Division of Revenue A/B, Adjustments Appropriation Bill & Special Appropriation Bill: FFC briefing

Meeting report

The Chairperson welcomed all the attendees, introduced the Financial and Fiscal Commission (FFC), and invited them to start their presentation.

FFC submission: 2022 MTBPS

Mr Chen Tseng, Head of Research, FFC, covered the following items:

Macroeconomic environment and fiscal policy

In the first quarter of 2022, the economy expanded by 1.9%, and it contracted by 0.7% in the second quarter. Load-shedding was intensifying and deepening the energy crisis. The inflation rate breached the upper limit of the 3-6% South African Reserve Bank (SARB) inflation target range, reaching a 13-year high of 7.8% in July this year.

Economic overview and prospects

The domestic economy continued to rebound from the impact of the COVID-19 pandemic, despite growth declining in the second quarter. Elevated domestic inflation and rising interest rates may exacerbate existing social inequalities and create vulnerabilities in South Africa. The official unemployment rate was sitting at 33.9%. Significant structural changes were required to decrease unemployment at a steady pace.

Tax proposals and revenue outlook

Due to the improved revenue estimates, the tax to gross domestic product (GDP) ratio was projected to increase from 24.9% in 2021/22, to 25.4% by 2025/26, which was higher than pre-COVID estimates. The expected moderation in the main budget expenditure broadly reflected fiscal consolidation measures enforced over the last few years. A primary budget (excluding debt service costs) surplus was projected from 2023/24, and would increase in 2024/25 and 2025/26.

Recommendations

The Commission supports the proposed amendments in the 2022 draft Taxation Laws Amendment Bill, the draft Rates Bill, the draft Revenue Laws Amendment Bill, and the draft Tax Administration Laws Amendment Bill. It was essential to note that the high inflation and low growth environment make raising revenue through tax increases challenging, so they recommend that the implementation of tax reforms needs to be done in a manner that does not harm growth.

Ms Noxolo Mahlalela, Researcher: FFC, covered the following items:

Adjustment appropriation and special appropriation bills

Total in-year spending adjustments amounted to R13 billion, of which R7.45 billion was in respect of adjustments to vote appropriations, and R7.24 billion was with respect to direct charges against the National Revenue Fund.

The 2022 Special Appropriation Bill proposed additional funding, amounting to R30 billion, to three state-owned companies (SOCs) located across the Public Enterprises and Transport votes. The challenges at SOCs had resulted in poor service delivery, poor financial management, less growth, massive unemployment, corruption and low business confidence, and the maturity of SOCs' debt payments coupled with poor functionality, posed a substantial risk to the fiscus.

Recommendations

Ÿ For the Adjustments Appropriation Bill -- the Commission welcomes the financial support provided to assist in rebuilding damaged infrastructure and the support provided to affected households.

Ÿ For the Special Appropriation Bill --  the Commission cautions against perpetuating a cycle of bailouts for poorly performing SOCs.

Spending: A functional perspective

For 2022/2023, learning and culture receive the largest share of consolidated expenditure, followed by social development and debt service costs. The Commission awaits further detail and finalisation of additional funding for early childhood development (ECD), finalisation of the funding framework for higher education and training, and a policy decision regarding support for economically vulnerable and working-aged individuals.

Recommendations

The Commission welcomes the prioritisation of growth in funding to the community services function. In light of the numerous municipalities in financial distress, they advise national and provincial governments, as well as Parliament, to exercise strict oversight over utilising these funds to ensure that there is no misuse.

Ms Sasha Peters, Programme Manager: National Appropriations, FFC, covered the following items:

Division of Revenue Amendment Bill for provinces

The 2022 Medium Term Budget Policy Statement (MTBPS) proposes a total provincial allocation of R1.7 trillion over the 2023 medium term expenditure framework (MTEF), representing a nominal growth of 2% from the budget allocation. The equitable share to provinces and conditional grants growth rates remains marginally at -2.5% and 4.3% respectively, over the 2023 MTEF. R116.8 million had been made available to the Eastern Cape and KwaZulu-Natal (KZN) through the Education Infrastructure Grant for repairs to schools that were affected by natural disasters. The Commission was of the view that there was a need to develop or update the climate change adaptation strategy, particularly for provinces and areas prone to natural disasters.

