National Treasury 2018/19 Quarter 4 performance; Appropriation Bill 2019, with Deputy Minister

Standing Committee on Appropriations

03 July 2019
Chairperson: Mr S Buthelezi (ANC) & Ms D Mahlangu (ANC)
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Meeting Summary

Members of the two Committees expressed concern that under-spending by some departments indicated failures in service delivery. The under-spending was highlighted by National Treasury during a presentation on fourth-quarter spending by national government departments and public entities.

Treasury said 98.7% of the adjusted appropriation of R11 billion had been spent. There had been noticeable under-spending at the following departments: Co-operative Governance and Traditional Affairs (R3.2 billion); Police (R1.3 billion); National Treasury (R1.1 billion); Health (R966 million); Environmental Affairs (R702 million) and Transport (R640 million).

The Committees were told that the Passenger Rail Agency of South Africa (Prasa) was sitting on R11 billion in cash which should have been spent on the Metrorail train system. Money had been taken from Prasa and given to the roads agency, Sanral, which was deeply in debt because of motorists’ refusal to pay e-tolls. Members said this amounted to using money intended for poorer rail commuters for the benefit of wealthier motorists.

The Committees were also briefed on the 2019 Appropriations Bill. The law required that Parliament pass the Bill within four months after the start of the financial year, and this meant the end of July. The Bill had been tabled in Parliament at the time of the Budget in February, but had lapsed when Parliament dissolved for the national elections. It had been revived by the National Assembly on June 27.

In outlining the allocations made in the Bill, Treasury said the reprioritisation of expenditure had resulted in baseline reductions of R50.3 billion over the next three years. About half of this related to salaries. The reductions were offset by provisional allocations over the next three years of R69 billion to Eskom, R5 billion to the Infrastructure Fund, and R1.3 billion for the 2021 census.

Treasury explained the government’s use of funds under Section 16 of the Public Finance Management Act (PFMA) to provide emergency financial support to Eskom. Members said they had reservations over this bypassing of the normal Parliamentary appropriations process, stressing that a Special Appropriations Bill for more Eskom funding to be presented to Parliament later this year should be accompanied by a clear plan on how its R450 billion debt crisis was to be tackled.

The Deputy Minister of Finance told the meeting that valid concerns had been raised about special budget adjustments, and they were well taken. However, they were necessary because of the dire situation at Eskom. He gave an assurance that Parliament would be presented with a clear plan for Eskom’s future.

Meeting report

Spending by government departments

Dr Mampho Modise, Deputy Director General (DDG): Public Finance, National Treasury, briefed the Committee on the spending outcomes at government departments in the fourth quarter of the 2018/19 financial year. She said 98.7% of the adjusted appropriation of R11 billion had been spent. There was noticeable under-spending at the following departments: Co-operative Governance and Traditional Affairs (R3.2 billion); Police (R1.3 billion); National Treasury (R1.1 billion); Health (R966 million); Environmental Affairs (R702 million) and Transport (R640 million). Statistics South Africa had overspent by R28.3 million.

The largest under-spending was on goods and services. This amounted to R5.6 billion, or 7.9% of the allocated budget.

In giving an overview of the spending outcomes, Dr Modise drew Members’ attention to key concerns about various departments: 

