Briefing by National Treasury on 2021 Division of Revenue Amendment Bill & Adjustments Appropriation Bill, 2021/22 Second Quarter Spending Outcomes, Public Entities Spending and update on SOCs

Meeting report

The Chairperson welcomed Members to the meeting. Following the presentation of the Midterm Budget Policy Statement (MTBPS) by the Minister of Finance the previous week, the meeting was for the Committee to interact with National Treasury (NT). Treasury provide a briefing on the Division of Revenue Amendment Bill and the Adjustment Appropriation Bill. This would be followed by the Second Quarter Expenditure Report, Quarterly Expenditure Reporting for Entities and an update on State-Owned Companies (SOCs).

Division of Revenue Amendment Bill

Ms Malijeng Ngqaleni, Deputy Director General: International Relations, National Treasury, provided an overview of the presentation which covered the 2021 Division of Revenue Amendment Bill – changes: to provincial allocations, to local government allocations, gazetted conditional grant frameworks and allocations; as well as the 2022 Division of Revenue in the MTBPS. She handed over to her team to present thereafter.

Additions to provincial allocations for 2021/22

R14.7 billion was added to the provincial allocations- to assist provinces to implement the wage agreement of the Public Service Co-ordinating Bargaining Council. A Provincial allocation of R11 billion set aside for the Presidential Youth Employment Intervention to continue government’s response to address impact of Covid-19 on unemployment as well.

Other changes to provincial allocations

Budget facility for infrastructure

• R150 million reduced from National Health Insurance Indirect Grant (NHIIG) for Limpopo Academic Hospital due to delays experienced in the project.
• R10 million reduced from health facility revitalisation grant for Western Cape for Klipfontein Hospital due to delays in the appointment of professional service providers for building design.

Rollovers, reprioritisations, and conversion of grants

• R210 million rolled over for schools infrastructure backlogs grant for the completion of projects as part of the Sanitation Appropriate for Education (SAFE) initiative for schools.
• R97 million reprioritised from the Schools Infrastructure Backlog Grant (SIBG) to the national department to fund shortfall on the workbook project.
• R234 million reprioritised from various components of NHIIG to the human resources and training grant to fund shortfall of the placement of medical interns.

Changes to gazette allocations

• Allocations for the Expanded Public Works Programme Integrated Grant that were gazetted for two separate sector departments in the Northern Cape are being combined into one allocation.
• The Department of Public Works and Infrastructure (DPWI) requested that allocations be combined in line with Proclamation 16 of 2020 which gives effect to merger of Department of Agriculture, Land Reform and Rural Development and Department of Environment and Nature Conservation into Department of Agriculture, Environmental Affairs, Rural Development and Land Reform.

Changes to Local Government Grant Allocations

Budget Facility for Infrastructure

• Reduction of R1.3 billion in Public Transport Network Grant (PTNG) to correct over-allocation for City of Cape Town’s MyCiTi public transport network
• Addition of R81.3 million in the Regional Bulk Infrastructure Grant to fund potable water security and remedial works project in George Municipality

Rollover in Regional Bulk Infrastructure Grant (RBIG)

• R582 million rolled over in the indirect RBIG for operational payments for the Vaal River Pollution Remediation Project in Emfuleni Municipality.

Changes to the structure of local government conditional grants

An indirect component of Municipality Infrastructure Grant (MIG) was created.

• Envisaged to improve efficiency in grant expenditure to develop more and better-quality infrastructure
• Conversions will be done in-year
• Criteria determined by the Department of Cooperative Governance(DCoG) include indicators for expenditure and reliability of infrastructure.

Adjustment Appropriation Bill

Dr Mampho Modise, Deputy Director General: Public Finance, National Treasury, said it was the first time that the Committee would hear the Appropriation Bill together with the Division of Revenue Bill which would speed up consideration compared to previous years. This was appreciated by Treasury as well as the Committee’s consideration to allow the postponement of the Quarter Two Performance Report due to NT being busy with the Budget. She handed over to Ms Nompumelelo Radebe, National Treasury Official, to present.

Unforeseeable and unavoidable expenditure

Vote 5 of Home Affairs Electoral Commission of South Africa for procurement of personal protective equipment (PPE).

Vote 40 of Transport R62.6 million by South African National Roads Agency- R50.5 million for toll revenue loss and R12.1 million for property damage.

Rollovers

Vote 1 on Presidency – R2.96 million for implementation of action plans to address gender-based violence, and R2.243 million for compensation of employees.

Vote 14 Statistics South Africa- Census 2021 pilot project – R344.649 million to purchase tablet computers, R200 000 for leave gratuity payments, R54.68 million for external computer advisors, advertising, communication, and minor assets, and R13.431 million to appoint contract staff.

Vote 41 Water and Sanitation R582.2 million for operational payments for the Vaal River Pollution Remediation Project.

Declared Unspent funds

Vote 8, National Treasury: R250 million for transfers and subsidies to South African Secret Service.

Vote 10, Public Enterprises R17 million for Compensation of Employees.

Vote 26, Military Veterans R50 million unspent for Military Veterans’ benefits.

Virements

The various virements to be approved by the Legislature were outlined.

The Chairperson requested that Ms Radebe explain what a virement was for the public’s information.

Ms Radebe explained that a virement was where a department moved funds from one department to another programme or from one economic classification to another but there were limitations as per the relevant legislation. She further detailed who could approve virements.

