Western Cape Adjustments Appropriation Bill: Provincial Treasury briefing

Meeting report

Provincial Treasury Briefing
Mr David Maynier, Western Cape MEC for Finance and Economic Opportunities, said an adjustments budget titled A Budget to Beat Covid-19, was tabled in the Provincial Parliament earlier in the day. It is important to emphasise this is an adjustments budget. It is part of a three-phase budget process to reprioritise expenditure of time.

Phase one comprises of the current adjustments budget.

Phase two comprises of a shift to identify savings from the Medium Term Budget Policy Statement. This Statement is a reprioritisation, ahead of the next adjustments budget, which comes later in the year. The realisation of even deeper savings is the focus, going into the lead-up to the main 2021 budget.

R3.05 billion in funding is mobilised for the immediate response to Covid-19. R1.8 billion is allocated to the Department of Health. R400 million is allocated to the Department of Transport and Public Works. R310 million is allocated to the Department of Education. R84 million is allocated to other departments for humanitarian reasons.

The budget is funded by committing R1.4 billion from provincial reserves, just over R1 billion in savings realised from baseline reductions, and R605.5 million in national grants. There is also R27.2 million in rollover and retentions.

This resulted in an upward adjustment of R1.1 billion. This is how the Western Cape was able to support the immediate economic, health, and humanitarian response.

Mr David Savage, Head of Department: Western Cape Provincial Treasury, said the national disaster caused massive disruptions. The current budget process is carried out entirely online. This is a first, and is achieved despite constraints and staff overload.

It is apparent the disruptions will have lasting implications on reporting timelines. Revised reporting timelines were communicated by national government. For example, the commencement of the 2019/20 audit was moved to June 2020. The submission of annual financial statements to the Auditor-General is delayed until the end of July 2020. Financial reporting on the 2019/20 pre-audit outcomes is moved to early August 2020. The tabling of annual financial statements and reports moved to November 2020.
An early and significant adjustment is introduced on the budget process side. This was tabled in the legislature earlier in the day.

He said the team from Provincial Treasury will present a revised view on the economic and fiscal outlook, the budget process and adjustments, and the adjustments process, to the Committee. At the end of the presentation, he will summarise some of the pressure going forward.

Presentation on the Revised Economic and Fiscal Outlook
Mr Anthony Phillips, Acting Deputy Director General: Fiscal and Economic Services, Western cape Provincial Treasury, said the International Monetary Fund (IMF) forecasts global growth by 4.9%. The South African economy contracted for three consecutive quarters. This means South Africa is in a deep recession.

The South African economy is expected to grow by -8%. This is according to the World Bank, the IMF in June 2020 said this. However, the South African Reserve Bank figures says it is -7.3%, which is marginally better. This is the largest economic decline in almost 90 years.

South Africa’s economy was struggling prior to Covid 19. The Western Cape is looking at an elongated u-shaped recovery if there are no interventions to revive the economy. It is expected, 167 000 jobs will be lost. The tourism sector is affected the most. The informal sector is expected to suffer a loss of 27 000 jobs. The wine industry is looking at a lower revenue of about R1 billion.

The Business Confidence Index went down to 8% in quarter two, even though in quarter one the Department looked at having an index of 22 points in 2020. There is a projected budget deficit of R761 billion, or 15.7% of GDP.

Regarding the reserves, he said funding is set aside to position the province for a second phase of response to the disaster.

Presentation on the Budget Process and Adjustments
Ms Taryn van der Rheede, Acting Director: Provincial Government Budget Office, Western Cape Department of Economic Development and Tourism (DEDAT), explained the immediate, short, and mid-term phases of the budget process. These are adopted to pursue an early response to risk.

The first phase is the immediate term. In this phase, there will be a reprioritisation of spending towards Covid-19. This results in immediate savings and cost-containment. It will input into the first adjustments budget which was tabled earlier today.

The second phase is the short term. This will be a policy-led reprioritisation. It will also be based on an updated Provincial Strategic Plan. The outcome of this phase will input into the second adjusted budget which will be tabled in November 2020.

