National Treasury Quarter 2 & 3 performance; Jobs Fund Update; Committee Annual Report

Standing Committee on Appropriations

12 February 2019
Chairperson: Ms Y Phosa (ANC)
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Meeting Summary

The Committee met with National Treasury for a briefing on quarter three spending outcomes of government departments and public entities for 2018/19, and an update on the Jobs Fund.

National Treasury said major contributors to underspending for the first nine months of 2018/19 were the following departments: Cooperative Governance and Traditional Affairs; Environmental Affairs; Agriculture, Forestry and Fisheries; Science and Technology; and Trade and Industry. There was marginal overspending in Defence; Basic Education; Human Settlements; and Energy. In terms of economic classification, transfers and subsidies registered the largest underspending, and goods and services the second largest. Under public entity expenditure, it was noted that resolution of system capacity and data integration challenges in the NSFAS allowed the entity to disburse funding faster. PRASA experienced challenges of decline in cash receipts from stakeholders due to declining passenger numbers and fare evasion. The entity lacked spending capacity. An update on the Jobs Fund noted that low economic growth, drought and implementation capacity impacted on the pace of project implementation.

In discussion, Members remarked and asked questions about the Department of Agriculture, Forestry and Fisheries and the Land Bank memorandum of understanding; special economic zones; equitable share transfers; the Department of Defence’s overspending on compensation of employees; the Compensation Fund; the dispute between National Health Laboratory Services and the Gauteng Provincial Treasury; regressed departments; conditional grants; Department of Trade and Industry incentives; vacant posts; and financial management in the Department of Water and Sanitation, with reference to the War on leaks. The Chairperson asked the Treasury to provide a report on municipal non-compliance with the Division of Revenue Act.

Meeting report

Introduction by the Chairperson
The Chairperson welcomed the National Treasury, which was going to brief the Committee on spending outcomes of government departments for 2018/19. She hoped that Members would ask relevant questions. No apologies were received from Members. An apology was received from the Director- General of National Treasury. The Chairperson asked Treasury to explain the reasons for his absence.

A National Treasury representative replied that the Director-General had to attend an ad hoc meeting to finalise the budget.

The Chairperson protested that it was incorrect to say that the Director-General could not be present. If he could attend an ad hoc meeting, he could attend the Committee meeting. The DG had not attended any Committee meetings for a long time. She asked the Treasury to express the dissatisfaction of the Committee to him. 

Briefing by the National Treasury (NT) on 2nd & 3rd quarter expenditure of government departments and public entities, and update on the Jobs Fund
Dr Mampho Modise, DDG: Public Finance, National Treasury, took the Committee through a presentation on the second and third quarter expenditure of government departments and public entities. Major contributors to underspending for the first nine months of 2018/19 were the following departments: Cooperative Governance and Traditional Affairs (CoGTA); Environmental Affairs; Agriculture, Forestry and Fisheries; Science and Technology; and Trade and Industry. There was marginal overspending in Defence; Basic Education; Human Settlements and Energy. In terms of economic classification, transfers and subsidies registered the largest underspending, and goods and services the second largest. Significant challenges were those of Defence, where the compensation ceiling did not support current personnel numbers, and slow expenditure under transfers to the Land Bank, earmarked for the AgriBEE fund, in the Department of Agriculture, Forestry and Fisheries.

Under public entity expenditure, it was noted that resolution of system capacity and data integration issues allowed NSFAS to disburse funding faster. The Passenger Rail Association of South Africa (PRASA) experienced challenges of decline in cash receipts from stakeholders due to declining passenger numbers and fare evasion. The entity lacked spending capacity. Compensation of Employees (CoE) in SARS was higher than the quarter two forecast, due to the enlargement of staff. An update on the Jobs Fund noted that low economic growth, drought and implementation capacity impacted on the pace of project implementation.

