National Treasury on its 4th quarter 2014/15 performance

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Finance Standing Committee

12 May 2015
Chairperson: Mr D Van Rooyen (ANC)
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Meeting Summary

National Treasury presented its quarterly report on spending for 2014/15. Treasury contributed to the government outcome of creating a better South Africa and a better Africa by participating in the creation of the BRICS New Development Bank; working with the Department of International Relations, and sitting on the board of the African Renaissance Fund. There was commitment to the creation of decent employment through inclusive economic growth. The briefing looked at 2014/15 outcome per programme; outcome per classification; headcount outlook per programme, and main achievements on certain programmes. In the City support programme, Built Environment Performance Plans (BEPPs) for all Metros were facilitated, among others. In the Infrastructure Delivery Improvement Programme (IDIP), all provincial log frames had been workshopped and quality assured, among others. There was an approved projects target of 132,725 new permanent jobs under the Jobs Fund programme. Funded vacancies were to be cut.

In discussion, the role of the National Development Programme (NDP) in macro-economic planning was questioned. There was DA concern about the reputation of the South African Revenue Services (SARS) due to recent events and the effect this had on its ability to collect revenue. There was considerable interest in the Eskom funding model. Irregular expenditure was discussed. Treasury was commended for alignment with the NDP and the Medium Term Strategic Framework (MTSF). Benefits of the City support programme should be extended to the rural areas. There were questions about transfers and interventions, fuel levies; the provincial equitable share and the inability of provinces to spend. An ANC Member made critical remarks about the lack of reconstruction of an over-bloated administration. The same Member also questioned the kind of employment provided through the Jobs Fund. The DA expressed a similar concern with decent employment. The DA also commented that guarantees to Eskom impacted on fiscal sustainability.

Meeting report

National Treasury on its 4th quarter 2014/15 performance
Mr Lungisa Fuzile, Director General, remarked on the absence of the South African Revenue Service (SARS) from the meeting. Whilst he could not condone the absence, it had to be realised that although SARS was on the Treasury budget vote, it also had to render a self-contained report to the Minister. Treasury and SARS could appear side by side or separately, when issues needed to be gone into deeply.

Mr Fuzile commented on Treasury's alignment with the National Development Plan (NDP) and the Medium Term Strategic Framework (MTSF). Treasury contributed to the achievement of government outcomes by inter alia participating in the establishment of the BRICS New Development Bank. Treasury sat on the board of the African Renaissance Fund. There was funding of resources for democratic elections. Treasury was committed to the creation of decent employment through inclusive economic growth.

Outcomes per programme showed 100% spending for Financial Intelligence and State Security; Revenue Administration, and Civil and Military Pensions. Lowest spending was on Asset and Liability Management (92.4%).

Under outcomes per classification, it was stated that there were deliberate cost saving mechanisms. There were new baselines across government. Entities had to search for cheaper contracts. Lowest spending was on Goods and Services (90.3%) and Payments for capital assets (90.0%). State debt costs had to be estimated, as interest rates changed.

Main achievements for its programmes included, under the City Support Programme, the facilitation of the Built Environment Performance Plans (BEPPs) for all metros; under the Infrastructure Delivery Improvement Programme (IDIP), all provincial log frames had been workshopped and quality assured, and 340 officials were trained on the Infrastructure Delivery Management System (IDMS) (Introduction).

Under the Jobs Fund, approved projects targetted 132,725 new permanent jobs. Projects had created 37,239 new permanent jobs, placed 19,949 people in jobs, created 11,092 short term jobs, while 86,301 individuals had received training.

Under headcount outlook per programme, funded vacancies would be cut. Funding was based on the ability to fill vacancies. The government vacancy rate was 12%. Funding for vacancies could be used differently or put into the pool. The vacancy rate for Treasury was 6.4%. There was scope to grow if skills could be found.

Dr D George (DA) asked if the NDP could coordinate and articulate macro-economic policy. The role of the NDP was significant in departments with spending problems.

Dr George noted concern about the raising of fiscal revenue, through collecting tax revenue. He commented that the reputation of the South African Revenue Service (SARS) had lately been damaged, with regard to its ability to collect tax revenue.

Mr Fuzile replied that the end result of tax revenue figures for the previous year did not suggest that there was a significant impact on revenue collection. The obvious question to ask was whether SARS was meeting its targets. Trends for the previous year were not different from preceding years. Things looked in order on the surface. He was not in a position to look beyond that.

Dr George referred to the liabilities of Eskom and South African Airways (SAA).  He asked about the possibility of changing the funding model. There were issues of financial management, with irregular and wasteful expenditure every year. He asked what Treasury was doing about this.

