Appropriation Bill 2017: comments by Financial and Fiscal Commission

Meeting report

Financial and Fiscal Commission submission
Mr Ghalieb Dawood, FFC Program Manager: Provincial Budget Analysis Unit, took the Committee through the submission which provided a comprehensive overview on the Bill; major revisions contained in the Bill and department budget votes with respect to inclusive growth and economic transformation as requested by the Committee; an assessment of progress towards targets in the Medium-Term Strategic Framework (MTSF); infrastructure investment; challenges and opportunities of State Owned Entities (SOEs); and efficiencies and savings.

One of the big fallouts of the current political climate is the investment ratings downgrade by two rating agencies. The ratings downgrade will increase government’s debt servicing costs, which implies fewer resources for public spending on infrastructure, social protection and other priority areas at the very least over the 2017 Medium-Term Expenditure Framework (MTEF) period. If the ratings downgrade significantly affects business confidence, the decline in capital investment will be further exacerbated, making the potential for even modest growth, more elusive, thus increasing job losses. So the budget (2017) proposed a prudent and sustainable fiscal trajectory, the Bill maintains fiscal discipline with the total real growth of allocations growing marginally by 0.5%. The Commission identified Higher and Basic Education and Health as key drivers of growth. However, key risks to fiscal discipline in the coming months included the wage bill and borrowing by poorly managed SOEs.

The assessment of baseline changes as per the Bill reflects that allocations to the national sphere show an increase of 0.5% in the Bill, signalling a recovery from the previous year when stringent expenditure ceiling measures were implemented. The strategy of growing appropriations in real terms implies, in principle, service delivery should continue to grow even though it may not be consistent across all national votes. With regards to the assessments of 2016/17 spending outcomes, most votes spent on par with the national average (98.9%) in 2016/17, with the exception of Basic Education, which has repeatedly underspent largely as a result underspending on its capital budget and under-performing conditional grants. So the FFC is pleased that national departments have to a large extent addressed the problem of underspending. The FFC would like to see departments concentrate more on demonstrating effectiveness and efficiency of resource usage.

The first case study the FFC looked at was the 2017 appropriation for the Department of Agriculture, Fisheries and Forestry of R6.8 billion representing a decline of 1.7% in real terms from the previous year. The declines are largely targeted at its Forestry and Fisheries programmes. The sector’s ability to achieve the MTSF goals have been hampered by the recent drought which caused major damage to infrastructure and production. The sector is struggling with a range of challenges, specifically, sustainability, weak implementation at provincial level and poor oversight and support by DAFF. There are also functional overlaps between DAFF and Department of Rural Development and Land Reform (DRDLR) that may continue towards undermining service delivery in rural areas.

The 2017 Appropriation Bill proposed a total allocation of R52.3 billion to the DHET (Department of Higher Education and Training), and the bulk (R43.5 billion or 83.1%) was transfers and subsidies to universities and to a lesser extent, colleges. So over the MTEF period the University Education programme projected growth of about 5.5%, while TVET and CET colleges grew by 1.8% and 0.5% respectively. As for the Department of Transport the budget allocation remained the same compared to real growth of 3.4% average per annum in the past three years. The FFC called on National Treasury and DoT to undertake a due diligence study to assess if PRASA is receiving adequate financial support from the fiscus and look into the governance failures of the entities under its mandate.

Dr Hammed Amusa, FFC Program Manager: Macroeconomics and Public Finance Unit, spoke on inclusive growth and economic transformation and said the following changes have been made to enhance economic transformation in the government’s 2017 budget:
• Tenders will target the empowerment of specific groups, such as black women;
• Bids up to R50 million which is up from the previous threshold of R1 million, will be evaluated in terms of the 80/20 preference point system, which will help smaller, black-owned firms to compete;
• Public entities will be permitted to negotiate prices to obtain value for money with preferred service providers
• Procurement of totally manufactured goods will be supported;
• Preference points will be allocated in line with broad-based black economic empowerment status
• Where feasible, the compulsory subcontracting of at least 30% for tenders above R30 million will be required to advanced designated groups.

This reflects a gradual shift for support to support inclusive growth and economic transformation, and in order to achieve this lowering of the barriers to entry for small businesses is at the centre of it all. The process of transformation will need to be embodied with interventions that will promote effective competition that can lead to a wide range of benefits.

