2019 Appropriation Bill: Financial and Fiscal Commission briefing

Standing Committee on Appropriations

10 July 2019
Chairperson: Mr S Buthelezi (ANC) and Ms D Mahlangu (ANC)
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Meeting Summary

The Standing and Select Committees on Appropriations met jointly for a briefing by the Financial and Fiscal Commission (FFC) on the 2019 Appropriation Bill.

The Financial and Fiscal Commission, in briefing, pointed out that the Bill was being considered just after the 2019 national elections, which led to several administrative changes within government. The changes include, among other things, a reconfiguration of national government departments by combining some of the departments. The Commission welcomed the reconfiguration of the national departments and this development was likely to improve government efficiencies and effectiveness through streamlining government operations, and more importantly it will reduce pressure on the fiscus. In the 2019 Appropriation Bill, government has increased the total baseline for national departments by 3%. Although there has been an overall increase, there were cuts in some departments- for example, the baseline for the Department of Minerals and Energy was reduced by 2%. The Commission acknowledged the need to reduce spending, given the current economic conditions. However, it remained concerned about the reductions in key sectors such as Energy, as they could have adverse effects on service delivery going forward. The FFC noted with great concern the gloomy environment in which the budget was presented. The 2019 budget was presented under similar conditions, if not worse. The economy was perhaps the biggest challenge and risk to the 2019 Appropriation Bill. More and more people have found themselves in a state of unemployment. Policy uncertainty evident last year, remain unchanged today, especially around the key issues of land reform, and the risks to the fiscus posed by precarious state of SOCs. Events playing out in the political arena were not helping the situation either, but only help compound the uncertainties and risks to the economy and the country’s public finances- the inconsistent messages regarding the independence of the South African Reserve Bank being a case in point. The Commission noted government efforts to address these challenges head on as pronounced during both the 2019 budget and the two state of the nation addresses (SONA) by the President. The FFC was by and large agreeable to the 2019 Appropriation Bill but the crux would be how it was going to be implemented going forward.

Members raised concerns about the efficiency of spending. Throwing money into a problem was not a panacea. It may be a necessary condition, but definitely not a sufficient one. Going forward, sectors like tourism and agriculture should get more allocations because of higher multiplier effects in terms of job creation and economic growth impact. The continued targeting of priority areas like social grants, education, health, and others, was welcomed. They asked if there was, on the part of government, any meaningful commitment to infrastructure development given the decreases in the allocation over the years. Infrastructure development was pivotal to economic growth and it ought to be taken as such. Were there any plans to cushion those who would be casualties of the proposed restructuring exercise within government? More resources needed to be channelled to the Department of Women’s Affairs and there must be clear plans speaking to gender parity. They emphasised the need to roll out the proposed National Health Insurance, saying the delay disadvantaged citizens who did not have access to quality health care.

 

Meeting report

Co-Chairperson Buthelezi welcomed everyone to the briefing by the Financial and Fiscal Commission (FFC) on the 2019 Appropriation Bill. He invited the presentation from the FFC.

Briefing by the Financial and Fiscal Commission (FFC)
Prof Daniel Plaatjies, Chairperson, FFC, took the Committee through a presentation on the 2019 Appropriation Bill. On baseline changes and service delivery implications of the Bill, the Bill was being considered just after the 2019 national elections, which led to several administrative changes within government. The changes include, among other things, a reconfiguration of national government departments by combining some of the departments. The Commission welcomed the reconfiguration of the national departments and this development was likely to improve government efficiencies and effectiveness through streamlining government operations, and more importantly it will reduce pressure on the fiscus. In the 2019 Appropriation Bill, government has increased the total baseline for national departments by 3%. Although there has been an overall increase, there were cuts in some departments- for example, the baseline for the Department of Minerals and Energy was reduced by 2%, and this department experienced a very high cut (-17) in the 2018 budget. The Commission acknowledged the need to reduce spending, given the current economic conditions. However, it remains concerned about the reductions in key sectors such as Energy, as they could have adverse effects on service delivery going forward.

Aggregate Spending and Deviations from the Final Budget
Over the period 2015/16 to 2017/18, most departments appeared to have spent 99% or more of their allocated budgets. There were however departments that spent below the national average, such as Basic Education (97.7%), Justice and Constitutional Development (98.9%), Minerals and Energy (98.4%), Water and Sanitation (96.8%) and Rural Development and Land Reform (98.0%). The Commission noted that except for the Department of Basic Education, all the underperforming departments have been affected by the 2019 reconfiguration and was of the view that government should be cautious in the implementation of the changes to ensure that they have no undesirable effects on service delivery. For the year 2018/19, the national average spending increased to 99.4%. There has also been a decline in the performance of some of the departments such as in departments of Health (98.9%), and Water and Sanitation (93.4%). The decline in the spending performance for the Department of Water and Sanitation was explained by the underspending in allocations for water infrastructure development. This was concerning for the Commission given the significant backlogs in water services and deteriorating state of the existing water infrastructure.

