Special Appropriation Bill: National Treasury on Eskom conditions; FFC submission on 2020-21 Division of Revenue

Standing Committee on Appropriations

09 October 2019
Chairperson: Mr S Buthelezi (ANC), and Ms D Mahlangu (ANC, Mpumalanga)
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Meeting Summary

The Standing and Select Committees on Appropriations met for a briefing by the National Treasury on conditions attached to the Eskom Special Appropriation Bill. The Financial and Fiscal Commission (FFC) also gave a briefing on its submission on the 2020-2021 Division of Revenue.

The National Treasury, during its presentation on conditions pertaining to the Eskom Special Appropriation Bill, highlighted thatthe Minister of Finance might impose conditions to be met by Eskom before any amount was transferred, and had to impose conditions to be met after transfer of any part of the amount. Proposed conditions included regular liquidity reports; monthly management reports; reports on actionstaken to recover electricity debts; reports on initiatives taken to reduce primary energy costs; reports on the defects of the build programme; and reporting on actions against individuals involved in irregular and fruitless and wasteful expenditure. Repayment of any loans had to be pre-agreed with National Treasury. Proposed mechanisms to impose conditions were the options of primary legislative conditions; subordinate legislative conditions, or ministerial conditions. Treasury recommended the third option, as it enabled the quickest transfer of funds and therefore the least chance of default by Eskom. The option could be strengthened by providing for parliamentary scrutiny of draft conditions in the Bill.

Members wanted to know about Eskom’s ability to comply with conditions; consequences for not meeting conditions; and the role of and conditions for National Treasury. They expressed concern about the fact that implementation of some of the conditions was not measurable, and emphasisedthe need for conditions to address State capture. Further, Eskom would have to submit cogent infrastructure plans before a transfer is made.Performance evaluation and implementation mechanisms would be crucial.

The Financial and Fiscal Commission (FFC) presented its submission on the 2020-2021 Division of Revenue. It was highlighted that local government sustainability was at risk because of poor financial management, endemic profiting from procurement processes, and poor maintenance of municipal infrastructure. Revenue problems were compounded by the debt crisis municipalities faced. Consumer debt was increasing, especially in rural municipalities. With respect to municipal functionality, the FFC recommended that the Ministers of Finance and Cooperative Governance &Traditional Affairs, and the President of the South African Local Government Association (SALGA) jointly lead the development of a government-wide accepted definition of “Municipal Functionality”. Municipalities were unable to spend capital budgets and to build quality infrastructure. Successful implementation of the city-region development model had to be driven by municipal cooperation. The FFC remained concerned about municipal dysfunctionalities and performance lapses, and would continue to focus on local government issues.

Members commented onthe lack of funding for municipalities; unfunded mandates; and reticulation costs. Capacity building was a problem and the challenge was getting the right people to do the work. It could not be tolerated that conditional grants and the municipal infrastructure grant (MIG) was used for other purposes; there had to be conditions attached to money supplied.The session with the FFC was empowering for the current part of the budget cycle. The FFC had to render further assistance.

 

Meeting report

Co-Chairperson Buthelezi welcomed Members and the delegation from National Treasury and the Financial and Fiscal Commission. He stated that Treasury and the Department of Public Enterprises (DPE) were currently engaging on the conditions attached to the Eskom Special Appropriations Bill. Conditions had to be stringent; a blank cheque could not be handed to Eskom.

Briefing by the National Treasury on conditions attached to the Eskom Special Appropriations Bill
MsTshepisoMoahloli, Acting DDG: Asset & Liability Management, National Treasury, in briefing, saidthe Minister of Finance might impose conditions to be met by Eskom before and after any part of the amount was transferred. Proposed conditions included that Eskom had to provide daily liquidity position updates, and submit monthly management reports; that recapitalisation only be used to settle debt and interest payments; that a monthlyreport be submitted on actions underway to recover electricity debts; that Eskom report on initiatives implemented to reduce primary energy costs; that Eskom report on the defects of the build programme, and that Eskom report on measures to deal with individuals involved in irregular, fruitless and wasteful expenditure. Repayment of any loans had to be pre-agreed with National Treasury. Proposed mechanisms to impose conditions were as follows: primary legislative conditions; subordinate legislative conditions, or ministerial conditions. Treasury recommended the third option as it enabled the quickest transfer of funds and therefore the least chance of default by Eskom. The option could be strengthened by having such provisions in the Bill for parliamentary scrutiny of draft conditions.

