Division of Revenue A/B, Adjustments Appropriation Bill & Eskom Debt Relief A/B: PBO briefing

Meeting report

Opening Remarks by the Chairperson
The Chairperson opened the meeting, welcoming everyone in attendance. He began by suggesting the poor network could be because of bad weather. He also acknowledged that there was an absentee with an apology.

He then outlined that the three Bills which would be presented to the Committee were tabled by the Minister of Finance when he delivered the Mid Term Budget Policy Statement. The said Bills include: the Division of Revenue Amendment Bill, Adjustments Appropriation Bill, and the Eskom Debt Relief Amendment Bill.

He handed over to Dr Dumisani Jantjies, Director, Parliamentary Budget Office (PBO), who took the Committee through the presentation.

PBO Briefing
Dr Jantjies said that the PBO examined the changes to the Division of Revenue, and the changes showed that the allocations to national and local government had decreased, while the provincial equitable share had been increased to fund the costs of implementing the 2023/24 wage agreement in the health and education sectors. National Treasury (NT) had stated that the reductions in conditional grants were based on underspending. As NT had admitted, spending cuts could make some programmes less effective. The PBO’s underspending analysis highlighted the need to address the root causes of underspending because basic public services remained vitally necessary.

The increase in the provincial equitable share might not be sufficient to cover the implementation of the public service wage agreement. Therefore, the provinces would have to reprioritise their expenditure to absorb the costs.

Provinces and municipalities were responsible for the provision of basic public services that the majority of households relied on. Fiscal consolidation meant that they had fewer resources to provide these services.

Fiscal consolidation had meant reductions in real per capita expenditure on health, education, and other sectors critical to the basic survival of the majority who relied on public services. Basic public services played a critical role in household social reproduction and in building resilience to disasters like the global pandemic, natural disasters and economic downturns.

The “social wage” in the 2023 Medium Term Budget Policy Statement (MTBPS) was not protected against inflation and population growth.

Members were taken through the PBO analysis of amendments to the division of revenue framework, provincial equitable share, conditional grants and a situational analysis. Members were also taken through the amendments per vote – see attached

Eskom Debt Relief Amendment Bill 2023
National Treasury now seeks to amend the Eskom Debt Relief Bill, promulgated in July 2023, by proposing the following amendments:
-Converting the R254 billion debt relief provided to Eskom from interest-free to interest-bearing to more accurately reflect the costs of the debt-relief arrangement
-Empowering the Minister of Finance (after consultation with Eskom) with the ability to reduce the amount of debt relief going forward if Eskom fails to comply with conditions aimed at protecting public funds
-Should Eskom not meet the conditions, the loan will NOT be converted into equity at the end of the financial year
- The interest to be paid on the loan will be at a rate determined by the Minister
-Consequences of non-compliance: Should it be determined that Eskom failed to comply with the debt relief conditions, the amounts reduced by the Minister will apply to future advances to Eskom -Conditional reductions: The reduced amounts may not exceed 5 per cent of the total amount for the applicable financial year
-Conditions: The operational conditions applicable to the debt relief will be included in Eskom’s corporate plan
-Monitoring and reporting: A task team has been established to monitor compliance with conditions and report quarterly on whether Eskom is eligible for the conversion of the loan to equity

SOE Update
Denel
-Government disbursed R1.9 billion to Denel through the Special Appropriation Act (2022) in March 2023, proportionate to Denel’s share of proceeds from the sale of its assets deemed to be non‐core assets
-Denel has used of these proceeds to settle the last of its government-guaranteed debt, allowing government to revoke Denel’s government guarantee
• Denel has not submitted its annual financial statements since 2019/20; it is in financial distress

