2022 MTBPS: National Treasury briefing, with Minister

Meeting report

The Chairperson greeted the Members of the Standing Committee on Finance, Standing Committee on Appropriations, Select Committee on Finance and Select Committee on Appropriations. He greeted the Minister of Finance and the delegation from Treasury. He welcomed the Members from the Provincial Parliaments to the meeting. He welcomed all those in attendance to the meeting. Today the Committee was interacting with the Minister of Finance and his team about the MTBPS that he presented the previous day. This would give the Committee an opportunity to interact, ask questions and for the Members to express their views on a number of things he pronounced on yesterday.

The Chairperson asked the Minister and his team to take the Committee through the briefing. After that, he would allow questions and deliberations from the Members.

National Treasury Briefing

Mr Enoch Godongwana, Minister of Finance, made introductory remarks. One of the things Treasury was trying to do in a difficult environment was to manage the trade-offs. Over the past few years, more money was given to SOEs and grants. That undermined the baseline Departments and the frontline services. In this MTBPS, starting from February, Treasury had been trying to grapple with that question. Treasury had been able to give more money to provinces for teachers. 10 000 police had also been deployed in this financial year. It intended employing 15 000 over the next few years. He would come back to those trade-offs. Treasury was trying to shift away from that arrangement, but challenges still remained. There were challenges from SOEs which had strategic importance in the economy and which made it difficult for Treasury to walk away from them in the current environment. Treasury was shifting the resources and beginning to put more money on infrastructure, education and police to deal with these challenges. Broadly that was where Treasury was heading. Were it not for the extension of the grant, Treasury would have put more resources into those areas. The extension of the grant was also imposing another trade-off. Some of those trade-offs included 30 000 police being put in place moving forward. Because of that trade-off, Treasury had to reduce the number of police it was going to be employing in the next financial years to about 15 000. There were other trade-offs which were done in other programmes. Treasury had not reduced the social services. He wanted the Members to understand where Treasury was headed to in terms of prioritisation, infrastructure and social services. Treasury wanted to make sure that they were attended to. There was a growth element in investing in more infrastructure but there was also a meeting of the basic needs of the people. Treasury was doing that balancing act.

Mr Ismail Momoniat, Acting Director-General, National Treasury, said that the good message from the MTBPS was that South Africa was restoring its health of public finances. South Africa was doing so at a time when globally there was a real slowdown taking place. He had gone with the Minister to the International Monetary Fund (IMF) and World Bank Annual Meetings two weeks ago. Never had he seen such bleak projections of what was happening with high inflation, the impact of Covid zero in China and what it had done to supply chains, and the Russia-Ukraine conflict that was ongoing. Those were having a huge impact. Part of the shock was also what happened in the UK when they put an unfunded mini-budget forward and there was a swift reaction by the markets. He noted that the global risks were very significant and Treasury was going to have to take them into account. Even the impact of interest rates rises in the US, and the UK. These were South Africa’s trading partners. It would have an impact on many emerging economies. The message from overseas was that it was going to be a rough next six months and perhaps even rougher next year. Members needed to keep that in mind. In the current global environment, Treasury needed to be a bit more fiscally prudent than it would have normally been. Treasury was helped by the fact that it had higher than anticipated revenues, which had reduced the gross borrowing requirement and allowed Treasury to prioritise key areas, spending priorities for frontlines services like health, education and policing. Treasury had also put more money into infrastructure so that the budget began to have more of a growth orientation. He noted that fiscal consolidation had really helped Treasury. It put the country on a good course. In 2023/24, a primary budget surplus – revenue exceeding non-interest spending – of 0.7 per cent of GDP is expected. He wanted it to be clear that there was still a budget deficit. The country had to pay debt servicing but it was not borrowing to pay its interest. That helped to stabilise the debt. Even as Treasury considered taking on Eskom’s debt, it was in a place where it could still stabilise the debt. Treasury was able to do so not only in spite of the global shocks but also in spite of the local shocks like with the flood damage that took place in April. He noted that these events shocked the fiscal framework in a significant way.

