Provincial Economic Review and Outlook; Provincial Treasury Quarter 1 2022/23 Performance

Meeting report

Briefing by the Provincial Treasury: Provincial Economic Review and Outlook 2022/23
Dr Roy Havemann, Deputy Director-General:  Fiscal and Economic Services, Western CapeProvincial Treasury, informed the Committee the world economy is confronted by high and escalating inflation caused by a series of destabilising events. Russia's invasion of Ukraine has a major impact on the global economy, mainly through higher commodity prices. The rise in commodity prices would further fuel global consumer price inflation.

He reported that in the first quarter of 2022, South Africa has officially recovered to the same or higher GDP level than the first quarter of 2020. However, employment levels are still 820 697 or 5% lower than pre-COVID‑19 pandemic employment levels recorded in the first quarter of 2020. South African outlook is hampered by increasing inflation and interest rates, high unemployment, power shortages, and slow reform momentum.

South Africa is expected to grow sluggishly at 1.7% in 2022 and 0.3% in 2023. Major growth contributions are expected from the agriculture, manufacturing, trade and transport sectors. The growth outlook for the agriculture sector (8.8%) in 2022 remains positive. Risks to the outlook are: increasing inflation; ongoing power outages accompanied by above inflation electricity prices increases; growing unemployment and subsequent socio-economic decline with potential social unrest and escalating crime rates.

Dr Havemann stated the Western Cape GDP is rebounding. Between 2012 and 2021, the average estimated economic expansion of the Western Cape was 1.2%. The Western Cape economy grew by 4.8% in 2021, following a 6.2% contraction in 2020.  Between 2012 and 2021, the agriculture sector (44.9%) outperformed all other sectors in the province. Between 2012 and 2021, real exports in the Western Cape expanded by 39.8% of which the agriculture (36%) and manufacturing (5.1%) sectors made the most significant positive contributions. The substantial growth contribution from the agriculture sector was due to phenomenal cumulative export growth (165.2%) over the period. In the first quarter of 2022, the estimated GDP exceeded the first quarter of 2020 (pre-pandemic) by 0.4%. However, employment levels in the Western Cape were still 8.1% lower than the pre-pandemic level.

He further stated employment and unemployment were moving in the right direction. The labour force expanded by 162 000 or 5.3% to 4.899 million. The labour force participation rate improved by 3% points to 66.0 per cent. Employment opportunities increased by 46 000 or 2% to 2.344 million. Unemployment increased by 116 000 or 15% to 891 000. The unemployment rate increased by 2.3% points to 27.5%. The expanded unemployment rate increased by 2.3% points to 31.3%.

Lastly, he stated the key findings from the data were pointing to the reprioritisation toward infrastructure investments to meet the demand for social services, but also to provide employment opportunities.

Education requires a renewed focus on infrastructure and an increase in fixed investment because the number of learners is growing, and there are fewer schools and higher learner-teacher ratios would require renewed focus on infrastructure investments.

New service delivery models and increased private sector participation involvement would need to be explored. Most of the top causes of mortality in the province were lifestyle-related and could be preventable. Incentives to promote healthy lifestyles could possibly reduce the burden on the health system.

Quarter One Performance 2022/23
Ms Zeenat Ishmail, Chief Director: Strategic Management: Department of the Premier, took the committee through the first quarter performance for the 2022/23 financial year. The Western Cape government is on track with service delivery and all targets have been met. A total of 804 performance indicators are confirmed in the tabled APPs of the 13 provincial departments for the 2022/23 reporting period. A further 156 performance indicators have been identified from the APPs of the 11 provincial entities. The PSIP Centralised Reporting Tool (CRT) was also compiled to track progress against specific performance indicators linked to interventions of the PSIP. The CRT comprises 134 PSIP indicators: 40 outcome indicators.

