Bus Subsidy Budget Shortfall 2008/09: briefing by Department of Transport

Meeting report

The Chair stated that the first meeting on the matter of the bus subsidy challenge had taken place the previous week when the South African Transport and Allied Workers had made a presentation to the Committee. The presentation had helped the Committee to understand from their perspective what the problem was and the stakes at hand for the drivers employed in the sector and the estimated 1.5 billion passengers using the subsidised bus services. At that meeting they had agreed on two things:
- to call upon the government to make some contingency arrangement so that there would not be a total collapse of the bus subsidy service.
- secondly, they needed to find out how this had happened and the appropriate remedies to ensure that come January and February next year they would not be in the same situation.

The Chair was pleased that the departments involved in this matter were represented. The Transport Department was represented by its Director General, Ms Mpumi Mpofu and National Treasury by its Deputy Director General, Mr Andrew Donaldson. 

The Chair indicated that the Committee was aware that the problem had escalated to the point that the matter was before the courts. The Committee was not going to be entangled in the matters being adjudicated in court as this would be inappropriate. The Committee wanted to know the contingency plans the departments had laid out. The Committee also wanted to be briefed on exactly what was being done to combat this problem. Most importantly, they asked how this happened and what was being done so as not to repeat the mistake.

Presentation by the Department of Transport (DOT)
Ms Mpumi Mpofu, DOT Director General, greeted the Committee and thanked the Committee for giving them the opportunity to clarify the challenges they were facing in the bus subsidy sector. She introduced her team which comprised of Mr Jan-David de Villiers, DOT Acting Deputy Director –General: Public Transport, Mr D Pretorious, DOT Chief Financial Officer: Public Transport, Mr C Manamela, Director: Bus Operations: Public Transport, Mr Lungisile Pakati, Ministry of Transport Director: Parliamentary Services and Stakeholder management, Mr D Viljoen, Ministry of Transport Deputy Director Parliamentary Services and Stakeholder Management, and Mr G Fredericks, DOT Deputy Director Administrative Support, Office of the Director General.

Ms Mpofu confirmed that due to the challenges they were currently facing the matter had been to court on more than one occasion. Nevertheless in their bid to clarify the issue, in some circumstances they would be limited by the court proceedings as to how much detail they should divulge. She reiterated that they were before the Committee was to explain how the bus subsidy transport system worked and the challenges they were facing with the budget allocation, but more critically, the nature of their intervention, what they intended to do and the steps already taken to resolve the current problem. The presentation itself showed the current contractual obligations and for one to understand the bus subsidy system one had to delve into its background first. The bus subsidy system began in 1996 with the white paper that introduced its framework. This was then followed by the introduction of competitive tendering in 1997 and contract regime in the system basically comprised of three different types of contracts. The first one was the interim contract which was ticket based, that is, governed by agreements that ran on a monthly basis. The second regime was the tender contract which had more long term arrangements between the bus contracting company and the various provinces.  The last regime was the negotiated contract and, like the tender based contract, was kilometer based.

The slide titled “National Budget- Subsidy Distribution- 2008/09” showed the scale of the issue, highlighted the areas with the greatest challenges and illustrated the distribution of the bus subsidy nationally. What needed to be understood was the relationship between the various categories of contracts, the number of contracts and the split between negotiated and interim contracts. As indicated by the pie charts 82% represented the number of tender based contracts, with 31 % being the interim contracts.  The other pie chart showed the subsidy split between provinces which clearly showed Gauteng received the largest portion. The problem being faced by the Gauteng province should also be understood in its historical context.

Referring to the slide titled “Subsidy Budget Allocation”, Ms Mpofu stated that DOT had to motivate annually for increases in their budget allocation. This system had been used since the inception of these contractual agreements. The main challenge was that the increase in the baseline up until the 2009/10 financial year had been somewhat limited. The subsidy allocation had only been done on the basis of the inflation adjustment up to that financial year. Despite the need for transformation programs and to improve services, limited or no provision had been made for the increase in passenger growth in the sector. As a result by definition the increase and the growth in the sector had not been aligned to the budget allocation. 

From 2004 -2008 the base line increase was 5, 5% and traditionally in government the target inflation adjustment in all subsidy programs was in the region of 3-6%. The challenge was that in this same period there had been an escalation in the cost of capital, labor and fuel. This increase averaged around 10-12%. In addition there was also a passenger increase which averaged around 10%. The crisis would have been better managed had there been an alignment in the budget that catered for the increases the sector was facing. She pointed out that the subsidy budget allocation graphs showed the years when the backlog started to accumulate. From the charts, the financial year 2005/06 indicated a variance of R85 million. The R85 million shortfall was the difference between the actual expenditure and the MTEF allocation. This shortfall steadily increased through the financial years until the financial year 2008/09 which had a projected shortfall of around R1 billion. The adjustment request was a mechanism that allowed DOT to apply for an adjustment allocation that dealt with matters unavoidable such as the current one. Moreover, the adjustment allocation was calculated on the basis of fuel costs whilst the adjustment requests were dependent and made on the basis of both fuel costs and passenger escalations.

