Restructuring of public entities; New Budget facility; Office of the Chief Procurement Officer & status on payment of suppliers per Budget Vote: National Treasury briefing

Meeting report

Opening remarks

The Chairperson announced that the Committee would receive a briefing by National Treasury on work underway in many areas including work on the Budget Facility for Infrastructure, streamlining of Public Entities and other major spending areas.

State expenditure, especially in procurement, was one of the key mechanisms that would enable the government to implement its developmental policy. Effectiveness in infrastructure spending, nationalised and streamlined public entities, curbing wasteful and fruitless expenditure, preventing procurement deviations and price escalations was the priority focus area in the medium term.  Those issues were a direct concern to the Committee as the mandate in the Money Bill Act directed that the Committee had to deal with all spending issues of government. National Treasury was a significant shareholder in the Committee's objectives of ensuring efficiency, effectiveness, and value for money in the government.

The Chairperson welcomed Mr M Maswanganyi (ANC) who was a new Member of the Committee.

Presentation on the Classification on Public Entities

Mr Goolam Manack, Head: Public Entities Governance Unit (PEGU), National Treasury (NT), made the presentation on public entities.

He indicated that key policy framework recommendations were to only devolve functions if there was sufficient reason so that form followed function. Ministers had to be held politically accountable for all policies and institutions that fell under his/her control and that responsibilities had to be spelt out clearly in establishment Acts and policy frameworks. Delegations of powers and responsibilities should accompany and be consistent with the devolution of functions.

Non-Profit Organisations /Section 21 Companies were to be curtailed, as well as Trusts, Ad hoc Funds, Co-operatives and Close Corporations. Subsidiaries of Public Entity subsidiaries and Shared Service Centres would also be curtailed.

A key issue was the classification of entities budget reform perspective to regulate and manage the use of devolved service delivery structures as transfers from the government to public entities amounted to approximately R180 billion and Government’s exposure to risk needed to be managed. Mr Manack listed those entities to be delisted.

Consolidation of Development Finance Institutions was taking place at the national level. The consolidation would create a single Human Settlements Development Bank (HSDB).  However, National Treasury was awaiting a formal submission of a business case and draft legislation by the Department of Human Settlements before Treasury's approval to set up the new DFI could be been given. 

Treasury had concerns about the DFI consolidation as no clear market failure had been identified and HSDB wished to undertake all the previous DFI’s activities, plus more, so there were no cost efficiencies gained from consolidation.

Discussion

Ms D Senokoanyane (ANC) asked NT to provide more information concerning the prohibited co-operative forms. According to the presentation, Non-Profit Organizations/ Section 21 companies were prohibited because on establishment, it was unclear who the members would be and with what authority they acted. The understanding was these companies had been in existence for a long time. She asked NT to explain how these companies had operated in the past given the stated problem.  She did not see anything wrong with Shared Centre Services because they seemed to be a good model. She asked NT to explain why they were also included as part of the prohibited corporate forms.  Had NT had not been consulted before the merger of the three DFI’s as NT had concerns over the issue while the consolidation was still in process?

Ms M Manana (ANC) asked NT to elaborate on why Trusts, Ad Hoc Funds, and close corporations were prohibited.  Why was each province creating its own entities? She was concerned that the process seemed not to be correctly coordinated.

Mr N Gcwabaza (ANC) asked NT if there had been a complete review of the entities to determine the continued relevance of their existence. He asked NT to indicate which of the entities had been inherited from the previous government.  He was also interested in knowing the total number of the personnel working in the public entity sector.  Why would a department establish an entity with a specific mandate and then the entity established other subsidiaries under it? That was a problem because it established a network of structures that made spending difficult to track and had the potential to blur accountability lines in the process.

Mr A Mclaughlin (DA) noted that one of the reasons for improving the framework for classifying and managing public entities was to ensure that public resources were subject to an appropriate degree of governance and oversight. He asked NT to explain what had been happening in the past if that issue was only being addressed now. How was Treasury measuring the effectiveness of the money being spent?  He wondered if there were targets in place to enable one to measure target expenditure against targets achieved. Mr A McLaughlin asked NT to clarify what the cooperate forms were. Could Treasury explain what made a state-owned enterprise different from a national public entity?

Mr M Maswangani (ANC) advised NT to include more classifications in their presentation. There were classifications beyond what was in the presentation. The understanding was that not all entities were commercial. He asked NT to outline which of the entities were commercial, non-commercial, DFI statutory cooperatives, etc. That was important for a better understanding of the purpose of their establishment of the entities and what they were currently doing. 