She reported the GDP growth rate for the Western Cape stood at 2% during Q1 of 2022/23. The number of people employed increased by 1.5%. Official unemployment rate stood at 25.5%.  There is stabilisation in violent crime, with homicides in the Western Cape decreasing by 1%. 11 priority areas in the Cape Metro recorded an 8% decrease in homicides. This accounted for 40.5% of all homicides in the province. Almost half of all homicides occur during weekends and are committed by firearms.

76.12% of grade one learners received formal grade R education in public ordinary schools. NEETs (Youth Not in Education, Employment or Training) aged 15 to 34 has risen by 22% since Q1 of 2020/21. The sharp surge in NEETS was more pronounced between Q1 of 2021/22 and Q1 of 2022/23, with an increase of 12%.

Departments achieved 324 out of 407 targets (or 80%) with three out of 13 departments achieving all their targets. Public entities achieved 64 out of 78 targets (or 82%). For quarter one, the performance of 211 of the 394 indicators was reported. Overall, the WCG average performance against APP targets linked to the PSIP thematic areas is 71%.
 
On the performance of provincial strategic implementation plan, she took the committee through the performance of each department. For example, the provincial treasury initiated developing and implementing an in-house eProcurement System for the province. The Department of Education supported 95 ECD centres across the province. These were implemented by two social service organisations (SSOs) funded by WCED to run “Blocks 4 Growth” (4 to 5-year-olds) and “Step Up” (5 to 6-year-olds) - in identified facilities/entities/sites to support children to achieve their developmental milestones. The Department of Environmental Affairs finalised 58 Environmental Impact Assessment (EIA) applications within legislated time frames.

The Department of Community Safety deployed 1 141 LEAP members to different areas and functions. The City of Cape Town indicated vehicles were delivered by end of July '22. LEAP members carried out 1 751 arrests targeting drivers of crime, against a target of 300. Confiscated 44 firearms, against a target of 33. The Forensic Pathology Services unit sends weekly reports on road traffic accidents and homicides to SAPS. The Western Cape Law enforcement agency conducted 55 enforcement operations with other agencies. The Department of Agriculture trained 291 participants in agricultural skills development programmes. Further, ten people were provided with internships or workplace experience. The Food Gardens project supported 498 households with agricultural food production initiatives.

The Department of Social Development funded 858 parents and caregivers who completed parent education and other family support programmes. It referred 4178 children assessed to be at risk to various targeted interventions. The Chrysalis Academy supported 190 youth. The department funded 3 298 service users who completed substance abuse treatment programmes.

The Department of Public Works and Transport processed during Q1 of 2022/23 1 371 abnormal load applications. PRE processed 71% of transport operating licences within legislated timeframes during the reporting period. Five new infrastructure projects (one education and four general facilities) were completed during Q1 of 2022/23. The total spend was reported at R251 million (R198 274 777 on education and R52 733 343 on general facilities). The Department reported 26 public infrastructure maintenance and upgrade projects completed (13 education projects and 13 general facilities) with a total spend of R115 million (R89 330 274 on education and R26 121 020 on general facilities).

Ms Ishmail said the first quarter is the first joint release for Q1 as part of their performance data reform journey to expand the depth and breadth of performance data. It further provides the Budget Committee with the quarterly outcome for the province in terms of performance indicators and an institutional performance overview. It provides the first overall view of Western Cape government performance from a reporting perspective, noting further work towards streamlining the integration of non-financial performance. The consumption of this release quarter on quarter is to build an annual performance report card for the Western Cape government.

Ms Annamarie Smit, Chief Financial Officer, Provincial Treasury, enlightened Members about the financial resources that have been used to achieve the performance targets. She indicated the departments were adjusting, reprioritising and adapting to emerging matters. There is conflicting application and interpretation of National SCM Prescripts. Readiness to implement and comply with the revisions in the supply chain and asset management regulatory regime could result in negative or compromised audit outcomes. There is uncertainty regarding the outcome and funding of the 2022/23 wage agreement. The latest offer to labour includes a 3% salary increase plus a R1 000 non-pensionable allowance that will impact the province by approximately R985 million.

