Division of Revenue Bill & Second Adjustments Appropriation (2022/23 Financial Year) Bill: FFC & PBO briefing

Meeting report

The Chairperson said the purpose of the meeting was for the Financial & Fiscal Commission (FFC) and the Parliamentary Budget Office (PBO) to brief the Select Committee on the 2023 Division of Revenue Bill [B2 – 2023] and the 2022/23 Second Adjustments Appropriation Bill [B4 -2023].

Financial and Fiscal Commission presentation

Dr Nombeko Mbava, FFC Chairperson, began the presentation by providing an overview of the entity's functions, and what the purpose of the presentation was.

Mr Chen Tseng, FFC Head of Research, emphasised the importance of the 2022/23 Second Adjustments Appropriation Bill, because it provided context for future actions and decisions. He noted that the Bill amounted to R9.5 billion and focused on four areas: the public service wage increase, bailouts, political parties' funding, and the reduction of unspent Social Relief of Distress (SRD) grant funds.

Ms Sasha Peters, Programme Manage: National Appropriations, FFC, highlighted a number of recommendations for the Second Adjustments Appropriation Bill. She said that the FFC viewed bailouts as fiscally unsound, and recommended that government create a functioning system of accountability to prevent state-owned entities (SOEs) from engaging in bad behaviour. The FFC recommended that future bills be accompanied by more information explaining the proposed adjustments. It was concerned with the criteria for the SRD grant.

Mr Sabelo Mtantato,Senior Researcher, FFC, said the 2023 Division of Revenue Bill proposed a total provincial allocation of R2.2 trillion. He noted that the total provincial conditional grants allocation for the 2023/24 financial year totalled R127.5 Billion. He presented the FFCs recommendations on the provincial allocations, and said emergency housing was a major concern, and recommended disaster plans to address natural disasters.

Mr Khutso Makua, Researcher, FFC, presented on the local government aspect of the 2023 Division of Revenue Bill. He noted that local government faced many challenges that affected the way in which basic services were delivered. He said local government allocations were expected to increase, and that the FFC welcomed this.

He highlighted the FFC's recommendations, including a review of local government transfers, and said that a review of capacity building and infrastructure grants should be municipality specific.

Mr Cheng said SOEs faced continuous burdens. He paid specific attention to South African Airways (SAA). The FFC recommended improving corporate and fiscal governance to enable SOEs to make profit-maximising decisions. It recommended that SOEs which failed to effectively provide a return on the investment should be restructured, sold or closed.

See attached for full presentation

Parliamentary Budget Office presentation

The Parliamentary Budget Office (PBO) presented a briefing on the 2023 Division of Revenue Bill [B2 – 2023] and the 2022 Second Adjustments Appropriations Bill.

Dr Dumisane Jantjies, PBO Director, provided an overview of the PBOs functions, outlined the presentation and provided an overview of the Bills.

Ms Sibusisiwe Sibeko, Analyst, PBO, presented a situational analysis which provided a context for the proposals that had been made. She covered a number of key areas and provided a detailed understanding of the context. She provided insight into budget trends, focusing on areas of education, health and grants.

Dr Mmapula Sekatane, Policy Analyst: PBO, presented on the Division of Revenue Bill, and stated that its purpose was to equitably divide nationally raised revenue between the national, provincial and local spheres of government. She said there was an effort to empower local governments through revenue, but that this had not yet been realised. She highlighted grant allocations and transfers.

Mr Siphethelo Simelane, Public Finance Analyst, PBO, provided insight into the state of local government’s fiscal space. He noted that municipalities were by nature self-funding and were responsible for generating 85% of their total revenue. The stability in some municipalities had been decreasing due to poor revenue collection and poor management, which meant that municipalities were unable to provide basic services. This was an issue, because it increased the reliance on grants.

Mr Simelane presented on the issue of under-spending, and highlighted a number of reasons for this. He said that the PBO aimed to understand the drivers of under-spending in various departments.