National Treasury reported that as at 31 December 2018, the Jobs Fund has allocated R6.67 billion in grant funding for CFP 1 to 7 (126 approved projects*) and R9.46 billion has been committed in the form of matched funding from partners. The average grant size is R53 million. At the inception of the Fund the Minister requested that the Fund’s operational expenses are also financed from the total R9 billion allocation to the Fund, i.e. the R6.67 billion in grant funding allocated to project partners does not include the Fund’s projected expenditure on operations. To date R4.63 billion has been disbursed to the contracted projects and against this amount R8.59 billion leveraged in matched funding. Disbursements are aligned with the cash-flow projections for the portfolio as provided by the JF partners. It is important to be cognisant of the fact that the cash-flow projections for the full implementation of the portfolio of projects go beyond the MTEF.

The Jobs Fund Challenge Fund model has been successful in crowding in substantial funding from the private sector, non-profit organisations and public entities. This has enabled the Jobs Fund to be more impactful reaching significantly more beneficiaries than what would have been achieved if only public funds were available for job-creation. The Fund has demonstrated the benefit of shaping financial risk to catalyse innovation
 
Discussion
Mr M Shackleton (DA) referred to slide 5 on Quarter 3 spending outcomes. He asked about the challenges related to the memorandum of understanding (MOU) between the Department of Agriculture, Forestry and Fisheries and the Land Bank. How could the resolution be sped up, and by when could the MOU be concluded? Slide 6 mentioned underspending by the Department of Trade and Industry (DTI) on special economic zones (SEZs). The President referred to SEZs in the SONA. He asked what was meant by the term. The President had mentioned that the object was the output of commodities. In China there was reduced tax in such zones, and it was possible to hire and fire easily. SEZs in China were “absolutely capitalist”, in the interest of job creation. He asked if it was to be the same for South Africa.

Mr A McLaughlin (DA) referred to the underspending by CoGTA. Local government could be seen as the interface between people and government. CoGTA was withholding money from municipalities. It was mentioned that the equitable share (ES) was not transferred due to payment rejections from municipalities. It made it seem as if the municipalities did not want the money. He asked if Treasury went there to remedy the situation. He referred to overspending by Defence. It seemed that when budgets were drawn up, Defence did not take into account that it was employing more people than it could pay. He asked what the NT was doing about that. Defence kept on employing more people than it could pay, year after year. It was stated on slide 7 of the report on public entities, under the Compensation Fund, that the cash flow from investing activities was R4.26 billion, which was R4.35 billion more than forecasted as the Fund did not anticipate to collect more than the projected assessment levies which was invested. He asked if it was forecasted that there would be a minus figure. It seemed the Fund suddenly received money it did not expect. It was stated on slide 13 of the same report that a settlement agreement of R1.2 billion was reached between the National Health Laboratory Services (NHLS) and the Gauteng Provincial Department of Health on outstanding debt. He doubted if the legislation allowed settlements due to non-payment of debt. He asked how much was actually due.

Mr N Gcwabaza (ANC) asked if the NT could identify regressed departments in terms of financial performance as compared to the previous financial year. He was worried about money underspent because of conditional grants not given to provincial departments and municipalities, as they had to provide services. It was not acceptable to say that grants were held back because conditions were not met. He asked how the NT assisted provincial departments and municipalities to get their act in order. He referred to the rejection of municipal accounts. Mr McLaughlin had pointed out one side of the problem, but the other side of it was the problematic nature of municipal accounts. It was probable that the money was rejected by the account itself. He asked how the problem could be solved. It was stated on slide 11 of the spending outcomes briefing that the DTI had committed to solving incentive problems. He asked if timeframes were given. Incentives had to be transferred to create jobs. The SEZs were created to spread economic activity, especially to the rural areas. SEZs would not survive if they were not funded. He asked how soon these matters could be sorted out with the DTI. He referred to underspending on vacant posts, and asked if all had become vacant during 2018/19, or whether there were backlogs. He asked which departments had backlogs. Was there an improvement in financial management in the Department of Water and Sanitation from 2017/18? The Committee had met with the Minister the year before, and he stated that there was money in the Department, although the Committee had heard that the Department was bankrupt. The over intake of personnel in Defence and Military Veterans occurred when funds were adequate. But there were cuts in the Defence budget, which created a situation whereby there was still a large amount of personnel, but less money to compensate them. Money was then taken from other programmes for CoE. The question was how this all started.

