Provincial Economic Review and Outlook 2021; Western Cape 2021/22 Quarter 1 performance

Meeting report

2021 Provincial Economic Review and Outlook (PERO)
Mr David Savage, Head of Department: Western Cape Treasury, in his introductory remarks stated that in these extraordinary times we need to look broadly at the evidence and data. The Provincial Treasury has made great efforts in looking at new data and evidence at sub-national level that helps us to understand the dynamics of the Western Cape. It is being innovative in how it presents its Economic Reviews this year. Ihe past it used to present both the Provincial Economic Review and Outlook (PERO) and Municipal Economic Review and Outlook (MERO) together. This year the publication dates have been split. The MERO would be presented in November after local government elections.

Dr Roy Havemann, Deputy Director General: Fiscal and Economic Services: Provinical Treasury, said the Western Cape is ready to reopen and recover. Through an extraordinary collaboration between public and private sector, nearly 36% of the Western Cape population had been vaccinated. The provincial economy is slowly returning to normal. The extent of recovery is uncertain fuelled by the pandemic and dependence on the openness of the economy, the speed and extent of vaccination coverage and underlying structural challenges present before the pandemic. The constrained fiscal environment and growing population would limit the extent to which government could contribute to recovery and deliver services. Unemployment remains a challenge and a more flexible labour market could improve employment growth. Crime rates have surged again as the economy opened up.

Covid-19 has had a profound effect on the mental health in the entire country. Depression symptoms have been prevalent amongst male workers. It was at 72% among those between the ages of 18 and 35. As the pandemic progressed, workers had higher odds of experiencing depressive. Childcare responsibility was associated with poor mental outcomes for caregivers.

Dr Havemann stated population growth has an impact on service delivery. The continuing inward migration would place increased pressure on provincial health, education and public infrastructure. In the context of constrained budget growth, the Western Cape government would need innovative policies involving increased use of information technology and improved spatial planning to make it more efficient and effective. The economic contraction also impacted the government sector with budget and service delivery implications at both municipal and provincial level. The implementation of the vaccine strategy is critical for enhancing economic growth.

Lastly, while the national economy has shown strong recovery signs since the third quarter of 2020, unemployment has continued to rise to 34.4% in the second quarter of 2021. Informal employment relatively absorbs more African and coloured populations, men, youth and less educated individuals. Less stringent labour legislation would not only benefit this group but would incentivise companies to take more risks and encourage fixed investments. The 2020 recession resulted in increased poverty and inequality in the Western Cape and this requires an integrated and transversal approach.

(Tables and graphs illustrated Western Cape life expectancy, number of crimes between 2017/18 and 2021/22, natural and non-natural causes of death, inequality, migration, informal sector employment recovery, employment growth, Human Development Index and Gini Index.)

Western Cape 2021/22 Quarter 1 Performance
Ms Analiese Pick, Chief Director: Public Finance: Provincial Treasury, reported that Quarter 1 of 2021/22 has seen spending of 22.2% of the main budget (R16.092bn of R72.614bn). Based on Quarter 1 trends, a net over-spending at year-end of R52.160m is projected. Over-expenditure of R54.5m in the Department of Health is due to over-expenditure that would be in Programme 2: District Health Services (+R99.711m) because of the “third wave”, anticipated “fourth wave” and vaccination programme. Projections were being updated dynamically due to COVID-19 uncertainties. The Department of Community Safety underspent by R2.35m due to delays in filling critical vacant posts. The main budget (R72.4bn) has been adjusted upward to R72.6bn to include approved national conditional grant funding of R216.7m. Rollover approvals have been included in the adjustments as well.

Ms Pick identified risks that have not been included in provincial expenditure as of 30 June 2021.
The estimated additional cost for the 2021 wage agreement for the province is R1.455bn.
Drought has been classified as a national disaster on 20 July 2021 affecting Central Karoo District, parts of Garden Route and northern parts of West Coast District (Matzikama region). The increasing trend of learner numbers impacts on number of teachers and infrastructure requirements. The impact and costing of COVID‑19 expenditure was noted. A funding request for the vaccination programme has been submitted to National Treasury.

Public entities of the province recorded a spending of 23.5% (R183.9m). A net underspend of R7.2m is projected because the Western Cape Nature Conservation Board (CapeNature) has a net underspend of R6.4m, mainly for Compensation of Employees and Payments for Capital Assets. Infrastructure spending is standing at 16.6% which is R1.5bn of the R9.1bn budget.

There are 589 infrastructure projects in the project pipeline as at 30 June 2021: 49.6% are in preparation phase while 32.9% are in construction, practical completion, or final completion. 102 packaged programmes and non-infrastructure items have been excluded from the analysis. Quarter 1 revenue collection of the province was R514.605m (20.5% of the main budget).

