Appropriation Bill and Eskom Debt Relief Bill: FFC & PBO Input

Meeting report

Financial and Fiscal Commission (FFC)

Dr Patience Nombeko Mbava, Chairperson, FFC, said the Commission would use this presentation to provide the Committee with its recommendations on the Appropriation and Eskom Relief Bill.

Mr Chen Tseng, Head of Research, FFC, highlighted that overall, the country had moved from a structure of energy production to purchasing electricity. That shift was not ideal and was an indication of underperformance thereof.

The total appropriation amounted to R1.077 trillion in 2023/24. The largest appropriation at the national sphere was the Social Development vote which would receive R263 billion.  

The consolidated government fiscal framework was provided to the Committee.

The state of State-owned entities (SOEs) was provided to the Committee. SOEs continued to face considerable hurdles in fulfilling their developmental mandates. The challenges they encountered entailed, among other things, 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, non-adherence to international best practices in corporate governance dictates, severe breaches of procurement policies, and weaknesses in oversight by line ministries and SOEs boards.

The Commission concluded with its recommendations. The Commission recommended improving corporate and fiscal governance through reforms that enable SOEs' management boards the operational autonomy they require to make profit-maximising decisions and eliminate political interference to enhance operational transparency. 

The Commission recommended the establishment of explicit and progressive guidance to SOEs on expected rates of return and the distribution or reinvestment of profits.

The Commission reiterated its recommendation that decisive judgement be made to deliver on return-to-investment effectively and efficiently.

See attached for details of the full presentation.

Briefing by Parliamentary Budget Office (PBO) on the: (i) Appropriation Bill [B3 – 2023]; and (ii) Eskom Debt Relief Bill [B5 – 2023]

Dr Dumisani Jantjies, Director, PBO, highlighted that the 2023 appropriation focused on the importance of energy insecurity and its implication on the economy.

Mr Tshepo Moloi, Economic Analyst, PBO, provided the Committee with the country’s macro-economic context. Generally, the economic growth of South Africa was below world average as well as that of developing nations. The spending priorities of 2023 in the Appropriations Bill were outlined. The possible risks were identified – this included unfunded compensation of employees in national departments, contingent liabilities and government guarantees and bailouts.

Members were taken through conditional grants and transfers to local government in the Appropriation Bill.

Eskom remained a key topic in the presentation as it also touched upon the Eskom Debt Relief Act. The PBO discussed with Members its concerns on the Eskom Relief Bill, including:

•Significant political will to implement, particularly from provinces and municipal councils tasked with oversight

•A meaningful take-up by historically recalcitrant municipalities who need to agree to participate in the plan

•Behavioural change from households, businesses and municipalities

•Some municipalities may require investment in additional capacity to collect (i.e., in staff, systems, etc.

•While National Treasury (NT) acknowledges its assumption about the recent tariff increase, it does not state its other assumptions that will affect Eskom’s operational and financial performance, for example, its assumptions about the amount of electricity that Eskom would be able to produce and sell

•The Eskom Debt Relief Bill outlines the intention of a debt takeover arrangement of R70 billion for the 2025/26 financial year, as direct charge against the National Revenue Fund. However, given the complexity of Eskom’s debt to many bondholders and numerous loan terms, maturities and conditions, the NT should clarify the process by which government will directly take over the R70 billion in 2025/26

•The Act seems to preempt the proposals that the new Minister of Electricity will make to the cabinet

•The conditions of the Act, particularly those that limit capital expenditure while empowering the Minister of Finanace concerning managing Eskom’s debt, may impinge on policymaking and actions of other ministers, particularly the Ministers of Public Enterprises and Electricity

•A general concern is that this debt relief (while needed to avoid debt defaults by Eskom) is being implemented in the absence of a larger government vision and plan not only for the future of Eskom but the South African electricity industry as a whole

See attached for details of the full presentation.

Discussion

The Chairperson thanked the presenters and commented that the presentation equipped and empowered Members to understand the Appropriation Bill and the Eskom Relief Bill.