Ms D Senokoanyane (ANC) remarked that transfers to Human Settlements and Energy were higher than anticipated. She asked about implications for the fourth quarter. She asked what the NT’s take on the national health insurance (NHI) budget was. It seemed that there was over-budgeting for things the NHI was not yet ready for. How did the NT distinguish between the creation of new permanent jobs and placements?

Ms M Manana (ANC) asked about interventions required to deal with projected overspending in the Water and Sanitation War on Leaks programme. She referred to the anticipated underspending on the Expanded Public Works Programme (EPWP) by Environmental Affairs due to delays in the procurement process. What was to be done about that? Also, trains were not functioning well, and yet PRASA had money.

Ms S Shope-Sithole (ANC) remarked that the DTI had to be invited to speak about job creation. She opined that the Defence budget had to be increased. The country had to have the ability to defend itself. Given the geopolitical situation, dreams of growth and development could not happen if borders were not secure.

Dr Mark Fletcher, Chief Director: Department of Health, responded to the question about regressed departments. It was true of the Department of Health. Quarter 3 showed R250 million underspending, but for January the projected figure was R1.4 billion. There was underspending on appropriated items approved by Parliament, such as mental health, chronic disease prevention, and the NHI indirect grant personal services component. It was not just a matter of spending, there was also a lack of capacity to implement NHI interventions. He suggested that the Committee meet with the Department of Health to understand areas of underspending. There were ten of those. He answered Mr McLaughlin that the dispute between the NHLS and Gauteng involved more than debt. At some point the NHLS had destroyed records. An audit by the Auditor-General, commissioned by the Treasury, found that the NHLS was in the wrong, but Gauteng refused to pay because records were destroyed. It was a contractual issue. Still there was improvement in the NHLS. Dr Chetty had stood in as CEO, and whereas the entity had been nearly bankrupt a year before, it currently had over half a billion in its account.

Mr Isaac Kwashe, Director: Public Finance, National Treasury, answered about the delays in finalising the MOU between the Land Bank and the Department of Agriculture, Forestry and Fisheries. There were questions around how the AgriBEE fund was supposed to function. A blend of lending and grants was envisaged, but stringent conditions related to lending discouraged funding. There were also questions around how the operating agreement would function in terms of the target market. He answered about SEZs that there were policy and funding issues. Government wanted to attract investment through providing incentives. The SEZ were to promote manufacturing and exports, by means of subsidised investment through cost-sharing grants. The Minister of Finance had stated in the previous year that there was underspending due to low levels of economic activity, which discouraged investment. Subsidised equipment had to be in use. If not, jobs would not be generated and the DTI would not release money. If the economy did not improve, the SEZs could not attract investment. Expenditure monitoring had led the NT to ask for intervention measures related to the SEZs and incentives programmes. He answered Ms Manana that due to change in the treatment of transactions linked to the EPWP, which were currently procured through the normal procurement process, thereby being classified as goods and services, not as transfers and subsidies, there was underspending due to delays in the procurement process.

Ms Gillian Wilson, Chief Director: Public Finance, National Treasury, replied that new permanent jobs referred to a situation where a contract was signed for a job project, and thereafter there was a need to employ someone beyond the duration of a contract. A permanent contract would then be signed with a company. Placement referred to placing in companies that were not Jobs Fund partners. It was therefore possible for training and development to fill positions in other companies.