Ms Mpofu explained that the main challenge was the amount of R883 768 948 which was the total of the shortfalls per province. This was the amount they were hard pressed to find in order to avert the crisis and the cover payments of December, January and February. March was excluded because payment for March would only be made in April. November was also excluded because money had been released to pay the contractors. These payments had been effected, with the exception of Gauteng, which had been allocated R126 million but, due to various challenges, could not effect the payment and this had led to the court case. The amount needed to effect payment for the December to February was indicative of the rising cost of fuel and increase in passengers.

The intervention to this problem Ms Mpofu said, was led by a Committee comprised of the Ministers of Justice, Transport and Finance. Among the solutions that had been suggested by the Committee included the identification of sources of finance that would not have the same contractual obligations as the ones in the subsidy system. To this end they were encouraging the provincial treasuries to work with the provincial department to explore virements and other flexible arrangements such as getting the approval of unauthorized expenditure.  

To this end the payment to Golden Arrow had been effected from the funds that had been advanced to them by the Western Cape Treasury. Ms Mpofu added that other provincial governments were also looking into these flexible arrangements and she confirmed that the Gauteng province had entered into a similar arrangement which resulted in the provincial government being able to pay its contractors. Another solution was looking to release funds located in the Division of Revenue through Special Adjustments Budget and to this end she was aware that the Western Cape and KwaZulu Natal had been allowed access to disaster funds. She highlighted to the Committee that these short term intervention were fraught with their own problems because shifting funds from one program to another involved legal and administrative aspects which could definitely mess up the time frames. The slide dealing with ”Interventions and Mechanisms for achieving change 2009/10 and beyond“ highlighted some of the interventions and mechanism for achieving change in 2009 and beyond. This included acquiring funding in terms of the Division of Revenue Act (DORA), developing Key Performance Indicators and finalizing integrated road based networks. The implementation plan included phased implementation in co-operation with provinces, negotiated performance based contracts for route operations, formalization of unscheduled interim contract services, defining operating areas that would not be served, implementation of supporting infrastructure, continued enforcement and monitoring of all contracted public transport operations.

Discussion
The Chairperson thanked DOT for its presentation and asked for assurance in relation to the future of the bus subsidy system.

Mr Donaldson replied that they did indeed have a solution starting from the upcoming financial year and, as mentioned earlier, with the exception of Gauteng, November was considered as not being part of the problem, as finance had been advanced to the various provinces. March also was not included as payment for March would be done in April. The vexing challenge was therefore finding the cash for the December to February months.

Ms Mpofu confirmed these assurances. More importantly, there would be a move from the interim contracts to the tendered and negotiated contracts. In addition funding for the bus subsidy was going to be governed by DORA.

The Chairperson asked for an explanation as to how they had got into this problem, because from the sound of the presentation, it seemed as if come April everything would be fine.

The Chair asked why the Treasury had not until now appreciated the argument of escalated costs.

Mr Donaldson replied that there was a misconception that Treasury was withholding funds that had been requested. The truth of the matter was the problem had arisen due to the failure in the budget. Therefore there was need to understand why the budget had not worked. One reason was South Africa’s historical complexities especially in the area of geography and long distance commuting that had been created during apartheid. This rendered the bus subsidy system ineffective and added to this, was the fact that interim arrangements such as the interim contracts ended up being more permanent and too much time passed without this being addressed.  The other reason was the inter-governmental complexities, especially the structures that surrounded the division of revenue between national government, provincial government and municipalities. Moreover the reason that Treasury refused to accede to some adjustment requests was that, according to the PFMA, these adjustments had to meet certain requirements, such as, the matter should fall under ‘unforeseen expenses’. In most cases the shortfalls could not be termed as unforeseen expenses; therefore Treasury could not release the funds. Lastly, there was a tendency to undermine existing contractual obligations in favor of new ones and this tendency created problems and financial literature was full of such examples. 

Mr B Mashile (ANC) remarked that they did not want to be a government that just responded to court orders and marches by people for them to rectify a solution. They were a democracy and should work collectively to deal with problems

The Chair remarked that there were going to be changes and that everyone needed to work together to make the necessary adjustments. He also called upon the government to move as swiftly as possible to combat this problem.

The meeting was adjourned.