Appropriation Bill: briefing; Committee Report on 2018 Appropriation Bill

Meeting report

Chairperson’s opening remarks

The Chairperson said the Committee had gone through a number of phases, with phase one being the fiscal framework and revenue proposals which were adopted as part of the national budget. The second phase was the Division of Revenue Bill (DoRA), which was taken to the nine provinces with legislators having conducted public hearings, final negotiating mandates being adopted in the National Council of Provinces (NCOP), and finally the third phase, where budget votes had been presented to select committees and debated in the House. They were now concluding the whole process by addressing the Appropriation Bill which would be tabled in the NCOP on 28 June.

He welcomed National Treasury, represented by Dr Mampho Modise, Ms Julia de Bruyn, Mr Owen Willcox and Mr Rendani Randele, to Parliament. He informed Members that when one entered the National Treasury building in Pretoria one felt the gravitas, the feeling of excellence and expertise. He commended them for the work they do and reminded Members that the National Treasury was ranked number one alongside New Zealand in terms of budgeting, and he encouraged them to keep it up.

Appropriation Bill: briefing

Dr Mampho Modise, Deputy Director General: Public Finance, National Treasury (NT) said a presentation had been circulated as part of the briefing, which contained a summary of the Appropriation Bill (AB). However, the entire document was accessible, and more details were in the document.

The summary of the 2018 budget showed that revenue fell short of expectation and there were a lot of spending pressures, which meant that the debt management strategy had to change. A decision had therefore been made by Cabinet to increase or introduce new tax measures, which had amounted to R36 billion. The biggest ones that were noticeable were the higher Value Added Tax (VAT), which had increased from 14 to 15 percent, as well as the increase in the fuel levy. The second measure was to reduce expenditure by R85 billion in all three spheres of national, provincial and local government through re-prioritisation. However, an additional R57 billion had been allocated for free higher education and training.

There had been an addition to the contingency reserve of about R10 billion, and this was mainly due to the persistent drought the country was experiencing. The reason was that impact of the drought was not known at the time. There had been other adjustments to spending, and those were the National Health Insurance (NHI) which had been allocated R4 billion, and R6 billion as a provisional allocation for drought and public infrastructure which was supported by the budget facility for infrastructure. These were some of the key highlights of the budget.

With the measures mentioned above, it meant that the deficit would be 4.3 percent of gross domestic Product (GDP), and that would gradually be reduced to 3.5 percent by 2020/21. This also meant that the debt would stabilise at 56.3 percent of GDP in 2022/23. Despite the government’s efforts, the net borrowing requirement remained at around R200 billion per year over the medium term.

The country remained with a promising fiscal framework, but there were still risks to the framework and the first one was the uncertainty around the economic growth outlook. As could be recalled, in the first quarter there had been a contraction that was much bigger than anticipated and hopefully that would not persist, because if it did it would result in lower revenue. The second risk was the wage pressure that could affect the budget. However, what was worrisome were the finances of the state-owned companies.

The macro economic framework, the fiscal framework, as well as the DoRA proposals across the three spheres of government had been tabled in Parliament, and the Minister had presented the budget review. The Treasury was before the Committee to present the Appropriation Bill. The Money Bills Amendment Procedure and Related Matters Act of 2009 required that after tabling the national budget, three things were required:

• Section 8(3) -- Parliament must within 16 days submit a report to the National Assembly and the National Council of Provinces on the fiscal framework and revenue proposals;
• Section 9(3) -- The Division of Revenue Bill must be passed no later than 35 days after the adoption of the fiscal framework by Parliament;
• Section 10(7) -- Parliament must pass the Appropriation Bill with or without amendments, within four months after the start of the financial year, namely 31 July 2018

The Appropriation Bill was the legislation that provided for the appropriation of money by Parliament from the National Revenue Fund in terms of section 213 of the 1996 Constitution and section 26 of the Public Finance Management Act of 1999 (PFMA).

Spending was subject to the PFMA and the provisions of the Appropriation Bill itself. Departments could spend only what was appropriated in the Bill and this was done through Parliament. Parliament decided how much departments may spend.

For transfers to sub-national governments, the 2018 Division of Revenue Bill also contained provisions in terms of which specific spending had to take place. Prior to the 2018 Appropriation Bill being approved by Parliament, departments would incur expenditure in terms of section 29 of the PFMA, which makes provision for spending before an annual budget was passed. For up to end of July, expenditure may not exceed 45 percent of the 2017/18 financial year annual budget.

