Appropriation Bill 2016: comments by Financial and Fiscal Commission

Standing Committee on Appropriations

10 May 2016
Chairperson: Mr N Gcwabaza (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) noted that the 2016 Appropriation Bill was enacted during a period of both internal and external challenges for the nation’s economy. There was a cumulative downward revision of 2.5% in the economic growth forecast for the country between 2014 and 2017. The low fragile growth below NDP targets, substantially constrains Government’s ability to address its triple challenges – high social ills, fiscal and external balances. These constraints were being tackled by the government through a reprioritization of government expenditure in achieving its macro-economic targets. Allocations to the national sphere show a decline of -3.8% in the 2016 Appropriation Bill, signaling a significant departure from the previous three years. Reductions were targeted at non-essential goods and services such as travel, compensation budgets, procurement reforms and cost-containment measures.

Government departments had improved on spending outcomes in terms of the allocation and implementation of budgets. Looking at 2015/16 spending outcomes, most departments were on par with the national average (99%) in 2015/16, with the exception of Basic Education, as a result of underperforming conditional grants.

Five key priorities had been identified by the government, in addressing the slow economic growth of South Africa. The FFC looked at the five priorities – promotion of economic growth; job creation and economic transformation; education; health; and improved public service –  in its assessment of the 2016 Appropriation Bill. The FFC also looked at infrastructure investment at the national level and measures to stimulate cost efficiencies. It identified the following areas to improve public sector efficiency: procurement; reduction of government spending on travel and accommodation; containing the public sector wage bill; eliminating spending inefficiencies and improving efficiencies in municipal spaces.

The FFC said that the 2016 Appropriation Bill continues the same trend of both the 2016 Division of Revenue Bill and Fiscal Framework, and Revenue Proposals of managing public expenditure by keeping within the expenditure ceilings set by the 2016 Budget Review. Government continues with the thrust of balancing the need to protect social grants, while targeting non-core and non-performing programs as areas where expenditure can be cut. The FFC supports increased efforts at improving efficiencies in the 2016 Appropriation Bill, although key indicators need to be developed to track value for money arising from these initiatives. The FFC welcomes measures being taken to reign in the wage bill, but notes that for the compensation projections to be realistic a multi-year wage bargaining agreement will be required, where salaries are pegged close to the inflation rate and productivities, instead of an annual agreement.

The discussions on the FFC briefing focused on the budget baseline change to basic education (-7.8%) and higher education (+8.5%), which implied that greater resources were allocated to the latter to the detriment of the former; the measurement of sector performance by budgetary performance instead of number of achieved targets; the need to promote maintenance of infrastructure; addressing the challenges of underperformance of the Department of Water and Sanitation without reducing their allocation; the need to regulate the amounts spent on travel and accommodation; tackling the challenges around the billing system for municipal spaces; the need to consider ground transport expenses when addressing travel and accommodation; the reduction in the expected growth rate of South Africa to 0.6%; the need to tackle the inefficiencies of public entities; and the provision of recommendations and options by FFC on the way forward in processing the 2016 Appropriation Bill.

Meeting report

Financial and Fiscal Commission (FFC) submission on the 2016 Appropriation Bill
Mr Bongani Khumalo, FFC Acting Chairperson and Chief Executive, noted that the submissions made by FFC were in accordance with the provision of section 4 (4)(c) of the Money Bills Procedures and Related Matters Act (MBPARMA) of 2009 which required the Appropriations parliamentary committees to consider recommendations of FFC during their deliberations on Money Bills; and the provisions of the FFC Act that required FFC to respond to any request for recommendations by any organ of state on any financial and/or fiscal matters relevant to its mandate. As requested by the Standing Committee on Appropriations, the presentation assessed the Appropriation Bill on these points:
- Allocative efficiency and baseline changes to main votes
- Effecting Government’s five priority areas in the Medium Term Strategic Framework
- Infrastructure Investment in national Government and
- Mechanisms that can stimulate cost efficiencies.