Mr Fuzile replied that several entities were guilty of irregular expenditure. There was a CFO Forum where CFOs shared experiences. Irregular expenditure was sometimes not malicious, but occurred because a rule was not followed. CFOs had to decide how to build checks and balances in their processes. Common causes of irregular expenditure could be linked to supply chain management. The CFO Forum could look at the existing rules and regulations. If there were valid reasons, rules could be adjusted. The Office of the Chief Procurement Officer (CPO) was available for the interpretation of rules. There were differences about Black Economic Empowerment (BEE) related rules for procurement. Treasury did not police. Other parts of the system were relied upon for that. Parliament complained that the same problems surfaced every year. But Treasury could not prevent wrong people from being appointed, and could not take disciplinary steps. As Director General, he could not discipline his CFO through law.

Ms P Kekana (ANC) commended Treasury that its approach was premised on the NDP and the MTSF. A Stats SA analysis of disparities between the NDP and the MTSF, was necessary. Implementation had to be looked at with the heads of departments, to see where the challenges were. Treasury had an overarching responsibility. The administrative blueprint had to be spoken to.

Ms Kekana noted progress with City support. There had to be a template that could also be applied to rural development. Rural development was not being taken seriously enough. There was an influx of rural dwellers into urban areas where there were no opportunities for them. The NDP had to be institutionalised through a template that spoke to that problem. Resources from national, provincial and local spheres had to allocate resources that could address the problem.

Ms Kekana asked if all transfers were done through the Division of Revenue Act (DORA). She asked how transfers were faring.

Mr Fuzile replied that the equitable share was unconditional, and could not be withheld.

Ms Kekana asked which part of the presentation spoke to Section 139 and other interventions. If an intervention was not planned, Treasury would be overwhelmed. Treasury had to look at intervention programmes and decide if it was equal to the task. As it was the last quarter, Treasury could look at trends and plan for the future.

Mr Fuzile replied that Treasury tried its best to not make people wait for an intervention. When unplanned resources were required, the CFO had to help to hire people.

Ms Kekana referred to spending on the Administration Programme on Goods and Services. Money had been over-required, and then not spent according to what was required. Belt-tightening measures had required a cutting of goods and services. Over-allocation and savings had to be balanced out. Treasury had to take the lead.

Mr Dalu Majeke, Treasury Chief Financial Officer, replied that Treasury had created the problem of a variance for Goods and Services. Treasury had to ensure that there was quality output. Service providers had to deliver appropriately. Project management was being intensified. There were penalty clauses if a service provider did not deliver. Service delivery costs were looked at in the context of the market. Government had to be clear about quality of service. Treasury would ask what the impact of service delivery would be for the country and the community. Service providers could run into problems and be liquidated. Treasury paid service providers within 11 days, so that they could not claim to have run out of cash. Controls were being intensified. There was a strict process. Over-commitment of money was avoided by obtaining more money with the agreement of the Auditor General (AG).

Ms Kekana referred to the provincial equitable share. Spending stood at 100%, yet provinces could not spend housing grants. The same applied to HIV/Aids grants.

Ms Kekana noted that Treasury's critical programmes were City Support; Capacity and Skills Development; Neighborhood Partnership Grant, and the Jobs Fund. She proposed that the Committee get another bite at the Jobs Fund. Critical programmes had to be looked at more closely. The BRICS New Development Bank provided capacity for access to funding for other countries. Cities could play a similar role to grant access to infrastructure for rural areas.

Mr Fuzile replied with reference to the Neighborhood Partnership Grant, that it could take a long time to admit problems. There had been a reconfiguration of the State in 2009. The National Planning Commission was a good development. Treasury could not plan for the rest of government. Treasury worked with the Department of Performance Monitoring and Evaluation (DPME) on monitoring.

Dr B Khoza (ANC) drew attention to Treasury's need to align its reporting to Outcome 12. The country wants to be highly competitive economically. She could not understand why South Africa in the last 21 years had not considered the reconstruction of its administration because it is so bloated. It is not responding to the current economic challenges. When thinking about saving costs, saving costs on food and travel is small stuff. Where the real impact is dealing with the culture of inefficiency in the public service. She asked what Treasury's role is in Outcome 12 (efficient, effective, development oriented public service), how is it influencing the policy direction in this space. This inefficiency is the serious cost driver.

Dr Khoza asked for more detail about jobs created by the Jobs Fund. There was reference to 132 000 jobs. She asked what kind of jobs those were, and whether it referred to grass cutters. She had seen people sleeping by the road with their grass-cutting machines. The question was whether decent employment was being provided. Things had to be seen from the point of view of the employee.

Mr Ross referred to contribution to government outcomes. There were systemic problems. When it came to decent employment, it was clear that things were not being done right. Treasury had to give guidance. There could be interaction with the unions to revise labour legislation.

Mr Fuzile replied that decent employment was a huge world-wide problem. The United States and India seemed to be doing well. South Africa could not aspire to the growth rates seen elsewhere in Africa. Even that growth was not as fast as it used to be. South Africa could not achieve growth through building a rail system, for instance. It was best to compare South Africa to countries with a similar economic structure. Agriculture and mining could not be as big as it had been in the past. South Africa was moving towards a services dominated economy. A finance minister in Hong Kong had remarked some years earlier that South Africa was resisting the move to a services dominated economy. Full advantage had to be taken of digital technology.