Division of Revenue Amendment Bill for local government

To address the challenges experienced by local governments, research findings suggest that municipalities should focus on strengthening municipal finance and investments. The Commission noted and welcomed the review of the conditional grant system regarding the rollout of infrastructure, building capacity and providing operational support.

The total local government equitable share (LGES) allocation was expected to increase from R87.3 billion in 2022/23 to R109.4 billion in 2025/26.

Conditional grants in real terms grew by 10% in the current financial year (2022/23), followed by a sharp declining trend of 2% in 2023/24, with further negative growth rates of -1% and -2% recorded in the 2024/25 and 2025/26 years respectively.

The Commission welcomed the sharp increase in conditional grants in 2022/23, given that the bulk of conditional grants for local government was for infrastructure-related projects and programmes. This approach was in line with government's economic growth and development strategy.

The Commission noted the shifting of disaster funding between the spheres of government. In principle, it supported the immediate grant disaster response, as recipients did not have to wait for the adjustment period before funds could be dispersed.

Recommendations

Ÿ For provinces

Though the Commission supports the 2022 Division of Revenue Bill amendments for provinces, it recommends that the grant framework for Part A of schedule 7 grant -- Provincial Disaster Response Grant -- be examined to improve its grant efficiency, appropriateness and effectiveness in light of the recent flood disasters.

Ÿ For local government

It recommends a fundamental reviewing of local government transfers, especially from a vertical perspective of the division of revenue, taking into account factors of geography, rurality and the people -- the nature of local development to ensure proper equitable sharing of nationally raised revenue amongst the three spheres of government towards local government.

Ms Gianni Donne, Researcher, FFC, covered the following items:

Fiscal risks

Ÿ Debt management

The 2022 MTBPS projected a primary balance surplus would be attained in 2023/24, and that debt-to-GDP would stabilise at 71.4% of GDP by 2023/24. However, debt dynamics may be worsened by weak economic growth prospects, with GDP averaging a sluggish 1.6% over the medium term. Debt-service costs were still high and were expected to increase, reaching 16.8% of main budgeted expenditure, and 4.8% of GDP, by 2025/26, crowding out expenditure on key functional areas and undermining the stability of the macro-fiscal environment.

Ÿ Contingent liabilities

These were expected to exceed R1 trillion in the 2022 MTBPS, posing a significant risk to the fiscus. Government guarantees as a proportion of GDP had more than doubled over the past decade. Eskom remained the largest long-term risk to the economy, accounting for 78% of all government guarantees.

Ÿ Inflation and monetary policy tightening

Rising inflation had been driven mainly by food and fuel price hikes due to ongoing global supply-side disruptions caused by the Russia-Ukraine war. The cost of living had increased faster than previously anticipated, dampening South Africa’s prospects of a quick economic recovery post-Covid-19. The depreciation in the rand exchange rate posed an additional risk, as it would raise the cost of outstanding debt which was denominated in foreign currency, and lower expected GDP growth.

Public sector wage bill

According to National Treasury, compensation of employees in the public sector would absorb 31.4% of government revenue in 2022/23. Key drivers for the rising compensation of employees’ expenditure over the past years include the size of increases in the adjustment of public employees’ salaries. While headcounts had decreased in the national departments, provinces and national public entities, salaries and wages had decreased, except the local government level.

Recommendations

Ÿ For fiscal risks

government should develop a long-term plan incrementally to address the unsustainable public sector wage bill. The plan should seek to improve public sector productivity at a lower cost.

Ÿ For public sector wage bill

An overall increase in the competitiveness of the economy through a reduction of regulatory barriers that support small and medium enterprises (SMEs) was urgently needed, and proper expenditure management was also required to prevent fiscal leakages and fruitless spending.