Mr Edgar Sishi, Acting Deputy Director-General: Budget Office, National Treasury, briefed the Committee on the 2022 MTBPS. The presentation discussed amongst others the global and domestic outlook, the medium-term fiscal strategy, the in-year revenue and expenditure outlook, debt management strategy and risks to the fiscal outlook. Treasury forecasts real GDP growth of 1.9% in 2022. This was downwardly revised from 2.1% in the 2022 Budget Review. The economy expanded 1.4% in the first half of 2022 compared with the first half of 2021. Persistent global supply chain frictions, elevated input costs, flooding in KwaZulu-Natal and the Eastern Cape, and industrial action in certain sectors of the economy contributed to a second quarter contraction which offset stronger than anticipated growth in the first quarter. Economic activity has been further disrupted by a significant increase in both the frequency and intensity of load shedding during the year. Investment and employment remain well below pre-pandemic levels The scarring impact of the pandemic on employment and investment decisions will likely weigh on the recovery over the medium term. Treasury noted that the social wage, totalling R 3.56 trillion over the next three years, will continue to take up the biggest share of the budget in support of poor households. The largest allocations are directed to the education, health and social development sectors.

Medium-term fiscal strategy

• The medium-term fiscal strategy prioritises achieving fiscal sustainability by narrowing the budget deficit and stabilising debt, increasing spending on policy priorities such as security and infrastructure, thereby promoting economic growth, reducing fiscal and economic risks, including through targeted support to key public entities and building fiscal buffers for future shocks.

• Over the next three years, spending increases will support economic growth and the delivery of health, education and local government free basic services.

• Over the medium term, 59.2% of consolidated non-interest spending goes to the social wage combined public spending on health, education, housing, social protection, transport, employment and local amenities.

• Infrastructure spending is also expected to increase over the 2023 MTEF period.

• Proposed conditional in-year allocations to Denel, SANRAL and Transnet will reduce contingent liabilities and enable these entities to continue supporting economic growth and national security.

• Government is considering various policy approaches to safeguard fiscal sustainability.

Risks to the fiscal outlook

• A slowdown in global economic growth, which would negatively affect domestic growth and revenue collection, worsening the fiscal position.

• Continuous electricity supply constraints, which would decelerate economic growth.

• Higher than budgeted public service wage costs would strain fiscal resources. Additional fiscal measures or reductions in headcounts would be required to contain overall compensation spending.

• The materialisation of contingent liabilities and the weak financial position of several state‐owned companies that rely on government support to operate might require additional fiscal resources.

• New, unfunded spending pressures could result in a faster accumulation of debt and negatively affect the public finances Any large permanent increases in spending must be matched by permanent increases in revenue or reductions in spending elsewhere, including suspending or terminating programmes.

(See Presentation)

Discussion

Ms D Peters (ANC) thanked Treasury for the presentation and briefing the Committee with regard to the MTBPS. She discussed the economic outlook. She appreciated the indications with regard to the impact of the damage to KZN, Eastern Cape and many parts of the country. She believed that those damages would continue because of climate change. She remembered towards 2011 there was so much talk about the impact of climate change. Beyond that, the country seemed to be quiet about it except for the Ministries related to the environment and climate change. She believed that the country needed to sustain this particular matter. The impact of climate change on society broadly needed to be spoken about.

She raised the issue of the dam in Jagersfontein. When these disasters happened, it was like the country was not ready to address the social impact of the disaster, especially on the poorest of the poor. She believed that at all times the government had the resources for disaster. That was why provinces could not declare disasters unless there was an engagement in concurrence with National Government. She could not believe that after the floods in KZN in April last year, to date Government was still talking about people who were living in halls. The bickering between KZN Government and National Government was not giving confidence to our people that their matters would be addressed.

She discussed the special appropriations and the more than R23 billion which would be used for the Gauteng Freeway Improvement Project (GFIP). Where would the money for the R23 billion come from? The Minister said it was an initial allocation. What was the total quantum for this arrangement between Gauteng, SANRAL and National Government? She noted that there were problems with roads throughout the country. She could speak about the roads in various places in the country. She noted that when people spoke about the roads in specifically Gauteng they did not speak about the pothole-ridden holes in the other parts of the country, where motorists had even developed nicknames for those roads.

The Minister mentioned the expansion of the Social Relief of Distress (SRD) Grant. The Members really appreciated this because in communities and constituencies, the Members dealt with people who did not even have somebody to turn to. The SRD was a true intervention that was welcomed. She asked if there was a problem in naming the consideration of the expansion of the SRD Grant as work towards the Basic Income Grant. It was important that Treasury called it what it is; that Treasury was investigating the financial implication and viability of a Basic Income Grant because that was what it is. Treasury kept on saying that there was an expansion of the SRD to 2024. Initially, it was to 2023. It would work out better for the people to understand that the consideration Treasury was speaking about, was looking at a possible sustainable intervention in this regard. It would be important that Treasury talked about taxing the rich to be able to cover whatever the grant required. Treasury needed to call that tax by its name. She said that she was smiling when she heard the Minister speak about independent transmission and system operators. She noted that if she was given another opportunity she would go back to the debt service cost issue.

