The Members of the Standing Committee were briefed in a virtual meeting by National Treasury on three financial bills submitted as part of the mid term budget process. The Committee expressed its concerns over the slow growth of the economy, and wanted to know what measures were being put in place to change the situation. The interventions being implemented were not sustainable and needed to be revisited.
Treasury presented the main elements of the 2023 Adjustments Appropriation Bill, the 2023 Division of Revenue Amendment Bill, and the Eskom Debt Relief Amendment Bill. Details of the conditions attached to government's financial support for Eskom were given.
The underspending of municipalities was discussed in detail. The Committee was told that this could often be attributed to municipalities not always adhering to conditions in the Division of Revenue Bill, which resulted in the transfers getting repelled. Verifying invoices between departments and suppliers was another of the reasons that contributed to underspending and resulted in the rollover process.
A programme-based reduction process was discussed, where it was proposed that budget reductions should not carried out across the board. A programme-based approach would give departments enough time to rethink the implementation of their programmes, allowing them to find better ways to implement some of them.
The presidential employment initiative was highlighted as being a good programme, and Treasury was urged to continue to fund it as it had proved to be beneficial in easing the plight of unemployed youth in the country.
National Treasury explained that they could not control how departments spent the money, but they were held accountable when organs of state failed to spend the money. The money was allocated based on the needs of the departments, and Treasury did not have the capacity to intervene.
The use of professional consultants was discussed, and National Treasury was of the view that municipalities should conform to the legal auditing requirements and should be able to produce the annual financial statements in-house themselves. The impact of load-shedding and logistics challenges on rail and port slowdowns, and the resultant decrease in tax collections, was identified as a major reason for the fiscal gap.
The policy proposal in this year's medium-term budget policy statement (MTBPS) was discussed. It had been modelled to show that the national debt could stop growing in the years 2025/26, and debt service costs would decrease the year thereafter if these policies were implemented. South Africa’s debt had changed in relation to other countries -- specifically emerging market countries around the world. The speed at which this debt had increased demonstrated that debt service costs had become the largest single item of government spending.
The Chairperson said the briefing would entail the medium-term budget policy statement (MTBPS) bills presented by the Minister of Finance-- the Adjustments Appropriation Bill, the Division of Revenue Amendment Bill, and the Eskom Debt Relief Bill.
Division of Revenue Amendment (DORA) Bill
Ms Malijeng Ngqaleni, Deputy Director-General: International Relations, National Treasury, provided an overview of the 2023 Division of Revenue Amendment Bill changes to provincial allocations, local government allocations, gazetted conditional grant frameworks and allocations; as well as the 2024 Division of Revenue in the MTBPS.
Mr Bongani Daka, Acting Director: Financial Management, and Dr Letsepa Pakkies, Director: Local Government Fiscal Framework, presented the details of the DORA Bill.
R57 million had been reprioritised from the school infrastructure backlogs grant to the vote of the national Department of Basic Education (DBE). Of this amount, R32 million would fund compensation of employees (CoE) pressures; and R25 million would fund information and communication technology upgrades in the national DBE.
R137 million was rolled over in the school infrastructure backlogs grant. Of this amount, R93 million was for the completion of projects of the Sanitation Appropriate for Education (SAFE) initiative for schools; R26 million was for the completion of projects of the Accelerated Schools Infrastructure Delivery Initiative (ASIDI); and R18 million was for associated management costs. The funds were for schools in the Eastern Cape, KwaZulu-Natal and Limpopo.
Adjustments to 2023/24 local government allocations:
R1.2 billion had been added to the Municipal Disaster Recovery Grant to fund the repair of infrastructure damaged by the floods that occurred between February and March 2023, and R372 million was added to the Municipal Disaster Response Grant to replenish the depleted grant baseline.
R53 million was reprioritised from the integrated national electrification programme (Eskom) grant to the vote of the national Department of Mineral Resources and Energy (DMRE) to fund the rehabilitation of derelict and ownerless mines. R309 million was reprioritised from the indirect component of the regional bulk infrastructure grant to the indirect component of the water services infrastructure grant to enable the Department of Water and Sanitation (DWS) to manage contractual obligations, budget pressures, accruals and payables for projects in several municipalities.
