Division of Revenue A/B; Adjustments Appropriation Bill & Eskom Debt Relief A/B: National Treasury briefing

Meeting report

The Chairperson acknowledged the presence of chairpersons of other committees and representatives of the provinces who had responded to the invitation that was extended to them. She trusted that the meeting would be fruitful.

National Treasury Presentation
Ms Malijeng Ngqaleni, DDG: Intergovernmental Relations, NT, led the team of officials in the presentation of the three Bills.

2023 DoRA Bill
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, NT, said the DoRA Bill contained adjustments to the provincial and local government allocations, and changes to gazetted frameworks and allocations. Changes are legalised and enacted through section 30(2) of the PMFA. Some allocations made to conditional grants, local government and the provinces were intended to revert to a more constrained fiscal framework. Allowance was made within the ambit of the Bill for unforeseeable and unavoidable expenditure, the shifting of funds within and between votes, the utilisation of savings, and the rollover of any unspent funds.

Mr Bongani Daka, Senior Economist: Intergovernmental Relations, NT, presented the changes to provincial allocations. As a result of the 2023/24 wage agreement, a decision was made to increase funding for the school sectors that were heavy on personnel to ensure the continuity of services. The funding was added through the provincial equitable share and allocated to the provinces based on the headcount. To allow provinces to implement the wage agreement, R17.6 billion was added. This resulted in the increase of the equitable share from R567 billion to R585 billion. The rollover of R137 million included R93 million for the replacement of pit latrines and R26 million for the completion of projects linked to the Accelerated Schools Infrastructure Delivery Initiative for schools in the Eastern Cape, KwaZulu-Natal and Limpopo. The school infrastructure backlog grant reduction included the reprioritisation of R57 million. The early childhood development (ECD) grant was reduced by R85 million. The national school nutrition programme grant had been protected while a larger reduction was made to the education infrastructure grant.

Dr Letsepa Pakkies, Director: Local Government and Fiscal Framework, NT, presented the changes to the local government allocations. R1.4 billion was allocated outside the local government equitable share formula to assist with the pressure that was anticipated but did not happen. This was due to NERSA approving a lower tariff increase. The money was transferred back to the National Revenue Fund. As a result of challenges following the natural disasters, R1.2 billion was added to the Municipal Disaster Recovery Grant and R372 million was added to the Municipal Response Grant to augment the depleted grant baseline. R53 million was reprioritised from the Eskom Grant to the DMRE fund for the rehabilitation of derelict and ownerless mines. R309 million was reprioritised from the regional Bulk Infrastructure Grant to the Water Services Infrastructure Grant. No reduction was made to the local government equitable share. Direct conditional grants were reduced by R3.4 billion and the Eskom grant was reduced by R250 million.

(See Presentation)

2023 Adjustments Appropriation Bill
Dr Mampho Modise, DDG: Public Finance, NT, reported that adjustments required due to significant and unforeseeable economic and financial events amounted to R21 billion. Cost containment guidelines involve restricting non-core recruitment; significant reduction in traveling, conference, workshops and catering; postponement of capital projects including buildings and other fixed structures; as well as machinery and equipment. A new proposed budget reduction mechanism was implemented to assist departments with service delivery.

(See Presentation)


2023 Eskom Debt Relief Amendment Bill
Mr Ravesh Rajlal, Chief Director: Asset and Liability Management, NT, stated that National Treasury introduced market related interest on the Eskom Debt Relief Package. The Debt Relief initially envisaged was an interest-free loan. Interest will be imposed upon approval of the Bill and will not be charged retrospectively. The interest will be paid on the disbursed amounts even if Eskom comply with the loan conditions. But the interest will be higher should Eskom fail to comply with the conditions. A Task Team was established comprising of officials from National Treasury, the Department of Public Enterprises and Eskom. The Task Team will be monitoring Eskom’s compliance with the conditions and will report quarterly to the Minister on whether Eskom would qualify for the conversion of the loan to equity.