Ms C Murray (DA, Western Cape Provincial Parliament) raised the issue of inflation. How did inflation in South Africa compare to other countries across the globe? What were the risks of the country’s high inflation as it stands? She was particularly concerned if there was a recession or global depression, what would that might mean? What were the contributors to the country’s high inflation? Was Treasury practising quantitative easing or were there other factors at play? National Treasury spoke about how the country was plagued with the Ukrainian crisis, how Covid had an impact and other global affairs. What were some of the protective factors that South Africa had and how South Africa could insolate its economy amid the impact of global economic decline?

Dr D George (DA) said that his questions were for the Minister. It was mentioned that there would be conditions for the additional bailouts to SANRAL, Denel and Transnet, and that a Special Appropriations Bill had already been tabled to give the R30 billion to them. Where were the conditions that were going to be attached to these bailouts? The Minister was completely silent on the spiralling cost of living that had already resulted in South African households not being able to put enough food on their tables. Other than the SRD Grant, what action was the Minister going to take to respond to this cost-of-living crisis, especially the spiralling cost of food? He discussed the future of the grants. The Minister mentioned very difficult trade-offs and financing decisions that needed to be taken. What were these trade-offs? He asked for some detail to be provided on that.

Mr W Aucamp (DA, Northern Cape) said that his questions were directed at the Minister. He was partially covered by Dr George on the bailouts to SOEs. It needed to be remembered that in the past a lot of these bailouts were given and up till today, there were no improvements. The country did not see that things were turned around. A problem was that in a lot of instances it was the same people who managed those companies into the dark hole that they were, that were still in the management of those companies. What were those conditions or the preconditions for the money to be made available to the SOEs? It was very important that stringent conditions were laid out and there needed to be consequence management if those conditions were not being followed. He raised the issue of VAT. The DA suggested an increase in the number of articles that needed to be put in the basket of zero-based VAT items. The DA had not heard anything about that. Was there an investigation into the ongoing possibility of implementing that? He discussed the fuel levy. The DA suggested that the fuel levy be re-looked at and suggested areas where it could be cut. He did not hear anything about it yesterday. Were the Minister and Treasury looking into that? If so, what were the timelines for a possible implementation thereof?

Mr J De Villiers (DA) discussed the bailout for Eskom. The DA would like to understand the conditions. Specifically, the DA wanted to understand how the Minister was going to stop Eskom from just taking on more debt itself if the Government now took over its debt. Investors loved Eskom bonds. They were high yielding. They were guaranteed by Government. What stopped Eskom from just borrowing more money once the taxpayer took over their current debt? Did the Minister not think that that was treating the symptom and not the cause? Everyone who had written about Eskom agreed that it was the business model that was currently the problem. It needed to be split up. Private power generation needed to be brought in. Eskom just needed to take management off the grid. Everyone knew these things but it seemed like that was not a priority. Changing Eskom’s business model was not the priority. Taking over Eskom’s debt was just going to reinforce the current business model which was not working. The DA advised against taking over Eskom’s debt. It would be a massive mistake. It was not like the country could currently carry more debt. The country was on over 70% debt to GDP ratio. It was reckless to take over Eskom’s debt. He said that the E-toll decision was puzzling. It seemed like the E-toll debt had been taken over, but E-tolls were not being scrapped. There was only one thing to do with E-tolls. They needed to be scrapped.  

Mr D Ryder (DA, Gauteng) congratulated SARS on the over-collection of what was expected. The taxpayers needed to be commended. It was the taxpayers that had come to the party in a very big way. They were a very vital part of this cog. Mr Sishi mentioned the potential risk of the public wage settlement which was probably going to be above what was budgeted for. There were comments that it was 3% that was budgeted for. COSATU said that they were sticking with 10%. There would probably be some settlement in the middle of that or maybe even closer to the 10% mark and noting that there was an election year next year and the Government needed all the support it could get. What was the potential impact of that higher-than-expected settlement going to be? It was going to be a moving target. Perhaps there could be an indication of what the impact would be.