The 2016 Appropriation Bill was enacted during a period of escalating external and internal challenges for the South African economy. This period recorded the third straight year of downward revision of growth forecasts for the country, with a cumulative downward revision of 2.5% between 2014 and 2017. The downward revision did led to a falling short in the expectations created around the growth of the economy.

The low fragile growth below the National Development Plan (NDP) targets constrains government’s ability to address the challenges of high social ills, fiscal and external balances. This slow growth would result in South Africa’s external competitiveness lagging behind its peers in BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey).

Assessment of baseline changes as per 2016 Appropriation Bill and 2015/16 spending outcomes
Mr Hammed Amusa, Programme Manager: Macroeconomics & Public Finance Unit, FFC, pointed out that government had been trying to address the challenges of slow economic growth and constraints emanating from the slow-down of the global economic boom. This led to a reprioritization of government expenditure in fulfilling its obligations towards macro-economic targets, to ensure that essential commodities needed by citizens were not cut back. Allocations to the national sphere show a decline of -3.8% in the 2016 Appropriation Bill, signaling a significant departure from the previous three years. Reductions were targeted at non-essential goods and services such as travel, compensation budgets, procurement reforms and cost-containment measures.
The budget of the Department of Higher Education and Training (DHET) was highlighted as its budget in the next appropriation period had increased substantially when compared to the 2013 to 2015 period. The DHET budget had increased by an average of 10.7%, compared to its previous 2.2%, resulting in a difference of about 8.5%. This increase reflected government’s response to key demands that had emanated from the higher education and training sector.

A similar trend had occurred in terms of Human Settlements, where the baseline change compared to the average real growth rate had increased. This showed the efforts being made by that department to tackle the issue of provision of houses.

Looking at the 2015/16 spending outcomes, FFC noted that government departments had improved in allocating and implementing their budgets. Government departments had been encouraged to ensure that the optimal allocation of resources were directed towards areas of need; and to enhance their budget spending in such a way that avoid underspending or overspending. Most national departments spent their budgets within the financial year where such budgets were allocated. The Department of Basic Education (DBE) was however an exception, and remained a concern for FFC, mainly because it was saddled with the responsibility of delivering a very essential service in form of basic education to primary school children. FFC was concerned about the range of underperforming conditional grants within the basic education sector.

The national average spending for 2015/16 is marginally above the spending average for the period 2012/13 – 2014/15, as a result of improved resource allocation and spending alignment. This was a result of the fiscal consolidation that government embarked on, which required departments to align their budgets with their spending priorities. An increase in the alignment of departmental allocations and spending had been noticed.

2016 Appropriation Bill and Government’s Five Key Priorities
In addressing the slow-down in the South African economy, five key priorities had been identified by government to transform the structural dynamics that underpin the change needed for the economy. These overarching priorities that informed the assessment of the 2016 Appropriation Bill were the promotion of economic growth; job creation and economic transformation; education; health; and improved public service.

• Assessing promotion of economic growth, there had been successive periods of downward revision in South African’s economic growth rate since 2013. In the past week, the International Monetary Fund (IMF) cut South African’s expected growth rate down to 0.6%. This constrained government’s plans and policies that had been set in place to boost the economy. South African’s export competitiveness, the constraint of the global economic environment, the weakening of the Chinese economy, and the continued slow-down in the European trading partners’ market had translated into a difficulty in rebalancing the economy. The growth in the United States of America economy had not translated into a boom or a substantial recovery of the world economy. It was important to compare South Africa’s growth rate (reduced to 0.6% from the 0.7% growth rate anticipated in January) to other emerging economies on the continent. Nigeria for instance, was expected to grow at 2.3% despite the slump in its commodity price, while Kenya was expected to grow at 5.6% to 6%.

