Western Cape Appropriation Bill & Western Cape Additional Adjustments Appropriation Bill (2022/23) financial year) Bill: Provincial Treasury Briefing; Provincial Treasury Q3 Performance

Meeting report

Mr David Savage, Head of Department (HOD), Provincial Treasury, Western Cape Government (WCG), introduced the team from the Provincial Treasury, which included Dr Roy Havermann, Deputy Director-General (DDG): Fiscal and Economic Services, Ms Shirley Robinson, Chief Director: Public Policy, Ms Julinda Gantana, DDG: Governance and Asset Management, Ms Analiese Pick, Chief Director: Provincial Government Public Finance, Mr Malcolm Booysen, Senior Manager: Local Government Budget Management, Ms Tarryn van de Rheede, Director: Provincial Government Budget Office) and others.

Ms Zeenat Ishmail, Chief Director: Strategic Management Information, Department of the Premier, and Mr Jacques Barnard, Director, Department of the Premier, introduced themselves to the Committee.

Presentation: 2022/23 Additional Adjusted Estimates and Departmental and Public Entity Third Quarter Provincial Performance Report
Additional Adjusted Estimate 2022/23
The 2022/2023 Adjusted Budget of R77 823m had been increased by R204m to R78 027m. The increase consisted of R115m for Education through the Education Infrastructure Grant and R89m for Local Government through an allocation from the unforeseen and unavoidable reserves in terms of Section 25 of the Public Finance Management Act (PFMA).

Third Quarter Provincial Performance Report

Part A: Overview of socioeconomic and performance trends
Jobs, safety and well-being
- Gross Domestic Product shrank by 2%;
- The number of people unemployed decreased by 3%;
- The official unemployment rate stood at 24.5%;
-  There was an increase in violent crime, with homicides increasing by 12.4%, and 13 priority areas in the Cape Metro recording a 17.2% increase in homicides;
- There was an 11% increase in the number of sexual assault presentations at public hospitals compared to the previous year;
- In terms of mental well-being in education, 692 cases had been referred to statutory social work services in the third quarter, down from 774 in the previous quarter;
- Youth not in education, employment or training (NEETs) had decreased by 5 262 from the previous quarter; and
- 11.47% of children born in government facilities weighed under 2500g.

Performance indicators
- Overall performance in the third quarter was 76% (408 of 536 targets achieved), compared to 80% in the first quarter and 93% in the second quarter.
- Departments had achieved 337 of 447 targets (75%), while public entities had achieved 71 of 89 targets (80%).

(See meeting recording for further detail)

Part B: Overview of Financial Performance Trends
- Departmental expenditure as at 31 December 2022 was below 73% provincial average spending, mainly due to transfers made after 3rd quarter.
- Public entity expenditure as of 31 December 2022 was 72.4% of the annual budget. Projected underspending related to the internal reprioritisation by the Saldanha Bay Industrial Development Zone Licencing Company and unfilled vacancies at the Cape Agency for Sustainable Integrated Development in Rural Areas and the Western Cape Tourism, Trade and Investment Promotion Agency. Projected overspending by the Atlantis Special Economic Zone Company (ASEZCo) would be mitigated by shifting underspending on compensation of employees (CoE) towards goods and services items.
- Social infrastructure expenditure as at 31 December 2022 was 65%.
- Economic infrastructure expenditure as at 31 December 2022 was 68%.
- Provincial receipts as at 31 December 2022 were at 90.1% of the R2.561bn adjusted estimate, which was 12.8% higher than the same period previous year. The main reasons for the increase were subsidies returned by municipalities and revenue from Finance-Linked Individual Subsidy Programme (FLISP) housing.

The presentation document also included an overview of the province’s delivery trends and infrastructure project pipeline.

(See meeting recording for further detail)

Presentation: 2023 Budget
Provincial economic and fiscal context of the 2023 budget
- The national economy was expected to expand by 0.6% in 2023 and by 1.6% in 2024.
- The Western Cape economy was expected to expand by 0.4% in 2023 and 1.9% in 2024.
- In the fourth quarter of 2022, the Western Cape surpassed pre-pandemic employment levels for the first time in 11 months.
- In 2022, the Western Cape had significantly higher growth in the value of building plans (21.4%). Since 2017, the Western Cape (21.5%) has also grown considerably in the value of buildings completed.
- In 2022, Cape Town International Airport recorded 597 478 foreign visitors, an increase of 322% from 2021.