The growing demand for services in the current climate was having an impact on the departments while they were trying to stabilise staff numbers. There is a critical shortage of staff in Social Development and the impact of financial pressure on the NPO sector; and inability to unlock adequate, affordable housing opportunities, poor contractor performance, protests, vandalism and land invasions, as well as technical capacity of municipalities to plan and implement projects in the human settlements environment.

Regarding compensation of employees, 24% of the budget went to compensation of employees as departments are implementing their bespoke CoE strategies. The overall headcount of the Western Cape decreased by 24 for Q1, which would change over the year, pending the varied recruitment processes.

Service delivery pressures have increased the need for staff and led to pockets of burnout.

Health reductions relate to mainstreaming Covid-19 contract posts and budget management.

Ms Smit indicated infrastructure expenditure amounted to 16.6% of the budget. Key challenges were delayed procurement processes and poor performance by contractors and/or professional service providers. Responding to challenges includes re-prioritising budgets towards alternative projects and acting against non-performing contractors or service providers.

Pertaining to infrastructure project status, the project pipeline at the end of June 2022 comprised 585 projects. Approximately 51% of projects are in planning phase: project initiation, pre-feasibility, feasibility, design, or tender phase. Approximately 26% are in construction stage, while 7% are in the practical or final completion stage; and a total of 96 packaged programmes and non‑infrastructure, that is, compensation of employees, health technology, administration, and the like, make up 16% of the Quarter 1 expenditure.

Discussion
Mr R Mckenzie (DA) asked what the biggest stumbling block for growth was in the Western Cape. He wanted to understand the impact of drought in the province in the agricultural sector. He enquired what the agriculture future policy would look like in the next eight to ten years. He wanted to know the timelines for assisting municipalities in ensuring that other sectors like agriculture are not hampered. He asked if available resources were enough because hospitals use a lot of diesel during loadshedding every day, and wanted to understand the impact of stage 6 on mid-term budget.

Ms Mireille Wenger, Minister of Finance and Economic Opportunities, stated some of the stumbling blocks are what we call enablers that we need to focus on to help the private sector to be able to create jobs. These include stable electricity suppliers, functioning ports to export agricultural products, increasing infrastructure investment, diversifying trade, and increasing business confidence to attract investment and foreign direct investment to grow our economy. In terms of timelines for municipality resilience projects, it is uncertain at this stage, but work has been done to advance projects. Members would be kept informed as progress happens. He said diesel has been putting strain on the Department’s budget because of loadshedding.

Mr David Savage, Head of Department, Provincial Treasury, said the energy supply is crippling the confidence of the investors. The new renewables would be put online and be our new sources of energy supply. The key is to grow agriculture around exports. But ports that are not functioning are causing delays in the exports of citrus to Europe. Agriculture is a fast-changing, dynamic sector. It requires a lot of R&D to bring new products to the market. That requires agricultural finance behind it. He also stated they are speaking with other departments about what this energy crisis means for them regarding budget. Municipalities are taking different approaches to this that fit their contexts. There is a lot of work underway in a coordinated way to ensure we are fully prepared for elevated periods of loadshedding. Some lessons have been taken from Covid-19. Those lessons were not applied to different contexts in terms of energy supply crisis we are facing. The Western cape is a fiscally sustainable province and is fully alert to the issue.

An official from the department stated that agriculture has made good progress on exports and that it is a competitive industry. There are areas in agriculture where tariffs still prohibit chicken, which is a problem. Free trade agreements like the African Growth and Opportunity Act (AGOA) should continue after 2025. Infrastructure like smooth-running ports and well-maintained roads are also important for exports. Agriculture would go a long way with good infrastructure.

