Appropriation Bill [B6-2015]: Financial and Fiscal Commission comments

Standing Committee on Appropriations

12 May 2015
Chairperson: Mr S Mashatile (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) briefed the Committee on the 2015 Division of Revenue Bill. It was stated at the outset that the 2015 budget had been tabled within a fiscally constrained environment. The key message of the FFC’s submission on the 2015 Appropriations Bill was that government had tabled a budget that maintained fiscal stability and had balanced contending priority areas. Real growth rates for most national votes had declined, although they were still positive. Despite a tight fiscal environment and macroeconomic challenges, government should be commended for maintaining a real overall real growth rate of 2.5%, equivalent to the average growth in the previous three years. Most votes spent were on a par with the national average of 97% in 2014/15, although uneven spending patterns were noticeable.

The performance of the Department of Labour (DoL) and the Compensation Fund was elaborated upon. The Compensation Fund had received disclaimers in the past two years and had overspent its transfer allocation from the DoL by 87% in 2014/15. Other funds within the Department were performing as they should. The DoL itself was under-spending, which was partly due to unfilled vacancies. This could be undermining its service delivery and its fiscal oversight role over the Compensation Fund.

On risks and oversight responses in 2015, the FFC was of the opinion that the weaker than expected economic growth was likely to continue in 2015/16. Government was attempting to slow the growth of the public sector wage bill. It was also working with poorly performing and inefficient entities to stabilise their finances in the short term and to improve their liquidity position. With the aim of promoting economic growth, the percentage of gross fixed capital formation by economic infrastructure had increased from 68% in 2010, to 73% in 2013, while that of social infrastructure had declined from 32% in 2010, to 27% in 2013. There was concern about the direction that social infrastructure was taking, given the lack of upkeep of hospitals and prisons, etc. To promote economic growth, economic infrastructure had to co-exist with social infrastructure. A balance between the two was needed.

The FFC’s assessment of the education vote showed that 77% of the education budget went towards the payment of salaries. Better management of the wage bill was required to free up resources to finance other important education inputs. An assessment of the health vote showed that health allocations were projected to grow at 7.1% over the Medium Term Expenditure Framework (MTEF).This represented the third fastest growing expenditure programme. Health remained a key priority in the 2015 MTEF.

The FFC had also conducted an assessment on job creation and economic transformation. Government’s strategy for job creation consisted of the Expanded Public Works Programme (EPWP), The Community Works Programme (CWP), employment tax incentives and the Jobs Fund. The Jobs Fund had been allocated R4bn in the 2015 Budget for facilitating access to finance, and the scaling up of small and medium-scale enterprises. Evidence had shown that large companies were the biggest creator of jobs, although until not too long ago it had been believed that small companies were the main creators of jobs.

An assessment of an improved public service was that a capable state needed to achieve the goals outlined in the National Development Plan (NDP). There also had to be measures aimed at improving its capability to implement infrastructure projects. The FFC had also looked at infrastructure investment at the national level. Due to the lower than anticipated economic growth and the need to contain expenditure, public infrastructure investment had been revised downwards by R34.2bn, bringing total infrastructure investment to R813.1bn over the next three years.

The FFC had identified measures to stimulate cost efficiencies. The public sector wage bill growth had to be curtailed. Unproductive and inefficient spending had to be resolved. Accurate cost estimates were needed for services being delivered, and the Information Communication Technology (ICT) infrastructure rollout by government needed to be prioritised.

The FFC was asked whether it had reviewed government entities in terms of whether they were performing as had been intended, or whether some of them could be consolidated due to duplication taking place. It was also asked to what extent entities were accountable to their departments. Members felt that the quintile system in education was not achieving what had been intended. They asked how the real growth rate of 2.5% had been calculated. Had foreign exchange fluctuations been taken into account? Did job creation lead to economic growth, or was it the other way round? Public perception was that not enough was being spent on education. How much did SA spend on a school child compared to other countries?