Discussion

Mr O Mathafa (ANC) thanked NT for the presentation and their consistency in providing updates to the Committee on financial developments and expenditure. The issue of military veterans had been in the public domain for some time. Slide 22 showed R15 million projected underspending on Military Veterans' benefits. What did the allocation include? Could it be the source of military veterans’ unhappiness? It would be a problem to underspend, yet those who were to benefit were complaining. Were there any measures that NT put in place to assist departments and municipalities to spend, particularly relating to roads, health, and education?

On the City of Tshwane, the conditions of roads were not impressive, yet money not spent, and in some cases returned to NT. Was there anything that NT could do in capacity building if there was lack of skills in those levels? Under the Adjustments Appropriation Bill, there were declared unspent funds of R1.9 billion on the PTNG. This was a concern because public transport was one of the key economic drivers. What was the issue with this grant and why was it not being spent? What measures were being put in place to correct the situation? There was a correction for an over-allocation for the same grant in Cape Town. If that was the case, how did it happen? When grants were allocated, there would have been business plans, or a processes indicating how the grants would be allocated. How did such an over-allocation happen, and what was done to avoid this in future?

On SAPO, the Member had raised a question in a meeting in previous months on why businesses transporting goods and services were making profits during the pandemic, yet SAPO was still showing a loss. Would the restructuring and repurposing of SAPO make it fit for purpose and modernised so that it would compete with the private sector? It was easier to send letters and parcels using private entities than with the Post Office. The restructuring had to consider ways of modernising it, so that it could be attractive to people and easy to use.

The payment of SMMEs within 30 days was a commitment made by the government. Not paying suppliers on time was currently a problem, but the matter had been continuous. What was the status, and NT’s work to eradicate this?

There was R9 billion drawn down on drawdowns on the contingency reserve. On the windfall resulting from the commodity price spike, how much of this revenue would have been taken into the contingency reserve, and how much was currently in the contingency reserve? The health of the fund was important in when assisting business rebuild and entities like South African Special Risk Insurance Association (SASRIA) to meet their claims obligations.

Mr Z Mlenzana (ANC) welcomed the presentation. He asked about the District Development Model (DDM). NT said there was a thinking for the Department of Cooperative Governance and Traditional Affairs to repurpose how the DDM functions so that there should be funding in place. What was it in the DDM that demanded funding? The DDM was about the coordination of the three spheres of government and there would not be need for specific allocation. NT indicated that it would just assist in the realignment and refocusing of funding that was already there. Could this be clarified? Was NT not considering shifting some resources from provincial to local as it was clear that local government was closest to the people, and at the core of service delivery? Why not pump funds to where the people are and expect service delivery the most? The Member was mindful of the concept of the DDM was not yet as fine-tuned as one would expect thus the question of who drove the DDM may still be the subject of debate.

The Eskom situation was worrisome. He was worried when he went through the notes of the Committee’s meetings with Eskom in September 2019. The said meeting received the internal auditor’s report of Eskom, and the topic was restructuring. To date, restructuring was still being discussed. How would the process of unbundling Eskom assist the balance sheet so that it reduces its debt and ensures a reliable and sustainable supply of electricity?

Mr Mathafa asked about Denel and State-Owned Entities (SOEs) in general. The Ministry of Finance took a stance that from now on, there would be a relationship of “tough love” with SOEs. But tough love required some long-term existence between the two parties. Denel staff raised issues of non-payment of salaries, and skills that were leaving because of uncertainty surrounding the financial stand of the entity. While the Committee supports that it cannot be business as usual to disburse bailouts for entities that are unable to turn around, what could be done to ensure the protection of the livelihoods of those employees within the SOEs? How could the skills generated in the entities be preserved? It was understandable that a professional would leave and look for greener pastures if there was uncertainty about whether they would receive their salaries or not. What safety net would be put in place?

The Chairperson thanked the NT for the presentations. While Members would raise many questions that should be directed at the Departments, the Committee hoped that the NT would be able to raise these on behalf of Members as it engaged with the Departments.

Mr X Qayiso (ANC) said the process at hand highlighted issues within SOEs. On SAPO, was Treasury intending to intervene? There were long queues in Post Offices in townships, where people queued for services like the R350 grant. However, the Post Office seemed overwhelmed by financial challenges, which needed the attention of the state. Could Treasury intervene in any way? 

The Chairperson asked if departments, provinces, and local government understood the impact of not spending money. For instance, the R1.3 billion MyCiTi reduction. The allocated money was supposed to improve infrastructure and provide service delivery by using the infrastructure to jumpstart the economy, as well as be an opportunity cost for jobs.

It must not be easy to just reallocate the money whilst unemployment in the country was high. There are many departments where such was going on. One of the issues under debate the previous day was the inability of the DPWI to use the money for EPWP, and the implications of not doing this. Was there sharing with other departments? The Committee spends so much time on this process, and there was competition for the limited funds appropriated to national, provincial, or local government, yet the funds were later returned. This was a great concern. There was also a bigger socio-economic impact of the funds not being used for development objectives. There were a lot of funds that were allocated to the Presidential Youth Employment Scheme (PYES) but was the impact known? Could the Treasurer send a report to the Committee of strides made through this scheme? Unemployment was forever increasing, hence what was the impact of the funds appropriated?

There were various grants like conditional grants and direct grants. Could there be an optimal way of dispersing the money? Considering the capacity of most of the municipalities, were all those eligible able to access the grants and were these grants as useful as intended? 

The presentation mentioned the reallocation for the Vaal Dam but issue of cleaning the Dam had been discussed for four years.