  • Defence overspent by R2.9 billion on compensation of employees. This had happened in spite of several warnings by the National Treasury that the Public Finance Management Act (PFMA) prohibited accounting officers from committing departments to any liability for which money had not been appropriated. The Department had said the compensation budget did not support current personnel numbers, but had been requested to develop a “rejuvenation strategy” to reduce personnel. 
  • Police under-spent by R1.5 billion on goods and services. The money could not be spent because the Department did not obtain Cabinet approval to shift funds within its budget.
  • There were delays in the transfer of an Agri-Black Economic Empowerment (BEE) fund from the Department of Water Affairs and Forestry to the Land Bank. After the National Treasury had raised concerns that the delays were affecting transformation in agriculture, a memorandum of understanding (MOU) was signed. Going forward, the Treasury would strictly monitor the use of these funds and ensure that they were transferred timeously to the Land Bank.
  • The Department of Trade and Industry spending on incentive programmes was very slow and picked up only in the last quarter of the financial year. The Department was advised to develop measures that would ensure compliance by beneficiaries of the incentives and speed up the disbursement of funds.
  • Land restitution and reform programmes were slow because the Office of the Valuer-General failed to value land parcels timeously. National Treasury was helping to improve the office’s capacity. The Director General of Rural Development and Land Reform had been advised to intervene speedily at the Valuer-General’s office.
  • The Department of Home Affairs reported unauthorised, irregular, wasteful and fruitless expenditure of R2.4 million at the end of March this year. The main causes were non-compliance with supply chain management (SCM) requirements and interest charged on overdue payments.
  • The Department of International Relations and Cooperation overspent on compensation of employees. The overspending was financed by savings in the budgets for goods and services, and payments for capital assets. This amounted to irregular expenditure. For the year to March 2019, the Department also reported irregular expenditure of R329.9 million, and fruitless and wasteful expenditure of R5.5 million. Dr Modise told the Committee that the Department had been advised to rationalise its overseas missions.
  • In the Department of Public Service and Administration, the establishment of the Government Employees Housing Scheme had not moved at the expected pace.
  • The Department of Women seemed to be moving at a slow pace in filling vacant posts in its core programmes.
  • The National Treasury’s spending on its Integrated Financial Management System amounted to only 41.8% of the available budget of R350 million at the end of the financial year. The under-spending was due mainly to rescheduling procurement of various services.
  • The Department of Communications transferred a total allocated budget of 187.4 million to the South African Broadcasting Corporation (SABC). The Department was using the Government Technical Advisory Centre to support the SABC in developing a realistic turnaround strategy for the Corporation.
  • Statistics South Africa overspent by R50.5 million in filling unfunded posts. This had resulted in unauthorised expenditure.
  • The Department of Health needed to build substantially more capacity to manage and implement the National Health Insurance (NHI) programme. The National Treasury was concerned that there was very little spending on oncology services and no spending on mental health services following the Life Esidimeni tragedy. Only 63.1% of budgeted funds was spent.

Quarterly expenditure reporting for public entities.

Dr Modise said there were challenges in reporting on public entities, as there were around 300 ranging from major public entities like Eskom, to constitutional institutions like the Public Protector, to provincial entities. One of the challenges was that data provided by these entities was not on the government’s Basic Accounting System (BAS) and thus could not be verified. Their budget programmes were not necessarily linked to deliverable objectives, and their accounting standards were different. Government  departments used a modified cash basis, which accounted for revenues only when money was received or paid out. The public entities used accrual accounting, where revenue was recorded even if cash had not yet been received or paid out. Another challenge was that the entities had different financial years.

Dr Modise gave an analysis of the spending performance at several public entities. She highlighted a number that gave cause for concern.

  • The National Student Financial Aid Scheme (NSFAS) faced a problem in dealing with the sudden announcement of fee-free higher education. They were not equipped to deal with the larger numbers of students, and there was under-spending of R5 billion due mainly to delays in pre-payments for the 2019 academic year. A lot of work was being done by the Department of Education to improve administration.
  • The Passenger Rail Agency of South Africa (Prasa) had R11.5 billion in cash at the end of the year. This was a problem because the money should have been spent on the Metrorail train service. Hopefully, the new Prasa board would ensure proper planning and effective spending.
  • The Road Accident Fund (RAF) was described as one of the biggest headaches facing the Treasury. The fault-based claims system meant that its liabilities were almost R200 billion. A Bill which aimed to change the way the fund operated was before Parliament but faced opposition from lawyers who, Dr Modise said, made a lot of money from the current scheme. She appealed for the Bill to be fast-tracked.
  • The South African National Roads Agency Limited (Sanral) had required bail-outs for the past three years. Sanal had been offsetting the non-payment of e-tolls for the Gauteng Freeway Improvement project with revenue from other toll roads. When this was not enough, money had had to be diverted from spending on non-toll roads. Money was then moved to Sanral from Prasa’s unused cash reserves. Dr Modise said the Committee would have to consider whether it was good budgeting to move funds intended for poorer people who used the train service to benefit wealthier people who used the N1 freeway.

Discussion


Several MPs voiced concerns about the shifting of funds in the Department of Transport to bail out Sanral.

Ms E Peters (ANC) asked how the government could say it was pro-poor and then take money away from them for Sanral. It would be a serious challenge to find a different funding model. She asked whether Members would be able to sleep at night in the knowledge that funds were being diverted from maintaining roads in poor rural areas.

Co-chairperson Mahlangu said poor people should not be punished for things for which they were not responsible.