Members were not entirely convinced the Expanded Public Works Programme (EPWP) was a job creator or that it was sustainable. They felt that capacity was not the only challenge faced by municipalities. There should be consequences for wrongdoing by officials. Job creation should not be the responsibility only of government, but partnerships should also be formed with the private sector. They asserted that large companies were using smaller Black Economic Empowerment (BEE) companies as fronts for government procurement processes, and suggested that the government should offer assistance to these BEE companies.

It was commendable that government was trying to cut public sector expenditure while at the same time trying to fill vacant posts. The issue was about finding a balance. The concern was that more and more people were being employed in the public sector. People needed to be encouraged to seek employment in the private sector.

It was pointed out that part of the problem at the local government level was that people were not paying municipalities for services rendered. A mindset change was needed. People had to start paying their rates and taxes. Should SA be increasing or decreasing its use of incentive grants, given the constrained fiscal environment? Members were not comfortable with R4bn being allocated to the Jobs Fund just to facilitate access to finance. The amount was huge just to facilitate access to finance.

Outstanding Committee minutes were adopted.
 

Meeting report

Financial Fiscal Commission (FFC)

The FFC briefed the Committee on the 2015 Division of Revenue Bill. The delegation consisted of Mr Bongani Khumalo, Acting Chairperson and Chief Financial Officer; Dr Ramos Mabugu, Head Researcher; Mr Ghalieb Dawood, Researcher; and Ms Khungi Nopote, Assistant Analyst.
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Mr Khumalo provided the Committee with a general overview of the FFC’s response to the 2015 Division of Revenue Bill. The 2015 budget had been tabled within a fiscally constrained environment. The key message of the FFC’s submission on the 2015 Appropriations Bill had been that government had tabled a budget that maintained fiscal stability and balanced contending priority areas.

Mr Mabugu continued with the briefing, saying real growth rates for most national votes had declined, although they were still positive. Despite a tight fiscal environment and macroeconomic challenges, government should be commended for maintaining a real overall real growth rate of 2.5%, equivalent to the average growth in the previous three years. Most votes spent were on a par with the national average of 97% in 2014/15, although uneven spending patterns were noticeable.

Referring to the performance of the Department of Labour and the Compensation Fund, he said the Fund had received disclaimers in the past two years and had overspent its transfer allocation from the Department of Labour by 87% in 2014/15. Other funds within the Department of Labour were performing as they should. The Department of Labour was under-spending, which was partly due to unfilled vacancies in the main. This could be undermining its service delivery and fiscal oversight role over the Compensation Fund.

On risks and oversight responses in 2015, the FFC was of the opinion that the weaker than expected economic growth was likely to continue in 2015/16. Government was attempting to slow the growth of the public sector wage bill. It was also working with poorly performing and inefficient entities to stabilise their finances in the short term and to improve their liquidity position. With the aim of promoting economic growth, the percentage of gross fixed capital formation by economic infrastructure had increased from 68% in 2010, to 73% in 2013, while that of social infrastructure had declined from 32% in 2010, to 27% in 2013. There was concern about the direction that social infrastructure was taking, given the lack of upkeep of hospitals and prisons, etc. To promote economic growth, economic infrastructure had to co-exist with social infrastructure. A balance between the two was needed.

The FFC’s assessment of the education vote showed that 77% of the education budget went towards the payment of salaries. Better management of the wage bill was required to free up resources to finance other important education inputs.

An assessment of the health vote showed that health allocations were projected to grow at 7.1% over the Medium Term Expenditure Framework (MTEF).This represented the third fastest growing expenditure programme. Health remained a key priority in the 2015 MTEF.

The FFC had also done an assessment on job creation and economic transformation. Government’s strategy for job creation consisted of the Expanded Public Works Programme (EPWP), The Community Works Programme (CWP), employment tax incentives and the Jobs Fund. The Jobs Fund had been allocated R4bn in the 2015 Budget for facilitating access to finance and the scaling up of small and medium-scale enterprises. Evidence had shown that large companies were the biggest creator of jobs. Until not too long ago, it was believed that small companies were the largest creators of jobs.

