2022 Western Cape Appropriation Bill: Provincial Treasury briefing

Meeting report

Provincial Treasury on 2022 budget

Mr David Savage, Head of Department, Western Cape Provincial Treasury, briefed the Committee on the 2022 budget approach. He said 2022 had been a challenging year because they were all recovering from the pandemic. The emphasis had been on understanding the changing fiscal and economic context. The Department took a sober view on transversal risks and had to come up with ways of responding to the risks. The focus was on the priorities of the province. Risks should not be a fiscal pressure and take away resources from the other priorities. The Department had to make informed decisions about the allocation of resources. He stated the 2022 budget was progressively achieving the 2022 budget objectives.

Mr Roy Havemann, Deputy Director-General: Fiscal & Economic Services, Western Cape Provincial Treasury, talked about the economic and fiscal context and the impact of the Russian invasion of Ukraine on the Western Cape. He said the global economy was expected to grow by 4.4% and 3.8% during 2022 and 2023, respectively. Youth unemployment was a big challenge in SA. It was standing at 49.3%. The rising geopolitical tensions, electricity constraints and additional waves of Covid-19 were posing a risk to the South African economy. The Western Cape economy was expected to expand by 2.0% in 2022, and by 1.9% in 2023. The unemployment rate was at 26.3% in the third quarter of 2021. Since the second quarter of 2022, the number of unemployed individuals had increased by 19.9% to 794 000.

The impact of the conflict between Russia and Ukraine would be felt on two fronts: an increase in global commodity prices and trade disruptions. For South Africa and the Western Cape, the impact of global commodity prices would have more serious implications than the trade disruptions. The extent of these would depend on the length of the conflict. Russia and Ukraine account for at least 30% of the world’s wheat exports, 20% of maize exports and 80% of sunflower oil exports. Wheat prices had risen to the highest level since 2008. Over the last decade, 56% of South Africa’s total wheat consumption was imported, while 35.7% of South Africa’s total wheat imports came from Russia. The Western Cape accounted for 50% of South Africa’s wheat production. Higher global wheat prices would benefit local farmers, but this would have negative implications on food security. Rising agricultural input costs, such as oil and fertiliser, could lead to food inflation in other commodities.

For the period 2016–2021, Western Cape was estimated to have experienced the largest inflow of approximately 470 657 migrants. By 2025, it was estimated that 7.6 million individuals would reside in the province -- an increase of 7.0% from 2021. The compensation of employees was the largest provincial spending item and remained a fiscal risk, especially in the 2023/24 financial period. This required the Western Cape government to significantly reprioritise resources and look at new ways of financing service delivery pressures.

Mr Malcolm Booysen, Chief Director: Public Policy Services, Western Cape Provincial Treasury, took the Committee through the budget fiscal strategy. As part of the budget process, the fiscal strategy was guided by four key principles: protect basic services outcome, unlock allocative efficiency, enhance productive efficiency, and enable long-run fiscal sustainability. The 2022 medium-term expenditure framework (MTEF) fiscal strategy included transversal commitments that were essential to drive effective delivery towards achieving the four key principles.

The 2022 budget would, amongst other things, sustain the fight against the COVID-19 pandemic, including the successful rollout of the vaccination programme; protect frontline services, including education, health and social development; mitigate risks, including drought, fire and flooding; significantly improve the efficiency of expenditure by driving value for money in procurement; re-balance the composition of expenditure by increasing spending on infrastructure, and ensure long-term fiscal sustainability through replenishing provincial reserves.

He further noted the national Department of Women had developed a draft framework on gender-responsive planning, budgeting, monitoring, evaluation and auditing. It was aimed at ensuring better outcomes for women and girls, as well as more tangible gender impacts. The Western Cape departmental reporting on gender responsiveness was done through the budget process -- the medium term expenditure committee -- which was coordinated by the Department of the Premier. Relevant and appropriate platforms for citizens had been established to engage through the joint district and metro approach (JDMA). The Department was working towards implementing alternative forms of citizen engagement, taking a facility-level approach. The feedback at facility level would influence departmental planning and budgeting decisions. This would also involve implementing social accountability interventions, such as information campaigns, scorecards and social audits.

Ms Analiese Pick, Chief Director: Provincial Government Public Finance, Western Cape Provincial Treasury, updated the Committee about the approach to compensation of employees (CoE) in the 2022 MTEF.