Mr D Ryder (DA) said under-spending could sometimes be a good thing if targets were still met. However, he was concerned about under-spending at departments that were key to service delivery. One example was under-spending of funds meant for local authorities by the Department of Cooperative Governance and Traditional Affairs (COGTA). He asked whether the Committees should confine themselves to considering budget appropriations only, or whether they should go further and delve into the way in which departments were doing their work. He found the Health Department’s lack of spending on mental health chilling.

Ms Peters said cancer patients in KwaZulu-Natal (KZN) had been unable to get treatment to prolong their lives, yet the national Department had spent little on oncology services. She asked what the Committee could  do about delays in the implementation of government programmes, such as the Digital Terrestrial Television (DTT) project. Another example was under-spending on building local authorities’ disaster management capacity. Capacity building in the Office of the Valuer General needed to be expedited. Land reform was an urgent issue, yet after 25 years, Committee Members were being told of difficulties in valuing land. She was also worried about the filling of unfunded posts at Statistics South Africa, and those responsible should be rapped over the knuckles. 

Ms M Dikgale (ANC) said traditional leaders were ‘getting peanuts’ from the Department of Cooperative Governance and Traditional Affairs (COGTA), given the work they did in rural communities. 

Ms E Ntlangwini (EFF) asked for more information on those departments which repeatedly under-spent so that the Committee could keep track of them. The number of vacant posts in the Department of Labour was concerning, particularly if these posts were for labour inspectors.

Ms Julia de Bruyn, Chief Director: National Treasury, said there was an ongoing shortage of labour inspectors. The reason was that departmental salary levels were lower than in the private sector. The posts should be re-evaluated, because inspectors were required to monitor issues like health, safety and employment equity.

National Treasury’s response

Dr Modise responded to questions about how government departments handled invoices. She said invoicing was one of the biggest problems. Delays and disputes in invoicing between departments caused delays in the system. The PFMA required that payment be made within 30 days, yet it was not enforced. She suggested that the Committees could call offenders to appear before them to make an example of them.

The issue of under-spending was a difficult one. Departments which overspent had to explain themselves to the Auditor General (AG) and to Parliament. Under-spending tended not to incur the same consequences.

Mr Mark Blecher, Chief Director: National Treasury, responded to the questions about recurrent under-spending at some departments, and referred to ongoing problems at the Department of Health. He said the NHI fund was a national priority, and R2.4 billion had been reprioritised for the NHI over three years. However, the Department had not built up capacity to run the NHI. At least 25%, or R600 million of the NHI grant was being under-spent.

Another problem was a prolonged strike in the Department of Health because of conditions in its Civitas Building in Pretoria. This had affected the functioning of the Department for a year, and it was still not fully resolved.

Mr James Archer, Chief Director: National Treasury, responded to questions about disaster management, and said responses to disasters thus far had been reactive and involved the granting of emergency funds. However, there was a move to a more proactive stance in creating more resilient cities and getting municipalities to plan proactively -- for example, in designing new townships.

Co-chairperson Mahlangu said the Committees should take a closer look at spending outcomes instead of just the numbers provided to the Auditor General. A clean audit might satisfy the AG, but did not reflect actual results of spending. She asked the Treasury to inform the Committees of undertakings by departments to improve performance so that they could monitor their progress.

Co-chairperson Buthelezi said he was concerned that the country was running a budget deficit, yet it was not spending money that had been borrowed. He agreed with colleagues that they should not just be accountants in overseeing spending, but should focus on the impact of under-spending on efforts to provide relief to poor people. It was also important to monitor the efficiency of spending. The under-spending of R1.7 billion at COGTA was a serious red light. COGTA and the Department of Defence appeared to have perennial problems, and both should be called before the Committees.

The Committees then adjourned for lunch before returning in the afternoon to be briefed on the 2019 Appropriation Bill and the government’s financial support to Eskom.


2019 Appropriation Bill

Dr Modise outlined the procedure for adopting the Appropriations Bill. She said the law required that Parliament must pass the Appropriation Bill within four months after the start of the financial year. This meant the end of July.

The Bill had been tabled in Parliament at the time of the Budget in February. It had lapsed when Parliament dissolved for the national elections and had been revived by the National Assembly on June 27.

The PFMA allowed departments to spend money before an annual budget was passed, but expenditure up to the end of July could not exceed 45% of the annual budget.

In outlining the allocations made in the Bill, Dr Modise said reprioritisation of expenditure had resulted in baseline reductions of R50.3 billion over the next three years. About half of this was related to salaries.

