Appropriation Bill [B4-2020]: National Treasury briefing; with Deputy Minister

Meeting report

Chairperson Mahlangu said the objective of the meeting was to receive a final briefing from the National Treasury on the 2020/21 Appropriation Bill. This was upon the Minister of Finance receiving a letter formally requesting the Select Committee on Appropriations to consider prioritising the passing of the 2020 Budget, due to the urgent need for an adjustment budget to respond to the overall challenges of the COVID-19 pandemic. She reminded the Committee of its mandate according to Section 213, subsection (2) of the Constitution, which stated that “money may be withdrawn from the National Revenue Fund only (a) in terms of an appropriation by an Act of Parliament; or (b) as a direct charge against the National Revenue Fund, when it was provided for in the Constitution or an Act of Parliament.” This was alongside Section 77 subsection (3) of the Constitution, which stated that “all money Bills must be considered in accordance with the procedure established by section 75. An Act of Parliament must provide for a procedure to amend money Bills before Parliament.” The role of both Committees was to make sure that the process followed all the constitutional imperatives as outlined above, without any fear or favour.

The Chairperson welcomed the Deputy Minister, Dr David Masondo. She noted an apology from Mr Y Carrim (ANC, KwaZulu-Natal), stating that he would be late as he was still in another meeting. The Standing Committee Secretariat noted an apology from Ms N Ntlangwini (EFF), who indicated that she would be leaving the meeting early to attend another meeting. Mr X Qayiso (ANC) indicated that Mr O Mathafa (ANC) had also sent an apology, as he was writing an examination.

2020 Appropriation Bill: Briefing by National Treasury

Deputy Minister’s introduction

Dr David Masondo, Deputy Minister of Finance, said that the 2020 Appropriation Bill would provide the legal basis of expenditure as envisaged in the Public Finance Management Act (PFMA). Therefore, it was critical that it got passed. Departments had been spending funds since 1 April using authority provided by section 29 of the PFMA. National Treasury would return towards the end of June to present a supplementary budget to deal with the in-year allocation costs from the pandemic response, such as the additional social grants and health costs. Treasury was finalising its micro-economic focusing projections, and would present on this.

He highlighted that the South African economy had taken a huge knock as a consequence of the COVID-19 shock. The International Monetary Fund (IMF) projected that the global economy would decline by 3%, and South Africa’s would decline by 6%. The South African Revenue Service (SARS) had projected a revenue shortfall of almost R300 billion, which would increase the government’s deficit. Government’s ability to borrow had been negatively affected by the downgrade. Unemployment would increase, due to its correlation with the declining economic growth.

He commended Parliament for moving faster in processing the Bill, relative to previous years.

National Treasury briefing

Dr Mampho Modise, Deputy Director-General: Public Finance Division, National Treasury, pointed out that Treasury had sent the documents requested by the Committee at the last presentation through its parliamentary liaison, Ms Cindy August. This included the SARS report on its information technology (IT) system; the list of universities that had not received grants and the amounts; a write-up on the Road Accident Fund (RAF); a comparison of international experiences; estimates of the legal costs associated with medical chains; a report on the Integrated Financial Management System (IFMS); a presentation on the State Owned Companies (SOCs), including the Post Office; and the list of conditions that were associated with the bail-outs of SOC’s.

She elaborated on the structure of the Bill and the Estimates of National Expenditure (ENE) publication, which was the explanatory memorandum to the Appropriation Bill. She explained the poor economic outlook and the resulting continued deterioration of public finances. In response to fiscal deterioration, the Treasury had looked at how to reprioritise funding within the current programmes, and implement reductions to close gaps where there was spending pressure. The skills levy had had to be reduced because the skills levy income had not met expectations.

She referred to the largest baseline reductions over the medium term expenditure framework (MTEF), and said the reductions on goods and services may negatively affect the maintenance of government facilities and information communications technology (ICT) infrastructure, and lead to increased accruals. The reductions could also possibly result in closure or downscaling, necessitating efficient use of the allocated budgets.