(See Presentation)


Discussion
Mr D Ryder (DA, Gauteng) said the reduction in local government allocation appeared to be disproportionate. The situation was reverting to when the allocation of the fiscus was 9% and below. National Treasury was reneging on the undertaking to improve on the 9% allocation. He was concerned about the medium-term impact of the reduction on service delivery. Dr Modise referred to the unforeseeable nature of events that required adjustment appropriations. But most of the appropriations were not unexpected. National Treasury chose to ignore the warnings about the impact of the wage bill on the budgeting process and was trying to fix the mistake through adjustments. Prof Sachs, a former National Treasury official, referred to it as a new budget and not an adjustment budget. He was concerned about the big shifts from departments because of the increased wage bill. With the reduced allocations, departments would be unable to meet their targets or deliver services as set out in the year plans. Reallocating money from key service delivery departments to meet the wage bill was a big concern. He emphasised the need for zero-based budgeting and questioned National Treasury had omitted it from the presentation. The reduction in the school infrastructure allocation was a shocking example of how service delivery is crowded out to meet the wage bill.

Mr F Du Toit (FF+, North-West) said most of the ECD allocation in the previous budget was used to fund wages. He asked National Treasury to advise on measures to ensure the appropriate use of future ECD and basic education allocations. He wanted to know if independent candidates would also benefit from the R300 million political party funding allocation or if it was meant for political parties only.

Mr M Moletsane (EFF, Free State) said reducing the allocations for the different departments would have a negative impact on service delivery. He asked when the distribution model would change. Local government needed more money because it was dealing directly with communities. The 9% allocation should increase to empower municipalities to provide better services.

Mr Mziwonke Ndabeni (Eastern Cape Legislature) asked National Treasury to explain what it would mean if part of the Eskom debt is converted to equity. He wanted to know if some of the debt would be sold off to lenders. He asked if National Treasury had a plan to deal with the debt and if an analysis had been done on the reasons for the escalating Eskom debt. Government was able to deal with the huge debt post the apartheid era and even posted a surplus in 2008. But since then, the debt continued to increase. Generations to come are being committed to the sky-rocketing debt. The local government allocation is continuously being reduced although the infrastructure in rural municipalities was collapsing. The democratic project would collapse if the capacity of local government to deliver on the service delivery mandate is not safeguarded. Protests are taking place at municipal level and not in the national government space. He asked what informed the budget reductions and if the implications thereof had been considered in terms of projects that would have to be delayed or stopped.

The Chairperson said complaints about equitable share had previously been raised by provinces, SALGA and the Committee. The local government equitable share was small in comparison to other spheres of government. She asked what informed the decision and what the justifiable reasons were for further reductions. She was concerned that it would negatively impact service delivery at local government level and reverse all the good work that had been done over the past years. If it were not reasonable for her then her constituency would also find it difficult to understand. She was concerned about the impact of the conditional grant reduction and asked if an assessment had been done. She asked for an update on the restructuring of the social services grant. She wanted to know if independent candidates would be able to access the R300 million allocated for political party funding. She was concerned that the distribution of the funds was going to create difficulties for the Home Affairs Department.

Ms Shameen Thakur-Rajbansi (KwaZulu-Natal Legislature) sought clarity about the Basic Education allocation because the amount in the presentation was different from what was being reported elsewhere. She understood that the political party funding allocation was meant for parties already elected and that the quota would be provided in the November adjustment. National Treasury appears to be applying a carrot-and-stick approach to the Eskom debt. The Eskom Debt Relief Bill is hotly being debated in council. It is suspected to be an exit strategy for Eskom in anticipation that the entity might go bankrupt. This was raising fears that interest would be cascaded down to ratepayer level. She asked National Treasury to allay the fears and explain why the Bill came into effect.