An assessment of an improved public service was that a capable state was required to achieve the goals outlined in the National Development Plan (NDP). There also had to be measures aimed at improving the capability to implement infrastructure projects. The FFC had additionally looked at infrastructure investment at a national level. Due to the lower than anticipated economic growth and the need to contain expenditure, public infrastructure investment had been revised downwards by R34.2bn, bringing total infrastructure investment to a total of R813.1bn over the next three years.

In conclusion, the FFC had identified measures to stimulate cost efficiencies. The public sector wage bill growth had to be curtailed. Unproductive and inefficient spending had to be resolved. Accurate cost estimates were needed for services being delivered, and the Information Communication Technology (ICT) infrastructure rollout by government needed to be prioritised.

Discussion

Mr M Figg (DA) was surprised that Mr Khumalo was still holding two positions within the FFC. The FFC in its previous meeting with the Committee had assured Members that the issue would be resolved.

Mr Khumalo pointed that he was also the Deputy Chairperson of the FFC, and hence held three positions within the organisation. He said that the National Assembly had passed an amendment to the FFC Act the previous week. The amendment was currently sitting with the National Council of Provinces. If the amendment passed muster, there would be a separation of positions.

Mr N Gcwabaza (ANC) referred to page 10 of the presentation, and asked whether the FFC had considered looking at government entities -- whether they were relevant in the current context, and whether there was a need for consolidation in some instances where perhaps duplication was taking place. This might be needed to improve the capacity of the state to achieve its objectives. The problem was that each government department had a myriad of entities. Were these entities relevant, and did they achieve what was intended? To what extent were entities accountable to departments?
On page 13, mention had been made that there was a need for the equitable distribution of resources at schools. He felt that the quintile system currently used in education was not achieving what it had been intended to. The problem was that in certain areas there were both poor and affluent schools. The allocations did not speak to the real issues.

Mr Khumalo responded that the FFC had not as yet considered looking into the relevance of government entities. He had had a conversation with the former Minister of Finance regarding the development of a concept for a funding model for public entities. The FFC did have a concept document which covered the issues of duplication and overlap between entities. Issues of rationalisation and consolidation could be discussed. National Treasury was dealing with the issue. He made the point that the FFC had advised against the adoption of the quintile system by the Department of Education. The Budget Council had asked the FFC to make a submission on the issue. The FFC had warned against the very challenges that were being raised about the quintile system. The quintile system looked at the school itself, and not the learners. The FFC would provide the Committee with its findings once its work on the quintile system was complete.

Mr  Figg said he wished to clarify that he was not questioning Mr Khumalo’s ability to hold different posts. On page 6, mention had been made of risk areas. Could a value be put to the risk? Was the risk material or immaterial? On page 7, it was stated that the government was able to maintain a real growth rate of 2.5%. How did the FFC calculate this, if it took into account only 12 of the 40 government departments? The same could be said when 2014/15 spending outcomes were looked at. There had been 97% expenditure when 12 government departments were taken into account. Even if all 40 government departments were taken into account, the figure still sat at around 90%. He asked whether job creation could not lead to economic growth. He also asked whether there had been a saving on funded vacancies. How much had been saved? There were always comments by the public that not enough money was being spent on education. How much did SA spend on a school child? What should SA be spending? On page 14, it was stated that health was a key priority. Health allocations were projected to grow at 7.1% over the MTEF. For 2015/16, the figure sat at 3.6%. Would it reach the 7.1% mark? On page 15, the EPWP was considered a job creator. He did not feel that the EPWP was sustainable and was not a job creator. He considered what persons earned with the EPWP to be pocket money. On page 17, it was mentioned that public sector investment sat at R813.1bn over the next three years. Should a benchmark not be set? Should studies not be done beforehand on the viability and consumer affordability of infrastructure projects? He asked what advice the FFC had for any norms for frontline or administrative staff of departments.

