The purpose of the virtual meeting was for the Parliamentary Budget Office to provide an assessment of the Appropriation Bill. In answer to the Committee members questions, the PBO spoke about whether the allocations to specific departments were adequate for them to carry out their mandate; the effect of the Russia/Ukraine war on the South African economy; fiscal consolidation; compensation of employees; loss of skills and expertise in the public sector; the impact on contingent liabilities due to cutting costs on infrastructure maintenance and reducing human resource capacity; the impact of public-private partnerships; the differences in the new loan guarantee scheme; the role of the private sector and the impact of public-private partnerships; and financialisation of the SA economy where debt was securitised and bought in different markets.
The Chairperson said the Parliamentary Budget Office (PBO) would give researched comment on the 2022 Appropriations Bill. He noted the PBO Director's apology.
2022 Appropriations Bill: Parliamentary Budget Office (PBO) assessment
Dr Nelia Orlandi, PBO Deputy Director of Finance, said the PBO would assist Members with deliberations and recommendations on the Appropriations Bill. The PBO presentation focused on the provisions of the Bill and how department appropriations link with policy priorities and department responsibilities in realizing policy priority changes since 2021/22. The PBO looked at key risks in realising fiscal policy objectives over the medium term and the call for accountability in the use of public finances indicated by AGSA.
The 2022 Appropriations Bill reflects a summary of the Appropriations per main division on classification per Vote, which included the spending on compensation of employees, goods and services, transfers, interest on rent on land, payments for capital asset and financial assets. The details were presented in the 2022 Estimates of National Expenditure and the two documents needed to be read together. She noted that the details of the Parliament budget was excluded from the Bill and excluded from the ENE.
The mandate of national, provincial and local government was outlined with provinces responsible for delivery of basic education, health, roads, housing, and social development. Municipalities provide water, sanitation, electricity, roads and community services.
Pressures on the budget
Social Protection and Safety and Security being the two largest expenditure functions of the national sphere of government. Statistics were provided for these two functions such as the Department of Social Development was expected to pay social grants to 18.6 million beneficiaries although this excluded recipients of the special COVID-19 social relief of distress grant.
Macroeconomic Developments since 2022 Budget
Mr Tshepo Moloi, PBO Analyst, said since the budget was tabled in February, the outlook for the global and SA economy has been struck by several profound developments. The invasion of Ukraine by Russia fundamentally affected global trade and reduced global economic growth and certainly caused higher inflation especially commodities such as fuel and food. Meanwhile China has implemented strict lockdown measures to curb the spread of Covid-19, which then further exacerbated global supply chains, adversely affecting a small open economy such as South Africa.
Global inflation pressures were boiling over, resulting in a sustained rise in long term interest rates across the globe with banks aggressively increasing interest rates. Financial market volatility was seen with a lot of capital outflows.
Domestically, several constraints add additional downward pressure to growth on top of the global setbacks. The hit to disposable income from a weaker labour market, higher inflation and likely more domestic policy interest rate hikes, persistent load shedding and the latest resurgence in domestic Covid-19 infections. There are the adverse external trade and agricultural/manufacturing production impacts of the devastating recent floods in KZN. Some sectors of the SA economy, most notably mining, are still benefitting from higher commodity prices because of the Russia/Ukraine war. Although this should also continue to benefit corporate tax revenue, severe problems with the bulk export rail lines and port facilities suggest that real GDP growth may not gain that much from the higher commodity prices.
The 2022 Budget presented an improved growth outlook compared with the 2021 Medium Term Budget Policy Statement. No material changes in the growth outlook have been made since the updated forecasts in the budget. Downside risks to the growth outlook have, however, increased due to: Russian invasion of Ukraine, new wave of the coronavirus, floods in KZN and higher domestic inflation. See presentation for figures and table.
Dr Mmapula Sekatane, PBO Analyst, linked the budget to policy priorities specifically looking at State of the Nation Address pronouncements and the Budget's response on economic development under the headings: Job Creation, Infrastructure, SMEs, SOEs, Business Environment, Agricultural sector, Land Reform (see document).
Budgeting by function across the three spheres of government is grouped as follows: learning and culture, social development, community development, health, general public services, economic development, and peace and security to target policy priorities.
