Quarter 3 expenditure of SOEs for 2023/24

Meeting report

Update on State Owned Companies (SOCs) Quarter 3
Land Bank
The Land Bank, in default since April 2020, is working on a solution with lenders, using a portion of the R7 billion allocated in the 2021 National Budget. The National Treasury has processed repayments to lenders and aims to transfer the remaining funds. However, conditions for equity funding from the National Treasury have not been fully met. The bank aims to enhance its development and transformation mandate and financial sustainability through a multi-phase business case up to 2028. Despite challenges, it remains crucial for the Land Bank to resolve its default situation and implement its business case.
In Quarter 3 of 2023/24, the Land Bank reported a net loss of R97 million, driven by higher impairment charges and lower net interest income. Operating expenses were below budget but higher than the prior year. Funding liabilities and net loans decreased, but the non-performing loan portfolio slightly reduced, although the NPL ratio increased due to a declining loan book.

Eskom
Eskom reported a loss after tax of R7.5 billion in Q3 of 2023/24 despite growth in net revenue. However, arrear municipal debt remains a challenge. Sales volumes fell below budget, and primary energy costs increased year-on-year. Debt securities and borrowings rose, while cash reserves decreased. Cash interest cover and debt service cover ratios are projected to remain below norms, indicating continued need for government support.
Eskom's Energy Availability Factor decreased, leading to increased load shedding days. Efforts are underway to improve availability, although challenges persist with load losses and emissions compliance. New build progress includes synchronising Kusile Unit 5 to the grid.
Eskom received R44 billion in debt relief, with a portion converted to equity. Interest has been introduced on the relief package to align with market standards.

South African Airways (SAA)
SAA Group reported a net loss, attributed to revenue shortfalls despite cost savings. Mango remains in voluntary business rescue.

Transnet
Transnet Freight Rail (TFR) faces challenges from security incidents, locomotive unavailability, and poor infrastructure, risking the economy. Funding mandates a National Treasury-led review of freight corridors to boost efficiency, starting Q4 2023/24.

South African Post Office (SAPO)
SAPO's performance continued to decline in Q3 of 2023/24, with a net loss and below-budget revenue. Operating expenses were reduced but remain high. Efforts are underway to address outstanding liabilities and streamline operations.

Denel
As of December 31, 2023, Denel's revenue lagged by 37% at R847 million compared to a budget of R1.343 million. Operating costs amounted to R566 million, exceeding the budget of R456 million due to delayed cost reduction measures and reduced productivity. Denel's EBIT worsened to a negative R359 million, leading to a net loss of R463 million, 37% worse than anticipated. Lower revenue, higher operating costs, and losses from associates like RDM and Barij exacerbated the financial strain, highlighting the need to finalize asset disposal initiatives and execute the turnaround plan promptly.

Discussion
Mr H Mmemezi (ANC) appreciated the presentation as a lot of preparation went into updating Members on behalf of South Africa. From his perspective, there should not be any under-expenditure. When the department was given a budget, it was done for the people of South Africa. It was not for any Director-General to be happy because they had a budget. The budget had to change the lives of the people, especially those who were marginalised under the previous regime. The Committee felt unhappy when its own people in government, as technocrats who had to accelerate service delivery, were the ones not spending. Secondly, there should be clear consequences for failure to perform. There should be performance measurements. If people still did not perform and did not spend on available projects, they compromised the people of South Africa. As such, these people should not continue to stay in the government’s employ. Being there was not part of their entitlement.

He moved to the municipalities. National Treasury and the Committees all stayed on municipal land. They were all part of the municipality. In the areas people lived in, when municipalities did not perform, people felt something needed to be done. The qualifications of municipal officials needed to be verified. Do we have municipality officials that have proper and relevant qualifications in all departments? Do we have officials with the wrong qualifications or irrelevant qualifications in various departments? There could not be an acceptance of already knowing that municipalities were not going to perform. Why are they not performing? Qualifications should be checked to see what the problems could be. The national department could not be a spectator when municipalities were not performing because it also worked on municipal land. The municipalities needed assistance. If there was a problem, it needed to be identified. He was unhappy because this became the norm – no municipalities were performing and it was just being accepted. If the national department was performing and municipalities were not, it meant the national department was not helping them and was not part of the municipalities. It operated as if it had its land outside of municipal land. There was no such thing in South Africa. Every department was in a municipality. When there were problems, they needed to assist.

On the Land Bank, the biggest thing he heard about was its recent support and drastic reduction of its R40 billion debt. This was appreciated. He wanted to understand if Land Bank understood that since 1994, government had been working on transforming South Africa, especially for those who were previously marginalised. These people needed to benefit from Land Bank. Whatever effort led back to understanding the majority of South African people were excluded from benefiting from these institutions. Are there visible achievements of poor people benefiting in the rural areas, informal settlements, and townships? These institutions needed to be relevant to ordinary people. If they continued helping the few or those who always had assistance previously, then it did not help South Africans. It was a continuation of Apartheid plans. He wanted to be told what the efforts were to ensure the majority of South Africans on the outskirts beyond urban areas understood the Land Bank could assist them. He wanted to be told that Land Bank was now relevant to the majority.