At 0.6% for Africa’s most industrialised economy, this spoke to the need for government to play a bigger role in fast-tracking and implementing its plans aimed at addressing the slow-down in the economy.

• In terms of job creation and economic transformation, statistics released by Statistics South Africa revealed that the rate of unemployment remained in a critical state, despite concerted efforts by government to tackle the issue. The current unemployment rate was 26.7%, an increase of 2.2% since the previous quarter, and the highest rate recorded since 2005 with 5.7 million people out of jobs. The loss of jobs had been identified in the two key sectors of manufacturing and construction, which was able to absorb a lot of low and middle-skilled people in South Africa. The loss of jobs raised concerns on whether government’s ongoing policies were actually addressing the unemployment burden, and more particularly among the youth working population between the ages of 16 and 34.

Statistics had revealed rising employment in the government sector for community and public services, especially within local governments and provinces through the Expanded Public Works Programme. However, the efforts to address the unemployment rate were still relatively insignificant. There was a need to develop longer-term policies that would address the unemployment crisis, with focus on sectors that could absorb more low-skilled personnel and people getting employed for the first time.

In the medium term, government’s investment in public employment programmes like the Jobs Fund and Expanded Public Works Programme, had increased substantially by 5.8%. However, the extent to which such allocations to these programmes would translate to a positive change in the employment figures, was yet to be identified.

• Education was one of the main priorities of government in the Medium Term Strategic Framework (MTSF) and consumed a large chunk of government’s allocations. Mr Ghalieb Dawood, Programme Manager: Provincial Budget Analysis Unit, FFC, said the percentage spent on education was 17.6% of total government expenditure. FFC was concerned that despite the allocations for education, shortcomings were still found in educational outcomes. Key developments within the sector include:
- Prioritizing the provision of learner and teacher materials to strengthen and improve quality of teaching and learning. The FFC welcomed this priority as it responds to a recommendation from a 2004/05 FFC study.
- Merging of the indirect component of the school infrastructure backlogs with the education infrastructure grant by 2017/18. The FFC welcomed this merging as it streamlines grants with the same purpose and improves efficiencies.
- New conditional grant in 2017/18 to expand and improve ECD. The FFC welcomes this as it recommended this in its submission for the 2016/17 Division of Revenue.

• Health remained a priority in the 2016 Appropriation Bill. One of the key developments and priorities in the Bill was the expansion of HIV/AIDS and TB treatment and prevention, which would most likely result in a reduction of the mortality rate and an increase in life expectancy rate. Another important matter to note in the 2016 Appropriation Bill was that the National Health Insurance (NHI) grant would be phased out over the MTSF. The NHI grant had been faced with significant implementation challenges in the previous years. Although FFC welcomed the close-out report that would focus on some of the key challenges and identify some solutions that would emerge from the close of this grant, it was still concerned about the haphazard initiations and closures of grants, as it impacted in the way NHI was being rolled out.

• On improved public service, the NDP had clearly stated that a capable state having skills and capacity that can implement government’s programme of action was required to achieve the developmental objectives that had been set in place. The 2016 Appropriation Bill contained a number of interventions aimed at boosting state capacity. These measures included reforms aimed at stabilizing public entities that played a significant role in the infrastructure-led growth strategies of government. A compulsory impact assessment of policies and regulatory change had been introduced. This was aimed at assisting the impact of new policies yet to be implemented. The idea was to ensure that new policies were aligned towards the budget process. Government’s tender system is undergoing major reforms led by the Office of the Chief Procurement. The Public Procurement Bill is in the pipeline, which will replace all other legal instruments governing public procurement. What is required are appropriately formulated indicators that can track the impact of these reforms in achieving value for money and reducing graft in government operations.

Measures had also been put in place to improve the capability to implement infrastructure projects. These measures included new procurement standards issued in November 2015 to allow officials greater flexibility to negotiate lower prices, plus the introduction of management contracts, whereby one contractor is hired to oversee all aspects of a project, and in effect reduce government’s exposure to risk of overruns and delays.