He noted that a Presidential Review Committee (PRC) was reviewing the State-Owned Enterprises.  NT should have mentioned it in the introduction of their report to show that there was a lot of work was currently being done to review the entities with an intention to merge and de-establish some of them.  Most of the case studies had been done in that regard.  The presentation showed that the framework should provide the possibility of a growth path towards greater autonomy for entities. He said that there was no need for more autonomy for public entities. The entities were wholly-owned by the government. The board was the accounting authority, and the Minister was the executive authority. There was no need for more autonomy. He asked for clarity on the issue.

The Chairperson asked who was responsible for delisting public entities. She asked NT if there was a work plan. The work plan should have time frames so that the Committee would know when to expect the work of delisting would be completed. Regarding in-year monitoring, NT had introduced quarterly reporting to the Treasury by all national Public Entities. She thanked NT for having implemented the Committee’s recommendation to implement quarterly reporting by public entities.

Response by National Treasury

Mr Manack explained that Section 21 companies were legal, given that they had been established under the Companies Act. However, the problem was that those companies had members and not shareholders. When a Section 21 company was dissolved, the assets were supposed to be transferred a similar institution that dealt with a similar mandate. That was a challenge for government-funded NPO's, given that there was no clarity as to where the assets would go upon dissolution.  He said that NT had been able to curtail the number of institutions that were looking to establish such companies. NT had engaged with institutions before they established NPO's and had explained to them that the corporate form would not be supported by NT.   The situation was similar with Trusts, Ad hoc funds, and co-operatives.

Mr Manack said that subsidiaries of Public Entities were also established under the Companies Act.  The entities could establish additional functions. It was appropriate for them not to undertake the additional functions within the current structure but to establish a new structure/company so that they could consolidate their efforts and focus on their core business. For the PFMA, all the subsidiaries were consolidated within the main entity. Quite a few of the major public entities were inherited from the previous government. One of the most significant ones taken over was the Independent Development Trust, which had been established in the late 1980’s.

The purpose of improving the policy framework for classifying and managing public entities was to improve the current situation. That did not mean that nothing was happening previously. The intention was to improve the mechanisms in place for appropriately classifying the institutions.  NT had played a key role in assisting the Presidential Review Committee. Many recommendations had been tabled. The current President had been the Deputy President at the time, and he was leading an Inter-Ministerial Committee on implementing the recommendations. Those were continuing, and some of the work was being undertaken by the Department of Public Enterprises with the NT as a reliability unit and Public Entities was looking to implement some of the recommendations that had been made.

Mr Manack explained that a government business enterprise was a corporate form funded from its own revenues whereas a national public entity was an agency of government that operated as an extension of government and therefore needed funding for carrying out its mandate.  Treasury’s focus was on re-organizing and re-justifying those institutions to ensure that the corporate forms that they had chosen were appropriate to the functions that they implemented.

Regarding the BFI consolidation, the Minister noted the intention to create the Human Settlement Development Bank. In doing that it meant that existing functions performed by other DFI’s would be merged. NT was currently in the process of determining how that would happen.  The work concerning the de-listing of provincial public entities was in process and NT was responsible for the process of de-listing. In doing that, a lot of engagements were taking place between the national government and the provincial governments on those institutions that NT was looking to de-list.

More than 200 000 personnel operated in the public entities. Mr GH Manack would confirm the exact number and make it available to the Committee.

Presentation on the Budget Facility for Infrastructure (BFI)

Ms Dorcas Kayo, Director: Infrastructure Finance, National Treasury presented on progress in the development and rollout of the BFI.

On 19 October 2016 Cabinet had approved that NT, the Presidential Infrastructure Coordinating Commission (PICC) and the Department of Planning, Monitoring and Evaluation (DPME) would work on the modalities to address constraints in the implementation of prioritized national projects. Cabinet recommended that programme management capacity be developed together with the ability to technically package good projects. There should be credible funding and investment plans, and partnerships with the private sector should be managed. A conceptual document established the Budget Facility on Infrastructure as a joint arrangement between the NT, PICC, and DPME.  A Cabinet Memorandum detailing the proposals in the conceptual document was sent to Cabinet through the Ministry of Finance. There was also a request that the minister of finance fast tracks the finalization of the Budget facility on Infrastructure.

Cabinet approved and strengthened the conceptual document. Technical support and advice would be provided through the BFI to fast-track viable projects; the infrastructure build would be broadened; and the proposed time frames on future phases set out in the document (project pipeline, multi-year authority to spend and the proposed project account) had to be reviewed with a view to expediting project implementation.  Cabinet also approved the proposals for the establishment of the Budget Facility on Infrastructure as detailed in the conceptual document. The Budget Facility of infrastructure advanced the objectives set out by Cabinet.