Dr Sekatane provided an outline of the revisions to the non-interest expenditure. She noted that SAA would receive R1 billion, the South African Post Office (SAPO) would receive R2.4 billion, and the Land bank would receive R5 billion. She added that there were several conditions to this funding.

See attached for full presentation

Discussion

The Chairperson stated that she was experiencing network issues due to loadshedding, and requested Mr E Njadu (ANC, Western Cape) to assist if she could not connect to the virtual meeting platform.

Mr Njadu extended his thanks to the FFC and PBO for the presentations, and said that the discussion could proceed, beginning with Mr D Ryder (DA, Gauteng).

Mr Ryder said there were many things to be concerned about regarding the Second Adjustments Appropriation Bill. He noted the bailout of the South African Post Office (SAPO), and said that many post offices were being closed down, which impacted on the payment of grants, which the post office processed. He said that the closure of several post offices was negatively affecting people’s accessibility to the services provided by the post office. This financial issue was not only an issue in South Africa, but was being experienced by postal services around the world because of technological gains that had decreased the productivity of post offices. There had been no visible re-invention or changes in how the post office worked, and for post offices to be made viable again, they would need to be reinvented and updated. He knew about the Post Office Bank Bill, but said that this would be a financial burden to the country because the bank would need to be capitalised. He doubted that the Post Office Bank Bill would be beneficial, because it was too late to have a real effect. Commercial banks had been forced to open Mzansi accounts because of the previous failure of the Post Office Bank.

Mr Ryder said the South African Airways (SAA) bailout was expected, but he had wanted to hear about the progress of the ‘secret deal’ that was happening behind closed doors.

He requested clarity on the Land Bank bailout, and asked if it was a development finance institution or a commercial entity. There were many concerns about how this entity was operating, especially in terms of the entity's heavy-handedness.

He had heard the Congress of South African Trade Unions' (COSATU's) argument the previous day about the Political Parties Funding Act, and its argument partly convinced him. He said it was bad timing to have an adjustments appropriation to fund political parties while many South Africans suffered financial hardship. Citizens would probably not be happy with the funding of political parties while facing bigger concerns.

Mr Ryder said that the Social Relief of Distress (SRD) grant under-spending was bad and needed to be monitored carefully. He said it was due to the tough conditions and red tape around qualifying for the grant. He commented that the under-spending might indicate that the grant amount had to be increased, because it implied that the current beneficiaries desperately needed assistance, and R350 did little to help these people.

He said it was difficult for both of the presentations to fit into a single meeting because so much needed to be discussed and unpacked. Some of the analyses presented by the PBO had been superficial and did not provide substantial detail or reasoning behind the analysis. The PBO had said that complex procurement processes had resulted in under-spending, and while he agreed with this statement, the PBO had made no effort to go beyond this basic statement.

He noted that the Regional Bulk Infrastructure Grant (RBIG) had taken away municipalities' ability to spend, and now there was under-spending of this grant. This resulted in a downturn in the RBIG, which was worrying during the water and sanitation crisis. There had been increased cases of drinking water being polluted with sewage, and the downward trend in the RBIG was dangerous because it was meant to fund the building of sewage treatment plants and reservoirs. He said under-spending in the RBIG was estimated to increase further, and would likely increase only in four years. Clearly, government was not prioritising this, because it had not been effectively budgeted for.

He welcomed the increases that were happening for provincial and local governments. He asked how much of the increase was a result of indirect grants. Meeting with the provincial treasuries to get their input on the matter was necessary.

