2014 Medium Term Budget Policy Statement: briefing by Human Sciences Research Council (HSRC)

Meeting report

Human Sciences Research Council: briefing on the 2014 Medium Term Budget Policy Statement
Prof Ivan Turok, Executive Director: Economic Performance and Development, noted that the general context was that of slowed economic growth; a weak global economy; high government debt, and a large budget deficit. The current approach was prudent and restrained, with the focus on efficiency and a commitment to contain public spending. There was a tougher approach to managing State Owned Enterprises (SOEs) such as Eskom, and a commitment to increase private sector investment, especially in strategic infrastructure projects. The growth of employment was bound to be slow, both in the public and private sectors. There was a new focus on investment in cities, and also to accelerate economic growth. Massive municipal investment was needed, with the reform of infrastructure grants to local government. Treasury would work with financial institutions to expand the municipal debt market.

Dr Vijay Reddy, Executive Director: Education and Skills Development, noted that R833 billion was proposed over the MTEF three year period for education and skills development. The Department of Basic Education (DBE) received 15 percent of the budget, but post-school education was the fastest growing share of the budget. Allocation effectiveness had to be questioned. Schooling and education had to be linked to home, community and society. There had to be skills planning in response to needs for post-school education and training.  No-fee, fee-paying and independent schools had to be distinguished for improved educational outcomes. Provincial accountability for education had to be looked at. There was a link between development and mathematics development. South African figures for mathematics skills did not compare favourably with other countries. The supply and demand for intermediate and professional level skills had to be understood. Workplace skills training had to improve. Emphasis had to be on a demand driven approach to planning.

Professor Gillian Marcelle, Executive Director: Science Technology and Innovation, stated that science and technology innovation enabled socio-economic development. The MTBPS identified opportunities for structural reform, diversification and transformation of the economy in the areas of energy, mining, telecommunications and ICT. The state had a role to play as policy maker and regulator. The climate of fiscal prudence and containment provided opportunity to strengthen non-technological forms of innovation, with greater emphasis on innovation for social purposes. Support for public programmes like the Community Works programme (CWP) was welcomed.

Prof Leickness Simbayi, Executive Director: HIV/AIDS, STIs and TB, presented results from the HSRC National HIV Prevalence, Incidence and Behaviour Survey. HIV prevalence in the total population was 12.2 percent. 6.4 million people were living with HIV/AIDS. The highest prevalence was among women in the 30-34 age group. The estimated number of people on anti-retroviral treatment (ART) by mid-2012 was two million. The HSRC welcomed the allocation of 11 percent of total spending on health, and that the comprehensive HIV and AIDS conditional grant would grow over the MTEF. However, the proposed lack of growth in the budget allocation for health over the following three years was problematic. There was transitioning in the major external funding sources for HIV/AIDS. There would be cuts to funding over the following three years.

Prof Demetre Labadarios, Executive Director: Population Health, said that South Africa could be seen as a cocktail of four colliding epidemics, namely maternal, newborn and child death; HIV/AIDS and TB; non-communicable diseases, and violence and injury. The country had 23 times the global average figures for HIV/AIDS, and five times the global average for homicide. The proposed lack of growth in the budget allocation for health was problematic. There had to be more funding to model the costs and consequences of non-communicable diseases in South Africa.

Dr Benita Moolman, Executive Director: Human and Social Development, said that early child development (ECD) was identified in the NDP as a priority. Early childhood was a critical phase that laid the foundations for future development. Plus minus 500000 children from age three to five received the State subsidy. There were deficiencies with regard to the critical nought to two-year age group, when brain development was most rapid. Provision of population level services would benefit children immediately. Services for children of two years old and younger were critical. An essential service package would include pregnancy (health and nutrition), birth to three years (social assistance and parent support), and three to five years (opportunities for learning).

Prof Daniel Plaatjies, Executive Director: Democracy, Governance and Service Delivery, outlined the MTBPS approach to a capable state and public service. There was a combination of enhanced fiscal consolidation and investment for future economic growth. The poor and the vulnerable had to be cushioned through efficient social expenditure and job creation. There were austerity and cost containment measures, and the intention to combat waste, inefficiency and corruption. Greater distribution of funds through the Local Equitable Share (LES) to poorly resourced municipalities made the distribution more equitable, but municipal capacity had to be monitored. Capacity of the public sector at local government level had to be developed through the “back to basics” approach that emphasised service delivery, accountability and financial management. There had to be an increased focus on procurement costs through the Public Procurement Review (PPR), with cost containment measures to identify goods and services expenditure that could be eliminated without affecting service delivery. Waste and corruptions had to be fought with support from audit institutions.

