In this virtual meeting, the Committee was briefed by National Treasury on the Appropriation Bill and Special Appropriation Bill. Treasury stated that the Committee has the power to change the allocations if it feels the Executive’s decisions are not aligned to public interests. South Africa’s fiscal challenge is to balance the immediate need for support to the economy during the pandemic with ongoing efforts to close a large, pre-existing budget deficit. The 3 priorities are to reduce the deficit and stabilise debt, continue providing support to the economy and health sector and improve the composition of spending. This resulted in budget cuts across the board, mainly concentrated on programme baselines reductions and the wage bill.
Treasury pointed out the trend of underspending in departments between 2012/13 – 2019/20. It elaborated on the reductions in each department and the implications, which include difficulties in filling critical vacant posts, an inability to pay subscription fees to international organisations, a negative impact on some of Statistics South Africa’s (Stats SA) surveys, and the Funza Lushaka Bursary Programme. NT has managed to secure enough funds for the National Student Financial Aid Scheme (NSFAS) this year. However, government still needs to have a proper discussion on how students will be funded in the future and the sustainability of the fee-free higher education policy and its programmes. Treasury highlighted the adjustment of names of votes in the Appropriations Bill and the adjustments regarding public enterprises. The Land Bank, which defaulted on its debt, will receive R7 billion in recapitalisation over the medium term. NT has requested the Department of Public Enterprises (DPE) for R2.7 billion to be unearmarked from the R10.5 billion allocated for the implementation of South African Airways’ (SAA) business rescue plan. The R2.7 billion will be transferred to SAA’s subsidiaries.
Members raised concerns around the impact of the reductions on economic growth and whether the February projections still hold. Treasury explained that the framework presented in February by the Minister had assumed these reductions so it has no further impact on the estimated growth trends. It also pointed out that growth prospects seem slightly more positive than what was projected, as last year’s deficit was R160 billion instead of the estimated R300 billion. Members also raised concerns around the impact of the reductions on departmental capacity to deliver mandated goods and services. Treasury stated that it is assisting departments with spending reviews to look for areas of efficiency and cost-savings to enable them to cover operational costs. despite reductions. It has also tried to protect capital spending by implementing reductions mainly on operational spending. Treasury requested that once it has presented the financial framework, that departments be responsible for implementing it.
Members noted the implications of the reductions and raised concerns around the impact of reductions to Stats SA, the increased allocation to the contingency reserve and the state of State Owned Enterprises (SOEs).
The Chairperson welcomed everyone in attendance and noted an apology from the National Treasury Director General, Mr Dondo Mogajane.
The Committee Secretariat noted apologies from Mr A Sarupen (DA), Ms D Peters (ANC), Mr N Nkwankwa (UDM), Ms N Ntlangwini (ANC) and Ms M Dikgale (ANC), who is in another meeting and will join the Committee later. He also noted apologies from the Minister of Finance and Deputy Minister of Finance.
Briefing by National Treasury
Dr Mampho Modise, Deputy Director-General: Public Finance, NT, presented the 2021 Appropriation Bill and Special Appropriation Bill. She requested that the relationship between the Standing Committee on Appropriations (SCOA) and Select Committee on Appropriations (SECOA) be strengthened, to include SECOA in more briefings such as this one. She pointed out to Members that the Committee has the power to change the allocations if it feels the Executive’s decisions are not aligned to public interests.
The backdrop of the 2021 budget is an uncertain economic environment. South Africa’s fiscal challenge is to balance the immediate need for support to the economy during the pandemic with ongoing efforts to close a large, pre-existing budget deficit. The 3 priorities are to reduce the deficit and stabilise debt, continue providing support to the economy and health sector and improve the composition of spending. Finding R300 billion in the existing resource pool resulted in budget cuts across the board. The cuts were mainly focused on the Skills Development Levy (SDL), programme baseline reductions and the Wage Bill.