A major issue was that reduced programme spending efforts over the years had been nullified by spending pressures from SOC’s like South African Airways (SAA). For instance, the R66 billion reduction in spending last year had been redirected to SAA and Eskom due to the government’s guarantee debt obligation. The total reduction in non-interest expenditure was R8.7 billion. The baseline reductions mainly affected conditional grants and national and provincial programme spending. The reduction of about R37 billion in the Wage Bill would be achieved through not having an increase in salaries for 2021.

As far as possible, reductions had been made in underperforming or underspending programmes. The largest reductions were made to the human settlements and public transport sectors. One of the implications was that the Integrated Public Transport Network (IPTN) had to be suspended. This would lead to suspending the IPTN implementation in the Buffalo City, Mbombela and Msunduzi Municipalities. Reductions in the Department of Health implied that the implementation of some of the components of the National Health Insurance (NHI) would have to be done over a longer than anticipated timeframe.

The summary of budget spending showed that all categories had declined, except for payments for financial assets, mainly because of SAA and Eskom.

Discussion

Mr Z Mlenzana (ANC) said he had changed from his initial stance of targeting departments and entities with poor performance for budget cuts, particularly at the local government level. Could Treasury not introduce the realisation of the district management model in municipalities, to avoid just making in an issue of cutting. Could Treasury assist with the enforcement of strong consequence management, where underperformance and underspending were due to persistent misconduct by officials?

Dr Masondo responded to the issue of consequence management by pointing out that the amended Public Audit Act (PAA) empowered the Auditor General (AG) to follow-up with accounting officers on public funds that were lost through wasteful expenditure. The accounting officer would be held liable for failing to take action against such misconduct. This was a good legal basis for accounting for mismanagement of public funds. It was important to assess how far government was with implementing the PAA.

Mr D Ryder (DA, Gauteng) emphasised the need for strong consequence management. He said COSATU had made it clear it did not accept reductions in the public sector wage bill, and was instead insistent on adhering to the three year agreement and would push for wage increases, even in the future. Therefore, Treasury’s projections for the next three years were flawed, as it expected cooperation from people who said they would not cooperate. Was there a plan B? A new approach and rewrite would be needed regarding revenue collection. Was it already there?

Dr Modise stated that for the first time, Treasury had presented to the unions in advance. She said the “the truth of the matter is, we are in trouble.” Government was in a situation where spending was relatively high, but it did not have income as a result of the fall in gross domestic product (GDP), underperforming revenue and the junk status rating, which meant it could not borrow at a favourable interest rate. In response to this, Treasury had looked at how to rationalise SOCs, as that was where most of the reprioritisation funds went, and what needed to happen with the high Wage Bill. The Wage Bill was high because of the rate of payment to government employees, not necessarily because of the number of workers.

Mr Qayiso asked if it was still necessary to implement deeper cuts in the Department of Human Settlements. Given the current challenges around the COVID-19 pandemic, should the Bill not deal with the issue of consequence management instead of just looking cuts when it came to the conditional grants? He asked if the proposed Wage Bill reduction had been informed by discussions with relevant stakeholders.

Dr Masondo responded by saying that there were ongoing negotiations with the labour movement, led by Minister Senzo Mchunu.

Mr A Shaik-Emam (NFP) asked if reductions in key areas were the only way forward. Were there any other measures Treasury could put in place to counter this -- for instance, by investigating the country’s loss in revenue due to a lack of value for money? How soon could the Committee expect a system of transparency to be implemented?

He requested Treasury to send a report on SAA’s sale of an airplane fleet, with information on why the assets were sold, who had authorised it and who had benefited. Given the proposed reduction in the Human Settlements allocation, did Treasury agree that ordinary South Africans could not expect any improvement in the quality of services in the near future?

He said government needed to have a balance with job creation, and there had been no mention of how to boost the economy in the presentation. Were there any measures that could be put in place to do this?

