Appropriation Bill & Eskom Debt Relief Bill: FFC briefing

Meeting report

The Chairperson welcomed everyone to the meeting and invited the FFC to present its submission on the 2023 Appropriation Bill & the 2023 Eskom Debt Relief Bill.

[The meeting video cut off and we were unable to monitor a portion of the meeting].

Briefing by the Financial and Fiscal Commission (FFC)

The presentation was led by Dr Patience Nombelo Mbava, Chairperson & Commissioner, FFC.

The FFC’s submission was presented by Mr Chen Tseng, Head of Research, FFC, Mr Thando Ngozo, Research Specialist: Macroeconomics & Data Information, and Ms Sasha Peters, Programme Manager: National Appropriations.

In terms of the fiscal framework regarding the Eskom Debt Relief Bill, revenue projections exceed 2022 budget estimates due to strong collections from personal incomes and corporate profitability. A consolidated budget deficit of 4% of GDP is projected in 2023/24, narrowing to 3.2% in 2025/26. Various pressures over the Medium-Term Expenditure Framework (MTEF) period will impact the fiscal position. The poor and inefficient financial performance of SOEs continues to put pressure on public expenditure. Government debt is projected to increase due to the Eskom debt-relief arrangement. As a result of the Eskom debt relief and increasing market lending rates, debt-service costs will increase from R 307 billion in 2022/23 to R 397 billion in 2025/26.

In response to addressing the energy crisis, the Eskom Debt Relief Bill attributes to the Vote of the National Treasury, totalling R 254 billion for the 2023 MTEF as a loan with conditions. At the determination of the Minister of Finance regarding the progress on compliance, these loans can be converted into ordinary shares. National Treasury must report on compliance with the conditions and disclose the amounts of the conversion. In addition, for the 2025/26 financial year, R 70 billion of the Eskom debt will be a direct charge against the National Revenue Fund through a debt takeover arrangement as determined by the Minister.

On the 2023 Appropriation Bill, total appropriation by vote amounts to R 1.077 trillion in 2023/24. Summary of issues include, inter alia: (i) Largest appropriation at the national sphere is the Social Development vote, which will receive R 263 billion in 2023/24 – driven by extension to Social Relief of Distress grant and adjustments to the value of social security grants. Still no clarity on sustainable and permanent support for unemployed individuals. (ii) Allocation to the Cooperative Governance vote is projected to increase by 11% in 2023/24. Additional funding is directed at the local government equitable share – FFC welcomes the protection of funding for basic services. (iii) Health Vote is projected to decline from R 62.1 billion in 2022/23 to R 60.1 billion in 2023/24. This includes a reduction in the health allocation contained in the social wage package, implying that free healthcare will be affected. FFC advises Parliament to request an understanding of how this reduction will impact the poor who rely on the public healthcare system. (iv) Transport vote dominates in respect of infrastructure spending over the next three years (R47.2 billion in 2023/24, R51.5 billion in 2024/25, and R56 billion in 2025/26) – the focus will be on rehabilitation of provincial roads and reducing the rehabilitation backlog on national roads. (vi) Based on high levels of crime in South Africa, the commission welcomes the additional resources and recruitment drive being implemented under the Police vote.

Recommendations with respect to the 2023 Appropriations Bill were that the FFC appreciates the government’s efforts to balance protection of the social wage package alongside growth-inducing allocations to public infrastructure investment and additions to fight crime and corruption. As part of its oversight efforts, Parliament must seek to understand how strategic departments will absorb reductions in their budgets and how the reductions are likely to affect service delivery.

In terms of public sector institutions and investment, where the government guarantees to public institutions are forecasted to decelerate by R 81.4 billion to R 478.5 billion by 31 March 2023, the government's guarantee exposure will accelerate by approximately R 800 million and reach R 396.1 billion. Government exposure to SOEs remains very high, particularly in Eskom. The government's guarantees exposure to Eskom, increased to R 337 billion in 2022/23. The total government guarantee exposure is forecasted to increase from R 385 billion in 2020/21 to R396 billion in 2022/23.