Discussion.
MrASarupen(DA) emphasised the importance of DPE as a shareholder.Would Eskom be able to comply with conditions? Conditions had to be related to the short, medium and long-term restructuring of Eskom.

Mr O Mathafa(ANC) remarked that condition 8 (reporting on initiatives to reduce primary energy costs) could be more explicit. Contract renegotiation had to be looked into. The condition that Eskom had to provide initiatives was open to abuse, as it could be circumvented. What would happen if Eskom could not meet conditions? The DPE had to keep Parliament abreast of developments. What was the role of the Treasury going to be? The Treasury had an obligation to Parliament.

Mr Z Mlenzana(ANC) opined that there were perhaps not enough conditions. The Bill looked generic. There had to be a demand for quarterly Eskom board meetings, and monthly reports.

Mr D Ryder (DA, Gauteng) noted that a document from the President could be expected at the end of the month. Some of the conditions might be linked to proposals in that document. To finalise the conditions before that time could be pre-emptive. There had to be consequences for non-adherence. Implementation of conditions as it currently stood was not measurable. It was possible for Eskom to report that there were no initiatives. The conditions did not address possibilities for State capture. Eskom was paying too much for coal, and coal procurement had to be looked into. There was anger about the Eskom situation, hence there had to be clarity about consequences. The root causes of Eskom failure had to be looked into. MrMabuza, the Eskom CEO, had stated that Eskom could not trade its way out of the current situation.

MrF Du Toit(FF+, North West) remarked that new investments by Eskom could increase debt. There was no assurance that the bailout could resolve the Eskom crisis.

Mr Y Carrim (ANC, KwaZulu-Natal)) insisted that there be unity among parties in dealing with the Eskom crisis. There were different options, related to the choice between regulations and conditions. Conditions would have to be approved by Parliament. There was a lack of clarity about consequences. The Public Enterprise Portfolio Committee had to be involved. It could be taken informally to the Chairperson. That Committee could assist with monitoring. He asked about the position in law concerning conditions and regulations.

MrX Qayiso(ANC) pointed out that there was the risk of money intended for rural infrastructure could go towards the Eskom bailout. Conditions had to be developed for the Treasury.

MsM Dikgale (ANC) opined that the DPE had to be invited for a joint meeting. She referred to slide 5 of the presentation. How would the plan of implementation be monitored? She asked if bonuses would again be given after the bailout. She called for a downward adjustment of management salaries, so that workers could be helped.

Co-ChairpersonMahlanguagreed that the Portfolio Committee on Public Enterprises had to be invited for a joint meeting soon. She referred to slide 8 (Financial conditions). Eskom had problems with water and worn out infrastructure. There had to be a maintenance plan, based on understanding of the life span of projects. Would it be possible for Eskom to have to submit such plans prior to the transfer of money? Evaluation of performance had to be agreed to in a performance agreement. Implementation of conditions had to be measurable. How long would it take to develop legislation for implementation mechanisms? It would be difficult to pass the Bill if conditions were not binding. Commitment had to be proved to the public. She referred to the latest downgrading of Eskom by rating agencies. How much did Eskom owe?

Co-Chairperson Buthelezi remarked that conditions had to take note of the extent of the problem. The coal contract was problematic. Coal corporations were making super profits.