On Eskom, the presenter was clear that he presented unaudited numbers. He did not understand the rationale behind this. He did not know whether it was so the Committee would doubt the numbers given. It worried him. One had to ensure Eskom was made relevant to the South African people and industries because the country could not progress, its economy could not progress if Eskom was a problem for everyone. Industries stopped operating because of Eskom and people were made to believe that it was a God-given instruction that Eskom should not progress, it was unacceptable. Before 1994 and after, Eskom was working. It needed to be ensured that South Africans had electricity. People in the rural areas needed to know that there was Eskom and that there should be lights and electricity. People could not be punished for this now. This meant Eskom would only operate if it did so in urban areas. What happened in Eskom was unacceptable. Those working there needed to know they were compromising the people of South Africa. Their qualifications were questionable. The Committee felt South Africa was compromised by Eskom officials. It was forced to accept what was unacceptable even at the municipal level. It was forced to accept the escalating debt, which could not be accepted. There were educated officials in both Eskom and the National Treasury. Others needed to be deployed to Eskom to assist so there was no debt escalation. Members also wanted to see the difference in the municipalities, in rural areas where there was no visible income or revenue for such municipalities. South Africa belonged to all its people, which meant the big municipalities and metropolitan municipalities should have a way of helping the poor. The poor areas needed to be compensated. There should also be proper management of the budget in the municipality and how officials worked there.

The qualification issue needed to be analysed. The people needed to feel there was a municipality that assisted them. There had to be measures to ensure that users were indeed paying as well. Not everybody who could not pay, but those who could. People would not pay if the municipality officials sat in their offices doing nothing all day. There needed to be some efforts to ensure people paid.

South African Airways (SAA) was quite worrying as well. It was worrying that it ran at a loss given the current situation of the country. South Africa was one of the most developed countries in Africa and was seen as a country that was progressing, which meant it should be utilising SAA with success. It was worrying that it was not good at doing that. He did not know if there were measures taken to avoid these recurring losses.

Mr A Shaik Emam (NFP) reminded the Committee that it had been talking about value for money. According to the Auditor-General (AG) recent report, R5.19 billion was wasted in local government alone. This report was based on 170 of the 257 municipalities the AG had done due diligence on, interrogated and investigated. Goods were being ordered and not delivered and there were many other reasons for this wasteful spending.

For SAA, the situation seemed to be the norm in all these state-owned enterprises (SOEs) where they were run into the ground and then disposed of. Each aircraft at SAA was sold for R35 million at an airplane festival in 2000 and rented back to South Africa for R44 million. He had tried everything to try and get to the bottom of this, but could not. Nobody could give the answers the Committee wanted. Can you imagine selling your aircraft for R35 million and renting it back for R44 million? Fourteen of SAA’s aircraft were now being used by Fly Safair. He had received limited responses. He had told National Treasury he did not want to hear a story that the reports were no longer available because several years had passed. He wanted it to tell South Africa why its 14 aircraft were sold and rented back to it. If they were redundant and not fit for purpose, why did you rent them back? Who made those decisions? Which minister approved it? What role did Treasury play? He saw a similar scenario in many other entities. Until now, there had been so much secrecy around the SAA and Takatso deal. He wanted Treasury to submit a report on who Takatso was. What are they buying? What are they putting in? Who are the actors? What is the link to political parties or politicians?

While money was being put into Eskom, Standard Bank announced its partnership with some private enterprises to supply energy, which would be much more than what Eskom could provide. If that was the route the country was going, are we spending money on Eskom to run it into the ground again and then make it redundant and shut it down? O, is it to benefit those who are also in the renewable energy sector, many of whom have an interest in the coal mining sector? Where is Treasury in all this? Treasury just came to the Committee and said it needed money in certain places.

He agreed with Mr Mmemezi’s comments about local government. Treasury blocked him there. He wanted to know why there could not be a more transparent and credible process from local government. The upcoming election was all about corruption. All political parties received money from local government to run their election campaigns. Why can one not make sure there is a monthly report tabled for public consumption? Who benefited? This needed to include the names of the companies. Who are the directors? What is the value? What is the itemised billing? This was a requirement. He asked if these people complied and they were not. When he asked what Treasury was it was doing about it, it said nothing.

He reminded the Committee about the Integrated Financial Management System (IFMS). Have you ever heard any information that we requested previously on the corruption, Chairperson? Absolutely nothing. Why did Treasury not take an added interest in protecting the resources of the country. Is it because they have limited powers? On the ports, what nobody spoke about was that shipping companies had diverted their ships to other ports and that business was lost. So where is the economic growth rate coming from? How are we going to export? What are we going to do? The Committee was not being told this either. To Treasury, what is the problem? He was told that at the ports, people went onto these ships and held the captains hostage demanding that drugs and other things were carried by the ship and uploaded there whether they liked it or not. That was a problem. The security there was ineffective because these criminals were colluding with them. That was how serious things were. Some people said they did not want to come to South African waters.

He asked Treasury if nothing was happening with the business rescue. What about the aircraft Mango owned? Where are those aircraft? What is happening with Mango? Airlines like Lift and Cemair had great success in South Africa. What is the root cause of why SAA crumbled? Why has Mango crumbled our airlines? Are you putting any measures in place to ensure the availability of our airlines for public servants? Public servants used the services of other airlines and not the country’s, “charity begins at home.” What measures are you putting in place because our people fly all the time? He asked this so that South Africa’s interests could be protected. What is the problem? Is it interference? These things were only heard of when it was too late. What measures can you implement to prevent this? Are you asking us to continually pump money into these SOEs without giving us any assurances? How many times did Treasury come to the Committee and say it put in conditions for Eskom and other SOEs? These conditions were never met and Treasury came back to the Committee complaining about the same thing. How can we turn this around? What are the obstacles that you cannot ensure the success of these SOEs?

