Western Cape 2020 MTBPS and Second Adjusted Estimates of Provincial Revenue and Expenditure: Briefing by Provincial Treasury
26 November 2020
Chairperson: Ms D Baartman (DA)
Video: Budget Committee, 26 November 2020, After House adjournment
The Provincial Treasury briefed the Committee on the Western Cape’s 2020 Medium-Term Budget Policy Statement and the second Adjusted Estimates of Provincial Revenue and Expenditure for 2020.
The Head of the Western Cape Provincial Treasury stated that South Africa had already been increasingly underperforming its emerging market peers before the current crises arose. The extraordinary shock to the economic output in 2020/21 translated into large revenue shortfalls which would persist over the medium-term. Budget reductions initiated by National Treasury will fall heavily on provinces.
Members noted with concern that the Western Cape’s conditional grants had been reduced by
R86 million as a contribution to South African Airways. Members asked whether the Provincial Government would have a seat at the table for the national wage negotiations. Questions were mainly directed at getting clarity on the very detailed slide presentation, which often used unexplained acronyms and budgeting shorthand.
The Chairperson welcomed the Committee and delegation to the meeting. The rules of engagement were explained, after which Members were introduced.
Mr David Savage, Head of the Western Cape Provincial Treasury, said he would provide the background to the second Adjustments Budget for 2020, which had been made necessary by the crisis created by the pandemic, and which followed the first Adjustments Budget earlier in the year. He would outline the implications of budget cuts and changes for the Western Cape Fiscal Framework, and explain how the Provincial Government had chosen to respond. (find the comprehensive presentation attached)
Mr Savage stated that South Africa had already been increasingly underperforming its emerging market peers before the current crises arose. The extraordinary shock to economic output in 2020/21 translated into large revenue shortfalls which would persist over the medium-term. The Tax-to-GDP ratio would likely recover to the 2019/20 level only by 2027/28.
Globally, South Africa has one of the largest projected increases in debt over the next three years.
The fiscal position is a risk to the outlook: higher long-term borrowing costs and risk premiums have started to affect the broader economy.
The probability of default is at all-time high
Failure to arrest the debt trajectory will see debt-service costs consume around 31% of main budget revenue by 2024/25
Budget reductions initiated by National Treasury will fall heavily on provinces and Mr Savage outlined the complex and fast moving developments
Changes to the Provincial Equitable Share (PES):
-Increase in the PES for demographic shifts
-Compensation reductions: the core of the new national strategy over five years
-Non-compensation adjustments related to both inflation and policy cuts
Own revenue revisions:
-Gambling taxes most uncertain
-Credibility of the national fiscal path (legal action and wage negotiations)
-Prospect of a debt crisis
-Recovery and growth assumptions
Budgetary and service delivery risks facing the province include:
-Deterioration in the fiscal environment
-Increasing population growth, high unemployment, high poverty and inequality, burden of disease, and resultant service load pressures
-High violent crime and lack of safety
-Severe public transport and mobility challenges
-Prolonged period of drought, energy security, climate change, environmental degradation; and the
-Financial sustainability of municipalities
The greatest risk to the provincial fiscus is that of a reduced fiscal envelope, which could have serious implications for service delivery such as :
-increasing teacher-learner ratio
-non-compliance with infrastructure norms and standards at public facilities
-decreased access to- and quality of- public health services and standards and longer waiting times for emergency services
-inability to adequately provide social services and support to vulnerable groups
The 2020 2nd Adjusted Budget builds on the original 2020 Expenditure Estimates (the main budget) and the 2020 1st Adjusted Budget (the immediate response to the COVID-19 pandemic)
The objectives of the 2020 2nd Adjusted Budget are to —
-Enable reprioritisation and additional funding to support immediate financing requirements for the WC Recovery Plan (i.e. jobs, safety and wellbeing)
-Achieve fiscal sustainability in-year, while setting a base for fiscal consolidation over the 2021 MTEF, in the context of significant changes in national allocations; and
-Enable the Western Cape Government to continue to respond to COVID-19
The adjustment gazette includes multiple small changes in provincial transfers to municipalities including the allocation of previously unallocated funds and some new allocations. In aggregate, transfers to municipalities increase by R99.72 million.