Discussion
Dr Celiwe Madlopha (ANC) asked Dr Reddy about skills required from post-school education. She noted that there had to be planning for aligning education with skills demands, but the nation still did not know which skills were required. Education and skills supported growth. She asked that the HSRC be more explicit about skills needed, and whether the HSRC had checked if post-school education was aligned to market needs.

Dr Madlopha asked Prof Turok what was the cause of the low growth of key infrastructure, and what could be done to turn the situation around.

Dr Madlopha asked about blockages to private sector investment.

Dr Madlopha asked what interventions there were for short-term jobs and skills development. She also asked why there were not more labour intensive jobs in the manufacturing industry.

Dr Madlopha was concerned about economic debt and growth. There was a commitment to contain public spending but at the current rate of borrowing the country would end up unable to service its debt. Municipalities were being encouraged to borrow. She asked if there was an audit on where municipalities stood with regard to debt. Municipalities were in a good position to borrow.

Mr A McLaughlin (DA) noted that he had heard on that day that Japan owed four times the GDP in debt. The figure for South Africa was 46 percent of the GDP.

Prof Turok replied that the cost of debt was 10 percent of spending. R10 out of every R100 had to go to payback. The Japanese economy was large and settled and had been stagnant for 20 years, but South Africa had to grow. The counter-cyclical strategy was to borrow in the time of slow growth to help the economy grow. However, that was not a good long term strategy.

Mr McLaughlin referred to what Prof Turok had said about efficiency. It was an important matter. Every department wanted more money. With a 1.4 percent GDP growth rate it was difficult to attract foreign investment. There had to be means to promote internal investment. The private sector was sitting on cash. Government bonds could be considered to attract investment.

Prof Turok replied that there had to be investment in infrastructure to speed up slow growth. There was a lack of capital. The economic environment had to be planned to make that possible. The Infrastructure Bill could streamline things.

Mr McLaughlin remarked that there had to be more employment to make the economy grow. Labour intensive options implied using people rather than machines. It was better to employ a team of 10 people than to buy a grader, added to which the money for the grader would go to another country.

Prof Turok responded that there were labour intensive projects like the Expanded Public Works Programme (EPWP) and the Community Work Programme (CWP).  Mining had been mechanised because it was difficult to manage labour, and industry also mechanised for that reason. Labour intensive strategies required skills to manage people. South Africa was not committed to labour intensive strategies.

Mr McLaughlin said that the percentage of grants going to municipalities was too low. Municipalities could not just be told to collect revenue. Municipalities would sometimes move vehicles and trucks from site to site for inspections, to create the impression that there were enough. Municipalities could not buy vehicles. The allocation had to be increased. At the municipality where he worked, money was borrowed to buy tractors. It was in order to move with a debt burden, but it was risky to expand municipal debt beyond a certain point. Infrastructure grants to upgrade housing were with the provinces, not with the municipalities. Informal settlements could not use the Municipal Infrastructure Grant (MIG). The question was how they were to be serviced. He asked if converting them into formal settlements would destroy value. A new economy had been created with the trade in RDP houses, but there were backlogs. People had to get title deeds

Prof Turok replied that it was good for municipalities to borrow for large capital projects and equipment. Large metros like Cape Town did not borrow more. It would be necessary to transfer responsibility for housing from the provinces to the municipalities. If RDP houses were sold for cheaper than they were bought for, it would indeed destroy value.

Mr McLaughlin told Dr Reddy that the Department of Higher Education and Training (DHET) had reported the week before that 30 percent of an allocated R40 billion had been wrongly allocated since 1999. He asked if the HSRC could see how much was fraudulently tapped out. It had to be seen that money went to the right place.

Mr McLaughlin asked Prof Simbayi how many HIV positives were economically active. Increased HIV could place a burden on the state. He asked how it was deduced from the HIV figures for females that women lived longer.

Mr McLaughlin said to Dr Moolman that 500000 children with a state subsidy would place an additional burden on the state. He asked about the cost of getting a deserving child into the ECD system.

Mr McLaughlin said to Professor Plaatjies that pressure on public sector salaries might force people to look on the outside for better prospects, which could be a good thing. He asked if the real value of public sector salaries would be maintained.