Risks to the 2019 Appropriation Bill
Ms Sasha Peters, Program Manager: National Budget Analysis Unit, FFC, identified various fiscal risks that were likely to have a negative effect on the 2019 Appropriation Bill. The poor performance of the economy was perhaps the greatest risk. Other risks would include: poor infrastructure delivery, poor project planning including maintenance plans which has often been inadequate; the precarious financial position of state-owned companies (SOCs); and the huge public sector wage bill. The Commission was of the view that these fiscal risks should be addressed and failure to do so will undermine core service delivery functions. On SOCs, the Commission noted that it is important for government to have specific timelines on these initiatives (e.g. unbundling of Eskom) and a clear plan for their recapitalisation given that most of them were struggling financially. On the wage bill, efforts to rationalise the civil service were worth noting. The Commission recommended additional measures such as stricter management of headcounts, discouraging the filling of non-critical vacant posts, and limiting the hiring of personnel in administrative and managerial positions.

Promoting Economic Growth
Ms Peters pointed out that faster growth was needed to attract more investment to stimulate the economy, such that more jobs can be created to raise the revenues needed for addressing the hereditary issues of poverty, inequality and unemployment. The Commission applauded the government for adopting the recommendation to identify, explore and invest in industries where there is clear competitive advantage for an export-oriented growth strategy. These include high-value manufacturing exports (motor vehicles), agricultural exports (fresh fruits and nuts), finance and tourism. South Africa must strengthen its cyber-security and cybercrime investigation capabilities by enhancing its ICT skills specific education and training in order to advance labour supply to take up their positions with qualified ICT skills in the Fourth Industrial Revolution. The Commission agreed with the President that local densification, greater investment in public transport and housing programmes development must be accompanied by a functioning local government base with complementary basic services.  

On job creation, between first quarters of 2008 and 2019, job creation remained stagnant as only 1.853 million jobs were created over the period compared to the 3.684 million new entrants in the labour force. Moreover, it is estimated that 32.4% (approximately 3.3 million) of the young cohort, are Not in Employment, Education and Training (NEET) – meaning that close to one in three young South Africans are completely disengaged from the labour force without any sign of converging into the economic mainstream in the immediate future. The Commission further noted that the state’s human resource capacity had become top-heavy through the occupation specific dispensation (OSDs) at the cost of expanding entry- and junior-level positions. This resulted in costly public sector wage bill, discontinuity of legacy for skills and knowledge and inefficiencies of the public sector, culminating towards muted employment creation.

SOCs Challenges and Opportunities
Dr Mkhululi Ncube, Program Manager: Local Government Unit, FFC, highlighted challenges and opportunities within SOCs. A number of SOCs have large government guarantees while their long-term viability is uncertain.  
While government guarantees have remained relatively flat, exposure has notably increased, in turn increasing government’s contingent liabilities and constituting a risk to the sustainability of the fiscus. Given that guarantees are not exposed to the same level of scrutiny in the budget process as regular spending, the Commission advised that oversight mechanisms of guarantees should be strengthened to reduce the risk of unintended consequences from materialising. He pointed out that Eskom poses a greater risk to government’s contingent liabilities. In 2018/19 guarantees to Eskom accounted for 72.4% of the total government guarantees to SOCs. The Commission was of the view that a clear process, along with timelines, needs to be devised to guide the unbundling of Eskom.

Improving Public Sector Efficiency
Improving efficiencies should be the hallmark of public sector service delivery. Doing more with less should be the norm than the exception and there should be no room for complacency on this. In reality, the level of inefficiency in the public sector remains high and growing. The Auditor-General’s (AG) report paints a very grim picture of the inefficiencies in government operations across the three spheres of government. Many recent developments and proposals made by government to promote public sector efficiency were commendable. In addition, the Commission underscored the importance of modernising the public sector and leveraging on new technologies as well as minimising unnecessary outsourcing of services and tasks that can be performed by civil servants. The Commission would also recommend increased support for oversight bodies to effectively hold executives to account as well as carrying out benchmarking exercises within the public sector.

