There is a really wonderful interview with Thuli Madonsela on the ZAR podcast. It took place while she was still the public prosecutor. In that episode, she addressed the issue of the shortage of funding for the Public Prosecutor’s office, which turned into a much broader question about irregular expenditure in the South African government.

Thuli Madonsela’s “Suitcases of Phantoms”

It’s a very difficult question because you’re asking, perhaps in your head, perhaps by everyone in society, ‘Where should the money come from?’…

My sense of that is we can all genuinely deal with maladministration – all genuinely deal with the leaking pipes in our system which are due to […] incompetence, or irregularities where we end up paying for contracts that we didn’t use. For example, you find that because a tender was handled badly, we have to pay parties that didn’t perform simply because the court orders us to pay. And that’s money that we need. Then there are those that are given contracts when they are totally incompetent.

My view to government would be: kill the middleman. No middlemen. If you want to advance black people or historically disadvantaged people, the methodology that we created has never been used anywhere [because] it is bound to enable corruption. The tender should be given to the big companies because you can identify [them]. A big company has its own means of ensuring the outcome. You can then ask the company to ensure that it subcontracts, or includes in their implementation process, smaller companies that need to gain skills. But you’re still holding someone accountable who is identifiable.

Because the so-called suitcase companies – or what we call ‘phantom companies’ – they disappear when the money has been paid in advance. It was a one-person company – and they’ve used [the money] to buy ferraris and all sorts of cars. They don’t even re-invest that money. [This] is killing the economy. Because they are not companies, these suitcases of phantoms.

So where will the money come from?

From killing the middle man.

I guess the point is: ‘corruption’ of this nature is the very worst kind. South Africa is trying to run a welfare state off a very small tax base. Whatever your feelings on welfare states, I don’t think that anyone really wants the money to be wasted. Rather that those funds went directly into the hands of welfare recipients than be spent on fancy cars. And/or rather that those funds went directly into the projects that they were meant to be funding!

All the irregular expenditure

The Auditor-General has just released their annual report on the state of public finances. Alongside this scary graph:

irregular expenditure

Two key points:

  • That irregular expenditure has increased by more than 50%.
  • And that’s before taking into account the PRASA audit (which accounted for almost half of all irregular expenditure in the 2015/2016 period).
  • If you assume that PRASA has had no improvement or worsening of its situation, that’s how you get to the “R65 billion” number that you see reported everywhere.

Also, only about a third of this ‘irregular expenditure’ related to irregularities that took place in prior years. That is: the situation worsened dramatically last year.

Here are some relevant extracts from the AG’s report (any emphasis is mine):

Irregular expenditure had increased by 55% since the previous year to R45,6 billion. The amount could be even higher, as it does not include the irregular expenditure of the auditees where the audits are still ongoing – including the Passenger Rail Agency of South Africa (Prasa) where the irregular expenditure last year was almost R14 billion. Furthermore, 25% of the auditees disclosed that they had incurred irregular expenditure but that the full amount was not known, while 28 auditees were qualified as the amount they had disclosed was incomplete. The top 10 contributors to irregular expenditure were responsible for 53% of the total amount of irregular expenditure – four of which were departments of health. As also reported last year, procurement by implementing agents was often the reason for the irregular expenditure, while grant money was used at six of the top 10 contributors. This links back to our concerns about the monitoring of projects funded by grants and the risks associated with using implementing agents.

The irregular expenditure does not necessarily represent wastage or means that fraud was committed – this needs to be confirmed through investigations to be done by the accounting officer or accounting authority – but losses could already have arisen or may still arise if follow-up investigations are not undertaken. The track record of auditees in dealing with irregular expenditure and ensuring that there is accountability is poor. The year-end balance of irregular expenditure that had accumulated over many years and had not been dealt with (through recovery, condonement or write-off) was R81 billion.

The significant increase can be attributed overall to continued weaknesses in SCM. The most common findings for the past four years related to deviations from the prescribed procurement processes. Three written quotations or competitive bids were not invited to enable the selection of a supplier based on a competitive and fair process. Although such deviations are allowed, we found that it had often not been approved; or, if approved, the deviation was not reasonable or justified. This points to the inappropriate use of management discretion in the procurement process. In some instances, the accounting officers used their discretion to appoint targeted suppliers without justifiable reasons – thereby failing to ensure compliance with legislation.

Another important point: fixing the procurement processes won’t necessarily save the government R45.6 billion. But it would save a fair amount, if you asked me. After all, you don’t tend to violate procurement processes in order to offer a cheap and competitive price…

But what of general wastage?

People focus on the irregular expenditure numbers, but there is one worse than this. What of ‘regular’ procurement contracts that don’t deliver? Because you can get middlemen who legitimately win contracts and then don’t deliver. That’s not irregular expenditure by the AG definition.

Here are two departments that should be doing good things:

  1. Education: this is where empowerment starts;
  2. Water and Sanitation: SA is one of the most arid countries in the world, and Cape Town is about to be the second capital city in the modern world to run out of water.

Well, on the Education front, SA spent R12 billion to get:

  • 16 new schools (out of a planned 59)
  • Sanitation for 30 schools (out of a planned 265)
  • Water for 29 schools (out of a planned 280)
  • No electricity for any school (out of a planned 620).

education spending

In terms of performance, the department spent 93% of its budget to hit 6% of its target.

Due to “poor performance by contractors and implementing agents, resulting in the termination of contractions, and inferior quality work that had to be redone.”

And as for Water and Sanitation:

water and sanitation spending

I’ll just leave that there.

Does South Africa have a tax problem?

To put this into perspective:

  • a new and unpopular VAT hike (up from 14% to 16%) would raise a further R40 billion in new revenue. Compare this to the R65 billion estimate of irregular expenditure.
  • When Pravin Gordhan decided not to fully adjust the tax brackets for inflation, that was going to increase revenue by an estimated R12 billion. Compare that to the R11.7 billion spent by the Department of Education on achieving only 6% of its targets.
  • And the new increased tax rate of 45% on top earners? That was only going to raise an extra R4.5 billion. Compare that to R12 billion spent by Water and Sanitation, with no new big dams delivered, and only 11% of its planned small water and wastewater project targets for the year met.

This looks an awful lot like a spending problem to me.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.