Notable increases include:
-HIV/AIDS: New allocation of R4.4 million for City of Cape Town.
-Provincial contribution towards the acceleration of housing delivery: New allocations of R19 million
-Roads projects: R5.7 million for Saldanha Bay, R332 000 for Witzenberg and R1.9 million for Mossel Bay municipalities
-Public Transport: George Integrated Public Transport Network-Operations: R30.5 million and R2 million for Rail Safety for City of Cape Town.
-Community Library Services Grant: New allocation of R7.7 million to support identified municipalities that have been identified.
-Development of Sport and Recreation Facilities: New allocation of R3 million, split among identified municipalities.
-Western Cape Municipal Interventions Grant: New allocation of R3.6 million to Kannaland Municipality
Most municipalities received small decreases as a result of a reduction of R1.521 million from Western Cape Financial Management Capacity Building Grant. Provincial Treasury is still in the process of reviewing the grant model.
Transitional support to strengthen service delivery is provided by the Fiscal Transition Support Facility:
-20 per cent of Western Cape government reserves will provide budget votes with fiscal transition support - reducing the potential negative impact of spending reductions and offering an opportunity to obtain funding to support improved service delivery outcomes and savings over the long term.
Specific focus is placed on providing evidence of immutable spending pressures, likely development outcomes and fiscal impacts of Votes’ strategy to restructure expenditures to achieve long-term savings.
Departments are to be provided an opportunity to submit proposals which will be assessed as part of the Provincial Government’s Medium Term Expenditure Committee (MTEC) process 2.
The Department of the Premier has an initiative to provide tools for managing compensation reductions.
Going forward, Mr Savage concluded that
-The outcome of the (national) wage agreement could impact the fiscal framework
-National engagements on compensation are ongoing
-These mean hard discussions on compensation, way of work and service delivery models
-Policy priorities would be identified as a matter of urgency
-The funding for the Fiscal Transition Support Facility would be appropriated as part of 2021 Main Budget
-Pilot studies are being conducted on a zero-based budgeting process
-There is a continuing review of contractual commitments and risks
-The budget process continues, with the Provincial Government’s Medium Term Expenditure Committee meeting in January 2021 and tabling of 2021 Budget scheduled for 4 March 2021.
Mr R Mackenzie (DA) said he felt “butterflies in his stomach” every time he saw the R86 million reduction to the conditional grant for the province, knowing that it would be going to SAA (South African Airways) and would yield no return on investment. He stated that going forward they needed to explore new ways of financing and wanted to know as to how they would ensure that it remained within the required framework. With the second wave [of the Covid-19 virus] coming according to him, he wanted to know if the reserves were going to be sufficient to deal with that, given that the Western Cape was currently still in a lockdown.
Mr G Bosman (DA) sought more information on why, and for what, money was allocated to Kannaland Municipality.
Mr P Marais (FF+) stated that he was concerned as to the reserves being utilized in the wake of the reduction budget over the medium-term and enquired whether that would become a regular situation. He asked whether the reserves were going to be devoured given the chances of a second lockdown which could prove disastrous and if so, the Municipalities would be in serious trouble as the Western Cape had only received 6% of the allocation to Municipalities in the country. Lastly, he asked if there was any sort of plan in place, in the event the country moved into a further lockdown once again.
Mr L Mvimbi (ANC) asked whether there had been a reduction in the budget for small business from R14 million to R12 million.
Mr David Maynier, MEC: Finance and Economic Opportunities, replied that it was important for the Committee to bear in mind that their first response would be to draw on their existing resources. Only once they have exhausted their resources would they consider dipping into the provincial reserves. The Committee would be aware that Premier Alan Winde had announced that he would be convening a meeting on Friday [27 November] to design the provincial response for the resurgence of Covid-19. Further announcements should follow soon regarding that. The R12 million [slide 29] had been an additional amount added to the already R27 million budget. They managed to mobilise R39 million in the current financial year to support small businesses and would have liked to be able to mobilise more.
Mr Savage responded that they had saved the reserves for a rainy day and currently, it was not only raining but it was pouring. While the reserves were available for usage, the need to build up the reserves once again was keenly part of their recovery strategy and would be something they focused on.
