National Treasury Quarter 1 2022/23 Spending Outcomes for Departments & Public Entities; Update on State-Owned Companies

Meeting report

The Chairperson welcomed everyone and explained the agenda for the day.

Apologies were noted.

Quarter 1 2022/23 Spending Outcomes for Departments

Dr Mampho Modise, DDG: Public Finance, National Treasury, briefed the Committee.

The National Treasury (NT) presented a spending summary of the first quarter of the 2022/2023 financial year, looking at higher than projected expenditure, lower than projected expenditure, and personnel expenditure.

The report depicted lower than projected expenditure in the:

Department of Public Enterprises (R17,8 billion or 81,5 percent lower than projected spending)

Department of Social Development (R9,4 billion or 14,7 percent lower than projected spending)

Department of Higher Education and Training (R3 billion or 5,7 percent lower than projected spending)

Department of Water and Sanitation (R1,7 billion or 41,6 percent lower than projected spending)

Department of Agriculture, Land Reform, and Rural Development (R1,6 billion or 39,8 percent lower than projected spending)

Department of Justice and Constitutional Development (R1,6 billion or 33,4 percent lower than projected spending)

Department of Police (R1,3 billion or 5,4 percent lower than projected spending)

Department of Science and Innovation (R1,1 billion or 48,9 percent lower than projected spending)

Department of Trade, Industry and Competition (R1 billion or 32,7 percent lower than projected spending)

Department of Health (R1 billion or 6,4 percent lower than projected spending)

Department of Basic Education (R625,2 million or 6,3 percent lower than projected spending)

Department of Cooperative Governance (R553,3 million or 31,5 percent lower than projected spending)

For Public Enterprises, the lower than the projected expenditure is due to lower than planned disbursement of funds to Eskom, as the funds are disbursed in terms of the liquidity needs of the entity.

For Social Development, this was due to the delayed payment of the social relief of distress R350 grant because of re-registration of beneficiaries and finalisation of contracts with banks to conduct means tests.

For Water and Sanitation, this was mainly due to slow spending on indirect Regional Bulk Infrastructure and the Water Services Infrastructure Grants.

For Health, it was due to inventory: medicines since there has not been a need to purchase additional COVID-19 vaccines as the demand has declined and the slow kick-off of various projects for the NHI Indirect Grant.

There were also instances of overspending by Statistics South Africa and the Departments of Communications and Digital Technologies, Defence and Employment and Labour.  

With Stats SA, this was due to activities relating to the Census 2022. The Census collection was extended from 2021/22 to May 2022 due to challenges in the recruitment of fieldworkers and a shortage of rental vehicles in the market.

In respect of Communications, this was mainly due to transfer payment to the South African Post Office for a subsidy to cover costs related to Universal Service Obligations made earlier than anticipated.

In respect of Defence, this was due to the compensation of employees ceiling which does not support the current personnel numbers of the department, and accrual payment related to transport equipment such as trucks, and buses.

(See Presentation)

Quarter 1 2022/23 Spending Outcomes for Public Entities

The NT said it had experienced challenges in reporting on public entities, such as data verification, different budget programme structures, accounting standards, public entities that did not enable comparative analysis, and public entities that operated in other financial periods.

On the Compensation Fund, she reported that the cash available at the end of the quarter amounted to R10.9 billion which is R5.3 billion more than projected mainly due to slow spending on goods and services and compensation of employees.

On Legal Aid South Africa, she reported that there is a surplus amounting to R133m was accumulated as a result of revenue overcollection and low spending on current payments as explained above.

NT reported that NSFAS had a cash deficit of R835 million for the financial year which was lower than the forecast by R5.7 billion due to the unspent cash reserves which are held to pay for the resolution of claim discrepancies since 2017. The cash deficit was projected to be higher as the entity expected to resolve more claims with the assistance of an external service provider, but the data inconsistencies continue to delay finalisation of this process.

Concerning PRASA, the Committee heard that the total receipts were lower than budgeted at the beginning of the year mainly due to: worse than expected ticket sales as the number of paying passengers continues to fall; deteriorating services, and frequent service interruptions, exacerbated by the loss of infrastructure to vandalism and theft during the COVID-19 pandemic lockdown, depressed incentives for the return of paying passengers; and the halting of long-distance passengers services due to long standing financial sustainability issues, and also intensified by the COVID-19 pandemic lockdown.  The higher than projected receipts from interest is mainly due to high cash holdings as a result of significant underspending on the Agency’s capital programme.

National Treasury presented on the expenditure of disaster funding.