The third phase will be the midterm. This phase will focus on streamlining governance arrangements. It will be led by the Department of the Premier. The outcome of this phase will input into the 2021 Budget.
It is important to focus on the immediate and short-term phases to position the Western Cape government beyond the 2020 Budget.

Some of the key risks identified are: a prolonged peak in Covid-19 infections, deep, lasting economic and fiscal constraints, national policy uncertainty, lost momentum in service delivery, and a reduced ability to respond to persistent pressure from non-Covid risks such as climate change.

Some of the opportunities identified include the promotion of social cohesion and holistic well-being, in a whole of society approach. It also includes integrated public health strategies, such as linking violence prevention measures with alcohol-based harms reductions strategies, to respond to Gender Based Violence (GBV). It also refers to re-imagining Provincial governance by removing transactional inefficiencies, unlocking innovation, and building a capable Local Government.

Presentation on the Adjustments Process
Ms Analiese Pick, Acting Chief Director: Provincial Government Public Finance, Provincial Treasury, said the current adjusted budget is limited to the Department’s provincial response to Covid-19 revenue and expenditure pressures.

She said the key principles for determining additional funding needs are: maximising delivery on key provincial disaster responses, credible spending programmes which include a direct provincial mandate related to health systems, education, communications and community safety responses.

All votes must be adjusted to reflect the following: savings and cost-containment, and other reductions from baseline allocations. This is in instances where the fiscal room created by these measures is used to resource the response to Covid-19. It also applies to national conditional grant adjustments, and any new sectoral conditional grant frameworks. Votes will not be adjusted to earmarked funds, and rollover and revenue retention.

Savings on 2020 compensation of employees budgets will be considered as an immediate saving and revert to the fiscus subject to: the Departments of Health, Social Development, and Local Government utilising its 2019/20 compensation of employees underspending for disaster response, future retention subject to Provincial Treasury non-objection, and public entities being brought more firmly into the compensation of employees framework.

There will be a reduction in contingencies, with maximum provision for uncertainty in the fiscal and policy environment and potential disaster responses.

The second adjusted budget takes into account the following: assessing the full impact of the disaster on revenue collection by Departments and public entities, and the effects on its sustainability, all earmarked allocations in line with the policy-led review process, all municipal transfers, including agency agreements, protecting and enhancing a critical infrastructure pipeline, and compensation of employees cost containment.

Impact of the First Adjustment Budget
The first 2020 adjusted budget does not abandon the provincial priorities as outlined in the main 2020 Budget. Given the extent of fiscal uncertainty, a multi-phased approach to the 2020 budget process was adopted. The adjusted budget is an immediate technical adjustment to the 2020 budget in response to Covid-19.
The first priority is to resource the Covid-19 frontline response. The first adjusted budget impacts the 2020/21 financial year. The second adjusted budget responds to budget requirements of the 2020 Medium Term Expenditure Framework, including the required policy shifts.

Revised allocations account for 4% (R3.056 billion), including additional adjustment of 1.5% (R1.113 billion) to the main 2020 budget. There will be a net increase in compensation of employees, mainly in the Department of Health. There will be a decrease in all other planned compensation of employees budget of the departments. Conditional grant reductions result in reduced transfers and subsidies as well as capital spending delays.

Budget Considerations Going Forward
Mr Savage said the effect of revenue under-collection is yet to be determined. Revenue forecasts are currently based on lockdown trends. There will be a continued focus on managing an evolving pandemic, with the potential of a second wave of infection. There is continued uncertainty in the education sector, with full costing still be determined and responded to as part of the second adjusted budget.

The quarantine and isolation facilities are not fully financed, and this is impacted by the take up rate when it comes to community members utilising it.

The Western Cape Recovery Plan is to be taken into account, with the aim of adapting to the new normal. There will be a focus on enabling infrastructure development in the Western Cape, re-engineering people-focused governance, and strengthening data technology-driven platforms.

Fiscal discipline must be entrenched through compensation of employees’ containment. There will be acceleration of supply chain reform.