While being in relatively unchartered territories, the one thing which could be agreed on (from consultation with the relevant authorities and stakeholders) was that they were adopting a strong evidence-led data-rich approach as to how they would be managing the pandemic in the province. From consultations, they were relatively certain that their resources were sufficient enough to deal with a second wave and lockdown however it did not mean that they wished for it to occur or have to make use of it.
In terms of legal authority, the jurisdiction lied with national government. He stated that he was very passionate about building easy-to-operate supply chain management systems which would allow small businesses to become suppliers to the provincial government. An interesting fact of the procurement disclosure report was that a lot of small businesses were looking at the prices obtained through their procurement; which was increasing the level of competition and participation.
The documentation which was made available had detailed discussions on the infrastructure in the medium-term budget policy statement and could be found on pages 39-43.
Mr Steven Kenyon, Chief Director: Local Government Public Finance, responded that many of the allocations had been provided in detailed in the Gazette which was being published that day. The Department was providing funding to ensure that municipalities could complete projects which would have significant revenue benefits in future.
Mr C Dugmore (ANC) asked for a more concise summary of what both the equitable shares and conditional grants looked like, including the previous transfers from National Treasury. Posing the question to Mr Maynier, he wanted to know whether or not the Premier had made a mistake in his announcement in the House after the President had made the speech that there would be a R10 billion reduction over the period of the MTEF, as there seemed to be no reductions of any sort occurring. With 20% of the Western Cape Provincial Government’s Reserves going towards the Fiscal Transition Support Facility, he sought an indication from Mr Maynier as to how deep the reserves currently ran. With the MEC mentioning that R1.7 billion being an indicative of approximately 20%, he wanted to know if he was correct in assuming that there was only around R10 billion left in the Provincial Reserves. Lastly, in regard to the South African economic construction recovery plans, he sought confirmation as to whether he was correct in assuming that currently the Provincial Plan would only be ready in February 2021 and what the process comprised of.
Mr B Herron (GOOD) asked what Policy Based Funding was (mentioned on slide 27) and what the, source of funding was. Similarly, he sought clarity as to the what the Provincial Revenue Fund (PRF) Financing on slide 42 meant, as well as an explanation of slide 36. He asked what had led to the reduction in Provincial Grants and Transfers. Lastly, with reference to slide 32, he asked for comparative explanation between the R875 million and the R814 million which had been reflected earlier in the presentation (slide 27).
Mr Marais wanted to know what exactly the Department had learnt as a result of Covid-19 when dealing with the budget. With Members working from home, surely there had to have been money saved with regard to the utilities and resources used by Members such as tea and coffee, electricity, transport etc. He wanted to know if it would not be more reasonable to conduct more meetings virtually instead of reverting back to the old ways – it seemed that the virtual online methods were more cost effective.
The Chairperson, with reference to various Conditional Grants, wanted to know if it were possible to spend the money and then have the invoice sent to the National Government, because a total of R86 million cut from the Conditional Grants would essentially be going to South African Airways. Minister Pravin Gordhan who currently served as the Minster for Public Enterprises should be brought before the Committee to explain how the Western Cape’s R86 million cut was justified and would be used to keep an airline open which the country did not need.
The Premier had previously indicated the Western Cape wanted a seat at the Labour negotiation table. The chairperson wanted to know whether the Western Cape had that seat or whether they had to start their own discussions with Labour. Using the phrase: “If Mohammed couldn’t go to the mountain, they needed to bring the mountain to Mohammed”.
MEC Maynier responded that the leader of the opposition (Mr Dugmore) may have misunderstood what the Premier had said in his speech. At the end of the day there was about R25.2 billion worth of budget cuts over the Medium-Term Budget Plan for the Western Cape.
The difference between the recovery plan of national government and that of provincial government was that Provincial Government had already been implementing the Recovery Plan along with their current responses. He clarified that their support to small businesses had already been allocated R27 million along with the additional R12 million which equated to a total of R39 million – all with the aim of supporting small businesses in their province and saving jobs. He explained that there was a big question regarding the credibility of the Fiscal Framework itself, which he believed was the reason as to why the rating agencies had switched to a rapid fire mode the previous Friday.