Changes to gazetted frameworks and allocations
Section 15(4) of the Division of Revenue Act, 2023, required National Treasury to consult Parliament on any proposed changes to a conditional grant framework for the purposes of correcting an error or omission.
Grant framework change
Parliament was requested to consider and approve inclusion of the condition below in the framework of the municipal disaster recovery grant :
“R1.2 billion in 2023/24 is ringfenced for the reconstruction and rehabilitation of municipal
infrastructure damaged by the floods that occurred between February and March 2023. This funding may be utilised only for approved projects as listed in the post-disaster verification assessment reports and business plans approved by the National Disaster Management Centre (NDMC).”
2024 Division of Revenue in the MTBPS
Government proposes allocating 48% of available non-interest spending to national departments, 42.1% to the provinces, and 9.9% to local government
Adjustments Appropriation Bill
Dr Mampho Modise, Deputy Director-General: Public Finance, National Treasury, presented the Bill to the Committee.
He said adjustments required due to significant and unforeseeable economic and financial events involved consideration of underspending, restricting non-core recruitment, significantly reducing travelling, conferences, workshops and catering, the postponement of capital projects, including buildings and other fixed structures as well as machinery and other equipment, and surpluses in public entities.
Eskom Debt Relief Amendment Bill
Mr Ravesh Rajlal, Chief Director: Assets and Liabilities, took the Committee members through the presentation, and explained the rationale for the Eskom Debt Relief Amendment Bill.
He said National Treasury was introducing interest on the Eskom Debt Relief package to better reflect the cost of this arrangement, with the interest charged being market-related. In developing the interest to be charged, National Treasury was cognisant of the delicate balance that needed to be struck between ensuring that such interest did not negatively impact Eskom’s cash flows, while at the same time reflecting a fair market-related rate.
This approach was different from what was initially envisaged in the Eskom Debt Relief Act, 2023 -- that the debt relief would be an interest-free loan. The interest would be paid on the disbursed amounts, even if Eskom complied with the conditions. However, the interest would be higher if Eskom failed to comply with the conditions. The subordinated nature of the loan would remain the same, but it would be an interest-bearing loan.
National Treasury had engaged and agreed with Eskom on the approach.
Monitoring of Eskom compliance with the conditions
National Treasury had established an Eskom Quarterly Monitoring Task Team (EQMTT) comprising of officials from National Treasury (NT), the Department of Public Enterprises (DPE), and Eskom. The EQMTT would monitor Eskom’s compliance with the Act's conditions and report quarterly to the Minister if Eskom qualified for the conversion of the loan to equity. If Eskom complied with all the conditions, the loan for the quarter would be converted into equity.
Failure by Eskom to comply or to demonstrate compliance with any of the conditions would result in the delay in the conversion of the loan (or part thereof) until the next quarterly meeting, where compliance would be reassessed. Failure to comply or to demonstrate compliance with the conditions at the subsequent meeting, would result in the balance being carried over until 31 March 2026, whereafter the loan would be converted into a liability payable in cash and at market terms. If required, a separate loan agreement would be entered into on 1 April 2026 to set the terms and conditions related to the interest-bearing loan, and Eskom would be required to pay the outstanding loan within a year.
It was therefore important for Eskom to comply with all these conditions to enable the conversion of the loan amounts that would have been disbursed in the quarter into equity. It was also important for Eskom to comply with the conditions, as non-compliance would result in a higher interest payable. In addition, the Minister may reduce future amounts from the debt relief arrangement.
(For the full presentations, see the attached documents).
Mr H Mmemezi (ANC) said he agreed with the presentations. The presenters had given reasons for their presentation, and it was always important to highlight the reasons behind the changes. Because the presentation provided so much clarity, there was not much room for questions.
The various departments and provinces did not always spend the budgets allocated, and this was very concerning. They should ensure that the budgets were always spent, and targets were met, as this would be in the best interest of the community. He asked for clarity on what was being done to ensure the money was spent, to enable the community to benefit from this. The budget did not belong to the departments; it belonged to the community, and they needed the money.
