Adjustments Appropriation Bill; Special Appropriation Bill: briefing

NCOP Appropriations

24 November 2022
Chairperson: Ms D Mahlangu (ANC, Mpumalanga)
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Meeting Summary

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In a virtual meeting, National Treasury explained the legal requirements for virements to occur and presented these for 2022/23 as tabled in the Adjustments Appropriation Bill.

All virements and shifts approved by National Treasury in terms of section 43 of the PFMA, Treasury Regulation 6.3 and Section 5 of the Appropriation Act, 2022, are tabled in the Adjustments Appropriation Bill, 2022 and detailed in the Adjusted Estimates of National Expenditure chapter for each budget vote with accompanying motivations.

Virements specifically requiring Parliament’s approval are the following:
- using funds for items specifically and exclusively earmarked in an Appropriation Act, that cannot be approved by National Treasury.
- using funds totaling more than 8% of the amount appropriated for a main division for a financial year.
- using funds appropriated for compensation of enployees, that cannot be approved by National Treasury.
- using funds appropriated as transfers and subsidies, that cannot be approved by National Treasury.
- using funds appropriated for payments for capital assets, that cannot be approved by National Treasury.

The Special Appropriation Bill proposed the following additional funding allocations for 2022/23:
• R3.378 billion for Denel for the implementation of its turnaround plan;
• R23.736 billion for SANRAL for repayment of its maturing debt and debt related obligations;
• R2.9 billion for Transnet for the acceleration of the repair and maintenance of locomotives.

The Committee wanted to know the reason for the underspending of the Social Relief of Distress R350 Grant when unemployment and poverty remained high and what the exact criteria for people to apply for the grant were. This was because underspending on the grant means government will shift funds from the Department of Social Development to the Department of Defence and Department of Home Affairs in the Adjustments Appropriation Bill.

Treasury told the Committee that the underspending or savings referred to efficiency gains received from the measures put in place by Treasury to reducing the number of people who received the grant. The efficiency gains did not take away money from the people that deserved it, but it took it away from the people who were robbing the state.

Committee members asked questions about the impact of virements on service delivery; disaster recovery funding for Jagersfontein; source of funds for looming increased wage settlement between public sector unions and government; reason for R31 million underspending by police for Integrated Criminal Justice Strategy; how was Gauteng going to pay for the e-tolls; and about non-compliance on bailout conditions.

The Committee was satisfied with the amount of detail provided by Treasury in the responses to questions, but Members stressed the need for the presence of the Department’s political head in such meetings, as some of their questions were politically driven and needed political responses.

Meeting report

Adjustments Appropriation Bill [B23-2022]: briefing
Ms Nompumelelo Radebe, National Treasury Senior Budget Analyst, presented the amendments to the Appropriation Bill, the Details of Adjustments to spending for 2022/23, as well as the summary of adjustments, virements and shifts for Parliament’s approval.

On virements between main divisions within a budget vote, a Department accounting officer may utilise a saving in the amount appropriated under a main division within a vote towards the defrayment of excess expenditure under another main division within the same vote, unless the relevant Treasury directs otherwise. The amount of a saving that may be utilised may not exceed 8% of the amount appropriated under that main division. An accounting officer must within seven days submit a report on a saving to the executive authority and to the relevant Treasury.

On sections 43 and 76(3) of the Public Finance Management Act (PFMA), CoE (CoE) and transfers and subsidies to other institutions, excluding transfers and subsidies to other levels of government for purposes of paying levies and taxes imposed by legislation, may not be increased through virement without approval of the relevant Treasury. New transfers and subsidies to other institutions may not be introduced without the approval of the relevant Treasury. Allocations earmarked by the Treasury for a specific purpose (excluding CoE) may not be used for other purposes, except with its approval. Virement of funds from CoE to transfers and subsidies for the payment of severance/exit packages are excluded.

Despite section 3 of this Appropriation and section 43(4) of the PFMA, the Minister may approve unspent funds in an amount allocated for:
- CoE, to be used within for transfers and subsidies for payment of severance or exit packages.
- goods and services, to be used for CoE.
- transfers and subsidies to other institutions, to be used elsewhere within the same main division.
- payments for capital assets, to be used elsewhere in any main division.
- payments for financial assets, to be used elsewhere within the same main division.