The Chairperson asked whether the FFC could provide the Committee with examples of where norms had been used successfully.

Mr Khumalo said that regarding norms and standards on the public service wage bill, the FFC had made submissions on the wage bill in 2012/2013. On who was actually being paid, he noted that the FFC had looked at the Departments of Education and Health. During the section 100 intervention in the Limpopo Province, the FFC had done a head count versus the amounts that were being paid out in salaries. He said that there was a big gap between the number of people that should have been paid and those that actually were paid. Whether people were employed in funded vacancy posts was a decision that was left up to managers of departments. The issue was about accountability. It was difficult for the FFC to make recommendations. Perhaps legislative amendments were needed. The FFC had also looked at who was getting paid. Was it the person delivering the actual service, such as a teacher or a nurse, or was it a person in an administrative post. Ratios needed to be looked at. Perhaps a ratio could be determined per sector, although this would not be easy to do. The ratio would have to be sector specific. The FFC, the Public Service Commission and the Presidential Commission would be working together to review the public service sector. Work was being done in consultation with key stakeholders. Entities would also be included. Work was therefore ongoing.

Mr Mabugu said that the FFC had not yet quantified financial risks. The FFC could propose how to quantify risks. He was of the opinion that both economic growth and jobs were outcomes. They were the outcomes of processes behind the scenes. Which came first, jobs or economic growth? The idea was to find causality between the two. For South Africa, economic growth always predated job creation. He was more inclined to target economic growth, which would lead to jobs. It was highly unlikely that creating jobs would lead to economic growth. On the issue of how much SA was spending on educating a child, there were international benchmarks. One could look at the basket of countries around SA, the Brazil, Russia, India, China and SA (BRICS) bloc of countries, and even countries in North Africa. He commented that SA put in much more, compared to what it was getting out. What was problematic was how inputs were converted into outputs. On the issue of whether the EPWP was a job creator, it had to be understood that the EPWP was a transitional arrangement. Recent evidence had shown that in India, where there was an EPWP of sorts, that it could have a bigger impact than normal job creation. He felt that the crisis in SA had been going on for far too long. Perhaps the design features of SA’s EPWP needed to be looked at.

Mr A Shaik Emam (NFP) noted that there were challenges in relation to the National Development Plan (NDP). In local government, capacity was always identified as the major challenge. He felt that there were many other challenges at the local government level. There was a need to focus on consequences. He agreed that the quintile system in education was not working. The briefing spoke about the overall growth rate being 2.5%. He was not too sure about this figure, and was convinced that there might have been a decline. He suggested that there should be more partnerships with the private sector on job creation. Leaving housing provision in the hands of the state was not the ideal solution. On procurement processes he had discovered that larger companies were using smaller Black Economic Empowerment (BEE) companies as fronts. The larger companies were seeing most of the profits. The problem was that the smaller companies did not have the resources that were required to deliver. If government was in a position to perhaps supply them with materials, this could assist them. On combating corruption by way of investigative plans, he was not convinced that it was working. What solutions did the FFC have for the challenges that were prevalent in local government? He personally felt that provincial governments did not ensure that local governments were performing. There was disappointment that government was not actively pursuing finding a cure for HIV and AIDS. It was commendable that government was trying to cut public sector expenditure while at the same time trying to fill vacancies. The question was about finding a balance. The issue of under-spending by some government departments was a serious problem. Lack of capacity could be the problem. Irregular expenditure by local government was also a problem.