On the financial performance of SOCs, SOEs continue to face considerable hurdles in fulfilling their developmental mandates. The challenges they encounter entail, inter alia, a lack of clarity in objectives, a multiplicity of mandates within their business models, improper costing of mandates, complex and decentralised oversight model, governance interference manifested in political appointments of boards and senior management, severe breaches of procurement policies, and weaknesses in oversight by line ministries and SOEs boards. Furthermore, SOEs reflect weak financial performance. Most of the major SOEs experienced sharp declines in the value of their assets, which constitutes a fiscal risk for the government as they require fiscal transfers to cover their losses and recapitalise their balance sheets.

Public infrastructure investment is expected to increase over the MTEF period. The FFC supports the increased funding for infrastructure investment as it will promote longer-term growth prospects. However, the government should remain committed to improving the management of infrastructure spending, given that mismanagement, wasteful expenditure, cost overruns, delayed project completion, and defective workmanship often characterise public infrastructure projects. Regarding the shares of public infrastructure investment, SOCs make up the largest share at 27.9% in 2022/23. The shares of public entities and SOCs are increasing, while provincial and local government shares are decreasing.

In conclusion, with respect to the Eskom Debt Relief Bill impacting the fiscal framework, in 2019 the government made R 23 billion provisional allocation per year to Eskom to service its debts and meet its redemption requirements. In addition, a special appropriation with conditions responsible by the Department of Public Enterprises at R 59 billion was allocated to assist Eskom with its financial obligations over the medium term. These experiences raise doubts that adopting the same approach, even with conditions, to address the structural issues at Eskom would yield a different outcome in 2023. The FFC recommends improving corporate and fiscal governance through reforms that enable SOEs' management boards the operational autonomy they require to make profit-maximising decisions and eliminating political interference to enhance operational transparency. The FFC recommends the establishment of explicit and progressive guidance to SOEs on expected rates of return and the distribution or reinvestment of profits. The FFC recommends that decisive judgement is made to deliver on return-to-investment effectively and efficiently. Failing which, dysfunctional SOEs should be restructured, sold off or shut down.

With respect to the 2023 Appropriation Bill, the FFC appreciates the government's efforts to balance the protection of the social wage package alongside the provision of growth-inducing allocations to public infrastructure investment and funding additions to fight crime and corruption. As part of its oversight efforts, Parliament must seek to understand how strategic departments will absorb reductions in their budgets and further how the reductions are likely to affect service delivery. The focus should be placed on, amongst others, the departments of health, transport, and higher education and technology. Timelines need to be devised for the finalisation of the new funding framework. A lack of continuity on this issue is observed as no mention is made of this aspect in the 2023 Budget.

(See Presentation)

Discussion

The Chairperson thanked the FFC and appreciated the presentation. He hoped that Ms T Tobias (ANC) was feeling better today.

Ms Tobias said that she was feeling better but could not sit, so she was still lying down.

The Chairperson said that the Committee appreciated that Ms Tobias was joining the Committee. She had not been feeling well and had been in hospital. The Committee wished her a speedy recovery.

Mr O Mathafa (ANC) thought that the silence by Members, and his hesitation as well to take to the podium, was because of what they had gotten used to from the FFC. Their presentations were very clear, straight to the point, concise, and very helpful. He thought that they were very clear and said he himself even only had one question. The question came from slide 9 wherein a decline in the health vote had been identified. He thought that it was important that the Committee took the advice from the FFC that they should seek clarity on what this meant for the poor who solely depended on public health services. Having said that, he also had a question of his own, which was if the FFC had formed an opinion on what this movement meant in the context of the NHI. If an opinion had been formed, can the FFC please share it with the Committee? Because Members would know that the NHI had been a contested concept, it had been in the public domain for quite some time, and there were very contradictory movements in terms of investing the position of the government insofar as that was concerned and the views of the private sector. So, he had a keen interest in that particular subject to hear what the FFC thought it meant if there was a decline in this particular vote. This was because he thought that was where the NHI funding or investment resources would have come from.

On the issue of the SOEs, with the new approach by the National Treasury (NT) with regard to the Eskom debt relief, what is the view of the FFC? Could this be a manner that a bailout should be approached? Does the FFC think that it carries some nudging in the right direction wherein management of these SOEs will, in his view, start taking seriously the usage of these resources in ensuring the sustainability of these particular entities? Because time immemorial, money is poured into the SOEs and the following year comes and again everyone is sitting around the table and discussing another bailout. So, could this loan conversion to equity be a way that should perhaps be tried going forward to ensure that any recapitalisation of these SOEs is structured? He thanked the FFC team for a brilliant presentation.