Promulgation of the 2018 Appropriation Act was necessary because:

• It would allow for monthly expenditure above the transitional provisions contained in the PFMA;
• It would ensure that expenditure was in accordance with the vote and programme purposes as stated in the Act.

The Bill was divided by vote and by main division within a vote -- that is, by programme and transfer and subsidy to a national department within a vote. A purpose was set out for each vote, programme, transfer and subsidy to a national department within each vote.

Allocations were categorised in terms of current payments, which included compensation of employees, goods and services, interest and rent on land, transfers and subsidies, and payments for capital and financial assets. This structure helped in analysing and assessing where the different funds would be going to in terms of the different votes.

There was also a voluminous document which was an explanatory memorandum of the Bill. It contained all of this information and could be accessed on the Treasury’s website. The one that was on the website was even more detailed than the document. Treasury tried to make sure that this information was available publicly.

Although the Treasury tried to do good budgeting, it was still not there yet. It tried to ensure value for money. The idea was to ensure that each rand contributed two rand in terms of the outcome. In order to do that, Treasury had objective-based programme structures which would help strengthen the link between the budget and service delivery. There were activity-based costings, especially of the sub-programmes, so that these would support programme outcomes and objectives. There was continuous reform to improve links between the budget and service delivery performance, but the Medium Term Strategic Framework (MTSF) also had to be linked to strategic plans, annual performance plans and the budget.

Main Budget Allocations

The main budget amounted to R1.5 trillion and of this, the current payments amounted to 27 percent of the total expenditure.

Compensation of employees amounted to 11 percent. The compensation that was here was for the main budget allocation. The amount that was transferred to provinces and local government would be under transfers and subsidies, where the allocation accounted for 71 percent of the budget. The compensation of the provinces was still part of transfers and subsidies. This did not mean that the consolidated national government compensation was only 11 percent. This was how the Bill was structured, and everything that was transferred to provinces came under transfers and subsidies. That meant that the 35 percent that was referred to in the book also considered the re-classification of transfers and subsidies to provinces regarding the economic classifications.

The debt service costs amounted to R180 billion, which was a large proportion (12%) of the budget.

An issue that needs to be worked on was payments for capital assets, which accounted for one percent of the budget, at R14 billion.

Compensation of Employees

The Appropriation Bill was structured in order to reflect the big departmental spending in terms of the different items. Treasury looked only at departments that were accounting for over 80 percent of the compensation of employees (CoE) categories.

• Police were allocated R70 billion, which was 43 percent of the CoE budget;
• Defence and Military Veterans accounted for 16 percent, at R27 billion;
• Correctional Services was allocated 10 percent, at R16.9 billion;
• Justice and Constitutional Development was allocated R11 billion, which was seven percent;
• Higher Education and Training was allocated R8.9 billion, which was five percent.

Regarding higher education, technical and vocational education and training (TVET) and community education and training (CET) lecturers accounted for a large portion of the CoE budget. Security departments also tended to be labour intensive.

Goods and Services

This also focused on departments that accounted for 80 percent of the goods and services budget.

• Police -- 24 percent, or R16 billion;
• Defence and Military Veterans -- 19 percent, or R12 billion;
• Correctional Services -- nine percent, or R6 billion;
• Justice and Constitutional Development -- R4 billion, or six percent;
• Cooperative Governance and Traditional Affairs -- R3 billion, or five percent.
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The main purchases for the Police were computers and fleet service vehicles; for Defence, it was payments for contractors; for Correctional Services, it was nutritional support for inmates and property payments; for the Justice Department it was computer services, operating leases and property payments; and for Basic Education it was printing and work books.

Transfers and Subsidies

• National Treasury was allocated R505 billion, or 47 percent;
• Social Development was allocated R172 billion, or 16 percent;
• Higher Education was allocated R80 billion, or eight percent;
• Cooperative Governance and Traditional Affairs was allocated R80 billion;
• Transport was allocated R58 billion, or five percent.

National Treasury transfers include the Provincial Equitable Share (PES), which account for 98 percent of the Treasury transfers. The provincial share accounts for 93 percent, and the grants for local governments account for three percent of the total. Regarding social development, only a small portion goes to the provinces, with the bulk of the funds going to social grants. For Cooperative Governance, the biggest share goes to local governments, which was 98 percent.

