Infrastructure budgeting facility: National Treasury briefing

Standing Committee on Appropriations

10 May 2017
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

National Treasury presented a proposal by government to create a new financing facility for large infrastructure projects which required government guarantees and support. This facility would tackle present flaws in the planning and execution of infrastructure projects, as it related to life-cycle budgeting, operations and maintenance costs. The facility would assist to build a pipeline of projects that had gone through a thorough technical analysis. It would be a combined project of Treasury, the Presidential Infrastructure Coordinating Committee (PICC) secretariat and the Department of Planning, Monitoring and Evaluation (DPME). The first phase was scheduled for 2017 after a technical unit and governing body was established. The Treasury was working with other departmental stakeholders on a project proposal for the facility, to present to Cabinet.

Members were concerned about the current non-provision for operating and maintenance costs when infrastructures were planned. This was a problem identified in the implementation of infrastructure, and more often than not, the costs of infrastructural projects were under-estimated. Members wanted to be convinced why this facility was needed at a time when the economy was struggling and had just been downgraded. It was pointed out that Treasury coming to brief the Committee on this infrastructure document was perhaps early, because it was not a finalised project. This was because there were still processes that needed to be undergone. For instance, the document was yet to be presented to the new finance minister, before being placed before Cabinet. However, Treasury said that all comments made today had been relevant and would further enrich the document. It promised to come with all stakeholders to present the finished product at a later date to the Committee.

Meeting report

The Chairperson welcomed the Committee and the Treasury. The briefing would assist the Committee to deepen the Committee’s understanding of the infrastructure projects and help it play the oversight role constitutionally required of the Committee. The Committee had agreed in March to focus on infrastructural projects to assist the government to achieve its goals of tackling unemployment, poverty and inequality. This government needed infrastructure that supported industrialisation, the beneficiation of minerals and delivered services to the people. SA had projects worth over R4 trillion in the pipeline, as contained in the national infrastructural plans, but many of them had not been rigorously packaged through the various feasibility stages, and this was an impediment to them attracting global investments.

Mr Dondo Mogajane, Deputy Director General (DDG): Public Finance, Treasury, said that the Committee’s request for the presentation was a bit early, because the facility being presented was still new and very much under consideration, being negotiated and discussed by government and various stakeholders.  

Briefing by National Treasury (NT) on Budget Facility for Infrastructure

Ms Dorcas Kayo, Director: Infrastructure Finance, NT, undertook the briefing:

-Government is proposing a new financing facility for large infrastructure projects that require funding or other state support, such as sovereign guarantees.

-The aim is to address shortcomings in the planning and execution of infrastructure projects, particularly as they relate to life-cycle budgeting, operations and maintenance costs. The facility will help government build a pipeline of projects that have undergone rigorous technical analysis.

-The budget facility for infrastructure is a reform to the budget process that creates institutional capacity to appraise and budget for national priority infrastructure projects and programmes funded from the fiscus.

-The facility will put in place a mechanism to improve the rigor of planning and budgeting for large infrastructure projects through standardised appraisal methodologies that ensure that full life-cycle costs of projects are planned for, adequately budgeted and provided for in future budgets.

-The facility will be established as a joint arrangement between National Treasury (NT), the Presidential Infrastructure Coordinating Committee secretariat (PICC) and the Department of Planning, Monitoring and Evaluation (DPME). It would develop recommendations to MTEC, the Ministers’ Committee on the Budget (MINCOMBUD) and Cabinet in respect of funding for large projects.

-The first phase of the facility is expected to begin operating in 2017 with the establishment of a technical unit and governing board.

Some of the current challenges in infrastructure delivery include weaknesses in project preparation and technical aspects of infrastructure planning, execution and delivery which result in the following:

  • Poor estimation of life-cycle costs
  • Failure to budget effectively for capital, operating and maintenance costs
  • Poor implementation and management
  • Lack of uniform decision making framework across government
  • Lack of adequate integration between the budget process with capital budget expenditure budgets resulting in inadequate provision for operation and maintenance costs.

Given the priority afforded by government to infrastructure projects and the special capabilities required to appraise them, the current processes are sub-optimal.

National Treasury said a complementary reform to the budget facility, would be for Parliament to consider stand-alone legislation for mega projects. Very large projects are highly complex, are implemented over several years (or even decades), are very risky and politically controversial. Such projects should ideally be subject to even closer public scrutiny, and proponents should be encouraged to negotiate broad social support for their implementation. One way of ensuring this takes place is by requiring mega-projects to gain the support of Parliament. Once a project is approved by cabinet, standalone “authority-to-spend” legislation could be tabled in Parliament to govern the implementation and funding of a project where its size and duration are particularly large.