Historical spending reviews informed the reduction decisions. There has been major underspending in departments between 2012/13 – 2019/20, with Department of Cooperative Governance and Traditional Affairs (CoGTA) consistently underspending. She highlighted the reductions in each department and the implications, which mostly consists of difficulties in filling critical vacant positions. For instance, the reduction in Correctional Services will lead to a worsening of the staff to inmate ratio. Other implications include inability to pay subscription fees to international organisations and lower transfers to public entities. The Chairperson raised a concern around the implications of the reduction in allocations to Statistics South Africa (Stats SA). She stated that the allocations will affect future surveys, however; Stats SA should pilot the census programme and utilise the funding that has been allocated for this. She pointed out that NT has managed to secure enough funds for the National Student Financial Aid Scheme (NSFAS) this year. However, government still needs to have a proper discussion on how students will be funded in the future and the sustainability of the fee-free higher education policy and its programmes. Social development reductions will lead to an increase in social grants below inflation. The net reductions in budget from last year is 0.8%.
She highlighted the Land Bank (LB) funding issue, in which the LB defaulted on its debt in April 2020. The bank will receive R7 billion in recapitalisation over the medium term, for it to become stable and sustainable. She pointed out the amendments to the names of some votes in Bill and the additional allocation to the Health and Social Development votes in the Special Appropriation Bill. Lastly, she highlighted the adjustments in the Bill on the Public Enterprises vote. NT has requested the Department of Public Enterprises (DPE) for R2.7 billion to be unearmarked from the R10.5 billion allocated for the implementation of South African Airways’ (SAA) business rescue plan. The R2.7 billion will be transferred to SAA’s subsidiaries.
Mr O Mathafa (ANC) said the presentation touched on key issues plaguing the country. He noted the request to unearmark the R2.7 billion business rescue allocation in order to distribute the allocation to SAA’s subsidiaries, such as Mango. Will the earmarked amount be enough to cover what it was intended for and any additional costs airlines will incur as a result of the disruption? Alternatively, will NT return to Parliament in future to request more funding for the airlines?
Are the budget reductions across departments aligned to respective departments’ past performance, especially underspending? Has Cabinet shown signs of taking an approach to mitigate the effects of the reduction implications highlighted in the presentation? For instance, how will government ensure crime does not increase with the current resources available?
Going forward, how will NT approach the R200 billion Loan Guarantee Scheme managed by banks on behalf of government. Some sectors of society have not experienced the benefits of the scheme, especially black entrepreneurs, who were excluded by the bank regulation requirements. Has non-interest spending been achieved in the past 5 years? What measures will NT implement to assist departments improve revenue management?
Dr Modise replied that the current budget was the most difficult to compile. The biggest number that had to be found was R56 billion to be reprioritised towards funding higher education. This in addition to facing a budget reduction of R300 billion. It was not possible to exclude certain departments in finding this amount. Treasury has tried to protect social grants and some service delivery programmes like in water and sanitation and human settlements. Government has also tried to protect capital spending in the process of deciding on the budget cuts. The magnitude of the reductions made it impossible for there to be no implications. Departments had to review APP targets and see what can be done.
Dr Mark Blecher, Chief Director: Health and Social Development, National Treasury, replied that the reductions were also informed by spending reviews that look out for potential areas of efficiency and savings.
Dr Modise added that NT is working with the Government Technical Advisory Centre (GTAC), which has developed spending review tools that look at the importance and relevance of programmes, whether the programmes yielded desired outputs and so on. This will be done through the different departments and SOEs. Treasury will assist to ensure there is accountability. She proposed that the departments be responsible for implementing the framework after Treasury has presented the financial framework to Parliament.
Dr Rendani Randela, Chief Director: Finance, National Treasury, said departments are coming up with several initiatives to cope with the budget cuts. For instance, the South African Police Services (SAPS) is decentralising its structure from head office as one of its initiatives. There is also a dispute resolution initiative that is addressing the issue of less wardens to prisoners ratio.
