Economic Development Department (EDD) Strategic Plan 2012: Financial and Fiscal Commission (FFC) briefing; Committee Report on Department Budget Vote; Committee Programme

Economic Development

16 April 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Financial and Fiscal Commission briefed Members on the Economic Development Department's Strategic Plan 2012. It began with contextual background, before presenting on the Department's key programmes, expenditure trends, expenditure outcome per programme, and third quarter performance by programme; the Department was responsible for three regulatory bodies and three development finance institutions. The Commission gave figures for transfers and subsidies. It then outlined its design of policy evaluation while noting that it was not possible to judge the success of policy by the observation of statistics alone. Its approach was to enquire, for example, if the scale of funding was big enough to make a difference or was targeted at relevant factors, if macroeconomic models indicated a positive effect on growth, if growth performance was better in assisted regions, and if there was concrete evidence of positive results. The Commission gave its major findings on the prospects for achieving accelerated economic growth, the Millennium Development Goals, and current inter-government fiscal transfers. The Commission noted that the costs of attaining all outstanding Millennium Development Goals was prohibitively high.

The Commission recommended that Government should further reprioritise expenditures for the equitable share and conditional grants for 2012/13, and should continue strengthening the equity focus of the current system of intergovernmental transfers, in particular in the health and education sectors. The existing transfer system was not the most effective instrument to support Government's growth objectives. The Commission further recommended that the Government should actively and specifically continue implementing significant capital investment in public infrastructure. Key concepts in economic development included consistency of Government's projections, redistribution, restructuring, investment versus subsidies, wide partnership, geographical balance and reducing disparities, and climate, green growth and jobs.

Members asked the Commission to elaborate on its position on the first millennium development goal, to explain the existing structure of South Africa's economy, noted growth and economic development in the regions that were well-populated while those under-populated were under-developed, found this one of the most fascinating presentations that the Committee had ever received, were interested in the Commission's approach to its analysis of the Economic Development Department's response, as a new Department, to its task, noted that it was useful to Members to think 'out of the box', asked the Commission about wastage of public funds, agreed with the Commission on the role of provinces in economic development but asked about the capacity of the state to implement policies, were especially concerned about health and education, in particular, in the Eastern Cape,  and asked for clarity on key concepts, in particular, wide partnership. How did the Commission see the current partnership between Government and business? Members also asked about the role of the private sector in producing essential skills for each specific industry, and about 'unintended targets' as beneficiaries. There were also questions on the infrastructure spending by public entities and South Africa's role as a country in producing continent-specific initiatives to deal with the problem of equality and job creation. The Chairperson said that the Committee hoped to follow up on this briefing, which had come at an opportune time while Members were preparing for the Budget Vote debate, and expected written responses to the questions which remained unanswered because of time constraints. 

The Committee adopted its 2012 Second Term Programme with amendments.

The Committee adopted its Report on Budget Vote 28: Economic Development, with amendments

Meeting report

Financial and Fiscal Commission on Economic Development Department (EDD) Strategic Plan 2012
Mr Bongani Khumalo, FFC Acting Chairperson and Chief Executive Officer, briefed Members on the Economic Development Department (EDD)'s Strategic Plan 2012, with reference firstly to the contextual background: economic growth; economic development challenges; Government's spending priorities, strategic outcomes, and policy priorities (slides 2-6). He noted the uncertain economic climate exacerbated by South Africa's exposure to the Eurozone, its trade relationships, and its relationships to the global financial markets concentrated in that Eurozone area. The Commission had projected that the economy would most likely recover in around 2015,but it might take a little longer. Sluggish growth had implications for the Economic Development Department and the new growth path (NGP) and the broader targets of the National Planning Commission (NPC). The Commission had thus noted a downward revision of the growth forecast. Uncertainty was still a reality and posed a significant threat to full recovery from the crisis. One huge challenge was the high unemployment rate, which the Commission considered to be a big social hazard. Then there was the issue of poverty reduction. However, the policies adopted by Government did make a difference, but the pace at which this was happening was not as fast as desirable. Moreover, there was growing inequality which did not seem to be slowing down. South Africa was also vulnerable to climate change, with threats around water supply, environmental degradation, and energy supply. The Commission would be making a submission on or around 23 May 2012 to Parliament on some of the issues that it had interrogated. There was also the issue of the slow pace of development of small businesses, and poor infrastructure which resulted in poor social outcome in such fields as education and health.      