The Chairperson asked who would be responsible for monitoring compliance with the Eskom Relief Grant. As an oversight body of Parliament, the Committee should have access to the conditions of the grant.

Ms Ngqaleni said National Treasury was not taking delight in having to reduce departmental budgets because of the effect it was having on everyone. However, difficult choices had to be made to address the rise in overall debt. Debt has been rising from 2007/8 to meet the needs of the country at all levels. The debt increase is based on consumption and not on investment. It is becoming irresponsible to pile up debt for consumption. The current level of revenue under collection was unexpected. Aligning expenditure to revenue was the responsible thing to do. This is what informs the reductions. She replied to the questions on local government reduction by explaining that the allocation was reduced by R3.4 billion but R1.5 billion was added for disaster recovery. Local government underspent R10 billion in conditional grants in the previous financial year. Rollovers for the underspent amount have been approved. The reduced amount was aligned to the spending capacity therefore no major service delivery impact was expected. National Treasury was hoping that this fiscal constraint would lift the efficiency level of local government and would give value to the assets. The local government equitable share had not changed significantly. The equitable share cannot increase if revenue is not generated. Based on the performance of the economy, there was no additional money to increase the equitable share of local government. To increase revenue, more tax must be raised. The tax efficiency in local government must be optimised. Consumers have not been paying their accounts. Hence the Eskom Debt Relief Package was introduced to support the Revenue Enhancement Programme for municipalities. The programme is meant to progressively relieve debt to pay the Eskom current account. But this would depend on the political will and the capability at the administrative level. The programme to extend support to consumers is solid but intervention was needed to address the challenges of a dysfunctional administration at the political level. She replied to Ms Thakur-Rajbansi that provinces had been supported with additional allocations for health and education to deal with the wage bill shortfall.

Ms Fanoe said the wage bill was based on the headcount per province. The matter in KwaZulu-Natal is further complicated which the provincial Department of Basic Education must deal with. The additional personnel pressures were making it difficult to deal with in the short term. Restructuring in certain government departments was needed as a medium to longer-term solution.

Mr Edgar Sishi, DDG: Budget Office, NT, referred Members to Table 4 and annexures of the MTBPS for information about local government spending. He disagreed that the local government equitable share was decreasing. Instead, the rate had increased from 8.9% in the previous year to 9.5% in the current year and would increase to 9.8% in the next year. He disagreed that National Treasury knew how much was needed for the wage bill, but the risk of an increasing wage bill was acknowledged. He replied to Mr Ryder that Prof Sachs used inflation-linked adjustment to substantiate his claim about the wage agreement, but he was wrong in suggesting that the actual amount was known. The response to the multi-varied approach of the fiscal framework is outlined in Chapter 3 of the MTBPS. The government tabled and Parliament approved the wage agreement after the budget. National Treasury indicated why it was necessary to apply fiscal consolidation. The government can only spend money it collects from taxes, but it could borrow to fill the gaps. He agreed that interest on loans was crowding out service delivery but stated that budget cuts are a result of the crowding out. The government started living beyond its means from 2008. The plan is to have stability by 2026 which meant that the process of realignment would take time. National Treasury has an active debt management strategy which is published annually in the budget and updated in the MTBPS. National Treasury continues to engage with international institutions and has received confirmation about the application of the active strategy from the OECD, and World Bank. In response to the government’s tendency to live beyond its means over the past ten years, the MTBPS proposed a reduction in the debt imbalance and its impact on future generations. The aim is to gradually increase revenue through fiscal consolidation. He stated that people have been complaining about the debt but was unwilling to accept spending reductions.

Dr Modise replied to Mr Ryder that components of zero-budgeting had been used in the budgeting process. She advised him to consult the published framework for more information. She undertook to share the link to the website, where spending reviews are published, with the Secretariat. She explained that R300 million was added to the baseline for political party funding to prepare for the upcoming elections. National Treasury would be approaching the IEC for more information about the allocation of the funds for independent candidates. She replied to the Chairperson about the restructuring of the social grant. A balanced approach was needed to avoid creating dependency. The best allocation of grants is being reviewed to protect vulnerable citizens. The work was taking longer than expected and was ongoing. It is envisaged that the nature, formulation, and review of the system will be finalised by 2024.

