actual amount of transfers made to schools included these learners. Furthermore, payments to schools in respect of learners effected by the rationalisation of schools were duplicated. • Payment for Capital Assets : The under expenditure of R 213. 350 million is mainly due to the following: o Machinery and equipment relates mainly to late delivery and processing of invoices in respect of vehicles purchased by the department; and o Buildings due to delays in the evaluation and adjudication of the 23 Early Childhood Development (ECD) projects that were expected to be spending in the first half of the year. 46

HEALTH • Overall, the department has spent R 22. 233 billion or 99. 5 cent of its adjusted budget of R 22. 336 billion resulting in an under expenditure of R 102. 754 million for the year. Even though the under expenditure is below the 2 per cent threshold, it is significant as it is just above R 100 million. • Compensation of Employees: The under expenditure of R 106. 667 million is due to delays in the filling of 190 health professional posts earmarked for the highly litigated hospitals as a result of medico legal claims. • Goods and Services: The under expenditure of R 267. 835 million resulted from the department not having sufficient cash available and payments to suppliers were therefore withheld to offset the overspending on Transfers and subsidies due to unbudgeted medico legal claims payments. • Transfers and subsidies: The overspending of R 407. 351 million is mainly due to the payment of medico legal claims not budgeted for. • Payment for Capital Assets: The under expenditure of R 140. 076 million is due to a misallocation of R 100 million paid under Goods and Services. There was also non-submission of invoices by contractors in respect of current work undertaken in Amathole and Nelson Mandela Municipalities, as well as delays in issuance of orders for the procurement of laptops for Oral Health and Environmental Managers. 47

INFRASTRUCTURE SPENDING ON ECONOMIC AND SOCIAL INFRASTRUCTURE 48

INFRASTRUCTURE PERFORMANCE (1 – 1) Table 5: Infrastructure spending as at the 31 March 2018 49

CONCLUSION (1 - 1) • The transparency on Nationally funded economic development projects should be equitably distributed across provinces, in particular to under developed provinces. • With the constrained fiscal outlook facing the country, the province would welcome the introduction of conditional grants for economic development projects, more especially with departments such as Dti, Economic Development and Tourism. • The committee to note the intensification of revenue collection strategies that include the appointment of service provider to identify new sources of revenue and the participation of the province in the review of the Provincial Equitable Share. • Although Provincial preliminary spending as at the end March 2018 is at R 74. 594 billion or 99. 0 per cent with an under expenditure of R 750. 274 million it is within the 2 per cent threshold. • Despite underspending of R 750. 274 million, the preliminary accruals and payables amount to R 740. 063 million which went to service delivery. Therefore, when comparing the aforementioned, the under expenditure is R 10. 211 million. • The vigorous implementation of IDMS/SIPDM control framework gates coupled with site visits have resulted in the improvement on infrastructure performance. 50

THANK YOU!!! 51