Once an appeal for assistance was made to South African National Defence Forces (SANDF), but the problem did not seem to be solved. What was happening? There were many unfinished projects across the country.

Did Treasury listen to debates in the houses on finance and finance-related matters as several issues were raised there? NT had to listen to the debates and select issues raised by Members across the political spectrum. Other parties were not able to sit in on all committees, but debated and raised critical issues. Could NT follow the programme of Parliament especially on Finance matters? There was about R1.9 billion projected unspent money by the end of the financial year. Where exactly did this come from? What were the reasons and how could this be prevented?

There were unforeseen expenditures, including R40 million for the Independent Electoral Commission of South Africa (IEC) for Covid-19 and Covid-19 related challenges. Why this was not foreseeable was questioned as the election was planned for this year and there was awareness about Covid-19. The PYES was also said to be unforeseeable. Why was that so when the problem of unemployment in the country has always been known and that they should be intervention? The PYES was there before, why then was it classified as not foreseeable?

He asked if the slide on rollovers could that slide be revisited for Members to get a better understanding. The Department of Higher Education and Training (DHET) was mentioned in the presentation, but this cut across many departments, where many vacant posts would even go for 12 months. Would it be that those posts are unnecessary is they are unfilled for a whole 12 months? If they were needed, did that not compromise service delivery?  

Where was the problem with conditional grants? Was it the local government as the recipient, the National Government, or a combination of both?

Mr Mlenzana asked about the rollovers. Was NT able to establish the exact time when the commitments were made? Many times, entities, and departments initiated commitments two weeks or even a day before the end of the financial year so that all such funds could be rolled over. Many times, the percentage mark which was the requisite gets run over. He asked about the determination and monitoring of expenditure trends, particularly at the municipal level. Previously, Treasury was clear on the percentage mark up for goods and services versus the capital expenditure, which was 70-30. With the current wage bill, was expenditure not mostly directed towards the wage bill than the actual work that needed to be done in addressing basic services?

Responses

Ms Ngqaleni responded to the concerns on poor spending performance in infrastructure across the spheres of government, especially in provinces and local government. The issue of infrastructure was a major concern for Treasury because its importance was appreciated in supporting service delivery, access, and as an important platform for economic activities. There were limitations in what NT could do because of capacity and skills required to provide support to 257 municipalities and the many departments in the provinces that deliver infrastructure as well. However, in addressing the challenges, NT continued to provide an enabling environment in terms of the systems.

Part of the challenges in planning was having an appropriate pipeline of projects to be delivered when the money was available. NT was putting in place an Infrastructure Management System which encourages forward planning and consideration of the whole lifecycle of the project. NT has also provided capacity assistance, by considering the systems, competencies required, and finances. In the provinces, for instance, in Education and Health, NT defined the competence requirements that needed to be managed through the management system. A portion of the conditional grants was also allowed to be used to support technical capacity needed by departments. This has happened for several years.

NT was concerned that the departments often choose not to appoint the right people with the allocations it had. NT has said if those with the right skills were not appointed, funding would not be available in the long term. NT believes that performance must be incentivised. However, the challenge when providing money and assistance remained accountability as the accounting officers may decide to not appoint the right people or not follow the system as outlined. This created a problem. The Municipal Infrastructure Support Agency (MISA) was the key agency allocated more than R300 million annually to support the infrastructure delivery in local government.

The measures for converting the grants from direct and indirect were part of the measure to assist. If the municipality or province was unable, then the national department could take over and support the delivery. This was because the focus was on the delivery of infrastructure for the people. However, even with the direct grant, there have been challenges, for instance, the infrastructure grant run by the Department of Education.

There was an overall challenge across government, hence the effort to get the systems right and institutionalise the culture of project planning and pipelining of projects. NT was pushing very hard towards this. Money was allocated for project preparation so that the system would be in the rhythm of proper planning of projects but if implementing agencies did not get this right, the struggle would continue.

The Chairperson said it was a very valid point that departments, provincial governments, and some SOEs who were not performing had highly paid people who had to be responsible. While Members asked these questions, they were aware of this. Could NT come up with solutions on what specific departments could do? As the Committee interacted with the Department of Monitoring and Evaluation the issues could be raised. The Committee was not expecting NT to solve all the problems, but to give pointers and propose solutions that could be shared with departments in other forums.

Ms Ngqaleni said she hoped her remarks already gave some pointers, for example that MISA was a very important agency which aimed to support departments. Departments have also asked for indirect grants to convert them to help the municipalities in strategies. As such, if there was failure in water delivery, then Department of Water had to answer since there was mechanism in place to enable them to do that.

On the PWNG in Cape Town, as earlier indicated this money came through the Budget Facility for Infrastructure, where the City applied for the funding. This year, it indicated that it was behind in its processes. Treasury was considering the Assessment of Readiness, whether there was a rigour that needs to be introduced for determining the actual readiness. The funds were given in line with the understanding that there was readiness for its absorption. However, it appears NT got this wrong. The City has asked to reschedule the money to align it with their planning. This could be a good thing because instead of the money being spent and wasted, planning would be done the right way. This was something for NT to reflect on in dealing with the budget facility for infrastructure approvals.

On DDM funding, DDM was a mechanism for collaboration and capacity for both skills and the systems, which was a problem in the municipalities. The expectation was that national departments would strengthen its hand to sorting out the challenges. This way, there would be support required to ensure planning and alignment in provinces and national government. There was an intention to strengthen that capacity within the municipalities and the hand of the departments to address the systems' challenges in the municipalities.