Dr Orlandi noted an increase since 2021/22 of R149.08 billion. Tables were provided of Appropriations per vote as well as percentage spent by each on compensation of employees; goods and services, and transfers. In total these were: Compensation of employees: 17.3%; Goods and services: 7.7% and Transfers 69%. There were 31 Votes that allocated more than 25% on administration and each were noted and the percentage and amount outlined. Appropriation per economic classification was also provided.
Adjustments to the main budget were made possible by an improved revenue outlook. Upward adjustments include compensation of employees specifically for Health, Education, Police. Other increases include transfers to:
• Increases to the local government, however, do not guarantee indigent household needs will be sufficiently met especially if systemic financial and operational challenges are not addressed.
Any new spending commitments, such as additional social protection, must be fully financed by tax measures or spending cuts. Any shortfall in revenue collection, affecting expenditure will have to be absorbed within existing baselines
Risk to 2022 Appropriations
Mr Siphethelo Simelane, PBO Finance Analyst, identified these risks.
• Contingent liabilities
place significant pressure on public finances, diverting resources away from spending priorities and harming the sustainability of public finances. The example of support to SOEs was given when government has to pay an SOE’s creditors of government guaranteed debt if the SOE cannot. It is critical that government monitor and update contingent liabilities. A graph was provided of the growing contingent liabilities (R1.17 trillion in 2022). Contingent liabilities share in 2022/23: Eskom 28%; Independent power producers 13%; South African National Roads Agency Limited 4%; Road accident fund 40%; Other guarantees 4%; Other contingent liabilities 10%.
• Risks at State Owned Enterprises (SOEs) as the financial position of major state‐owned companies remains under pressure. To meet short‐term obligations, most of these companies deferred their capital investment projects to preserve cash. Continuous delay and underspending on infrastructure projects hampers capital investment.
• Key financial health indicators at departments
Ms Sbusisiwe Sibeko, PBO Financial Analyst, spoke to this sustainability risk. The high unauthorised expenditure in 2020/21 audit figures show departments unable to operate within their budgets, resulting in deficits, cash shortfalls and bank overdrafts:
- Number of departments with deficit 32% (50)
- Number of departments with cash shortfall 61% (89)
- Number of departments in bank overdraft 19% (30)
- Estimated settlement value of claims against the state R166.07 billion
- Number of departments with unsettled claims 94% (138)
• Poor accountability for use of public finances
Key governance failures that could affect the implementation of the 2022 Appropriation Bill and the Auditor General calls for action on accountability for the use of public finances:
• Low levels of accountability among accounting officers and accounting authorities
• Lack of internal controls, in particular the implementation of preventative controls
• Control weaknesses in government’s information systems result in project failure and financial loss
• Poor decision-making, neglect or inefficiencies result in high fruitless and wasteful expenditure
• Lack of oversight, monitoring and assurance
• Lack of material compliance with legislation – not paying creditors on time.
Second Adjustments Appropriation Bill [B8-2022]
The Bill effects adjustments to the appropriation of money from the National Revenue Fund for expenditure approved in the 2021/22 financial year to:
Health vote – R500 million is appropriated to procure COVID-19 Vaccines
National Treasury vote – R18.1 billion is appropriated to purchase equity from the South African Special Risks Insurance Association (SASRIA).
Committee members all appreciated the presentation made by the PBO team.
Ms M Dikgale (ANC) raised her concern about recent news report that social development officials fraudulently obtaining a social grant as well as receiving a salary. Such officials were not taken to jail but simply given a garnishee order. People were suffering and the ones who stole the money do not go to jail?
Mr Z Mlenzana (ANC) referred to the budget cost pressures. He wanted the Committee to adopt the budget with the ability to look into if the money allocated went where it should according to PBO. He requested that PBO short list these cost items and prioritize them according to their amount. It may require PBO to go deeper into budget analysis.
Mr X Qayiso (ANC) would have liked the PBO team to explain if the Appropriation Bill dealt adequately with national priorities for development as it was key to understand this. PBO had referenced the Russian conflict as affecting the economy. He was interested to know what specific areas would be impacted as it was generally known that countries would be impacted differently. How should the Committee respond? He asked how exactly the Russia/Ukraine conflict would impact the macroeconomy and service delivery.
He pointed out that the 30-day deadline for payment of service providers had been in place for over five years – if something did not work there has to be a new way. He asked PBO to advise how best to make this work so that it would not be included as a risk under the low level of accountability.