Dr Ramos Mabugu, Director: Research, FFC, then presented on the Department's key programmes (table, slide 7); expenditure trends (slides 8-9); expenditure outcome per programme (table, slide 10; slide 11); and third quarter performance by programme (slide 12). He noted that the key outcome on which the Department focused was decent employment through inclusive growth. The emphasis on growth was important because of the link with economic development and the latter was linked to the quality of life. Economic growth, however, was related to volume changes, and although the two were linked, there were significant differences, and one could have economic growth without improvements in people's lives. Also distribution became central to development. The spending priorities for 2012 and for the Medium Term Expenditure Framework (MTEF) focused on promoting investment for economic development and trade competitiveness, in particular, in the provision of development finance, effective implementation and adjudication of competition policy, and creation of an efficient system of international trade administration. It could thus be seen that the Department had a special focus on addressing bottlenecks in competitiveness and less so on distributional aspects. The Commission emphasised the Department's coordinating role. The Department spent 89% of its total budget in 2010/11. The Commission noted that the Department's underspending was mainly as a result of the high vacancy rate.          

The Department was responsible for three regulatory bodies and three development finance institutions (slide 13). The Commission gave figures for transfers and subsidies (table, slide 14; chart, slide 15). 

The design of policy evaluation – economic development - at the Commission was outlined under the sub-headings of the question of the evaluation and the evaluation design (slide 16). The Commission noted that it was not possible to judge the success of policy by the observation of statistics alone – there were other factors at work. Its approach was to ask: was the scale of funding big enough to make a difference? Was it targeted at relevant factors? Did macroeconomic models indicate a positive effect on growth? Was growth performance better in assisted regions? Was there concrete evidence of positive results? (Slide 17.) The impact of policy was indicated (chart, slide 18).

Dr Mabugu gave the Commission's major findings for economic development – on prospects for achieving accelerated economic growth; on Millennium Development Goals (MDGs); and on current intergovernmental fiscal transfers (IGFTs). The Commission noted that the costs of attaining all outstanding MDGs was prohibitively high; there was too much to do in four years. (Slide 19).

Dr Mabugu reported that the Commission recommended that national, provincial and local government should further reprioritise expenditures in respect of the equitable share and conditional grants for 2012/13 to move towards attaining the MDGs. It should continue strengthening the equity focus of the current system of intergovernmental transfers, in particular in the health and education sectors.

The existing transfer system was not the most effective instrument to support Government's growth objectives, and this aspect should continue to be strengthened so that it played a supportive role.

The Commission further recommended that the Government should actively and specifically continue pursuing implementation of significant capital investment in public infrastructure that had a positive impact on total factor productivity and sustainable employment in the context of the new growth path (NGP) (slide 21).

Dr Mabugu presented the Commission's key concepts in economic development: consistency of Government's projections; redistribution; restructuring; investment versus subsidies; subsidiarity not top down (generally); wider partnerships; geographical balance/catching up/reducing disparities; regions: sub-national; and climate, green growth and jobs (slide 22). He emphasised the central role of the provinces in economic development, since they were actually responsible for the implementation of health, education and social services, and the need to distinguish economic development from growth per se.

Mr Khumalo did not read the concluding remarks of the presentation (slide 23) but noted that it was important both at a micro and at a macro level to understand the key issues for the EDD.
(Please see presentation document for full details.)

Discussion
Mr Z Ntuli (ANC) welcomed the presentation. He understood that the key MDG, especially for this Committee, was the first – to eradicate extreme hunger and unemployment, and asked the Commission to elaborate on its position on this MDG.

Ms S Van der Merwe (ANC) agreed with Mr Ntuli on key MDGs.