All virements and shifts approved by National Treasury in terms of section 43 of the PFMA, Treasury Regulation 6.3 and Section 5 of the Appropriation Act, 2022, are tabled in the Adjustments Appropriation Bill and detailed in the Adjusted Estimates of National Expenditure (AENE) chapter for each vote with accompanying motivations. All virements and shifts requiring approval by Parliament are also tabled in the Adjustments Appropriation Bill and detailed in the AENE chapter with accompanying motivations for consideration by Parliament.

Virements are either marked with superscript *1 or *2 to show that either National Treasury or Parliamentary approval is required. *1 is usually for NT-approved virements unless the department only has virements requiring Parliament approval. For virements requiring parliamentary approval, National Treasury consensus was obtained by the relevant Department prior to inclusion in the Adjustments Appropriation Bill. Among the virements requiring Parliament’s approval are:
- using funds appropriated for items specifically and exclusively earmarked in an Appropriation Act, that cannot be approved by National Treasury.
- using funds totaling more than 8% of the amount appropriated for a main division for a financial year.
- using funds appropriated for CoE, that cannot be approved by National Treasury.
- using funds appropriated as transfers and subsidies, that cannot be approved by National Treasury.
- using funds appropriated for payments for capital assets, that cannot be approved by National Treasury.

Special Appropriation Bill [B24- 2022]: briefing
Ms Tsholofelo Marotholi, National Treasury Senior Analyst: General Sector, said the Minister of Finance would introduce a Special Appropriation Bill proposing the following additional funding allocations in the 2022/23 fiscal year:

• R3.378 billion for Denel for the implementation of its turnaround plan.
• R23.736 billion for SANRAL for repayment of its maturing debt and debt related obligations.
• R2.9 billion for Transnet for the acceleration of the repair and maintenance of locomotives.

Payment will only be disbursed when the Minister is satisfied that the required conditions are met.

Denel
Denel had a revised turnaround plan funding requirement of R5.2 billion. R1.8 billion would be raised by Denel through the disposal of non-core assets and R3.4 billion through recapitalisation by government. Denel had realised R900 million through the Denel Medical Benefit Trust (DMBT) and it anticipated realising the remaining balance from the sale of non-core assets by end of March 2023. Denel will utilise the funds received from fiscus and the disposal of its non-core assets to settle remaining current and legacy obligations (enabling it to manage existing threats of liquidation), including restructuring costs to stabilise and sustain Denel’s anticipated growth opportunities.

Transnet
Ms Nolwazi Dlungwane, National Treasury Senior Analyst, said Transnet’s operational loss incurred in 2021/22 could be largely attributed to a shortage of freight rail locomotives. Transnet’s inability to repair and maintain its freight rail locomotives had an adverse impact on its domestic and export coal operations. Therefore, the return of out-of-service freight rail locomotives will improve Transnet’s ability to service the coal industry and will benefit the South African economy.The allocation of R2.9 billion will therefore allow Transnet to repair and maintain freight rail locomotives.

The conditions given to Transnet for them to receive the funds include the following:
- Independent review of all freight rail corridors and associated port operations.
- Monthly report on progress made in the rehabilitation of locomotives and impact on volumes.
- Monthly report on progress made in addressing operational challenges.
- Monthly update on status of Transnet debt.
- Transnet to avail the relevant representatives to discuss the monthly reports.
- PFMA section 54(2) applications to be approved by Ministers of Public Enterprises and Finance.
- DPE to include NT in the PFMA section 54(2) pre-notification process.
- DPE to consult NT prior to the conclusion of Transnet Shareholder Compact.
Conditions will be reviewed on an annual basis.

South African National Roads Agency Ltd (SANRAL)
Ms Ulrike Britton, National Treasury Chief Director: Urban Development Infrastructure, said to avert the pending SANRAL default and the subsequent call on the SANRAL government guarantee, it is recommended that a funding allocation of R23.746 billion be provided to SANRAL for repayment of the maturing debt and its interest for 2022/23 and 2023/24. The funds are to be used to repay SANRAL debt and debt obligations. SANRAL government guarantees will reduce in line with the allocated funds. SANRAL cannot raise or refinance debt until the Minister of Finance communicates otherwise.