Ms Zeenat Ismail, Chief Director for Strategic Management Information: Provincial Treasury, briefed the committee on provincial non-performance for Western Cape government departments and public entities. The combined public entities achieved 77% against 65 indicator targets. Only 6% of the targets were not achieved, while 17% were partially achieved.

Contractual delays with procurement of service providers; Covid-19 pandemic; budget and funding issues; Quarter 1 performance data not received timeously; and unfilled vacancies were some of the reasons cited by the public entities for not meeting targets. Some of the reasons Departments gave for unmet targets were municipalities not tabling and adopting 2021/22 budget; pressure due to Covid-19 third wave; reallocation of funding; dependency on other stakeholders; and incorrect target setting.

Key observations on Quarter 1 performance comparison with 2020/21: For departments, 392 targets were recorded in Quarter 1 for both 2020/21 and 2021/22. On aggregate, 46% of targets were achieved in Quarter 1 of 2020/21 and 75% achieved in the same quarter in 2021/22, resulting in a 29% increase in performance. COVID-19 and budget constraints were key causes for the poor performance in 2020/21. For public entities, there were 59 targets in Quarter 1 of 2020/21 and 65 targets for 2021/22. On aggregate, 49% of targets were achieved in Quarter 1 of 2020/21 and 77% in the same quarter in 2021/22, resulting in a 28% increase in performance for 2021/22. COVID-19 and budget constraints were also key causes for decreased performance in 2020/21.

Through an extraordinary collaboration between the public and private sectors, nearly 36.6% of adults in the province have been vaccinated. There were 61 Covid-19 interventions implemented during Quarter 1 by departments. Of the 61 interventions, 50 continued from 2020/21 and 11 were newly implemented during Quarter 1 (see document for details).

(Tables and graphs showed provincial expenditure, public entity expenditure, infrastructure expenditure, performance indicator targets, Covid-19 interventions, Quarter 1 2020/21 comparison)

Discussion on PERO
The Chairperson asked how the research was going to influence the Medium Term Budget Policy Statement (MTBPS). He asked if there was commitment from Provincial Treasury to support businesses that suffered during lockdown such as the liquor industry. He wanted to understand if the mental health strategy has worked for the relevant departments and if additional funding was going to be provided. Would SA be removed from the UK red list and what was the status on moving to Lockdown Level 1? How far were the taxi negotiations with Transport Minister Mbalula and Provincial Transport Minister Daylin Mitchell? He asked how the cyber attack in Cape Town's harbour on the Transnet container terminals was going to be addressed so that it does not happen again.

Mr Savage replied there is a straight line in how the budget is sequenced. PERO helps to understand the dynamics of the provincial economy and its outlook. It is the first stage in the budget making process to ensure the public policy statements are appropriate. The MTBPS is the policy budget adjustment phase for the next Medium -Term Expenditure Framework (MTEF). Between the two (PERO and MTBPS) a series of discussions happen at technical, executive and political level to look at the response to the budget votes.

On support to businesses, there are a number of programmes and schemes from the Department of Economic Development and Tourism (DEDAT) to provide support to maintain operations of struggling businesses. There have been efforts to keep price increases low across the board and reduce red tape for businesses wanting to do business with the Western Cape government.

On mental health, the National Income Dynamics Study – Coronavirus Rapid Mobile Survey (NIDS-CRAM) revealed a need to address the mental health of many South Africans, especially the frontline staff. It is not clear what the primary requirement is on additional funding, but the tailoring of programmes is important to meet immediate needs. This was a matter the executive needed to make a decision on.

Provincial Minister of Finance and Economic Opportunities, David Maynier, replied about the cyber attack stating that Transnet met an unprecedented crisis and managed to deal with it. The Department has not yet received enough information from the public entity on what happened and measures put in place to prevent the collapse of operations in the port of Cape Town. Transnet needs to strengthen its communication. The provincial government is aware of the role of the Cape Town port in the overall architecture of the Western Cape economy.

Provincial Minister Maynier stated that there is a great deal of information and misinformation on the UK red list. The UK has been concerned about the efficacy on certain vaccines and quality of vaccine certifications. He has written to the UK government to say it was unfair to keep SA on the red list. The Office of the UK Prime Minister has assured him SA would be removed from the red list by mid-October.

On moving to Level 1, there is data that provides evidence for moving to Level 1. There should consideration of the number of people that can gather. Convention centres like CTICC should be re-opened but there should be regulations in place. There is scope to look at convention centres that are vital for the tourism sector. When it comes to airlift, many airlines would be opened. The real bone of contention is the Delta Airline which has not resumed its Cape Town to Atlanta route and an adequate response has not been received yet. There is a need to revisit a new visa regime for long term tourists. The matter has been raised with the Minister of Home Affairs. South Africa needs to be competitive because Thailand has started on long term visa reforms for tourists.

Mr D America (DA) asked if there is a causal link between inward migration of people to the Western Cape and rising inequality across the districts in the province and asked if this was making the municipalities unable to render services to the communities because the inward migration represented indigent individuals and this was making a case for the equitable share in the Western Cape.