Government will need to pay more attention to job creation, education, health and an improved public service in order to achieve the MTSF goals in the 2017 Appropriation Bill. With regards to job creation, in the previous year the unemployment rate peaked at a 13-year high, particularly for the youth and the unskilled. The number of unemployed workers accelerated by 11% in 2016 and increased the unemployment rate to 26.5% of the economically active population. The FFC is of the view that addressing long-term unemployment will entail: accelerating implementation of programmes; reorienting South Africa’s investment tax incentives to favour sectors that could increase job creation. As for the promotion of economic growth, the FFC is of the view that the promotion should incorporate: structural reforms aimed at education, health, post-secondary sectors as well as improvement of governance in SOEs, reduction of business costs such as port tariffs and spectrum allocation for broadband, liberalising trade to promote regional integration and galvanising the SMME sector, and the reduction in transport costs could enhance employment.

Ms Sasha Peters, FFC Program Manager: National Budget Analysis Unit, highlighted the social issues which included basic education - it accounts for 15% of the national consolidated budget in 2017. The spending priorities include the improvement of infrastructure delivery with an allocated budget of R37 billion, the improvement of the school curriculum delivery through increased access to ICT in schools, and increasing the number of learners who complete grade 12. The FFC welcomes the 2017 focus areas as they are in line with the MTSF strategic objectives. With regards to health, the Department of Health is allocated R184 billion in 2017/18 growing to R224 billion in 2019/20. Some of the key priorities include the expansion of the HIV/AIDS program with a budget allocation of R17 billion - with 3.5 million people receiving anti-retrovirals, government is making progress towards meeting delivery target of 5.1 million. The treatment of TB is another key priority, and estimates indicate that the TB cure rate improved significantly from 54% to 78% in 2015. However compensation of employees continues to account for a bigger portion of the health budget (62%).

On improving the public service, spending on general public administration increases from R45.2 billion in 2016/17 to R46.8 billion in 2017/18, and the increase is meant to enhance the Batho Pele initiative and implementation of Public Service Charter. These initiatives aim to improve accountability to citizens and are also priority areas in the MTSF. Investment is essential for sustaining economic growth, so over the 2017/18 MTEF consolidated government infrastructure amounts to R970 billion of which two-thirds is targeted at human settlements and municipal infrastructure. Infrastructure spend has been delivering sub-optimal outcomes largely as a result of poorly designed and managed infrastructure projects. To achieve sustained economic growth, aligned and coordinated infrastructure investment plans should remain a key priority for government. Hence the FFC would like to emphasise that while investment in new infrastructure is critical, management of existing infrastructure is also equally important.

With regards to State Owned Entities, with a combined asset base of R1.2 trillion, SOEs continue to have a key role to play in driving government’s development agenda particularly infrastructure-led growth. Some key challenges for SOEs include inefficient operations, poor governance and persistent weaknesses in the balance sheets, all of which serve to undermine their ability to effectively roll-out the infrastructure-led growth strategy. And with the size of guarantees being projected to grow over the 2017 MTEF, implications of the recent downgrading of major SOEs (Eskom and Transnet) need to be well understood particularly in respect of increased guarantees that may need to be provided to ailing SOEs.

On measures to stimulate cost efficiencies, high incidence of wasteful and fruitless, irregular and unauthorized expenditure remain a major challenge in the public sector. Over the 2012/13 – 2015/16 period, irregular spending by national, provincial and government entities increased from R26.2 billion to R46.4 billion. In the same period, fruitless and wasteful expenditure decreased from R2.4 billion to R1.4 billion, while unauthorized expenditure decreased from R2.4 billion to R925 million.

The Public Sector wage bill, over the 2017 MTEF, is expected to grow by 7.2% per year and to account for approximately 35.5% of consolidated government spending, thereby crowding out other government priority expenditures and forcing sector departments to reallocate funding from priority areas to fund the wage bill. The FFC notes the projected cuts on the public sector compensation budget for the 2017 MTEF. However, the FFC believes efficiencies will also be gained by linking the public sector wage bill sector to productivity; leveraging on the latest technologies in the provision of public goods and services; and investing more in monitoring and evaluation capabilities across all government spheres.