MsMoahloli replied that there had been engagements with DPE about conditions, but not with Eskom. Treasury would consider making conditions and regulations part of the Bill. Consequence management was a challenge. As a company Eskom was bound to the Public Finance Management Act (PFMA), concerning wasteful and irregular expenditure, and the roles of the executive authority and the Board. The Companies Act prescribed the role of the Board. The role of the Board inconsequence management had to be clear. It had to be known how it would be managed if an employee did wrong.DPE had to be kept abreast of conditions, and had to play a critical reporting role.DPE and Treasury could join forces in reporting to Parliament. Conditions would have to be traversed into in detail for effective oversight. Quality information was required. When Eskom provided information about initiatives, it had to indicate how primary costs would be dealt with. There had to be exact information about core contracts, about what was owed to Eskom. The Board had to meet every quarter. Recouping of debt might involve litigation, but the process had to be pushed through. The link between conditions and the turnaround strategy had to be spelled out. The interface between DPE and the shareholder compact and corporate plan had to be known. Conditions had to be measurable and were not to be left generic. She agreed that conditions had to be guard against State capture and corruption. The impact of investments had to be assessed. Concerning monitoring of conditions by the Treasury and DPE, the two departments engaged regularly, and DPE had full-time officials delegated to deal with Eskom. Conditions for the Treasury could be filtered into the performance agreement. Onshort, medium and long term restructuring, there were structural issues related to restructuring. Money would come from revenues collected from the South African Revenue Service (SARS), and the local and international capital market. It would be a bad situation if the national government had to borrow money. Downward adjustment of management salaries would be opposed by labour. Eskom had to borrow R46 billion, and some of the monies would come at a huge cost. Some loan agreements were not negotiable and some were. Treasury and DPE could negotiate with lenders. It could not be business as usual.

AdvEmpie Van Schoor, Chief Director: Legislation, National Treasury, spoke about consequences for non-compliance.If conditions were not met, funds would not be transferred. The Board had to take steps to curtail irregular expenditure. It was a criminal offence for an Accounting Officer not to take actions against that. It had to be made sure that conditions were obtainable. The stipulation that the Minister “may” impose conditions to be met before any part of the amount was transferred, could be changed to “must”. When conditions were finalised, all changes had to be reported to the Committee.

MrRaveshRajlal, Chief Director: Sectoral Oversight, National Treasury, replied that daily cash management by Eskom had to improve, as well as debt management. There was no sense of urgency. Cash flow management had to improve, and the Board had to be involved. There was no legal mechanism to increase the additional R26 billion required. Treasury would meet with Eskom the following day, as a potential shortfall could arise by the end of March 2020. The fiscus could not provide more for the current financial year. There had to be a sense of urgency on the part of the Board.

MsJacky Molisane,Deputy Director-General, DPE, replied about Eskom’s inability to trade itself out, that revenue had to be improved and costs reduced. There were risks in the system, and further capital expenditure by Eskom had to either be deferred or executed more efficiently.

Co-Chairperson Buthelezi commented that the question was how to ensure that oversight was stronger. The Public Enterprises Minister had stated that Eskom could deal with its financial obligations until the end of October. It had to be known which legislation pertained to the conditions. The Minister had stated that there was to be no free lunches. Conditions had to be implementable and accompanied by time frames, and had to be measurable. Money was not to be taken from education or infrastructure. Conditions could not as yet be finalised. Issues raised by Members would be included in the Committee report.

Mr Ryder opined that Option 1 (primary legislative conditions) could affect all departments. There were some of the conditions that could not be signed off in silo. The Minister had to have the power to go for option 3.

Co-Chairperson Buthelezi remarked that Adv Jenkins, Parliamentary Legal Adviser, had to stay close to the process. If Eskom defaulted by the end of the month, it could have an effect on other departments. Risk to the fiscus had to be avoided. South Africa’s ability to raise funds was not to be affected.

Briefing by the Financial and Fiscal Commission (FFC) on its submission on the 2020-2021 Division of Revenue
MrMkhululiNcube, Programme Manager, FFC, highlighted that the sustainability of municipalities continued to be at risk, because of poor financial management, endemic profiting from procurement processes, declining or stagnant own revenues, and poor maintenance of municipal infrastructure. The revenue problem was compounded by the debt crisis they were grappling with. Municipal consumer debt was increasing, especially in rural municipalities. With respect to municipal functionality, the FFC recommended that the Minister of Cooperative Governance and Traditional Affairs (CoGTA), the Finance Minister and the President of the South African Local Government Association (SALGA) jointly lead the development of a government-wide accepted definition of “municipal functionality”. Municipalities demonstrated an inabilityto spend capital budgets and to build quality infrastructure. The manner in which the infrastructure grant framework was structured created challenges for coordinating project implementation at the local level.