Some of the assets were called strategic assets, and these were being sold and given away. This wealth is meant to belong to the people of the country, but the people had no say whatsoever when their country’s wealth was taken and handed over to others. This was why the country was still in the hands of the few. It was known that underspending was the order of the day, especially in infrastructure. This happened repeatedly despite all the measures implemented. Commissions and committees were erected for this. The amount of money put into this was known, even in infrastructure, but there was no value for money. The Committee went and saw the infrastructure of schools in certain areas. One person received two contracts at the same time which exceeded his general building (GB) rating. He did not even have money to buy the materials. The Committee also went to see the water projects in the Eastern Cape and nothing was happening. What are we going to do? How are we going to change this? 30 years have passed. To change the next 30 years, what measures are you going to implement to ensure transparency? Who are the people getting all these tenders? What are the values? How much is it? He asked so there would be a deterrent and involve the public more in things so money was saved. There was no service delivery because there was no money.

Mr O Mathafa (ANC) requested to turn off his camera as his network was unstable. He appreciated the presentation and the efforts made in compiling it. The Committee had been lamenting the challenge of underspending for some time simply because of the effects it had on society at large. They were visible in certain areas and other areas like education, social services and health, those impacts would only be seen in generations to come. There would always be a challenge with inequality and not being able to put a finger on the pulse to say, why is this inequality not going away? Underspending was a contributing factor to the challenge of inequality that the country was confronted with. The Committee always asked what accountability measures could be implemented so that underspending was looked at with a dim view as it did with non-compliance to legislation and its procedures. It was time that the Committee requested Treasury to find out what other measures were stringent that could be implemented. This was so those accounting officers and officials who were underspending felt the pinch. Perhaps due to the work these officials were in and the positions they were in, they did not feel the effects of their underspending on service delivery. The only ones who felt this were those who did not have any other option but to rely on government services and infrastructure. When Treasury deploys resources to various spheres of government, what do they do with the reports on those deployed resources? He came from the City of Tshwane and was once a councillor there. He knew for a fact that Treasury deployed resources in Tshwane to assist the municipality in governing better, properly, and operating accordingly. However, when listening to the State of the Nation Address (SONA) and the AG audit outcomes of the City of Tshwane, the situation was getting worse and there seemed to be no improvement. He wanted to connect the Treasury reports to the suggestion by the Minister of Cooperative Governance and Traditional Affairs (COGTA) to look at legislation on how it could intervene directly at both local and provincial levels. This would happen where there was either underspending or bad governance without invoking putting these particular municipalities under administration. He lived in Centurion but when he goes to visit his parents in Soshanguve, he could see two sides of the same coin. He travelled through a well-serviced area, not ducking potholes, but construction workers, programmes and projects that were city-led. When he got Soshanguve, there was nothing of the sort and sewage spilling all over. There were potholes, street lights were not working. The service delivery in townships had collapsed, but R2.6 billion was allocated to the City from Treasury for township spending. This spoke to the skewed approach of service delivery. What can we do to prevent such a situation? If a municipality only serviced certain areas, then it was fine for Treasury to take its money back. But what are we saying about those people that are denied services? These people had constitutional rights to receive those services. He wanted to hear Treasury’s views on those two issues.

Next, what drove government’s actions was the Economic Reconstruction and Recovery Plan (ERRP) which was presented by the President as a necessary programme to turn around the economic fortunes of the country. From this expenditure report, do we see alignment with the ERRP? If not, are there measures to ensure that the whole country follows this? Members sat here lamenting but there was a plan to reignite the economy. Are we aligning with the Plan? He wanted to hear Treasury’s views on this.

Mr Mathafa said that Mr Mmemezi and Mr Shaik Emam spoke well on the entities, but they left out SAPO and Denel. He linked the South African Post Office (SAPO) with what Mr Shaik Emam raised. Does Treasury require government officials to fly with SAA? What does the law say on government utilising those services? This could also be revenue-generating. Is government using the SAPO postal and courier services? With communication, are we using the communication systems and tools that SAPO presents to the market? If not, why not? Government officials could not lament that an entity was not profitable; yet the same people were spending money elsewhere. He agreed that “charity begins at home.” Are we using the services of SAPO or are we just treating it like any other enterprise that is competing in the open market? Do we have a law that allows government to procure directly from its entities? His concern was SAPO was currently drowning and needed drastic intervention. For him, drastic intervention was in the best interest of government as the biggest spender in most services being procured in the country.

Mr X Qayiso (ANC) said Members repeated themselves on several questions that had been previously raised when the Committee met with several departments in previous quarters. One could observe that some of the Committee recommendations were not considered, especially on SOEs and Eskom. He referred to local municipalities, their challenges, and financial viabilities. During the Department of Water and Sanitation (DWS) presentation, the Committee had made a recommendation asking DWS to intervene directly where local municipalities were unable to provide critical services and where water and sanitation seemed to have collapsed. DWS heeded that call and managed to intervene smoothly.

On the challenges faced by municipalities as reflected by the AG audit report, there were a wide range of challenges associated with the crisis. One of the issues was the failure to pay salaries to employees, which created disgruntlement and could easily play into the hands of civil commotion. So it would be prudent for Treasury to look into those circumstances. There were provisions made by Treasury through the Ministry’s announcement that there would be an intervention for municipal debt. This would be an extraordinary step forward. There were several municipalities in Free State and other parts of the country where the salaries of workers were not being paid due to municipalities not being able to generate income on their own. The way these municipalities were structured made it difficult to generate revenue independently. Therefore, Treasury should not wait and watch, it should intervene. This was very important, especially during this period. The Committee needed to see stability moving forward. Treasury needed to intervene immediately and stabilise the relevant parts connected to the workforce. This was so there was no commotion as a result.

He heard in the presentation that Eskom’s turnaround strategy did not seem to work effectively. Under those circumstances, where the policy was ineffective, it invited the Eskom board review the strategy to make it effective. The only way to do this was to review and assess the parts that seemed to be ineffective in its financial performance. The board should sit down, assess the situation, and look at what needed to happen.