Discussion

Mr A Shaik Emam (NFP) thanked Treasury for an insightful presentation, and expressed the opinion that SA had serious infrastructural challenges. Now that the Department was looking for a new board and chief executive officer (CEO), the concern was that not enough strategic planning had been done, and the biggest challenge was lack of consequences for non-compliance. All that was being done was recommendations, which were never carried out by anyone anyway. This Committee had deliberated that this was the time for action, where consequences must be visited upon people or organisations that did not comply with set rules, because lack of delivery over time escalated costs. Also identified was the non-provision for maintenance when infrastructure was built. Infrastructural projects were often underestimated, and he held the view that there was a major scam going on in these projects because of the loopholes in the system. For instance, in housing projects, after all conditions had been met, two weeks into the project a variation order would be submitted to push up prices. Another issue was under-spending, and in cases where money was borrowed and interest had to be paid. How were other countries dealing with issues like this, and what were Treasury’s plans to prevent them from happening? 

Mr A McLoughlin (DA) asked the Department to convince him why this meeting was needed. SA was in a situation that the economy was struggling and had just being downgraded, yet it was planning better ways to spend more money. This was in no way increasing SA’s abilities and resources, or would this happen off budget? Money would be taken out of existing budgets to fund these things -- how was this going to operate in practice? The Department mentioned that this facility would be established as a joint arrangement between Treasury, the Presidential Infrastructure Coordinating Council (PICC), the Department of Performance Monitoring and Evaluation (DPME), the Medium Term Expenditure Committee (MTEC), and the Ministers’ Committee on the Budget (MINCOMBUD). It was going to have regulatory meetings, but this was an expensive exercise and what was going to be achieved at these meetings? Were these meetings regulatory?

Mr McLoughlin said this had been described as a new financing facility, and asked what was meant by that. Was this a new way of approaching the fiscus to get money out of them, or was Treasury going to create a separate fund? How would the Treasury set up the budget? If it put up a ten-year project, for instance, was it going to be broken up into one year financing chunks, or be a straight ten-year budget? Long-term financing was difficult, because one can not predict inflation rates and fluctuations over ten years.

Treasury had said that projects were going to undergo rigorous technical analysis -- who was going to do such analysis? Efforts needed to be made to save costs so that there was more money left to do the real job. What, then, would decide what project fell into this threshold? In the presentation, it had been stated that operational expenditure and maintenance was forgotten about, and this was scary -- how could anyone forget this in a project cycle? This was supposed to be a part and parcel of building anything. Could this be the reason why one ended up with so many white elephant projects in SA?

Ms D Senokoanyane (ANC) said the presentation had been an eye opener. The approach adopted was good, because infrastructure was one of the biggest challenges facing SA. Would one see a change in the way national, provincial and municipal projects were perceived? This was because, when one went out to the communities, they made no distinctions between any of the projects. The focus should be on the municipal road infrastructure, which she saw as one of the biggest challenges the country faced. Township roads were terrible because they were municipal roads, and everyone knew that municipalities were plagued by a lack of funds. She was hoping that perhaps there was going to be a shift if there was this central planning system. People were used to seeing national projects abandoned for years, so what Treasury was putting into place had the potential to monitor the progress of infrastructural projects and to ensure that they were completed in record time. The appraisal and approval instruments in the system were going to help too. Another pressing issue was shoddy work and the inflation of prices by contractors -- how was this going to be dealt with?

Dr C Madlopha (ANC) said under-spending was seen as a failure of a department to plan correctly. It always came up with projects, but lacked planning. What did Treasury consider the reason for under-spending? Comparisons were made with other countries’ experiences. It seemed SA had difficulties in areas such as formal appraisals, independent reviews, project adjustments, reviews and ex-post evaluation and the cost of monitoring -- was Chile’s model what SA should aspire to and adopt? If it was being suggested that projects that would last more than seven years required a new Appropriation Bill or Act, when was it envisaged that this legislation would be in place before Parliament? Had the Department started to have a green or white paper, or at which stage was it now?  It had been mentioned that the ministers of planning in other countries were always evaluating projects to ensure that they were in a good state – had existing structures in SA been looked at to make them effective? In order to build an effective way of planning for infrastructure development, how could this Department be made to be in a position to formally appraise without creating new structures which would cost more money?

Ms S Nkomo (IFP) said that she had noted the principles that would guide this public sector investment vehicle, one of which was transparency. How did the Department intend to maintain transparency, taking into consideration the intent to involve the public when most of the deliverables made known to the public were hardly understood by them? If SA was to benchmark itself presently, the situation might look like Vietnam, according to the Department’s analysis, in which there was poor coordination between departments. Take the Moloto rail project, for instance, where departments were fighting each other and achieving nothing because of a lack of coordination. The UK model was of interest as well, as they had an independent evaluator. SA needed to ensure that the service agreements signed should be the guiding principles for large infrastructural projects that spanned for seven years or more. Furthermore, how much were these agreements taken into consideration when political power changed from one party to another?