Allocation will be split into two tranches. R8.98bn will be released within 10 days of the Special Appropriation Bill being passed into law and R14.76bn will be released once the following conditions have been met:
- Department of Transport to submit draft Road Funding Policy to National Treasury by 31 January 2023 for comment, prior to submitting the policy to Cabinet for public comment by 1 April 2023.
- Independent review of the SANRAL supply chain management policy and related procurement processes.
- Independent review of the performance of the SANRAL Board.
- National and Provincial Government to sign an agreement on a solution for the Gauteng Freeway Improvement Project road network.
- If conditions not met by 31 March 2023, outstanding allocations will be returned to National Revenue Fund.
- National Treasury may request updates on the progress made in meeting the above conditions.

Discussion
Mr D Ryder (DA, Gauteng) asked for more details on the shifts of funds from the Department of Social Development (DSD) to either the Department of Defence (DoD) or the Department of Home Affairs and from where the money came. He also asked for more details about the low take up of the R350 grant.

On the bailouts to state owned entities (SOEs), he noted the conditions put in place for the funds to be released, but was unsure what the penalties for non-compliance would be besides the funds not being released.

On the shareholder having to approve of the Denel business recovery plan, he asked if this would go through a Portfolio Committee process or if it would just be decided by the Executive.

There was a comment about Denel having recovered money from its Medical Benefit Trust, was it normal for the funds to go back to the shareholder? With pensions, when there are surpluses, the money is usually disbursed to employees, so how was this different? The crash of e-tolls was foreseen and predicted before it even started, but now people are being forced to pay a lot of money for a really bad project, especially in Gauteng. The scary thing was that R9 billion was required to carry on its going concern status. What took so long to find a solution? Was there a plan for this or was it a last minute patch? He was concerned if the R23.7 billion was going to be enough to solve the e-tolls problem and what would happen if Gauteng failed to raise the money.

Mr Ryder said it looked like there would need to be a higher settlement in the ongoing wage negotiation contest between the public sector unions and government. It was scary that additional funding would need to be sought to be able to pay state employees. Was government going to fund that from the money it thought it would save from windfall tax receipts?

Mr M Moletsane (EFF, Free State) said when National Treasury spoke about the unforeseeable and unavoidable expenditure caused by disaster, only the Western Cape, KZN, and Eastern Cape were covered. Why was the Free State not covered in the adjustment since it experienced the Jagersfontein disaster?

Mr E Njadu (ANC, Western Cape) asked for clarity on police underspending by R31 million because the Department of Police was struggling to revamp, equip and complete certain new police stations, including the one in Manguzi in KZN.

What was the reason for the underspending of the Social Relief of Distress (SRD) grant when unemployment and poverty remained high? What were the exact criteria for people to apply for the grant?

Mr Njadu asked if government had set clear timeframes and plans to ensure that the challenges affecting SOEs were completely sorted out so they could start contributing towards growing the economy.

The Chairperson asked if Treasury was given a clear set of plans with timeframes so that when they allocated the funds, they were sure that the plans had achievable outcomes within specific timeframes. This was because when this Committee started its work in 2019, it was reluctant about agreeing to the Eskom bailout. It wanted to see the conditions that were set for Eskom before it would approve the bailout. She wanted certainty that Treasury was certain that the bailouts would be used for their intended purposes.

What measures were taken to ensure that the underspending of R101 million for financial assets was addressed? What was the reason for the under expenditure? What would be the impact of the projected underspending on service delivery? She wished she could change the law to ensure that all revenue made by departments would stay at National Treasury so that it could allocate funds where they would be needed the most. Perhaps she needed to understand the logic for that not being the way things worked. How did Treasury ensure that the shifting of funds did not affect service delivery for programmes to which the funds were initially allocated?