The approach of the national government to CoE remained uncertain, both in negotiation outcomes and fiscal strategy. The outcomes of the new round of wage negotiations would impact the 2023/24 financial period, but there was no funding certainty. It was critical to continue to maintain downward pressure on the wage bill over the 2022 MTEF and to allocate cash gratuities to frontline departments. The remaining 2022 funding would be held in reserve until the 2022 adjustments budget to ascertain requirements by remaining departments. There would be no additional headcount unless it was funded through additional provincial equitable share (PES) allocations or additional mandates/functions. Over the 2022 MTEF, there would be a net additional headcount, the majority being in the Department of Education for educators and support staff in schools and also in the Department of Transport and Public Works. In the Health Department, there would be a decrease in contract posts for Covid-19 and a reduction in the equitable share.

Mr Havemann took the Committee through the 2022 MTEF budget policy priorities. He identified five budget policy priorities: Covid-19, jobs, safety, wellbeing, and enabling public service.

An enabling public service would focus on:

Integrated service delivery;
Approach to local government;
Governance transformation;
Talent and staff development;
Digital transformation.

Wellbeing would concentrate on:

Socio-emotional and physical wellbeing;
Meeting basic needs and protecting human rights;
Strong foundations;
Building social cohesion.

Safety would give attention to:

Violence prevention;
Support to neighbourhood watches;
Area-based teams;
Review of the Western Cape Liquor Act;
Chrysalis Academy.

Jobs would look at:

Ease of doing business;
Work opportunities and skills;
Investment;
Economic resilience;
Infrastructure.

Covid-19 response would cover:

Epidemic surveillance;
Agile and responsive health;
Addressing backlogs in other health services;
Vaccination rollout and communication;
Mainstreaming the management of Covid-19.

Mr Klaas Langenhoven, Director: Infrastructure, Western Cape Provincial Treasury, focused his presentation on the investment made to boost infrastructure in the province. There had been real growth in the infrastructure over the MTEF. Average annual growth over the 2022 MTEF of 6.08% had been recorded, compared to the 2021 revised estimate. Product processing facility allocations had been made to strengthen the investment pipeline. The Western Cape infrastructure delivery management system (IDMS) had been aligned to the national framework for infrastructure delivery and procurement management. For the 2022 MTEF, the focus area would be on improving reporting on infrastructure performance to the executive and Parliament. The 2022 MTEF infrastructure budget allocation amounted to R32.3 billion. The focus remained on the maintenance of the existing provincial infrastructure asset base, with refurbishments and rehabilitation, and maintenance and repairs accounting for 47.89% of the planned infrastructure investment in the 2022 MTEF.

Mr Savage emphasised the 2022 budget was built on the 2021 adjustments budget and the 2021 medium term budget statement. It was continuing to respond to Covid-19 and the Western Cape recovery plan and enabled the frontline departments to respond to increased service delivery demands. It had further increased infrastructure investment as a long-term enabler of growth, and deepened good governance and value for money through procurement and supply chain management (SCM) practices. In addition, it proactively managed and mitigated risk, in partnership with the Department of the Premier, and replenished reserves to enable long run fiscal sustainability. Lastly, it continued to respond to the constrained economic and socio-economic environment. Ensuring impact for citizens would require a strengthening of collective oversight over the implementation of the 2022 budget.

Ms Pick briefly updated the Committee on the provincial expenditure as at 31 December 2021. In the second quarter of the 2021/22 financial year, spending was standing at 72.5% of the R73.889 billion adjusted budget. The budget was mainly spent on CoE and goods and services. The third quarter reporting included the 2021 adjusted estimates, which resulted in a net increase of R1.492 billion to the main budget of R72.397 billion.

There was a projected underspending at the end of the year amounting to R5.076 million. The provincial treasury underspent by R5.403 million, mainly on goods and services due to delayed procurement for consultancy services. The local government department under-spent by R631 000, mainly on CoE because of delays in recruitment of drought-related and other departmental personnel, and the department of cultural affairs and sport under-spent by R112 000, mainly on CoE, and operating payments and travel and subsistence within goods and services. Expenditure by public entities during the third quarter was standing at 71.3% (R585.818 million) of the adjusted budget.