(See Presentation)

Update on state-owned companies

NT presented an update on the progress of state-owned companies, including Eskom, the South African Post Office, the South African Special Risk Insurance Association (SASRIA), South African Airways, Airports Company of South Africa, and the Land Bank.

Eskom faced financial, operational, and revenue challenges. Eskom is the single biggest risk to the South African economy and resolving the security of electricity supply and reliability must be prioritised. Eskom’s high levels of debt pose significant risks to its going concern status and financial sustainability as well as to the fiscus. These high levels of debt continue to place pressure on Eskom’s liquidity due to debt servicing requirements. Eskom’s reported revenue of R66.3 billion as at 30 June 2022 (June 2021: R58.6 billion), was largely driven by a tariff increase of 9.61% for 2022/23.

Although a number of reforms have previously been implemented to strengthen SAPO’s mandate and financial position, the entity continues to struggle with its commercial revenues. SAPO’s Q1 as at 30 June 2022 performance has remained weak and urgent attention is required to address organisational performance as only 6 KPIs were achieved against 13 KPIs planned Corporate Plan targets which is an overall performance of 46%.

SASRIA requested an equity injection of R22 billion, as it had insufficient reserves to settle claims arising from the July 2021 unrest. As at 30 June 2022, Sasria has paid R25 billion, with outstanding claims of R7 billion. Sasria has estimated its SCR at 117% by June 2022, and projects to achieve an SCR of 195% as at March 2023, with all the initiatives being implemented. NT continues to monitor the progress Sasria has made in the settlement of claims received, through engagements and reports submitted by the entity.

Mango Airlines remained under business rescue and had not resumed operations. South African Airways Technical continued to incur losses.

The Land Bank was struggling to repay its debts. The lenders had rejected the last version of the liability solution, and the new Lank Bank board established in December 2021 was developing a new one.

(See Presentation)

Discussion

Mr O Mathafa (ANC) enquired about the current constraints and fiscal objectives of the Border Management Authority (BMA). What was the funding model? Was there any engagement between the NT and the BMA to ensure the entity was funded?

He believed that the unfilled vacancies in the Department of Public Works and Infrastructure (DPWI) and StatsSA were due to poor project management. The DPWI often failed at fulfilling its mandate because it lacked the capacity, yet critical positions remained vacant.

He was concerned about the under-spending in many departments. The DPWI had under-spent but had a list of projects that needed to guide their spending. He was also worried about the Department of Basic Education's (DBE's) slow spending on infrastructure grants while some students were without accommodation. Was it possible that some of these functions could be devolved to other departments? The Department of Agriculture, Land Reform, and Rural Development (DALRRD) needed to expedite grants to struggling farmers. The Department of Water and Sanitation (DWS) was under-spending its budget, yet there were yearly protests in KwaZulu-Natal (KZN) due to a lack of water. There needed to be consequences for under-spending.

Mr A Sarupen (DA) was concerned about the condition of the Land Bank. What would the consequences be if the Land Bank could not repay its debts? When creditors lend money to private entities, they gamble whether they would get compensated or not. When the loan fails, creditors forfeit their money and take what they can get. He asked if it would not make more sense for the Land Bank to be liquidated and for a new entity to be created. The state should not be held entirely responsible for all the consequences concerning the Land Bank.

He said that this year had been the worst year on record for load-shedding. The presentation had explained the challenges that surrounded Eskom, but it had not touched on the conditions imposed by ministers to improve the situation and ensure compliance. Had there been any improvements?

He requested an update on the progress of Mango Airline’s business rescue operations. The airline was not currently operational. He was not aware of any possible talks around potential privatisation of any sort. Were any conditions imposed on the airline before the bailout, or was good money thrown away?

Lastly, he remarked on the slow spending of the DWS. He wanted to know what the causes of the sluggish expenditures were. How were municipalities engaged to ensure that something was done about towns without access to water?

Mr Z Mlenzana (ANC) remarked that few findings in the presentation had changed over the years, particularly the problem of under-spending. He was aware that his question might sound controversial, but was the NT hiding any information from the Committee? The Committee had previously advised that quarterly or monthly monitoring may not be sufficient, and the NT should implement weekly tracking. However, there had been no changes. Had any of the officials employed by the National Treasury been deployed to various departments? Could these officials be undermined?

He asked how the NT decided on the allocations to the various provinces. Did reports by municipalities, or merely thumb-sucking, guide decision-making? Was the National Treasury able to follow up on the impact of the allocated funds? Money was being injected into provinces to deal with disasters, only for those funds to be under-spent.