He discussed E-tolls. He was an NCOP Member representing Gauteng. It was an important issue for them. The Minister had indicated that there were a lot more discussions still to happen. It had not all been nailed down yet. He noted the final sentence in the Minister’s comments about SANRAL in his speech the previous day. It indicated that the gantries would stay in place and that it was likely that there would still be a payment needed from Gauteng motorists. He wanted the Minister to give an idea of what the intended model was going forward. Would Gauteng motorists still be expected to pay some sort of E-tolls? Would it be a reduced amount? What was Treasury’s plan?

Mr X Qayiso (ANC) said that he agreed with what Ms Peters had raised in regard to the issue of disasters, especially in KZN. He noted that the area of urgency was not treated very well. In the future, there was a need to respond promptly to social needs when such disasters occurred. He noted that the issue of Jagersfontein was one part of the disaster that happened recently. He wanted to believe that it should be covered as well by Treasury. He wanted clarity from the Minister.

Sometimes the developmental state was spoken about. What was meant by unlocking private investment in Eskom? Did it mean partial privatisation? He did not understand it well. He noted the issue of ports. What kind of competition would be introduced in ports? Did that also mean partial privatisation?

He discussed water agencies. He wanted more clarity on the matter.

The expansion of the SRD Grant hand been spoken about several times. People wanted to see something that was sustainable, which could assist them with regard to the socio-economic challenges that they were facing. If the extension was being spoken about year after year then Government needed to look into the Basic Income Grant. There should be a base where something started. The government needed to start with a baseline for the Basic Income Grant moving forward. It would be managed accordingly to fit the needs of the people, rather than speaking about the expansion of SRD.

This Committee had spoken about the conditions in previous meetings when bailouts were being discussed. It did not seem like the issue was taken seriously. If things were really to work well then Government should not pour money into the same arrangement where after a while there was no impact. They were the same people who were managing the same environment. If money was being poured into the same hole and there was no impact it meant that the leadership needed to be changed. The Committee could not agree with Government just throwing money with the same conditions and being managed by the same people. He noted that there were rumours of a syndicate roaming around the area and criminals syphoning Eskom to its knees. That meant there was something wrong with other people who were inside there. There had to be an overhaul.

He agreed that there needed to be a tax on the wealthy so that they subsidised the poor. It was a good suggestion, but it did not seem to be taken seriously. Little reference was made to unemployment in reference to inflation. The Reserve Bank was supposed to assist. He understood that inflation was an issue, but the Reserve Bank had to come more, not only on inflation.

Mr N Ntlangwini (EFF) discussed the 15 000 police officers that the Minister mentioned. Had Treasury done proper research to see what the ratio of women and children killed in South Africa on a daily basis was? Those 15 000 police officers would only be ready after three years yet, there was a pandemic where women and children were being killed daily. It seemed as if Treasury did not take the violence against women seriously. She noted that in the MTBPS there was only one line addressing the pandemic and violence against women in this country. It was quite scary.

Local government was again given the lowest of the cut. It was challenging the branch of service delivery and it was at the heart of service delivery of the South African people. She asked Treasury to provide a synopsis of why it always gave local government such a small cut of the Government’s revenue. Why was Treasury not cutting the provinces? The province seemed to be the middleman and was receiving more money than local government. Local Government was at the coalface of service delivery. She expected that local government would have received more resources of Government than provinces. She provided the example of Jagersfontein. There was a fight between the province and local government. The one did not know which excuses to give to the communities. It was time that proper research was done to cut provinces and to have only National Government and local government.

She discussed the conditions to the entities that the Minister spoke about in his MTBPS. What exactly were these conditions? Because tomorrow Treasury would state the conditions, but the Members would not know what these conditions were. Treasury needed to publish these conditions so that the Members knew exactly what were these conditions that were set for all of the entities that received bailouts from the Government. The Members needed to understand what the real conditions were, whether it was five conditions or 20 conditions. The conditions must be public to the country. What were the conditions for giving these entities the bailouts?  

Mr A Sarupen (DA) discussed the issue of bailouts. The last time the conditions for bailouts were disclosed to the Appropriations Committee, it was discovered that there were specific conditions being imposed by Treasury. Some conditions included producing a quarterly report in certain financial areas. It was not the reporting issue that was the problem. It was a management issue that existed. None of the conditions in the past were actually of any use on how the SOEs were being managed. What was created was a moral hazard where the entities knew that they could do what they wanted. The SOEs could be mismanaged because they would always get money from the State.