Mr Ryder said that the PBO had focused on revenue collection in municipalities, and had said that local governments were supposed to be self-funding, but they were not. It had stated that this showed a failure of the model, but he did not agree. He said that the reasons given for the revenue collection problems that were being experienced were not correct. Based on his experience in local government, he understood that local governments were not doing revenue collections in the way they were supposed to. He highlighted the example of Emfuleni, and said that the Spatial Planning and Land Use Management Act (SPLUMA) was not being applied to the building regulations, the development and planning personnel were inadequate, and they were not collecting bulk contributions to fund the increased need for infrastructure. Emfuleni was also not doing re-zonings, and was rating and taxing properties at an incorrect level, which caused an under-collection of revenue. Even when billing people, collection was not being done, and he highlighted a previous analysis that showed four properties that owed the Emfuleni local municipality R8 million, but the money was not being collected because it was politically uncomfortable for the municipality. This showed that the issue was not with the model, but rather with the lack of ability to drive revenue collection because of technical incapabilities or a lack of political will. There were cases where the model and the municipalities worked well because revenue was collected. It suggested that the Committee hear from these successful municipalities to find out what was going wrong in other municipalities.

He had seen little in the analysis about wastage. Considering the non-revenue water and non-revenue electricity, money was being wasted while substantial amounts were owed to Eskom and the water boards. A lot of money was for water not being billed out, and money was being paid for water running into the stormwater system because leaks were not being repaired. It was important to protect the revenue coming in while protecting what was going out.

Mr Ryder noted that some people spent money on non-essentials like DStv, instead of paying rates and taxes at the end of the month, and stressed that this had to be challenged. He observed that during apartheid, there had been a strategy of non-payment led by the ANC, and now the ANC was having trouble turning that culture of non-payment around.

He appreciated the presentations, but encouraged more time to fully unpack what had been presented. For a fair job to be done, the information presented would need to be analysed over time.

Mr W Aucamp (DA, Northern Cape) agreed with what had been said by Mr Ryder, and said that he had covered a number of shared concerns. He agreed that the Committee had limited time to digest the information presented.

He said he would focus on the Northern Cape and the disasters experienced there. Clearly, there was no disaster plan, based on the response to the fires that broke out in 2022 and the beginning of 2023. There was no plan in place, and money had been collected internally to get aircraft in because the government had taken so long over their response, and said there had been a response time of sometimes two days. While the government was doing this, the fires were raging. The public sector had got the money and had done what it felt was necessary, and only in some instances had the local and provincial governments helped afterwards -- and that had been too little, too late. He asked the FFC and PBO to advise the Committee on how to streamline the process of disaster responses, to make sure that action was taken swiftly when disasters occurred without disadvantaging other areas of government.

Mr Aucamp asked how the criteria for the SRD grant could be adjusted without having a negative impact on the people that needed it the most, while dealing with the issue of corruption taking place within the social grant space. Some people received social grants but earned money somewhere else, and had more than one bank account. Certain adjustments had been made to prevent money leakages, but they did not seem to be effective. He asked what could be done about this.

He asked what the best way would be to address the challenges faced by the fiscally unsound SOEs without breaking the fiscus. He said SOEs were mismanaged and run into the ground for many reasons, including corruption, cadre deployment, and the incorrect application of Black Economic Empowerment (BEE) policies. Money was continuously being put into SOEs, but there were no real plans to turn this around. He asked the FFC and PBO to respond to this concern.

He said the Committee agreed that capacity-building measures should be comprehensive, and proper consultation should take place with the concerned municipalities to make sure the correct diagnosis is made. However, it seemed like this was not taking place, and he asked what could be done to address this issue.

Mr Aucamp said the PBO had attributed the increase in poverty, inequality, and poor quality services to an inadequate social wage. However, other factors led to these financial issues, such as unemployment, the appointment of unqualified and inexperienced people due to cadre deployment and nepotism, which resulted in mismanagement of the social wage. He asked if money should always be thrown at the problem, and how these issues could be curbed.

He agreed with Mr Ryder about people who chose to pay for non-essential services or products like DStv or cars, but would not pay for other services. Municipalities were struggling because of the non-collection of revenue for services delivered. There was a culture of non-payment in South Africa that needed to be addressed because there were people who could afford to pay for services but chose not to, resulting in people who were really struggling being unable to access the necessary resources or assistance from government.