On the question of considering shifting resources from province to local government, she said it was difficult because each of the spheres was funded for the functions that it performed.  The fiscal consolidation process had shown the challenges in this even with provinces that needed to tighten to increase efficiency. Money could not be taken from provinces to local government whilst still leaving provinces still with their functions. This would be a challenge but the overall problem was limited funding for government spending.

On whether the optimal mechanisms for dispersing applications to grants were are too many, she agreed that there were too many.  NT has done a lot of work to try and consolidate some of the grants in the system. MIG arose as one of those consolidations. With the realisation of capacity challenges, additional water grants were created to focus more on water. The principal was that the centre would provide support and capacity. The challenge was whether to provide more authority to the departments to oversee the performance in the municipalities or to provide a similar grant to municipalities being overseen by one department. The creation of more grants was an indirect response to the emerging challenges. The system would continue to emerge to find the optimal level at which grants could best be managed, including the capacity that needed to be developed. Hopefully, the DDM would help in addressing some of the structural issues within the municipalities that undermine their capacity to deliver as expected.

On the local government wage bill, NT was concerned about this as well. Local government had to generate sufficient revenue as salary levels were affected by the ability to collect revenue.

This was a challenge. Some of the municipalities were spending more, and a lot of the equitable share went towards salaries. The composition of some municipalities was of general workers with no skills because there was no employment, and the municipality seemed to be the source of employment in rural and smaller municipalities. The problem was that the money benefitted a few instead of having a lean and mean municipality that could deliver for the benefits of the majority. This needed serious consideration especially with the new Councillors who were entering a serious crisis in local government. Support was required in a very decisive way to reverse some of the challenges.

Dr Modise responded to questions of roll overs. When NT received a request for a rollover, criteria was used to avoid departments from piling up money. Rollovers were only considered for payment for capital assets required for project finalisation. Invoices were checked to confirm if the funds were already committed, when they were committed and the source of the delay.

For transfers and subsidies, consideration was made for rollovers based on what the money was originally voted for. Approval was not given where the department changed the purpose. Rollovers were not approved for funding the compensation of employees since this had to be budgeted for. For specific purposes, money could be rolled over for more than one year. Recurring services that the departments incur were not considered. Consideration was also made for whether the amount being requested for rollover could be managed within the department’s existing baseline for the following year. Where the assessment indicated that the roll over request could not be dealt with within the baseline it was not approved. Departments often used all available avenues to try and get an additional allocation. As such, in the rollover process, departments would ask for amounts that were significantly higher than the roll overs that are approved, since the criteria was strict to avoid fiscal dumping.

On the PYES, she said the details of the allocated funds and jobs created were given on page 14 of the MTBPS. Approximately 445,000 jobs were created through the employment programme. However, the issue was more complex than NT just allocating funds because the magnitude of unemployment and job losses in the private sector was very significant. The 445,000 short-term jobs that were created did not contribute much towards changing unemployment figures. The key was to collaboration with the private sector rather than just considering the State because the initiative did not add the jobs at the same rate that they were lost in the private sector. However, this was not the only money allocated for jobs. There was an estimated amount of R74 billion for different employment initiatives. Yet this was not enough to deal with unemployment as the private sector must be involved. The details as requested by the Chairperson would be best responded to by the Project Management Unit in the Presidency who submitted proposals to NT on intentions of the jobs. It would be able to present to parliament on the impact of the jobs.

On unforeseeable and unavoidable expenditure, she said during the presentation to the Treasury Committee chaired by the President, a similar question was raised about the IEC. The IEC made the budget bid three years prior to funding being allocated. This was prior to Covid-19. However, there were discussions on allocating money for Personal Protective Equipment (PPE) so that lives of citizens were not put in danger since it was not a normal election. The request was more than the R40 million that was given, and all elements that were not unforeseen and unavoidable were removed.

PYES was classified as expenditure earmarked in the 2021 budget speech. Slide 15 being referred to was Significant and Unforeseen Economic and Financial Events. The adjustment of R20.5 billion was allocated for the wage bill because it had not yet been known that Government and Unions would agree to the money that they agreed upon. As such, the money was for the wage bill rather than the PYES.

On the projected underspending, the critical amounts were those for declared unspent funds, which was money from allocation to departments to the value of R1.95 billion. This was a total for all the votes, with the largest being transport. She explained the reason for the underspending. NT tends to consider spending patterns of the years and estimates across different departments to project underspending. As such, the amount was not from departmental baselines, but from the assessment which showed a potential underspending across the departments of R3.8 billion. Since this was an estimate, departments could spend the money, and the amount would be less by February 2022. The critical one would be the declared unspent funds since that was taken from departmental baselines.

The Chairperson asked if the figures for unspent funds were inclusive of SEOs.

Dr Modise said it was from departments’ baselines since transfers were not dealt with until the end of the year.

On Contingency reserves, NT was very explicit at the time of the budget, that it was not clear what the cost of the vaccine would be, and its effects. The money was allocated throughout the year to Health and other departments. The money for the windfall was not in the spending money. MTBPS provided details on debt and debt servicing costs on page 70. The difference between gross loan debt and the net loan debt would be the revenue windfall as part of that difference. The amount did not come through as Contingency Reserve, but rather through the funding and strategy of government. Contingency reverse was to cover spending that was uncertain rather than to have it as a reserve. Most of the funding referred to would be in the financing requirements in the Asset and Liability Management (ALM) chapters.