For Transport, the largest transfers go to the following:

• South African National Roads Agency Ltd (SANRAL) -- R15.6 billion;
• Passenger Rail Agency of South Africa (PRASA) -- R 18.8 billion;
• Provincial Roads Maintenance Grant -- R11.03 billion;
• Public Transport Operations Grant -- R6.2 billion;
• Social Development (social grants) -- R163 billion.

Most of the transfers go to the different spheres of government, but some of them go the national departments of public entities.

Constitutional institutions were granted R3.2 billion, and the breakdown was as follows

• Independent Electoral Commission -- 61 percent;
• Independent Communications Authority of South Africa -- 14 percent;
• Public Protector            -- 10 percent.

National public entities were granted R110 billion, broken down as follows

• National Student Financial Aid Scheme -- 21 percent;
• South African National Roads Agency -- 14 percent;
• Sector Education and Training Authorities (SETAs) consolidation -- 13 percent;
• South African Revenue Service  -- 8 percent;
• South African Social Security Agency -- 7 percent;
• National Skills Fund -- 3 percent;
• Legal Aid South Africa -- 2 percent.

National Government Business Enterprises were granted R22.8 billion:

• Passenger Rail Agency of South Africa -- R18.7 billion (82 percent);
• Council for Scientific and Industrial Research -- R1.2 billion (5 percent)

Payment for Capital Assets

Departments accounting for over 80 percent of payments for capital assets were:

• Police -- R3.7 billion (26 percent)
• Water and Sanitation -- R3.6 billion (25 percent)
• Basic Education            -- R1.3 billion (9 percent)
• Justice and Constitutional Development -- R1.1 billion (8 percent)
• Health -- R1 billion (7 percent)
• Defence and Military Veterans -- R887 million (6 percent)

An amount that was marked specifically and exclusively in schedule 1 and 2 of the Act may be used only for the purpose indicated, unless the amount or purpose was amended by or in terms of an Act of Parliament. There are a large number of these items, and they include:

• All additional direct or indirect grants;
• All compensation of employees;
• All compensation linked to capital projects;
• All funding allocated to departments within a vote;
• All funding allocated to constitutional institutions;
• Social grants;
• Commitments that bind the National Revenue Fund, such as the rolling stock fleet renewal programme in PRASA, and contributions to the reduced Gauteng Freeway Improvement Programme tariffs, based on the 2015 new dispensation.

Largest Positive Reallocation and Funding Additions

Despite the reduction of R85 billion over the Medium Term Expenditure Framework (MTEF), there would still be some funds that would be reallocated to other programmes that were deemed to be essential.

The total appropriation bill amounted to R814.5 billion in 2018/19, excluding direct charges such as the provincial equitable share and debt-service costs.

The following represented the largest positive reallocation and funding additions to the budget baselines in 2018/19:

• Basic Education – R1.5 billion for the school infrastructure backlogs indirect grant for the completion of current projects. The reallocation was from the Education Infrastructure Grant.
• Health – R700 million for the development of an interim National Health Insurance (NHI) structure, and the NHI indirect grant to cater for a package of prioritised NHI services.
• Human Settlements – R518.7 million to the title deeds restoration grant for the title deeds backlog.
• Social Development – R327.5 million for social assistance grants to offset the impact of new tax measures.
• Economic Development – R240 million for the operationalisation of the Tirisano Construction Fund Trust.
• Home Affairs – R180 million to the Independent Electoral Commission for the 2019 national government elections.

The biggest allocation in the 2018/19 Appropriation Bill was R57 billion over the MTEF, which was given to the Department of Higher Education and Training. For this year, R12.3 billion of the R57 billion would be disbursed.

• R7.2 billion would go to the National Student Financial Aid Scheme (NSFAS) for the phasing in of fully subsidised higher education and training for poor and working class students;
• R2.7 billion for TVET college subsidies, refurbishing TVET infrastructure and starting operations at three new TVET college campuses (R11.1 billion over the MTEF);
• R2.4 billion for university subsidies (R11.3 billion over the MTEF).