Dr Mabugu replied, regarding MDGs, that there were no credible figures on poverty for South Africa for before 1990. The figures available began from the 1990s, with a poverty level of around 6.7% on the basis of a headcount. When one compared that starting point with the present, 'poverty reduction was more than out', so that was why the Commission had not focused so much on MDG One as compared to the other MDGs. From the base from which figures began, poverty had been more than halved. As to details on why that had happened, it had been seen, from 2009, that social grants had driven this reduction of poverty. The Commission was continuously developing ways of examining other attributes of poverty than consumption or income. Thus the Commission had not focused on MDG One because of the reduction in poverty through social grants.

Mr Ntuli said that there were many calls to restructure South Africa's economy, but asked the Commission to explain the existing structure of South Africa's economy.

Dr Mabugu replied that South Africa had moved from a primary-based economy, initially based mainly on agriculture and later on minerals, to an economy based on manufacturing. Now the South African economy was becoming a service-based economy. However, in contrast to other countries, South Africa's services were capital-intensive rather than labour or knowledge intensive services. There were big and lingering structural problems in moving from the old manufacturing economy.   

Mr Ntuli referred to slide 22 on redressing geographical disparities. He noted growth and economic development in the regions that were well-populated, while those regions that were under-populated were under-developed.
Dr Mabugu replied that highly populated areas were likely to be the centres of growth. However, the Commission saw potential for the sparsely populated areas. Such areas were important ecosystems for sustaining growth in the highly populated areas. However, it was necessary to produce a growth plan to respond to that area's competitive advantage in such areas as tourism and pristine environment.  

Ms Van der Merwe found this one of the most fascinating presentations that the Committee had ever received. She was very interested in the way that the Commission had approached its analysis of the Economic Development Department's response, as a new Department, to its task. It was very useful to Members to think 'out of the box'.

Ms Van der Merwe suggested a challenge to the Commission: the question of wastage as raised in the newspapers that morning by the Minister of Finance. For Ms Van der Merwe it was not just a matter of stealing money, but also the capacity of officials to spend money effectively in order to deliver. This was a theme that had occurred to her throughout the presentation, and, in particular with reference to slides 3 and 17. She sought the Commission's assistance in the Committee's performing its task of oversight.

Mr Khumalo replied that corruption was a very serious issue. The Commission was working on a concept note and the terms of reference for a fully-fledged project on the impact of corruption. Some of these issues had been detected by the Public Service Commission (PSC), some by the Special Investigating Unit (SIU), but nobody had put all that information together and produced concrete or holistic recommendations.

The Commission had noted responses in the media to Section 100 interventions. Such responses suggested that there was something seriously wrong with how the Government conducted its business. The newspaper
headlines on corruption principally pointed to inadequacies in supply chain management (SCM). He had visited Limpopo with Members from the National Council of Provinces (NCOP). The Committee's concerns were indeed genuine and a serious threat to any initiative from Government. The Commission noted similar problems in other provinces – hence its decision to undertake a fully-fledged project on the impact of corruption. However, he acknowledged a general reluctance to talk about corruption directly and a preference to talk about, for example, efficiency improvement. Nevertheless, there were leakages in the system.     

Ms Van der Merwe found slide 18, on the impact of policy and the Commission's modelling block, complicated and asked the Commission to simplify it.  

Ms Van der Merwe agreed with the Commission on the role of provinces in economic development, but asked about the capacity of the state to implement policies.

Mr K Mubu (DA) said his first question had been anticipated by Ms Van der Merwe's last question. He was especially concerned about health and education, in particular, in the Eastern Cape.

Mr Khumalo replied that even in Gauteng there were capacity issues around health and education. The Commission had raised concerns around growing personnel budgets when examining in February 2012 the Division of Revenue and on the Fiscal Framework. However, it had not examined the actual vacancies. There was nothing wrong with a growth in personnel budgets if one was actually buying the service on which one was spending money. In terms of the submission that the Commission would table in May 2012, there would be a chapter on capacity issues. Some of the lessons applied not only at local level but also at provincial level. The amount of resources that the Government had spent on capacity-building was immense. However, it had to be asked where that capacity went.  

Mr Mubu asked for clarity on key concepts, in particular, wide partnership. He assumed that the Commission referred to partnership between public and private sectors. How did the Commission see the current partnership between Government and business? 