Mr O Mathafa (ANC) asked if PBO viewed the budget allocations as in line with NDP priorities and broad agenda of building a developmental state. He asked about concerns that the Committee had put forward such as schools still using hazardous pit toilets and the slow progress in land distribution. Were the allocations responsive to issues this Committee had lamented for years?
Mr Mathafa asked if the allocations were also in response to past performance by departments? The presentation mentioned missed opportunities for growth in exports due to the ongoing poor state of railway lines. He was sure that expenditure performance would speak to this. He wanted to find out if there were linkages between past performance and the 2022/23 budget allocations?
On the redesigned loan guarantee scheme for small businesses to bounce back from the pandemic and civic unrest, had the PBO identified any differences from the previous R200 billion loan guarantee? According to many constituencies the Committee engaged with, that scheme had left out African companies but benefited companies in white hands. Establishing scheme after scheme without identifying setbacks that led to the previous one failing, that was government "being busy" without expecting any outcome. He was interested in knowing what the difference would be with the new scheme.
Compensation of employees was 17.3% of the total allocation and he asked if comparisons had been done with other countries particularly on the African continent. Dr Orlandi mentioned that there would normally be a correlation between compensation of employees (CoE) and goods and services. The police budget had compensation of employees at 78% and goods and services at 16%. He asked if there were a correlation between the two figures, looking at rising crime and moral law of police officers. In the streets the view was that the police had low morals. There was a growing perception that in South Africa the only way to end up in jail is if you get caught red-handed because the capacity to investigate, prosecute and convict was very low. He asked if the 16% was sufficient for the kind of mandate SAPS carried for SA residents.
Ms D Peters (ANC) asked to what degree the SA economy was insulated from the Russia/Ukraine situation. In PBO’s view, if required, would National Treasury be able to quickly revise its key assumptions and projections for 2022/23. She raised the same question she asked the National Treasury the day before, if it was believed that SANRAL non toll allocation should be utilized to support provinces, especially those with major networks. The situation in the country informs that 10% of good roads are under SANRAL and about 30% of good roads were under SANRAL. During President Mandela’s term, SA established SANRAL which was seen globally as doing well. If there were any doubts, she said the N2 in the Eastern Cape and the Msikaba Bridge in KZN were good examples. She considered the technology used to build the Umgeni Road interchange was one of the best, although the floods had interfered with it as God’s hand.
She asked if PBO believed the budget for the Department of Basic Education and Higher Education spoke to quality of education. Ms Peters said it was important to produce better outcomes in education to properly deal with youth unemployment. The country had to produce better equipped, qualified and trainable young people.
Looking at the need for primary health care health promotion was the health budget enough and she referenced cervical cancer prevention and other interventions? What needed to be investigated was if health interventions were able to produce people with robust bodies that could withstand diseases. This would prevent overcrowded hospitals.
In the peace and security area, were the defence force and SAPS adequately funded to perform their tasks? During an oversight visit, Defence had complained about budget reductions.
She asked for PBO’s view if the Department of Human Settlements was adequately funded to perform its tasks and she referenced rural communities and mud houses. What was the relationship between DPME and National Treasury about evaluating the impact of the budget?
Mr Mlenzana said that Ms Peters added to his question by adding an element of measuring the intensity of work that had to be done when prioritizing cost pressures.
Mr Qayiso said the PBO noted the poor performance of state-owned enterprises affected infrastructure development. How would the PBO foresee a situation where infrastructure development would be fast tracked?
Mr Mathafa referred to the fiscal consolidation policy of National Treasury where budget cuts were prioritized as well as reprioritization. Was it possible for Treasury to maintain this position without risking the deteriorating capacity of departments? A surplus was expected in 2022/23 but if this would not be realised, what then? Should that policy stance continue? What were the risks? Would departments be able to deal with maladministration, irregular expenditure and poor performance?
Ms Peters asked for the PBO’s view of the budget besides looking at SONA.
The Chairperson said, looking at the nation’s budget, would PBO say that the problem faced was a money problem or something bigger than money? They say if one throws money at a problem, the problem never disappears. He asked PBO to point out what the problems could be. Despite the R2 trillion budget, the main indicators that must be impacted are unemployment, inequality and poverty which are going in the wrong direction. SA has the highest inequality in the world as per the World Bank and the inequality goes along racial lines and black people are at the receiving end of it. Members would agree with him that unequal societies are the most unstable and investors did not want to go to unstable societies. What would PBO say the problem was that all the performance indicators were going in the wrong direction? The presentation said that SA was not taking advantage of the high commodity prices. Did PBO have an idea of what the country was losing and about not being able to take full advantage of the boom in commodity prices?