Regarding government receiving value for its money, Dr Modise said that the Procurement Bill was currently being considered by Cabinet, and would be presented to the Committee once it had been approved. Treasury had issued several instructions to ensure the procurement of personal protective equipment (PPE) was made easier and fast-tracked, in line with the rules, and ensuring a diverse range of businesses were supported. The Chief Regulatory Officer had issued several regulations, which Treasury could send to the secretariats of both Committees.

Dr Masondo said that in an interdepartmental committee led by the Department of Public Enterprises, Treasury had presented on SAA and Eskom’s situation. At the meeting, Treasury had made commitments to return with written answers of plans to deal with both SAA and Eskom. It would have to come back and follow-up on that commitment in writing. He added that Cabinet had a responsibility in terms of dealing with the high cost of business, how to attract investment, the domestic economy and putting together an economic recovery plan. It came down to accelerating structural reform. Cabinet was working hard on this and Treasury would have to come back and report on it.

Mr S Aucamp (DA, Northern Cape) said the DA had warned against the effects of past decisions. The issues with SOCs kept recurring like old ghosts when more money was given to them. Why did the government keep making the same mistakes by giving SOCs money and expecting different results? How could government justify taking pensions as security for loans to SOCs, which were still being run badly? How was wage expenditure going to be reduced by R37 billon without consent from the unions?

Dr Masondo responded that the decision of allocating the assets, such as the deferred payments of workers held in the form of pensions, lay with the Public Investment Corporation (PIC) board, based on the mandate of its clients such as the Government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF). The Finance Ministry was not involved in the allocation of those assets.

Mr S du Toit (FF+, North West) said he was concerned with education issues amidst the country’s R300 billion revenue shortfall. 1 500 schools had been looted or vandalised, and some had been burnt down during the COVID-19 lockdown, yet there was also a reduction in the education infrastructure budget. There needed to be more effort to assist students to be up to standard when it came to education.

He requested Treasury to provide the exact figures used to bail out SAA and other State-Owned Enterprises (SOEs).

Mr D Joseph (DA) asked for clarity on whether there was any new money for SAA or Eskom. Regarding the provisional allocations, would there be another review that would include all departments? The government was in a fiscal crisis, and needed to review how it spends money. However, it would keep going round in circles unless a task team was created. This would include all role-players taking on the proposals of the Financial and Fiscal Commission (FFC) in an open and honest way. Things needed to be done differently.

Dr Modise responded that the Division of Revenue Bill (DoRB) contained a summary of recapitalisations and bailouts of SOCs. It showed that recapitalisation to SOCs had increased significantly over the past few years. Between 2008/9 and 2019/20, Eskom had received bailouts of R132.7 billion. For the coming three years, the money allocated to Eskom would be R112 billion. Since 2008/9, SAA had received bailouts of R22 billion, and this Bill proposed an additional allocation of R10.3 billion. There was also a proposal in the current bill to allocate R600 million to Denel and R200 million to South African Express. The total proposed allocation for recapitalisation and bailouts of SOCs for this year was R67.1 billion, which had been approved by Cabinet. These funds had to be allocated, as it was guarantee debt. If the funds were not paid, there would be a default. If Eskom was not assisted, there would be no electricity. The proposed allocation was what Treasury thought was the best under the current situation.

Dr Masondo said Treasury’s position was that the Eskom debt was a symptom of the cost structure and its business model that generates inefficiencies and losses, where costs exceed revenue. Eskom needed to improve its operational inefficiencies and its cost-drivers. It was currently reviewing its cost-drivers, such as the primary fuel (coal) price and Independent Power Producers (IPPs).

He agreed with Mr Joseph on the need for common action for recovery and social compacting.

Mr Y Carrim (ANC, KwaZulu-Natal) said that there was nothing new coming from the opposition

Co-chairperson Buthelezi asked if the government had any programmes to deal with problems of money not being spent effectively and efficiently by departments. What impact would the reductions have on the macroeconomic performance in general? Where did the government provide for the fines it would charge such as those by the Competition Commission?