Dr Modise responded about compensation of employees in the Department of Defence. The Department had a special Defence account for machinery and intellectual property. It also owned land all over the country. There was no money problem. The problem was that many people employed by Defence were over 40 years of age, and were not deployable and redundant. Defence had to rely on the reserve force. It had to consider mobilising its resources. Older people could be used on the borders or in the criminal justice system. Defence money could be better used to fix hospitals, than to pay for 75000 people. The NT had asked Defence to consider how to deploy people, but it was unwilling to do so, and the NT could not intervene. The NT therefore asked Defence to ask Cabinet what it could do about non-deployable people, as it was causing a shortage of money for training or equipment. An option to be considered was to provide for early retirement. Defence had to employ fewer people, capable of being trained and deployed. If the department was stranded, it could resort to the special Defence account.

Dr Modise added that entities often did not focus sufficiently on the money they could expect to get, and some underestimated what they would receive. Through in-year monitoring, the NT tried to revise forecasts. Money granted to municipalities went through CoGTA and the Department of Water and Sanitation (DWS), for example, as accounting authorities. Municipalities that did not comply could not receive money, but the problem was that the process of application could be slow, and municipalities suffered. CoGTA and the DWS had to decentralise. There were offices in the provinces for that purpose. There were unsuccessful attempts to centralise the process, and the current trend was back to decentralisation, as it could speed up the process. The intergovernmental relations (IGR) systems in the NT worked with municipalities that struggled to comply. She answered about regression in the DWS, that there was at least some improvement in the Water Trading Entities. There was underspending of the conditional grant. But the biggest problem in the DWS was the War on Leaks project. The DWS undertook the War on Leaks project to skill artisans to assist municipalities, but it was under-budgeted at the start. The Department could not afford to take artisans through three or four years of training. The Department failed to consider the option to use the Sector Education and Training Authorities (SETAs) or Technical and Vocational Education and Training (TVET) colleges for training. The NT formed a task team with the Department to deal with the matter, but there was bound to be overspending. The NT informed the DWS that it was not mandated to offer training, and students had protested that the NT was ruining their lives.

Dr Modise, in response to Mr Gcwabaza, said vacancies had indeed increased in the current year. The new wage agreement was higher than anticipated. Entities could apply to the NT to increase the budget for posts, if it had funds elsewhere and could provide a strong motivation. The NT introduced an expenditure ceiling on compensation of employees in 2015/16, and to stay within the ceiling departments had to reduce the number of people employed. The DWS wanted to move funds from COE to the War on leaks project, but the NT declined, because the Department needed skills. Defence moved money that could be used to fix hospitals, to compensation. Project spending in other areas had to be protected. The NT was aware of the fact that the Committee visited military facilities in the Free State, and saw the state that hospitals were in. It was shocking that Defence had moved money from hospitals to compensation. It wanted to move R3 billion to compensation. Money had to go towards capital spending. Early transfers were good, if the entity did proper planning. But PRASA, for instance, did not have the skills to spend money. There was R13 billion sitting in the system that could not be spent. The NT went to the World Bank to assist with an intervention to build skills in PRASA to spend money. R3 million to SANRAL, as it did not help to put money back into the fiscus. Private institutions could help, but political will was needed to buy into getting the private sector to spend government money.

Mr B Martins (ANC) remarked that unemployment was a serious problem especially among the youth. Slide 18 of the public entities briefing referred to underperformance of the Jobs Fund, which was a perennial issue. He asked what could be done towards change. There seemed to be no effective measures in place, as employment was not improving.

Ms S Shope-Sithole (ANC) noted that the World Bank was approached to assist with PRASA. She asked if the Development Bank of Southern Africa (DBSA) had been considered. The Brexit debate had brought to light the risks attached to depending on the World Bank and the International Monetary Fund. If a strong economy like that of the UK could be worried about those institutions, SA had more reasons to be cautious. Those giants were not committed to development in Africa.

Mr Gcwabaza remarked that he also felt uncomfortable about relying on the World Bank. Institutions like the Reserve Bank could be considered. Concerning education and training, he agreed with the NT that fuller use could be made of the SETAs and own universities. Good work was done by the NSFAS, but there were also challenges, and noises made by students. He asked if funding for free higher education for identified households would be kept separate, and if so, where it was located. Had the NSFAS become bigger, and if so, why were there still student funding problems? More students were entering university every year. He asked where funding problems for basic training, besides accommodation, lay.