Mr Khumalo pointed out that the Municipal Finance Management Act and the Public Finance Management Act were the ultimate enablers of consequences. These Acts provided the processes of what had to happen. There had to be consequences for breaking the law. Sometimes persons who had stolen funds got fired or were asked to resign, but in most instances the missing funds were not returned. The FFC could not enforce anything. It could only make recommendations. He noted that incentives were not only about rewarding good behaviour. Many things could be done to incentivise people. Incentives should be part of an institution. People should not be rewarded for things that they were supposed to do in terms of the law. Incentives could be positive or negative. A positive incentive could be support that was given to a struggling municipality.

Mr Mabugu referred to the issue of finding a cure for HIV and AIDS. At the back of his mind, he believed that current prevention measures were going to put an end to the HIV and AIDS pandemic. He felt it to be a matter of tradeoffs in SA. Ultimately it was about choices. It was about doing research for a cure versus attainable prevention measures.

Mr A McLoughlin (DA) said that the briefing had alluded to the fact that the FFC took inflation into account when they looked at real growth. He asked how the FFC approached the issue. Did the FFC take into account exchange rate fluctuations and decreases? He was seriously concerned about the Compensation Fund’s over-expenditure by 87%. The Auditor General’s Office had also given the Fund a qualified audit report and disclaimers. Was this over-expenditure lawful or irregular? On the other hand, the Department of Labour had been under-spending when its entity -- the Compensation Fund – had been over-spending. He felt this was contradictory. The briefing had noted that the government was attempting to slow the growth of the public sector wage bill, yet the bill seemed to be growing all the time. More and more people were being employed in government. Government departments were aiming to increase their sizes. It would be ideal to limit the growth. He asked what the FFC’s point of view was. How could it be made to look more attractive to work for the government, rather than in the private sector? The belief was that the government provided work. A mindset change was needed. He asked for an explanation on the difference between economic infrastructure and social infrastructure. 77% of the education budget went towards the payment of salaries. He felt that far too much money was being spent on salaries and yet there were vacancies that needed to be filled. How much of the 77% was being spent on the payment of teachers, and how much of it on the payment of administrators? Were there more administrators than there were teachers? On page 15 of the briefing document, it stated that R4bn in the 2015 Budget had been set aside for the Jobs Fund to facilitate access to finance and the scaling up of small and medium scale enterprises. R4bn was a huge amount, and he asked whether it did not form part of the actual finance to be provided. The fact of the matter was that more people were employed by big business than by small business, and the reason was because SA’s labour law did not allow a business to fire an unproductive employee. Problems at the local government level were partly because municipalities were not being paid by the public for services rendered. If municipalities were paid, then they in turn could pay service providers like Eskom. The mindset of the public needed to be changed. People had to pay their rates and taxes. He did not believe that National Treasury withholding funds from municipalities was a solution to municipalities not paying service providers like Eskom. He noted that the Auditor General’s report on the Department of Water and Sanitation for the previous year had stated that misspending by the Department was a huge problem. It was felt that state-owned enterprises or companies would not succeed if they did not operate profitably. On infrastructure investment, he felt that if assets were maintained then there was less need for rehabilitation and replacement. The unproductive and inefficient spending of appropriated funds was a huge problem. It was not emphasised enough that there needed to be consequences for non-performance. He suggested that perhaps people needed to be incentivised to perform. Policies and plans needed to be attached to budgets. He was furthermore concerned about the procurement management system in SA. It was all good and well to have a one-size-fits-all, but was this what was needed?

Mr Khumalo said that procurement represented a huge expenditure for government. The problem was that procurement was never treated as a strategic function of government. A chief procurement officer was a step in the right direction. Procurement was complex, and should not be seen as a secondary function. There was a need to place procurement at a strategic level. Chief procurement officers were aware of challenges, like exchange rates. On the growth in government spending in the public sector in creating jobs, it was felt that government should be a facilitator. The intention of the infrastructure build programme was to modernise the infrastructure in SA. He pointed out that the private sector would be willing to invest only if electricity, roads, water and sanitation were in place. Better coordination was needed. The Presidential Infrastructure Commission could play a vital role in coordination. Municipalities were key to economic growth. Getting it right at municipalities was a good start. Encouraging people to pay for their municipal services was a huge task for municipalities. Operation Masakhane was one such attempt to encourage people to pay. It was important to look at local government, as well as what the role of other spheres of government should be. Capacity support was perhaps what was needed at the local government level. Much work also needed to be done on service delivery. He said that the Auditor General was compiling a report on the presidential programme on the rollout of water and sanitation in rural areas.

