ATC200717: Report of the Portfolio Committee on Public Enterprises on the Adjustment Allocations Of Budget Vote 10: Public Enterprises, Dated 15 July 2020

Public Enterprises

REPORT OF THE PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES ON THE ADJUSTMENT ALLOCATIONS OF BUDGET VOTE 10: PUBLIC ENTERPRISES, DATED 15 JULY 2020

 

The Portfolio Committee of Public Enterprises, having received a briefing from the Department of Public Enterprises on 8 July 2020 on the adjustments to Budget Vote 10: Public Enterprises, reports as follows:

                                                                                                           

1. INTRODUCTION

 

Section 30(1) of the Public Finance Management Act (PFMA) (1999) empowers the Minister of Finance to table an adjustments budget in the National Assembly when necessary.  The fiscal and economic impact of the national state of disaster declared as a result of the COVID-19 pandemic has made it necessary for the Minister to table a special adjustments budget to revise government’s spending priorities for 2020/21.

 

Section 30(2) of the PFMA specifies the type of spending that the adjustments budget may provide for. This special adjustments appropriation makes provision for:

•           Adjustments due to significant and unforeseeable economic and financial events: these adjustments are required due to a significant reduction in government revenues and changes in spending priorities in response to the COVID-19 pandemic.

•           Virements and shifts within the vote: a virement is the use of unspent funds from amounts appropriated under one main division (programme) to defray excess expenditure under another main division (programme) within the same vote. Section 43 of the PFMA, read together with Treasury regulation 6.3 and section 5 of the Appropriation Act (2020), sets out the parameters within which virements may take place. The virements included in this adjustments budget are mainly those intended to respond to COVID-19.

 

All other adjustments not included in this adjustment budget will be implemented in the October 2020 adjustment budget, with the details outlined in the Adjusted Estimates of National Expenditure.

 

This special adjustment budget has a dual purpose. It reports on the COVID-19 fiscal measures, and the adjustments to the division of revenue and departmental allocations. It also sets out government’s commitment to strengthen the public finances, and to position the economy for faster and inclusive growth. Public spending priorities as proposed in the 2020 Budget have been reordered in response to the coronavirus pandemic. Government has prioritised saving lives, and took the difficult step of severely restricting economic activity at a time when GDP growth was already weak. The scale of the crisis, and the continued uncertainty of epidemiological and economic outcomes, have required rapid decisions in response to fastchanging conditions. South Africa, like other middle- and low-income countries without large savings, has to balance essential publichealth interventions – such as prolonged lockdowns – with severe economic effects – such as job losses, lower tax revenue and higher poverty.

 

In March 2020, government initiated a wide-ranging relief package to manage the immediate impact of the virus. This involves scaling up capacity in the public health system and mitigating the effects of restricted economic activity for households and businesses. Concurrently, the Reserve Bank has reduced interest rates and provided support to the bond market, while indicating it is prepared to take additional action as required. The COVID-19 adjustment fast-tracks normal budget processes to provide resources to frontline services, provincial and local government, and firms and households. Yet the evolution of the pandemic and its effects remain highly uncertain.

 

Even as South Africa responds to the current health and economic crisis, a fiscal reckoning looms. The public finances are dangerously overstretched. Without urgent action in the 2021 budget process, a debt crisis will follow. Failure to contain ballooning debt and debt-service costs, and narrow the budget deficit, would damage the country’s long-term economic prospects. Over the medium term, compensation and debt-service costs would be the largest expenditure items, and outstrip the investments government makes in human capital, social and economic infrastructure, and service delivery. This document is a bridge to the October 2020 Medium Term Budget Policy Statement (MTBPS), which will set out Cabinet’s proposals to stabilise public debt and accelerate economic growth – and by which time a fuller picture of the effects of the pandemic is expected to emerge.