Dr Havemann said there had been a rise in collections this year, partly due to commodity prices increasing and income from mining taxes. Inflation does help in collections but it is difficult for the Treasury to know what the collections would be. It does look as if it is a difficult situation nationally. So, there are not going to be significant increases in the allocations in the next two or three years.

Ms N Nkondlo (ANC) wanted to understand if we are making inroads from the analysis that has been done on the fiscal future and asked if there is evidence that this would happen, and asked how job creation would happen seeing that the Department wants to be the champion of job creation while employment recovery is taking longer. She remarked that there was growth in agriculture and manufacturing but unemployment in other sectors is growing.

She also wanted to find out what the situation was in the Western Cape on youth employment and how reality would be disrupted because graduates get employed after three years of graduation. It appears learnerships are not working. She further noted those between 35 years of age and 55 years were not getting work because it is reserved for young people yet the very young people were not getting the work, and enquired what tool was being used to move from MERO to PERO and asked if changes were being seen in how municipalities were integrating PERO.

Mr Savage stated the fiscal future process is ongoing because it focuses on challenges. It has led us to focus on compensation costs and strategy adjustments in the province to ensure sustainable personnel management.

When it comes to infrastructure, the new data is to crystallise focus on infrastructure investment as input into the broader economy rather than on things we are focusing on like schools, roads, hospitals, and so on. The Department is modernising the approach to infrastructure management.  He further mentioned that SA has no answer to the job creation matter, but the data tells us where to focus attention. And we need to ask ourselves if the focus should be on sectors or land. There should be a relative balance.

Another way of looking at this is to scale up public employment programmes even though they come up with their own challenges and risks. A very successful programme is the Presidential Youth Programme in the education sector. There are other things to be done in the youth development space. These are reflected in our current provincial programmes in various departments.

About PERO influencing policy-making, the Provincial Treasury is starting to re-emphasise what the data and evidence are saying, and challenge that as it goes through the technical aspects of the budget process.

The executive would convene soon with the Medium-Term Budget Committee and have a discussion on the data to have engagements with every department in the province. The MEC would be speaking with the business community around the province.

He further indicated they could not really force municipalities on the MERO even though the Department talks about it in its strategic engagements with them. The Department prefers to digest the information and see how it impacts municipalities. The Department only measures the process. He indicated municipalities do take MERO into account. The Department gets requests from them to be briefed on MERO. The Department only engages with municipalities on request.

An official from the department added they get requests from municipalities to brief them as part of the strategic planning sessions. There have been a couple of sessions this year in the municipalities of Bergrivier, Oudtshoorn, Swartland and Bitou for a briefing on MERO.

Mr C Dugmore (ANC) remarked there is a lack of details in the PERO in tracking the population's assets. For example, land in urban areas is still owned by historically white people, while land in rural areas was in the hands of black people. He said the presentation by the MEC and Premier said nothing about racial backgrounds and inequality in the province, and asked why there had been no concern about land ownership and agricultural land.

MEC Wenger stated gender and racial breakdown are included in the presentation, especially in the jobs chapters where these things are dealt with extensively.

Mr Savage stated there had been no new instruction not to discuss race.  More information has been provided on racial segregation in the MERO. The Department would be coming up with a new set of data, especially on property markets.

Mr L Mvimbi (ANC) remarked agriculture is the only sector that has shown growth. He wanted to understand to what extent this growth had translated to land ownership by black people in the agricultural sector and asked if an analysis had been made. He also wanted to know the actual figure on the expanded unemployment rate, especially when it comes to the definition of unemployment; and asked if there are figures on the public service employment rate because government plays a big role in employment.

Mr Savage said the emerging farmer support programme has been relatively successful in the Western Cape. The journey of transformation has been significant. In public sector jobs, the categories have been, specifically community and social services jobs. Those are by-and-large public sector jobs.

An official from the department said the figures for expanded unemployment were standing at one million and 65 000 for quarter two in 2022, while during quarter one it was 126 000.