The Land Bank
-The Land Bank could not cover its debt obligation in April 2020 and remains in default
-At the end of 2022/23, National Treasury transferred R5.1 billion to the Land Bank, subject to conditions, as part of a R7 billion fiscal allocation
-Government has wiped out its  guarantee exposure to the Land Bank by settling R1.4 billion debt owed to all the Land Bank’s guaranteed lenders
-The remaining portion of the R7 billion fiscal allocation will be transferred to the Land Bank in this financial year to use in its blended finance scheme during March 2024

Transnet
-Transnet’s Issued guarantee remains at R3.5 billion
-Existing debt was R130 billion at the end of March 2023
-It faces serious operational challenges, which are largely due to underinvestment and inadequate maintenance over many years
-As a result, its revenue and liquidity have been declining, which has negatively affected its profitability
-Transnet has begun to implement a five‐year capital investment programme estimated to cost R122.7 billion, which includes R99.5 billion for operational maintenance and R23.2 billion to expand infrastructure
-However,  it faces significant funding constraints because of its existing high levels of debt and its poor profitability

South African National Roads Agency
-SANRAL received R23 billion in the 2022 Adjustments Budget to help with rehabilitation and expansion of the toll road network
-It will ask government for approval to revise its funding plan

See attached for full presentation

Discussion
Ms T Tobias (ANC) requested a list of municipalities within the Thabo Mofutsanyana and the Fezile Dabi District Municipalities that may or may not have applied for relief from Eskom’s electricity bill. She asked for a list of those who applied before and after the deadline.

Mr O Mathafa (ANC) asked about underspending. He noted that the School Infrastructure Backlog Grant was still underspent. There was a rollover, but not of the entire R260 000 000. They had been following up with the sanitation programme. Has the PBO made any progress in this regard? Was the underspending making a negative impact in this regard? The Committee saw many pictures of learners studying under the trees, yet such a grant existed and was being underspent. What was the issue in this regard?

Regarding the Department of Human Settlements - despite the budget cut, the percentage spent was still below expectation; what was the issue in this regard? Was there a reason for the underspending? He had always learnt that budgeting meant that one would be realistic with the budget. He noted that the PBO had increased targets with water and sanitation but their spending was nowhere near acceptable performance. Was it not realistic to list an unattainable target? If yes, why would National Treasury allow such to occur? He commented on the slide on economic make-up, noting that Stats SA indicated that, within the private sector, Africans earned three to four percent less than their European counterparts. This was persistent. What could the government do to move away from such a discriminatory process?

It was commented that, even with all the interventions the government had made to advance a conducive environment, they had yet to see the private sector investing in the economy of the country. The economy was not seeing results from such measures being taken. How could the government close the income inequality, with the knowledge that the private sector remained the major employer supported by government initiatives?

Mr A Shaik Emam (NFP) expressed concern for future generations. Did the PBO know the total debt exposure of the country of national, provincial and local governments, including State-Owned Entities (SOEs)? What was the total amount owed? What was the take of the PBO on the Finance Ministers of the last few years who approved borrowing money for the country, the ever-increasing debt? What would happen in this regard, and when would they reach a point of no return where the country would be bankrupt? What were the implications of this? On administration in the country: was the money spent on administration being well-spent? Were they getting value for money?

He was worried about the National Health Insurance (NHI) now that there were budget cuts. Did the PBO see success on the NHI? Primary healthcare was at an all-time low. Too much money was being spent on training the healthcare workers, and they were leaving the country. A lot of money was spent on training through student financial aid and came without any restrictions. This was a waste of taxpayers’ money. How far were they with the zero-based budgeting? Was Treasury doing enough in terms of illicit financial clause? For 15% of the taxpayers in the country, it was like taking blood out of a bonnet. There was no compliance for foreign nationals who ran businesses in the country, and many left the country. What was the PBO’s view on this? Could Treasury do more to increase revenue in the country? Was the PBO worried about the number of skilled taxpayers leaving the country?

Mr Z Mlenzana (ANC) appreciated the presentation. He struggled to differentiate between budget cuts and under-expenditure. His take was that, when generally looking at the division of revenue, ‘nominal’ confirmed that there would be a cut and Rand and cents revealed the reality. Money which was taken would be seen as unspent money by Treasury. Could the PBO speak on this?