 

2. THE IMPLICATIONS OF THE COVID-19 PANDEMIC ON THE MANDATE OF THE DEPARTMENT

 

The Department of Public Enterprises is the shareholder representative for government at the State-Owned Companies in its portfolio. The Department’s mandate is to fulfil oversight responsibilities at these State-Owned Companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the Medium-Term Strategic Framework (MTSF), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP).

 

State-Owned Companies are crucial to driving the State’s strategic objectives of creating jobs, and enhancing equity and transformation. The Department does not directly execute programmes but seeks to use State ownership in the economy to support the achievement of these objectives. The post COVID-19 strategies, plans and priorities will be included after the tabling of the new budget which is going to be presented by the Minister of Finance. These priorities are expected to be included in the Annual Performance Plan of 2021/22.

 

COVID‐19 has turned the global economy upside down. In the February Budget, government expected that the global economy would expand by 3.3 per cent in 2020. Government now expects a global contraction of 5.2 per cent this year.  This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1 per cent in the first three months of this year.

The South African economy is now expected to contract by 7.2 per cent in 2020. This is the largest contraction in nearly 90 years. Inflation will likely register 3 per cent in 2020. Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports the country has been hit hard by both the collapse in global demand and the restrictions to economic activity.

Government’s COVID‐19 economic support package directs R500 billion straight at the problem. This is one of the largest economic response packages in the developing world. The South African Reserve Bank has reduced interest rates and made it easier for banks to lend money. The SARB has also supported liquidity in the domestic bond market. The Bank has stated that it stands ready to take additional action, should the need arise. More than 2 million customers have received around R30 billion in relief from their commercial banks. Insurers and medical aid schemes have provided premium holidays. Landlords have provided rental relief. All of this occurred within 100 days. This is indeed a remarkable achievement.

 

The Department provides oversight of the following SOCs:Alexkor, Denel, Eskom, South African Airways, South African Express, SAFCOLand Transnet. These SOCs were impacted by the novel virus Corona Virus also known as COVID-19. The detailed analysis in terms of impact on the SOCs is detailed below:

 

 

3. ANALYSIS OF THE REVISED BUDGET ON EACH PROGRAMME

 

Table B.10.1 Revised programme allocations (National Treasury)
	2020/21	Downward revisions			Reallocations
R thousand	Main budget	Suspension	Virements	Virements	Allocated	Virements	Virements	2020/21	2020/21
		of funds	from	from	to	to	to	Total net	Total
		(COVID-19	(COVID-19	(other)	(COVID-19	(COVID-19	(other)	change	allocation
		purposes)	purposes)		purposes)	purposes)		proposed	proposed
Programmes
Administration	164 315	-28 871	–	–	–	–	–	-28 871	135 444
State-owned Companies Governance Assurance and Performance	54 647	-11 000	–	–	–	–	–	-11 000	43 647
Business Enhancement, Transformation and Industrialisation	37 630 393	-22 000	–	–	–	–	–	-22 000	37 608 393
Total	37 849 355	-61 871	–	–	–	–	–	-61 871	37 787 484
Economic classification
Current payments	305 858	-61 871	–	–	–	–	–	-61 871	243 987
Compensation of employees	197 122	-30 000	–	–	–	–	–	-30 000	167 122
Goods and services	108 736	-31 871	–	–	–	–	–	-31 871	76 865
Transfers and subsidies	17	–	–	–	–	–	–	–	17
Provinces and municipalities	17	–	–	–	–	–	–	–	17
Payments for capital assets	3 480	–	–	–	–	–	–	–	3 480
Machinery and equipment	3 480	–	–	–	–	–	–	–	3 480
Payments for financial assets	37 540 000	–	–	–	–	–	–	–	37 540 000
Total	37 849 355	-61 871	–	–	–	–	–	-61 871	37 787 484
Table B.10.2 Explanations of budget adjustments
R thousand	Downward	Reallocations	2020/21
	revisions		Total net
			change
Goods and services: Suspension of allocations to general operational spending items such as travel and subsistence, communications, inventory and consumables, and venues and training facilities	-31 871	–	-31 871
Compensation of employees: Filling of vacancies suspended for the financial year	-30 000	–	-30 000
Total	-61 871	–	-61 871