Mr M Moletsane (EFF, Free State) referred to the fact that there had been an above-inflation increase in the allocations to local government, and asked if this was to cater for the high cost of living in households who qualified for basic services.

Mr F Du Toit (FF+, North West) asked the presenters about the expanding social gap, and said that the broader public was not educated enough about this and its implications. The country was experiencing growing unemployment and poverty, which was not being addressed. He asked the presenters if this was something that needed attention.

He said that the country had lost millions to SAA bailouts, and asked if the presenters had seen SAA's finances and if any progress had been made with its financial position. He noted that government still had some shares in SAA, and asked if it was anticipated it would need another bailout in the near future.

He said that the books of the other SOEs were not up to scratch, and that only the Development Bank of Southern Africa (DBSA) was able to provide a clear set of books. Was it anticipated that the other SOEs might require bailouts in the next two years and if so, how many would need assistance?

Mr Y Carrim (ANC, Kwa-Zulu Natal) said that he was not sure if the allocated amount was sufficient for SAA, commenting that it seemed small compared to what had been stated in the media. This issue was complicated by a lack of understanding by this Committee, and said that the Committee on Public Enterprises would know more about why the current deal was complicating the situation. It seemed like the money that was supposed to come from the purchaser had not been delivered. He requested more clarity on this issue.

He agreed with Mr Ryder about the water crisis, and said that more money should be allocated. It would need to be balanced against other basic needs, but water should be a priority.

Mr Carrim agreed with the statements about the local government model. He had previously chaired the Committee, and had noted that the experts did a lot of research on the equitable share and the local government model for finances. He expressed the view that they had been wrong collectively, but added that many of the issues could not have been foreseen. He did not think that the issue was solely the failure of the model, but also the failure of the politicians, CFOs and senior officials to manage the money they had in a way that delivered services productively. Instead, there had been cases of mismanagement, corruption, lack of direction, and a lack of skills,

He agreed with the suggestion that the presentations should be discussed further, and said more action was necessary.

Mr Njadu asked the presenters what the best way would be to address the challenges faced by fiscally unsound SOEs without breaking the fiscus. The PBO had said that the non-payment of services was because of poverty and not an unwillingness to pay. He said that, to some extent, that may be true, but asked what the view was on households that could afford to pay for non-essential services and products, but were unable to pay for basic services.

Mr Ryder said that the substantial move to solar energy would impact local governments' revenue collection, because local governments made money from selling electricity. The move to solar power, especially by people who paid for the electricity and other services, would have an impact on local government’s funding. With the annual increases permitted by the National Energy Regulator of South Africa (NERSA) for Eskom, their margins were under pressure because NERSA gave local government a slightly lower amount that they were permitted to pass on to consumers. He gave an example of NERSA granting Eskom a 10% increase, but municipalities being allowed to pass on only a 9.5% increase to their consumers. He commented that the increased margin was used for a number of things, including funding maintenance of the electrical network, ensuring expansion of the electrical network, and funding other services that were not self-funding or billable. He emphasised that the margin was under immense pressure, and that the squeeze for funds had been happening for some time. He asked if any analysis had been done on the margin squeeze by the FFC or PBO, and if they would be able to provide an impression of how this would affect local government.
 
FCC's response

Dr Mbava said that the national debt and SOEs were major concerns for growth, and were a risk to fiscal sustainability. Debt service cost had been the fastest growing expenditure line item, and each successive bailout made the problem worse. The detrimental effect of debt service cost crowding out social programmes could lead to a total collapse of basic services and service delivery. She expressed that it was a possibility that needed to be faced because funds intended for core spending would be diverted to service the debt. SOEs posed a huge risk.

She said municipalities were implementing the budget allocated by Parliament, and the Committee should shoulder a bigger responsibility to ensure that the allocations went toward better quality service delivery. It was no use for the FFC, PBO and Parliament to make budget allocations to municipalities that were dysfunctional and national departments that could not disperse relief funds that had been earmarked for the poorest citizens. The problem was not about the money -- the problem was about the state's capacity to deliver. This was a daunting issue, because it could not be resolved through the budgeting process -- it needed to be addressed in a deeper way. She said the budgeting process did achieve its aims, but she doubted that the services reached the people it was supposed to, and whether there was state capacity to effectively disburse the funds.