Ms Tobias thanked the FFC for the presentation. She subjected her questions to the comments made by Dr Mbava at the end of the presentation. She had two issues that she needed to understand. First, the FFC Chairperson had emphasised the issue of the autonomy of SOEs and companies. Now, as everyone knew, the scheduling of these entities made them account to the Public Finance Management Act 1 of 1999 (PFMA). Can the FFC be clear as to what are the suggestions that are being put on the table if SOEs are expected to be autonomous from the government, whereas, in terms of their schedule, they get their funding from the public purse? Can the Committee get proposals there because the SOEs would have to be self-sustainable? Second was the issue of the returns on investment. The risk appetite of SOCs was not the same as Johannesburg Stock Exchange (JSE)-listed companies. Can Dr Mbava be clear as to what she meant about the returns of investment of these companies? Because in terms of the shareholder compact, in all SOEs and companies, the shareholder compact estimated what is required. Can the FFC expand on that issue so that everyone understood one another? Because it was a policy issue and as the Committee moved forward they understood what the FFC was putting on the table.

Mr X Qayiso (ANC) agreed with Mr Mathafa that the FFC had really made a straightforward presentation and recommendations. He suggested that the Committee take those recommendations. Now, just on the point that had been raised by Ms Tobias, which was on the issue of SOEs and accountability insofar as the financials of the SOEs. It just did not make any sense to him that these SOEs were being governed by the PFMA and the Committee allowed a situation of no accountability insofar as financial expenditure reports and concerns. It did not make any sense because the PFMA governed that. So, it should not be that each and every cent needed to be followed insofar as the PFMA was concerned there. Therefore, the SOEs definitely had to bring in a financial report as to how they had spent their finances since 2017 to date. It would make a lot of sense.

He did not know what the view of the FFC’s was in that regard because this was governed by the PFMA. The Committee could not allow a laissez-faire in that situation. He wanted to find out from the FFC whether the SAA would be in a position or what they foresaw as a situation of absorption of those workers who were affected due to the turnover of the SAA during the period under review. He just wanted to get the view of the FFC. To what extent will that rescue materialise? Coming to health, he also agreed with Mr Mathafa that the economy of the country was also based on how healthy its people were because they were needed for production from time to time. So, health was also one element that determined economic healthiness as well.

If the country had more unhealthy people at a production level, then there would be fewer at a production level which also affected how the performance of the economy was concerned. He agreed that primarily the NHI was a key delivery aspect of primary healthcare that was supposed to be supported at all material times. However, if one followed up on some reports, one would see that there were certain critical areas there which, one, would like a comment from the FFC with regard to issues such as child mortality rates and adult mortality rates. He thought that they were very much important insofar as primary healthcare was concerned, therefore bringing in the issue of NHI. So, even if the Committee could not squeeze them in here, one would agree that the Committee definitely needed to get a written understanding or explanation from the Department of Health as to how this situation was going to be of affect?

[The meeting video cut off and we were unable to monitor a portion of the meeting].

Dr Mbava said that she would first like to speak to the question about the autonomy aspect which had been raised by the Chairperson and also Ms Tobias. When the FFC said “autonomy of the board”, essentially, what they were trying to drive at was to say that they needed to be aware that SOCs must also exercise good corporate governance, and that any reforms implemented there must look into the issues of financial, operational efficiencies, and all those other matters. The FFC understood that the shareholder representative, through the minister, would also sit in those boards. However, the FFC just wanted to caution that any decisions which are made at the board level or at the SOEs’ boards should rather be business driven. That meant being informed by imperatives to make sure that the business model is successful, rather than steered by political imperatives. That was just that grey line because that line could sometimes be sort of blurred.

