Appropriation Bill: briefing by the Financial and Fiscal Commission (FFC)

Standing Committee on Appropriations

09 July 2014
Chairperson: Mr P Mashatile (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) told the Standing Committee that there was confusion that it provided money. Its role was rather to recommend on the distribution of money. The Commission responded to the Division of Revenue Bill; the fiscal framework; the Appropriations Bill, and the Medium Term Budget Process Statement. The theme for 2014 was fiscal levers. The budget had to be consolidated to deal with unemployment and social security. Further Education and Training (FET) colleges had to deal with youth unemployment, often linked to school dropout. Responsibility for expenditure was shifted from provincial to national, but revenue remained in the provinces. The budget injected into science and technology, and research towards a knowledge based economy. Fiscal stress in the provinces had to be anticipated. The economy was still recovering from the global economic crisis, and Africa had not grown as expected. New government departments had been created, but the Amendment Bill was still premised on the old structure. There could be no new money until adjustments had been made. Key risks were labour unrest; inadequate education and skills base; insufficient infrastructure investment and service delivery, and inability of consumers to cope with increasing inflationary pressure. The briefing looked at the 2014 Appropriations Bill in relation to key government priorities; infrastructure investment at the national level, and measures to stimulate cost inefficiencies.

During the discussion, there were questions about ghost workers; the State wage bill challenge; and equitable share grants to local government, which was seen as inadequate. Members pointed out challenges related to conditional grants. Local government lacked capacity to use grants. The FFC was asked to unpack its thinking about revenue. Members had problems with performance perks for some municipalities, while funds were witheld from poor performers. There was concern about education issues. The shift of responsibility for FET expenditure to national government was interrogated. There was concern about lack of standardisation of wages for government officials. Members had questions and critical comments on the Extended Public Works Programme (EPWP). An EFF Member felt that the Commission had been silent on borrowing, public sector debt and intergenerational fairness. The same Member asked about the doubling of the defence budget vote, and the contra indications of youth employment tax. The same Member expressed contempt for the comments of an FFC official.

Meeting report

Briefing by Financial and Fiscal Commission (FFC) 2014 Appropriations Bill
Mr Bongani Khumalo, CEO and Chairperson, FFC, noted that the FFC consulted with and made recommendations to Parliament, primarily. There was confusion that that the FFC provided money. This was not the case. Its role was in fact to recommend on the distribution of money. Parliament could ratify or reject these recommendations. The FFC was a budget player, according to the Intergovernment Fiscal Relations Act.  The Commission engaged with the medium term policy statement. Engagement for 2015 was already done in May 2014. There were copies of recommendations made in May 2013. Submissions were made for three years. The FFC responded to the Division of Revenue Bill; the fiscal framework; the Appropriations Bill, and the Medium Term Budget Process Statement.

The theme for 2014 was fiscal levers. The budget had to be consolidated to deal with unemployment. Social security grants were not to be compromised. There had to be safety nets for the vulnerable. Further Education and Training (FET) had to deal with youth unemployment, often linked to school dropout. Responsibility for FET had been shifted from provincial to national. Expenditure would be centralised, but not revenue. Money remained in the provinces. The budget injected more into science and technology, also into research for a knowledge based economy. Underspending of conditional grants by provinces and local government would be reviewed with the Treasury. The question was how to anticipate fiscal stress in the provinces. Municipalities received performance based grants.

Dr Ramos Mabugu, RRP Director, FFC, noted that the economy was still suffering from the global crisis. Africa had not grown as much as expected. Locally, strikes had a detrimental effect on the economy. New government departments had been created. The Amendment Bill was still premised on the old structure. Blanks were left in the old Amendment Bill for the new departments. There had to be administrative mop-up for consolidation. There could be no new money until adjustments had been made.

The key domestic risks were labour unrest, inadequate education and skills base, insufficient infrastructure investment and service delivery, perceptions of rising corruption, and stress on consumers to cope with increased inflationary pressures.

The briefing provided assessments of the composition of funds, and of the 2014 Appropriation Bill in relation to the key government priorities of promoting economic growth; education; health; job creation, and improved public service. It also looked at infrastructure investment at national level, and measures to stimulate cost efficiencies.

The briefing concluded that resources were efficiently allocated to priority areas, but government needed to improve the impact of spending programmes. A less adverserial relationship between business and organised labour had to be fostered. Skilled capacity of the public sector to implement projects and reduce corruption was needed.