He recalled discussing the auditees who were indebted to the Auditor-General of South Africa (AGSA), and it was suggested that said auditees be billed directly. There were departments and municipalities indebted to Eskom. Was it possible to pay out all these monies? This held back service delivery. Is it possible or permissible to pay back all the debts before April 2024?

On the use of consultants, and considering the high levels of unemployment in the country, there was synergy in this regard. It was necessary to have Human Resources (HR) help intervene in such matters and advise on hiring consultants. The said consultants were being exploited and underpaid. Government could hire unemployed youth. Was the PBO doing anything in this regard? What would putting aside consultants in the private sector do to the percentage spent?
 
There were serious allegations about the budget being called ‘neo-liberal’. This was a shrinking budget which would be against the notion of a developing state and would slow down the process of service delivery. What did the PBO think of this?

Mr X Qayiso (ANC) welcomed the presentation. He hoped there would be action accompanied by the plans and statistics in the presentation, with advice from the PBO. To what extent were the recommendations affecting the assessments of the PBO? What did the PBO think of the Foreign Exchange Reserve? He considered this when thinking of the shrinking fiscus. It was a compound crisis. This was an important matter.

He noted the increase in the provincial equitable share, although it was still not enough. The R350 Social Relief of Distress (SRD) grant changed the lives of many South Africans. The government did well in this regard. There needed to be a medium term plan; the long term plan would be the implementation of the basic income grant. Due to the inflation, the R350 SRD grant had diminished its value. Outsourcing was a major issue in most departments, which required funding. If ten people were employed, five extra would be outsourced, which would require additional funding. This made no sense because the five did the same job as the ten. Was there a way to discontinue this?

Because of underspending by a department, their budget was cut. He understood this to be the service being cut and not the budget. The service had not been executed. It was therefore unfair to cut the department’s budget in this regard. The money was unspent by the department, and it was being cut. This affected the service negatively. What was the real cut?

He was concerned about unpaid work. This put pressure on women who did unpaid work, as they were mainly domestic and looked after their families in their homes. Race, class and gender were interconnected. The budget cuts were challenging in this regard. Every action had a reaction. He was concerned about the Department of Human Settlements and Tourism Department. Their performance budget was at 30%. This negatively affected the services for the people, especially with regard to housing. The performance should at least be at 50%.

Did the PBO make suggestions on advocating for more funds for various grants? On Denel's audits, he said that Denel should be instructed to provide audited financial statements so that they could resolve their problems. Since 2020, Denel had the freedom to not report, which was not right. The report should be submitted directly to the AGSA.

The Chairperson asked if anyone had anything to add to their comments, before the responses would come in.

Mr Emam asked what the reason for the underspending was. Was it because they did not have the capacity? Which sites would have reduction in expenditure? He gave an example of cutting down on all overseas educational tools. He felt that going into the last term was often a waste of money. According to a report from the Minister of Police, 8 000 detectives were shot. The country had a crisis of population explosion where 91 000 children were giving birth to children. What measures needed to be in place to contain this? How could they absorb the population increase into society?

Mr Mlenzana mentioned a talk on Treasury on census results. Could the PBO comment on the impact of the census results going into budgeting for 2024?

Mr Qayiso commented on the issue of slow spending on the Agricultural Grant. What was found to be a problem in the research done in this regard? The area of land should alleviate poverty. Farmers around him were frustrated at the lack of funding. This was a serious issue, and required governmental support. Slow spending could equate to underspending.

