The Financial Crisis in the Eastern Cape Department of Health Threatens the Collapse of Health Services, the loss of doctors and a loss of life – National Government has a Duty to Intervene Urgently
May 30th 2012
Over the last two weeks SECTION27 together with our partners the Rural Health Advocacy Project (RHAP), TAC, Africa Health Placements (AHP), Rural Rehabilitation South Africa (RuRESA), the Rural Doctors Association (RuDASA) and the South African Medical Association have received many reports from health care professionals and activists within the Eastern Cape who are concerned about the rapid decline in service delivery in the province.
These reports chronicle a variety of issues including non-payment of staff, drug stock-outs and shortages of basic medical supplies, and point to widespread systemic failures in the management and financing of services in the province. Although the crisis has been devastating to all types of state health facilities in the province, the impact of delayed or non-payment of critical healthcare workers and the difficulties in replacing such essential staff is even more acutely felt in rural areas, where healthcare teams are small and extremely fragile.
This briefing note for the public and the media outlines the tenuous financial position of the department, based on official internal Eastern Cape Department of Health documents that we have obtained.
The Eastern Cape Department of Health is facing a shortfall of between R2.5 and R3 billion. This will have to be funded out of the R15.17 billion allocation for 2012/13, and will effectively leave the Department with approximately R12 billion to meet its service delivery commitments. Given the 2012/13 budget is already considered to be insufficient to meet the needs of the department and has in fact, declined in real terms, this is likely to severely exacerbate their weak financial position. This is likely to impact on service delivery within the province. This shortfall has arisen for various reasons:
• Demographic factors: While the provinces burden of disease and the size of the population accessing care in the public sector continue to increase, budget allocations have not followed suit and once inflation is accounted for, have actually declined in real terms by between 7.7-10% for 2012/13.
• Underfunding or unfunded initiatives: Underfunded or unfunded initiatives have provided additional budgetary pressures of around R1,19 billion. These should have been adequately budgeted for as both the Treasury and Department have been aware of the additional costs associated with these initiatives for a number of years. A high proportion of underfunded and unfunded initiatives relate to employee compensation, which is already one of the primary cost drivers within the province. This is underfunded due to higher than budgeted salary increases, poorly formulated Occupation Specific Dispensation (OSD) phases and unfunded mandates such as the Human Resources Operational Project team (HROPT). A recruitment plan that has been developed for 2012/13 has also not been budgeted for in the MTEF.
• Issues related to management: Management issues such as weaknesses in the department’s supply chain management systems and Personnel and Salaries (PERSAL) system have led to substantial wastage and loss. This is both due to the following. Firstly, the department has insufficient mechanisms in place to ensure that money allocated for the purchase and distribution of goods and services in the province are used for their intended purpose. Secondly, weaknesses in the PERSAL system artificially inflate human resource costs in the province both as a result of payment of workers fraudulently entered into the system, and through payment of workers that are no longer working for the department.
The department has responded to the budgetary shortfall in the following ways:
1. Shifting spending from areas such as goods and services: The department has dealt with shortfalls in its human resource budget by shifting funds from other areas of its budget, such as goods and services. This has not been combined with significant rationing in other areas. The department continues to place orders for goods and services based on budget allocations at the beginning of the financial year and not on what is actually available once the budget has been reduced to accommodate funding shortages in other areas. This has meant that the department is unable to pay suppliers for goods and services delivered and continues to accrue debt to suppliers.
2. Shifting spending from capital expenditure: The department has shifted spending away from capital expenditure. This is likely to create maintenance issues in the future and place an increasing burden on existing infrastructure. For 2012/13, for example the allocation for capital assets has decreased by more than 26% from what was allocated in 2011/12.
3. Austerity measures: The department and Treasury have implemented various austerity measures including the following:
a. A moratorium on new appointments (though exemptions will be made)
b. The rationing of non-critical services
c. A review to identify non-existent personnel
d. Establishing a recruitment committee to deal with appointments
e. “Top slicing” the budget by reducing at Treasury level prior to payment to the department in order to allow the Treasury to directly re-pay loans.