Mr Ravesh Rajlal, Chief Director: Sector Oversight, National Treasury, explained that R2.7 billion has been reallocated to SAA subsidiaries. R818 million out of the R2.7 billion is for Mango. When the amounts for the subsidiaries were calculated, there was an understanding that the amounts may change due to restructuring plans. If more funding is required, it will have to come from the existing R2.7 billion.
Dr Modise said the loan guarantee scheme has been extended for another 3 months. The media report on this will be circulated to Members. From this experience, Treasury has learned how to collaborate with banks and work around the risks associated with the businesses concerned. It will draw on this experience when structuring programmes in the future.
Mr Z Mlenzana (ANC) asked if the Appropriation Bills, along with the budget reductions, seek to achieve economic growth and what pointers are there to indicate this? Do the February projections still hold? How is NT monitoring departments to ensure growth targets are being followed? Will the reductions to the Department of Water and Sanitation worsen the debt crises across South Africa’s water boards?
Dr Modise replied that the Fiscal Framework that was presented to Parliament shows how the budget cut implications impact growth. The growth estimates given in February assume the presented reductions have been implemented and so the reductions do not affect the growth projections given by the Minister. The Operation Vulindlela unit, led by Dr Duncan Pieterse and comprised of Treasury staff and the Presidency, can brief the Committee on how the unit works and how it plans to assist departments achieve structural reforms for economic growth. The current aim is how to sustain public finances and stabilise debt, in order to reduce the cost of borrowing. The money from the reduced cost of borrowing can then be reprioritised to more productive areas.
Dr Blecher said it would be useful to get a broader presentation on the economic growth prospects from Dr Pieterse’s Team and the SARB. The growth prospects seem slightly more positive; as last year’s actual deficit was R160 billion. This is significantly lower than the estimated shortfall of R300 billion.
Dr Victor Ngobeni, Director: Water and Sanitation and CoGTA, National Treasury, said there is no correlation between the budget cuts to the Water and Sanitation vote and the transfers to water boards. The cuts were implemented on goods and services and COE. The debt issue is more of a revenue issue than a spending one, and is dealt with differently under the multidisciplinary revenue committee. He indicated that the state of water boards has gotten worse during the pandemic. NT is helping the water boards determine its credit control policies, in order to collect what is owed to the boards. It also reviewing the pricing.
Mr X Qayiso (ANC) asked if NT thinks the National Health Insurance (NHI) will be implemented any time soon, given the implications of the budget reductions?
Regarding the redistribution of farmland announced by the Department of Agriculture, Rural Development and Land Reform (DRDLR), how will Treasury assist small-scale farmers? How will NT ensure small emerging farmers are not side-lined by collateral requirements?
The SCOA and SECOA have noticed that NT and the Department of Planning, Monitoring and Evaluation (DPME) enable some departments to report high levels of achievement to Parliament, whilst underperforming. How is NT and the rest of government dealing with the issue of high target scores in department Annual Performance Plans (APP) yet a failure to deliver on key mandates? What policy instruments are being implemented to ensure better quality spending of public funds, across departments and State-Owned Enterprises (SOEs)?
Dr Blecher said the NHI Bill has been before Parliament for 18 months. The passing of the bill is essential to moving forward with its implementation. Even though there was a reallocation from NHI, this is because that area has a history of underspending.
Ms Lebogang Madiba, Chief Director: Public Finance, National Treasury, replied that the DRDLR, is working with CoGTA and the Department of Justice & Constitutional Development (DOJ&CD) to start provincial consultations with small-scale farmers on the issue. There is a lack of proper documentation for tenure rights amongst small-scale farmers. The departments are looking into amending the Land Tenure Act to ensure the rights of small farmers are protected. Also to ensure small farmers can approach banks, who require collateral.
