Unauthorised, irregular, fruitless and wasteful expenditure
The amendments to the Public Audit Act became effective on 1 April 2019. These amendments provide us with an expanded mandate to go beyond auditing and reporting in an effort to strengthen the accountability mechanisms across government, mainly through the material irregularity (MI) process.
Unauthorised annual expenditure
Unauthorised expenditure occurs when departments:
- used more funds than had been allocated (in other words, overspending)
- used allocated funds for purposes other than those intended.
Unauthorised expenditure for 2019-20 included R15,13 billion incurred by the Department of Social Development from paying the April 2020 social grants early in response to the covid-19 lockdown measures. If we exclude this anomaly, the unauthorised expenditure in 2019-20 would have been R2,99 billion. These figures indicate that unauthorised expenditure has increased every year since 2018-19, although the number of departments that incurred such expenditure decreased in 2020 21.
The unauthorised expenditure was mostly caused by departments overspending their budgets. Budget cuts and reprioritisation, along with emergency spending in response to the covid-19 pandemic, meant that departments had reduced funding available to fully cover their operational costs. Claims against the state further reduced available budgets (as detailed later in this section).
Contributors to unauthorised expenditure
- Eastern Cape – R2,05 billion (64%)
- Free State – R0,48 billion (15%)
- Northern Cape – R0,26 billion (8%)
The provincial health and education departments alone incurred R2,83 billion in unauthorised expenditure. We discuss the concerning financial state of these sectors in chapter 4.
The Eastern Cape departments of Education and Health, the Free State Department of Police, Roads and
Transport, and the North West Department of Health have incurred unauthorised expenditure for the past three years, including overspending on their key service delivery programmes, mainly on employee compensation:
- Department of Education (EC) – public ordinary school education programme
- Department of Police, Roads and Transport (FS) – administration (R0,04 billion) and transport regulations (R0,07 billion) programmes
- Department of Health (NW) – public district health services programme
In the case of the Eastern Cape Department of Health, unauthorised expenditure was due to medico-legal claims.
Fruitless and wasteful annual expenditure
Fruitless and wasteful expenditure is expenditure that was made in vain and that could have been avoided if reasonable care had been taken.
Government cannot afford to lose money because of poor decision-making, neglect or inefficiencies, making the extent of fruitless and wasteful expenditure a good indicator of how the public purse is being managed.
The reduction in fruitless and wasteful expenditure from the previous year is encouraging, but losing just over R1,7 billion that could have been used for the pressing service delivery needs of citizens is a red flag for government and needs urgent attention. A total of 36% (R0,62 billion) of this expenditure was interest and penalties – this means auditees paid their creditors late and even paid over tax to the South African Revenue Service late because of their poor financial position.
A further 1% (R0,02 billion) of the expenditure was costs incurred for litigation and claims, while 63% (R1,08 billion) relates to causes such as paying higher than market-related prices to procure personal protective equipment, suffering losses on projects and incurring costs where no value was received.
Contributors to fruitless and wasteful expenditure
- National government – R1,09 billion (64%)
- Gauteng – R0,38 billion (22%)
- Free State – R0,10 billion (6%)
With the exception of the national Department of Agriculture, Land Reform and Rural Development, all these auditees have incurred this type of expenditure for the past three years, with some of the main contributors being as follows:
- At the Water Trading Entity, fruitless and wasteful expenditure was attributed to abnormal costs incurred of R0,17 billion and R0,21 billion relating to internal and external projects, respectively.
- At the National Treasury, the main reason for the fruitless and wasteful expenditure was payment for technical support and maintenance on the Integrated Financial Management System programme, which
the department is not using. - At Transnet, the fruitless and wasteful expenditure mainly relates to redundant assets and stock (R0,05 billion) of raw materials that could not be used, theft of laptops and cellphones, damage to motor vehicles, misuse of company assets, employee fraud (R0,05 billion) and poor contract management, including non-adherence to the procurement procedure manual (R0,02 billion).
- At the South African Post Office, the fruitless and wasteful expenditure was mainly interest and penalties on late payments, of which
R0,05 billion relates to the South African Revenue Service. - At the Gauteng Department of Health, the fruitless and wasteful expenditure was due to service providers overcharging on procurement of personal protective equipment.
Despite the limited resources, we still find auditees not diligently and carefully managing funds. This is also apparent from the material irregularities identified, which we cover in more detail in chapter 9. Many auditees also do not follow the required procurement processes to ensure that the best price is paid for goods and services – we provide more details later on in this section.
Irregular annual expenditure
Irregular expenditure
Irregular expenditure is expenditure that was not incurred in the manner prescribed by legislation, and does not necessarily mean that money was wasted or that fraud was committed.
When an auditee incurs irregular expenditure, it indicates non-compliance in the process that management needs to investigate to determine whether it was incurred because of an unintended error, through negligence or with the intention to work against the requirements of legislation (which, for example, require that procurement should be fair, equitable, transparent, competitive and
cost-effective).
These investigations also determine who is responsible for the non-compliance and what the impact is, and provide the basis for determining the next steps. If the non-compliance had no impact and negligence was not proven, one possible step is to condone the expenditure. Alternatively, if negligence was proven, the auditee can take disciplinary action, recover any losses from the implicated officials, or even cancel a contract or report it to the police or to an investigating authority.
Irregular expenditure remains high at R166,85 billion, and auditees are still slow to deal with it.
The biggest increase in irregular expenditure was in national government, mainly as a result of the National Student Financial Aid Scheme increase. If we exclude this amount (R77,49 billion), irregular expenditure for the current year would be R89,36 billion.