 

 

 

4. OBSERVATIONS AND FINDINGS

 

The financial performance of state-owned companies, which has placed considerable pressure on the public finances for several years, is likely to deteriorate in 2020/21. The pandemic and associated economic restrictions are expected to reduce revenues for entities. Global market volatility may further limit the ability of state-owned companies to borrow in capital markets and service their debt obligations. The COVID-19 pandemic underlines the urgent need for broad-based reforms at state-owned companies so that they can become efficient and financially sustainable. These reforms include rationalisation (reducing the number of and merging some state-owned companies, and incorporating certain functions into government), equity partnerships, and stronger policy certainty and implementation. Planned transfers from the fiscus will be strictly conditional on improving their balance sheets.

 

All the programmes within the Department have been affected by the COVID-19 pandemic. The main budget in all programmes has been affected by the suspension of funds for COVID-19. Most of the interventions are aimed at social programmes such as health, economic such as unemployment and state interventions. COVID-19 interventions outlined in government gazetted regulations will affect the environment in which the Department executes its mandate. Compensation of employees and goods and services has also been affected by the suspension of funds for COVID-19 purposes.

 

Table B.10.1above describes the changes in allocations from the year 2020/21. From this, the following can be concluded:

• Programme 1: Administration, has a nominal decrease by R28 871 million resulting from the suspension of funds for the purposes of COVID-19.
• Programme 2: State-Owned Companies Governance Assurance and Performance, receives the smallest allocation in 2020/21. The programme decreased by R11 million resulting from the suspension of funds for the purposes of COVID-19.
• Programme 3: Business Enhancement, Transformation and Industrialisation, accounts for the largest allocation of the budget.  Programme 3’s allocations has decreased by R22 million due to the suspensions of funds for the purposes of COVID-19 in the 2020/21 budget, of the R37 billion allocation during the adjusted budget process in October 2020 to this programme.

 

Overall, the Department’s budget decreases by R61 871 million in 2020/21.

 

Compensation of employees amounts to R197.1 million for 2020/21, and the suspension of funds in the programme results in R30 million for the purposes of COVID-19. Goods and services amount to R108.7 million, and the suspension of funds resulted in decrease of R31 871 million.

 

5. IMPACT ON THE RECOMMENDATIONS MADE DURING THE BUDGET VOTES AND SERVICE DELIVERY

 

The revised budget is as a result of the responses to the coronavirus. This will have a large impact on the budget vote as the revised budget seeks to find mitigating responses to the COVID-19 pandemic. It is imperative that the Department provides oversight to SOCs, however, with the revised budget the service delivery aspects of the Department are going to be constrained. The challenges faced by the entities will require proper staffing within the Department but the challenge of a reduction of the budget on the compensation of employees will mean that the Department will have to find other mechanisms to attract skills.

 

Most of the reductionsin the supplementary budget result from the programme on administration. The purpose of this programme is to provide strategic leadership, management, and support services to the Department.  The Department’s core functions require significant administrative support, and a substantial portion of the budget is in the administration programme, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications. More work to be done by the Department will require responses from this programme.

 

The second programme is State-Owned Companies Governance Assurance and Performance. The purpose of this programme is to provide state-owned companies’ governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder to ensure alignment with government priorities. The supplementary budget for this programme has been reduced by R11 000 million meaning some of the programmes will have to be reprioritised to respond to COVID-19. This will mean that the budget set aside in the Strategic Plan and Annual Performance Plan will have to be reset to respond to the new revised budget.