Mr Dawood said that on per capita expenditure at the provincial level, 90% went towards teachers and 10% towards capital inputs. He explained that economic infrastructure involved investment in transport, roads etc. Social infrastructure expenditure was on the building of schools, clinics etc.

Dr C Madlopha (ANC) asked whether SA should be using incentive grants more or less, given the constrained fiscal environment. She referred to page 8 of the briefing document, and asked the FFC to unpack why the Department of Energy was under-spending, compared to other departments. It was surprising, given the energy issues that were being experienced in SA. She also referred to page 9, and said that the Department of Labour seemed to over-spend and under-spend in two consecutive years. The problem was once again that there were no consequences for bad performance. She felt that the public service wage bill was likely to grow in the future, given the challenges that were present, and suggested that the Committee meet with the Department of Public Service and Administration (DPSA) to discuss the issue. Reference was made to pages 10 and 15 of the briefing document, which spoke about job creation and economic transformation and the impact that the Expanded Public Works Programme (EPWP) and the Community Works Programme (CWP) was making. She noted that the EPWP made provision for a minimum of 100 days of work for a person employed in the programme. She pointed out that a recent amendment to the Basic Conditions of Employment Act no longer allowed a person to work in a temporary capacity for longer than three months. She asked whether the EPWP was sustainable. She asked why large companies were now the job creators, when in the past it had always been the smaller companies. She was not comfortable that R4bn had been set aside for the Jobs Fund to facilitate access to finance. Specifics were needed on what the R4bn was to be spent on.

Mr Khumalo said that looking at the Department of Labour and the Compensation Fund figures, something did not look good. The Compensation Fund overspending by 87% was a huge amount. He said that the idea behind the EPWP was only to create temporary jobs, and not permanent jobs. He conceded that he had not had the opportunity to look at the amendments that had been made to the Basic Conditions of Employment Act.

Mr Mabugu stated that in his assessment, there had not been much change in SA’s labour laws over the past five years. On the constraints side, there had been a worsening situation of inputs, such as the energy crisis. Big companies were better equipped to deal with crises than smaller businesses. Another issue to consider as to why bigger companies were better job creators, was that bigger companies had responded much more to the wage subsidy -- the employment tax incentive -- than smaller companies.

The Chairperson asked whether the R4bn allocated towards the Jobs Fund was to be used for the creation of real jobs, or to facilitate access to funding.

Mr Mabugu said that the R4bn allocated to the Jobs Fund was to facilitate access to financing and to scale up small and medium enterprises. He did not wish to speculate on what was meant by facilitation.

Dr Madlopha said that the incentive grant issue was about the under-expenditure on it, due to SA’s constrained fiscal environment. On the subsidy fund, it was suggested that the Committee receive figures on the number of jobs that were created by the fund. If big business created jobs with the help of subsidies, then it meant that they were not investing their own funds. She proposed that the Committee invite the chief procurement officer of the department where the Auditor General had identified problems. The Committee could be informed as to what goods were procured on a centralised or decentralised basis.

 Mr Khumalo said that from the FFC’s point of view, there was no point in allocating more funds to a programme that was not doing well. Some incentive programmes had design faults. There was no automatic entitlement to incentives. Rewards should be given only where there was performance.

Committee Minutes

The Committee minutes dated 21 April 2015 were adopted as amended. The Committee decided to defer the adoption of minutes dated 22 April 2015 until such time as additions were made to them.

The meeting was adjourned.
 

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