Infrastructure investment at the national level
Investment in infrastructure is essential for sustaining economic growth. R275 billion would be allocated to economic infrastructure and network regulation over the 2016 Medium Term Expenditure Framework (MTEF). A greater percentage of the investment would be directed towards the electricity and transport sectors, so that infrastructure bottlenecks could be removed and economic growth could be enhanced through these investments. R34 billion in 2016/17 is allocated to public transport, including commuter rail. The funding for the electrification program declines from R5.8 billion in 2015/16 to R5.7 billion in 2016/17 is R5.7 billion. To achieve sustained economic growth aligned and coordinated infrastructure investment plans should remain a key priority for government. There was a need for infrastructure investment plans to be properly coordinated. Often times, different sectors implement the infrastructure investment plans in isolation of other sectors. It was important for these investment plans to be merged and streamlined, in order to achieve synergies and economies of scale.

Much emphasis had been placed on building new infrastructure. The bulk of infrastructure investments had been allocated towards new infrastructure, leading to the maintenance and refurbishment of infrastructure being left behind. FFC emphasized that the management of existing infrastructure was equally as important as investment in new infrastructure.

Measures to Stimulate Cost Efficiencies
The FFC said that an efficient government is key to attracting investment and sustaining growth. It identified the following areas to improve public sector efficiency.
- Procurement
The FFC continued to be concerned about waste, poor quality government services and inflated prices and the frequent flouting of supply-chain processes by all spheres of government. FFC welcomed the reforms that were being implemented through the Chief Procurement Office. Nevertheless, these reforms should not only be concentrated at national level but cascaded to sub-national government and government entities as a matter of urgency.
- Reduction of government spending on travel and accommodation.
The National Treasury in 2016 estimates that R10 billion is spent annually on air and other travel by all spheres of Government. The FFC is of the view that efforts to contain such expenditures need to be followed by sub-national government and government agencies and a centrally managed system where travel and accommodation rates can be negotiated for all layers of government should be put in place.
- Containing the public sector wage bill
The public sector wage bill crowds out other government priority expenditures and forces sector departments to reallocate funding from priority areas to fund the wage bill. The FFC is of the view that a strict regime in managing a bloated public sector workforce should be applied to the local government as well and that the public sector wage bill should be linked to public sector productivity.
- Eliminating spending inefficiencies
The FFC continued to be concerned with deep rooted problems of underspending on appropriated funds, and high incidences of irregular and wasteful spending. Efforts at building capacity of oversight and monitoring bodies, and budget officers should be doubled as they are key to improving spending efficiencies.
- Improving efficiencies in municipal spaces
Other areas to reap efficiency gains in local government include reducing water and electricity losses, improving billing systems and ensuring regular repairs and maintenance of infrastructure.

Conclusion
Mr Khumalo noted that the 2016 Appropriation Bill continues the same trend of both the 2016 Division of Revenue Bill and Fiscal Frameworks, and Revenue Proposals of managing public expenditure by keeping within the expenditure ceilings set by the 2016 Budget Review. The Budget Review helped in assessing the allocations and the spending outcomes from the previous financial year, which ascertained the credibility of the MTEF. Government continues with the thrust of balancing the need to protect social grants, while targeting non-core and non-performing programs as areas where expenditure can be cut. The FFC supports increased efforts at improving efficiencies in the 2016 Appropriation Bill, although key indicators need to be developed to track value for money arising from these initiatives. The FFC welcomes measures being taken to reign in the wage bill, but notes that for the compensation projections to be realistic a multi-year wage bargaining agreement will be required, where salaries are pegged close to the inflation rate and productivities, instead of an annual agreement.

South Africa had come a long way in dealing with some of the legacies of the past including the lack of infrastructure in provinces that inherited the homelands. It was therefore depressing to see that the resources invested by the state were being wasted, through the destruction of school infrastructure, especially in Limpopo Province. FFC was currently analysing a report that emanated from the Eastern Cape, which highlighted the challenges of inherited and ongoing infrastructural backlogs being faced by that province.