Ms R Nyalungu (ANC) referred to FET colleges and how they would be monitored when the shift in their expenditure occurred from the provinces to national.

Ms Nyalungu asked what was done about ghost workers. She asked if there was pay without work, and if there were measures to enforce consequences. She further asked if there were legal measures that prevented it.

Mr Khumalo replied that ghost workers had to be dealt with by accounting officers. Audits had been done in Limpopo and Eastern Cape and there were drastic reductions. There were corrective measures in the law for identified transgressions. The accounting officer or the CEO had to act. To spend money not budgeted for was against the law.

Mr E Gcwabaza (ANC) remarked that the State wage bill was a challenge. He asked if the FFC was mandated to address financial stress.

Mr Khumalo replied that the State wage bill in relation to municipalities was instructed by the Municipal Systems Act as amended in 2012. The question was how the FFC fitted into the collective bargaining process. Treasury would say that it provided for inflation, and that implications were different among municipalities. The South African Local Government Association (SALGA) questioned the role of the FFC. The unions wanted to control the process. FFC decisions on submission of revenue was also based on studying the inflation rate. Some municipalities depended on transfers from the centre. SALGA had to deal with that. The FFC studied national macro economic aggregates. The FFC had to stay away from employer/employee relations.

Mr Gcwabaza asked about unstandardised salaries of officials across national, provincial and municipal levels.

Mr Gcwabaza asked about development finance institutions. There were metros with huge revenue versus poor municipalities. The question was how it could be standardised. Not only wage bill stress had to be addressed, but also fairness.

Dr C Madiopha (ANC) questioned the allocation of equitable share funds to local government. They only got 9% and they were at the coalface. Equitable share criteria had to be revised. People were getting service delivery perks whilst not dealing with challenges.

Mr Khumalo replied that performance perks was an institutional arrangement that rewarded good performance. The consequences for bad behaviour was a negative incentive. The Constitution allowed for the witholding of funds. There were laws and regulations.

Dr Madiopha referred to conditional and incentive grants. There were challenges of coordination. Inequalities and disparities were not known. The question was how a grant could be used if there was no capacity to spend it. The poor municipalities were sometimes instructed to spend their own funds first, by the formula. Poor municipalities lacked own funds. Currently 40% had to be spent, and then there could be a claim after performance.

Mr Khumalo replied that municipalities were funded from national government through conditional grants. There was a R20 billion shortage. Money was pumped in, in the face of underspending and wasteful expenditure. The provincial levers were cooperative governance. National and provincial had to support municipalities.

Dr Madiopha said that there had to be recommendations to build capacity. The FFC did not talk about capacity to spend.

Dr Madiopha asked that the FFC unpack its thinking about revenue generation. In KZN people were begging. There was the government and Amakhosi, and local government could do nothing. There had been efforts in the rural areas to introduce house and land charges, but it could not be done because the land belonged to Ingonyama Trust. Local government could not raise money.

Mr Khumalo replied that a comprehensive study was completed in 2011/12 on the local government fiscal framework. The division of revenue was not the problem. The money was there but it was not spent. It was not an equitable share problem. Municipal managers were saying that there was a problem with funding arrangements. Municipalities had to raise money for operational needs. It had been like that under Apartheid. It was wrong to treat municipalities as if they were all the same. Differentiation among municipalities was included in the formula introduced in 2013, among metros and other municipalities. The question was how to provide support for lack of capacity. Collection of revenue had to take poverty and unemployment into account. The Auditor-General only looked at how money was spent. It looked at expenditure at the expense of revenue.

Mr M Figg (DA) remarked that there were challenges at national, provincial and local levels. There were limited funds for services. It was not so much a matter of how to spend, but who was spending. There had to be a look at human resources policies. Accounting officers did not know how to account for and how to spend funds. Performance bonuses rewarded municipalities but money was taken from poorly performing ones. Beneficiaries of grants would suffer. He asked who performed the functions.

Mr Khumalo replied that intergovernmental cooperation was essential. On oversight visits to the Northern Cape to discuss energy issues, it was noted that officials from national government wanted to withold money unjustifiably. Those were junior people who did not believe in the process and wanted to create a ruckus. Credibility was destroyed. The independent development programmes failed because people were sent who were not relevant.