Mr Tseng said that if there were other ways to handle the fiscally unsustainable SOEs, they would have been tried. However, it came down to failure, and the only option left was to reinvent, which meant there was a need for termination and restructuring. The process would be painful, but it would be more painful if the government kept trying what was not working. A big issue was the obsolete business models that the SOEs were using, which was why there was an emphasis on the sectoral nature of the SOEs and a need to consider the specificities of the SOEs, the goods or services they provided, and the role they played in the larger economy. He said the world economy had changed and moved, and the SOE business models had to be restructured to keep up.

Mr Tseng said that the culture of non-payment was a difficult issue. It may not be the case that households did not want to pay, and from a public sector perspective, it was important to know the value chain of the issue. There was generation for bulk purchases of the basic goods or services by municipalities, which then reticulate the bulk services into basic services for households. If there was no generation, then there would be nothing to reticulate, leaving no margin for municipalities. He said there were issues with individual household behaviours, where other things were prioritised over basic services. Government needed to consider whether the public sector ensured that the services were accessible to the public. He agreed that there were instances of malice and abuse of the system with the culture of non-payment.

He said the social wage gap was widening and that there was increasing disparity because most of it was being diverted and had been eroded by implementation failures. The SOEs were an example of this, where funds had been designated for social wages that could potentially be diverted to assisting SOEs. The FFC had previously presented on the government guarantee exposures, which was the actual money or guarantees being used by the entities because they had a shortage of funds, which had cost close to R400 billion, with the biggest chunk of R337.8 billion going to Eskom. It was more than likely that the trend of guarantee exposures would continue. SANRAL was exposed to approximately R28 billion, and Transnet to R8.7 billion. He said that in the past three years, those had been similar figures, and it could be expected that it would continue this way.

Mr Tseng said that the persistent failure of SOEs indicated a need to consider the long-term consequences of the SOEs continuing to fail. If they continued to fail, the spotlight would move to the issue of oversight by Parliament. This shift had already begun, and accountability demanded that all oversight bodies be held into question.

BPO's response

Mr Seeraj Mohamed, Deputy Director: Economics, PBO, agreed that the issues brought up by the PBO and the FFC needed to be discussed further. There were times when PBO presentations may have come across as superficial, and said that that was the nature of the meetings, and there was often not enough time to fully elaborate on certain topics. If given more time and space, the PBO would be able to provide more details.

He said that the Committee should understand that the PBO was beginning to work on its list of under-spending projects. It has looked at three departments so far, and the initial approach has been to understand the trends and analyse the data. It had done a literature review that looked at the global situation, and literature specific to South Africa. He said that it was necessary to communicate with the South African Local Government Association (SALGA), government entities and local governments to formulate a deeper understanding of the issues. He described this stage as the first round of finding things that were actually compelling enough to present at the time.

One important finding had been, looking at the data and the spending at a national level, that departments were not under-spending by more than 2%. Mr Mohamed used the Department of Health as an example, and said that the reason for this was that there was a massive backlog, and resources that were ‘underspent’ were contributing to easing the backlog. The PBO was learning throughout the process and creating a mode of analysis which was important for the future of the project.

Mr Mohamed said that PBO's analysis of the business model of local governments was very broad. The PBO was questioning if the level of self-financing actually helped local governments. He did not deny that there were many people who did not pay, or there was inefficiency, or there was wastage or corruption, but he felt it was necessary to look in the direction of causation between these factors, as it was a two-way street. It was easy to say that money should not be given to inefficient municipalities or departments, but it was important to realise that some of the issues involving inefficiency may be because of long-term underfunding.