Discussion
Mr A McLaughlin (DA) noted that the implication of section 4(4)(c) of Money Bills Amendment Procedure Bill was that it was important for the Committee to be mindful of that provision and consider the recommendations of the FFC on the Appropriations Bill.

The assessment of baseline changes showed that basic education had a reduced difference of -7.8%, while higher education had an increased difference of 8.5%, which implied that more money had been allocated to higher education because of the recent events of student protests in higher institutions. However, this increase was done at the detriment of the basic education sector, and it may affect basic education which was the foundation for higher education in the long run. He sought clarity on the how the figures for total appropriation by vote under Assessment of Baseline Changes in Slide 7 were reached.

Mr McLaughlin asked the FFC to comment on the reasons for the common tendency for measuring sector performance by budgetary performance, instead of by the number of achieved targets.

He noted that the infrastructure investment at the national level would most likely be short-lived, when all needed infrastructure had been put in place. He wanted to know how the predicted end of acquiring new infrastructure would affect the country’s performance in future. The emphasis placed on maintenance of infrastructure was a welcomed development. He proposed that legislation that would make maintenance obligatory should be introduced in all areas of government.

He said the idea of doubling the efforts at building capacity of oversight and monitoring bodies was indeed critical in eliminating spending inefficiencies. It was suggested that unannounced visits should be made to provinces and municipalities when conducting oversight, in order to see the state of things as they really were, rather than what was usually obtained at announced visits.

In terms of improving efficiencies in municipal spaces, he noted that municipalities rarely collected the money that was legally due to them by not billing the entire community appropriately. This resulted in a major problem because the money that should be collected by municipalities was designed to make up for the low grants that they received.

Mr McLaughlin said that the Department of Water and Sanitation, identified as the worst performing department, usually experienced a cut in its budget due to its underperformance. The cutting of this department’s budget in order to fund other departments, was not the appropriate solution. Instead, ways in which underperformance could be tackled in this department should be looked into.

He requested an explanation on how to track value for money on developed initiatives.

Ms M Manana (ANC) agreed with National Treasury on the huge amounts being spent by government on travel and accommodation. She approved of a centrally managed system that would oversee travel and accommodation should be developed, as opposed to the use of various travel agencies that charged government exorbitantly. Incentives to government officials was another area that should be looked into, as most people used this avenue to make money from government.

She wanted to know when the issues around the improvement of the billing system in municipalities would be tackled. The maintenance of infrastructure at the local government level was highly important.

The Chairperson said that ground transport expenses were another area that should be taken into consideration under travel and accommodation, as it was often overlooked. FFC was asked to provide recommendations that could be used in processing the 2016 Appropriation Bill, especially in tackling the rising unemployment rate.

Ms S Shope-Sithole (ANC) asked FFC to look into the IMF’s reduction of South Africa’s expected growth rate to 0.6%. She wanted to know the reasons for the reduction.

Mr M Figg (DA) agreed with the Chairperson on the need for FFC to recommend what Parliament could do in processing the Appropriation Bill. In terms of the predicted slow growth that would be experienced in South Africa’s external competitiveness, he suggested that South Africa should focus on what it could best instead of blaming other factors or countries. However, the NDP existed to help the country to compete effectively and make the economy grow. Efforts should be made to achieve the targets set in the NDP. The inefficiencies of public entities had to be tackled. The reforms to stabilise public entities was therefore a welcomed development.

The Chairperson requested that FFC should not only provide recommendations, but should also suggest various options that it believed Parliament could consider in ensuring that the Bill addressed urgent issues.

Ms Shope-Sithole urged the Committee to support FFC in condemning the destruction of property unequivocally. She was supported by Mr Figg.