The Chairperson thanked the National Treasury for their presentations, and said the reasons behind these changes stemmed from the economic position the country was in. These interventions were temporary, and the cuts were projected over the medium term expenditure framework (MTEF) period. The economy was not growing, and the situation would not change. This was something that should be accepted as government and as South Africans, as these interventions were not sustainable. The revenue generated was not enough, and this was due to the economy not growing at the required rate, which did not allow the South African Revenue Service (SARS) to collect enough tax.
What role could government play to ensure that the economy started growing at a higher rate? This current situation was not sustainable, and it would not be possible to cut expenditure for the next three years because the implications were dire. He got the impression that the government was not putting in enough time for the growth of the economy. How would one get growth back into the economy? Interventions at the local government level were very important.
The indebtedness of the municipalities was R100 billion -- was this because of money owed to them for services provided, or was it debt incurred by the municipalities? What was the cost of servicing the debt? Were there any redemptions due at the local government level? He asked for more clarity on the procurement issues cited as the reason for the underspending, and for an explanation of the payments for financial assets in the adjustments appropriation bill? The Eskom debt relief amendment bill changes included the payment of interest -- were they not creating onerous conditions for Eskom if they failed to pay the debt? He was concerned that Eskom would approach the National Energy Regulator of SA (NERSA) to increase tariffs, directly affecting consumers. Did they have financial projections for the end state at Eskom? How would the unbundling process assist Parliament? The government and Parliament were investing billions into state-owned companies (SOCs) like Eskom and Transnet, yet there was so much instability at these institutions. Were there strategies in place to deal with these instabilities?
The provision of basic services like refuse removal in a town might seem very peripheral, but it was an important factor when considering investment. When the refuse in a town was not collected, it created the impression that services were not up to standard, and this would deter further investments in the town. The monitoring of the economic regulation of transport (ERT) was very important, as it would serve as an indication of the growth anticipated. Did National Treasury consider the inputs of Members of Parliament, members of the public, the Financial and Fiscal Commission (FFC), and the Parliamentary Budget Office (PBO) when making decisions? It would be interesting to see examples of what these role players were saying.
It was understandable that the external economic shocks had placed the country's revenue in this predicament. The cuts they were experiencing, even if the reasons were valid, such as underspending, were not helping to grow the economy. There were rollovers in school infrastructure in schools in KwaZulu-Natal (KZN), Limpopo and the Eastern Cape, and this was not the first time. What interventions had the NT put in place to avoid these rollovers? There was a reduction of R6.6 billion for direct conditional grants, and the local governments' equitable share would be reduced by R5.9 billion, which was a lot of money. What were these conditional grants intended for? What interventions had the government put in place to resolve these issues?
National Treasury responses
Dr Modise responded to the question on underspending. There were many reasons behind underspending, some good and some bad. The good reasons would be situations where a department had implemented cost-saving measures and improved efficiencies. There was a section in the presentation that spoke about self-financing, which was due to improvements implemented by departments. Other areas of underspending could be seen as problematic. These would be linked to the capacity of the state, where a department found it difficult to carry out procurement, or to follow the Public Finance Management Act (PFMA) in terms of how to spend. There were also issues of non-adherence to conditions. The municipalities did not always adhere to the conditions in the DORA bill, which resulted in the transfers getting repelled. Verifying invoices between departments and suppliers was one of the reasons that contributed to underspending and resulted in the rollover process. She said that it was no secret that the procurement process within government was long and winding. The supply chain process was too slow, and the departments ended up postponing the spending that was planned. The Procurement Bill should assist with some of these issues, but procurement in the state remained an obstacle to procuring goods or services. Underspending due to efficiency was what NT looked for and encouraged.
Some work was being done with departments and local government to ensure they adhered to the conditions. When infrastructure projects were being undertaken, it was essential to ensure departments had their plans ready at the beginning of the year. This was to ensure that they started their procurement processes earlier in the year, and not later. This would alleviate the pressure on the procurement process. Once procurement was started in the second half of the year, it was likely to result in underspending.