He asked whether the National Treasury had a working relationship with the Auditor General and Members of Parliament. Were all these branches in synchronised conversation? How was the Auditor General (AG) supported in conducting its function?

Mr X Qayiso (ANC) pointed out that the performance of the Unemployment Insurance Fund (UIF), South Africa Tourism, and the South Africa Revenue Service (SARS), had improved. The Committee and National Treasury should appreciate these developments.

Questions and findings that surrounded under-spending were repeated yearly. The Committee needed to draw a line to address the problems. It also needed to draw a line with a deadline on filling funded vacant posts. He wanted to see more progress.

He found it unacceptable that the Department of Higher Education and Training (DHET) had a large sum of unpaid grants. There was a university in the Free State that had been built in the bushes. The building had not been completed and was thus not a functioning college. Why did the DHET not pay the grants? Under-spending undermined the government’s ability to address unemployment in South Africa.

The Department of Basic Education failed to address issues around infrastructure and backlogs. The Department needed clear deadlines to ensure problems were resolved.

Eskom repeatedly brought up the same challenges and findings. It had reached critical levels without much improvement. South Africa’s economic recovery programme was based on Eskom. The failures of Eskom made any progress challenging to achieve. Eskom needed to redouble its efforts.

He noted considerable wasteful expenditure on the Integrated Financial Management System (IMFS). Were any assessments conducted? Were any disciplinary actions taken?

Mr E Marais (DA) maintained that StatsSA had overspent its budget due to the extension of the census. The census had been extended because the employees were sometimes not paid in time. Furthermore, there was a significant turnover, and new employees had to be trained. The census was vital for allocating appropriate funds to provinces. When would the final report on the outcome of the census be available?

He was concerned about the under-spending of infrastructure budgets, especially in municipalities. He thought the Land Bank’s debt was too high, and insufficient management was in place.

The Chairperson was critical of the under-spending by various departments. He questioned the budgeting skills of the departments that had almost 40% of variations between funds allocated to them and what was actually being spent. Budgeting skills went hand in hand with project management. Could anything be done to improve budgeting skills? Did the National Treasury appreciate the implications of under-spending? Under-spending had an extremely negative effect on service delivery and infrastructure. He requested a review that depicted trends over the last five years. What was the importance of under-spending in the previous five years in rand value? How much return had Eskom provided to the citizens in the last five years?

He wanted to know what the money given to Mango Airlines had been used for since the entity was not operational or profitable.

Land Bank lenders wanted to secure their loans. This was not good for the Land Bank. A moral hazard might arise, as the lenders had no financial consequences because the government was expected to step in. Was the Land Bank continuing to give out loans to farmers? He wanted a report from the Minister and executives on how to resolve these issues. He also requested an update on South Africa Express Airways.

He asked why the National Treasury was so accommodating to Eskom. Had the Department implemented any conditions to ensure oversight?

National Treasury's response

Mr Ravesh Rajlal, Chief Director: SOE, NT, said National Treasury would provide a detailed briefing on the conditions around the allocation of funds raised by the Committee at the next meeting.

Land Bank

Mr Lefentse Radikeledi, Director: Development Finance Institutions, NT, addressed questions on the Land Bank. The government did not necessarily run the lending to the Land Bank. The NT could negotiate with the lenders to restructure the debt. The debt would be paid back in total, but it may not be delivered in the agreed-upon time frame. The Land Bank and Agricultural Development Act did not allow the Land Bank to be liquated by its lenders. It had to be done through the courts. However, if the Land Bank were liquidated, there was a greater chance that the lenders would make even more significant losses. The R7 billion that was supposed to be allocated to the Land Bank was still with the government.

The lenders wanted an assurance that if the Land Bank could not pay, the government would take over its debts. The Minister had declared that he was entirely behind the Land Bank and desired a Land Bank that was sustainable and that generated enough money to repay its lenders. The lenders had not taken the Land Bank to court, because they were not making any losses. The Land Bank had not failed to compensate them every time.

The National Treasury believed that the negotiations should come to an end. The process had been delayed. Conflict might arise if the government took over the Land Bank’s debt. What would the government then be saying to lenders of Eskom or other state entities that had not received their money back?

The Land Bank did not have money to give farmers loans. The Bank had to get its lenders' permission to provide farmers loans.

Eskom

Mr Jeffrey Quvane, Senior Analyst, NT, answered concerns about Eskom. He would make the details of conditions and compliance available later. Eskom met the requirements of compliance. However, it faced many challenges, such as the plants failing. Eskom’s debt was purely dispersed to meet the capital needs and interest on the debt. It provided the NT with weekly updates to understand its cash flow.