Mr Khumalo replied that it was not a money issue. Accounting officers had to be held accountable. They had to adhere to the law. It was an administrative issue. The FFC could only advise Parliament. When departments came to the Committee, issues could be raised with them. The FFC did not have the power to compel teachers to tighten controls.

Ms S Shope-Sithole (ANC) told Mr Khumalo that he was the institutional memory of the FFC. He had perfected his skills. She remarked that in a knowledge based economy, research had to be strengthened to compete globally. She stressed about the lack of knowledge in communities. High level skills were lacking.

Ms M Manana (ANC) said the presentation was informative. She asked about the shift whereby national took over Further Education and Training colleges from provincial, while funds remained in the provinces. She asked how things were operated before.

Mr A Shaik Emam (NFP) also asked about the funding of FET colleges.

Mr Shaik Emam said that unemployment had to be addressed. It was no use training quality people if they could not get jobs.

Mr Shaik Emam remarked that underperforming municipalities got unqualified audits, but they beat irregular expenditure opinions just by releasing all information.

Mr Shaik Emam asked about the amount of money spent on teachers who were also deputy mayors and the like. Spending had to lead to quality education. More teachers did not necessarily mean quality education. If one was not present in the classroom one could not teach.

Mr Khumalo replied that different functions needed different combinations of inputs. Many teachers were needed in education, but one could not have moonlighters.

The Chairperson referred to page 111 of the 2014 budget review, with reference to FET colleges. Special committees had to meet with provincial treasuries to look at the shift in base funding. The equitable share formula was welcomed.

The Chairperson agreed with Dr Madiopha that very little of the equitable share reached the local sphere. Non-metros struggled to get money from ratepayers. Municipalities were clubbed together, but Johannesburg did not shove money into the heap. Some municipalities had merged to broaden the tax base.

Mr Khumalo responded that the issue of the FET college function shift had to be finalised. Funding for FET colleges was from the provincial equitable share. The educational component had to be 48%. The 48% was an instrument. Provinces had to decide on the bases of priorities. But there were competing priorities. Those were not visible in the FET formula. The function shift showed a peculiar pattern. The formula gave instructions, but disparities in funding was a real issue. The distribution of FET funding did not tally with the need. In some areas funding for colleges was always too low. The current funding arrangement did not assist to plan for the function. A way had to be found to determine needs. There had to be capacity to rationalise. New money was not the answer. Money was sitting in SETAS, wrongly allocated. It was a challenge for the department to find that money.

Mr Gcwabaza referred to the wage bill stress. Wage increases were not negotiated and there was a lack of standardisation. Some CEOs of government entities earned more than others, especially metro municipal managers. He asked what was to be done about that.

Mr Khumalo replied that the FFC could not play a role in standardisation. The Department of Public Service and Administration (DPSA) had a bill related to the public service. The FFC was only consulted late in the process. There was no mandate to deal with who got paid what. The FFC could only pronounce on how provinces and municipalities dealt with national decisions. There was a nationally determined agreement on what provinces had to pay. Provinces could not bargain about that.

Professor Daniel Plaatjies, Commission Member, FFC, added that there was a commision to look at salaries of office bearers. Currently the agency responsible was SALGA. Many were saying that the public service was bloated. The most effective size and shape still had to be determined.

The Chairperson remarked that the DPSA was looking at the issue within the context of a single public service.

Dr Madiopha said that a single public service could consist of three spheres. In some Departments the CEO received more than the Director General. A report was needed.

Mr Gcwabaza asked how often the Treasury reviewed the equitable share formula to keep abreast of changes.

Mr Khumalo replied that the equitable share formula was reviewed on an annual basis.

Mr Gcwabaza remarked that the mobility of people from rural to cities had to be taken into account. Automated ways of managing revenue collection could not be relied upon entirely. There was no guarantee that people would pay. There was also the culture of not paying.

Mr Khumalo replied that there were challenges related to the movement of people. The education budget fell short in Gauteng due to migration. The annual budget was updated, but at the wrong time. Parliament, the FFC, the Treasury and SALGA had to talk. Automation of revenue collection mechanisms had to be looked at in terms circumstances in municipalities. Where there was no electricity it was not possible. Automation could serve as a substitute.

Mr Figg asked about structural implications. He asked what had increased since 2013. He asked when NSGI would be implemented.