There would be a long presentation on State Owned Companies (SOCs) which would answer most of the SOC questions raised by Members. She requested the Chairperson keep questions on SOCs until after that presentation.

Ms Julia de Bruyn, Chief Director: Public Finance, National Treasury, responded to the question on rollover of School Infrastructure Grant. In this case, the delay was because invoices were received after the cut-off date, and could not be processed, hence the rollover. It was not for something that was still under construction.

On vacant posts in DHET, these were for Technical Vocational Education and Training (TVET) College lecturers that were needed. The challenge was that colleges struggle to complete processes as 200 applications could be received for one post. The number of applications would be overwhelming for one vacant post and TVET Colleges had not yet worked out an electronic way of dealing with this. These Colleges still worked with printed versions which took long. It was not that the posts were unnecessary; TVET Colleges require lecturers as these are the skills needed in the country. 

Dr Rendani Randela, Chief Director: Finance, National Treasury, responded to the question on the source of the declared amount of R50 million for Military Veterans. This was from a budget that caters to some of the benefits like education, health, and housing. One of the indicators lagging in the Adjusted Estimates of National Expenditure (AENE) was number of houses built, with only 15 achieved to date against a target of 355. Since there were six months to go, there was no expectation that the remaining houses would be delivered. It was to be noted that the departments were only implementing agents and not necessarily providing the benefits to the veterans. Housing was under Human Settlements and Health was under the South African Military Health Service.

On whether this was related to what was in the media, the media had been reporting about the gratuity of R4 million per military veteran. Currently, the said benefit was not provided for in the law. The law provided for things like housing, health, educational support, burial support, and pension among others. There was a project task team assigned to this, led by the Deputy President. When the issue was raised in one of the meetings, he indicated that the gratuity of R4 million was unaffordable for the State. 

The project was there to relieve the Department of Military Veterans where management and leadership had been lagging. There was no Chief Financial Officer (CFO), and it had been under the leadership of acting accounting officers. Hopefully, with the initiative and the new DG, there would be change. One of the policies being pushed by this initiative was the Patient Policy and other benefits for military veterans, hence the declared amount, because some of the things would not materialise in the current financial year.

On what NT was doing to curb underspending, he said some of the issues would emerge in the next engagement when dealing with spending. For example, the security department had the State Information Technology Agency (SITA) for ICT and the DPWI for infrastructure. There were legislated monopolies and there was a need to question the status quo and service delivery models. With Defence, NT was trying to negotiate that the DPW relinquish the mandate on delivery of infrastructure so that Defence could carry the function on its own. This was also a recommendation from the previous Standing Committee on Appropriations. Although it may be difficult to relinquish power and mandate, NT was busy with this.

On vacant posts, as indicated, what further complicates the matter was that departments were cautious given the uncertainty around wage settlement. Moreover, the 2021 budget also imposed a reduction on SOE budgets, that way it would be difficult to appoint given that there would be no provision for that.

Mr Molefe-Isaac Fani, Chief Director: Transversal Contracting, National Treasury, responded to the question of 30-day payments. He said the matter was dealt with by the Auditor-General (AG) office within Treasury. What NT had was an email repository where concerns are raised and dealt with as received. What NT could do by law is to send the concerns to the accounting officers and request for an explanation on why there had been no payment. There had been little success in receiving responses to unblock the challenges but NT continued to do this. In the last engagement with the AG’s Office, there was a request for additional resources to deal with an influx of requests from suppliers on expediting payment within 30-days. The matter was receiving the attention of the DG's office, and change would be seen. However, the responsibility remains with the accounting officers, to ensure that money allocated for goods and services was spent as such making payment as required. 

The Chairperson said there was a lot of cross-pollination of the questions with what would later be presented, for instance, on underspending. If there was a proposal that NT could make of how the Committee would deal with the issue of Public Works and SANDF, NT should communicate this. 

On Military Veterans, he said the issues were all over, as there were several departments involved, including Education, Health, and Housing. It is not optimal. There was a need for a one-stop station for matters of this nature. There were not many Military Veterans yet what was agreed was not delivered. Parliament approved the budget, but nothing was happening. 15 out of 350 houses was too little. Hence the call for NT to propose a delivery model to parliament since the work of parliament was to make laws.

He thanked NT for the enlightening presentations. The meeting was adjourned for five minutes.

The Chairperson asked Dr Modise if she remembered what the Committee had said it did not want to hear anymore concerning spending.

Dr Modise said she remembered not to say, “Departments did not spend because of Covid”.

Briefing on Second Quarter Spending

Mr Shaneel Ragoo, Budget Analyst, National Treasury, presented on the Second Quarter Spending.

A spending summary was provided as follows- Departments that spent higher than the projected spending included Social Development (4% higher), Health (9.9%), Public Enterprise (6.8%), and Trade and Industry (19.4%). The higher spending in Health, DTI and Social Development was related to Covid-19.

Departments that spent lower than the projected spending included National Treasury, (19.8% lower due to delays in implementation of Municipal Revenue Management Improvement Programme, non-payment on recapitalisation of the Land Bank, and non-transfer to the Secret Service); Transport (9% due to withholding of transfers payments to Passenger Rail Agency of South Africa); Water and Sanitation (24.9% due to invoices pending certification, verification, and approval of payment of work done by implementing agents, and withholding of transfers on the direct portion of the RBIG), and Environment Forestry and Fisheries (27.85% due to delays in rollout of the EPWP as impacted by the Covid-19 lockdown restrictions, and lengthy procedures for renting vehicles and tender process for procuring security services).