National Treasury response
Ms Mampho Modise, National Treasury Head: Public Finance, said Treasury was always tasked with the difficult job of making sure that funds go to projects that deserved the funding and to close the gaps against corruption and theft. When the R350 grant was introduced in 2020, Treasury did not have sufficient time to look at the criteria to ensure that people who were not supposed to benefit from the grant did not get the grant. The grant continued in 2021 but Treasury realised that they had both inclusion and exclusion errors. Inclusion errors referred to people benefiting from it who were not meant to receive the grant. Exclusion errors referred to people who were supposed to be receiving the grant but were not receiving it. Treasury implemented criteria to determine who would receive and not receive the grant.

In 2022 Treasury contracted the banks to ensure that people who opened multiple bank accounts to enhance their chances of receiving the grant could be identified. Treasury could see across all the commercial banks in the country who received income and how much it was and if people received multiple incomes through different bank accounts. As the application process was that a person applied once a year, meaning if they applied in January and then got a job in February, they would receive the grant for the rest of the year, even though they no longer qualified for the grant. Treasury noticed that many people did not qualify for the grant because they got jobs after they had applied for it.

Treasury was also considering tracking cell phone banking because there are people who work informal jobs and get paid through e-wallet, money transfers, etc. They still applied for the R350 grant even though they no longer qualified for it. The SRD grant underspending or savings referred to efficiency gains received from the measures put in place by Treasury to reduce the number of people who received the grant. She assured Members that the efficiency gains did not take away money from the people that deserved it, but it took it away from the people who were robbing the state.

National Treasury underspending of R101 million was a technical correction that it had to make because the Land Bank defaulted paying the guaranteed debt and Treasury did not need it in the manner that it was appropriated. The amount was appropriated to recapitalise the Land Bank but because Treasury had to pay the guaranteed debt as part of the direct charges in the National Revenue Fund (NRF), the R101 million became an underspending.

The criteria for self-financing are very stringent and there were two arguments. The first was how departments who spent their money on something else would then need to focus on service delivery. For example, if the Defence Force decides to pay for troops in the Democratic Republic of Congo (DRC), they would be using money that was for something else to pay for those troops. Getting the money back would mean they would close gaps where they took the money. Treasury did not see a problem with this because it would be money that they budgeted for and would only receive it later. The list of departments who were self-financing was limited because when Treasury did the assessments, they ensured that the departments would use the money in-year and the money would be from the activities done by the department.

The second argument was based on Treasury encouraging the departments to be self-efficient and think about how they could improve their revenue. Treasury often gave departments the leeway to find ways to enhance their revenue and then it would return the funding back to them. The Constitution is clear that funding received by departments must be paid to the NRF. Treasury encouraged departments to find ways to increase their revenue and use the revenue to fix some of the issues that they may have.

Ms Britton said there was a funding model for SANRAL and one of the things that Treasury agreed with provinces was the affordability without compromising the integrity of the network. The Memorandum of Understanding (MoU) would set out all the arrangements of how Gauteng province would pay for the e-tolls and set out any of the requirements or conditions on what would happen if the province failed to pay.

On the disaster recovery and disaster funding, she said the last chunk of the funding in the system would be for the rehabilitation of infrastructure related to the KZN flood damage. The Jagersfontein incident happened later in the year. In the disaster management cycle, Treasury first dealt with relief and then recovery, so the Jagersfontein disaster would be in the relief phase, and the rehabilitation and the recovery of infrastructure should be funded slightly differently and the modalities of that would be worked out by the province. Since this was classified as a provincial disaster, the province would have to work out how it wants to approach rehabilitation and recovery and then approach national government where assistance is needed.

The Adjustments Budget does provide for Treasury to top up provincial and municipal disaster relief grants or disaster response grants, as well as the provincial emergency housing grants, which creates the space to deal with any disasters that may have happened after the April and May 2022 floods.

Ms Radebe explained that the Police received an allocation earmarked for the implementation of the Integrated Criminal Justice Strategy (ICJS) from Treasury every year. This was a strategy that followed the old Criminal Justice System (CJS) seven-point plan. As part of allocating that funding, Treasury set conditions for the Police to report and to submit plans on what the money would be used for. Treasury also had a condition in the allocation letter that says should they determine during the year that they would not be able to fully exhaust the funding for whatever reasons, they would need to return the funds during the Adjustments Budget. The Department of Police was returning the funding because of that condition.