Discussion
Dr M Figg (DA) stated that the disappointment is that this information is not really used to the benefit of the Committee, it is made available but it cannot really be utilised. On slide 9, he would like to hear from the FFC whether the 5.5% is adequate for University Education programmes, or is there a better figure that can be used. On slide 11, on transformation of the economy, the R50 million from the previous R1 million is that not too big a jump, especially in areas where incompetence is prevalent? What tool will be used to monitor that the compulsory sub-contracting of at least 30% for tenders above R30 million, and would such a tool be included in the contracts above R30 million? On Slide 19, if the right things are done, what is the prospect of achieving that 7.2% NDP target for economic growth? On liberalising trade, he agreed with this because in developed countries you find that their economy is mostly made up of SMMEs. In FFC’s view is the DSBD working (he thinks not), is the government going to get value for money and should the appropriation be increased or decreased for the DSBD?

Mr A Shaik-Emam (NFP) shared the concern about how the FFC recommendations will be achieved or implemented, with prices shooting up in the economy and stringent labour rules that have a significant impact on the labour market. We are nowhere near the growth rate required to achieve the NDP targets, what impact is this going to have on the country and what will happen to the programmes that have been set up to achieve those targets, if those targets are not met? What is the role that the FFC believes the DPME should play in the capability to achieve the targets. Can the FFC tell the Committee why funds are being created to address challenges yet the same challenges still persist? While a lot of challenges have been identified such as with the health sector, provinces have come before the Committee and claimed that health is under-funded. What is the FFC’s view on what should be done differently to achieve targets bearing in mind the provincial department and local municipality complaints on health being under-funded? Given the current state of health in South Africa, what does the FFC believe should be done differently to achieve the positive outcomes hoped for?

Mr A McLaughlin (DA) stated that with the ratings downgrade, the number of the poorest of poor continues to increase as the current economic conditions persist and translates to job losses. People will not be purchasing many goods and services in the market and the number of grants will continue increasing. He said Slide 5 states that the “key drivers of growth are Higher, Basic Education and Health”. He differed with the FFC, stating that the key drivers for economic growth is economic activity- it creates jobs, once people are employed then everything else happens, there is a ripple effect. So there is a need to start in the right place. Municipalities are being pushed into a position where they now have to borrow money because they unable to deliver essential services to the public, so the escalation continues. How can that be best tackled and what is the FFC’s opinion on this.

He said the GDP growth rate has declined for the fifth consecutive year and the chances of the country achieving the 7.2% growth rate in the next 13 years is close to zero. Does this mean the NDP needs to be restructured? What does the FFC understand by liberalising trade, what does it mean? On reducing transports costs, how should this be done with fuel prices going up, fixed exchange rates and fluctuating exchange rates, with oil prices going up – how can transportation costs be reduced bearing this in mind?

Ms D Senokoanyane (ANC) asked about the lowering of barriers for SMMEs and potential businesses into the market, and the importance of this because people are not able to access economic opportunities due to stringent requirements. Access to markets is key but sometimes SMMEs struggle to get into the market due to red tape or regulatory measures that obliterate that market access. What does the FFC see as a mechanism to achieve lowering of barriers? With regards to the Department of Basic Education, underspending has been going on for a long time. It would be reasonable to suggest the reduction of the budget but that is an area that is key in the country. The non-utilisation of the money presents serious problems.

It seems that there is structural reform for SOEs but the picture painted by FFC about persistent governance issues, and how it impacts on government in terms of the guarantees it continues to provide for them when they face capital and cash flow challenges - what does FFC believe should be done to eliminate this?

Ms M Manana (ANC) asked what is stopping government from assisting in the reduction of transport costs to enhance employment, economic activity and investment competitiveness. What is the role of the Department of Telecommunications and Post Office in this regard. With regards to the National Infrastructure Programme, what is the view of the FFC on whether it is progressing well and bringing the expected benefits. On the irregular spending by national, provincial and government entities, it is not pleasing at all, so can the FFC suggest which departments should be strictly scrutinised. Minimising the outsourcing of work that can be performed by civil servants has been raised many times. Which department does the FFC believe are still doing that?