Economic impact of power supply shortages
- The province was estimated to have lost between R48.6bn and R61.2bn in real GDP since loadshedding commenced in late 2007.
- The real GDP lost in 2022 was estimated at R8.2 billion.
- The volume of electricity delivered to the Western Cape in 2022 was significantly lower than in 2008 (-17%), but also lower than in 2020 (-5%) and 2021 (-3%).
- The cost of loadshedding to the provincial economy in 2023 was projected to be R12.8 billion.
(see slide 9 for further detail)
National fiscal context
- National government intended to achieve sustainability by narrowing the budget deficit and stabilising debt over the medium to long term.
- National government projected a main budget primary surplus in 2022/23.
- Government debt is expected to stabilise at 73.6% of gross domestic product (GDP) in 2025/26.
- Debt service costs as a percentage of GDP were expected to peak in the same year. Debt service costs were crowding out spending on services.
- The 2022/23 Budget provided R254bn in debt relief to Eskom over the next three years.

Provincial fiscal framework
According to the final allocation letter received on 10 February 2023, an additional R393m would be added to the Provincial Roads Maintenance Grant (PRMG), the Provincial Emergency Housing Grant would be shifted to the national Department of Human Settlements (DHS), while the shift of agricultural colleges to national government had been delayed until all legal prescripts had been met. The provincial equitable share would increase by R5.8bn to R183bn over the 2023-2026 medium-term expenditure framework (MTEF) period.
(see slides 10-14 for further detail)
Provincial fiscal strategy
- Protect basic services: education, health, social development, mobility, and infrastructure were the priorities.
- Unlock allocative efficiency: growth for jobs, safety, well-being, and innovation, culture and governance were budget priorities over the MTEF period. This included measures to reduce the impact of power cuts.
- Enhance productive efficiency: the strategy addressed COE, transfers to other spheres of government, and infrastructure investment and development.
(see slides 15-34 for further detail)
Long Run Fiscal Sustainability
Provincial reserves amounted to R3.6bn over the 2023 MTEF period. These would be used to stabilise the fiscal framework against future volatilities to the provincial equitable share and conditional grant allocations, to fund additional service delivery pressures, to fund unforeseen and unavoidable events impacting the fiscal framework, and to mitigate the economic and socioeconomic impact of loadshedding.

The 2023 Budget in a nutshell
- R39.82bn billion to boost economic growth to create opportunities and employment for our citizens;
- R1.1bn to build energy resilience;
- R4.76bn to make sure citizens are and feel safe in their communities;
- R170.91bn to support a healthy population with access to medical and mental health care, to properly prepare children for the future with the support and skills they need to succeed, and to meet basic needs so that citizens are cared for along their entire life journey;
- R19.27bn to entrench innovation as a pillar of how the WCG approaches challenges and solves them;
- R32.57bn for infrastructure investment over the 2023 MTEF period, with maintenance of existing infrastructure to remain a priority;
R6.97bn for additional core pressures over the 2023 MTEF period, which included the impact of the 3% public sector wage increase in 2022/23, and service pressures in education, health and wellness, and social development;
- R41.31bn for COE (51% of the 2023/24 budget, but lower than the 2022/23). The decrease was attributed to the continued implementation of upper limits and compensation ceilings underpinned by the Western Cape Compensation of Employees Strategy; and
- To ensure fiscal sustainability, the WCG was focusing on rebuilding reserves over the medium term to ensure that the province was prepared to respond to any disasters and unforeseen spending pressures as they arose.
(see slides 37-41 for further detail)
Discussion
Mr D America (DA) asked how municipalities would be monitored and held accountable for spending the allocation for responding to loadshedding, given that the financial year for local government ended in June and that, as was well known, municipalities were often slow to spend allocations that were earmarked for capital projects. He noted that the number of NEETs had decreased by 5262 but asked for more context. What percentage of the total number of NEETs was it?