Mr D Ross (DA) referred to energy requirements and growth. Alternative funding methodologies had to be explored. He asked about the structure of the Eskom funding model. Massive guarantees to Eskom had an impact on fiscal sustainability. Higher electricity prices impacted on jobs. Treasury had to contribute in the Cabinet “War Room” to consider funding from the IMF and the World Bank.

Mr Fuzile replied that borrowing guarantees did not necessarily imply failure. Borrowing guarantees were given at a time when Eskom did not have financial difficulties. Relative to the scope of its activity, Eskom currently did not have enough money. There were power stations that were 30 years old, which had to be maintained. There were long-term money commitments. Eskom had to borrow on the strength of its balance sheet. If Treasury helped with oversight, it could strengthen government. Treasury gave guarantees, but insisted on a small risk call on those.

Mr Ross noted that progress had been made with big municipalities, but small municipalities had collapsed. There were slow responses from officials and breaches of compliance. He asked what Treasury advised with regard to non-compliance.

Mr Fuzile replied that Treasury intervened on the side of struggling municipalities. If there was failure other than financial, the Cooperative Government and Traditional Affairs (CoGTA) function was called upon. Breaches of compliance had to be persistent to justify intervention. Persistent breaches had to be proved. When breaches became evident, there was “soft” intervention at first in the form of discussing it with officials.

Ms T Tobias (ANC) said that Parliament defined macro-economic policy for the Treasury. There were 12 points to guide and she believed that Treasury was on course.

Mr Fuzile replied that with regard to economic coordination, the power of the budget was underestimated. Many factors converged in the budget. Coordination was structured around the alignment of the budget with the NDP and the MTSF. A structured budget process was established in the late 1990s. At the executive level key Ministers were involved in managing government functions. The budget was not an end in itself. It ensured that government directed in line with its objectives. It was not a perfect process. Flaws were attended to over time. Planning was led by the Cabinet Lekgotla. Treasury presented on behalf of the economic cluster. It identified the national and global position to determine a fiscal stance. Coordination of government took time.

Ms Tobias noted that spending was 100% on the Financial Intelligence and State Security programme. She asked if the Intelligence and Defence budget had been checked. She asked if expenditure was aligned with the outcomes of infrastructure programmes.

Ms Tobias said that the SARS had to deal with illicit trade. There had to be a more appropriate budget for that. State debt costs had to be related to SARS.

Ms Tobias referred to figures on transfers. Skills issues affected the ability to spend. Housing grants had to be retrieved unspent. She asked how that was to be dealt with in principle.

Ms Tobias asked why the Jobs Fund was called by that name. There had to be creative ideas to tap the Jobs Fund. People were brought up to believe that they had to look for jobs. The education system was only currently beginning to change towards the generation of new skills.

Ms Tobias referred to funding models for State Owned Companies (SOCs). A day had to be set aside to discuss that issue. There had to be a focus on contingent liabilities.

Mr N Kwankwa (UDM) noted that Dr Khoza had referred to an over-bloated administration. He felt compelled to draft a motion on the matter. He referred to measures to manage state debt costs. There were interest rate risks. It was a complex issue.

Mr Fuzile replied that there was under expenditure, as in the previous year. Interest rates for bonds could change from week to week.

Mr Kwankwa referred to Goods and Services. Government was caught in a grind of negotiations. Reduced costs had to be managed, whilst maintaining Goods and Services.

Mr Kwankwa asked if South Africa was getting value for money from the African Renaissance Fund.

Mr Kwankwa noted that unemployment in the country was largely youth unemployment. There had to be a bias in favour of young people in the Jobs Fund.

Mr Ross referred to funding of Eskom. It was said that 30% of Eskom shares could be converted to public shares on the Johannesburg Stock Exchange (JSE).

Mr Fuzile replied that the debate on infrastructure bonds had occurred before. The question was what was in a name. The stock of bonds from Eskom went to banks, and from there into infrastructure. Development Bank of South Africa (DBSA) bonds went to infrastructure. Work was done in the previous year to create an Islamic finance compliant instrument to open that market. Islamic law was against interest on debt. The law had to be amended to issue bonds without flouting existing laws. The easiest course to private resources were the Independent Power Producers (IPPs) and renewable energy projects, where there had been resounding successes. Private money was available for green projects.

The Chairperson concluded that the quarterly performance reports were for purposes of monitoring, to build up to the next round of the Budget Review and Recommendations Report (BRRR). Treasury had to provide a more detailed report. There had to be a broader discussion of the funding model. There was to have been a meeting with the Chief Procurement Officer (CPO) on the following day, but the CPO was not available.

The Chairperson adjourned the meeting.

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