 

The third programme is Business Enhancement Transformation and Industrialisation. The purpose of the programme is to provide sector oversight to ensure that state-owned companies contribute to the advancement of industrialisation, transformation, intergovernmental relations and international collaboration services.  The programme will also support the shareholder in strategically positioning and enhancing the operations of state-owned companies. The main allocation was R37 billion but had since been revised to R22 000 million revision in the supplementary budget. It means transfers to SOCs are done through this programme and most of the initiatives in the SOCs will have to be prioritised to respond to COVID-19. Efforts in this regard will include safety, job creation, skills development, BBB-EE and restarting of the economy.

 

6. RECOMMENDATIONS

 

The Committee recommended that the Minister of Public Enterprises should, within the 2020/21 financial year, ensure that the Department of Public Enterprises:

6.1        advise the Committee on the establishment and operationalization of the Presidential SOE Coordinating Council, including the work the council will be doing in the implementation of the recommendations of the 2014 report by the Presidential Review Commission on SOEs. Some of the recommendations were that Government should develop theshareholder management bill, the shareholder model, SOE remuneration, etc, to empower Government in its oversight of SOCs.

6.2        consider introducing a comprehensive plan to expand the corporate social investment of SOCs to rural parts of the country.

6.3        develop a communication strategy for all state-owned companies in order to promote the companies and educate and inform the public and rural communities about the work of SOCs and opportunities that they offer.

6.4        consider working with the Department of Trade, Industry and Competition and the National Treasury in addressing localization strategies.  These should include resetting of trade and investment cooperation to stimulate and support small businesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments in industrial value chains.

6.5        prioritise the development of programmes with SOCs aimed at equipping young people with appropriate skills for the economy to address youth unemployment.

6.6        provide the Committee with shareholder compacts on an annual basis and quarterly reports on how the SOCs are performing in achieving targets.

6.7        ensure that SOCs accelerate investment and procurement programmes, promote industrialization and support small and medium enterprises that are owned by women, youth and people with disabilities. 

6.8        ensure that SOCs find a balance between advancing their commercial and public mandates. They should not over-concentrate on the commercial mandate while neglecting the developmental mandate of transforming the economy and improving the quality of lives of South Africans. 

6.9        ensure competent executive and board appointments at SOCs through conducting security clearances, integrity checks, and lifestyle audits before the appointments are made.The Committee should be furnished with such reports.

6.10      collaborate with the Department of Rural Development and Land Reform in addressing long-outstanding issues relating to Safcol land claims and that regular progress reports (quarterly) to the Committee.

6.11      furnish the Committee with the business rescue plan and the report on the retrenchments, which also indicates the management positions affected by the voluntary severance packages.

6.12      work with the Department of Transport to ensure that a whole of state aviation strategy/policy that can enable the sustainability of national carrier(s) is developed.

6.13      work with the Departments of Cooperative Governance, and of Rural Development and Land Reform to ensure that the Richtersveld Mining Company and Communal Property Association are properly constituted to facilitate the successful implementation of the deed of settlement, and delivery of socio-economic development programmes to the beneficiaries.The Department of Public Enterprises should also furnish the Committee with a geological report on the future of mining for Alexkor.            

6.14      address the financial and governance issues facing the state-owned companies within the Department’s portfolio and provide feedback to the Committee quarterly.

6.15      Work with the Department of Cooperative Governance and Traditional Affairs and other relevant parties to resolve the municipal debt owed to Eskom and provide feedback to the Committee on this process quarterly.

6.16      ensure that all vacant positions are permanently filled within the Department of Public Enterprises by the end of the financial year and reports thereon to the Committee in the next quarter.

6.17      submit post COVID-19 strategies, plans and actions and include them in its budget, plans and SOC shareholder compacts.

6.18     report every quarter to the Committee on progress being made.

 

7. CONCLUSION

 

Having considered the supplementary budget review of the Department of Public Enterprises, the Committee recommends that the House passes the budget.

[The Democratic Alliance and the Economic Freedom Fighters objected to the Report.]

 

Report to be considered.