It should not be said that people were choosing not to pay, because a large number of people had to make difficult choices between feeding their families and paying their bills. The issue of accessibility was not only about having electricity connections or water -- it was also about being able to pay for these services. He noted the expensive tariff increases were directly linked to the need to collect a certain amount of money through self-funding. It was important to unpack this further, and more research was necessary, but he was unsure if the PBO could do that level of research on the issue.

Mr Mohamed said that making the disaster plans faster and more effective was not an area that the PBO had researched. He was unsure if the PBO was the correct institution to provide that kind of analysis and recommendations.

Ms Sibeko said that the SRD grant had received 13 million applicants, and approximately 7.8 million had been approved to receive the grant. This showed that a lot of people needed the money. The minimum threshold for the amount of money individuals could have in their accounts meant that many people were excluded from receiving the grant. If people had R350 in their accounts, an additional R350 would make a huge difference and bring them above the food poverty line. The means testing meant that there were exclusion areas which had been previously acknowledged. She emphasised that part of the broader problem of streamlining grants required a deeper analysis of intra- and inter-household transfers. African households were the poorest because of the migration structure regarding work. Because of this, a more nuanced idea of household income needed to be created so that people who received money on someone else’s behalf were not excluded.

When considering under-spending, Ms Sibeko said the PBO's method had looked only at the national and provincial governments, and they did not have a direct response on the local government sphere. Treasury conducted a diagnostic review in February 2022 which looked at the capacity building system for local government. The PBO was reporting on what departments reported as the drivers of under-spending in their annual reports. Because the PBO was collating only what different departments had said, it was likely that there were more reasons for under-spending.

She said the PBO had indicated that government needed to take a more proactive approach to disaster planning. The frequency of national disasters was increasing, and it was important to ensure that households were resilient to national disasters before they happened. It was important to build the infrastructure and capacity to deal with disasters before they happened to avoid major consequences. She indicated that the Auditor-General of South Africa (AGSA) had noted that audits had not been done to redress previous disasters. This indicated a backlog of unknown size. A proactive approach should consider the backlog while building disaster management systems.

Referring to whether the above inflation increases at the local government level were intended to deal with the needs; she said it was a matter of redress. If the expenditure was increased now after a period of inadequate investment at the local government level, the increase in allocations would not be significant enough to deal with the backlog of redress.

Ms Sibeko said that the analysis done was on a per capita analysis, which allowed for an understanding of what was being spent per person over time. South Africa had experienced a decline in the fertility rate over time -- the population growth in 2016-2017 had been approximately 1.6%, but was currently approximately 1.06%. COVID-19 had had an impact, and population growth itself and the fertility rate had declined, so the pressure of population growth was not as big as was believed. However, it was true that the number of people in poverty, unemployed and destitute, was increasing.

Mr Simelane said that this analysis project was meant to stimulate conversations around under-spending and that it was important to continue to engage on such a platform.

Mr Tshepo Moloi, Economic Analyst. PBO, said that in the presentation, when referring to households that were unable to pay for services, the PBO was referring to poor households who did not have the resources to pay. Many poor households were unable to access basic services because of inefficiencies in the system, and this was linked to issues with the general household survey. Because the data was not available, at a policy implementation level, when it came to identifying households in need, there would always be issues.

Mr Mohamed agreed that SOEs needed to update their business models. Eskom was working with a 100-year-old utility model, and there was a move towards a more modular approach. He noted that the prices of renewable energy sources had come down, and that South Africa was looking further into harnessing renewables, which indicated the need to reinvent its business model. He noted the importance of maintenance of the water system, and said that in the future, the PBO would do more research on areas outside of just Eskom.

The Chairperson thanked the FFC and the PBO for their responses and commended them on the progressiveness of their responses. She was impressed with the responses and was confident they would help the Committee. The engagement would be helpful when they were creating the Committee report.

Adoption of minutes

The Chairperson moved on to considering the minutes of meetings dated 23 and 28 February, and 8 March.

The minutes of the three meetings were adopted.

The meeting was adjourned.