He discussed the proposed transfer of Eskom debts from Eskom to the State’s balance sheet. This sent a message to all the other SOEs that no matter how badly they borrowed, mismanaged and mismanaged, no matter how much had been looted that they should continue to do it because Government would take on its debt when the SOEs became unsustainable. He wanted a clear answer from the Finance Minister how he would deal with that situation. There were still a lot of people with nefarious intentions up and down the Government who may now see this as an opportunity to accumulate more SOE debt as SOE debt was transferred to the State. What would the transfer of the debt from Eskom to the State do to the country’s debt-to-GDP ratio? He noted that the quantum still needed to be measured depending on the bondholders. Would that not mean that Treasury’s report yesterday about stabilising debt-to-GDP ratio and achieving a lower debt-to-DGP ratio by 2024 was entirely incorrect considering the intention of what Treasury wanted to do with Eskom? If so, was that not effectively printing misinformation because the debt-to-GDP ratio would rise? If the Government took all R400 billion of Eskom’s debt onto the State’s balance sheet then it would reach a debt-to-GDP ratio of nearly 100%. What would that do to the ability of the State to borrow, to fund infrastructure, fund services and all the essentials that the State needed to borrow for the last couple of years?

Mr I Morolong (ANC) asked to what extent the revenue overrun attributed to stronger tax collections and commodity cycle. What were the determining factors to support some SOEs as opposed to others? For example, support was not lent to SAA or the Post Office. He noted that the employment stimulus was scheduled to end in 2024. However, public employment programmes will stay until 2025. Should this be seen as an indication that the employment stimulus would continue? Treasury had built-in unallocated reserves for 2025 and 2026. Why was this?

He had a question about the progress of Operation Vulindlela. What was the progress registered thus far on Operation Vulindlela?

Mr V Lwana (ANC, Eastern Cape Provincial Legislature) noted the improvement in the fiscal positions. He applauded the collection by the revenue services. He welcomed the commitment to increase spending on health and education. He noted the interventions to the fiscal space of Transnet, Denel and SANRAL. He raised two areas of concern. He noted the 3% increase cap on the public sector wage against the imminent labour showdown. How prepared was the country to mitigate once circumstances go beyond what had been put in place? It was something that had not come up clearly. He noted the low funding towards local government. That low funding, which stood at 10%, was continuing to expose the very low revenue base, especially to medium and small municipalities. How could this be turned around given that this formula had not helped local government to improve the conditions of the people in those affected areas?

The Chairperson said that there seemed to be a view that the problems of SOEs were money problems only. That once money was thrown in then the problems were gone. He had read with trepidation that many SOEs had failed to present their annual reports as expected by the PFMA. That showed very low levels of governance. What assurance could Treasury give the Committee that the governance at the SOEs was at the required level if such basic things could not be done? Simple things like complying with the PFMA in terms of presenting the reports to Parliament so that Parliament was allowed to play its oversight function was a concern. He wanted to hear from the Minister what Treasury was doing about that. He discussed the issue of a moral hazard, being too important to fail. There was an impression of SOEs knowing how important they were and that there was no way they would not receive money. How was that being mitigated by Treasury? Was it working? What was the indicator to say that it was working? How much had the country lost, as far as revenue was concerned, because of load shedding? How much of GDP had been lost because of load shedding? That was very important for fiscal stability and sustainability. If those things had been working, then he was sure the country would have a better debt-to-GDP ratio. He wanted to know the impact of Transnet on revenues and its impact on GDP. If they were functioning optimally or at the position where they were two or three years ago then there would be a better outcome as far as revenue and as far as GDP was concerned.

The Chairperson invited the Minister and his team to respond to the questions.

Minister Godongwana said that he would deal with some of the broad issues. He discussed the Basic Income Grant. As things stood, there was no policy by the Executive on the Basic Income Grant. What Treasury was dealing with was a temporary grant which was intended to support the vulnerable during the Covid period. It had justifiably been extended given the cost-of-living challenges that were facing the country now. It had never been labelled as a Basic Income Grant.

He discussed the trade-offs, which also talked about the police issue. Treasury said it wanted 10 000 police this year. Initially, it indicated another 10 000 next year and another 10 000 over the outer years. Initially, it spoke about 30 000 moving forward, precisely because of the trade-offs. When Government took the decision to extend the grant with no revenue source, Treasury had to reprioritise the budget. Not because it did not want to fund the police. Those were the trade-offs. By extending the grant there were trade-offs that were associated with it.