The reductions were offset by provisional allocations over the next three years of R69 billion to Eskom, R5 billion to the Infrastructure Fund and R1.3 billion for the 2021 census.

The contingency reserve would be increased by R6 billion in 2019/20 for possible financial support to state-owned enterprises. Any such support would be raised from the sale of non-core assets.

Financial support to Eskom

Mr Dondo Mogajane, Director General: National Treasury, briefed the Committees on the government’s use of funds under Section 16 of the PFMA to provide financial support to Eskom.

He said the Treasury had assumed that shortfalls at Eskom could be dealt with in the normal appropriation process, and that the money would be disbursed in October after the adoption of the Budget by Parliament. Based on the assumption that Eskom would be able to raise interim funding, the Treasury had not submitted a Special Appropriation Bill before Parliament rose for the election.

The China Development Bank (CBD) had committed to disburse R7 billion to Eskom by March 25. However, the bank had held back the funds because of concerns about Eskom’s financial situation.

The Treasury had asked the Corporation for Public Deposits to provide a bridging facility while Eskom waited for the CDB funds, but the Corporation had refused.

Eskom had then obtained a bridging facility from Absa Capital, which matured on April 2 and which was backed by government guarantees.

The Minister of Finance had then invoked Section 16 of the PFMA, which allowed the use of funds from the National Revenue Fund (NRF) for exceptional expenditure which could not be postponed for a Parliamentary appropriation. 

Mr Mogajane told the Committees that the PFMA limited the funds that could be used in this way to  R17.652 billion. This would form part of the R23 billion allocated to Eskom in the February Budget.  Disbursement of the rest would happen after the normal Parliamentary appropriation process.

Treasury would come to Parliament later this year with a Special Appropriation Bill to provide more resources to Eskom, as announced by the President in his State of the Nation Address.

Discussion

Co-chairperson Mahlungu invited discussion of the presentations after noting the presence of the Deputy Minister of Finance, Mr Amos Masondo.

Ms Z Mlenzana (ANC) asked whether there was not a danger of Section 16 of the PFMA being used to bypass normal appropriation procedures.

Mr A Sarupen (DA) said Eskom had become an existential threat to the country. He asked for more information on what would be done with the funding provided by special appropriations, and on what was being done to restructure Eskom into different components. What was being done about what he termed “bloated staff structures” and historically problematic procurement practices, such as buying coal that could not be used?

Mr S du Toit (FF+) described Eskom as a very dark hole into which money had to be poured. He said while Eskom had to reduce its staff numbers, these job losses should be weighed against the greater unemployment caused by the impact of the Eskom crisis on economic growth. 

Mr Y Carrim (ANC) said Eskom had the potential to become a far deeper black hole, and he trusted that all political parties would agree that it had to be rescued for the sake of the economy. The Special Appropriation Bill to be brought to Parliament should not be a blank cheque, but should clearly indicate the conditions under which the money was being paid to Eskom. Restructuring Eskom could not be done without job losses, and alternative employment for those affected had to be considered urgently. He suggested that the private sector, which had a vested interest in Eskom, could absorb some of the jobs.

Co-chairperson Buthelezi said Parliament took a dim view of the use of Section 16 of the PFMA.  He said bypassing normal appropriation processes could give rise to conspiracy theories about how the money was used. 

Mr Mogajane said Eskom’s debt was R450 billion, and it was increasing by the day. There was a need for a new Eskom with a new capital structure which would allow it to return to the financial markets. A special appropriation for Eskom had to be accompanied by a paper on the future of the company.

Responding to questions about the Appropriation Bill, Mr Mogajane acknowledged that the reprioritisation of expenditure was a contentious issue.  However, slow economic growth and declining tax revenues over the past nine years meant that resources had to be re-allocated between departments.

He said infrastructure development was a government priority. An infrastructure fund of R100 billion over 10 years was being set up. However, the problem was that there was no clear pipeline of projects. There was now a new process of rigorously assessing projects submitted by government departments and building planning capacity in association with organisations which had the necessary expertise, such as the World Bank and the African Development Bank.

On the sale of non-core assets, Mr Mogajane said these had been identified but details could not be released in advance because of market sensitivity.

Deputy Minister Masondo’s closing remarks were that valid concerns had been raised about special budget adjustments, and they were well taken. However, they were necessary because of the dire situation at Eskom. He gave an assurance that Parliament would be presented with a clear plan for Eskom’s future.

The meeting was adjourned.
 

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