He followed up on his colleagues to ask about SAA subsidiaries and the issue around them. He agreed with concerns about the emergence of other airlines during this process or crisis. They were operating successfully, but things were not proceeding smoothly on the other side. He questioned the Mango process. A business rescue plan had been implemented, but it was crucial not to overlook what the process revealed or how much was truly required to rescue the airline itself.

Mr Qayiso said that the Post Office had shut down branches moving from 1000 to about 600 plus. Simultaneously, the strategic plan aimed at reconfiguring or restructuring the Post Office to enhance future efficiency. With that approach, what would it achieve now? How is it going to achieve that reduction? If there were to be a reduction of branches, how is it going to be effective in terms of the reconfiguration of post offices? What are the reasons for the moratorium on the vacant posts? How does it affect the quality of services provided by the entity? Is there a moratorium applied across the board in other ways at all levels? When does the entity intend to leave the moratorium? On overspending due to compensation of employees, it was important that there was enough provision for salaries so that this did not occur in the future. This occurred in the middle of negotiations, but there should always be a provision made so that this did not occur. He was referring to the over-projection that occurred because of wage negotiations, it should be covered and not be made an excuse in the future.

He noticed the Compensation Fund did not spend R36.4 million on the compensation of employees (CoE). Why is it not filling vacancies? Why is there this non-expenditure?

Mr Shaik Emam said did not want to be misunderstood because Treasury could have limited powers. All Committee members had raised that SAA was not a viable institution at this time. They needed to consider the other role players that directly or indirectly gave rise to the collapse of SAA. There were limited air travellers in the country, but routes were being given to new airlines constantly. The route was opened for international airlines, which previously used to come to South Africa and then domestic airlines like SAA would fly those people to other provinces. This needed to be looked at. People would raise competition, democracy, constitutional rights, and all these things enforced on us by the West. This needed to stop. Government needed to take back control because it seemed like the country was still captured 30 years later. The Department of Trade Industry and Competition had to address this which was not being done.

He mentioned the need for Treasury to get more involved. Banks were exploiting people. They closed accounts unilaterally and Treasury did not come to their rescue. Why is this happening? Can Treasury not do more to protect our people? The varying prices of food in the supermarkets on different days were shocking but nothing was being done. Perhaps Treasury needed to exert some pressure on these departments so they were funded and able to do more with the money they received and not just sit and do nothing. He wanted Treasury to consider this when dealing with the relevant departments. Routes were being given to more and more airlines, which meant less demand for SAA, it was an issue. Is that a direct, deliberate attempt to shut us out across all institutions? Is that what it is all about? Even when looking at the Post Office, people sent parcels everywhere. So what will happen with your post office? It was obvious. If all the renewable energies were going to come in like Standard Bank, what was going to happen to your store? It was going to go down. There could be good intentions behind Treasury putting money into such things but the measures in place were counterproductive. It worked against itself and its goals, and the taxpayer paid the ultimate price.

The Chairperson noted Treasury said the calculation of expected expenditure was based on what the departments told it. How scientific is that? Should we not expect 75% of the budget to be paid when we are at 75%? Why depend on them? He referred to the underspending in the Department of Military Veterans (DMV) year in and year out, yet the situation of military veterans was dire. What is the reason? What does DMV say? This department was responsible for the welfare of the military veterans. It was also responsible for the payment of the education fees of military veterans and their children at schools and universities. There were daily complaints that this was not being taken care of yet there was this under expenditure. They needed to find out what the issue was.

COGTA has a perennial problem with local government not complying and this would continue happening if left unchecked. Can we find a creative way of trying to deal with this problem because the people who are supposed to receive these services suffer when caught up in bureaucracy between government departments? The story of R2.5 billion in Tshwane being sent back when the situation there was so dire was unjustifiable. Can we please intervene and see how we can assist to resolve these bureaucratic things, which end up not assisting in terms of expenditure?

He understood the way Treasury framed its expenditure comparisons. He would have loved to have another column that showed the previous year’s expenditure. How did the department perform in the previous year? The Committee would like to compare and check if there was any improvement or deterioration. Will that be too much to put in your presentation?

On Land Bank, he asked Treasury to share the implications of the inability to resolve the Land Bank issues since 2020. Parliament provided a recapitalisation plan, but the matter was still not resolved. What are the implications for service delivery and Land Bank’s mandate? What are the financial implications to the taxpayer if we do not resolve this matter? One of the reasons there was a cited loss by the Land Bank was the impairments. When they budgeted, were they not aware of these impairments? What is the source of the impairments and are they dealing with this? Or are they going to have the same problem next year?

He saw municipalities owed Eskom R75 billion. This was a concern for municipalities which were always blamed for underperformance. For them to owe so much money was worrisome. What intervention is government trying to make here? Many of these municipalities were very small. They could not take on Eskom through the legal process. There should be some intervention from the national government to help these municipalities recover their money from Eskom. What is the progress on debt relief for these municipalities which were set with a parallel agreement before? What progress are we making as far as it is concerned? Treasury expressed wanting to strengthen Eskom’s balance sheet so it could do other things. He heard the other interests that were introduced. What does it mean? What are we trying to achieve here? This was equity being introduced to Eskom. This was done with the debt relief to change the loan-to-equity ratio, etc. when this was introduced, are we not weakening Eskom’s balance sheet, sterilising the first thing we wanted to do when we came up with the relief scheme?

When Treasury shared SAA’s financials, it included its subsidiaries. If the SAA presented its standalone financial performance, the picture could be different. What is the performance of SAA without its subsidies? When speaking about Denel, delays were the reason it did not meet its targets. These were managerial issues. There needed to be an assurance that enough was being done with these bailouts from Parliament. This was Parliament’s contribution. When members heard about delays and they looked at those, most of them were controllable. What is happening here? He told Treasury to answer the questions it could.