The Chairperson said in Slide 8 the FFC alluded to the functional overlap between DAFF and DRDLR and the poor service delivery in the rural areas. Can the FFC advise what needs to be done here as the Committee wants to recommend something that will add value in this area? TVET colleges and CETs have indicated that they are experiencing serious budget shortfalls. What does the FFC think should be done about this? The FFC has an influence on the budget process and it does advise National Treasury. As much the scarcity of skills is the centre of the conversation, it is important that this is addressed because it potentially speaks to economic growth. On slide 21, in the Committee’s oversight of overspending of departments, these are things that the Committee looks at but the focus should be on corrective measures. She asked for the list of the departments in 2015/16 that contributed to the R46.4 billion so that those departments can be called to account and come up with a plan of action to correct the situation. This R46.4 billion is too much, especially at a time when the country is experiencing fiscus challenges.

Prof Daniel Plaatjies, FFC Commissioner, stated that for many of the questions asked by the Committee, the FFC does not have the resources to engage with the departments, municipalities and other stakeholders to gather the appropriate information. The FFC used to have those resources, and engage in a way that empowers and provides additional information that is evidence based so that Parliament can enhance the quality of its voice. Previously, the FFC was such an important institution in terms of its recommendations to Parliament in the economic, financial and budgeting space. The FFC lost of a lot of ground around that. It would be great to have an open and public engagement about that. On the TVET colleges, the Portfolio Committee on Higher Education has asked this question and the FFC has responded comprehensively on this, and provided a document detailed enough to address all the questions asked. The FFC will make that document available to the Committee so that it can peruse it and see what was said.

On the jump from R1 million to R50 million procurement, he stated that the Committee should ask the big departments such as Higher Education, Social Development, Health that are affected  and the Chief Procurement Officer through the Minister of Finance, on the rationale behind this jump, and the implications of the changing system and the regulatory practices as effected by the Office of the Chief Procurement Officer.

On tools to monitor tenders above R30 million tenders, the Committee can ask the National Treasury through the Accountant General, because it can see what every department, provincial department and municipality is doing and how departments account for R30 million, but it is more than R30 million. Sometimes the Accountant General knows more than the MECs, mayors and ministers on where the pressures are going to come from.

On the Department of Small Business Development, the FFC is not quite clear from which angle the question is being asked. Is the Committee talking about community projects, reduction of red tape, financial assistance to SMMEs and Cooperatives, or the appropriateness of rules and regulations?

Dr Amusa replied on whether the target of 7.2% is achievable and feasible. He suggested that the target be solely placed in the context of South Africa and developing countries on the African continent over the past ten years. When SA’s economic trajectory was about 1.5 to 2%, its African peers (Nigeria, Tanzania, Angola and others) were experiencing growth rates of about 5 to 7%, and were enjoying the domestic policies implemented to foster economic growth and investment infrastructure. Post 2008, one has seen a pick up in the economies of countries like India (averaging 6.5% growth rate) and Brazil, so when you look at SA along with its peers, one can ascertain that those targets can be achieved. So those targets are feasible, but the fundamental question is: to what extent are government policies advocating this growth being implemented? However it is the ‘how’ the targeted growth rate can be achieved, it is achievable but implementing the right programmes to ensure that it is achieved is the fundamental key because government would not set targets that are not achievable.

On the reduction of transportation costs, he said this is broken down to transportation costs for goods as well as commuters who use the bulk of their money on transportation. The FFC did a study on transportation costs for commuters in South Africa and the study revealed that 60% of South African households within the income range of R500 to R1 500 spend about 20% of their income on transport costs commuting to and fro the workplace. Transport is not merely a function of money but also a function of time. The study revealed that about 60% of commuters within that same income group spend on average four hours of their time travelling to and fro work. There is a constraint of both income and time, which is spent on transport alone. The subsidy given to cities where the bulk of their people use public transport to commute, only four of the cities have a functional public transport system. There is a key fundamental disjuncture between the cities that receive the integrated transportation network grant, and the extent to which they provide significant public transport services, and that has an impact on the ability to lower transport costs. To address these challenges, the FFC advocated for: better coordination of the grant framework; better implementation of the grant; alternative funding models through local government that have functions related to public transport; addressing the spatial environment in which the city operates through diversification. On the goods side, Transnet has taken the past ten years to wrap up the investments on the freight programmes. This is highly welcomed but the network between rail and land transport still poses a challenge and that is where the tariffs will need to be addressed. Hopefully when Transnet rolls out its infrastructure programme which is now almost in its eighth year we can begin to see a significant reduction of costs. So these two key aspects are the ways in which transports costs can be reduced for a significant amount of the population.