She agreed with the analysis the Chairperson had made about MTEF budget reductions. The problem was not related to spending, but to the absence of economic growth, rising debt, and decreased revenue. Because of the growth and revenue problems, spending had to be considered. The way reductions were made must be very strategic and should not be across the board, such as a proposal for a 10% cut across the board. It was crucial that service delivery be preserved by growing the economy and focusing on the reforms that needed to be implemented. If the reduction route was chosen, it should be programme-based, rather than across the board. The programme-based approach gave departments enough time to rethink the implementation of the programme, and the programme could be paused for a couple of years until the department came up with a better way to implement it. The emphasis was on cost-containment measures that had been implemented.
The next focus would be to encourage private entities to start using their surpluses to meet the impact. There had been some focus on reviewing the spending, and some work had been done on assessing the efficiencies of the programmes that were in the system. The work would aid in deciding which programmes needed to be reconsidered. Once this had been done, the impact on service delivery would be met.
Answering the question about public consultation, she said the proposals were considered once the reports were finalised and the recommendations provided by the Committee were reported in the budget review. The recommendations would form part of the conversation when Cabinet presented the budget. She said they have meetings with different stakeholders before tabling the budget in the MTBPS and the National Economic Development and Labour Council (NEDLAC) processes, where the presentations were also done. During this year, the President invited NEDLAC to discuss economic growth and the fiscal framework. Therefore, these conversations and contributions made by the public were considered through these interactions. There had been consideration for Social Relief of Distress (SRD) grants and continuation of the presidential employment intervention, but not all projects would be considered immediately but would be considered at a later stage.
In response to the question about the payment of financial assets, the lenders to the Land Bank had sent a letter to Treasury requesting payment because the Land Bank had defaulted. This transaction would be recorded as a direct charge from the National Revenue Fund. The NT had allocated R1 billion for the Land Bank, but because the money was already paid through the National Revenue Fund (NRF), it meant that the budget for the Land Bank would be reduced by R500 million, because that was what had been paid. This did not mean the money had not been spent; it was merely a transaction recording process, where money was allocated through the direct charge, but the money was already allocated for the Treasury.
Ms Ngqaleni said that Treasury was held accountable when organs of the state failed to spend and perform, and Treasury was expected to intervene as they were responsible for allocating the money. The NT did not have the capacity to oversee the way in which the money was spent, and the money was allocated based on the needs of provinces, local governments, and departments.
What measures were in place to hold municipalities accountable when they did not perform? National Treasury provided support to them by running programmes. The allocation of funds did not assist the government in stimulating economic growth, as seen with capital expenditure (capex) as it had a negative multiplier, which meant the money that was allocated was not bringing about the type of investment envisaged, in addition to that money not being spent. The grants allocated in the current year showed that what had been reduced was less than what had been underspent by the organs of state. In future, the cuts would be aligned with the capacity of the state to spend. How did they improve the capacity of the state to spend efficiently? This would ensure greater value for money. The National Treasury needed assistance to ensure that organs of state perform.
Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, NT, said he fully agreed with the statement made by the Chairperson -- for the private sector to consider investing in municipalities, the environment should be conducive. The city should be clean, and municipalities should come across as being on top of their management issues. That was an area that required a lot more attention from municipalities and oversight institutions. The R100 billion referred to was due to the total outstanding creditors as at the end of June 2023. This meant the municipalities had used external services to do the work, and the amount due was outstanding. In terms of the Municipal Finance Management Act (MFMA), the invoices need to be paid within 30 days. The amount in question was R99.9 billion, and included in this amount were the biggest creditors, Eskom and the water boards. The fourth quarter section 71 publication showed the Eskom amount as being R49.2 billion, with the water boards at R16.3 billion.
In response to the question posed by the Chairperson about the stock of debt, he said that in addition to the Section 71 publication, they also published a bulletin on municipal borrowing, and the debt stock at the end of June of the previous financial year had been R70.5 billion. That amount was largely in the metro space, and the information would be shared with the Committee.