Treasury response
Dr Modise asked her colleagues to respond to some of the questions.

Mr Ravesh Rajlal (Chief Director: Sectoral Oversight at Treasury) said that before getting the team to respond, it was important for him to give a few broad responses to the questions and comments. On the what the challenges were at the SOEs, Treasury had been asked this question before. From its perspective, it was largely responsible for ensuring oversight of these entities. It had the executive authorities who were responsible for these entities and it provided oversight to ensure that they did not rely on bailouts and government guarantees and actually met their key performance indicators and performance targets. Generally what it saw with most of these entities was a lot of change in the boards and management. Following this, there would be turnaround plans that needed funding. This was problematic because it was a new turnaround plan which needed funding. When the entity could not generate internal funding, it fell back onto the fiscus in some form or the other. If it had a consistent board with executive management that had the right skills and experience, then there should not be an issue with these entities.

On the broad comment around the conditions that Treasury imposed for bailouts, yes, it was noted. There was a comment about the Eskom Finance Company where Treasury included this as a condition since 2019 in the previous support package with Eskom. Eskom had not met those conditions. Treasury included conditions in the Eskom Debt Relief Amendment Bill. If Eskom did not dispose of the Eskom Finance Company by the end of March 2024, the Minister would have the power to reduce the disbursements going forward. This reduction would not be to the detriment of Eskom. He thought this was quite important. There would be those types of conditions being imposed. Linked to that was the fact that, historically, Treasury provided recapitalisations with no recourse for SOEs not meeting its conditions. It changed now, it provided SOEs like Eskom with a loan, and if they did not meet the conditions, the loan would be converted to equity. This would be detrimental to the entities and forced them to comply with the conditions before converting them to equity. Interest would be charged on the loan. It would not be a pure form of recapitalisation like with Eskom. Treasury thought along the lines of providing these support packages. Hopefully, there would not be too many entities so there was some recourse to the fiscus and for Parliament to hold these entities to account for meeting those conditions.

On exclusivity, there was a lot of talk about the Post Office or even SAA where Treasury could get government to use these services. This should be contained in some Act. However, this had to be consistent with procurement policy to ensure value for money. While government officials were not forced to use SAA, one had to remember the cost of doing this and what the cost-benefit analysis was. This needed to be brought into perspective when trying to get government to use those services. These questions would be better answered by the Department of Public Enterprises, which was the executive authority, and the Department of Communications and Digital Technologies for the post office.

Mr Lefentse Radikeledi (Director: Development Finance Institutions at Treasury) spoke on financial inclusion. The focus of Land Bank now was on blended finance to ensure the improvement of financial inclusion, especially on the transformation of the agriculture sector. The agreement was between the Department of Agriculture, Land Reform and Rural Development (DALRRD) and Land Bank. Blended finance targeted the transformation of agriculture and ensured it served the majority of black people. He had not received a breakdown of the numbers and demographics of who benefited from the previously given R600 million in loans already disbursed. He would ask Land Bank to provide the breakdown of that and ensure that the report reached Parliament.

A default had serious implications for SOEs. It made it difficult for lenders to have confidence in SOEs repaying their debts. It increased the borrowing cost of other SOEs. One of the entities that requested Treasury to resolve the Land Bank default was the Department of Public Service and Administration, which was vocal about the matter because it affected how it raised funds in the capital market and how it performed to deliver on its mandate. He was not sure to what extent this affected the private sector; he could only focus on the SOE side.

Impairments were due to the quality of the loan book. Land Bank was budgeting for these impairments. In some instances, it budgeted more and there were releases of impairments because it realised the impairments were not as bad as expected. In other instances, it budgeted less. The numbers in the presentation fell under net impairment charges. This meant Treasury deducted those who performed well from those who performed badly and it was left with a figure of R252 million. The impairments were budgeted for. Have they actually been budgeted at the level of the quality of the debt on the Land Bank loan book? Land Bank had to do an evaluation of its loan book when it defaulted to check if the quality was reflected. There were instances where it realised a loan was owed and its quality was less. Land Bank would recover less than expected or what was seen in the loan book. The situation was improving. Land Bank managed to repay a large portion of the debt. To what extent will Land Bank be able to raise every cent of the money owed? Only time would tell. It was able to recover a lot of money, in some instances it recovered what was expected and in others, less. He would ask it to provide Treasury with a full report of its evaluation, impairment losses, and how it planned to ensure it recovered every cent reflected in the loan book.

Mr Phatu Rasivhetshele (Director: Sector Oversight at Treasury) replied about Mango and SAA. On the sales and leasing of SAA aircraft, and the current state of Mango aircraft, these questions needed to be referred to the Department of Public Enterprises as the executive authority. Treasury would raise these questions during its monitoring meeting with DPE. Once details were obtained, it could provide feedback. On domestic and international route rights, these questions needed to be referred to the Department of Transport.

On the details of the Takatso Consortium, one of the conditions attached to the funding was on the provision of some of these details to Treasury. It was yet to receive the sale and purchase agreement for the strategic equity partnership. It could only do the review and provide feedback once the relevant documents were received from the Department of Public Enterprises.

The three subsidiaries remained in the SAA Group. This included South African Airways Technical (SAAT), Air Chefs, and Mango. Mango was still under business rescue. There was a question about where Treasury was with the business rescue. There were processes underway which were currently challenged in the courts. Treasury was unable to provide any commentary on that until the legal processes were concluded. On the SAA standalone financial performance, it made a loss of R725 million, but the consolidated group profit was R776 million. A significant amount of that loss was due to the financial performance of SAA.