Ms Peters replied that the proposed 5% growth for higher education is not enough, if considered with the targets and commitments made with the #FeesMustFall campaign, it is not nearly enough. The general assessments made by the FFC of the overall growth in the higher education budget will not allow for growth in enrolment. The growth will be stagnant. When the FFC presented to the Fees Commission a few months ago, it said that given current figures there will need to be an addition R40 billion for free education. A more detailed submission on this will be furnished to the Committee at a later stage as advised by the Commissioner.

The main implementers of government infrastructure plans are the SOEs, provincial departments, districts and local municipalities. As noted, outcomes are sub-optimal. Things are not on track, the country is not reaping the benefits that could come from the infrastructure programmes. Much of the challenges revolve around the lack of capacity to manage large scale infrastructure projects.

Mr Dawood stated that the FFC did an assessment on the Department of Health, and it found that the health sector seems to be doing very well in achieving its targets in terms of the MTSF in comparison with other departments. However, the assessment reflected that there is an inequality in access to health services, the bulk of the resources are going to the private sector (where the fewest people are being serviced), whereas the opposite is true for the public sector. So there is a huge imbalance in the sector in terms of access and resources. There are huge inefficiencies in the sector which, if the department were to address, would yield significant cost efficiencies. On poor service delivery in the rural areas and the dysfunctional overlap, the FFC has made recommendations on this. The FFC is quite clear that when it comes to agriculture, it should be the prerogative of DAFF but with infrastructure set up, this is where the DRDLR needs to come in. He recalled that there was a conversation between the two departments about the mandate overlap and which department should focus on what, particularly regarding infrastructure. The FFC encourages the two departments to continue the conversation about the mandate overlap and come to a consensus.

Mr Thando Ngozo, FFC Senior Researcher: Macroeconomics and Public Finance Unit, replied to the request for the list of departments, saying that for the purposes of the presentation, the FFC wanted to paint a general picture of what is going on but if more information is required by the Committee the FFC can provide the list of those departments. On liberalising of trade, what constrains trade are tariffs but one does not want to confine this to tariffs only, so the focus should be on looking at other measures that government can tap into to support SMMEs to be able to export their products. That is what is meant by liberalisation of trade.

Mr Dawood advised that there was a conversation that took place a few years ago between DAFF and DRDLR to iron out the mandate overlap of the two departments before the allocation of resources towards rural and agricultural infrastructure development. Any infrastructure for farming activities should be handled by DAFF, and anything that will encompass the infrastructure such as building roads to ensure that agricultural activities run smoothly should be the responsibility of the DRDLR.

Mr N Gcwabaza (ANC) asked about the role of the Land Bank to make financial support available to emerging farmers and assist the Departments of Agriculture and Rural Development. Secondly, institutions and structures in the past that facilitated access to markets for emerging farmers were the Agricultural Boards. Does FFC not think that these structures would be needed to provide accessibility to the market? With regards to infrastructure in the rural areas, and the broader aspect of economic development, perhaps providing transport for farmers so that goods can easily reach the markets? The role of rail infrastructure in the rural areas was raised earlier by the President. So to what extent is that going to be developed, with Transnet being the major player? On slide 11, it seems that the government target of 30% procurement of goods and services of SMMEs is being watered down, so is the R50 million inclusive of the 30%? He suggested that 30% should be the minimum. If the Bill were to be amended, these are what would persuade Parliament to think along those lines, because the appropriation of funds should begin to speak to radical socio-economic transformation. The 60% set aside for infrastructure jobs seems to now be missing in many documents, including the FFC’s. Can the FFC provide some clarity on this? The country needs policy changes, so what does the FFC mean by the need for structural changes in the health and education sectors? Could FFC also provide clarity on the lowering of policy uncertainty - which policies does the FFC believe are causing policy uncertainty?