He asked why the Bill excluded the detail of the Parliament budget allocation. PBO said that about 46% of the Department of Military Veterans budget went to goods and services, what was the main function of that department? That was an outlier and did it not compromise its core functions?
What were the guarantees when coming to the independent power producers (IPPs) and public-private partnerships (PPP)? Was it prudent taking the land and then recapitalising the land to take care of debts that were maturing? In the following year the situation would still be the same and would not enhance the capacity of a company like Denel. He referenced the R18.1 billion to buy equity from SASRIA. Was it not recapitalization of SASRIA rather than buying equity as SASRIA was already 100% owned by government?
Dr Orlandi indicated that most of the questions were sector specific and the team might not be able to answer all questions. If needed, a budget analysis would be done on sector specific questions.
The Social Development staff that received grants was linked to the Auditor General’s findings on internal control. Perhaps internal control recommendations by the AG could be followed up.
On cost pressures, the other day PBO learnt from Treasury that more than 200 programme reviews were done. She was convinced that the reviews would reveal what kind of cost pressures there were, what kind of programmes were inefficient and not working and what kind of programmes could help with department performance where reviews were done. She agreed with Mr Mlenzana that a much deeper analysis was needed on cost pressures on specific items. She had done analysis to identify specifics stemming from discussions in Parliament especially on the expenditure on entertainment and the floods for example. She did not present it in the meeting because of time however analysis on specific items could be done on the total Appropriations Bill.
Whether the budget expressed itself within the NDP requirements, at this stage it was difficult to get the link because the function groups were developed to align the budget with the priorities. But with the 2019-24 medium term strategic framework (MSTF), the priorities had changed but the function groups had not changed, so it was difficult to make the specific alignment.
The only way to try to do the alignment is there is a project that would be presented per output during the course of the year do investigate which departments could be linked to a specific priority and what the department’s responsibilities were in terms of outputs and if the outputs were presented in the annual performance plan. The only link that could be made was if it was in the annual performance plan, it would be funded. If not, then it was not funded. Also, if the outputs were not in annual performance plan, then it was not directly reported or the PBO and Parliament did not have access to such reports because they were not in the standard reporting system. The reports either went to the DPME or to Cabinet or the President.
There were a lot of reasons why departments did not pay within the 30-day period, it might be technical or financial. Ms Sibeko would answer in more detail. Dr Mohamed would answer the question on the Russian conflict.
She responded to Mr Mathafa on infrastructure saying the Committee would be having a meeting with the Department of Public Works and Infrastructure. There were a lot of developments where new institutions would manage the Infrastructure Fund but there were a lot of uncertainties on where the money was and whose responsibility it was to spend the infrastructure funds or projects linked to the funds.
No analysis was done on the proportion of CoE to Goods and Services. She did not know if there was a standard to follow on that because every department was different, and a standard call could not be made. As mentioned, normally when an analysis is done there would be a correlation between CoE and goods and services. On police she did not know how low morale could be addressed but there might have been a lot of uncertainty as SAPS was restructuring. On capacity, the review might also reveal if there were enough resources to address all the needs. She could not answer on the Ukraine and SANRAL questions at that stage.
On the quality of education, a lot of research had been on skills requirements but there was no change in programmes and courses provided by universities and TVET colleges. There are changes that need to be made to address the skills requirements in the country. She has looked at some of the SET targets. They have been changed but were still not met especially the targets set for math and science were not achieved. Perhaps other policies could be looked at to address this. There was a suggestion by DPME to look at supporting educators in the math and science field and how more teachers could be trained.
What would be adequate funding for Peace and Security? The PBO team would not know what would be adequate; perhaps the programme reviews would give more insight into that. The PBO’s view on Human Settlements was that it transfers its payments to provincial or local government so the reporting and evaluation system of the department should be looked at the project implementation by provincial and local government. Also, much of the funding was via conditional grants so the monitoring of conditional grant funding would be important.