While these austerity measures will help in reducing mismanagement of funds related to management, no quantification of the expected gains are provided and it is unlikely that this will be significant enough to cover the losses from the other two key sources, namely the size of their service delivery platform and the underfunded and unfunded initiatives.
4. Attempts to access financing: This financing shortfall is not restricted to this financial year and was first was brought to the attention of Treasury in 2010. Two steps were taken to address the shortfall in the last few years. However, these did not effectively resolve the issue.
a. Firstly, the Treasury agreed to adjust the department’s baseline, to make provision for the payment of accrued debt by R2.18 billion divided in three phases. However, this was insufficient to cover its intended purpose given additional budgetary pressures that arose.
b. Secondly, the Department negotiated an overdraft to cover accruals and its existing overdraft. This was meant to be funding of R 1,51 billion (capital), which was to be managed through top slicing (or repayment by Treasury prior to disbursing the budget to the Department). The Department has argued this overdraft was never provided. However, the top slicing to repay the overdraft has occurred despite the fact that no overdraft has been provided. As such, they are in effect paying out against a capital contribution that they do not have. Hence they have requested a restoration of R1.1bn to the budget.
Going forward, the following is required:
1. At the very minimum a restoration of the top-sliced amounts related to the overdraft facility is necessary. If the information provided to us is correct this money appears to be funding a capital contribution to an overdraft that does not exist.
2. In addition, there needs to be a serious evaluation of the actual costs and budget required with adjustment made if necessary to redress issues of unfunded mandates which appear to have also created a loss of over R1bn by estimates provided and seem to be a key contributor to the crisis.
3. Negative growth in budget is legally impermissible and should be queried in the context of health. The shifting of expenditure from goods and services and capex to HR in order to manage the situation is only going to create future crises and budgetary constraints.
4. Austerity measures can play a role in curbing overspending related to mismanagement, but should not impede healthcare in the process. This is a serious concern if moratoriums on new posts are in place and human resources are not sensibly managed.
This crisis was foreseeable and therefore to some extent, preventable. We are concerned by the fact that efforts to turn around the department’s financial position have not had their desired effect and that the situation is growing in magnitude and severity, thereby having a significant impact on people’s health and right to quality healthcare.
Implementable and sustainable solutions need to be found urgently. If the Eastern Cape Department is unable to immediately and effectively address these problems it becomes essential that the National Department of Health intervenes to maintain norms and standards in the province and prevent the drastic threats to health and health care that face many in the Province. It is particularly critical that any interventions, such as austerity measures do not deepen the crisis by leading to the withdrawal of essential services and the further deterioration of healthcare outcomes in the province.
Any turnaround plan will only be effective if weaknesses in critical systems such as human resource and supply chain management are identified and are fixed, and the endemic corruption is eradicated. Extensive and hugely costly corruption in healthcare is especially serious as the funds siphoned could have been directly used to improve the quality of life for those most vulnerable.
In addition, it is necessary for the Department to communicate the extent of the crisis and measures being taken to address it with patients and healthcare workers in the province who are being directly affected.
For further information contact: Daygan Eagar
For comment contact: Mark Heywood
 Employee compensation alone accounts for 65% of the budget this year, up from 57% in 2008/09.
 R793 million in 2010/11, R663 million in 2011/12 and R726 million this year. The purpose of this overdraft would be to clear existing overdrafts with the Provincial Revenue Fund and to pay outstanding accurals.
 The Department has argued that they never received the overdraft of R1.5 billion into its baseline. After further negotiations the Treasury finally agreed to an over draft facility of R800 million (which was far less than the R1.5 billion initially agreed to but would still have allowed the department some financial relief). However, it appears that the Treasury has not added the overdraft facility to the baseline for this year. Despite this top slicing of the budget to pay for the overdraft continues