The Chairperson noted that the presentation did not give reasons for cutting expenditure, nor the implications thereof. If there was under-collection by the receiver, this would not grow the economy. How did they deal with the source of the problem? He recalled from the last meeting that the PBO did address this. Did the provinces and municipalities understand their role regarding economic activity? What could the provinces and local government do to improve? What was the reason put forward to reduce funding for the Public Works Programme? What were the reasons provided for the change in the Water Infrastructure Grant from local to national government? When was the last time that the minimum was adjusted upward? Regarding the SRD Grant, how much was the SRD Grant underspent in the last two years?

He asked for more information on slide 30. On slide 36, there had been a 60% increase in the energy available factor. The Committee expressed earlier that they wanted to see improvement in the availability of electricity at Eskom. Could the PBO expand on this, as this would grow the economy? On Transnet, one of the factors which led to Transnet not executing its mandate was lack of locomotives. There was a stand-off between China and Transnet. This impacted the availability of spare parts in locomotives. Did the PBO agree that this was one of the contributing factors? And how far were they on the resolution of this matter? Could the PBO respond to this fully?

Responses from the PBO
Dr Jantjies said they would look at the list and share it with the Committee thereafter. The reason why they embarked on a study of underspending across the government was to try to find out why underspending was used as a justification for budget cuts. If spending was cut, this would affect other areas too, and reducing the budget did not resolve the issue as this negatively impacted service delivery. They were far behind on their target for the National Development Plan (NDP). They needed to address the challenges of spending. Some areas included critical vacancies and leadership. There was difficulty with completing projects, and these all impacted service delivery. Cutting the budget was not enough. Some of the underspending was inherent due to the nature and duties of government.

Transformation of the economy was a concern. Government had bodies which dealt with such matters, and this would push Parliament to ask more questions on the progress of transformation and what the sectors were doing.

On borrowing whilst in debt, he said they had tried to find more avenues to increase revenue. In the previous week, he had mentioned the energy and financial sector as an opportunity for windfall tax. Government debt was not just an expenditure problem; it was an interest rate problem, and it was also very one-sided. If the interest rate was higher than the growth rate, this would result in debt.

They had not yet looked at a study on NHI. The healthcare sector was such that it was unsustainable. There were mechanisms in place to try to reduce inequality in the healthcare sector. There should be mechanisms in place which did not perpetuate inequality. They had written in their tax brief on tax expenditure on how to widen the tax space.

On Stats SA informing on the budget, Dr Jantjies said that the multi-dimensional index provided insight into which areas had higher poverty rates. There was no clear evidence that this informed some of the provisions. Some proposals undermined the priorities set out in the State of the Nation Address (SONA) earlier in the year. This had not come up strongly.

On consultants, he responded that there were cases where departments did not have capacity and were forced to hire consultants. Insourcing would be beneficial to achieve their goals.

He felt that he needed to see the impact which they were making and how far they were in certain areas. The conversations had changed slightly where they received responses to certain issues raised, and this was encouraging. He agreed that reports needed to be submitted.

They had not done work on foreign exchange resources. Other countries have looked into how to alleviate pressure on public finances. The SRD Grant had worked, and this was encouraging for government. This could be looked at how to not be a burden on public finance in the future, as this would lead to more demand on the economy in the future.

Lack of growth was imperative to address. They would not want to relegate the problem of economic growth to these issues only. The structure of economics did not support lack of growth. Various sectors needed to play a role in growing the economy. It was important to see how the municipalities and local government used their support. Over the years, it was revealed that more government consumption led to more growth. Government, SOEs and the private sector had not reached their target regarding the NDP.

Dr Nelia Orlandi, Deputy Director: Public Policy, PBO, responded to the Human Settlements Grant; many role-players were involved here. There was the Social Housing Regulatory Authority, and National Housing Financing Corporation, and some stakeholders delayed providing housing.

They could not provide answers on the National Health Service. The Department had created seven Chief Director positions within the NHI. There were not enough hospitals and clinics to provide such a service.

Regarding moving from the original Bill to water services, Dr Orlandi said the reasons were not clearly provided. The move was to manage contractual obligations, budget pressures, accruals and payables for projects.