Ms Julia de Bruyn, Chief Director: Public Finance, National Treasury, explained that the APP indicators are scrutinised by the DPME. The DPME is responsible for assessing whether the indicators are aligned with Department mandates. Treasury assess whether there are enough finances to cover what is in the indicators. The Committee should select departments of concern and ask the DPME to brief the committee on the questions it has raised, such as those departments who have failed to deliver services.
Ms Dikgale raised a concern with the silence on the Department of Defence (DoD) in the Special Appropriations Bill and requested that NT consider the DoD as well. Regarding the difficulty of filling posts across departments, what is the source of this issue?
Dr Randela replied that departments under the security cluster have a unique recruitment process. The process can include 6 months of training, and while this happens, some employees resign or retire. There is also uncertainty around recruiting new employees due to the wage dispute.
The Chairperson said it is important for NT to continuously reflect on growth initiatives. He requested Treasury to keep track of the President’s ERRP and report on its progress thus far.
The South African Statistics Council announced that it will withdraw its support for official statistics to Statistics South Africa (Stats SA). The reason is that it does not want to endorse unreliable data, as the funding allocations is not enough to ensure reliable data is obtained. Is NT not worried about the possibility of having unreliable data? Is the reduction a wise step, given that the data is used to formulate strategies and inform policy decisions? For instance, how will government ensure that allocations to Basic Education and Early Childhood Development (ECD) keep up with rising birth rates and public school enrolments?
The contingency reserve is being increased from R5 billion to R11 billion, whilst there are reductions across departments. Is this increase not drastic? The reductions to the Department of International Relations and Cooperation (DIRCO) may lead to an inability to pay subscriptions. What are the implications of this and will it lead to a termination of South Africa’s membership? He requested an account for the R3 billion that was allocated to Land Bank last time. Does NT think the recapitalisation of Eskom producing the desired results?
Dr Modise said Treasury is aware of the consequences of the budget cut to Stats SA. She acknowledged that some of the surveys would be affected, however, Treasury conducted a spending review exercise with Stats SA to enable more efficient spending. Findings reveal that the structural costs of Stats SA differ across provinces and this needs to be standardised to reduce costs and also optimise on loans. Vehicle costs are also inefficient and Treasury has asked Stats SA to look into this and other avenues of the budget to become more efficient. She highlighted that Stats SA is showing signs of underspending. R800 million was allocated towards the pilot census programme last year, and only half has been spent so far. Before discussing insufficient funding, Stats SA needs to complete the pilot programme and show that all the allocated funding was used.
She replied that the contingency reserve increase is a safety measure to ensure the country is able to respond to the pandemic. The country should be able to deal with a possible third or fourth wave of COVID-19, and have enough money for vaccines and personal protective equipment (PPE). An additional R7 billion is being reserved for COVID response. The remaining R5 billion is a reserve for natural disasters, such as flooding or droughts. During the Medium Term Budget Policy Statements (MTBPS), government can then review how much of the contingency was used and reallocate according to its spending priorities.
She agreed that the reduction to DIRCO would lead to an inability to pay for subscriptions. Dr Modise said that an inability to pay for subscriptions to institutions like the World Bank, New Development Bank (NDB) and International Monetary Fund (IMF), leads to a decrease in shareholding. Non-payment to other multilateral subscriptions can lead to a loss of membership. However, the department can negotiate with the multilaterals and explain its funding condition. For instance, departments can negotiate for a new payment agreement to pay for membership over 10 years instead of 5. Government also needs to review the necessity of its subscriptions, to see if it is receiving any value-for-money.
Ms de Bruyn explained that the reduction to National Department of Basic Education is on goods and services, COE and the Fundza Lushaka bursary programme – which is funding 400 less students than the previous year.
Mr Rajlal said that R105 billion has been dispersed to Eskom in the past 2 years. The Special Appropriations provided that these funds be used solely for debt and interest payments. Eskom does not generate enough cash to service its debt, and had it been managed correctly, it would not be in this position. The key issue is to ensure Eskom is self-sufficient and financially viable.