On 10 May 2017, the National Treasury had briefed the Standing Committee on Appropriations on the progress that had been made in the establishment of the Budget Facility on Infrastructure (BFI). A call for proposals for large national priority projects was issued as part of the 2018/19 Medium Term Expenditure Committee (MTEC) Guidelines.  As a result, 64 projects worth R 138.6 billion had been submitted.  National Treasury, the Economic Development Department (EDD), PICC and DPME had worked together to put in place the structures, processes, and criteria for the appraisal and evaluation of those large projects during the MTEC process.  The Joint Technical Committee (JTC) managed the detailed technical assessment process. JTC was a multi-stakeholder Committee comprising senior officials from National Treasury, the PICC secretariat and the Department of Planning, Monitoring and Evaluation.

The JTC recommended that the following projects to undergo detailed technical appraisal:

• Construction of new and refurbishment of magistrate and high courts
• Limpopo Central Hospital
• Moloto Development Corridor Rapid Rail Project
• Cape Town Metro Southeast (Bus Rapid Transit System)
• Umzivumbu Water Project
• 31 Water Projects
• SA Connect Phase 2 Broadband Project.

A project had been received from the Department of Higher Education on student accommodation. However, the JTC request the Department of Higher Education to resubmit the project once the feasibility study was ready In November 2017.  Nothing had since been heard from the Department of Higher Education.

Only one project had met the criteria.  Assistance was being provided to potentially viable projects that were badly packaged. A plan had been put in place to ensure that those projects were fast-tracked and were ready to be considered for funding during the adjustments budget in October 2018.

Discussion

Mr Maswangani had a problem with the fact that student accommodation was not a priority. The establishment of student accommodation on campuses should be a priority. With no accommodation, students had to stay far away from campus, and that was a disadvantage for poor students regarding transport, and safety for female students. He advised NT to urgently attend to the matter. The problem was that the Department of Higher Education wanted to do the Department of Public Works’ function. The Department of Higher Education was responsible for higher education, and it was not tasked with the responsibility of building infrastructure. The act of demobilizing certain departments that had been established for specific purposes was wrong and was the reason for the failure of departments to properly attend to the needs of the public.

Mr Maswangani advised NT to look at the 2010 World Cup from an expenditure point of view. The World Cup experience had affected the roll-out of infrastructure. The challenges associated with the World Cup were still affecting the economy.   One of the major challenges was collusions associated with the establishment of e-toll and the stadiums. They had been improperly procured. 2010 had cost the country a lot of money. There was the need for NT to find ways of mitigating the effects of the World Cup.  

Mr Mclaughlin was concerned about the existence of a lot of plans that had not been implemented.  There seemed to be no ability to plan properly. It was a major concern because a lot of money had been spent on planning and consulting, but the result was always a fancy plan that could not be implemented. He asked NT to explain if there were measure in place to ensure that the plans produced results rather than more plans. Only one project had met the criteria. He asked NT to provide more information regarding the 64 projects that were assessed by NT.  What was meant by the phrase “building a projects pipeline”?

Mr N Gcwabaza asked NT to explain how the BFI was linked to the national budget announced in February. SOE's had been established to assist departments with the development of economic infrastructure, but nothing was heard about them and their involvement.  SOE's like Transnet and PRASA had the financial and technical capacity to help with infrastructural development, but they were either doing nothing, or their own things. He asked NT to explain why that was the case.

The Chairperson stated that the first recommendation for the implementation of the BFI had been in 2016 and implementation would be in 2017. However, 2017 was over, but it had not been implemented yet. That meant that there had been a postponement of the implementation. She asked NT to indicate when there would be some movement.

The Chairperson had a problem with the fact that only seven out of 64 projects had been selected for technical assistance. That was a problem given that infrastructure development was one pillar of the National Development Plan that was supposed to assist the country with the creation of jobs and bridging of inequality. She asked NT to specify which project had been selected out of the seven so that the Committee could closely monitor it.  The presentation indicated that a plan had been put in place to ensure that the projects were fast-tracked and ready to be considered for funding during the adjustments budget in October 2018.  She asked for clarity on which projects were being referred to. It was not clear whether it was the seven projects or remainder after subtracting the one project that had been submitted.  She asked NT to provide the plan to be submitted to the Committee. This plan was to be specific, time-bound and with the budget.

The Chairperson said that the Constitution stressed the need for government to be responsive to the needs of the public. The President had announced fee-free education. The infrastructure plan was supposed to be aligned with to fee-free education. Universities would be attended by children from poor families, which meant they would not be able to afford accommodation. It would be very wrong for NT not to prioritize the provision of student accommodation.