Mr Savage stated there is no link between the two because people, all over the world, migrate when they see an opportunity. The evidence is mixed from a public policy perspective. The immigration is an opportunity for the province to increase its growth potential. Migrants come on a different basis – seasonal, especially in the agriculture sector or permanent. This could be unpacked at municipal economic review level. The equitable share adjusts to population trends movement at local and provincial level. The Western Cape is a growing province and it is struggling with these movement matters but adjustments are made in the distribution formula.

Ms N Nkondlo (ANC) asked for the rationale for not releasing the PERO/MERO and why MERO would be presented after the local government elections. Then she asked for clarity on the reopening of the economy when the province was at 36% concerning vaccination and asked what this measure indicated and if it came from WHO. She wanted to find out if the province has got clear data in the growing sector like BPO and Green Economy to show the number of jobs created and unemployed youth, and asked if the there is a youth policy in the Western Cape because it co-exists only at national level. She asked if there is a strategy in the province to respond to the informal sector that is recovering faster than the formal sector. Lastly, she wanted to understand if there was a difference or a relationship that could be drawn between the Gini Coefficient Index and Human Development Index (HDI) because from 2016 the Gini Index has been closer to 1 while the HDI has been on 0.1

Mr Savage replied that the decision not to publish PERO and MERO together was not a political decision. The key is how to use evidence for planning and budgeting, and this has to happen at the right time. Municipalities and provinces have different budget and financial cycles. Not publishing them together was to avoid drowning the system with too much data and to improve the system when it comes to the budget process. MERO would be tabled around 30 November 2021 to ensure the data is up-to-date and fresh for the new executive that comes in after the local government elections. This is done to strengthen evidence based planning and budgeting. It is a technical decision that has nothing to do with politics, but would add richness to the debate. He is not qualified to answer about the opening of the economy when the vaccination rate is at 36%. It is the Department of Health that could explain the adequate level.

On jobs and youth unemployment, Mr Savage replied that PERO would provide answers and evidence. There are various programmes aimed at the youth, especially youth not in education and training. The executive would provide a determination on modifications to the measures in March 2022.

Dr Havemann replied that it is important for the SA economy to implement a series of reforms to stimulate economic growth. These could be in areas like improving electricity supply and improving the link with the rest of the world to ensure exports are supported. These are relatively short-term strategies. Employment in the agriculture and tourism sector makes you realise that without exports, life becomes difficult for the province.

Dr Havemann replied that there are a number of different measures of inequality: wealth, income inequality, goods and services inequality and so on. Gini looks at inequality but has constraints related to it, while the HDI has international measures. It is important to look at how developed societies deal with these matters and there is a huge range of literature on the HDI. The poverty rate has been declining in the Western Cape especially when you compare it with the rest of the country. There is another way of looking at how economic growth impacts society because people have to get out of poverty while inequality is rising at the same time. It is a complex way of understanding where you are in the economy. There is a direct link between creating jobs and poverty.

Provincial Minister Maynier replied that the data is clear on what needs to be done in the formal economy. Various programmes have been implemented and there is a need to understand constraints in the informal economy. There is scope to expand the Pick n Pay programme to other sectors like building material. Preliminary conversations with big retailers have started so as to develop the buying power in the informal economy. There is also a need to explore technology for making payments easy for township retailers.

Discussion on Quarter 1 Performance
The Chairperson asked if the R8.7bn spent on infrastructure was for projects under construction or for new projects. To what extent does Provincial Treasury investigate the underlying reason given by departments for non performance as being due to the Covid-19  pandemic?

Mr Savage explained infrastructure investment has long lead times and projects go through a cycle for implementation. There is also the asset management cycle where you look at what needs to be achieved. There is project management stage as well in the mix. The projects are in different phases. The presented figures are an estimate of the projects. Some are in the implementation phase, while others are in a continuation stage. There are multi-year projects as well. The annual PERO publication gives the status of the various projects undertaken. There are 389 identified projects in the pipeline that are in the preparation and continuation stages.

The Provincial Treasury undertakes investigations on Covid-19 expenditure, and it is quite aware of the disruption of the pandemic, especially on the Department of Health where people have to remain agile. It is not a health disaster but a national disaster. No part of public expenditure has been left unchecked. Some public entities had to adjust course and systems have been disrupted. Treasury does not take it at face value. It wants to work with departments to execute their expenditure.

Ms Nkondlo asked if one would be able to see in the PERO exactly where the projects are in the informal sector.

Mr Savage replied that the PERO budget analysis and design of assets is useful to the public and informal sector. It is a multi-faceted approach. Provincial Treasury wants to ensure resourcing of fiscal information so that policy issues can be in the public domain. He could not make any commitment in respect of PERO showing exactly where the projects are in the informal sector.

The Committee adopted reports and minutes from the Budget Committee Workshop of 21-23 July 2021.

The meeting was adjourned.