The higher than projected spending was due to overtime payments processed due to the public unrest in July 2021, and salary increases following the implementation of the 2021 public sector wage agreement.

The lower than projected spending was due to vacant posts that were not filled as projected, outstanding Community Education and Training (CET) college lecturers claims that were not processed as projected and delays in implementing the post-provisioning norms for the TVET colleges.

Quarterly Expenditure Reporting for Public Entities

Dr Modise presented on Public Entities’ expenditure.

See presentation attached for further detail

Update on SOCs

Mr Ravesh Rajlal, Chief Director: Sector Oversight, National Treasury, gave an overview of the presentation which provided updates on six SOCs.

Ms Unathi Ngwenya, Chief Director: Governance and Financial Analysis, National Treasury, presented on the Land Bank and thereafter Mr Rajlal presented on the remaining five entities.

Eskom

Eskom remained the single biggest risk to the fiscus and a risk to government's economic recovery plan. It faces strategic, operational, financial, and structural challenges, which have resulted in an increase in funding requirements which have led to extraordinary fiscal commitment being provided to Eskom over and above the increase in debt from external funding.

To date, government had provided Eskom with equity support of R136.7 billion. Eskom was unable to service its debt as it did not generate sufficient operational cash flows to cover its debt servicing costs which place more pressure on liquidity. The utility had made progress in its unbundling plan by establishing a transmission company registered with Companies and Intellectual Property Commission. The new structure was developed and Public Finance Management Act (PFMA) approvals were granted, and debt allocated between its proposed electricity generation, transmission, and distribution entities. However, proposed restructuring needed to be approved by its lenders. The utility has a deadline of 31st December 2021 to complete the legal separation of the transmission unit, with the other two units in the next 12 months.

Denel

In support of the 2019 turnaround plan, Denel was allocated R1.8 billion in 2019/20 and R576 million in 2020/21, including the provision of guarantee facilities of R5.6 billion. Implementation of the turnaround plan was delayed due to consultations with relevant stakeholders. Thus the entity continues to experience liquidity and solvency challenges.

SASRIA

Following the July 2021 unrest, SASRIA received claims that were higher than anticipated and this significantly deteriorated SASRIAs financial position. As of 30 September 2021, SASRIA received claims of R30 billion, and final claims amount was estimated to settle at R32 billion, with total assets amounting to R14.6 billion compared to total liabilities of R29.3 billion, thus insolvent. R11 billion was provided in 2021/22 through the Contingency Reserve. In addition to Government support, SASRIA would be implementing self-help initiatives including liquidation of assets and reviewing the reinsurance and premiums.

South African Post Office (SAPO)

SAPO was at a critical juncture. The shareholder department needed to restructure urgently and repurpose the entity. Government must decide whether SAPO has a role to play as a delivery arm of government. If not, SAPO must be drastically restructured as the entity will not be able to continue in its current form without yearly funding from government to cover its losses.

Challenges and financial update

Overstaffing was included among the challenges at SAPO. Its current Voluntary Severance Packages(VSP) process was not yielding the required reductions. SAPO applied for R23 billion funding given its current liquidity challenges. The main revenue streams continue to perform below the budget. Creditors stood at R4 billion, of which statutory payments were R2.182 billion. It had a net loss of R1.155 billion.

South African Airways (SAA)

NT was requested to provide quarterly updates to parliament on the utilisation of the R2.7 billion allocation to SAA subsidiaries. This formed part of the R10.5 billion that was allocated at SAA during the 2020 MTBPS. SAA exited business rescue by 30 April 2021, but the airline remained under care and maintenance until September 2021 when it resumed operations.

Mango

• On 10 August 201, the South Gauteng High Court granted the Board of Directors’ application to place Mango under voluntary business rescue. Of the R819 million allocated to Mango, R100 million was transferred to the airline for payment of the July, August, and September 2021 salaries and to cover costs of developing the Business Rescue Plan.

South African Airways Technical (SAAT)

• SAAT incurred a loss of R431 million as of 30 September 2021. The company anticipates to start generating positive cash flows from December 2021 as the major customers Comair and SAA have resumed operations.

Air Chefs

• Air Chefs incurred a loss of R117 million as of 30 September 2021. Regional customers such as Air Peace Zambia and Pro Flight Zambia resumed operations in South Africa in October 2021 which would have a positive impact on it going forward.

Discussion

The Chairperson said some questions had previously been asked and did not need to be repeated as they were noted to be addressed in this session.

Mr Mlenzana said there was the question of terminology within NT. Dr Modise talked about restructuring and business rescue. Whether this was to do the plan with the practitioners responsible for such, the activities need money. Yet NT was trying to pull the entities from the mud. There was money for bailout, and for the rescue and restructure plan.  This needed to be cleared before Members started appropriation.

On SASRRIA, he said there was no problem in considering the unrest or looting, yet the bottom line was that SASSRIA needed to be assisted to funding such. However, with the history of SASRIA, who were its ultimate beneficiaries in terms of demographics such as geographics, race, and gender? South Africans would ask if Government could find ways of broadening SASRIA's scope, so that it was not seen as funding a particular elite.

Mr Qayiso asked about expanding funding for Public Works programme which had also been asked about following presentations the previous day. It had been said that it was unable to hold due to certain problems that affect other departments. How does that link to the Department of Forestry where it was said that project delays and security issues were due to EPWP programmes. There seems to be a relationship with what was said by the Parliamentary Budget Office (PBO). There was a serious problem with the EPWP.