Ms N Nkondlo (ANC) asked if the R1.1bn for energy contingencies mentioned in the Premier’s State of the Province address would come from the Provincial Reserve Fund (PRF) or the main appropriation. She asked what exactly the R95.9m budgeted for energy resilience in the office of the Premier would be used for, and whether consultants would be used.

Mr C Fry (DA) observed that horse racing tax revenue increased from R212 822m in 2020/2021 to R350 870m in 2021/2022. What was the reason for this increase? Was it due to industry growth or an increase in the number of gamblers due to the rise in debt? He asked whether R430m would be enough to fund the 3% public sector wage increase, given the increases in the cost of living, and if the addition of 1176 teachers to the cohort had been considered.

Ms C Murray (DA) noted the increase in revenue received on a municipal level and from the Western Cape Gambling and Racing Board. She asked how the ratio of revenue on accounts receivable was calculated, as she understood that it could be quite subjective. She asked how programmes such as the Municipal Energy Resilience (MER) initiative would impact revenue collection from municipalities and how this would be factored into the budget process.

Mr G Brinkhuis (Al Jama-ah) said that he would support the budget if the department could perhaps ensure that loadshedding was minimised during the Muslim observation of Ramadan, because the Muslim community had to wake up early during Ramadan to eat before sunrise.

Mr L Mvimbi (ANC) observed no mention of a public participation component in the budget process was made. Had there been any public participation? He also asked for clarity on the R1.1bn for energy contingencies announced by the Premier. How did it relate to the R57m earmarked for municipalities, the R24m earmarked for the Department of Economic Development and Tourism (DEDAT), and the R88m earmarked for emergencies?

Responses
Ms Mireille Wenger, Provincial Minister of Finance, Economic Development and Tourism, WCG, said that control measures on emergency funding included requiring municipalities to sign transfer payment agreements to ensure compliance with the conditions of the grant framework. The Department of Local Government had been asked to publish regular reports on the progress of beneficiary municipalities to ensure that money was being spent according to the prescripts of the grant. She explained that the R88m for emergencies was from the 2022/23 budget, not part of the R1.1bn. The R1.1bn comprised R598m to reduce the impact of load-shedding, boost the green economy, set up a pipeline of energy projects and support municipalities, and R501.5m was from the energy reserve. Responsibility for delivery was spread across various departments. The Department of the Premier was allocated R95.9m for leading, coordinating, and driving some components of the energy resilience programme, such as emergency power packs for vulnerable households, preparing the integrated resource plan, the municipal pool buying project and demand-side management programme. The Department of Infrastructure, meanwhile, was allocated R148.7m to drive energy procurement by municipalities from independent power producers (IPP). R60m had been allocated to Wesgro and Freeport Saldanha to enable green hydrogen development for longer-term energy. The Department of Economic Development and Tourism (DEDAT) has been allocated R24m to improve energy resilience in municipalities, and R55m to help small, medium and micro enterprises (SMMEs) to implement alternative energy supply systems. The Department of Local Government has been allocated R57.5m to pilot renewable energy solutions on a municipal level with the assistance of specialists. She sympathised with the problems caused by load-shedding during Ramadan. This problem could not be solved in a week. She said the Department was doing its best to become independent from Eskom so there could be greater certainty and a more reliable electricity supply in the province.

Mr Savage added that there was a monthly reporting requirement and other transparency requirements to ensure accountability for spending of emergency funds. Although the funds were being monitored and allocated in a controlled environment, however, the aim was for the funds to be spent quickly because they were emergency funds. As of the day before, R56m had already been transferred to municipalities and expenditure was underway. Speed with accountability was the goal. The Department was not anticipating a rollover of funds after the municipal financial year ended on 30 June because these were emergency funds. He said the R1.1bn was split into two parts, the first of which would be appropriated right away from the reserves, and the second of which was intended for projects that were not ready for appropriations yet. He said that responsibilities were divided among departments according to their mandates and capabilities, with the Department of the Premier (DotP) leading the coordination of this project.