Dr Modise said that the documentation had a Departmental Receipts Table, with a line on fines, penalties and forfeits. The money got allocated towards other spending needs.

Dr Masondo referred to the impact of budget adjustments on economic performance, and explained that economic theory stated that GDP was composed of consumption by government, businesses and households and net exports, which were required to increase in order to have economic growth. The reality was that South Africa was facing challenges in all these components with COVID-19 impacting incomes, thus the ability to spend. Government needed to do more to create employment and assist businesses through structural reforms. Its ability to spend and stimulate the economy was constrained. Borrowing to spend on infrastructure was beneficial, but borrowing to spend on consumption and wages did not improve growth. The country’s ability to export was also constrained, given the challenges in the global environment. There were talks of the effect of Brexit, as well as the US-China trade wars. Developed markets tended to protect their economies through nationalist polices, challenging the ability to earn from foreign trade.

Mr Mlenzana asked what had informed the rating agency’s downgrade decision. Was it not a political move, looking down at the country?

Dr Masondo said that rating agencies were there to assess the ability of countries to timeously pay back money borrowed. To conduct a credit assessment, the agencies looked at economic growth, which would indicate if a country’s economy could generate enough revenue meet its debt obligations, and the reorganisation of debt.

Dr Modise said most of the questions were related to the adjustments budget which would be presented at the end of June. The adjustment budget would give a good indication of how funds had been reprioritised in response to COVID-19. It was difficult to say what would be done in the Adjustment Appropriation Bill because it was still being decided on and still had to be approved by Cabinet before being presented to the Committee.

Dr Masondo requested that the Bill be passed, and announced that Treasury would return towards the end of June to report on how it viewed the economy, the fiscal response, and the recovery plan for when the conditions for managing the virus were better than the current condition.

Ms D Peters (ANC) raised the following concerns:

• Would the reduction in the allocation to the Passenger Rail Agency of South Africa (PRASA) be reallocated to it to address the new COVID-imposed restrictions on transport infrastructure, such as social distancing, sanitisation and not touching any buttons? This was a time for ticket-less and motion sensor access control.
• What was Treasury proposing for those departments that had seen reductions in their budgets and had been significantly impacted by COVID-19?
• A R2.3 billion reduction in the human settlements allocation was an indictment of South Africa, especially in view of the number of people living in squalor.
• Was Treasury proposing new standard operating procedures for work, to reduce travel, accommodation and subsistence allowance costs and general costs?
• Basic Education and Health needed rapid response teams to deal with challenges of the new infrastructure required to render services. Was National Treasury engaging with these departments to ensure that the most vulnerable were not affected detrimentally by the lack of capacity in the departments?

Dr Modise repeated that most of the questions were related to the adjustments budget which would be presented at the end of June. To reassure the Committee, she said that when departments had to spend money for a different purpose, they had to come to Treasury for approval, or to Parliament. This was to ensure moved funds were done so within the law. Even though PRASA was underspending, in future the government would have to worry about where it would find the money to reallocate back to them. Even though it was underspending, the service was still needed, so the reduction postponed the problem by a year or two.

Dr Masondo said that PRASA was one of Treasury’s priorities.

Mr Ryder asked what certainty the Committee had that once the Bill was approved, Departments would not spend money that was likely to be re-appropriated in the adjustment, considering Dr Modise’s words that “we are in trouble”.

Dr Modise said that the Bill needed to be approved because without it, departments were not allowed to spend on anything new, only what was in the Appropriation Bill of last year, and only 45% of it. Therefore, no department could misuse funds by buying something new and claiming it was COVID-19 related. Treasury was assessing the emergency funding requests made by departments. For now, departments could only spend within the prescripts of the law. The Chief Procurement Officer had been very busy dealing with those departments which had misused funds.