Mr Khumalo replied that Government had its own institutions dealing with partnerships. The Commission was probably more qualified to comment on those happenings that were linked to such institutions.

Mr X Mabasa (ANC) appreciated the Commission's input, and asked further about the capacity of the state to deliver
vis-à-vis the role of the Department of Higher Education and Training and the role of the private sector in producing essential skills for each specific industry.

Mr Khumalo agreed that higher education and training was central. It was clear that failure in primary and secondary education would be mirrored in higher education. Again the Commission would be tabling in May some recommendations on higher education. This would be the first time that it tabled recommendations on higher education. These recommendations would be linked to the kind of education model that existed at the lower level, and to the question as to whether present arrangements were appropriate for the century in which we lived. The link between primary and secondary education and higher education and training was critical for meeting the dimensions for economic development that were under discussion. He would link this to the question of how one moved away from this disparity in the distribution of economic growth. Despite having the latest available technology in South Africa, disadvantaged schools failed to prepare children to use such technology.

Mr Mabasa asked about 'unintended targets' as beneficiaries in relation to the poorest of the poor in economic development and growth. Did not the 'unintended target' sometimes benefit at the expense of the 'deserving target', so one found that one was not necessarily narrowing the gap between the rich and the poor but rather merely taking a small layer, the middle class, and pushing it upwards, while those on the lowest rung of the ladder remained without any benefits. 

Mr Khumalo replied that the application of the no-fee schools had unintended consequences. He gave the example of a school designated as a no-fee school whose budget had, as a result, been halved. This meant that parents must contribute to the cost of materials to the extent that it was as if they again had to pay school fees. This was not the intention of the policy, but the people who were supposed to benefit were now disadvantaged. This was one of the issues that would be raised in the Commission's submission in May.

Ms Tania Ajam, FFC Commissioner, added that it had been intended to provide a social safety net by means of the social grants. However this safety net was supposed to be coupled with adequate basic and higher education provision. This was where there had been failure, and the desired social mobility was not happening. In respect of job creation, it had to be asked if the products of the education system were employable. If South Africa's students were employable, they would find jobs in neighbouring countries. It was necessary to address the issue of employability.

Mr Mabasa asked if there were not also challenges of management and leadership at the level of delivery across departments.

It appeared that this question was not answered.

The Chairperson asked Mr Mabasa not to ask any further questions at this point.

Mr N Singh (IFP) referred to the Third Quarter Expenditure Report discussed in a meeting which he had attended that morning [Standing Committee on Appropriations?] in which Members had been concerned at under 50% capital underspending. The Commission had pointed out that for economic growth there was need for infrastructure development. How could this need for infrastructure development be aligned to capital underspending?

Mr Singh's second point was the infrastructure spending by public entities. Were Parliament's committees focusing enough on public entities' infrastructure spending? Or were committees just looking at departmental spending? He pointed out that Government transferred much of its money to these entities. It had been asked in that morning's meeting if National Treasury should not list some of these major infrastructure programmes when it presented budgets.

Ms Ajam replied that it was important for the Commission to consider state owned enterprises as there had been a shift in Government priorities to fund social infrastructure on the budget and to move economic infrastructure onto the balance sheet of state owned enterprises. National Government departments and state owned enterprises did not have to report in the same way as local and provincial government which had to report outputs of funding through the Division of Revenue Act.

Mr Singh acknowledged the link between what happened abroad and what happened in South Africa in regard to the global economic climate. Did the Commission think that South Africa was doing enough as a country to produce continent-specific initiatives to deal with the problem of equality and job creation? He asked lastly what kind of intervention the Commission thought could accelerate the pace (slide 3). What more could be done?

The Chairperson asked Mr Singh not to ask any further questions at this point.

Ms Ajam replied that continent-specific initiatives were one area in which South Africa could not afford to miss out. The developing world was not going to grow. The only areas that were going to grow were Africa, China, and India. When visiting Sudan, Ms Ajam had seen many Indonesian, Chinese and African enterprises, but she asked herself where the South Africans were, as she saw only MTN. It was necessary to manage the Southern African Development Community (SADC) as a whole, but in a way so that South Africa was not seen as imperialist. The Industrial Development Corporation (IDC) was aware of this, which was one area in which the Committee could assist.     