Mr Isaac Kurasha, Director: Trade and Industry, NT, said in terms of a 2012 agreement with the Competition Commission, construction companies agreed to contribute R1.5 billion over 12 years to a fund, in addition to administrative penalties. The funds are paid to the Department of Trade, Industry and Competition (DTIC) and thereafter transferred to the National Revenue Fund. During the budgeting process, the funds are reallocated to the DTIC and during the year when adjustments are made, consideration is made about the reallocation of funds. The reallocation emanated from companies affected by the Covid-19 pandemic. Agreements about repayments and contributions are entered into with the DTIC. Pioneer Foods set the precedent. The funds should flow directly from the National Reserve Fund.

Mr Rajlal said the R254 billion Eskom Debt Relief Grant was separate from the Municipal Relief Programme. He assured the Committee that private lenders were not involved. National Government departments are the lenders through the National Reserve Fund. The loan to Eskom was different from the previous manner of support to SAA, SAA Express and the Post Office. The Eskom loan attracts interest. The entity would be negatively impacted if the loan conditions are not met. It would therefore be in Eskom’s interest to comply with the repayment conditions.

The Chairperson said her question about the monitoring of the Eskom debt had not been answered. She noted Mr Ryder’s comment in the Chat Platform and did not want to entertain it. She advised against the politicisation of the Committee. She was concerned about the statement that the government lacked the political will. The government had to go back to basics and was following a clean audit campaign and other strategies to deal with the fiscal problems. She wanted to know if National Treasury held the view that all these interventions had failed or if the economic problems were due to political unwillingness. She was a bit disturbed by some of the comments from National Treasury.

Ms Ngqaleni replied that National Treasury is continuously being asked about interventions to fix local government. Significant programmes and interventions were implemented but despite the support from National Treasury, it all failed. The problem starts at the political level with dysfunctional councils. The level of support will be of no value if the right people are not employed at municipalities. Governance is critical to ensure that the support provided is meaningfully absorbed. The formulation of coalition governments in some municipalities added to the political instability. National Treasury did not have the capacity to solve this type of problem or to manage municipalities. Absorbing support was dependent on effective leadership at local government. Municipalities need to attract the right people to do the complex work of target setting and revenue collection. The system would collapse if the right people were not employed.

The Chairperson noted Mr Du Toit’s comment on the Chat Platform and requested him to stop abusing the forum. She advised him to use the internal platform to deal with his concerns.

Mr Ryder said unless National Treasury admitted that it had done everything possible to assist municipalities, it could not be blameless. The model used for local government funding should be reviewed. In their response to his question about what had been done to assist the Emfuleni Municipality with their water and electricity challenges, National Treasury replied that it had not been asked for guidance. In his view, National Treasury was misrepresenting the situation in municipalities. He agreed that the problem is of a political nature but stated that blaming coalitions was diluting the discussion.

The Chairperson discouraged Mr Ryder from politicising the matter. She apologised on behalf of the Committee for having involved officials in the differences between Members. She encouraged the representatives from the provincial legislatures to peruse the budget documents as referenced by National Treasury officials.

Adoption of Minutes
The Committee Secretary presented the outstanding minutes for adoption. The Committee adopted the following minutes without amendments:
11 October 2023;
2 November 2023; and
7 November 2023.

Announcement
The Committee Secretary advised that the next meeting was a joint meeting with the Standing Committee on Appropriations and SALGA. Public hearings with stakeholders would follow thereafter. All related documents had been attached to the email forwarded to Members.

The Chairperson thanked Members for their input.

The meeting was adjourned.