Response by NT

Ms Kayo responded that everyone was concerned that student accommodation became a priority project. However, the BFI could not take the role played by the Department of Higher Education. The Joint Technical Committee also had the same concern over the issue and had advised NT to speed up the process regarding the provision of student accommodation.  She said that there was the need for the JTC have a meeting with the Department of Higher Education to identify what was wrong. It was also necessary for the PICC to intervene.  NT had raised the issues per project that needed to be addressed, and lead assessors were involved in assessing each project. For each project, there was a way forward with milestones that needed to be achieved.  A task team on each project was addressing the shortcomings that had been identified in most of the projects. 

Ms Kayo said that NT was aware of the expenditure problems introduced by the World Cup experience. There was the need for a concrete intervention to help push through the projects and make them ready. The JTC had asked NT to look at whether the money allocated to the PIC was sufficient for it to do its job adequately.  From the start, Cabinet had indicated that the BFI should be strongly linked to the budget process. The appraisal of projects should be year-round, and the projects that were ready should slide into the budgeting process. The expenditure on major projects should also go through the normal budgeting process to create awareness of what was happening in the budgeting of these projects. For example, a project like Limpopo Hospital project had high operational costs.  There was the need to know how money was being spent and if there were adequate resources to run hospitals like that.

Ms Kayo explained that a projects pipeline was a pool of good and viable projects that were ready for funding. Currently, NT did not have a projects pipeline given that only one project had met the criteria. There were plans in place to build a projects pipeline so that the government could easily prioritize the projects for implementation.  The projects that came through needed to meet the following criteria:

• had to be a national priority
• had to have large financial implications and economic impacts on the economy
• had to be ready for funding.

Only seven had passed the criteria. Of the seven, the one that had met the criteria outright was the Cape Town Metro Southeast (Bus Rapid Transit System). The two other projects that might be implemented through the adjustment budget included the Limpopo Central Hospital and the SA Connect Phase Two Broadband Project.

The Chairperson requested NT to submit the plans of the seven projects, in writing, to the Committee. There had been a lack of seriousness in work done by the PICC since it had been established in 2013.  She insisted that a master plan be developed to ensure that things were done systematically.

The Departments were responsible for developing the terms of reference for their own infrastructure, for example Health was responsible for hospital planning.

Payments within 30 days: National and Provincial Departments – National Treasury

Mr Jayce Nair, Chief Director: Governance Monitoring & Compliance, National Treasury, reassured the Chairperson that a circular had been sent to all departments regarding 30-day payments.    

The Chief Director informed the Committee that to track the Public Finance Management Act requirement of paying invoices within 30 days, Treasury compiled reports on all invoices paid after 30 days.  He explained that Treasury Instruction Note No 34 required all departments to provide information about invoices paid after 30 days so that the report could be compiled.  He cautioned that it meant that the results were self-reported but presented a list of late and unpaid invoices per department and per province.

In the previous quarter, the Department of Health had been by far the worst offender in respect of invoices not paid within 30 days.  Education was also guilty of not paying invoices timeously.  Cabinet had determined that a task team be formed, headed by Treasury, to investigate why invoices were not being paid timeously.

Common challenges at National Departments ranged from the problems experienced with legacy systems not producing reliable information for the Department of Defence to decentralised points of receiving invoices and a lack of invoice tracking systems. However, common to all departments was the problem with budgetary constraints. Challenges at provincial departments related predominantly to budgetary constraints.  In Mpumalanga, particularly, cross-border patients put a strain on the Department of Health budget.  The Gauteng Department of Health was struggling with health and medical negligence claims and litigations. Non-payment of invoices was usually due to insufficient cash flow and departments had to wait for the next tranche of funding before payments could be made.   He presented a lengthy list of reasons for non-payments. 

Of particular concern to Cabinet, and government in general, was the impact of late or non-payments, especially on SMME’s and cash flow. The stark reality of late or non-payment was that suppliers were forced to borrow money to meet contractual obligations, and retrenchments and forced closures occurred due to constrained cash flow positions. That was counter-productive towards the government mandate to create sustainable jobs and to promote SMME’s. The situation could lead to corruption and was certainly a reputational risk to Government.

Mr Nair spoke of proposed interventions but cautioned that for any intervention to be successful, there had to be consequence management, effective leadership, and political and administrative will. Interventions included disciplinary steps against the officials that contravened the legislation.  Accounting Officers were required to analyse the reasons provided for late payment and to ensure that payment of suppliers within 30 days was a standing agenda item for executive meetings.  He agreed that budgetary constraints made payments difficult but overdue payments attracted interest which could be viewed as fruitless and wasteful expenditure.

He added that Treasury issued an annual report to SCOPA on 30-day payments and offered to provide the same report to the Committee.

The Chairperson appreciated the presentation which was very clear and to the point. She agreed that it would be valuable for the Committee to receive the annual report on 30-day payments.  There was no time for further engagement and the Chairperson requested the Office of the Chief Procurement Officer to present at a future meeting.

The meeting was adjourned.