Prof Plaatjies, in conclusion, said the FFC noted with great concern the gloomy environment in which the budget was presented. The 2019 budget was presented under similar conditions, if not worse. The economy was perhaps the biggest challenge and risk to the 2019 Appropriation Bill. More and more people have found themselves in a state of unemployment. Policy uncertainty evident last year, remain unchanged today, especially around the key issues of land reform, and the risks to the fiscus posed by precarious state of SOCs. Events playing out in the political arena were not helping the situation either, but only help compound the uncertainties and risks to the economy and the country’s public finances- the inconsistent messages regarding the independence of the South African Reserve Bank being a case in point. The Commission noted government efforts to address these challenges head on as pronounced during both the 2019 budget and the two state of the nation addresses (SONA) by the President. The FFC was by and large agreeable to the 2019 Appropriation Bill but the crux would be how it was going to be implemented going forward.

Discussions
Co-Chairperson Buthelezi appreciated the presentation by the FFC and invited questions and comments from Members.

Ms E Peters (ANC) said the high rate of unemployment was of serious concern. She asked how the Job Creation Fund was performing and if it has had any impact thus far. Has the Commission been able to engage the Departments of Basic Education as well as Higher Education and Training on improvements in education outcomes, noting the increases in their allocations? Was the FFC able to have some kind of impact in the career guidance space so that students acquire skills that are relevant in the digital era? Students studying under NSFAS in particular should be directed without dictating to them on which studies to pursue. On improved public services, has the FFC been able to engage the governance cluster within government on this? She pointed out that provinces do not set aside sufficient budgets for road maintenance. There were also instances where road maintenance allocations are made for roads that do not even exist. This should be looked into. Was the Commission in a position to engage NGOs on their concerns on the proposed unbundling of Eskom?

Mr D Joseph (DA) asked if there was, on the part of government, any meaningful commitment to infrastructure development given the decreases in the allocation over the years. Infrastructure development is pivotal to economic growth and it ought to be taken as such. He further asked for the FFC’s understanding of the proposed unbundling of Eskom. Allocations should go along with coherent plans rather than having funds poured into black holes.

Ms R Komane (EFF) asked if the FFC gets to advise departments as well following the tabling of the Appropriation Bill. She wanted to understand why the proposed spend on water infrastructure development was declining yet there were serious backlogs across provinces. What would be the FFC’s advice to land reform recipients in terms of their contribution towards food security? She wondered how reference could be made to road infrastructure maintenance when the reality was that roads in the provinces continue to kill people owing to their poor state.

Mr S Aucamp (DA, Northern Cape) said the FFC paints a very grim picture when it points out that the economy was in ‘survival mode’. What were the issues that contributed to policy uncertainty during the build-up to the May 2019 elections? It was clear the FFC believes land expropriation and the state of SOCs were the biggest risks to the fiscus. Therefore, in its view, to what extent were these risks a contributory factor to poor growth? He asked for views on the proposed unbundling of Eskom and emphasised the need for reforms that would improve educational outcomes across the board.

Mr D Ryder (DA, Gauteng) appreciated the presentation from the FFC. How much of a ‘Hail Mary’ was the Appropriation Bull given the baseline increases in departmental spending? On infrastructure development, was the current allocation to provinces acceptable? Was there sufficient focus and investments on the part of government? He asked for the FFC’s perspective on the affordability of a national health insurance scheme for South Africa.

Mr M Moletsane (EFF, Free State) emphasised the need for a strong educational foundation, particularly at early childhood development (ECD). He pointed out that ECD educators were not motivated enough but expected to lay a solid foundation for future success. Money was being pumped into education but the outcomes were not impressive. There was need for broader discussions as to why this was the case.

Mr Y Carrim (ANC, KwaZulu-Natal) asked about the criteria used by the FFC to determine whether the Appropriation Bill was done right or not. Does the FFC also look into the quality of allocations, not only quantity? He referred to allocations for education and noted they were one of the highest in the world. However, educational outcomes were not impressive at all. On the wage bill, there was need to strike a balance as it was shocking what some of the teachers and social workers were earning in relation to the hours they put into their occupations. There should be more emphasis on the quality rather than quantity of the spending given the performance declines within the public service over the years. He added there was need for more oversight on contingent liabilities on the part of Parliament.

Mr T Matibe (ANC, Limpopo) said despite pressures from various stakeholders, he did not believe calls for the wholesale privatisation of SOCs would see the light of day. To what degree did the FFC believe the Appropriation Bill would be fully implementable? On infrastructure investments, how would they be fully achieved given the proposed allocations? He asked for views on proposed cost containment measures by government, and their impact to economic growth. Which areas should the Committees emphasise in their oversight functions?