He discussed the issue of whether motorists were going to pay in Gauteng. The question was whether they were going to pay it via the equitable share in Gauteng or pay through a toll or pay via any other taxes that the provincial government was empowered to tax. The people in Gauteng would have to pay for the maintenance of the roads. The question was going to be what that method should be.

He discussed the other entities that had not been attended to. He did not have the figures for the Post Office. He noted that SAA to date had taken R46 billion. The request for another R2.3 billion would have taken it to R49 billion. It had not been treated differently. He took the point the Chairperson raised about a moral hazard. Eskom had been given R230 billion rand to date. Treasury was between a rock and a hard place. If Treasury did not intervene Eskom may default and in doing so drag the Sovereign with them. He noted that Treasury would attach the conditions. He discussed the matter of wages and unions. After a long period, Treasury reached an agreement with the unions through a facilitated process which it had agreed to table at the Bargaining Council. When this matter was tabled at the Bargaining Council all the parties, including Treasury, had to sell it back to the constituencies. Treasury went to sell it to the Mandating Committee of Cabinet, which included the nine premiers. It was not a good sell for Treasury. The provinces were hitting hard on Treasury because they had a huge salary bill. Treasury had managed to sell it. The unions said that their members rejected the deal that had been tentatively agreed to. In the circumstances, Treasury had no other options but to implement. Treasury was in a process of continually discussing. It had not closed the door to discussions with the unions at the moment. Treasury would continue to discuss with them the salary issues. The Minister noted that if there were any other questions he would deal with them.

The Chairperson asked for the question of governance in SOEs to be addressed. The SOEs came for money but could not comply with the basic things that all companies should do.

Mr Momoniat said that there were two parts to what the Chairperson was asking. The first is related to the President’s statement on Sunday where he dealt with processes, in response to the Zondo Commission, on how boards would be appointed and to have boards that had the right skills. The right people needed to be appointed, whether it was in management or on boards, to make the right decisions. That was a whole area of governance. It also related to how procurement was dealt with and whether the boards got involved with procurement. The Chairperson was also referring to how they came into the budgeting process and the question of moral hazard. Many of these entities came to a point where it was hard to say no. There was the threat that they were going to default on their debt. That would pull down the Sovereign debt. Treasury needed to find measures to take in-year action before it became a problem. Many of the SOEs provided reports but were there consequences? There were limits to the various powers that Treasury had. Treasury had spoken about conditions. The conditions would be made available to the public.

Mr Duncan Pieterse, Deputy Director-General: Asset and Liability Management, National Treasury, said that there were quite a few questions about Eskom’s conditions, how Treasury stops it from occurring more debt, treating the symptoms and not the problem, and proper conditions versus reporting. He responded to a few of those issues. Those conditions were not yet finalised but they had been a subject of discussion between Treasury, Eskom and the Department over the last few months. Those conditions would be made public as Treasury had done in the past with other conditions. He gave a sense of what Treasury foresaw what they would include. The conditions would include things like the sale of non-core assets in the entity in order to make sure that the balance sheet was sustainable and fit for purpose. It would include certain things around operation improvements, including the management of costs. It would include commitments around how planning was done going forward. Treasury was also planning to undertake an independent assessment of the operations of Eskom. In particular, the generation fleet to ensure that the conditions were informed by and responsive to the real operation challenges at the entity. He agreed that there was no point in dealing with the debt without dealing with the underlying challenges that the entity faced. The Minister also emphasised the fact that there would be preconditions. The idea about preconditions was precisely to deal with the moral hazard that some of the members had indicated. The Minister indicated in his speech that unless those conditions were met that the funding would not flow. It was worth pointing out that the debt takeover was only one part of a broader package to ensure that the entity was going to be sustainable going forward. The detail of that package would be captured in the conditions. Further updates on that would be given at the time of the budget next year. There were also quite a few questions about the broader conditions of other SOEs. Those conditions would be made public once finalised. That was important. That would also be made available and engaged upon with Parliament. There would also be preconditions. To the extent that the entities did not meet those conditions, the funding would not flow to them. This was in order to manage that moral hazard. The conditions went far beyond just monthly reporting. That was some of the mistakes Treasury had made in the past where the conditions focused on reporting requirements as opposed to really dealing with the underlying issues. For Denel, SANRAL and some of the other entities that were getting bailouts some of those conditions included things like the execution of a proper turnaround plan so that the entity had a business case going forward. It also includes the disposal of any non-core assets in order to resolve the balance sheet challenges. The fact that the bailouts were for debt specifically. In some cases, Government guarantees would be reduced in line with that debt. There would also need to be certain operational improvements and certain assessments of operations in order to make sure that the entities were sustainable going forward. Treasury was trying to make sure that through these conditions it did not have a situation where entities kept on coming back for more money and that the moral hazard was managed.