Dr Nombeko Mbava, Chairperson, FFC, concluded the presentation by saying that the Commission welcomed government's efforts to stabilise government debt earlier, at a lower rate. They noted the provision for the public wage bill increase for this financial year. They called for more comprehensive planning, including developing a long-term plan to address increases in the public sector wage bill and to improve public sector productivity. They recommended programmes and resources to capacitate new councillors, protection of the LGES funding to retain the gains achieved in the progressive realisation of basic rights, and a review of the structure of conditional grants.

Discussion

Ms D Peters (ANC) asked if the FFC was of the view that the annual decisions to extend grants gave confidence to the South African population that government truly wanted to alleviate and reduce poverty. What was their contribution to the ongoing debate about a more affordable and sustainable social security intervention, especially for poor people between the ages 18 to 59? There was also a concern about unemployment and job creation, and the private sector’s contribution to reducing unemployment, as the public sector alone could not sustain the unemployed graduates. Did the FFC support the taxation of the rich to sustain the intervention in the form of the extended social relief of distress (SRD) grant within the poverty line quantum? Did they act on the proposals worked on by the government, as the government always reported that there was work going on without specifying what work it was?

The division of the revenue for the local government sphere was said to be 10%. Ms Peters was concerned about whether it was enough to support the citizens, as this sphere was the first point of contact for citizens with government services. There had been reports from local municipalities about damaged infrastructure, and she was concerned about the funds allocated to municipalities to renew them.

Mr A Shaik Emam (NFP) asked if government took the FFC seriously with all the points and recommendations they had. Did they believe the provincial and national governments did enough to hold the local government accountable for poor performance? Did they also believe that the local government did not get enough funds allocated to them, or did they just not show value for money for the funds they got? Did they think the local government had the skills, capacity and knowledge to deliver quality services to the citizens, and what did they think should be done about corruption, as there were media reports about a corrupt official every day?

Grants were created because of no implementation by the structures. Without looking at addressing the capacity to implement, did the FFC believe that a positive result would be achieved because of the direct and indirect grants, or should the capacity to be able to implement be addressed? Was enough being done, especially in the manufacturing sector, to create job opportunities? Considering rising inflation rates, would the SRD grants be sustainable in the long run? There were hardly any state-owned enterprises (SOEs) currently bringing revenue to the fiscus. They were not ready for a coalition government, which was about power, control and selfishness. Was there a concern about the amount of money the state would get in loans and grants for the energy transition in the country, as proposed? What would the impact on the public sector and unions be?

Mr X Qayiso (ANC) urged the Committee to consider the FFC’s recommendations, and said that these needed to find expression in the strategic plans within the departments so that they could monitor them. What did the FFC advise regarding the stringent conditions that National Treasury should consider, and to what extent should they be implemented? He said that performance measurement should be done at the local government level, because that was where things were happening, and the measurements would be a true reflection. Continuous reports of mismanagement of funds, consequence management and corruption, showed an inability to address these acts, and one could foresee it as a growing problem in the long run.

He appreciated the recommendation about the public wage bill, as it involved stakeholders. There was a threat to the economy because Eskom and other SOEs were draining the fiscus. Management and governance were elements that needed to be looked at in SOEs, as there was always money sent to them but their performance was always declining. To what extent did the FFC think the economic reconstruction and recovery plan (ERRP) had been implemented?

Mr Z Mlenzana (ANC) asked the FFC what impact the mass actions by the public sector had on service delivery. He said the regulatory changes on broad-based black economic empowerment (BBBEE) and SOEs might lead to privatisation. He thought synchronising all government’s spheres would reduce fiscal dumping.

Mr O Mathafa (ANC) asked if the allocations and adjustments were still in support of the ERRP, and how they addressed the challenges communities were facing. He agreed that proper management at the local government level was needed, as money could be invested in government projects but without proper management, its purpose would not be served. Better decision-making should be implemented in all spheres of government. He asked if there was a consolidated strategic plan for SOEs to show the impact of their business activities on the national economy.