(See attached powerpoint for full presentation)

Discussion
Mr R Mackenzie (DA), said the Minister’s speech made mention of a disclosure report. He wanted to know the technical details of the report, and asked if it will be sent to the Committes, or if there will be a website.

He asked how the Western Cape government will respond to a second wave of infections and if Treasury is already taking from the provincial reserves. He noticed a lot of money spent on goods and services, and wanted to know how this spending will be balanced with the need to spend on infrastructure, going forward.

Mr Savage said the disclosure report will be launched on Tuesday, 28 July 2020.  This will be a web-focused, public-facing report. It adds another layer of transparency.

Regarding the reserves, he said funding is set aside to position the province for a second phase of response to the disaster. The province elected not to implement uncalibrated cuts, but rather negotiated with departments. The reduction in infrastructure spending is really a result of lockdown regulations. There will be a focus on this in the coming phases. The provincial government will have to look for alternative sources of funding.

Ms W Philander (DA), wanted to know about the amount allocated to medical staff. She asked where this is going and requested a breakdown. She wanted to know about the criteria used by Provincial Treasury when it comes to deciding how budget cuts are implemented. She said she wants to know this because there is no framework or guideline on reprioritisation in provinces.  She wanted clarity on the quarantine and isolation facilities which are not fully financed because of the take-up rate. She asked if these will be ready if the need arises.
 
Mr Savage said the Department of Health can give a detailed breakdown, but the amount is allocated for the full medical staff component needed to activate additional field hospitals. The Provincial Treasury found cost-containment measures where the provincial government can forego expenditure items which are not absolute priorities at the moment, and do not impact overall provincial service delivery mandates.

Provincial Treasury works with departments during the entire process. The main issue with the quarantine and isolation facilities is the take-up rate among community members. The Department is ready to escalate take-up rates.

Ms N Makamba-Botya (EFF) asked for the rationale behind cutting the budget for human settlements.

Mr Savage said the Human Settlements Department is predominantly funded through a conditional grant from national government which is severely cut, with R220 million taken off this grant.

Mr L Mvimbi (ANC) asked if de-densification is allocated for. He wanted to know if the personal protective equipment (PPE) allocated is imported or if it is manufactured locally. He wanted to know at which stage the Solidarity Fund will be utilised.

Mr Savage said the Department of Human Settlements can give a detailed response when it comes to de-densification. De-densification as a public health response is as effective as the other measures considered.

De-densification cannot happen overnight. It is not as effective as some other measures.
When it comes to PPE, there are regulations which require 100% local content for cloth face masks. Requirements such as price bench marks also exist. Even though the Department will not be supporting suppliers through procurement, there is an invitation to suppliers to register on the Supply Chain Database so suppliers from the Western Cape benefit. It is not necessarily purchasing by government, but getting SMME’s to produce masks.

The Solidarity Fund provided a little over R120 million for medical equipment.

Mr Mackenzie asked if the R14 million allocated to the Department of Economic Development and Tourism to aid small businesses is enough. He wanted to know what the plan is, going forward, to assist small businesses.

MEC Maynier said the R14 million will go some way to assisting small businesses including in the hospitality sector. The solution lies in the Department working hard to persuade government, regulations need to be amended so ultimately, the sector can be opened up in way which is safe.

The Chairperson thanked the team from Provincial Treasury and excused them.

Committee Affairs
The Chairperson got feedback from Provincial Treasury regarding questions asked. Provincial Treasury asked for an additional week to furnish answers. Members agreed to provide the extension.

The Committee is still awaiting a response from the Rules Committee regarding the Money Bill Procedures process.

Consideration and Adoption of Minutes
The Committee considered the minutes for the meeting held on 20 July 2020.

Mr Mvimbi moved for the adoption of the minutes.

Ms Philander seconded this.

The minutes were adopted.

Resolutions
Mr Mackenzie asked the Committee to receive details of the launch of the Supply Chain Disclosures Report, as well as a link to the website.

The Chairperson thanked everyone. The meeting was adjourned.