On the service delivery impact of the Department of Police returning the funding, this ICJS money was allocated specifically for its Forensic Services and most of the software and equipment procured in that space was procured internationally. As a result of stock shortages due to the COVID-19 pandemic and the Russia-Ukraine war, there was a delay in some items procured internationally for Forensic Services.

The funding was allocated for two projects, one was the coding system and the other one was the Semi-Automated DNA Processing System, and both were supporting the implementation of the Criminal Law (Forensic Procedures) Amendment Act, which was an Act that authorised the department to collect DNA samples from people who were incarcerated. The coding system would allow the department to do comparison searching and would allow it to see if the DNA sample of a person is linked to a criminal offence. The Semi-Automated DNA Processing System is going to be for the forensic laboratory in the Eastern Cape. Both are critical for service delivery and were not new projects, but they need regular software updates and installations.

On the impact of virements on service delivery, Ms Radebe said the reason the legislation required Parliament to approve virements was so that it could exercise the necessary due diligence to question departments on the extent to which shifting these funds would impact their service delivery. There were instances where the departments had to reprioritise funds internally to offset excess expenditure due to foreign exchange rate fluctuations. The virements were not always done because of bad financial management by the departments, but Treasury did do the necessary due diligence.

Ms Marotholi said the Denel business plan will be only approved by the shareholder, but this will be after Denel does the relevant consultations with stakeholders where Denel may have capabilities that may be servicing the DoD or the Department of Science and Technology. Those consultations were done, but final approval lies with the shareholder. Before Denel could access its Medical Benefit Trust funds, it went through rigorous due diligence processes, including Denel undertaking an evaluation of the DMBT to determine the assets and liabilities in the funds. It also included Denel engaging with the beneficiaries of the Trust wherein they would either accept or not accept the offers that were made, and this was done in a way that would ensure that the beneficiaries would still receive future benefits out of the funds. In other words, the beneficiaries were compensated for Denel to be able to access the funds, and the transaction was taken through a court process and had to be approved by the courts before the entity could access the funds.

Ms Modise said when budgeting, trade-offs need to be made and any wage settlements that were above what could be afforded meant that the resources that they thought could be allocated for the improvement of the services in the health and security cluster, would have to reconsidered. Treasury does not have funding that is reserved for what they believe public services do not deserve. They had to look at a balance between trying to deal with the baselines that were eroded and to avoid a total collapse of services in government.

National Treasury ensured that South Africa did not have a debt crisis and did not need bailouts from the International Monetary Fund (IMF) and World Bank.They also ensured that the debt servicing costs did not take much out of their resources because they were the second largest item of expenditure over the MTEF, surpassing social grants, health and security. The fact that they were spending so much on debt servicing costs meant that they had to reconsider the level of debt that they had. Through the revenue overruns, they split it between dealing with the fast-rising debt servicing costs and dealing with the pressures in the system on the health sector, education, security and cost of employees.

Follow-up discussion
Mr Ryder said the answers to the questions left him feeling unfulfilled, especially the question about the SANRAL funding model where it was answered that there was a funding model but this was also contradicted by saying they had no preconceived idea of what the funding model would look like. The point was that no funding model has been announced in Gauteng for the e-tolls and where the province is going to find the money that it needs to repay. It was probably unfair to be asking all the questions to Treasury because the questions were politically driven in nature and meetings of this nature probably needed the presence of members of the Executive, whether the Minister or the Deputy Minister to assist with political questions.

Mr Njadu appreciated the responses to Members' questions and was satisfied by the responses.

The Chairperson partially agreed with Mr Ryder that members of the Executive needed to be invited to such meetings to assist with answering politically driven questions. She said some of the questions would be forwarded to the Minister and Deputy Minister, including the fact that they were hardly ever available in Committee meetings. She thanked Treasury for their satisfactory responses to the questions regardless and noted that the Committee saw the progress they were making in their operations and appreciated their efforts.

The Committee adopted its minutes dated 22 November 2022 and the meeting was adjourned.

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