Mr Chen Tseng, Research Specialist, FFC, added thatthe MECs of provincial CoGTAs had to strengthen the infrastructure delivery intergovernmental forums. For successfully implementing the city-region development model, it had to be driven by municipal cooperation. The FFC continued to be concerned about dysfunctionalities and performance lapses found in many municipalities, and would continue to keep its focus on local government issues.

Discussion
Mr Ryder commented that it was underemphasised that only 9 percent of the fiscus went to local government. The majority of municipalities failed because of lack of funding. Local government complained about the pressure caused by unfunded mandates. The five year political term impacted on finance management. There was too much authority for extension beyond the term. There was a tendency to blow the budget in the last year. Roads were built on loan and the debt was left to the next administration. There was also the National Energy Regulator of SA, (NERSA) margin squeeze. Municipalities had to sell electricity to cover the cost of reticulation. Revenue streams like weighbridges were open to petty corruption. Section 139 did not work for local government. At Emfuleni, the same people were doing the same thing with different hats on.

MrASarupen(DA) remarked that there was no data on Back to Basics. Was ministerial capacity presented to CoGTA, and if so, what was the response?

MrO Mathafa(ANC) askedif there was interaction with the District Land Development model. There had to be capacity-building at the level of CoGTA.

Mr Z Mlenzana remarked that amalgamated municipalities led to a stretched workload and HR problems.

MrQayiso noted that Stats SA conducted surveys when people were at work, which meant that data was not accurate. Concerning the ES, it had to be ensured that money and development went in the same direction. He asked what the endgame was, with respect to local government.

Co-ChairpersonMahlangucommented that the FFC had to help the Committee to deal with the budget. Capacity building was a problem and the challenge was getting the right people to do the work. It could not be tolerated that conditional grants and the municipal infrastructure grant (MIG) was used for other purposes, there had to be conditions attached to money supplied. Intergovernmental relations between the Finance Minister, CoGTA and SALGA had to be sound. It had to be asked if courses for officials provided value for money. The session with the FFC was empowering for the current part of the budget cycle. The FFC had to render further assistance.

Prof Daniel Plaatjies, FFC Chairperson, replied that municipalities were at the coalface. A different tack had to be followed in the Sixth Parliament. Costing and pricing of programmes had to be emphasised. It was easy to do in the metropolitan municipalities. Constitutional democracy worked according to five year cycles, but there were continuity problems. Loans were an ongoing concern. The FFC had presented on infrastructure-led growth scenarios as cities were the new centres of industrial growth. There could be a weekend workshop with the FFC. He agreed that the endgame was capable municipalities that were responsive to mandates. Some municipalities had no taxpayers and amalgamations could compound workload and HR challenges. Municipalities had no fiscal space to support economic activity. Bigger towns could pull in other municipalities. District municipalities could coordinate local municipalities. South Africa did not follow the example set by Europe, in which non-citizens had to pay more for services. The FFC had met with municipalities in the Free State and the Eastern Cape. The Provincial Legislatures pulled in the municipalities. Section 139 interventions were a constant quagmire-a province under Section 100 administration could not call for aSection 139 intervention for a municipality. There were value chain issues related to CoGTA. People received training and then went to work in the private sector. Treasury had to be promoted as an employer of choice. Universities could not adequately train people to serve in the public sector. Property value evaluators had to be appointed in the provinces and municipalities. Problems of urbanisation could be resolved if students could be attracted to go back to their areas of origin. Social, physical and economic infrastructure had to be built. It was true that the Equitable Share was founded on population numbers, for which Stats SA was relied on. Stats SA could be called in tospeak to this to the Committee. There was a vertical gap between mandates and resources. Since 1994 there had been a one-size-fits-all approach, but there could not be governance without capacity. Municipalities had to define their capacity to build. Electrical supply by municipalities was more costly, as the Constitution stated that municipalities were responsible for electricity reticulation. Before 1994 most non-payers were black, but lines were currently being crossed, with the rich benefitting from free basic services. Agreements were signed with Eskom in the knowledge that money was not available to pay. There were non-payers everywhere.

Co-Chairperson Mahlanguconcluded by indicating that there could be a workshop on cities and industrial growth, if time permitted. The Committee had to meet with the Minister of CoGTA soon.

The Chairperson adjourned the meeting.

 

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