Dr Mampho Modise, Deputy Director-General: Public Finance, National Treasury, responded to the question of disaster funding. Treasury had proposed additional funds to the Department of Transport and for COGTA. This was through the unforeseeable and unavoidable expenditure where around R6 billion had been added as an added allocation. Treasury was trying to respond to the disasters. Treasury had also pencilled in money for the next three years. In terms of the disaster, Treasury had done the allocations. The key condition for SANRAL was that the amount that had been provided must strictly pay for the guaranteed debt and the interest. For every amount that Treasury would have given to SANRAL, it would reduce the Government guaranteed debt. Treasury was reducing its ability to use the guaranteed debt because Government would definitely be paying for it. If SANRAL wanted to go out and borrow then there needed to be a proper conversation between Transport, SANRAL and the Minister of Finance. There would be operation conditions that they would have to report. The key for SANRAL in terms of dealing with their debt was to make sure that the debt was reduced as and when Treasury paid the interest and the redemption.

Ms Boipuso Modise, Acting Deputy Director-General: Economic Policy, National Treasury, responded to the questions regarding inflation and the impact of load shedding on economic activity. She would also provide a brief update on Operation Vulindlela. She discussed the core drivers of inflation in South Africa and how South Africa compared to some of its peers. The core drivers of inflation in the South African context have primarily been from non-core inflation, largely from fuel and food inflation. Treasury was concerned that it was seeing this pass more onto the core. This could have implications for the durability of the surge of inflation that was being seen at the moment.

She discussed Treasury’s assessment of inflation for 2022. It was 6.7%. That was lower than what the IMF projected for the EM average, at about 9.9%. In the following year, Treasury was expecting inflation to come in at 5.1% whereas inflation was expected to ease to 8.1% in the following year. In all environments, there was significant price pressure. Inflation was quite high in relation to historical trends but slightly below emerging markets averages. She discussed the risks inflation posed to economic activity. Treasury was concerned from a domestic perspective about the implications of inflation on the cost of living, household consumption and on GDP because of its overall high share of GDP. Another concern was inflation and subsequent responses to try and contain inflation might have implications for economic activity and the pace of growth. She discussed what could be done to try and insulate South Africa from the impacts of inflation. This was set out in chapter two of Treasury’s booklet where it set out the three pillars of what it thought makes for a sustainable growth strategy. The first was a stable macro-economic policy. Including sound macro-economic policy on the fiscal side as well as on the monetary policy side. This was needed to ensure price sustainability and to protect the economy by building necessary buffers against risks that could arise from the external environment. The second pillar is related to structural reforms. The third pillar spoke to a capable state which was a theme that had arisen from a lot of the questions this afternoon, regarding the interventions that needed to be made to ensure that the State was able to provide critical goods and services in a way that was supportive of economic activity.

She discussed critical SOEs and their impact on growth. She noted energy availability and load shedding. In the first three quarters of this year alone, the country had lost somewhere near 4197-gigawatt hours to load shedding. This was significant and the highest level of load shedding on record to date. The costs of this varied depending on the stage and how the costs of it were estimated. Treasury had recently seen estimates that stage six load shedding costs somewhere near R500 million per hour. She would follow up with those details. This was significant. Treasury was particularly concerned about what this meant in an environment where growth was slow. Treasury was concerned about what this would mean for the country’s growth trajectory. There were fairly robust global demands as well as very high export commodity prices, supporting the country’s recovery post-Covid. The prices were slowing particularly on the export side. Treasury was also very mindful of the sharp revisions to global growth which would have implications for global demand. Treasury published those assumptions in chapter two. Treasury was particularly concerned about the structural impediments to growth and what this meant for the economy’s resilience and the ability for it to grow the risks that the external environment posed. On the logistical side, Treasury was concerned about the constraints that logistics particularly in freight rail were providing for economic activity in more general and for export performance. The country needed to take full advantage of the external price support and the demand support that was seen historically. Treasury kept on pressing the importance of the expedited implementation of structural reforms to put the country on a higher and more sustainable growth trajectory.