The MER team was also moving to the DotP to provide coordination capabilities across the province. Consultants would be used for transaction advisory services. For example, a municipality entering a long-term electricity off-take agreement with an IPP would have to ensure that all fiscal and legal implications were dealt with. This was difficult and therefore transaction advisors were needed to ensure the best deal was made for the municipality. This was something that the Treasury encouraged, especially when making long-term agreements in an area where one was not well versed. He acknowledged that the budget did not address municipalities’ revenue shortfall due to structural changes in the electricity sector. Treasury was aware of the challenges the municipalities faced, but these would not be solved by giving municipalities more money. However, Treasury provided a lot of support to municipalities in various aspects of revenue management and frameworks. It was in the process of tailoring some of this on request to the electricity sector. It was clear that municipalities needed to completely refurbish their revenue models in terms of the electricity sector to cope with a completely different environment, and Treasury was always happy to provide technical support in this regard. He said that the Overview of Provincial Revenue and Expenditure (OPRE) contained a discussion of civic engagement in the budget process. There had been engagements both within provincial government and also with local government and their representatives. The Minister had also launched a campaign in the current cycle which was a direct outreach to citizens for direct input in the budget. The province did extensive surveys of citizens' experiences and demands for services. Transfers to school governing boards were an example of public participation: parents voted on school budgets in each school and each year.

Minister Wenger added that there had been a roadshow for the Provincial Economic Review and Outlook (PERO) and Municipal Economic Review and Outlook (MERO). There had been engagements with the Children’s Commissioner so children could engage with the budget documentation. There was also a pop-up event at First Thursday’s for budget messages. The Department tried to increase public participation throughout the budget process.

Ms Ishmail said the total number of NEETs in the third quarter was 803 635.

Mr Booysen pointed out that gambling had come to a standstill during 2020/2021 due to lockdown measures. The advent of online sports betting also disrupted the industry, which opened up significant opportunities. The gambling industry had recovered in all sectors, including casinos and bookmakers. Significant growth had been observed in online sports betting, and this was due to the Gambling Board having created an environment for sports betting to flourish by positively responding to licensing requests from applicants and offering new contingencies permissible for gambling.

Ms Pick said that the larger part of the increase in the number of teachers had been budgeted for in the 2022/23 budget. There were in fact only 430 new positions that needed to be funded. They would be filled by December 2023 only, which was why the funding allocated in 2023/24 was not the full amount. She assured the Committee that the three frontline departments had cleared the calculation of this full amount of R430m over the MTEF period. Treasury believed that it was sufficient.

Further questions
Ms Murray noted that her question regarding the ratio of accounts receivable had not been answered. She wanted to know how it was calculated and whether it would be adjusted in the future in response to high revenues. She also asked whether the Growth for Jobs strategy had been incorporated into the 2023/24 budget.

Mr Mvimbi asked whether the money set aside for the safety plan in the Provincial Minister’s budget speech would only be used to employ more officers, or did it include capital expenditure as well. He drew attention to the amount of R9.11bn budgeted for mobility over the MTEF period. How much of this would be allocated to Golden Arrow, and was it possible for there to be subsidisation of the taxi industry?

Mr Brinkhuis asked for confirmation that the R88m additional adjustment was for energy security. He also asked the Provincial Minister if he understood correctly that load-shedding allowances could not be made for Ramadan because there was insufficient time.

Ms Nkondlo asked why there had been no mention of the informal economy in the budget speech. She also asked to what extent the province expected to deal with infrastructure maintenance backlogs over the MTEF period. She noted that 12.6% of the budget for goods and services would go to the Department of Infrastructure and asked whether this accounted for all infrastructure activity across all departments.

Mr America said the Committee was mindful of service level pressures in certain departments, particularly education and health. In the case of health, mention had been made to the effect that one way of managing COE spending was through attrition. He noted that as a result of the pandemic, certain service delivery expectations, such as elective surgery, had been placed on the back burner. Although progress has since been made in dealing with backlogs, pressure remained within the health sector concerning certain services. He asked if managing COE spending through attrition signalled that there was going to be greater circumspection in terms of hiring personnel in the health sector. He asked how the province would navigate the competition for resources that would emerge as the whole country confronted the problem of energy resilience. He observed that the City of Cape Town had very ambitious plans for energy security and asked if the WCG was planning to their plans to include the entire province.