Mr McLaughlin remarked that it was not good practice for the South African Revenue Service (SARS) to employ more people. There was a huge national wage bill. SARS had functioned well previously with fewer people. It was also unacceptable to allow SARS to have its own buildings. Departments were not to own the buildings they used. Defence and the Department of Justice & Constitutional Development owned many properties, and the NT had to bail them out.

The Chairperson asked why municipalities failed to comply with the Division of Revenue Act. The NT could attend to that through in-year monitoring. She referred to the withholding of AgriBEE funding. When was the MOU to be finalised? Transformation in the agricultural sector was being delayed. She referred to delays with the infrastructure grant to TVET colleges. When would criteria for college maintenance and refurbishment be finalised? Concerning transfers, she asked what the NT did to assist provinces to spend budgets according to plan. Five departments overspent. The NT had a monitoring and evaluation unit that could engage with departments that overspent on compensation of employees.

Ms Wilson responded about underspending of the Jobs Fund. Disbursement to projects was lower than expected. The two targets were to spend 80 percent of previous disbursements, and 80 percent of current targets. SMMEs were being dealt with. It was difficult to get partners from the private sector to match funding. However, underspending did not impact on job opportunities. With SARS, it was more a matter of internal movement of employees within the entity. The Nugent Commission had recommended that closed units be reopened. There were 705 internal placements.

Dr Fletcher responded about local government transfers, that municipalities did not surrender unspent conditional grants in the previous year, hence funds were withheld in the current year. There were five municipalities with capacity issues.

Dr Modise replied about assistance to PRASA. She noted the concern about the World Bank, and that the NT would speak to the DBSA, the African Development Bank and the New Development Bank. The NSFAS needed more money to go into the administration of funds. Its systems were not strong enough to deal with the quantum. The NSFAS infrastructure had to be dealt with. NSFAS had to go through a process of checking if students actually qualified. It would be easier in the current year to disburse funds. The NT could prepare a response about why municipalities did not comply with the DORA. The IGR unit could be consulted to prepare a formal response. There was a question about a deadline for the MOU between Agriculture and the Land Bank. The NT team could help, but there was not as yet an agreed upon mechanism. The NT would follow up on the matter. Engagement with departments was on a needs basis. The NT would send out memos to departments to force them to write memos to Cabinet, as for instance for the DWS to do so about the War on Leaks. What the NT could not do, was to take over the responsibilities of AOs. The NT was in favour of closing down the War on Leaks project, but a Cabinet decision was needed.

Ms Wilson returned to the matter of the management of SARS properties, which was a concern for the NT, since properties were in high value areas. Property management had to be centralised. It amounted to wasteful expenditure on the part of SARS, in budgetary terms.

The Chairperson concluded that Members had benefitted from the engagement. Over-expenditure in Defence on compensation of employees caused concern. The NT would be invited to attend a meeting of the Committee with Defence. The Committee was happy that challenges at PRASA were being attended to. But in taking steps to improve finance administration, care had to be taken not to be captured by the World Bank and the IMF. Underspending of the NHI grant caused concern. The NT did not report on expenditure on medico-legal claims. A report had to be received from the Department of Health. Some of the aforementioned matters would have to be highlighted in the Committee legacy report. Expenditure on the Accelerated School Infrastructure Delivery Initiative had improved. She commended the report on public entity expenditure, and the pro-active thinking around the Jobs Fund. The Committee noted NT’s concern about a retention strategy for inspectors, embarked on by the Department of Labour and the DPSA. The Committee awaited a response on why municipalities did not comply with the Division of Revenue Act.

Consideration and adoption of the Committee report for 2018
The Committee Report for 2018 was considered and adopted with suggested additions under the headings of Introduction, and Method of Work.

The Chairperson adjourned the meeting.


 

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