Regarding South African Airways, he stated that provincial government, including Members of the Committee, had an obligation to question where resources were being allocated. He believed that it needed to be taken up robustly and undoubtedly agreed with the Chairperson’s recommendation that the National Minister of Public Enterprises be called to defend those allocations and budget cuts. What was more distressing about the situation was that nobody believed for a second that the almost R10.5 billion bailout to the Department of Public Enterprises for South African Airways would be the last one.
Regarding the Labour question, he stated that the Premier had written to the President regarding a seat at the table (for provincial representatives), however, he could not answer as to the progress of that. He encouraged Members to put the question to the Premier for a definitive answer.
Mr Savage said firstly that he would like to apologise for the descent into acronyms which had been used in the presentation. The Policy-Based Funding referred to the critical priorities of job safety and the overall well-being of the province. They have had to search in detail to make sure that they had enough resources available to support the initial phase of pursuing those priorities within the current financial year and as such took a fund-based approach rather than merely allowing departments to simply reprioritise. He said they needed to consolidate that funding into a virtual fund which they called a Policy-Based Funding Facility. Thereafter, they would distribute it again. The ‘PRF’ referred to the Provincial Revenue Fund. Regarding slide 36, he clarified that the 20% was the target figure and not the actual allocations which would be determined by March time 2021 when the applications for funding would have been submitted, and appraised in the process of authorisation.
Regarding the question raised by the Chairperson, he explained that whilst he understood the motivation for the suggestion he cautioned against it as it would result in authorised expenditure and as such wouldn’t recommend that as a specific course of action. Regarding a seat at the negotiation table for labour, he stated that the Western Cape played an active role and interest in maintaining a positive and constructive working relationship with the labour unions. However, he clarified that in a management function, when it came to the issue of the wage negotiations, they were always curiously left out. It was a big problem for them that there was not a fully functional framework for labour relations, given the value they placed on the relationships with their staff.
Ms Analiese Pick, Acting Chief Director: Public Finance, Western Cape Provincial Treasury, responded that slide 27 indicated and explained how the adjustments budget was financed along with the sources of revenue. Those included: provincial equitable share from National Government; additional grant allocations from national government, the Provincial Revenue Fund; and their own revenue collection from the Department.
With reference to slide 27, she explained that the R864 million was an increase in the provincial equitable share from National Government which was made up of the Presidential Employment Initiative for Education of R814 million, along with R51 million for food relief for the Department of Social Development. All-in-all, that was an increase therefore in their equitable share.
Slide 32 indicated all the allocations which were made in the adjustments budget. The positives had been divided into the positive allocation and then divided further into the Western Cape’s Recovery Plan Response in terms of job safety and the well-being of the province. It also included the negative allocations which dealt with the reductions on compensation of employees; reductions in terms of their own revenue collection; and the conditional grant loans.
When looking at the total allocations of classes and sources for the jobs figure, it was made up of the following:
-R1.1 billion which came from National and was made up of National Financing
-On the R875 million, the National number (included) R814 million for the Presidential Employment Initiative for Education and a further R61 million was allocated for Maintenance Grants, which ultimately made up the R875 million.
Mr Kenyon responded that slide 36 referred to the decrease in the Provincial Grants Transfers which reflected the Western Cape’s policy position in the three-phase budget approach. The table on slide 36 showed that Municipalities were recognizing sources of funding for their infrastructure budgets and that of their infrastructure spending which had been achieved in the previous year; as such, the decrease referred to the change between those.
The Draft Committee Minutes for 25 November 2020 were adopted as is.
The Chairperson thanked the Committee Members for their presence and their vigorous interaction regarding the matters dealt with in the meeting. The Chairperson thanked the delegation for their presentation and responses.
The meeting was adjourned.
Baartman, Ms DM
Marais, Mr PJ
Allen, Mr R
America, Mr D
Bosman, Mr G
Botha, Ms L
Brinkhuis, Mr G
Dugmore, Mr C
Herron, Mr BN
Lekker, Ms P
Mackenzie, Mr R
Mitchell, Mr D
Mvimbi, Mr LL
Philander, Ms W
Smith, Mr D
Wenger, Ms MM
Windvogel, Ms R
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