Co-Chairperson Mahlangu commented on aggregate spending and deviations from the final budget. She noted departments that have spent below 99% of the national average, and asked how best this could be addressed. Was there value for money in terms of the expenditures as allocated? She emphasised the need for transformation and indicated all departments should report on this. Was there a budget for programmes geared towards realising a transformed society? She asked if the FFC believed the Bill in its current form spoke to the seven points and priorities articulated by the President during his State of the Nation Address (SONA). Were there any plans to cushion those who would be casualties of the proposed restructuring exercise within government? More resources needed to be channelled to the Department of Women’s Affairs and there must be clear plans speaking to gender parity. She emphasised the need to roll out the proposed NHI, saying the delay disadvantaged citizens who did not have access to quality health care. She asked for comments on what could be done in this respect.

Co-Chairperson Buthelezi asked how government could generate more revenue to fund programmes. He identified the emphasis on cost cutting rather than on how revenue generation could be spruced up as a challenge. Did the FFC have a ballpark figure on how much was being lost by SA through base erosion and profit shifting (BEPS)?  Was tourism being given enough attention in term of allocations? He also asked why the country’s construction industry was in an intensive care unit, noting its multiplier effects on economic growth and employment creation, and what government could do to rescue the sector. Was government doing enough to crowd-in private investments into the sector currently?

Prof Plaatjies replied that the input the FFC gives to Parliament was meant to help influence policy direction. The FFC expected Parliament to consider these matters during its interactions with line departments. In all this, for social and economic reasons, there was need for patriotism to the sovereign despite political differences. This would help dispel the perceptions that SA is an unstable society. On the FFC’s assessment criteria, analysis gets done based on the financial and fiscal realities on the ground. The FFC looks at the priorities and articulation of the government as well as legislation and political messaging relative to the needs of the country. The FFC also looks at what different stakeholders such as labour and markets were saying in coming up with its analyses. The FFC was acutely aware of the need for transformation to address the structural constraints and the inequality question which is deepening. The whole education value chain from early childhood right up to higher education, in particular the matric section, needs a relook. Part of the transformation question also had to do with the nature of the social contract between the state, industry and citizenry. The question was how to re-conceive the role of the state in the current conjuncture. The country was on a negative growth trajectory and any positive deviations would boil down to the nature of policies to be implemented going forward. The relationship between departments, agencies and the FFC was collegial, and the Commission would continue utilising the existing platforms to share views. On the rollout of the NHI, he cautioned that arguments about its affordability could only be made after a clear costing and pricing is done relative to the country’s economic growth prospects. Until then, the litmus test and standard of measure for the feasibility of an NHI could not be done objectively. Notwithstanding this, the FFC fully supports the idea of an NHI scheme and would support well-coordinated efforts to improve health outcomes. On land expropriation, no opinion could be made until there is a clear land reform policy. The Executive and Parliament was responsible for this policy and the FFC could only form an informed opinion following its completion.

Prof Plaatjies, on provincial budgets towards road infrastructure, explained that there was need to evaluate the project cycles and use the analysis as a yardstick to measure performance. It had to be clear whether the road infrastructure plan was working. On Eskom, there had to be clear set targets pursuant to the pronouncements made by the President at SONA. This would help in the policy direction going forward. The whole question of financial sustainability and utility value of the three components relative to the economy would be of interest to the FFC. On the oversight of SOCs, there was need to deal with their established legislations, their financial sustainability, government leadership and management of these entities, their service delivery conundrum and developmental mandates. On the public service, its declining quality was definitely a key point in the rationalisation and wage bill debate. On tourism, there is a need to explore the whole pricing regime so as to attract domestic tourism. 

Ms Peters identified the need for efficiency in spending. She agreed that ECD, critical as it is, was beset by various challenges and severely underfunded. ECD is critical in building a foundation for learning and development. The FFC had done some research in this area and would have more to say on this during its next appearance before the Committees.

Dr Ncube said there must be a clear plan and performance targets for the special appropriations. The 6% baseline cut to the Department of Women’s Affairs was concerning to the FFC as well because the department is strategic in exercising oversight in as far as gender parity mainstreaming was concerned. He agreed that there were maintenance backlogs in water and sanitation whilst spending was increasing yearly. This clearly spoke to the quality of allocations as alluded to by Members. He agreed that the aim of public investment spending must be to crowd-in private investment. Therefore, public private partnerships must be streamlined to ensure this is realised effectively.

Co-Chairperson Buthelezi reiterated concerns about the efficiency of spending. Throwing money into a problem is not a panacea to problems. It may be a necessary condition, but definitely not a sufficient one. Going forward, sectors like tourism and agriculture should get more allocations because of higher multiplier effects in terms of job creation and economic growth impact. The continued targeting of priority areas like social grants, education, health, and others, was welcome. He thanked everyone for the engagements.

The meeting was adjourned.

 

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