Mr George Tembo, Treasury Public Finance Director, replied about SAPO. Branches were reduced from 1000 to around 500. Treasury did not pick a number for reduced branches and say it was an efficient number for SAPO to operate under. The reduction included post offices that were initially rented like in malls. Some of the properties were completely derelict buildings that did not take off and never operated. Some were vacant land bought to build post offices in certain areas. Unfortunately, there was no need for post offices in those specific locations. The business practitioners came in and a study was done on which post offices in certain areas needed to be reduced, and a certain numbers of offices were found. These were rationalised to the point where the post office would still be in those areas but some would be closed. Part of the restructuring was trying to bring down the operational costs of these offices. Some of them were not profitable. The sole existence of these post offices would be to serve one or two customers.

On officials using government services, the Post Office did have some business from a few government departments. It needed to compete for this business with other businesses. It would not go without being challenged by its competitors in the market.

Mr Thabang Mathebula from Treasury replied to the many questions on Eskom. Treasury had to state that the numbers were not yet audited. This was not to cast doubt. It was Treasury’s language in finance and accounting in case at the end of the year, the numbers differed and this was just to be transparent. If the Committee did not like that statement then it would be removed next time. It was not to say the numbers could not be trusted. It was the language used to cater for any changes at year-end when the auditors reviewed the numbers.

The Chairperson understood the need to stress that the numbers were not yet audited by external auditors. Now that it was clear, the statement could be removed the next time.

Mr Mathebula spoke about electrification and provision of free basic electricity services to poor and non-income households. This was seriously pursued by government. The electricity tariffs and government policy in the energy space were structured in a way for households to preserve electricity. The lower the consumption, the less rate the customer would pay. The cost to supply lower consumption customers was much higher than those who used a lot of electricity. The poor were protected through a transparent tariff structure running across subsidies approved by the National Energy Regulator of South Africa (NERSA). There were models for protecting the poor. This included incline block tariffs and free basic electricity. In rural areas where there was low income or consumption, the electricity was provided for free or those who consumed less should not pay. The structure and policy were such that the poor were protected. Heading into the last State of the Nation Address (SONA), electrification had expanded so much throughout the years. Almost 90% of South Africans had access to electricity. This displayed government’s progress over the years in recognising where it came from and its commitment to providing for the people.

On municipalities resolving their problems and those who had to pay, it was a very important point to raise. The magnitude of unpaid municipal debt was significant and hindered Eskom’s ability to remain liquid. Eskom was also providing additional services to the same municipalities. The annual debt growth rate was very discouraging, especially because some of the issues came from metropolitan municipalities. Some of the growing debt came from Gauteng, in metros like Tshwane, Ekurhuleni and Johannesburg. Treasury agreed that municipalities should implement prudent financial management systems, get the right people for positions with the right qualifications and manage their affairs very well. The user-pay principle was to ensure a nationwide culture for those who could pay for the services, should pay for them. These services were not free and had cost implications. Treasury discouraged those who could pay but did not. It was not good citizenry. It wanted to get to a point where everyone moved in the right direction on this.

Treasury's motive for Eskom was not to run it into the ground. When it introduced the Eskom debt relief, it acknowledged that the debt relief alone was not a silver bullet in resolving Eskom’s challenges. Eskom’s situation was exacerbated by unexpected tariff increases, increasing non-payment by municipalities, declining service volumes, and operational challenges. These should move in tandem. All these levers should be implemented, not only financial support. With the financial support, Treasury wanted it to hit the ground running so it encouraged different role players and executive authorities to move forward. The debt relief alleviated pressure on Eskom servicing its debt obligation. It had high levels of debt. Leading Eskom to its demise was not the motive. Treasury wanted to step in to ensure Eskom did not default on its commitment. This would have severe consequences for Eskom, the fiscus, and the entire country.

In the Eskom debt relief arrangement, Treasury drafted the conditions differently from before. It told Eskom it was giving it money and that Eskom had to concentrate on fixing its power plants. The storage capacity of the power plants was insufficient to cater for the needs and demands of the country. The problem was that the power plants did not operate as desired. Treasury gave Eskom money and told it to ensure it focused on the maintenance of these power plants. It also gave Eskom room to expand its transmission lines to connect the new generation projects that were coming like renewable energy. In the end, this would ensure a robust system able to connect projects wherever. Eskom’s capacity needed to perform at maximum and optimal levels so there could be the desired output. The conditions were drafted in a way that placed a burden on Eskom to improve its finances. Treasury did not want to see the demise of Eskom. It did not want to see Eskom in a place where it could not meet its obligations. Treasury took Eskom’s sustainability, liquidity, and going concern status seriously. The going concern status was being maintained by the support Eskom received from government. This debt relief was characterised by a set of stringent conditions. Non-compliance with these conditions would require Eskom to repay the loans, unlike before when it was just given money. Improvements could be seen even around the ratings because of the debt relief. S&P Global Ratings graded Eskom with a stable outlook. This was done after Eskom’s debt relief. He would support that Eskom was meeting its servicing obligations. Eskom defaulting was slowly disappearing because of Treasury’s support.

Treasury shared the same sentiments as the country that this situation had been ongoing for a while and it did not seem to improve. With the April 2023 appointment of the permanent head of generation, those involved began the process of refining some of their policies on the generation plant. They also pumped up their maintenance to deal with unplanned losses. Most of the challenges came from power plants that were breaking down. This would be reflected in the new corporate planning. Treasury hoped that in the future most of these would be clamped down. This would help moving towards addressing load shedding and reducing this drastically. It was not all gloom and doom. Treasury’s process may not be visible or satisfactory, but it believed there was light at the end of the tunnel given what it was implementing and other new generation capacity coming online. It wanted to fast-track this process.