There was an issue with Denel during the year where workers were not paid. To what extent did Treasury think Denel had been of assistance to the workers?

The questions on SAPO had been raised several times, and the Committee has emphasised the importance of SAPO since it provided services to the poor. In the current situation, the lifespan of SAPO appeared highly challenged as it was requesting the assistance for R23 billion. There was also a suggestion that the State must decide whether to shut it down. This would mean millions of poor people would not be able to access the services of SAPO. Was it a problem of leadership and management incapacity or was it a technicality that resulted in the need for financial beef-up? It was surprising that overstaffing at SAPO was mentioned.

As the Member once raised, visiting post offices in Eastern Free State where all services and grants were offered it was apparent that there were issues. There were stacks of letters unable to be delivered as there were not enough staff to do so. There were no bicycles for those services as well. What was the breakdown of the staff compliment?

The Committee did the same with Eskom when it said it was overstaffed, yet the Union had a different opinion. Details of staff breakdown were requested, this made the Committee realise there were gaps. Overstaffing was a disputed area.

Mango was allocated R819 million, yet it was announced a few days later that operations were shut down. Was it given special allocation to cease operations or to rescue it? It would be better if there was a process seeking to revive operations.

Mr Mathafa said every time there was a presentation and it was noted that there was underspending in departments, spending projections were adjusted downwards. How then would spending be improved? This was considering the Zero-based budgeting model where past performance was a determining factor for allocations. What could be done to not deprive the departments?

Under Department of Water and Sanitation, one of the reasons indicated for the underspending was withholding of transfers on the direct portion of the RBIG. Considering the focus in the mainstream media during the past local government elections was on infrastructure and whether government could provide services for residents and citizens. This became a focal point going forward.

The withholding of the grant was worrisome as citizens would be punished because of the incompetence of those who should be implementing. It would be advisable to consider areas that were covered by mainstream media for whether there were grants withheld in the areas of need. Could the national departments not find ways to intervene directly as done for the Vaal Water System where assistance was given to local implementing agencies instead of withholding grants?

On spending in the Department of Agriculture, there was mention of invoices, building, and leases. Was this a result of working from home? Or were there other causes for the underspending? What measures were being put in place to turn this around?

Members appreciate the feedback and progress achieved in SAA since the allocation of the R10 billion in special allocations. However, the presentation was silent on new developments. Through other committees, it was known that there have been new players in that space. Numbers have been brandished with new capital injections. What was the current situation after the airline exited business rescue and now under care? What was the role of the new players on the financial standing of the airline and was there new capital expected from them? Had their new role turned the fortunes of the airline?

The Chairperson agreed with Mr Mathafa on SAA. Did this include the subsidiaries? The Committee would like to see the impact of what is heard in the media on the solvency of the company. The presentation made it appear as though government was the only shareholder. What were the expectations? The underspending in the first and second quarters would likely be carried to the third and fourth. Most of what was cited were controllable variables that depended on what government did. For instance the EPWP and DPE being overwhelmed by applications and SITA invoices, among others. Parliament cannot be expected to do the work. This was why officials were appointed in the institutions. Most of the issues appeared to be excuses for why work was not done. Could NT find a way of writing to the departments to raise the issues? Parliament could not be expected to solve departments’ problems.

On the conditions of Eskom’s recapitalisation, it also had to assure the Committee on the security of electricity supply. This had an economic impact since most of the appropriations depend on that. This condition should be added. He asked NT to respond promptly, as Members needed to be in the National Assembly by 2pm.

Dr Modise said there was a final presentation by the Office of the Chief Procurement Officer (OCPO).

Mr Qayiso said since the meeting had to close at 2pm, some questions would have to be submitted in writing. The Office could present if it would be for less than 15 minutes.

The Chairperson said it would be better to receive responses for the current questions and that another meeting had to be scheduled for the OCPO presentation to allow for better engagement.

Responses

Dr Modise said there were several questions raised on SOCs. The biggest problem was that budgeting and funding for SOCs took funds from service delivery departments and allocated it to SOCs. Over the years, SOCs have received R290 billion in bailouts while budgets were reduced by R230 billion. The biggest frustration was that departments remained critical to deliver services but were not doing the work. Resources that could have been allocated towards service delivery and improving the system were now given to SOCs. The bailout of SOCs was done in two ways. First money was given for recapitalisation, and secondly for debt payment. This was done with Denel and SAA where debts were paid, and SAA was also recapitalised to stay afloat.

Restructuring was done in different forms, either changing the business model or reducing the business to ensure efficiency. However, the problem with bailout, restructuring, or recapitalisation was that resources had to come for the fiscus, and because of stress in the fiscal framework, money was taken away from service delivery in local government, provinces, and national departments. There were too many public entities in government and there had to be a conversation about rationalising this. Critical public entities had to be prioritised to reduce dependency on the fiscus otherwise funds would continue to be diverted from service delivery to bailing out SOCs.

On Public Works and duplications, with spending reviews, NT was considering the efficiency of the programmes. NT had an exercise to look at what the money was spent on in every department, and whether the public employment programmes were still essential and necessary. When evaluation was done for the PYES, NT looked at the implementing departments, and whether they had the manpower to do so. On the other hand, for EPWP allocations were not permanent, hence in the next round of motivations, the DPW will be motivating the need to add money for EPWP. Once this was done, duplications and if the project was still fit for purpose had to be considered.