On PBO’s relationship with National Treasury and DPME, DPME shared some of its documents with the PBO in terms of monitoring. National Treasury normally provides the PBO with a lot of information for data analysis. She noted that Dr Mohamed would answer about fiscal consolidation. There were a lot of procurement policies and so the PBO did not have a view on that as it was also the mandate of Treasury to change and monitor the policies.
She answered Mr Buthelezi that the problem would not always be money but there could be technical and capacity challenges in government. The reviews could reveal some of the issues if it was money, inefficiency, capacity or not setting the correct outputs in terms of priorities set by the President. If the outputs were not in the APP, then there would be no reporting on them within the standards Treasury and DPME provided for reporting and monitoring.
The PBO excluded the Parliament budget details because Parliament had its own Financial Management Act and it was not in the Appropriations Bill. Parliament produced its own Appropriations Bill. The Bill had not been taken to the Appropriations Committee therefore there was no information on the main divisions or economic classifications of Parliament.
Military Veterans used a lot of consultants or contractors in terms of goods and services and that could be a reason for the high goods and services budget. An analysis could be done on this and the Committee could be informed.
Dr Mohamed Seeraj, PBO Deputy Director for Economics, agreed with Dr Orlandi that the questions raised by Members were quite deep and fundamental. Instead of going through the questions one by one, he replied to the theme of the questions raised by Ms Peters, Mr Mathafa and Mr Qayiso about adequate funding and on government reducing funds. Dr Orlandi raised an important point about how the NDP and the MTEF were aligned and budgeting was according to function groups. The concern with a department cutting expenditure is there were more needs that were not met. This was linked to the Chairperson's question if the problem was a money problem or something else like capacity, so the question about financing and capacity were important.
His first point was that there had been a lot of talk about zero based budgeting and starting from scratch. PBO has raised its view on that. The thinking should not be about starting from scratch but about what the needs were and how much had been allocated. From year to year there have an increasing and shifting items around with an effort to increase the number of people working for the state and building state capacity to deliver.
Shortly after the global financial crisis when the government was starting to look at fiscal consolidation, there was concern that the country would start losing nurses, teachers and doctors unless salaries were adjusted. The cost of employment was linked to the notion of effective capacity. One realised that one of the problems in slowing down increases in cost expenditure, was that service delivery and state capacitation and its developmental role to provide for people’s needs – some that was being reversed.
There may have been a loss of expertise and capacity and institutional memory on the increase during that time. A few years ago, wage freezes were presented. Government was one of the major employers of highly skilled workers necessary for building capacity, and now there was a look at reducing that capacity. A loss of skills may be observed as the government is a major employer and the private sector would not pick up those skills, because of lack of adequate investment and growth and employment within the private sector. These were important impacts of what fiscal consolidation had been and the ability to spend enough.
On infrastructure maintenance and the SOEs, one of the problems with cutting expenditure and fiscal consolidation was that there would be inadequate maintenance. Ms Peters spoke about education and housing. The impact it had on people’s resilience to pandemics and the floods and other natural disasters became lower. The inadequate expenditure could to some extent be looked at as a contingent liability as later more people would get sick and there would be more disasters. There would have to be rebuilding, people would lose jobs and the economy would decline. The government would have to try to meet needs.
There was a need to rethink the approach about how much was being spent and how is the financing and how much debt the country should be taking on rather than chasing a certain debt-to-GDP target and fiscal deficit targets. Trying to achieve surpluses within two to three years but what would be the cost of not meeting the needs that would be incurred later? On the question of if was a money problem or something else, when it came state capacity, cost of employment and public sector expertise and the ability to deliver were integrally related to what was not done in building capacity. Maintaining an argument that there was a trade-off between cost of employment and capital expenditure, infrastructure development, payment of social grants, there had to be a rethink because state capacity and expertise were needed in more numbers to provide that.
On CoE comparisons with other countries, in general SA fell in the middle or probably below. Different needs had to be looked at and SA was a developing country where the huge need was in development of improved and deeper quality of basic services of health, education and employment. More of such capacity was needed in the state. There was also need for money to be spent on fixing problems because there was a lot of wasteful expenditure, loss of production and the possibility of state capture. As was seen with the Zondo Commission and the cost of having the Commission, a lot of money needed to be spent to deal with those who had been corrupt and those who facilitated state capture, then more money would be needed to charge, prosecute and hopefully detain the people.