Mr Ravesh Rajlal, Chief Director: Assets and Liabilities, replied to the Chairperson’s question on the reduction not exceeding 5% of the total amount for the applicable financial year. The presentation did not go into too much technical detail, but it was important to unpack this. To explain how this 5% would work, he said that if Eskom did not meet the conditions for a quarter, for instance, the Minister may then reduce future allocations in the fiscal year from future disbursements. When considering the R78 billion that would be disbursed in this fiscal year, of which R36 billion had already been disbursed, in the event that Eskom did not meet the conditions stipulated, the Minister may reduce a future allocation by a maximum of 5%. If one took 5% of R78 billion, that amounted to R3.9 billion, so the Minister may reduce future allocations by R3.9 billion. In the next fiscal year, the Minister may reduce the allocation by a maximum of R2 billion. This issue had been discussed with Eskom, and its negative impact may have on their financials. They were working hard to meet the conditions to avoid a situation where the Minister had to invoke this section of the Amendment Bill. A key point was the disposal of the Eskom finance company, where significant progress should be observed during the disposal of the non-core assets.
In response to the question on the interest charge, when the Debt Relief Bill was presented, it was mentioned that this support package for Eskom would not be a pure recapitalisation -- it would be disbursed as a loan. The goal was to move away from traditional recapitalisation, where NT would disperse or recapitalise and there was no recourse to Treasury, government, or Parliament in terms of entities not conforming to conditions. By executing this debt relief package in the form of a loan, they had to ensure that it was market-oriented and that it reflected the correct understanding of a loan, which must attract interest. Eskom had agreed to the interest charged on the loan, and had included this in their financials.
In response to the question about the instability of the SOCs, he replied that whenever there was a new board and management appointed at Eskom, a new turnaround plan was formulated, and they asked for recapitalisation. The presidential state-owned enterprise (SOE) council was currently addressing this governance issue with the aim of creating stability. They were moving away from relying on government support and looking at ways to get entities to contain costs and sell off non-core assets. A similar approach was being taken with Denel, where support was provided in addition to the existing internal support systems at Denel. The other aspect was to look at ways in which the private sector was able to augment support provided by the government.
Mr Jeffrey Quvane, Chief Director: Energy and Telecommunications, NT, responded to the question posed by the Chairperson about the impact of the changes on Eskom. This would introduce and enforce discipline within Eskom to meet the conditions, so that at the end of the period, they could meet the intended objectives, which were for the entity to function without government support. They had been providing financial support to Eskom but it was not yielding the desired results because the conditions were not fully met, and those that were met were not moving the needle. The conditions introduced this time were geared towards ensuring the entity was turning around at the end of the period and could function without government support. He explained that they had taken over the guarantees, which were also a form of backing provided to Eskom. This was viewed as a form of discipline enforced on Eskom to ensure that they met the conditions on a regular basis.
So far, no detailed modelling has been done on the three entities, the reason being that, at this stage, they were still dealing with the governance arrangements and getting all the PMFA approvals set out. With transmission as the priority for now, NT had observed that the entity had received licensing approvals from the regulators, which was crucial to ensuring that the entity started operating as a subsidiary. Some projections had been done regarding the transmission to indicate what the entity would look like. The critical factors at this stage would be the revenues, which were still bundled tariffs. To do the detailed modelling, the regulator would need some clarity about the methodology going forward, which would provide insight into how to do the full unbundling of the financial structures of all these entities. So far, the NT was interacting with the lenders to obtain their consent, but because the subsidiaries were going to fall under the holding companies, there would still be an intercompany transaction within the group. Hence, there has not been much financial detailing done thus far. The biggest benefit of this unbundling was that it would provide a clearer perspective on how each business was performing and operating. Transmission was quite critical in ensuring they could address load-shedding by ensuring enough investments came through in the transmission space. The process of ringfencing these entities into smaller chunks had enabled them to understand how the business operated, and which interventions to implement should the need arise.
Mr X Qayiso (ANC) said he was listening attentively to the expenditure developments and had not been aware that they were heading towards budget. Why were there no hints or warnings? What was Treasury's take on the issues that had been raised by the Auditor-General, such as the employment of consultants and the exorbitant fees charged to local municipalities? Could this be reined in? He hoped that enough resources had been deployed for the mobilisation of tax collection and that this would boost the fiscus. If there was no revenue collection, the country would be affected in terms of revenue mobilisation.