National Treasury had indicated that there was no universal approach. This meant that any Department could have their budget cut for various reasons. They were guided by the underspending.

She referred to slide 30, which was flighted, to show the changes made in the adjustments budget on the targets set in the budget. The said targets had been changed. Reading from the slide, she said that the public service records showed a reduction. Correctional Services indicated that they would not be able to provide more as they were 50% overfull with bed space. Agriculture had not met all their targets, and this may be because of the budget cuts. Her colleague would expand on some of the reasons.

Dr Mmapula Sekatane, Policy Analyst, PBO, responded to the Education Infrastructure Grant. Reviewing the 2021/2022 performance on the grants, the analysis showed that they spent 100% of the budget allocated to them which was R2 300 000 000. The issue was that no targets were set for the expected output, which made measuring the performance very difficult. They were also supposed to build new schools and provide them with water, sanitation, and electricity. A total of 21 schools were built, 112 schools were provided with water, 1 019 schools were provided with sanitation, but no schools were provided with electricity, and 100% of the budget was spent.

The reason for underspending in the Agriculture Conditional Grants was delayed delivery of Information Technology (IT) equipment by service providers due to the global pandemic. There were procurement challenges and e-tender procurement processes. They were also unable to use a contractor to complete the project, and there was an unavailability of service providers. For the Letsema Grant, the reasons for underspending were procurement challenges, no response from the service providers who also delayed the procurement finalisation, service providers turning down the opportunity due to lack of cash flow, and delays in e-tender procurement processes.

On underspending in the Land Care Programme Grant, the reasons were problems with payment to labour teams by the appointed paymaster, slow internal procurement processes, late start on projects, delays in supply chain management processes, and late implementation with the project. There were issues of communication with the Department and the service providers.

Ms Sibusisiwe Sibeko, Public Finance Analyst, PBO, responded that the minimum wage was adjusted on 01 March 2023.

She said that the projected population growth was higher than the previous instances, which meant that the expenditure was less per person than previously. The Census data which came out last year, listed the nation’s population at 62 000 000. Population growth in the country was not expanding as rapidly as one might think; it was sitting at below 1.5% on average. The fertility rate had declined from 2.66% to 2.54% in 2022. This was not setting aside the need to budget for their current population.

On the underspent SRD Grant, she indicated that R5 500 000 000 was shifted away from the Department of Social Development, where R3 700 000 000 of this was declared as ‘unspent funds’. The revised expenditure on said grant was lower this year because of the stringent rules for eligibility, which meant that many people were excluded from accessing the grant. There were nuances in the underspending. Treasury had admitted in the past that by cutting budgets. This made the departments less efficient. There was the case with the AGSA on health in Gauteng Province, where the province spent 100% of its budget but the outcomes were not as expected.

On illicit financial flows, she said that an estimated R3.5bn to R5bn left the country. No one was sure why this was the case. It was important to consider how to redistribute resources more effectively.

On NHI and the healthcare sector, she said that even the private healthcare centre was subsidised by public expenditure. The recipients were benefitting from the system. They considered how many people would cross-utilise the resources, so they could not look at this from a singular lens. She acknowledged the comment made about the doctors who were subsidised to study in the country but ended up vacating the country.

In their previous MTBPS briefs, they had written a lot about unpaid care work and underpaid work; women in the country earned 35% less than their male counterparts. Their work considered the benefits for the community.

Dr Seeraj Mohamed, Deputy Director: Economics, PBO, responded on the total public sector debt which was currently at R5 800 000 000. He said that the total for the economy, including the private sector, was currently at R45 000 000 000. In the total economy, the financial liabilities were lower than the financial assets which were approximately R49 000 000 000. They thought about how the debt was used and where it was allocated, which would hopefully reduce poverty and contribute towards the economy.
 