There were a lot of costs to that and inadequate funding was due to the chasing of certain targets which should not have been the final targets. As Mr Buthelezi said the final targets should be reducing unemployment, poverty and inequality. He emphasised that inequality was a major constraint in the ability of the country to develop, it impacted negatively on all aspects of life in terms of health, crime levels and people destroying state infrastructure and facilities to be able to sell scrap metals and protests in terms of expressing unhappiness because the people felt unheard.
There were a huge number of issues thinking about how much money was appropriated with the broader issue of the fiscal framework that was coming clearly into view.
On Ukraine, the South African economy had become more integrated into the global economy. Levels of growth within the global economy when affected by large shocks like what has happened in Ukraine had impacted the SA economy on the demand for goods exports and some commodity prices were higher. As mentioned before, there was no ability to benefit. The biggest site of the shock was on food and fuel prices. What was seen in commodity markets generally was because of the increase in financial global economy, there was a bigger alignment with the price of food and other commodities and the movements in financial markets. Even if SA was not the biggest importer of wheat and grains and imports of oil and petroleum products from Ukraine and Russia, it was putting pressure on SA costs as input prices were increasing for fertilisers and chemicals.
The PBO spoke about the supply side of inflation, because of links to the disruption of value chains, the movement of goods etc. To some extent those became bad because of the pandemic and the impact the pandemic had on ability of different countries to produce and to transport things. We saw in China a city like Shanghai closing which was an important economy in itself and the provider of exported products to the world. Those were seen as impacting SA.
On Treasury needing to change the assumptions as they did the forecasts and projections, Dr Mohamed assumed that Treasury had started doing that in terms of the models and global prices for oil and food. The latest forecast had not been seen. Numbers were coming out from the IMF and World Bank on low global GDP growth in the different regions but not much impact had been seen on sub Saharan Africa. As more work would be done on projections not only from National Treasury but from UN agencies, World Bank, IMF and the Reserve Bank, changes would be seen.
Linked to the impact of the war in Ukraine, the PBO in the past had warned about the way in which the thoughts about risks to the fiscal framework and, in particular, general risk to the economy must take into account the increase in geopolitical conflict not spoken of. In the last two years or so there had been five coups in Africa. There was the possibility of big changes in Ethiopia linked to internal strife. Geopolitical risks linked to climate change, fires, flooding, droughts, inequality and growing internal social disruption linked to inequality are all risks that needed to be taken seriously and factor into thinking about the economy. There was a confluence of factors: increase in geopolitical events, climate change events, linked to inequality was growth in far-right groups around the world. It was important to think through the risks to the fiscal plan.
On SOEs and infrastructure, the IPPs and PPPs, the general point Dr Mohamed had made was that there was this idea across the developing countries coming from the influence of the research organisations like the OECD, IMF and World Bank was to see the delivery of services, and infrastructure development linked to, that as a financing issue and to say that government did not have the fiscal space. That brought back the issue of thinking through what government spent, how many contingent liabilities were taken on. The approach taken was that the private sector needed to step in; it had the finance and could do the projects or finance projects. One of the problems with that was that it brought in more and more global financial markets, securitisation of debt and the process of financialisation where debt was securitised and bought in different markets. The problem with that was that requirements of those buying the debt. The PPPs got government to provide increasing reduction of potential risks including minimum revenue agreements for provisions of different kinds of services.
Mr Tshepo Moloi replied that a huge part of not taking advantage of the commodity boom had to do with severe problems with crime networks specifically related to transport infrastructure, inefficiency in transport and export rail lines. The country was definitely benefitting from the high price of coal but it forgoing export volumes given the limiting constraints.
There was current research being done to prepare a brief on the implications of the bounce back scheme proposed by Treasury. Some of the preliminary observations on the new scheme included that banks and DFIs and non-bank SMMEs finance providers had sole discretion on which businesses were provided finance. This had significant implications as it was known that financial institutions were inherently risk averse when it came to the provision of finance to SMMEs. Mr Moloi spoke about the misallocation of capital problem currently faced. By this he meant that the situation constantly saw the financing of large enterprises in sectors such as mining utilities, professional services at the expense of job-creating SMMEs such as manufacturing.
The latest investment summit reflected the appetite of investors to allocating money towards the South African economy. Dr Mohamed had touched on the financialisation of the SA economy and broadly the global economy which meant that financial institutions were still able to remain profitable without investing in the real economy and creating sustainable jobs.