So, the SOEs, in the FFC’s analysis, was that they needed to function like any other business in terms of ensuring that there was a return on investment. So, what do we mean by return on investment in our context? Quite rightfully so, as the Chairperson had said, South Africa’s SOEs, first and foremost, had a developmental mandate. Members would have seen in the FFC’s presentations that they had found that in most of the SOCs, their mandate was to implement infrastructure projects for the government. So, the SOCs were very, very critical in that sense and their operational resilience in terms of having good business models, workable, financial models, sustainability, and stability was quite critical. So, when the FFC said “return on investment”, they meant a return on taxpayers’ money. So, taxpayers’ money was being invested into these SOEs and as taxpayers, one would want to see service delivery, one would want to see a return on investment.

However, what taxpayers have seen throughout the years when the government has invested in SOCs, was a syndrome of a leaking bucket. Taxpayers put in money, but they did not actually see the actual service delivery. So, what the FFC was saying now was that they wanted to make sure that any further investments into SOCs actually brought about better operational efficiency, and a return on investment in terms of taxpayers’ money being used in an efficient manner. What the FFC had also seen was that the issue was not about the money itself in many of the SOCs. The issue was about operational efficiencies, it was about procurement problems, and it was about project management which was not done properly. All these issues morphed and actually presented a fiscal problem, which was what South Africa had now where we had to have government guarantees and bailouts because the SOCs were unable to actually present a return on investment or actually present a workable business case. Those were essentially the areas the FFC was alluding to.

In terms of accountability and issues around a laissez-faire sort of stance, the FFC believed that the country needed to have a transparent and credible fiscal framework. What they meant by that was that we need to have SOCs and other entities which reported in a transparent manner how they had spent the financial allocations made to them. So, whether, in this instance of Eskom, the bailout was through some sort of balance sheet model or it was a direct transfer, to the man on the street it did not matter because, ultimately, it was taxpayers’ money. All taxpayers were still actually bailing out this entity. So, it did not matter the configuration thereof, whether it was through any shareholding or through a balance sheet restructuring, or a straight transfer. The problem still remained – taxpayers were still doing a bailout. So, to the man on the street, it did not really make any difference how that configuration ultimately transpired.

Mr Tseng said that he shall attempt to go in reverse because following Dr Mbava he thought it went well with what she had already spoken about. About the return, correctly it was not monetary returns at this point. It was really about productivity returns in terms of the money that went in, what production, and also the sustainability of that production – in this case of Eskom, electricity generation, being again one of the output or productivity returns. Indeed, as Ms Tobias correctly said, the returns here were not profit returns in terms of normal JSE kind of companies and the shareholder compact here was the shareholder ultimately at the end of the day should be about the people. In terms of the too big to fail question, it depended. However, at this point, he thought, unlike the situation of the 2008, 2009, or 2010 financial crisis, in this case, it was too big to fail in a sense of, obviously, monopoly within the electricity markets or power markets. And in this case, one had to really think in terms of what the role or the existing role of the SOE was, that being Eskom here.

Monopolies were not exactly a bad thing; it depended on what kind of market they existed in. In the financial sector, of course, because of the liquidity issues and the other aspects of financial instruments, here the FFC was talking about markets of electricity, almost like a product and service. And one had, insofar as it was too big to fail in the sense that it was a monopoly, as well as the service, the product it produces being of a public good nature in that this was a necessity, obviously, as power utility, and that was for public good consumption, that being electricity. So, it was too important, he thought, to fail, but the necessary thing still had to be done, which was to reform it. He thought the separations or the decomposition of the different functions, the generations, the transmission, and reticulation, was an approach that could operate within the framework of that consideration and Eskom being a monopoly, but in for public goods.

However, he thought it was still one step short of the necessary reforms and transformation and structural transformations in terms of productivity within those. Even once they are separated, it was about productivity in generation, it was about productivity in transmission, and it was about productivity in the reticulation arena. In terms of conditions, he would answer them in a bit of a combination – the regulations and the conditions for the loans, and the guarantees. So, there was a substitution effect in terms of this. It was the Eskom Debt Relief Bill and the government guarantees in that government guarantees declined, as one could see in the Medium-Term Framework is being substituted by the Debt Relief Bill. But what happens if they don't pay? The issue, he thought, was correct, as the Chairperson had said, that it was a concern and a condition if Eskom did not pay back the loans but had also been done. As one could see in the substitution effect was that an attempt was that Eskom would have a bailout and then pay back the debts.