The Chairperson recalled that the previous Provincial Minister of Finance had made sure that the spending of money set aside for the COVID-19 response was transparent. Would the same approach be taken with the funds set aside for the energy emergency? Would there be monthly or yearly reporting? What were the details? Country-wide corruption had made South Africans anxious during the COVID-19 State of Disaster. How would the WCG gain people’s trust when it came to spending energy emergency funding? She asked where she could find details about previously allocated funds for the province’s Just Energy Transition Investment Plan, which had been mentioned in the budget.

Responses
Minister Wenger asked if she understood correctly that Ms Murray wanted an account of the difference between the projected revenue and the actual revenue of the gambling board. She explained that the actual revenue had been higher than the projection because the projection had been made during the pandemic when the Department had been unsure if gambling revenue would recover. She said DEDAT and the other Growth for Jobs departments (such as the Department of Local Government and the Department of Agriculture), as well as related entities, had not received allocations in the adjustment budget but in the main budget, where there had been a substantial allocation for the Growth for Jobs strategy. The details of this strategy would be unpacked in individual budget votes and when the strategy was finalised at the end of the financial year. The informal economy would also be addressed in more detail at this time. She confirmed that the R88m was for emergency energy funding for the current year, and that the province was not in a position to change load-shedding schedules to accommodate Ramadan. The matter should be taken up with Eskom as the country’s principal electricity provider. However, this situation showed that the province wanted to become independent of Eskom as quickly as possible, so it could buffer its citizens from load-shedding. The Department was aiming to report spending in response to the energy emergency in the same way it had reported COVID-19 expenditure.

Mr Savage said that the bulk of safety spending was for the compensation of officers but it included equipment, training, capital assets and technology. Expenditure on this programme was shared with the City of Cape Town. He confirmed that the allocation for mobility included payments to Golden Arrow. Subsidising the taxi industry was part of an extended debate but from a fiscal perspective, there were not enough funds to do so. There had been a pilot programme but expanding it was beyond the financial means of the provincial government. When it came to subsidising public transport, the major policy question was whether to subsidise providers or users, and research into this question was being done. He said that the emergency energy funds would be used to protect the water supply and sanitation, and not to provide general energy to municipal grids. This ensured that the energy crisis did not lead to a public health issue. Much as everyone would like to use renewable energy, the reality was that most of the money would be spent on diesel generators. He acknowledged that the province was struggling to keep up with maintenance. The Department was trying a different approach this year, which involved making money available for maintenance that significantly impacted the users’ experience of public facilities, in contrast to the kind of deep maintenance that was not necessarily readily apparent. The Department of Infrastructure would take a much more strategic approach to long-term infrastructure investment needs across the province. He explained that its budget did not cover infrastructure for education and health, which were budgeted for in the votes for those departments. He said that the province had always been circumspect concerning headcount growth in all departments. The challenge for the Department of Health was the constraints on available funding. The government was also in the process of reverting back to normal services in the wake of COVID-19. This budget was an attempt at smoothing out the transition. He understood that it was difficult for the Department to re-engineer its service platforms but it was unavoidable, and the province depended on national financial flows. He recognised that service backlogs and allocations had been made to smooth these out. He said that the province was not afraid of competition in terms of resources and that with the right strategic plan, it would be able to attract the right skills, talents and resources. The approach was to look for partnerships with municipalities, such as the City of Cape Town. It was hoped that other municipalities could learn lessons on how to become independent of Eskom. He said the province was committed to tracking disaster spending, adding that the energy crisis was slower-moving than COVID-19, so it might make more sense to track it quarterly rather than monthly.

Ms van de Rheede said that the Department of Education had made allocations for solar panels, and for the Just Energy Transition Investment Plan by DEDAT. Details could be found in the budgets of the respective departments.

Closing
The Chairperson appreciated the services that the province provided and the hard work that had gone into preparing the budget. She assured the officials that the little things were appreciated, across the province, not just in Cape Town.

The meeting was adjourned.