The loan guarantee bounce back scheme on its own would not fundamentally address the financial and operational challenges faced by SMMEs. There was a need to ensure that there were other business and financial interventions so sustainable jobs were created and that SMMEs sparked inclusive growth. Another issue was the scheme’s lack of mandated transformation as related to race, gender and age and priority should have been given to businesses that were hit the hardest by the respective economic shocks. The main issue was the new scheme was still through the financial system architecture that was still not suitable for informal townships and the rural nature of many of SA’s SMMEs.
Ms Sibeko replied about the 30-day payment of service providers. AGSA had highlighted that some improvements had been made. It needed to be at the top of the agenda for government entities to ensure that there was full scale implementation and accelerated. Critical to the inability to pay creditors on time was financial pressure which linked back to the broader question of was there enough money or not? The average payment period was 70 days. AGSA said that most entities that did not pay on time was because they were in financial distress. The delay impacted the businesses and their workers and the whole ecosystem was impacted.
To add to what Dr Seraaj said earlier, the questions about health had been noted. The infant mortality rate was regressing and there were more infant mortalities in 2019/20. What would be the trend going forward? Dr Orlandi mentioned policy outcome – money was spent but what were the outcomes on the ground? Medical legal claims were straining the health budget and the claims were driven by several factors but how would the problem be diagnosed and how it related to appropriations and therefore budget implementation; this needed to be addressed more slowly. She explained that the R18.1bn for SASRIA was to set off the high levels of claims and not equity purchases. It was to ensure that the insurer has sufficient capital to meet regulatory requirements.
Dr Orlandi said there was a reason that PBO presented the function groups. Treasury also indicated that there is already a lot of duplication found in service delivery and in funding the services being provided. The functional group process really worked because in those discussions there was a need to discuss mandates and functions and if duplication came up then departments or executives should give and take and realise where there was duplication and which services needed to stop and where was there a need to create new outputs for services if there was duplication. Lately she has seen that services were requested from government and all the small entities could not provide the services required and still funds were transferred to the entities. They were not capacitated to assist communities or citizens or the entities did not deliver on its mandate or outputs.
Follow up questions
The Chairperson pointed out that there were still a few questions that needed to be investigated. PBO did not cover the optimal way of dealing with business institutions by financing debts that were due without ensuring that the following year the institutions would not return again with other maturing debt? He asked Dr Mohamed if the way that debt was financed was the most cost effective or if there were examples somewhere of debt dealt with more cost effectively.
Dr Seeraj Mohamed replied that the question needed PBO to do more research and it would reply to the Committee in writing. On the question of debt financing and its cost effectiveness, it was one of the biggest questions in public finance especially the growth in the use of quantitative easing in developed countries and the increasing use of it in 2020. It had come up on the agenda of some developing countries. The period was short especially for developing countries to look at if developing countries used impact on interest rates paid through getting financing from the central bank. That was an area SA and the central bank treated as the bogeyman and worried that raising it would cause problems within the market because of credibility. It was an issue that needed to be investigated and raised within society. The other side of it was that if this was considered, then looking at increasing borrowing from cheaper sources such as the IMF, the World Bank, and others.
With the IMF, people said there were no conditions attached to that but there was a change in how the IMF was lending money to countries. The structural adjustment had to be done by countries before qualifying to borrow. So in a sense SA, through self-imposing certain conditions including fiscal policy, was approached to qualify for those loans, especially if SA wanted to change its approach to fiscal policy in borrowing. Using options like quantitative easing and other things in the future and becoming more reliant on institutions like the IMF was something that since the 1980s Africa was concerned about. Overall the approach taken by the IMF had not changed that much in terms of what structural adjustment meant. Treasury had done a lot of work on this and the PBO still had to do research on the approach in debt markets and how debt was managed in shifting of short term to long term debt to improve the overall debt situation in the country. Developed countries in this regard had to be looked. It was not leaving the interest rates made by sovereign governments to the markets but getting the central bank to provide the financing and get involved in supporting fiscal stimulation. The big issue was that the institutions have taken control of the interest rates.
The Chairperson mentioned that he had not heard discussed when talking about the advantage of lower interest rates, about the lack of firmness in the exchange rates associated with that. National Treasury did not say much on that which was important because of the volatile exchange rate. He thanked Dr Orlandi and the PBO team and adjourned the meeting.
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