Treasury's purpose in the introduction of interest was mainly to better reflect the cost of this arrangement with the interest charge being market-related. When developing the interest, it sat down with Eskom because it was aware of the delicate balance that needed to be struck. This was to ensure that the interest did not impact Eskom’s cash flow. Simultaneously, it reflected a fair market-related interest rate. It took a cautious and simple approach in developing the interest. Eskom worked out the modalities, mechanics and numbers. At the end, Treasury could get to a point where it correctly classified the loan given to Eskom, while not creating a burden on Eskom and the fiscus. In its next appearance before the Committee, it would provide feedback because the interest would only be effected once the Eskom Amendment Bill was processed and approved. In the next appearance, the Committee would see the numbers once implemented. The numbers were minimal and Treasury struck a balance between correctly reflecting the arrangement and not creating a burden on Eskom and the fiscus. Eskom was on board with this.

On the progress of the municipal debt relief packages, this was handled by Treasury's intergovernmental relations (IGR). He was not sure one of them was present, if not, those questions could be forwarded to them to submit a written response to the Committee.

Ms Ogalaletseng Gaarekwe, Treasury Chief Director: Provincial Budget Analysis and Intergovernmental Relations, replied to the question about what Treasury did with the reports from other spheres of government. She was responsible for overseeing the implementation of provincial budgets. Treasury published the local and provincial government reports on its website and in the Government Gazette at the end of each quarter. Treasury met with the national departments together with their local and provincial counterparts quarterly on conditional grant spending to assess what spending took place during that specific quarter and how the sector could improve. It published the third quarter spending for provinces at the end of January 2024 and it was starting to have those discussions with each sector at the national level. At this time of the year, they met to get a sense of how they intended to improve performance. Virtual platforms allowed these engagements to happen from anywhere. These virtual platforms gave them more opportunity to have regular engagements with any province they thought required more attention before it got to a Section 100 national intervention in a provincial sphere of government.

Mr Sifiso Mabaso (Economist at Treasury) replied to the local government questions not yet responded to by his colleagues. Several initiatives were being done by the Treasury local government team on oversight responsibility. The local government team was doing a budget analysis throughout the country, visiting municipalities and engaging with them about their performance. These visits included robust sessions with the municipalities. They were two-day sessions where the municipalities were engaged on their performance. The first session was held in the boardroom or municipal office, and the second session was where the physical visit happened to assess the infrastructure and performance. Projects were selected based on certain criteria. Treasury would select an underperforming project and select one that was overspending, then one that was on track and also within budget and project scope. These were the criteria used to select and visit municipalities. The same process was replicated by provincial treasuries so they visited other municipalities that they looked after that were delegated to them as oversight responsibilities.

In March, once the municipalities presented their budgets, a different process unfolded, where they were engaged on their budget. This was followed by a robust discussion with them to test their budget if items were funded or unfunded. Treasury then provided feedback to them to make the relevant corrections to implement a funded budget. Parliament had issued a directive that no municipalities should be allowed to adopt and implement an unfunded budget. This was also enforced by Treasury for municipalities to adhere to parliamentary directives. Those were the engagements it had with the municipalities. There was quite a lot happening in the country as could be read in the newspapers on municipal failures. However, several initiatives and reforms were being run to try and reverse the situation and make an improvement. Some municipalities did well compared to others. The numbers still showed that the challenges faced by municipalities were diverse and deep. This area was being handled. The Municipal Financial Recovery Service was up and running within Treasury. That service only looked after municipalities that were failing to deliver as per their mandate and were not handling things well. Certain criteria were used to identify those municipalities that should fall under the recovery service. Those were the measures that existed in the system that were being pushed aggressively.

Ms Julia De Bruyn (Chief Director: Public Finance at Treasury) referred to the Second Quarter report for public entities. There were two reasons for the underspending of SOEs, which were vacant positions and delayed payments that had to be made to the department for salaries. The Compensation Fund worked on a split service basis with the Department of Employment and Labour. If the second part was taken out, then the projected underspending was about R18 million, which was 3%. Delays in filling all vacant posts were departments and entities had to run a process, which took longer than expected. A 3% deviation was not something to be overly concerned about.

Dr Rendani Randela (Budget and Policy Analyst at Treasury) dealt with the underspending by the Department of Military Veterans. DMV provided various socio-economic benefits such as health and education. However, DMV was not the direct implementing agent of these benefits. Health was provided by Military Health Services, education by the National Student Financial Aid Scheme (NSFAS), and housing by Department of Human Settlements. DMV sometimes faced delays due to the implementing agent such as delays in invoices, non-delivery of houses by Human Settlements and other reasons. Part of the reason particular to DMV was leadership and management instability. He did not remember having a Director-General who lasted more than a year or two. Currently, there was a newly appointed acting Director-General. So these were some of the challenges faced in that department. The Chairperson’s proposal to engage directly with the department was welcomed. Some of the reasons leading to underspending were within the control of the department and some were not. In the infrastructure space, these days construction mafias were causing huge disruptions to the delivery of infrastructure. For this reason, a task team had been established within the police. The Economic Infrastructure Task Team dealt directly with those problems impacting the economy. Underspending can also be a result of departments coming up with efficient ways of doing business.

Mr Edgar Sishi (Treasury Deputy Director-General and Head of the Budget Office) noted that Budget 2024 would be tabled on 21 February. There would be reflections on what was seen in terms of the updated estimates of the outcomes for 2023/24. It sought to deal with the wage bill issues in two ways. One was to assist departments in implementing measures to improve efficiency both within their compensation budgets and other areas of the budget so they could afford the staff they currently had. In this regard, it prioritised different departments. It proposed guidelines to both national and provincial to reduce the hiring of certain staff to favour frontline service delivery staff, particularly in education and health. Secondly, at the time of the Medium-Term Budget Policy Statement (MTBPS), a proposal was introduced for some additional funding over the Medium-Term Expenditure Framework (MTEF) for the staffing requirements of specific areas which were personnel intensive such as health, education and the police. Going forward, there was a wage agreement that was still in effect for 2024/25. So the next time a new set of discussions on wages ensued, would be next year for 2025/26. For the current year, it was still the same wage agreement that was effected. At the moment in terms of the current year, Treasury was working with the relevant departments, particularly the police, on the pressure points. However, a majority of departments appeared to be handling the pressure relatively well. It thought these departments would come up with the budget for the current financial year and over the MTEF.