Mr Shaik-Emam asked why the FFC has a limited mandate to what it had a while ago, because its inputs are valuable. He asked how the FFC thinks the manufacturing industry can be enhanced, and what efforts are being put into boosting exportation. R4 billion is spent by SA on importing condoms and surgical gloves when the country has such a high rate of unemployment. Government is not creating a conducive environment to create these industries. Does the FFC believe with the Public Service wage bill, if it is converted to quality and performance, it is in line with NDP targets? Year-in-year-out irregular expenditure keeps shooting up, how do you change the culture of wasteful expenditure and what mechanisms should be put in place to mitigate this? The intentions are very good to address it but it is not enough. The TVET colleges are set up to provide the scarce skills for the country, yet these colleges are performing below par and government continues funding them so what about the issue of scarce skills?

Dr Figg stated that the rating downgrades affect service delivery, job creation and the economic growth rate. He asked the FFC if there are any areas where savings could be implemented so that there is less impact on job creation, service delivery and economic growth.

The Chairperson referred to slide 23, what is being done to strengthen the monitoring and evaluation units in all departments cutting across the three spheres of government, and the impact that can be made by the DPME (Department of Planning, Monitoring and Evaluation). On the serious budget shortfalls for TVET and CETs colleges, what does the FFC suggest the Committee outline for DHET to do immediately to address the budget shortfalls? The Committee will peruse the FFC recommendations that were presented to the Portfolio Committee on Higher Education and Training. There are many measures at the disposal of the government departments to assist in addressing these challenges.

Mr Dawood replied on the role of the Land Bank, saying when the FFC did a study last year on the Land Reform Programme, one of the findings was that the grant funding should coincide with affordable loan funding. Currently many emerging farmers cannot access loans because they are not affordable. DAFF started a process of looking at financial instruments that can organise the system to provide affordable funding for emerging farmers. The emerging farmers are experiencing the challenge of extension services as when it comes to production there is a lack of support. These enterprises are not financially viable which then makes the banks reluctant to loan to these farmers because they are not making a profit. If you look at the available funding for extension services for emerging farmers it is very small and only a few farmers receive the benefit.
 
The Auditor General identified the problem about monitoring and evaluation units in departments. In many departments there is a lack of adequate leadership and the outcomes are always sub-standard. When looking at the Department of Transport, for instance, one of the key gaps found was that at the senior level there was a significant gap in capacity and key vacancies had been unfilled for a long time. There is a slow response from the departments in addressing these issues.

Dr Amusa replied on areas of uncertainty and government’s ability to generate savings for job creation and economic growth. In the 2015 Budget Speech, the then Minister of Finance illustrated that as part of the push to get government to generate savings, there were plans for government to invest in activities which did not yield any substantial claim on government and of merging entities to make them more effective. South African Airways (SAA) was highlighted as one of the entities that would be considered for this. Yesterday SAA announced projected losses of about R800 million, which might necessitate guarantees. From 2015 to date, there have been pronouncements that SAA would be merged with SA Express but it has not happened yet, and there is still uncertainty on when will this occur. The FFC advocated that where government has articulated a plan of action, it needs to be articulated how to implement the plan of action for these public entities to go about merging so as to ensure that the private sector will invest resources in this sector.

Ms Peters stated that the FFC agrees about the lack of rail transport for farmers in rural areas. In Transnet’s long term plans, there seems to be a re-emphasis on rail to be re-opened in rural areas to booster economic activity.

Mr Ngozo replied on the role of Land Bank in supporting emerging farmers.  A study was done by the FFC last year on the role of DFIs in enhancing rural development and one of the case studies was on the Land Bank. The findings reflected that the kind of support provided by the Land Bank does not go to small emerging farmers but to big commercial farmers. With regards to trade liberalisation, it is an ongoing process and more could definitely be done. In strengthening the fight against irregular expenditure, the Auditor-General pointed out in its report that there are inadequate consequences for irregular expenditure. There is a lack of serious and decisive enforcement. Perhaps the focus to eradicate irregular expenditure is to strengthen the enforcement measures.

The minutes of the 9 and 10 May 2017 meetings were adopted without amendments.

The meeting was adjourned.