Ms D Tsotetsi (ANC) asked how progress could be measured when inequality persisted, and small businesses remained undeveloped.

It appeared that this question was not answered.

Ms Tsotetsi asked how departments should work together to ensure compliance.

It appeared that this question was not answered.

Mr Khumalo replied generally that some of the questions required more than the time available to answer.

The Chairperson apologised for having to stop the FFC from responding further at this time, but asked it to complete its answers by providing the Committee with written responses.

Mr Khumalo promised to send any written responses required within the next day or so.

The Chairperson said that the Committee hoped to follow up on this briefing, which had come at an opportune time while Members were preparing for the Budget Vote debate. 

Committee's 2012 Second Term Programme: consideration and adoption
The Committee adopted its 2012 Second Term Programme with amendments, and subject to the understanding that some changes might be required if necessitated by changes in Parliament's programme.

Committee Report on Budget Vote 28 – Economic Development: consideration and adoption
The Committee began its deliberations on its Report on Budget Vote 28 – Economic Development. It was essential to adopt the Report in time for tabling in the National Assembly in time for the Budget Vote debate on 24 April 2012.

The Chairperson noted that the Report included the Economic Development Department's entities and hence was a large document. She asked Members to examine the Report's recommendations and make additions or subtractions. The intention was to have a clear recommendation after every issue. She drew Members' attention to the summary of recommendations on page 6.

Mr Singh asked if the wording 'One of the success stories is that South Africa was exporting a lot more than the rest of the African continent' was correct. Should it not be 'rest of the countries of the African continent'?

The Chairperson asked if this arose during discussion, when the Minister had responded to a Member's question and explained how South Africa had managed to cushion itself during the global economic crisis.  

Mr Mabasa said that the sentence needed some improvement.

Mr Mubu said that it needed to be established whether the sentence's meaning was that South Africa exported more than the rest of Africa combined or exported more than other countries individually.

The Chairperson asked for suggestions to improve this sentence.

Ms Van der Merwe suggested 'One of the success stories was that South Africa is the largest exporter on the African continent'.

The Chairperson asked if South Africa was the largest or one of the largest.

Mr Mabasa thought that South Africa was the largest exporter.

The Chairperson asked the Researcher to verify.

Mr Singh suggested beginning the sentence 'In this context'.

Mr Mubu asked if the Committee was looking at making proposals and recommendations to accompany these summary discussions on each point.

The Chairperson clarified that these were discussions. There were issues raised, in bold type, to which there were Departmental responses. After all this there were recommendations. Therefore it was sometimes necessary to change the wording of the responses in order to put them into context. It was the responses from the Ministry that were of greatest importance. She suggested changes to the grammar so that the Report made better reading and to ensure that it reflected correctly what had transpired on that day.     

Mr Mabasa said that this Report would be a public document. The capturing, as it stood, would be appropriate for minutes. However, it was necessary to structure it as 'an objective communication'. 

The Chairperson thought that no one would disagree.

The Committee continued its deliberations at length and in great detail.

The Chairperson adjourned the meeting at 17h30 since Members were tired. It would resume the following day, procedurally as a continuation of the same meeting.

The meeting continued at 10h00 the following morning to complete its deliberations, with Mr Ntuli as Acting Chairperson. The Chairperson's apologies, and other apologies were noted. Mr Singh was attending a meeting of the Standing Committee on Public Accounts (SCOPA) but would make himself available if required.

The Acting Chairperson asked Members to continue correcting the Report, starting with the recommendations on the Competition Commission, with the object of adopting the Report by the end of the meeting. Any Members who came late would still have the chance to contribute.

Mr Mubu seconded.

Members deliberated at length on the details of the Report.

Mr Mabasa moved for adoption

Mr Mubu seconded.

The Acting Chairperson noted that the Report was adopted with amendments together with the recommendations as agreed in the meeting.

The Acting Chairperson adjourned the meeting.

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