Dr Modise added that the best way to explain it was that when the department dealt with the projections for what it was going to spend, it had to consider the spending routine like salaries, municipal fees, and rent, which were easy to estimate how much they would cost each month. However, there were also expenditures like transfers and subsidies. Some departments had to transfer earlier such as the Department of Higher Education and Training transfer to NSFAS. There were also quarterly transfers. If entities spent their money well and better than anticipated, the department would transfer the funds earlier. However if one found that an entity was not spending, the transfer would be delayed. It depended on the type of spending, the department, and how it aligned to its payment schedule. Treasury used this as a reference when it received the financials from the departments which knew about their finances better and how these monies would be transferred. It checked these numbers so it could give comfort to the Committee. It allowed departments to change their schedule as and when circumstances changed so that when it presented to the Committee, it presented themes and updated drawing schedules. It was not necessarily scientific, but departments were allowed to schedule their payments so they followed within what they needed to do. The column for the previous years could be added to the presentation. The previous five years could be added. Due to budget reductions, it was key to look at if departments were going to be able to fit within these adjusted budgets. That was why previous years were not included, but this information would be submitted to the Committee.

Different types of underspending were looked at. In a quarter, most of the underspending could be attributed to a municipality’s budget for an unfunded budget between it submitting the unfunded budget, working with it to change its budget, and then getting it to a point where it presented a funded budget. Between that period, those grants would be held and paid later. The municipalities struggled to adhere to the division of revenue conditions. Those funds would be withheld and used later on. Usually, there would be significant underspending in the quarterly budget during the fiscal year, but later on, those would be cleared for those who declared. The financial year for local government started on 1 July so that quarter also created some level of underspending. This was because municipalities had an extra quarter to try and adhere to these conditions, and then those funds would be transferred. Underspending was an issue, especially underspending in capital budgets – that was where a lot of work needed to be done. The planning was done by Treasury and the procurement processes were projected almost like the procurement processes earlier on. These were then cleared out so that when the budget came, there were not a lot of issues of planning or procurement delays, to avoid underspending.

For the capital projects, departments had to be pushed for proper planning, procurement and supply chain management processes. Once the budget was approved, it should be done for departments that were ready for implementation and this reduced unnecessary underspending. Treasury tended to adjust these budgets and move funds from departments that were likely to underspend and those with pressures. Allowing that movement of funds would also address some of the underspending. The budget was still in its final stages and was being worked on. A second adjustment would be issued for the budget where repurposing funds to deal with pressure areas would be looked at. This would only be confirmed and tabled on 21 February by the Minister of Finance. The key was changing the perspective while assisting the department and trying to help municipalities and other government spheres. Treasury also tried to bring some flexibility in the budget process. This was where it moved funds between those that were likely to underspend. Those that did not properly plan their budget would have the budget reduced because of the underspending. The question was more about if they were ready to implement this project, then the full funding would be provided. It was more to bring some level of flexibility in the budget process to deal with underspending.

Closing remarks
The Chairperson thanked everyone and said the meeting was a worthwhile interaction. Most of the concerns like annual performance planning when the budget came, especially when it came to underspending, more than 50% of the problems being experienced were due to a lack of project management skills. These skills were lacking. It would be good for this government to invest in that and ensure trained project managers in the departments were there to help with these things. When the budget came, plans needed to be made. This was something the Committee had discussed from day one of its term. It would be a massive investment for government to recruit and massively train project managers in the departments so that when the budget came, plans were made. It would help a lot where service delivery was concerned. If these people were appointed or already in the system, they needed to be trained. He thanked Treasury for engaging with the Committee and wished them luck for the tabling the budget next week.

The Chairperson said the Committee Annual Report was always tabled at the end of the year. The draft version had been sent to the members. This required their input. They still had some time to do this in the week. He wanted to present the report for adoption in the next Committee meeting.

A Committee staff member said the report was not yet sent to members pending internal processes. However, as soon as that was done, it would be sent to members for input.

The Chairperson thanked him and asked if it could be sent so he could start looking at it.

Committee Programme
The Chairperson read out the draft programme. He said he did not see the Second Adjustments Appropriation Bill in it.

Mr Darrin Arends, Committee Secretary, replied that this was the old programme. He did make amendments and incorporated the additional bill. He could flight the correct one, however, there were no substantive changes to the programme.

The Chairperson wanted to look at the latest draft programme.

Mr Arends said this week and next remained the same. The only changes were on 28 February 2024 when Treasury briefed the Committee on the Division of Revenue Bill. The 2023/24 Second Adjustments Appropriation Bill was added. The same for 5 March 2024 with the FFC briefing on the Division of Revenue Bill where the Second Adjustments Appropriation Bill was added. The same went for the Parliamentary Budget Office (PBO) meeting on 6 March 2024. The public hearings would now be held on 13 March 2024, which included the 2023/24 Second Adjustments Appropriation Bill . On 19 March 2024, the Committee would adopt the report on the Second Adjustments Appropriation Bill. There were no major changes to the programme except the Second Adjustments Appropriation Bill was added.

The Committee adopted this programme.

It also adopted the minutes of 29 November; 1 and 5 December 2023.

Meeting adjourned.