Ms Unathi Ngwenya, Chief Director: Governance and Financial Analysis, National Treasury, replied that the R3 billion to the Land Bank was used towards servicing debt interest and some of the capital debt amount. The LB has been servicing its debt and paid back R4 billion in February 2021, reducing the debt from R40 billion to R36 billion. There has been slow progress in renegotiating with lenders. No agreement has been reached yet, with the LB’s request to repay 2 instalments annually over 5 years using resources from loan book asset collections.
Mr Mlenzana requested Treasury to reassure the Committee that the appropriation bill and its reductions will take the country towards economic recovery and growth. What are the implications of cuts to the South African National Roads Agency SOC Ltd (SANRAL) on economic growth?
Dr Modise replied that debt servicing costs at R916 billion is higher than the cost of health, social development, security and the contingency reserve. The sooner the debt servicing costs are reduced; the more government will have some resources to spend on its priorities. To ensure the debt and financial situation stabilizes, the reductions were mainly on operational spending in an attempt to protect capital spending for the long-run. Also, in considering the implications on economic growth, Treasury focused on balancing tax-revenue and expenditure, to avoid increasing the tax burden in a weak economic environment.
Mr Qayiso asked how Treasury is planning to mitigate against the risks highlighted, especially when it comes to SOEs. What are departments doing to ensure oversight exercises over SOEs are effective? How far is the Public Procurement Bill process? How is NT dealing with the issue of fronting?
Dr Modise said the Public Procurement Bill is being re-drafted after it received over 4000 comments in December 2020. After the proposed changes have been incorporated, the Bill will be presented to Parliament.
The Chairperson asked when the permanent Chief Procurement Officer will be appointed. Is it possible to allocate some of the money to the Department of Health (DOH) for vaccines instead of contingency reserve? When will SAA start flying again? What value is derived from the business rescue plan?
Dr Modise explained that the way funds are rolled over can be problematic. Non-interest expenditure for next year is R1.56 trillion, which will be the baseline for department allocations. When departments underspend, the underspending amount automatically reduces the budget deficit. If funds are rolled over, the funds have to come from somewhere within the framework that has already been approved, whether it is from the contingency reserve or other votes. In order for there to be an allocation, there needs to be costing. The provisional allocation is based on the DOH’s submission of costing.
Mr Rajlal replied that Treasury is frustrated with SOEs and executive authorities. Due to a lack of implementation of various turnover plans with multiple management changes, the SOEs turn to the fiscus for bailouts. There needs to be implementation of the turnover plans. In the last 5 years, R219 billion has gone towards bailouts. SAA’s recapitalisation position has been R50 billion since 2008, and the value from this contribution has not been seen. Treasury cannot give an answer at the moment on when SAA will begin flying again. He added that he will engage on this issue with DPE and report back to the Committee.
Adoption of Committee Draft Programme
The Chairperson proposed the adoption of the draft programme for Term 2.
Mr Mlenzana moved for the adoption of the programme.
Mr Mathafa seconded the motion.
The programme was adopted.
Adoption of Meeting minutes
The Chairperson proposed the adoption of the minutes of 12 March 2021.
Mr Mlenzana corrected the spelling error in the South African Institute for Chartered Accountants (SAICA) paragraph. He moved for the adoption of the minutes with the proposed amendment.
Mr Qayiso seconded the motion.
The meeting minutes, with the amendments, were adopted.
The Chairperson proposed the adoption of the minutes of 16 March 2021.
Mr Mlenzana moved for the adoption of the minutes.
Mr Mathafa seconded the motion.
The meeting minutes were adopted.
The Committee Secretariat announced that SAICA would like to know if it can meet with the Committee this month.
The Chairperson said the Committee can decide in the next meeting. He thanked everyone in attendance.
The meeting was adjourned.
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