The Chairperson asked if the FFC agreed with the narrative that the SOEs played an integral role in B-BBEE. How did they think the government should help with the process of economic transformation, and what lever would the SOEs need to transform the economy should they separate from BBBEE? Had the FFC been able to pick up if the committees they were briefing were implementing the recommendations they had suggested during their meetings? Had they been able to trace if the budget matched the allocations of funds to small and black-owned businesses by the Department of Small Business Development (DSBD)? What should be done to deal with challenges of conditional grants? Were real or nominal numbers used to calculate the growth in performance of local governments' equity share? He also asked what the reasons for concern were with the transfers from direct to indirect grants. Did they agree that the Department of Social Development had made a saving with the money that had gone back National Treasury?

FFC's response

Dr Mbava said the SOE issue was complex. After many years of experimenting and analysing them, they had come to realise that the problem with the SOEs was not monetary, but had to do with operational efficiency and procurement. Many projects were allocated to SOEs with the hope that they would deliver, and in instances where they did not, it meant that the ERRP was precarious, as it relied on SOEs implementing projects. For the overall economic trajectory to be achieved, SOEs that need to be saved must be saved. Stringent conditions were there to assist in situations where contingent liabilities had been put in place to help cover the entities that failed to meet their commitments. Business models need to be refined and improved to meet the demands of the economy. Many of the SOE’s business models were not refined, and this was reflected in their balance sheets.

The Department of Social Development had sent money to the fiscus, which was deemed a saving. Some policies need to be implemented to fund people, and the methodology used to fund those in need has to be questioned. Ignoring the policies resulted in funds being given to the wrong beneficiaries. It would be a shame if the policy did not reach the many people who needed the funds, and the FFC would deplore the Department's actions if they gave funds to the wrong beneficiaries.

Mr Tseng said that the growth of the conditional grants was calculated using real amounts, considering inflation and interest, investment, and the repo and debt servicing rates. The issue with transfers between direct and indirect grants was that operational uncertainties and implementation difficulties had brought about the change in the grant framework and structure. Integrated development planning was not occurring in the country now, as every sphere of government and its departments were scattered, and it was a long process to track their activities.

The survival rate of small businesses was very poor. Issues in the private and public sectors were connected, especially from an industrial point of view. If government could not maintain control over its SOEs, it was uncertain that it would have a healthy relationship with the private sector. Three procurement factors must be examined to improve operational and spending efficiency, -- procurement management, contract management and payment management. Government should get into the habit of looking at the price of things it needed for its projects and then bargain with service providers, instead of waiting for proposals with unrealistic amounts for items.

Additional questions

The Chairperson still had some answered questions. He asked if the FFC considered B-BBEE a problem with SOEs, and, if they thought so, what transformation method should be used to support them. Did they think their input was taken seriously by the people they were issuing recommendations to? What were the issues they had raised with the Committee and its sister organisations that had been taken care of? For the first time, there had been a 2022 special appropriation bill to allocate money to Transnet -- what was the reason for this?  

FFC's response

Dr Mbava said the special appropriation bill allocating money to Transnet was to ensure that Transnet could use all the locomotives that had been out of use. This would ensure that the rail infrastructure was improved.

Mr Tseng said that the Chairperson had once asked the Commission to investigate the overall procurement process. They consulted industry experts and found a trend of convoluted instructions and practice notes. There were problematic contracts, with items of low quality and inflated prices, and methods of implementation which were not conducive to a successful outcome. It was not entirely a B-BBEE problem for the SOEs, but procurement management and hiring unqualified people to do the tasks.

The impact of the FFC's recommendations was in the hands of the national structures and a committee like this one. The Commission would research how many of its recommendations had been implemented. The Commission’s research involved a dynamic integrated mapping and planning approach into all aspects, considering the local economic opportunities involved.

The Chairperson said that 90% of SOEs and government businesses were run and managed by whites, so there should be a careful investigation into this. It looked as if black businesses were being criminalised to keep the business in the white companies, and he urged more research on the matter.

He thanked the FFC for their presentation, and emphasised that the Committee would still work with the Commission to deal with future matters.

The meeting was adjourned.