On the allegations that the budget was neo-liberal, he said that the broad definition thereof was to reduce the role of the state in the economy and increase the market-based activities, moving to free-market activities. He mentioned a book by Thomas Piketty, adding that there was concern about global inequality. Large financial corporations had freer reign, capital controls had been reduced or rid of, and investments were taken out and placed elsewhere. One way to reduce the state’s role in the economy was to get the state to spend less money into the economy. This brought the view that the state was inefficient and the market could do better. The private healthcare system relied on the backbone, training, regulatory activities, and environmental standards. They could not exist without the public sector.

He mentioned that the work of one of the President’s economic advisors’, Professor Mariana Mazzucato, famous for the book The Entrepreneurial State, discussed the view that ‘the State was inefficient, and the market was good’. The iPhone and other mobile devices were made possible because of investments by the state in research and development. The profits were being privately appropriated. They considered developing a developmental state in the country, and could they do this with the allegations of neo-liberalism. He learnt from Prof Mazzucato’s work that, for investments in the internet and cellphone technology, the state had to pay an entrepreneurial loan for the technology development.

He continued saying that he understood the neo-liberalism allegations but it was important to understand why this was the case.

On reductions in tax revenue due to the decline in the country’s profit, there was pressure from neo-liberal thinking, and they had become reliant on the commodity cycle. They had fewer exports from the mineral sector. The argument was that government’s focus on structural reforms did not take into account the economy. Dr Mohamed supported the notion of growing the industrial base and being less reliant on commodity prices. They considered the household contribution to the Gross Development Profit (GDP) since over 60% of the GDP was from household consumption. The household consumption was to keep people fed, raise children, and provide shelter. They needed to shift to a demand side thinking of the role of improving the households which would contribute to the economic transformation. Currently, there is a huge deficit in demand. They needed a fiscal policy which was linked to a developmental vision of improving the resilience and economic activities of households.

He would provide written responses to the outstanding questions.

Ms Tobias interjected to ask a question but the Chairperson denied her request and said he would take her question after the responses were given in full.

Ms Kagiso Mamabolo, Economic Analyst, PBO, responded by saying she agreed that the improvement of the Energy Availability Factor (EAF) was commendable. The EAF used to be at 81% in 2013 and 2016. They still had a long road ahead.

On the Transnet matter, she said that this issue had not yet been resolved. One of the key issues was that over 90% of locomotives had to be delivered to Transnet by the Chinese corporation, and they had not yet been delivered. There were tax clearance issues. Overall, this contributed to the setback of the whole entity. Infrastructure theft and inadequate maintenance have led to under-performance. This year, there was an increase in the reported irregular expenditure. This was a small part of a larger picture.

Dr Jantjies reiterated that they would respond to the other unanswered questions in written form.
One of the issues which came up in Transnet was the issue of employment volunteering time programme. This led to many engineers retiring and some returning as consultants. This impacted operations of the entity. They had covered most of the questions now.

Ms Tobias apologised in advance for sounding controversial. She said their lack of utilising the intelligentsia developed in the country to advise them on the macro-economic policy. What Dr Mohamed had said had been regurgitated over the years. The day they recognise such people and allow them to engage on other platforms would be when they would have many ideas packaged and deposited.
 
They lost many personnel because they left and returned as consultants. This issue had been brought up many times over the years and nothing had been done to resolve it. She wanted an update on the two municipalities she asked about, because there was no response. If Parliament did not create a fiscal space, they were greatly limiting themselves.
  
The Chairperson thanked all for their time and participation, and the presentation, saying that this was a good engagement. Dr Jantjies should deliver the responses to the outstanding questions.
 
Committee matters  
The minutes of 19 September 2023 were considered and adopted.

The minutes of 02 November 2023 were considered and adopted.

The minutes of 08 November 2023 were considered and adopted.

The minutes of 07 November 2023 were considered and adopted.

They had correspondence from the Minister on questions raised at the meeting of 07 November 2023. They had been circulated to everyone, and everyone was urged to check the correspondence.

The meeting was adjourned.