Efforts had been redoubled, and the National Treasury was hopeful that interventions announced by the President in July would reduce load-shedding and diesel expenditure.

Thus far, Eskom had received R114 billion. He admitted that the citizens of South Africa had not achieved anything in return. The money had been used to manage Eskom’s ability to repay its debt.

The National Treasury took a hard stance in terms of compliance. However, there was a limit to how far they could go. If the NT withheld funds from Eskom, Eskom might not be able to repay its debts. This could have severe consequences for the entire country.

Mango and SAA

Mr Phatu Rasivhetshele, Director: Sectoral Oversight Division, NT, said that funding allocated to restructure Mango Airlines had been placed into a business rescue plan. The National Treasury was working on a way forward and the future role of Mango.

He provided details about South African Airways (SAA) funding over the previous five years. Unfortunately, South African Express Airways had failed business rescue and was being liquidated. They were currently negotiating between selling the airline, or only the assets.

Education

Ms Julia de Bruyn, Chief Director: Public Finance, National Treasury, stressed that infrastructure delivery was very complicated. However, she agreed that the backlogs regarding infrastructure from the DBE and DHET were unacceptable.

She confirmed that the NT transferred money directly to higher education institutions. The institutions needed to provide a business plan, procurement, and cash flow details. If they did not provide all the required documents, the money would not get transferred. She was aware that not all institutions could handle all those requirements, but they were working on building capacity.

The NT received projections from departments at the beginning of the financial year. However, the accounting officer was responsible for ensuring that the departments spent the money they said they intended to.

The DBE had spent all its funds in the previous financial year. It received claims from an implementing agent, and the Department then verifies the infrastructure before the funds get paid. The DBE had not received claims, which was why it had under-spent in this financial year.

She agreed that hard deadlines needed to be implemented. The DBE had sufficient capacity to run and manage infrastructure projects, and the DHET had started to build capacity. However, both departments needed more funding to meet norms and standards.  

Agriculture

Ms Lebogang Madiba, Chief Director: Public Finance, NT, confirmed that they had removed the under-spending in the Department of Agriculture, Land Reform, and Rural Development. One of the reasons for the under-spending had been the transfers and subsidies under restitution due to disputes between the landowners and the claimers regarding the amounts.

Transfers to provinces around the provisional grants would be approved only if the area submitted a business plan to the Department. The Department’s legal unit would then review the business plan to ensure everything was in order. It was then sent to the accounting offices for approval. These processes commonly occurred in the previous year’s first quarter to avoid delays. Provinces should plan before the implementation month.

She highlighted the programmes that the DALRRD was under-spending on. The main issues were travel and the late submission of business plans and contracts that were still being finalised.

General issues

Dr Rendani Randela, Budget and Policy Analyst, NT, disagreed that under-spending should be punished. Sometimes, the entire budget did not have to be spent to meet targets. He believed that punishing under-spending may kill creativity and innovation.

The funding of the BMA was done through appropriations according to Section 22 of the BMA. An integrated finance work stream was currently in place. The BMA had struggled with issues around shifts in its function.

Ms Ulrike Britton, Chief Director: Urban Development Infrastructure, NT, said that the transfer funds had to comply with the conditions in the grant framework. If any department breached conditions, it might be deemed an irregular expenditure.

She said that underfunding in infrastructure may be due to uncertain conditions and delays in the implementation of some projects. Many unplanned issues occurred that were not contracted for. The effects of the "construction mafia" could not be underestimated.

Ms Mokgatla Tema, Director: Public Finance, NT, confirmed that the National Treasury did indeed provide support to the auditors, and had a working relationship with the Auditor-General of South Africa (AGSA). The census results were likely to be published in May the following year as they were currently busy with data coding.

Dr Modise assured the Committee that the National Treasury was not hiding anything from the Committee. At the next Committee meeting, it would elaborate on the Public Finance Management Act (PFMA) and the roles and responsibilities of different players. The director-general of a department could not take action against another department. Parliament should hold the accountants of that department responsible.

The media had produced a negative view of the impact of the disaster relief fund due to misunderstandings of how the processes work. As for budgeting skills, the employees hired for a specific role needed the necessary skills and capabilities to fulfill their responsibilities.

She recommended that the Committee request a presentation on the Integrated Financial Management System by National Treasury.

Mr Tsholofelo Marotholi, NT, confirmed that 80% of the claims for the July unrest in KZN had been paid. Claims that had not been paid out were related to customers or clients that still needed to forward information.

The meeting was adjourned.