Concerning infrastructure expenditure, as at 31 December 2021, there was a project pipeline of approximately 715 projects. 45% were in the preparation phase, while 38% were in construction, practical completion or completion. There were risks of potential underspending in both education (57.7%) and health (50.7%) infrastructure, including on national conditional grants -- the education infrastructure grant and the health facilities revitalisation grant. These were due to ongoing challenges in infrastructure delivery, like SCM processes, regulatory processes -- such as environmental impact assessments (EIAs) -- contractor and professional service provider performance, community unrest, slow implementation and Covid-19 knock-on effects.

Ms Naadia Ismail, Office of the Premier, presented comparisons on performance between Quarter 3 of 2020/21 and Quarter 3 of 2021/22 financial years. Pertaining to departments, a total of 394 targets were recorded in Q3 for 2020/21 and 424 for 2021/22. On aggregate, 70% of targets were achieved during Q3 of 2020/21, whilst 76% of targets were achieved during Q3 2021/22 -- a difference of 6% for 2021/22 compared to the same period of 2020/21. Regarding public entities, a total of 66 targets were recorded in Q3 for 2020/21, and 68 targets for 2021/22. On aggregate, 77% of targets were achieved during Q3 of 2020/21 whilst 81% of targets were achieved during the same quarter in 2021/22 -- a difference of 4% for 2021/22 for the same period 2020/21.

(Graphs and tables were shown to illustrate comparisons on performance between Q3 of 2020/21 and 2021/22; achievements of departments; infrastructure expenditure, provincial expenditure; Western Cape economic outlook, national fiscal context, global risks aligned to provincial transversal risks, approach to CoE, 2022 MTEF fiscal framework, provincial equitable share, revisions of conditional grants; infrastructure investment, budget and projects; spatial distribution of provincial budget, 2022 MTEF provincial reserves, and final 2022 MTEF vote allocations)

Discussion
Mr C Dugmore (ANC) wanted to know what the physical number was for unemployed people during the third quarter of 2021 when it stood at 26.3%; and he asked for clarity on the drivers which were increasing the population growth of the Western Cape because it was stated from 2016 to 2021 the province had experienced an inflow of migrants of just under 300 000, whereas the narrative states it was 470 000. He asked that this be compared with Gauteng in terms of net immigration during the same period.

Mr Savage said the figures were not comparable to other provinces. There had been no intention of making an interprovincial comparison.

Mr Havemann said the breakdown analysis of the immigration had been given in the presentation, where it was indicated where it emanated from and went to. The Western Cape was getting people from the Eastern and Northern Cape, while Gauteng was experiencing an inflow from outside of South Africa. He added that the physical numbers of unemployed people varied from quarter to quarter because of different conditions, from a Covid-19 perspective.

Mr G Brinkhuis (Al-Jamah) said the total difference in the surplus deficit was R5 billion, and he asked how much of the education budget had been spent and what the surplus was.

Ms Pick explained the presentation had indicated total education revenue of R6.3 billion. The expenditure had amounted to R10 billion. A sum of R1.5 billion had been set aside for reserves. There was a budget deficit of R1.53 billion. Gambling taxes also funded a portion of education.

Mr R Mackenzie (DA) wanted to know if there was a contingency plan in place because of the uncertainty around price increases on bread and fuel because lots of schools and hospitals used bread. He enquired if the R30 million allocated for forensic investigations would be given to the municipalities or the province.

Minister David Maynier said there were reserves for unforeseen circumstances. R439 million had been calibrated higher than what had been provided in the previous years. The Western Cape government was running a considerable surplus for contingency reserves during the MTEF period. The forensic allocation was there to build forensic and legal capabilities in the province, even though this would also assist municipalities. It was assistance that was provided in kind, not as a cash transfer.

Mr L Mvimbi (ANC) remarked it was good the budget was focusing on frontline services on health and education and wanted to know if there was enough money set aside for the Khayelitsha district hospital. He enquired if the Neighbourhood Development Grant had been allocated a budget.

Minister Maynier said an allocation had been made for the Khayelitsha project, and it included the establishment of a psychiatric unit. There was revitalisation project amounting to R200 000 that would be spent during this MTEF. All these were stated in the infrastructure book.