The Chairperson also emphasised the need to condemn the destruction of infrastructure, as it only resulted in backwardness of the economy and continuous spending by government in providing this infrastructure.

Mr Khumalo responded that the FFC’s recommendations had been included in its annual submission tabled in May 2015 on the 2016 Division of Revenue Bill. Reference was made to the recommendations that were given to address specific issues on page 36 of the Division of Revenue Bill. 94% of the allocations had been concentrated on public entities and the municipalities. If no outcomes emerged from the public entities and municipalities after all the allocations, it would mean that there was a problem in the overall fiscal policy stance taken by government to address the challenges it was faced with.

Contingency spending was another area that had to be considered in processing the Appropriations Bill.

The FFC’s engagement with the Eastern Cape Province revealed that the Province was faced with infrastructural challenges. It advised the Province to put together its specific complaints. The Eastern Cape then produced a report to FFC that spoke to the backlog. He referred to the provincial equitable formula and the provincial infrastructure grant (PIG).

On the difference in the basic education and higher education allocations, he pointed out that in 2012, FFC submitted a report that indicated that government’s contribution towards higher education and training was reducing. However, government’s responsibility towards that sector expanded, as more grants were introduced to subsidise students’ fees. More poor students were getting into higher institutions, but not all universities could take into account the expanded number and the demographic profile of students in terms of affordability of fees for all students. This resulted in a backlog in the funding of institutions of higher education and training. There was no trade-off between higher education and training and basic education; the former was only experiencing a backlog in funding. The response to the ‘Fees Must Fall’ protests only proved the importance of considering the fiscal implications of making changes.

Measuring good performance on the basis of budgetary performance was usually the first step that FFC took. FFC agreed that it was important to further confirm performance by investigating what the budget was spent on, in order to get value for money. Value for money simply meant getting the benefit that was worth the price at which a commodity was purchased. Value for money was linked to the accountability framework. It was important to link the decisions involving the use of money to the accountability framework.

The reference to the Department of Water and Sanitation was to highlight non-performing programmes. The department was a new one that was bound to face its own challenges. The assumption that a non-performing programme was useless and should not be funded, should be done away with. The causes of such non-performance should be evaluated, and those responsible should be traced.

The difficulty with tackling travel and accommodation was the current system of government that required people to travel from place to place in carrying out their duties. Institutional arrangements required some people to travel. There was a need to evaluate the value that travel and accommodation was generating, and ensure a balance.

On 26 May 2016, FFC would be tabling its annual submission for the Division of Revenue 2017 that addressed the issue of municipal spaces and their billing systems. The theme guiding FFC was aimed at introducing the issues facing the urban economy into the current narrative. The challenges facing the rural economy would also be taken into consideration. FFC’s submission addressed the challenges facing municipalities in general, and rural municipalities in particular. It was from this area that a lot of infrastructural gains were expected.

On globalisation and the credit rating agencies, it should be noted that it was not the first time South Africa would record a low credit rating in its credit rating history. Issues like this arose from time to time and should be dealt with as they arose. Government had to ensure that it put in place credible policies and exercised fiscal prudence. The citizens on the other hand, had a role to play in speaking well of the country.

The internal factors challenging the country’s economy had to be looked into, and there were other issues that the country had to adjust to. One of the internal issues was the collective bargaining system in the public sector.

Mr Dawood clarified the figures for the total appropriation by vote. The appropriation baseline change for 2016/17 was -3.8%, which implied that the actual value had declined by -3.8%. This percentage was compared with the annual average real growth for the periods of 2013/14 to 2015/16, resulting in an annual average growth of 3.5%. The extent to which the value declined from 3.5% to -3.8% was calculated as -7.3%.

The meeting was adjourned.

Apologies were received from Ms C Madlopha (ANC); Ms R Nyalungu (ANC); Ms D Senokoanyane (ANC); Ms E Louw (EFF); Ms A Shaik Emam (NFP); and Mr J Figg (DA).

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