Mr N Gcwabasa (ANC) said that he gets concerned when the stadium infrastructure built during the 2010 World Cup is “rubbished,” because football fans would tell you that those stadiums were put to very good use and football administrators would be unhappy to hear comments like that from public representatives. The question to be asked was whether those stadiums were used to the optimum, and if the municipalities were benefiting from them. A clear explanation was needed for this financing facility being touted by Treasury, especially when reference was made to state sovereign guarantees, given the prevailing economic climate. Did the government still have such windows to give such guarantees? And if the government could not, how then did one pursue state support, knowing that state support was critical? The Committee should be worried that the structures mentioned would not be too big and cumbersome and become a source of delay in decision making. What was going to be the role of the office of the chief financial procurement officer in all of this? What was the role of the state-owned enterprises (SOE’s) as implementing agents? Among all the departments mentioned, had the likes of Transnet, the Passenger Rail Agency of SA (PRASA) and others played any part in infrastructure development before? If not, how would Treasury incorporate them to take up this role? Finally, feasibility studies and environment impact assessments (EIAs) were sources of long delays -- what were the plans to deal with those? He added that there had been a budget announced in the state of the nation address (SONA) and budget speech to be passed today by the Appropriations Committee for 2017. The meeting was now talking about a financial facility that was not part of the budget. The team could come back when it had identified projects for 2017. This could help the House to pass the Appropriations Bill, knowing what was contained therein.

The Chairperson said that what had been presented should be treated as a process plan, and asked Treasury for a project plan. This process should be fast tracked, because the masses were becoming restless and one could see the escalation in protests all over the country. Time was not on the government’s side, especially considering the President had pronounced this period as one of radical socio-economic transformation. One had to do things differently going forward. This was a good plan, but the pace was slow. The concept plan had not yet been presented to the Minister.

Ms Dorcas Kayo, Director: Infrastructure Finance, Treasury, said the Department appreciated the engagement with the Committee and its understanding of the complexity around coming up with this budget facility. Treasury would need the participation of various stakeholders, for even when a Cabinet memo was prepared there was a requirement that adequate comments were obtained from key stakeholders.

The main question was what this facility actually was. It was part of the budget reform process, and was focused on creating the institutional capacity needed in the planning and appraisal of projects, and merging the process that came from this planning system with the budget process. Treasury wanted to align the budget with the infrastructure projects so that they matched and the end cost would be available and operational. This facility would provide the capacity to appraise and to budget properly for the projects. It would make sure of the provision for the life cycle which a project went through. A threshold had to be put in place and this was in the proposal being worked out. All proposals still had to go through the new minister and Cabinet.  Substantial work had been done, but the normal processes still had to be followed. 2017 was the operational year of the facility, though the technical committee still had to pass it. Treasury was not setting up new structures. Within the Treasury research department and SOEs, there was the expertise in the planning and appraisal of projects, and all these resources were being pulling together to set up the technical expertise Treasury required to carry out an independent appraisal. As a result, there would not be substantial financial implications to roll out the facility.

Another important aspect to consider was to have a standardised methodology for the appraisals, such as the focus, analysis and assumptions that had to be made. This would ensure that the budget was in full view of the project. To do this, a methodology would be needed and a green book would have to be commissioned. This had cost implications, though these were not significant. Treasury hoped to have this guidance needed by the Department to do a proper appraisal in the near future.

Ms E Louw (EFF) agreed that Treasury coming to brief the Committee on this infrastructure document was perhaps early, because it was not a finalised project. There were still processes that were just starting, and the responses from Treasury officials showed that they were not completely ready for the Committee. She agreed that they should come back in near future to present on the full programme. She had heard a lot of “maybes,” and unfortunately the Committee could not put words like that in a report. Suggestions were made for a second meeting when all the processes had run its course, such as meeting with the new finance minister and Cabinet. To present to the Committee when even the minister had not seen the document, was meaningless.

Ms S Shope-Sithole (ANC) said she hoped the narrative that Treasury was a frustrating department was not true, and she hoped this perception would be removed when Treasury came back again.

Mr M Figg (DA) also agreed that what had been presented was an incomplete proposal. In its current form, there was little to interrogate.

Mr Mogajane said he was happy with the comments made by the Committee Members, and agreed that their comments would enrich and help build this document. Initial comments suggested that this project would come into being in 2017, with the implementation of a technical unit and governing body. The modalities were being worked out. A lot still needed to be put together, and he suggested that the presentation be translated in a document that would help spell out certain aspects in detail. The Department understood the speed and urgency needed, and with partners speed would be the motto. There was also a draft document that informed the engagement today, which would be cleaned up and given to the Committee. There would also be a process plan that would target a date when the document would go to the Cabinet. All comments made today were relevant and would enrich the document. Treasury would come with all their stakeholders next time, because this project was not only for the Treasury Department.

The Chairperson, in her closing remarks, said that this facility was a good, progressive and significant initiative to promote radical economic transformation.

The meeting was adjourned.

 

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