 

Discussion

Mr De Beer requested the Members for questions. He said what they had before them had been debated for the past four or five weeks

Mr F Essack (DA, Mpumalanga) said he had a comment on the analysis that the public finances were going to be dependent on the performance of the economy, and that this was one of the risks to the fiscal framework going forward. There had been a drop in the GDP numbers in the last quarter which had been announced two weeks ago, and he asked what Treasury’s reaction to that was. Making a reference to the economic classifications in the main budget classifications, he pointed to the debt service costs, which accounted for 12 percent of the budget, and said they were ridiculously high. He asked what would happen to the debt costs should the GDP be somewhat adverse in the next six to twelve months, as it was already bleeding the fiscus. How was the Treasury going to address the debt service costs?

Mr M Shabangu (EFF, Free State) said he had questions regarding money allocated to PRASA and other entities. They were getting a lot of money, but were under-performing and not making a profit. He asked how the Treasury was going to monitor them, as well as monitor the grants going to local governments so that there was no irregular, wasteful and fruitless expenditure, as was the case every year. On the 5% subsidy allocated to transport, he was of the opinion that it was insufficient taking into account that the majority were very poor and especially that the price of fuel had been consistently going up. Regarding the allocation for free higher education, he asked when the allocation would be disbursed, because currently most TVET colleges -- with six of them in the Free State -- had closed down because there were no funds. At one stage, it was discovered that only R300 had been deposited into the students’ accounts. He appealed for assistance.

Mr De Beer asked Mr Shabangu if he had said that six TVET colleges had closed down.

Mr Shabangu replied in the affirmative.

Mr De Beer asked him to give more details to the Committee in writing, as it was a very serious issue.

Mr O Terblanche (DA, Western Cape) referred to the economic classifications budget allocations and expressed his concern over the one percent allocation for capital assets. He said that if one wanted to grow an economy, one needed to invest in infrastructure. There was a need to pay attention to the road network in the country.

Mr L Gaehler (UDM, Eastern Cape) sought clarity on the R240 million for the Tirisano Construction Fund Trust. He asked what the fund was for, and for further elaboration on the matter. Regarding goods and services, he asked why consultants were being contracted to deal with restitution claims. On the bulk infrastructure fund for roads, there was money for roads but on the ground, there was nothing happening. He conceded that the issue lay with the provinces and not the Treasury, but he wondered whether it was right to throw money away.

Mr De Beer referred back to the apparently closed TVET colleges in the Free State, and said the reason he had asked for details was because they interacted with colleagues in the committee dealing with higher education, and it would be ideal for them to go deeper into that issue. Perhaps a joint meeting could be convened on the matter. It was also important to be mindful of the expenditure saving of R87 billion over three years, as it had a real effect on the budget, and to be mindful of the programmes that the President was putting in place to task the envoys to go and engage with investors and potential investors to come and invest in South Africa. The reality of the negative growth in the first quarter of 2018 needed to be taken into consideration, and everybody had work to do -- not only the government.

Treasury’s response

Mr Owen Willcox, Chief Director: Economic Services, NT, said that the Tirisano Construction Fund was the result of a construction cartel. There had been a penalty levied by the Competition Commission on construction companies, and then there had been a settlement between the construction companies which had formed the cartel, and the State. As part of that agreement, the construction companies had agreed to establish a R1.5 billion fund to improve empowerment and transformation in the construction industry. The construction companies were paying R150 million a year into a revenue fund, and that money was appropriated through to the Department of Economic Development. The Tirisano Trust was managed by the Industrial Development Corporation (IDC) to undertake projects effecting transformation in the construction industry.

Mr Gaehler asked whether Members had to contact the IDC for information on how the fund was being used, because the fund was supposed to be assisting emerging contractors but on the ground there was nothing happening.

Mr Willcox replied that it might be better to contact the Department of Economic Development.

Mr De Beer responded that that information would come out in the period when Parliament dealt with the annual reports of departments, in the financial statements.

Mr Willcox added that the fund also produced its own annual report which could be accessed from the Department of Economic Development.