Mr D Ryder (DA, Gauteng) noted the FFC’s concern that the Social Relief of Distress (SRD) grant might not be getting to the intended beneficiaries to deliver the impact that government had hoped to alleviate the living crisis and poverty among the poorest population. He was unhappy with the business-as-usual tone which was set by both presentations. This could not be, since the country's economic environment was deeply distressing with the US Dollar to Rand exchange rate currently sitting at 1 to 19.40. The declining Rand had an immense and dire impact on every South African. The most direct impact would be on the fuel price which was a key component of many aspects of economic activities. Because of the increasing exchange rate, the increasing fuel price made those aspects more expensive and unaffordable. He thus criticised the presentation for not being acerbic enough to highlight those challenges.

Mr Ryder then highlighted several examples that indicated the looming picture of various aspects of government. In the country’s defence sector, he noted that the discussion on the Joint Standing Committee on Defense recently had revealed that majority of the country’s defence equipment was no longer serviceable. Hence, it meant that the country’s defence force was non-existent. Despite that, South Africa was sending its defence force to the DRC, and it was unfair to send those soldiers to the DRC and not equip them properly.

He was of the view that it did not make sense that government was spending three times more budget on higher education than on basic education. The fact was that only 7% of South Africans got higher education, whereas majority of children could not even do basic mathematics. It was an indication that the country’s school system was failing. He thus questioned the rationale of the inappropriate priority.

He lamented that there was no real move in this budget to deal exclusively with the electricity crisis.

He shared his deep concern about the public wage bill. He noted what Finance Minister Enoch Godongwana had mentioned that morning about the R37.4 billion added to the wage bill based on the current agreements. He expressed his concern that 73.6% of the appropriation went to staff costs which were quite skewed in his opinion. There was a need to itemise the transfers and subsidies to clearly understand how much of that had gone to the wage bill. His view was that this type of increase was unsustainable. He understood that since it was an election year, government wanted to keep the Congress of South African Trade Unions (COSATU) on its side to ensure that there were no strikes that would negatively affect service delivery. There was a need to draw a line in the sand about shedding jobs to continue the trajectory. He did not think shedding jobs in the public sector would even affect service delivery since many people in the public sector were even hiding.

Mr Ryder commented on the Eskom Debt Relief Bill. He felt that Eskom was acting with impunity whilst consumers were bearing the cost as Eskom passed massive increases to them all the time. It almost felt like government was throwing its money into a bottomless pit. Eskom had just been granted an 18.65% increase which was going to have a massive impact on ordinary South Africans. National Energy Regulator of South Africa (NERSA) was also reviewing the amount that Local Government was permitted to increase their tariffs, which was approximately 15%. The erosion of margins where the input cost had been increased by over 18% whereas Local Government was only permitted to increase the tariff by 15%. This significantly reduced the margins which municipalities were able to make on the sale of electricity since those margins were used to pay for the maintenance and expansion of the reticulation systems for which municipalities were responsible. In addition, cross-subsidisation when incomes from other services could be used to cross-subsidise, had also been reduced over time. This directly resulted in less and less funding space for Local Government to operate in, negatively affecting service delivery. Hence, 90% of municipalities were dysfunctional. Government was exacerbating the pressure by not reviewing that model.

He urged Members to use the Q&A [plenary] session that afternoon as an opportunity to question the Minister. He reiterated that a handbrake needed to be put on Eskom to stop those massive increases.

Mr M Moletsane (EFF, Free State) asked whether any recommendations had been made to reduce the debt since municipalities owed Eskom R70 billion, given the country’s increasing unemployment rate and poverty.

Mr S Aucamp (DA, Northern Cape) supported Mr Ryder’s views and said these had covered his points thoroughly. He reiterated the knock-on effect of the increasing Dollar-Rand exchange rate on ordinary people in the country. He criticised government for being hell-bent on not adopting proactive measures to address the issue. He emphasised the importance of basic education and agreed that the quality of basic education would directly impact young people’s ability to empower and look after themselves. He was not optimistic about the Appropriation Bill and emphasised that nothing would change if Consequence Management was not put in place for people who were not following processes. Those non-performing people were across all spectra of government; with maintenance not taking place and lack of equipment to do the jobs they were supposed to do.

The Chairperson welcomed both presentations, said the Committee took note of presentation content seriously, and incorporated those into its committee reports, which eventually went to the House. She indicated the need to do follow-up on the implementation of those recommendations. She urged Treasury to take those recommendations seriously.

The Chairperson referred to the slide that showed the appropriation to SOEs. She was concerned with the amount of funds that government spent on SOEs, yet there was no value for money. She agreed with Mr Ryder that government was throwing its money into a bottomless pit. She asked if the PBO and FFC had engaged with Treasury to make an informed view on this difficult issue.