Ms S Shope-Sithole (ANC) remarked that more research on higher education was needed. The DHET had mentioned that 4 FET graduates were to be matched with 4 university graduates to work as technicians with engineers, for example. National Treasury had to assist the Department to fund the FET colleges. The universities only seemed intent on producing more people. But there were more rural women like her than there were intellectuals. There were many graduates without jobs. She had started a school in 1984 to train people in computers and accounting. Those with education could assist other people. She had also established a school to teach women to cook properly, according to nutritional principles.

Dr Reddy responded that the DHET had asked the HSRC about a skills plan for South Africa. There had to be inclusive development. The developmental state could intervene to get people into the system. Skills plans had formerly been based on supply and demand. There was a skills shortage. On the demand side people were saying that there were not enough skills of the right kind. There had to be a shift in focus from supply to demand. The HSRC was conducting an international review. There were economic growth projects like the Strategic Infrastructure Project (SIP) and the New Growth Path (NGP). Industrial policy had to be analysed to inform skills development. Economic needs had to be understood. There was no centralised skills plan. Growth strategy had to be analysed to see how education could provide skills.

Ms Shope-Sithole pointed out that rape contributed to the figures of women who were HIV positive. People were getting bail for rape, and men who were released from prison after a sentence offended again. There were serial rapists. HIV was forced on women.

Ms Shope-Sithole noted that social spending on food had improved since the early nineties.

Mr N Gcwabaza (ANC) remarked that the manufacturing sector was capital intensive, driven by skills development. There had to be new skills and the reskilling of the workforce. The NDP and industrial policy planning had to aid in the shift to labour intensive manufacturing.

Dr Reddy responded that the manufacturing sector had been stagnant for some years. Light manufacturing was a sector that could assist economic growth. The question was how to direct resources.

Mr Gcwabaza referred to municipal borrowing. It was not clear if municipalities were borrowing internally or externally. He asked about the capacity to repay.

Mr Gcwabaza remarked that the need had to be understood to when shifting funds for education, so that funds could be directed there. There had to be a focus on bursaries for students to go into teaching. He asked if the maths and science programme was successful. The structure of the education system was a challenge. The curriculum development section was in the provinces, and was not well coordinated. There was scope for restructuring, curriculum and teacher development, and in-service training.

Mr Gcwabaza noted that Statistics South Africa had mentioned that there had been a deskilling of Africans over the preceding 20 years. He asked how that could be changed. He asked how HR skills lost over the preceding five years, could be recaptured.

Mr Gcwabaza was concerned about infant mortality. There was a government free health policy for pregnant mothers and children up to six, yet infant mortality continued.

Ms R Nyalungu (ANC) referred to the upgrading of informal settlements. There were too many grants in that area that were not coordinated. Best practice in other countries had to be looked at.

Ms Nyalungu noted the link between maths skills and development, and asked about corrective measures.

Ms Nyalungu asked why other countries had cut HIV donations to South Africa.

Mr M Figg (ANC) asked Prof Turok about the cost of debt and the downgrading of the credit rating. 46 percent of the GDP went to debt, and the figure was growing. He asked what would be sustainable. There was a budget deficit of four percent of the GDP. He asked what an ideal budget deficit would be.

Mr Figg asked what was implied by being tougher on SOEs, no specific solutions were offered so what was envisaged. Private sector investment had to be encouraged. But misadministration, fraud and corruption would have to be dealt with before there could be private sector investment. He asked if such investment would be domestic or foreign.

Mr Figg remarked that there had to be incentives to industry to engage in labour intensive manufacturing. Decreased unemployment would make the economy grow.

Mr Figg referred to rural-urban migration. There were good plans, but the question was whether there would be rapid implementation.

Mr Figg asked why the focus was on no-fee and independent categories, instead of the student environment.

Mr Figg asked what the 11 percent allocated to health was spent on.

The Chairperson said that some responses would have to be in writing. There had to be priorities. Post-school education had to be addressed. Skills had to be unleashed from the FET colleges on the economy. There had to be new house models for cities. Prof Turok had referred to proper growth in the preceding few years. He asked about the removal of constraints to accelerate growth. It had to be asked if the private sector would come on board. There could be issues of red tape that discouraged the private sector. Big projects took too long to hit the ground. It was forecast that the economy would grow slowly in the following three years. Something had to be done to help the economy grow. The HSRC had to advise.

Prof Turok replied that he could not prescribe about economic growth and production. He could only describe the situation. There were many variables at stake, and a range of factors to consider.

Ms Shishana concluded that questions that could not be dealt with because of time constraints would be responded to in writing.

Adoption of minutes
Minutes of 17 September and 21 October were adopted without comment as a true reflection of proceedings.

The Chairperson adjourned the meeting.