Ms Julia de Bruyn, Chief Director: Public Finance, NT said the Treasury did only high level oversight, so an accounting officer in a department was responsible for the spending of all the money that was appropriated. For instance, the local government grants were administered by the accounting officers in the Department of Cooperative Governance, who were responsible for expending and monitoring the grants, and ensuring that they were used for the intended purpose. There were provisions in the DoRA that if things were not happening in one place, the funds could be moved to another place using known criteria so that the money did not get lost. Sometimes the money that was appropriated did not get spent due to problems of capacity. From the National Treasury side, only high level oversight was done, but where it was evident that there were problems, it intervened. Treasury monitored the spending on a monthly basis and when money was not being spent, the accounting officers were asked to furnish reasons for the under-spending and if there were problems, Treasury asks how it can help. Treasury goes through different stages and levels of alerting, up to the level of Ministers. Treasury sometimes tries to do unblocking, especially regarding infrastructure.

The use of consultants depended on the department, because there were some departments that could not do without consultants. Some infrastructure projects could not be completed without the assistance of consultants who were technical people, like engineers. Consultants were considered on a case by case basis.

Addressing Mr Shabangu, she confessed that it was the first time she was hearing of TVET colleges closing for lack of funding, and she was taken aback by that. It would be important to find out from the Department of Higher Education what exactly was happening, because R57 billion had been allocated and if the funds were not moving, there was a problem.

On the state-owned companies that were not making profit, Treasury was equally concerned. Oversight of the entities was exercised by the executive authority and in the case of PRASA, it was the Department of Transport and the Minister. At a high level, Treasury gets quarterly reports from the entities. It was also important to remember that the Appropriation Bill was only looking at national departments, so the composition of expenditure regarding the one percent for capital assets was because a lot of departments did policy making, regulation and oversight. They did not actually deliver services. Included in the 71 percent that was for transfers and subsidies, there would be transfers to PRASA, which was capital, so the fact that it was not classified as capital assets did not mean that the allocation for capital assets was low. When the money was spent, it would then be re-classified as capital and it would be more than one percent.

Dr Modise admitted that the contraction in the first quarter was worrisome, but in the fiscal year they had had only two months in which Treasury had collected revenue, and they were not the biggest months for revenue collection -- the biggest months were March to September, and December. It would therefore be interesting to wait for the Medium-Term Policy Statement to see what the impact of the first quarter growth outcome would be on the expected tax revenue.

The biggest challenge concerning debt-service costs was that if the revenue that was expected was not realised, then the fiscal framework would have to be re-evaluated, and there were different ways in which government did that, but it would definitely be a problem because a lot of money had already been squeezed. R80 billion was a large amount by which to reduce spending. If revenue did not come, other consolidation measures would have to be considered.

Regarding the entities, she disclosed that because PRASA was not spending the money allocated to it, Treasury had reduced the transfers to the entity by over R3 billion, so these institutions were monitored.

Mr Willcox replied to the question on consultants, saying the restitution allocation was about R3.3 billion a year and that consultant fees accounted for R85 million of that. The consultants were used to establish the validity of restitution claims, and they were mostly historians who conducted the research. The Department was aware that they were spending too much money on consultants and they were moving to other methods, such as using consultants in broad areas

Mr De Beer reported that on Tuesday, 26 June the Committee for Finance would be dealing with the Public Audit Amendment Bill, which was an important piece of legislation which would empower the Auditor General to crack down on unauthorised, irregular, wasteful and fruitless expenditure. It was going to assist Parliament but he was not going to elaborate, as they would get a briefing, but he was excited about it. He recalled that there was a cluster of consultants that had been gathered together to assist municipalities, but he wondered where that group of consultants had disappeared to. Everyone was looking for the consultants. They were supposed to be under DCOG, but they were nowhere to be found.

Mr Gaehler asked what had happened to the National Tender Board.

Ms De Bruyn said it had been dissolved in 1994, and did not exist. When the PFMA was enacted in 1999, the accounting authority had taken over its responsibilities. Each department had a chief procurement officer.

Adoption of Committee Report

Mr De Beer said the message was that corruption should be rooted out.

The Committee had now received the briefing on the Appropriation Bill, and its report was a very short one:

The Select Committee on Appropriations, having considered the Appropriation Bill, B3 of 2018, referred to it and agreed to the Bill without amendments.

Mr Essack said the Democratic Alliance reserved its position.

Mr De Beer said it was noted.

Ms T Motara (ANC, Gauteng) moved that the Committee adopt the report.

Mr L Nzimande (ANC, KwaZulu-Natal) seconded the motion.

The report was adopted.

The meeting was adjourned.