The Chairperson recalled the occasion when the Select Committee had clashed with South African Airways (SAA) after SAA refused to submit its financial statement.

The Chairperson was uncertain about which types of resuscitation plans there were for those struggling SOEs.

Response by FFC

Dr Mbava expressed her appreciation of Members’ comments. She agreed with Mr Ryder on several issues raised which were in line with the FFC’s recommendations. The FFC had raised a concern about the SRD grant because it viewed the grant as a precursor which would eventually lead to the implementation of a permanent basic income grant. The FFC urged government to implement the SRD grant properly.

The FFC was clear on its position on Eskom that the numerous bailouts had not yielded the desired outcome for the struggling entity. It remained unconvinced about the current conditions attached to the appropriation bill because these conditions were still very opaque. The FFC was uncertain how Eskom would be held accountable in the re-payments. She pointed out that the challenge of Eskom was beyond monetary issues as it also touched on fiscal governance and proper governance of the entity.

Mr Tseng commented on the increasing exchange rate. He highlighted the implications of the weakening Rand. Ultimately, it was about the money spent that was deteriorating. He agreed with the Chairperson’s view that there was an erosion of productivity in the public sector. In the absence of sufficient power to drive economic growth, it was inevitable that the overall economy was in decline. He corrected the misconception that infrastructure investment was about throwing in money only. Infrastructure investment was about being productive and proactively building infrastructure. In the past decade, the focus on infrastructure investment was on money, accounting, the use of many definitions, etc. But in economics, it was as simple as how much value came out after the spent resource.

Ms Sasha Peters, Programme Manager, National Appropriation, FFC, agreed with Members’ view that there needed to be a rethink on the manner in terms of the proportion of funding being spent on basic education versus post-school education and training. There had to be more resources directed to Early Childhood Development and generally the foundation phase in the basic education system. A poor basic education system had a knock-on effect across the education system. The observation was that ill-prepared learners struggled to transition from basic to higher education and were then unable to get their degrees.

Ms Peters pointed out that the Appropriation Bill did not give people a full sense of what had been spent on basic education relative to higher education due to the exclusivity of higher education being provided by the National Government whereas basic education was a shared function provided by both National and Provincial governments. In 2023/24, R110 billion had been allocated to higher education and training whereas R31 billion was allocated to basic education. However, it also had to be considered that basic education was a shared function between the National and Provincial governments whereas higher education was an exclusive National Government function. If the consolidated spending by functions was considered, she referred to Table 5.4 of the review which showed that spending on basic education at a national level was R309 billion whereas spending on higher education and training was R135 billion for 2023/24.

Response by PBO

Dr Jantjies confirmed the effectiveness of policy interventions such as SRD. The introduction of SRD was due to COVID-19 and its related conditions. He agreed that government needed to find a permanent mechanism to incorporate that as part of the country’s economic policy.

On the weakening Rand and its impact, he confirmed that the weakening Rand would lead to a higher cost of living. The ongoing load shedding further exacerbated the prices of consumer goods. The PBO’s view was that the high interest rate was limiting government’s impact to deal with the rising prices. Given the high unemployment in the country, he believed that the interest rate hike would continue and cause more harm to society and the economy. The high interest rate was linked to the government’s monetary stance and suggested that government reconsider its stance on that. the PBO’s proposal was that government should continue to use the fiscal policy to deal with some of the rising cost of living and provide support for households’ stability. Many sectors were profiteering from the rising cost of living and only passed the rising cost to consumers without suffering any loss themselves. To deal with that, PBO recommended that government proactively adopt fiscal policy and raise taxes for those sectors that were profiteering from consumers.

He confirmed that 73% of the transfers and subsidies could be wage bills for the public sector and expressed the PBO’s concern about the limited oversight on that transfer.

On SAA, the PBO noted that there had been a lot of discussions around the entity and its procurement. The position of Treasury was that the priority of SAA was stability of the company and protecting public finance. Government tried to avoid spending large amounts of the public funds to sustain the entity.

The Chairperson commented on the limited time left for this administration but highlighted that it needed to try its best to deal with as many issues as it could, so that it would not leave too many issues for the next administration.

Adoption of outstanding minutes

The minutes of 9 May 2023 were duly adopted.

The Chairperson adjourned the meeting.