For the first time in many years, most of the irregular expenditure (R103,55 billion, or 62%) was caused by non-compliance with legislation that did not relate to supply chain management. As mentioned above, a significant portion of this amount (R77,49 billion) is from the National Student Financial Aid Scheme, mainly due to non-compliance with bursary-related regulations.
The R63,30 billion (38%) that relates to non-compliance with supply chain management legislation can be broken down as follows:
- Procurement without following a competitive bidding or quotation process – R7,43 billion (12%)
- Inadequate contract management – R4,65 billion (7%)
- Non-compliance with other procurement process requirements – R51,22 billion (81%)
Contributors to irregular expenditure
Irregular expenditure remains high at R166,85 billion, and auditees are still slow to deal with it.
The biggest increase in irregular expenditure was in national government, mainly as a result of the National Student Financial Aid Scheme increase. If we exclude this amount (R77,49 billion), irregular expenditure for the current year would be R89,36 billion.
For the first time in many years, most of the irregular expenditure (R103,55 billion, or 62%) was caused by non-compliance with legislation that did not relate to supply chain management. As mentioned above, a significant portion of this amount (R77,49 billion) is from the National Student Financial Aid Scheme, mainly due to non-compliance with bursary-related regulations.
The R63,30 billion (38%) that relates to non-compliance with supply chain management legislation can be broken down as follows:
- Procurement without following a competitive bidding or quotation process – R7,43 billion (12%)
- Inadequate contract management – R4,65 billion (7%)
- Non-compliance with other procurement process requirements – R51,22 billion (81%)
All of the top 10 contributors to irregular expenditure are repeat offenders, having previously incurred this type of expenditure within the past three years. Further insight on some of these top 10 contributors is as follows:
- National Student Financial Aid Scheme –
R43,71 billion (56%) of the irregular expenditure was incurred in previous years but was identified and disclosed in the current year. The remainder was incurred in the current year and was mainly due to a failure to consult with respective Ministers on the funding rules and eligibility criteria for the student bursaries. - Transnet – R16,96 billion (55%) of the irregular expenditure was incurred in previous years but was identified and disclosed in the current year. The remainder was incurred in the current year. Some of the more significant matters are being investigated by the Special Investigating Unit.
- Department of Transport (KZN) – R2,05 billion
(32%) of the irregular expenditure was incurred in previous years but was identified and disclosed in the current year. The remainder was incurred in the current year. Non-compliance with other procurement process requirements constituted 87% of the expenditure. The goods or services and key contracts affected included a bus service contract, security services and upgrading of roads. - Department of Roads and Transport (GP) – R2,01 billion (100%) of the irregular expenditure was incurred and identified in the current year – most of this represents irregular expenditure incurred on ongoing multiyear contracts awarded in previous years. All of the expenditure is due to non-compliance with other procurement process requirements and relates mostly to extension of expired bus contracts.
Auditees have a poor track record in dealing with irregular expenditure and ensuring accountability. The year-end balance of irregular expenditure accumulated over many years continues to grow and remains unresolved.
Below are some examples of why this type of expenditure continues to grow.
Approximately R37 billion of the Transnet amount relates to the procurement of 1 064 locomotives that was found to be irregular. These transactions are the subject of ongoing investigations and court processes, the outcome of which will determine the appropriate steps to be implemented for dealing with the irregular expenditure, including recovery of losses incurred (if any), disciplinary steps and/or condonation if there are good grounds to do so.
The Gauteng Department of Health is not investigating all cases of irregular expenditure due to instability in leadership, lack or non-submission of requests for condonement of the irregular expenditure to the relevant authorities, and the fact that most of the irregular expenditure is from legacy issues, such as consignment stock, security contracts and cleaning contracts.
The biggest reason for growing irregular expenditure at the national Department of Defence is
the lack of an effective consequence management and control environment. In the current year,
74 new cases of irregular expenditure were identified, while only three were condoned and none were recovered or written off.
A culture of tolerance and even acceptance of non-compliance fuels the situation where officials are not held accountable and consequence management is not implemented. This blatant disregard brings into question government’s commitment to respect the Constitution of the Republic of South Africa, as required by section 41 of the Constitution.
How was this expenditure dealt with
Our most common findings in this area were as follows:
- Irregular expenditure identified in the previous year was not investigated to determine if a person was liable for the expenditure –
84 auditees (26%). - Fruitless and wasteful expenditure identified in previous years was not investigated to determine if a person was liable for the expenditure – 55 auditees (17%).
- Effective and appropriate disciplinary steps were not taken against officials who incurred and/or permitted irregular expenditure – 52 auditees (16%).
As a result, the year-end balances of this unwanted expenditure continue to grow, with irregular expenditure standing at R488,14 billion, unauthorised expenditure at R28,67 billion, and fruitless and wasteful expenditure at R9 billion.
The Public Finance Management Act requires these types of expenditure to be objectively and diligently investigated. Neither accounting officers or authorities nor treasuries should write off or condone such expenditure without making sure that no losses were suffered or that any such losses cannot be recovered.
Unauthorised, irregular, fruitless and wasteful expenditure at key service delivery departments and provinces
Irregular expenditure at key service delivery departments and provinces
1. Health
2. Education
3. Human settlements
4. Public works
5. SOEs
6. Eastern Cape
6. Free State
7.Gauteng
8. Kwazulu-Natal
9. Limpopo
10. Mpumalanga
11. Northern Cape
12. North West
13. Western Cape
Unauthorised, fruitless and wasteful expenditure at key service delivery departments and provinces
1 Eastern Cape
2 Free State
4. Kwazulu-Natal
5. Limpopo
6. Mpumalanga
7. Gauteng
7. Northern Cape
7. North West
9. Western Cape