He further said there is not much statistical information available on land ownership in agriculture. According to the 2017 census on commercial agriculture, non-white people in the Western Cape have got 12% of all commercial farms in the Western Cape. Land ownership is the core mandate of the national government. The provincial government only supports farmers to be successful and this is a key challenge for the farmers because many do not own the properties and cannot get loans.

Ms C Murray (DA) asked what the timelines were for the implementation of projects and which municipalities would be assisted.

MEC Wenger said the Department was working on the SSEG and wheeling projects. The Department would like to see the landscape of the province’s roofs change dramatically. The Department would like to see solar panels on the roofs of the houses to take the strain off the grid and to help with energy resilience. This would enable excess power to be taken back to the grid.

Already the City of Cape Town has incentivised SSEGs for businesses and compensates them putting energy back into the grid. As more work develops, the more the projects would be rolled out. The same would be seen for residential households.

Wheeling is important in the bigger picture because it allows energy to be produced in one area through the grid and to another area where the consumers are. Seven candidate municipalities in the province to develop wheeling frameworks and tariffs.  It is a complex area, and the City of Cape Town and George are currently running pilots to support. These municipalities are Bergrivier, Cape Agulhas, Drakenstein, Overstrand, George, Stellenbosch and Saldanha.

The Chairperson remarked it had been estimated the SA economy has been impacted by loadshedding, and wanted to know how the people of the Western Cape would be protected against it. She enquired what the plan was for reducing waiting time at the harbours, and asked for clarity on how the condition of paved roads in the Western Cape is going to affect us.

MEC Wenger said a lot of work had been done on the ports. The Department of Economic Development and Tourism has a dedicated project manager that works with the entire logistics and value chain surrounding the port to try increasing efficiencies in the port. For example, research has been done on the port, its booking systems, and truck congestion. The Department has engaged exporters and encouraged them to use night time shifts. It has further engaged with shipping lines to share efficiencies that have made improvements around the port. In August, the port achieved a record of 19 000 TEUs. These efficiencies need to continue by increasing investments in the port and improving infrastructure.

Mr Savage stated the province has a Road Asset Management Programme and Plan which reviews the road segments that need upgrades. It assesses conditions of the roads according to pre-specified criteria. Underpinning that is the decision that assists in programming the sequencing and scaling of investments in the different segments of the roads in an efficient manner. The document is available on the Department of Transport and Public Works website.

Ms Nkondlo suggested the Committee should request an engagement on fiscal futures to better understand it.  It appears we took a long time to respond to the data. She wondered if there is a need for regulations to speak to data from MERO to PERO. During Covid-19 restrictions, the departments were able to overcome government compartments. People do not understand the three spheres of government, they only see government. There is a need to move in the direction of what the data is saying. There is no need for regulations.

MEC Wenger said the Department would be happy to brief the Committee on fiscal futures.

Mr Savage said they are trying to build a dialogue around the data with fiscal futures to align big government systems to make a change. We need to change the trajectory instead of repeating the narrative. Other sources of data need to drive the debate forward.

Dr Havemann said they would be happy to present fiscal futures because what they did the last time during the budget process was to give a scenario analysis for how the economy would grow in the next three to five years. The thinking was that if there was a huge boom in the economy, there would be more transfers from the national government. But if it does badly, there would be fewer transfers from the national government to provinces. This gives a sense of the top part of the fiscal futures, showing where money is gotten from.

On the expenditure side, the different scenarios would show what might happen in the next five to ten years, for example, more migration into the province that would put pressure on the education and health system and finding more resources for that or there could be less migration. This is the scenario planning exercise where you look at what might happen in the revenue and expenditure, depending on expected changes in economic growth and demographic growth.

He further indicated municipalities use this data for their own purposes, but the very important part of the MERO is to use the data for planning as a province.