This was how that replacement worked and one could raise debt and then call it something else sort of in this environment. So, that was what made the condition of these financial flows incredibly important. And that related to, in terms of the exemptions, various forms of exemptions on those conditions and in part, of course, that the FFC had seen was regarding procurements. He thought that the procurement space was about the approach. For instance, if one looked back into the history of procurement in terms of the PFMA prescripts, it was that when this extreme tightening or what he thought was the over-tightening of the procurement space into trying to, for good reasons, reduce corruption and wastefulness and price inefficiencies, it overstepped into the realms and expertise that was required for these procurements. For example, as he had presented, going up to the middle class, and incredibly heavy, especially in the R 300 000 to R 500 000 region of the bin of the income deciles. However, there was then a sort of big gap from about R 500 000 upward to R 1 million, and then again the fiscal incidence went up.

So, what this meant was that the FFC was dealing with an inequality that was happening especially in the upper-middle income class where there was no one there to support the fiscus. So, the question now became two things. One was from the top end, being the outer rich. Have they been properly taxed? And the answer is yes because one saw the huge hump up at the top decile before the sort of big drop. Then the bottom end was whether the middle-income class had perhaps been taxed too much so that they cannot move up to the next level, being the upper-income class bin. He told the Committee to stay tuned for that research to come out in the FFC’s annual submission. It was incredibly interesting but boring because of the fact that the FFC was in search of developmental states. The FFC could not have a situation where the middle-income class and upper-income class, which were supposedly the engine of the fiscal space, were under too much pressure for them to grow within the income deciles.

In terms of a little bit more about the profits and also the financial reporting of Eskom, the FFC noted in their upcoming research, which they would table, that there was profit shifting within the financial year. That was something rather problematic in terms of accountability of financial reporting. So, there was a bit of a dance and shifts that were not quite transparent, especially when it came to the PFMA and the Companies Act 71 of 2008 (the Companies Act). The FFC saw that if the company or Eskom wanted a bailout they would call on the Companies Act and/or the PFMA, and in the other way when they wanted to report they would say that they are within the Companies Act and do not need to report. So, there was a bit of a dance there that was not doing quite well in terms of transparency.

Regarding health, the FFC was just at the Portfolio Committee on Health the previous day. In terms of the declines in health, the FFC had identified a couple of issues. He would run through them but the FFC did have a report on the responses to the questions posed by the Portfolio Committee on Health regarding health and specifically to do with the decline thereof. There was a functional shift in terms of port health and in terms of some of the data and functions of the health service there from the Department of Health to the Department of Home Affairs. However, adding onto that was that the normalisation came into question where it was seen that there was a quantity versus quality tradeoff problem within the health sector. This is also related to the NHI. It was basically saying that an increase was seen in terms of the number of health facilities but the ideal clinics or quality measures of these facilities sort of decline.

This did not bode well for NHI either because for NHI to be a success, and definitely economically speaking, it needed to take place – especially for South Africa having a dual system or separating equilibrium market of the healthcare sector, with the outer reach having their own markets with medical aid and the poor majority without access to healthcare. So, the NHI did, in terms of that healthcare market, bring in and pull in the equilibrium. However, the implementation was essentially a problem here as the FFC had identified, in that the information on health or patients and doctors and health resources were not in place and not integrated. South Africa still had a very hospital-based system. If one went from hospital A to hospital B there was no communication or very minimal communication, and it took too much time and resources to communicate with each other.

That was the major hurdle in terms of this NHI rollout but the principal and the need for NHI together with the Competition Commission reports in 2019 did support the establishment of the NHI. He said that the FFC would share that report with the Committee regarding the health sector and the more detailed questions for this sector, and ultimately they would hopefully advise in terms of the appropriations movements. He hoped that that answered all of the questions, otherwise the FFC could come back for a second bite.

Ms Tobias commented on the Chairperson’s questions and said that the questions needed a whole day of policy engagement with the Standing Committee on Public Accounts included to deal with the matters that he had raised. She thought that at some point the Committee would need to engage them. Mr Tseng had hit the nail in terms of the recommendation that should be undertaken for them to break even. She went back to the issue of accountability. As Members might know, she was still hot under the hills, fresh from three boards that she had served on, and in one of them, she was the chairperson. The fiduciary responsibility of those to account could never be shifted to political leaders. Performance contracts were signed with CEOs in terms of the returns on investment of the public purse, but more often than not government did not get it back and they did not hold them accountable. In this case, the government needed to be honest.