The Chairperson said he was worried about the postponement of some capital projects. This was an area where one would have expected capital projects to have been given the available opportunities of crowding in the private sector, and affording small businesses more opportunities. What does it mean to expand the lifespan of one's information technology (IT) equipment? The years predicted were based on some scientific reasons, like a cell phone or a computer. Now, when problems arise, the lifespan could be extended to five years instead of three. The concept of conditional grants and their impact was understandable, but this grant was very problematic. Could NT explain how conditional grants work and the types of problems encountered? Some grants were not used in the past, and the Committee had had to call in the mayors to explain the reasons for non-use.
He said Treasury was the bearer of bad news about different things happening in departments, but it was not expected to solve these problems. The expectation was for Treasury and the Minister to raise these issues with Cabinet, and for the President to create awareness around the different issues. The Committee could also play their part by raising these issues with the Speaker of Parliament. The issue of conditional grants was but one of the issues the Committee would be raising with the Speaker in Parliament. He asked the Treasury to identify the municipalities that had not been using this grant so the Committee could escalate the matter to the higher authorities of Parliament.
Dr Modise said the issues raised by the Chairperson were quite complicated. An amount of R8.2 billion had been presented in the first quarter report, and the report for the second quarter had been submitted to Parliament the day before this meeting. They were looking at an amount of R9.6 billion linked to underspending. She requested that the second quarter presentations be taken into consideration when Treasury returned to brief the Committee to ensure that information was considered during deliberations. The second quarter report would provide more updated information in terms of providing an indication of which departments were overspending or underspending, and the reasons behind it. The report would explain the differences between what was estimated and the actual spending.
The Chairperson agreed to the proposal put forward by Dr Modise to present the second quarter report at the next meeting.
Dr Modise replied to the issues raised about the lifespan of cars and computers, and agreed with the Chairperson that the standard lifetime for a car or a laptop was indeed five years, but some of these assets were still in good working condition beyond the predetermined five-year lifespan. The request from Treasury was that departments continue using the equipment while it was still functioning -- it was not expected for any person to use faulty equipment, but if the equipment was not faulty, the request was that it be used for another six months or up to a year until the machine started giving problems. The cars used for administrative purposes by the Department of Social Development (DSD) to conduct their visits, for example, may still be used if the car still functions after 150 000 km. There would be no harm in the departments using their cars up to 180 000 km if those cars were still in good working condition. It was important to look at the quality and functionality of the assets, and if the assets were still in good condition, it should not hinder anyone from performing their duties.
Mr Spencer Janari, Director: Education Budget and Policy Analyst, NT, responded to the question related to the rollovers for the school infrastructure backlog grant. The infrastructure work in that programme continued throughout the year, as NT expected it to. Payment for work completed happened when the Department received invoices for the completed work. The Department would then go and conduct inspections to verify that the work had been carried out as stated. It was difficult to conduct verifications on work done in March before books were closed for the end of the year. It was these projects that did not get verified before the books closed, that went over into the rollover process. He said invoices for work completed were received before 31 March. In the case of infrastructure backlog grants, many small sanitation projects were happening, especially in the Eastern Cape, KZN, and Limpopo, where the verification process became a challenge. The processes had improved considerably over the past few years, and therefore applications for rollovers and underspending had also decreased. In this case, it was not due to slow pending due to under delivery, but more a case that the verification processes had to catch up with the actual delivery for the spending to take place.
Mr Rajlal replied to the Transnet question, and said that in terms of the alignment of the Transnet turnaround plan and roadmap, he was aware from the presidency and the discussions held with Transnet the day prior to the meeting, that there were ongoing engagements to ensure the turnaround plans were aligned to the roadmap, and once completed, the roadmap would go through Cabinet for approval. Transnet would ensure they executed the aligned turnaround plan of the roadmap. They were working through the Logistics Crisis Committee to ensure that the various levers of the roadmap were executed through the various workstreams.