Dr Madiopha said that priorities had to be talked to. Job creation was a top priority. There had to be a focus on labour intensive infrastructure development. There was a problem with the EPWP programme for building social infrastructure. There were currently alternative building methods which made it possible to build a house in three weeks. Yet the EPWP was supposed to provide employment for 100 days. The question was how to balance service delivery with job creation. She asked how figures like 100.6% were arrived at. The Commission had to look if expenditure got value for money.

Mr Khumalo replied that certain government measures dealt with transitory issues like the EPWP. Service providers were playing games and had to be monitored. The Presidency, with Monitoring and Evaluation reconfigured the service delivery mode. Outcomes currently had to be linked to programmes. Monitoring systems had to change. Spending beyond 100% was justified if there was value for money. The Auditor-General audited predetermined objectives. The margin to underspend or overspend was linked to predetermined objectives. The Audit-General asked about the level of materiality.

Dr Mabugu added that quicker building innovations had to be encouraged. To balance service delivery and job creation, the EPWP had to provide other work for the remaining days, if a school was completed rapidly.

Mr G Gaarde (EFF) said that there had to be preparation for 16 July, so that the Appropriations Bill could be supported by the House. The FFC presentation was restricted to expenditure. There was no analysis of revenue to finance service delivery. The FFC did not report on borrowing and public sector debt. The FFC had to take the Standing Committee into confidence about borrowing against the fiscal regime. It had to be known if borrowing adhered to the principle of intergenerational fairness. A next generation could be burdened with debt. The R300 million Nkandlagate was financed from borrowing.

Mr Khumalo agreed about the revenue side of the fiscus. But the role of the FFC was to unpack what government had tabled, and to make recommendations. Historically speaking, there was a time when revenue was abundant. But the economy was growing slowly, and more people were drawn into the tax net. There was a growing deficit on people’s needs. Alternatives had to be found. There had been a submission by the FFC on borrowing in 2009, against the background of the onset of an economic crisis. The FFC had recommended that economic investment had to be balanced for the poor, and there had to be a safety net for the vulnerable. At the time the FFC predicted that there would be economic recovery by 2015. Guarantees to State owned companies for borrowing could not be treated in a meeting of the current kind. The FFC had reports and could share about the issues Mr Gaarde had brought up. With regards to inter-generational debt, he said that the FFC was only responsible for commenting on how fairly resources were implemented.

Mr Gaarde remarked that the President had said in the SONA that the defence budget had been reviewed. The defence vote had doubled, from one to two billion. It had to be asked if such investments benefitted the country.

Mr Gaarde referred to youth employment tax. The FFC had noted that it was an improvement but it only focused on the good side of such measures. The contra side of employment tax incentives had also to be considered.

Mr Khumalo replied that the FFC could not make political statements about employment tax incentives. Monies allocated were tabled in Parliament. The contra side would also be addressed.

Dr Mabugu added that employment tax incentives had to be understood as intervention in jobs. There was discrimination against youth. Employers preferred experience. Neither the market nor economic growth could solve the problem. Intervention was needed. A failing system had to be unblocked. The size of subsidies had dropped. Youth unemployment had to be addressed. Capital had to be replaced with younger workers. There had to be a willingness to do that.

Mr Gaarde referred to the remark on the sustainability of the EPWP programme. The programme placed the rural poor in an undignified position where they were supposed to be earning, but the contract ended after six months. Dignity had to be brought to indigenous Africans.

Mr Khumalo replied that the EPWP was a transitory arrangement. It had to enable people to survive widespread poverty and unemployment. The solution was job creation and to create conditions for growth. When the FFC briefed the Department of Public Works, it would talk to numbers and targets met. If the Standing Committee felt that issues were important, the FFC was willing to discuss it.

Mr Gaarde referred to allocations to capacity improvement (page 12). There were grants with many names but municipalities were deteriorating. 40 municipalities were underadministrated. The impact of grants vis a vis outcomes had to be taken into account.

Mr Khumalo replied that there were capacity building programmes in local government, especially in rural, but also in urban areas. There was responsibility on the part of provincial and national for what happened in municipalities. The Municipal Infrastructure Support Agency (MISA) issues were relevant in the Standing Committee. The Commission was an instrument to help the Standing Committee interrogate plans.