She provided updates on Operation Vulindlela. There had been progress on Operation Vulindlela in four key areas. The first was energy and energy generation. This spoke to the work done under the National Energy Crisis Committee that looked at increasing Eskom’s performance as well as ensuring increasing private sector participation in energy generation. This was through renewable energy as well as better generation. A lot of work had been done in that regard, which was available both in chapter two and in the presentation. The other areas where progress had been made were in transport as well as telecommunications. A key highlight was the auction of spectrum. There were some reforms where the progress included the reviewing of the framework for work visas as well as the E-visa system which had been implemented in 14 countries. A lot more detail was available on the Operation Vulindlela website where there was a dashboard that gave a sense of progress updates.

Mr Momoniat responded to the questions about the cost of living and what the Government would do. Would it, for example, zero rate certain items? Treasury was not considering increasing the zero-rating list. He noted that in 2017 VAT was increased by 1% and there was a panel that looked into this matter. It came to a list of items that was put forward. To the extent that the Government wanted to reach poorer communities, it would be better done through targeted subsidies. The extension of the SRD was one of the measures this year that would help households meet their costs.

He discussed the fuel levy. Treasury had reduced the fuel levy. The price had come down since. Yes, it was still high. He noted that one had Government taxes to get revenue. The more concessions that were allowed it did mean less revenue. The issue then is how Treasury got that right on the spending side. Treasury was not considering extending the fuel levy, but Treasury was monitoring the price of fuel. Things were pretty uncertain. If there were any other negative shocks Treasury would look into whether it needed to update its approach.  

Mr Edward Kieswetter, Commissioner, South African Revenue Service (SARS), provided a broad response to revenue. There was a tailing down on the impact of the commodities. Thankfully in the first half of this year, there was a 11% increase in the contribution from the financial sector and an equal percentage from the manufacturing sector. Combined, those two sectors contribute about 55% of the corporate income taxes. When those performances fair well then there was an overall effect. The balance of that was a compliance dividend. Through the specific compliance actions of SARS, it was able to raise 12% of the total revenue result. That meant R92 billion of the revenue result was from the improved efficiencies at SARS. It believed that there would continue to be an endowment effect from the compliance dividend which would underpin the positive revenue outcome that the Minister was announcing in the medium term.

Minister Godongwana thanked the Members for the engagement. It was highly appreciated. The Chairperson raised a pertinent question. That question was about the SOEs that could not even produce whatever they were supposed to do, the operational dysfunctionality and what Treasury was doing about it. This was a tricky question for Treasury. These institutions directly reported to other Ministries. Treasury had been called into one Committee to answer why a Department was underspending. Treasury’s responsibility was to publish the underspending but it would be useful if the Chairperson could help Treasury so that the relevant Portfolio and Select Committees could begin to hold those Departments to account for those issues. He noted that the Section 32 Reports for National Government and Section 71 Reports for provincial governments were available for everybody. Treasury was doing an unusual step now in order to raise the flag. Treasury raised these matters with Cabinet to make sure that they were aware of the challenges. He wanted the Members to take up this matter with the relevant Chairs of other Committees so that it became a recurring theme of holding those, through the oversight process, relevant institutions accountable.

Dr George raised an issue. He had asked the Minister a question regarding whether there was going to be any action on the cost of living. It had not been responded to by the Minister. It had been responded to by the Acting Director-General, who indicated that there was no discussion regarding expanding the zero-rated VAT basket of food. When he asked the Minister the question in Parliament about it he indicated that if he requested it he would subject the proposal to a panel of experts. He thought he was getting a mixed signal. He wanted to know what the clarity actually was. It seemed as if Treasury was saying that there was no discussion or consideration on this whereas the impression he had from the Minister was not that same way. He wanted the Minister to clarify that.

Minister Godongwana responded that Dr George had asked him the question in Parliament. The Minister had responded that there was an independent panel of experts which was put into place to look at the zero-rating of certain items. That committee did its work. He was not in a position to make a judgement as an individual. He would be able to make a judgement on expert advice. He was not sure if Dr George was suggesting that another panel be instituted again. It was a special panel that did the work and concluded the work. The report was on the website. Maybe Dr George should interact with that report. On the one hand, people were saying that Treasury should reduce the revenue and on the one hand people were saying that Treasury should spend more. Treasury had to weigh how these things were going to work. That was the trade-off. The more revenue was reduced, and the more expenditure was increased one was likely to get into the British situation.

The Chairperson thanked the Minister for his response. The Members could still take these issues further with Treasury when they appeared before the Committee. The Chairperson thanked the Minister, the officials from Treasury, the Commissioner of SARS, the Members and all those in attendance.

The meeting was adjourned.