Ms Ngqaleni replied to the question on how conditional grants worked. The conditional grants were allocated to sub-nationals, provinces, and local governments in addition to the equitable share they received from the national revenue that had been collected. This enabled them to implement their mandates. The conditional grants were allocated based on conditions given for specific policy areas in the department, which talked to a targeted approach, support and oversight. The money was allocated to departments, which were then allocated either to provinces or local governments. This meant that the departments were responsible for implementing appropriate policies and indicators on what the additional grants should achieve, and also for monitoring the additional grants. The provinces or local governments reported directly to the departments and the National Treasury on financial performance. The departments' report to Treasury was based on what the local government was reporting to them.
The conditional grants placed a direct responsibility on the national department to oversee their implementation, and also to provide support where needed. The direct grants formed part of departmental and municipal budgets, but departments often requested indirect grants where there was a lack of capacity in either the departments, provinces, or municipalities. This was for them to implement on behalf of the municipality, to prevent the loss of money. The departments needed to be held accountable in terms of performance. Members should engage with the municipalities on why they were not performing, despite the support they were receiving, and what could be done to assist them.
In response to the question on the use of consultants, she said the Auditor-General had raised this in the context of preparing financial statements. Some of the municipalities that used consultants did not have acceptable financial statements and ended up with qualified audits. It became problematic when municipalities did not adopt prudent financial management and proper recording of transactions. She said they had introduced the "M score," which ensures the system was automated to eliminate some of the struggles municipalities face.
Another challenge was the delay in implementing the M score system. The consultants used by these municipalities were professional accountants who followed certain ethical standards. She had asked the AG if these consultants could also be held accountable, since they were hired to do the job and they were not delivering. The consultants should inform the municipalities if they were not able to complete the job, for instance, in constructing the records due to not keeping proper records.
Mr Hattingh said he agrees with the AG’s view on the use of consultants. After 20 years of implementing the Municipal Finance Management Act, the expectation was that the municipalities would conform to the legal requirements, and that they should have the capacity to produce these annual financial statements in-house themselves. It was a useless excuse to bring in consultants, as they did not add value, as Ms Ngqaleni had said earlier. He did not believe it would be possible to eliminate this. For instance, if municipalities did not have qualified engineers, there was a probability that one might require those specific skills in the water and electricity services. This had been flagged in their cost containment regulations issued for municipalities, but it was a delicate balance between having sufficient capacitated staff and the contractors’ rendering services in areas that were highly technical in nature.
Ms N Ntlangwini (EFF) asked what systems the NT had put in place to assist the country with its debt servicing costs, because they were continuously rising. Whenever National Treasury needed to cut budgets, they focused mainly on cutting in departments like IT, where they cut down on equipment instead of concentrating on addressing corruption and using those funds where they were needed. The fact that they were cutting salaries and filling vacancies indicated that they did not have a clear plan for ensuring a fit and proper government for the country.
Mr Qayiso said the presidential employment stimulus package seemed to work very well, inspiring many young people and providing job opportunities. This project should be resourced so that it could absorb as many young people as possible. The project assisted young people while looking for permanent employment.
The Chairperson asked about the conversion rate from the presidential employment initiative to permanent employment.
Dr Modise said she would have to confer with the presidency regarding the presidential employment initiative, as they looked after the output information, and she would send the report to the Committee. The importance of this programme was recognised, and it had been announced in the MTPBS that it would continue. This programme would be funded by looking at existing public employment programmes and assessing their efficiency and impact. The programmes that did not have the desired impact would be identified, and resources would be used to fund the presidential employment initiative. The state tended to add programmes on top of existing ones without assessing the programmes already in existence, and determining if there was value for money.
Mr Edgar Sishi, Head: Budget Office, NT, in response to the revenue question, said the improvement in revenue was due to the commodity cycle. In other words, the price of the minerals South Africa sold to the rest of the world had had higher global prices for a couple of years. In February, the Department had indicated that these prices were coming down, and therefore the revenue emanating from the mining industry would come down. Because of this, the Department had marginally reduced their revenue estimates at the time. However, an increase in load-shedding and logistics challenges had not been anticipated, resulting in the rail and port slowdowns witnessed this year. This compounded the revenue problem, which resulted in lower taxes being collected than initially projected, which was the reason for the fiscal gap. Going forward, the revenue estimates have been reduced to be more prudent when projecting revenues. In February, there would be an announcement linked to minor increases in revenue, to assist with the emerging fiscal gaps.