Mr Gaarde noted that basic education was getting nearly R20 billion. 213 million was removed from the school infrastructure backlog budget. 20 years into democracy people had to study in rondavels without desks. The Standing Committee should refuse the recommendations.

Dr Mabugu replied that the FFC agreed about the school infrastructure backlog, especially with regards to the Eastern Cape. The school infrastructure grant had to be spent fully. To ask for it to be reduced was against government policy. There would be an amendment. Money would be re-allocated but kept within the education realm.

Prof Plaatjies said that the FFC presented a set of facts about the fiscal position, to see if it had a mediating role. In political and ideological debates the FFC would respond to policies, even the constitution. Legislation was about the balance of forces and that was political. Members could use the FFC information to observe inefficiencies in the economy, towards sound economic and fiscal policy. The priorities were to create conditions for economic development and growth, and building social infrastructure. It was better to interact with the Treasury about delivery department functions. There were macro economic considerations. The response was to deal with total revenue, and to also look at contra implications. The Chairperson and the Committee could call the FFC back to speak to other fiscal issues.

The Chairperson referred to the Estimates of National Expenditure (ENE). It was in line with capacity constraints not to take money where it could not be used. But people were suffering. To keep five billion where it could not be used was not efficient. Capacity issues would keep coming up. Capacity had to be built at the local level and that could not be done by taking money away. The Standing Committee had to visit some areas, and then had to return to the issues.

Ms Shope-Sithole referred to the President’s statement that the current year had to be one of drastic transformation. Government had to do differently. The job of the Committee was in-year monitoring. The Standing Committee on Public Accounts (SCOPA) dealt with the post mortem. Departments had to be interviewed about monthly Auditor-General reports. The Committee needed FFC advice to allocate funds.

Mr Shaik Emam remarked that more money to science and technology was a good thing. The effect of the Chinese economy on South Africa had to be clarified.

Mr Khumalo replied that China was doing less commodity buying, which caused problems for South Africa.

Mr S Emam (NFP) said that small business development had to be encouraged, but there was much red tape. He asked how that could be addressed. Grants from the DTI were difficult to obtain.

Mr Emam said that grants for health emphasised HIV. TB was neglected. There was a close link between the two. National health had to look into that.

Mr Emam referred to corruption. The legal system stated that one was innocent until proved guilty. When people got suspended with full pay, monies had to be paid back if they were found guilty. There was corruption at every level of government.

Mr Khumalo replied that if monies could not be recovered it was written off.

Mr Gaarde told Prof Plaatjies that he held his comments in contempt. The President had said that a school would be delivered every week. Yet R231 million had been removed from the grant. There was to be direct delivery by national government. Things that brought pain to people had to be resisted. One only had to go to the Eastern Cape during a cold front to see how people suffered.

The Chairperson asked Mr Gaarde not to attack the FFC. They were there to advise the Committee.

Mr Gaarde said that white monopoly capital was inherently exploitative. If it was welcomed, it was political.

Mr Khumalo replied that the work of the Commission was based on evidence, not perception, assumption or ideology. It was not advisable to enter into debates about white monopoly capital. He himself had a personal interest in ideological issues, and he was willing to discuss it, but it would have to be a separate discussion.

Mr Gcwabaza said that it was important that members express themselves clearly, but one had to be careful with words. To say that one treated comments with contempt was too strong. One had to show respect to get it. One could not accuse people about issues not of their own making.

The Chairperson added that the Committee would meet with many people. If people were attacked one could not get from them what one needed. It was in order to be robust, but the FFC could not be accused of not doing their work. Ultimately it would be the Committee report that would go to Parliament.

The Chairperson invited the Commission to a strategic session on 29 and 30 July. The question that the FFC had to help answer was whether the implementation of programmes was effective, and whether funds were spent on what they had been allocated for. He referred to Mr Gaarde’s objection to the removal of education backlog monies from provincial by national. He assured him that national government could do what provincial could not. It could not take from the provinces without helping them to build capacity. The object was to improve the quality of life of people on the ground.

The Chairperson concluded that there would be a meeting on Tuesday 15 July with the Public Service Commission. There would be a Standing Committee meeting on 16 July. He advised Members that in the following week, if the Extended Public Committee (EPC) meeting coincided with the Committee meeting, the priority was the Committee meeting. Otherwise Members were advised to attend meetings of departments that the Standing Committee would be meeting with.

The Chairperson adjourned the meeting.


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