Dr Masondo appealed to the Committees to hold departments and accounting officers accountable. Treasury would have to come back with a list of the funds it had received from fines thus far. He pointed out that some of the companies may not be able to meet their obligations when it came to the fines. This was in light of the impact of the pandemic. It would have to deal with companies on a case-by-case basis.

Co-Chairperson Buthelezi said Treasury would have to look at the lack of development funding for the Land Bank and report on this when it returned. He reminded Members the Committee would not start with the Appropriation Bill before the DoRB was finalised by the National Council of Provinces (NCOP).

Eskom’s erroneous payment

The Co-Chairperson said that Eskom had released a statement to the public that an amount had been paid erroneously and it was in the process of recovering the money. He requested the Committee Secretary to give a background of the Committee’s engagement with Eskom on the matter.

Mr Sifiso Magagula, Committee Content Advisor, said that the Committee had planned an oversight visit to Eskom and PRASA for 14 to16 October 2019. However, due to Parliamentary processes, it had been called back before it could visit PRASA, but it successfully managed to visit the Eskom Megawatt Park facility. When Members had engaged with Eskom’s management, Eskom had indicated that a company had erroneously been paid R4 billion, which it was in the process of recovering. The funds were in relation to the construction of the new sites. The Committee had highlighted the issue of the erroneous payment in its oversight report, which had not contained the name of the company that had benefited.

Subsequently, the Committee had written a letter to Eskom in February to follow-up on:

• The issue of the erroneous payment;
• The special Appropriations Bill that was approved last year;
• Issues raised around the adjustment budget in October 2019.

On 25 February, the Committee had written a letter to Eskom to follow-up on whether it had recovered the R4 billion. Due to challenges arising from the Corona virus, the Committee had not received a response from Eskom. Mr Magagula highlighted that the Committee did not assume the R4 billion had been erroneously paid, but Eskom had informed the Committee that it was error. If Eskom had changed its stance, it needed to inform the Committee.

The Acting Chairperson requested the Committee Secretary to circulate the statement by Eskom.

Mr Joseph proposed that the Committee go back to the oversight report it had adopted after the visit to get more background information. He recalled Eskom mentioning invoices that had been paid to companies incorrectly during the oversight visit. The Committee should also go back to the recording of the meeting to ensure the Committee was on the same page on what it had been told by Eskom, before interpreting what had been said in the media.

Mr Qayiso said the authors of that statement had sought to undermine the Committee, implying that it did not know Eskom. The authors had not been there at the time to account for the R4 billion payment. They needed to withdraw the statement, and the Committee must condemn Eskom’s behaviour. The report must be submitted and the statement must be withdrawn.

Mr Mlenzana requested the Committee to remain calm and rational, and suggested that the Committee instruct Eskom to return with the report it requested, and also to go back to its own records of the two meetings to extract details.

Mr Shaik Emam said this matter needed to be extensively investigated, such as identifying which directors had benefited, and so forth. It indicated that the end to corruption was nowhere near. He expressed his disappointment at how Members had been treated by Eskom during the oversight visit. Eskom should be called in to account at the earliest convenience and Treasury should be present as well.

Co-Chairperson Buthelezi agreed with Members’ suggestions. Eskom’s statements seemed to suggest that there had been confusion during the Committee’s oversight visit. He requested that the Committee give Eskom the benefit of the doubt, as the CEO who came to the Committee might not have been aware of this background or been properly briefed. However, Eskom had a duty to report on this. He encouraged Members to not be emotional about the matter. He noted that questions from the media had been to Ms Felicia Lombard, of the Parliamentary Communication Services. The response to the media should be based on this discussion and the knowledge of Members around this matter. The Committee would proceed by writing to Eskom, instructing them to retract the statement which was not factual, and to submit the report.

Members agreed with the Chairperson on how the Committee would proceed.

Closing remarks

Co-Chairperson Buthelezi thanked Members and participants. He announced that the next meeting would be on Friday at 15:00, and it would be a joint meeting with both the Standing and Select Committees on public hearings.

The meeting was adjourned.