He said the debt issue was a serious challenge, and referred the Members to Chapter 1, where a statistical graph depicted how South Africa’s debt had changed concerning other countries, particularly emerging market countries around the world. The speed at which this debt had increased illustrated that debt service costs had become the largest single item of governmental spending. As the MTBPS indicated, this underscored the need to stay the course on fiscal consolidation to stop these debt service costs from rising. The policy proposed in this MTBPS had been modelled to show that debt could stop growing in the years 2025/26, and the year thereafter, debt service costs would decrease if these policies were implemented.
In response to the statement on wages, department-specific data would be available only in February, but looking at Chapter 4 of the MTBPS, it showed additions were being made to the compensation budget of key service delivery areas in government. This was evident, especially in provincial education, provincial health, police, the defence force, and the correctional services. Regarding the rest, they had been advised to absorb the cost of the wage agreement of 2023. It was important to consider this proposal against what colleagues had been saying through this meeting, that most departments routinely underspend on their compensation budgets, and this had been happening for years. There was a lot of slack in compensation budgets. There had been a growth in spending, as illustrated in annexure B of the MTBPS. There has been an increase in administrative functions in government, and deprioritising may increase the efficiency of the wage bill and compensation budgets.
Ms T Tobias (ANC) said she would not try and debate policy formulation where it did not belong. The matter of gross domestic product (GDP) growth projections was being raised for the third time. She requested indulgence from the presenter on the issue of where the graph lay concerning the revenue shortfall. This was a debate for another time, because a fundamental question had been raised, which suggested that compensation had decreased. It had basically been said that there was a need to look at the size of the administration to be able to deal with the shortfalls. If the revenue should be grown to deal with the current shortfalls and the needs and projections, and to be able to have the reserves needed for any eventuality, then the problem had not been addressed. She wanted a response to the latter statement, and wanted Treasury to go beyond the current policy and canvass more views on the tax base, so that the position taken would be informed in the next cycle. She proposed this issue for debate and asked the Parliamentary Budget Office (PBO) and National Treasury to develop a policy proposal.
Mr Sishi acknowledged that there was no disagreement between what Ms Tobias was saying and what NT was indicating. They agreed they wanted and needed the revenue to be higher. There were some short-term measures, but they would not fix the underlying problem. For instance, a very small increase of R15 billion in revenue increase, which was the previous week, was a small measure and had to be implemented. The tax space would grow when the economy grew more quickly than it was growing now. This was a major part of the theme that they were presenting as the MTBPS, where that needed to be the number one priority, and it was recognised as such in the first chapter of the MTBPS. The issues that had led to the revenue shortfalls needed to be addressed in the first place. These were the massive electricity shortages and the deterioration in the transportation of goods to markets and through the ports to international markets. These were the first steps that needed to be taken, and beyond that, there were other elements of the economic reform agenda that were currently being implemented. In general, these principles were not separate from each other.
The Chairperson said the economic issues the country was facing had a tremendous impact on service delivery. He asked Dr Modise to provide a historical performance of compensation of employees (COE) budgets in the next meeting. As Mr Sishi had pointed out, there was always underspending in that area. He asked for a five-year historical presentation, which would allow Members to formulate responses to the presentation.
The Chairperson thanked the Treasury for their attendance, and excused them.
The Committee's support staff advised that the next meeting would be with the PBO the following week to consider the 2023 Adjustment Appropriation Bill.
Mr Z Mlenzana (ANC) asked about the plans for the following Wednesday. He wanted to know if they would be attending Parliament.
The Chairperson asked Mr Mlenzana why he was asking that question.
Mr Darrin Arends, Committee Secretary, responded that they would meet with the Financial and Fiscal Commission (FFC) the following Wednesday to discuss the three Bills presented in this meeting. The following Tuesday, the same three Bills would be discussed with the PBO.
The meeting was adjourned.
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