She said that Mr Andre De Ruyter must be taken to task and account on the basis of the performance agreement he had signed with the board of Eskom about his performance, which in this case had failed but he later blamed it on politicians when there was a fiduciary responsibility. All Members had undergone training and they knew what the fiduciary responsibility of board members was and how they could expose any maturations that had to do with political interference. Any strategic plan, if not achieved, people should account and they should be able to tell the Committee why they had not achieved, and money paid unto themselves must be retrieved for failure. Perhaps an example should have been set with Eskom, where people should return the payments that they had received due to the failure to implement the very same models that they had come up with, as experts in the market, to be able to turn around an institution.

More often than not, it was pretended that any shareholder compact, trust deed, Memorandum of incorporation, or Memorandum of Understanding limited Members from taking fiduciary responsibility. In this context, there was no such thing. Responsibility lied with the boards and the CEOs that had been given a mandate to perform – and in this instance, they had not. Because of the developmental agenda of the South African government, the government continued to pump money into these institutions with the intention to give public good. So if one listened carefully to Mr Tseng, he had explained, and perhaps the Committee should engage the FFC in their view, about how distribution reticulation would speak to the end user, which was the public good, for South Africa to be able to maintain these entities as monopolies, but with the developmental agenda. That was why she had suggested that there should be a different engagement so that the Committee and the FFC could formulate a clear strategy as to how they were going to move forward.

Mr Qayiso understood that the FFC had spoken sufficiently about the issue that affected SOCs or SOEs, and then about their performance generally which was really poor and contributed to the many problems, as Eskom was facing. Now, his last question was whether there was any other way that, given the nature and the structuring of the SOEs, the FFC thought they may be able to operate efficiently as these number of SOEs. Perhaps the FFC could suggest something in the future that the Committee had to look at.

Mr Tseng thought that the questions were very industry-specific, and very, as he had said, related to specialist fields or expertise. In fact, it talked about engineers, designs, and infrastructures. So he thought, however, that separating them in terms of productivity would ultimately have to be looked at. The Member was totally right in that the FFC saw insofar as much as the FFC could on the financial indicators, which was a proxy indicator for Europe if the operations and productivity were correct, but it was not the full measure. So, in looking into the industries the FFC would need to engage with the people on the ground and in terms of the people who understood the engineering and the significant design feats. The FFC would look for some more of an economic indicator for those activities.

He thought that in generations, obviously, the FFC did have that productivity or the electrical power production or quantity measure. But he thought the issue was the sustainability of it and also the many other measures they could look at. And of course, again, the FFC did have their next incoming submission on the division of revenue that would be tabled at the end of May, with the media release on 1 June, regarding and specifically honing in on the financial status as well as the economic status of these SOCs and specifically on Eskom. The FFC would love to share it, of course, as they were mandated to do, but Members were duly invited to that release of the publication of the annual submission. He hoped that the FFC and the Committee would engage further as it did need a whole day as well as even a whole lot of the experts they could get together on this issue. It was too important to fail.

The Chairperson thanked the FFC for the presentation and engagement with the issues raised by Members. He thanked Members for raising those points they had raised with the FFC. That took care of agenda item four, and he continued to agenda item five.

Committee Minutes of 5 April 2023

The Chairperson said that the minutes had been sent to Members, who should have read them. He asked for a mover for the adoption of the minutes.

Mr Mathafa moved for the adoption of the minutes.

Mr Z Mlenzana (ANC) seconded the adoption of the minutes.

The Chairperson said that the minutes of 5 April 2023 was duly adopted.

Closing Remarks

The Chairperson asked Mr Darrin Arends, the Committee Secretary, when the next meeting was or whether he had any other announcements he would like to make.

The Committee Secretary said that the next meeting was the following morning with the Parliamentary Budget Office (PBO) at 10h00. The link would be distributed in the next half an hour.

The Chairperson said that Members would wait for the link and the documents from the PBO.

The meeting was adjourned.