On departmental underspending, NT assesses whether it was because the departments cannot spend, delays, or poor spending projections. Where it is poor spending projections, NT would assist in realigning the schedules, to avoid technical errors in drawing their budgets. Where it is because of delays, adjustments were made in the MTBPS. The declared unspent funds would be part of the process of dealing with underspending, where it has been ascertained that a department will not spend, it is taken out of the baseline. New estimates will be adjusted in the MTBPS, and new estimates would be reflected in the third quarter.

Spending reviews that NT did as a step towards zero-based budgeting do not only consider past performance but also whether it is fit for purpose and proposals are made. In the MTBPS, it is indicated that about 200 of these spending reviews have been done. Savings can be made by improving the procurement of the projects. There were some duplications between public entities and departments and rationalising some of these could achieve savings. In some departments, administrative or corporate services staff would be larger than the policy staff. If 60% are in corporate services and only 40% in policy design, NT looks at this and considers the ability of smaller departments sharing corporate services to achieve savings.

The question, however, would be whether Government would be willing to forego the high number of people in corporate services given the high unemployment rate. The trade-offs of saving and the implications would have to be considered. The reviews will be published at the time of the budget once Cabinet approves.

On Water and Sanitation, the delays were because the municipal year began in June and ended in May. Usually, municipalities took time to meet the conditions of the Division of Revenue Bill. It is not a big concern because at the end of the year, most of the transfers did go to the municipalities.

Mr Patrick Rasivhetshele, Sectoral Oversight, National Treasury, responded to the questions on SAA. The reason why the support was followed was that the strategic equitable partner could cover some of the fiscal burden related to SAA. Details on the deal would be provided by the Department of Public Enterprise (DPE).

The Chairperson said NT was being diplomatic like politicians, if it was giving money to SAA, it should be able to answer the questions.

Mr Rasivhetshele said some of the details were commercially sensitive and he would not want to disclose information on the platform which the DPE and SAA were not comfortable sharing currently. However, there had been communication that the deal was expected to be finalised by January.  

The Chairperson accepted the response and said the Committee would wait for the details the early following year.

Mr Rasivhetshele on Mango said the R890 million allocated was part of the R2.7 billion provided to SAA subsidies. However, this amount was allocated before Mango was placed into business rescue. A decision was then taken to use the funds for funding the business rescue process. On restart of the operations, NT had been informed that DPE was in discussion with Mango’s business rescue practitioners and wanted to ensure that Mango begins at an optimal time in the market, not to make loses, but rather generate income. As with SAA, feedback would be provided by the business rescue practitioners from Mango.

Ms Isabelle Mangazi, Deputy Director: Finance and Market, National Treasury, responded to the question of the ultimate users of SASRIA. NT did not have the data for race and gender at hand but the data would be sourced from SASRIA to be presented in the next session. SASRIA covers ordinary citizens, municipalities, and small businesses.

On whether there was a way for government to broaden SASRIA's scope, it was common knowledge that SOCs existed to satisfy specific market failures. If government wishes to broaden the scope, NT could do research as to whether SASRIA could play a higher role to extend its mandate.

On the extent to which NT thinks Denel has been of assistance to its workers regarding payment, she said when Denel realised that it would be facing financial challenges, it started cutting down on employee salaries, paying them on a cascading scale. However, this was ineffective as Denel did not have working capital for productions, hence no cash was coming into the entity. The solution lied in the consultations that Denel had to undertake with concerned stakeholders to ensure success.

Mr Jeffrey Quvane, Chief Director, National Treasury, responded to the question on the unbundling process. As Members said, this process was to assist Eskom’s balance sheet and sustainability. The team that was alluded to by earlier by Mr Rajlal, was looking at developing a financial model to produce an optimal capital structure. The approach was to look at broad elements of producing sustainable cooperate structure including tariffs, treatment of debt, and cost efficiencies within the entities. NT was concerned about the decision taken by the regulator to reject Eskom’s tariff in the Multi-Year Price Determination(MYPD). The model would relieve entities’ reliance on the fiscus and was a key element for sustainability of the entities.

Mr George Tembo, National Treasury Official, on overstaffing at the SAPO, said it was collecting less revenue but had over expenditure, with high staff costs. SAPO was trying to shed off employees, but more details on the staffing could be provided in the next meeting with the Committee. The initial plan was to shed off 5000 employees from the staff of 16,000, but an update would be given to the Committee later.

On where the main problem lied with SAPO, he acknowledged that similar postal operators and parcel companies had done well during Covid-19. However, when Covid-19 hit, SAPO was already backwards in technology and had very dilapidated IT infrastructure. The current strategy, allocated funding to SAPO to deal with its IT infrastructure in hopes that it would be able to compete with other operators. This was what the Department of Telecommunications aimed to do.

Mr Rajlal said the broad turnaround strategy of SAPO would deal with the digitisation of postal services, because the private sector had moved towards that. SAPO would have to do a market study and consider investing in IT to be able to compete. In addition, the study would understand whether SAPO would play a role in the commercial or developmental side in the future.

The Chairperson thanked NT for attending the meeting and said it was a marathon, but it had to be done. OCPO would be invited back to the Committee for its briefing. The issues of NT were complex, especially for Members. He thanked Members and staff of the Committee for being available on issues of national importance.

Apologies were noted from Ms M Dikgale (ANC) and Mr N Kwankwa (UDM).

The meeting was adjourned.