Mr Mvimbi remarked there had been a lack of public participation in the development of the budget. The public had not been invited during the planning and development process, except to comment on advertisements that were issued in the media. Apart from that, there had been no other processes to involve other stakeholders in the way the local government did with its integrated development plan (IDP) processes.

Mr Savage said the process started with different stakeholders. Extensive public participation processes were conducted. The focus was now on the modalities of citizen engagement to see where it should make the most difference in people’s lives. The need had been found to be on education and health. Soon the Department would be gazetting allocations to schools and clinics. The Department was also looking at tools that were available to citizens to engage with government officials. These could be social accountability scorecards that were being used globally to check the effectiveness of the expenditure. Also, the focus was on monitoring budget expenditure. Discussions were ongoing at the transversal level, led by the Department of Local Government.

Mr Dugmore centred his question on the approach to CoE for the 2022 MTEF. He said there had been a drop from R92 billion to R90 billion for 2022/23. The health department had experienced a serious drop, from R36 billion to R33 billion. Where were the deductions coming from? He also asked for clarity on the headcount increase of 1 330 in education.

Ms Pick said that the table presented the headcounts. For the 2021/22 financial year, they were expecting to end with 89 000 staff members. This number would increase during the 2022/23 period, decrease in 2023/24 and stabilise during 2024/25. The majority of increases from 89 000 to 92 000 were from education -- for educators and support staff members in schools. The Department of Health had been impacted by Covid-19 in terms of the number of contract workers and staff in responding to the pandemic. The response of the Department had been that of making use of contract employment. There would be a decrease in contract workers because Covid-19 would be moving into the mainstream of health. Another thing was the Department of Health had to look at service platforms based on the fiscal envelope received.

The Chairperson wanted to know what the province was doing, seeing that the preferential public procurement processes had been found by the courts to be unconstitutional, and asked how this was going to impact infrastructure projects. She also wanted to know what was being done about the locusts that were destroying crops in Central Karoo. Farmers in Laingsburg were panicking because the Karoo had been through drought and many problems. The issue of locusts was a disaster.

Mr Savage said he was aware the Department of Agriculture was alert to the issue. It had not yet been declared a disaster to unlock the budget. The Agriculture Department was better placed to give a thorough explanation because it seemed to be on top of the situation and risk.

He stated that the Constitutional Court had ruled that the Preferential Procurement Policy Framework Act
(PPPFA) was unconstitutional. This was creating problems for the public procurement system because two things were important for the system -- the establishment of thresholds for the 90/10 and 80/20 point system, and an evidentiary base for the points. The Department had had extensive engagements with National Treasury in this regard, to ask the court to provide clarity. The Department was also trying to put in place new regulations soon through an appropriate process. The draft regulations were out for public comments. These would be filed in court with papers around April. The executive of the Western Cape government had decided not to freeze procurement systems because citizens had a constitutional right to service delivery.

He said the Department of Public Works would not be scrapped, as this had been misunderstood in certain circles. It would remain the preferred service provider. However, if there were capacity constraints, departments would have an option to appoint another service provider, especially on infrastructure projects, to speed up service delivery.

Mr Dugmore suggested the government should introduce progressive taxation for motor vehicle licences. The value of one's car should determine the amount one should pay for a car licence. He asked if it would be possible for the Department to look at this proposal.

Minister Maynier said this was something that would be looked at and discussed with the relevant departments. However, he warned that electric vehicles did not have heavy engines like ordinary cars. They had a weight because of their big batteries.

Mr Mvimbi remarked that challenges had been reported about the Khayelitsha hospital. A considerable amount of the allocation should be made to the hospital because it serviced a big constituency.

Mr Savage said funding for district hospitals fell under programme 2. It was better to understand the operating budget of the Khayelitsha facility first, and then see how it was planning to meet its challenges.

The Chairperson commented that she had sent the Minister of Agriculture pictures of the locusts in Laingsburg. The locusts were everywhere and destroying crops, and this not being declared a disaster was frightening. The drought money farmers were receiving was for livestock, but what about farmers who were producing crops? She said something should be done, as this was having an impact on food security.

Mr Savage agreed this was a serious matter. When it was triggered as a disaster, the budget would be unlocked. He would engage the Departments of Agriculture and Local Government on the issue.

The Chairperson said the votes would now be sent to the respective committees.

The meeting was adjourned.