Mr D Plato (DA) said there is a need to view unemployment differently because it is a crisis. He said he was glad to see growth in agriculture because it is the backbone of the economy. In Brazil, he learnt that agriculture is part of the curriculum from primary to high school. SA has land, but it is not used. In the long term, we need to educate the young about fending for themselves when they finish high school. We need to start using the land more efficiently.

MEC Wenger said they had not used Brazil as a benchmark. There are indicators of fixed capital assets.

Mr Savage said they hoped the data would challenge them to start looking at the problems differently, and to view land differently and we are in a different pattern in SA in understanding land ownership. He said he suspects that some of the tenure rules and zoning arrangements in Brazil are the enabling factors for the type of agricultural outputs they are getting. It is all about how you put that basket of measures together to get a different outcome.

The Chairperson asked for clarity on the state revenue from wine products.

An official from the department stated the statistics were correct because they show sales and turnover and the producer gets the net income.

Mr C Fry (DA) asked for clarity on why no figures have been mentioned about the Children’s Commissioner.

Ms Nkondlo commented the performance of the department does not have the same effect on ordinary citizens. The issue is about practicality. Interaction with the Committee is more of a strategic conversation that needs to be kept going. She wanted to know if the risks identified would be raised in the annual report and if they have to do with what the AG raised. She asked how balance would be struck because there is a demand for services and warm bodies are needed to respond to service delivery protests. She enquired if poor performance by contractors on infrastructure was a sudden risk.

The Chairperson wanted to understand if the matter of project delays was concluded or still being implemented. She asked if there had been any progress on the draft procurement bill. She asked where the R985m would be found for the payment of public wages, enquired if there is an international best practice for capping public service salaries, and asked when Regulation 16 B would be reviewed.

Ms Smit agreed with Ms Nkondlo in terms of what the document is saying in terms of the increase in demand for services and wage agreement for frontline staff, especially when it comes to inflation-related increases. It is as if the pandemic has not eased for the Department as it comes in waves.

For example, an average salary for a teacher is R443 000 per annum whereas an average wage in the social development space is R433 000 per annum.

The salary matter is based on the OSD decisions that were made five or six years ago that were now impacting on the wage bill. These were some of the issues the adjustment budget was grappling with.

She further stated rollovers at this stage were not going to be included, and there have been no virements indicated in the first quarter at this stage. The focus for the R985m is on the headcount. When the headcount increases, it has to increase in the right critical areas of service delivery pressures. The province has been prudent in its compensation of employees’ decision-making.

The province is making plans and is not in the same boat as the other provinces. The matter is the least for the Western Cape compared to other provinces. Some plans would come from the national department for the 88 000 frontline staff feeling the pressure. 92% of this 88 000 comes from the social sector. The province would ask for a piece of the pie of over-collection.

On delays, Mr Klaas, an official from the Department, said they would have to engage the departments to quantify and make use of that information for detailed reports for the second quarter and state specifics and number of projects.

On instruction 16 B, it was repealed with effect on 1 September 2022. The Western Cape Management Infrastructure Delivery was also repealed.

Ms Smit said the draft preferential procurement Bill is still at the legal phase at this stage within National Treasury. Public comments were solicited and revisions have been made for the national treasury legal unit to discuss its impact and what it means.

Dr Havemann added the old policy was still being reviewed. The AG has provided good guidance on the matter.

The Chairperson asked if this is an interim solution for everyone or creating a Western Cape-flavoured one.

Dr Havemann said they would come back to the Committee about details because consultations were done with municipalities and other stakeholders.

Adoption of Committee Reports
The Committee adopted the Draft Report of the Budget on the Provincial Economic Review and Outlook 2022 (20 September 2022/23). It further adopted minutes of 5 August 2022.

Resolutions
The Committee resolved to request a presentation from the Department on fiscal futures, and to reschedule the Children’s Commissioner’s budget meeting, including the PEO briefing meeting. It further resolved to write a second letter to the Minister of Public Enterprises to clarify the scope of the content and ask the NCOP for assistance.

The meeting was adjourned.