FFC Briefing: Appropriation Bill & Second Adjustment Appropriation Bill

Meeting report

The Chairperson opened the virtual meeting, welcoming everyone present. The meeting agenda was adopted, and apologies were noted.

Briefing by the Financial Fiscal Commission on the 2022 Appropriation Bill and Second Adjustments Appropriation Bill

Ms Sasha Peters, Researcher, FFC, took Members through the presentation. The presentation outlined the background of the 2022 Appropriation Bill; Economic Overview and Prospects; Fiscal Framework and Revenue Proposals; 2022 Appropriation Bill and Adjustments Appropriation Bill; 2022 Division of Revenue Bill – Provinces; 2022 Division of Revenue Bill – Local Government; Public-sector institutions and investment; Balancing economic and social recovery with ensuring sustainable public finances and concluding remarks.

Two years post the onset of the Covid-19 pandemic in South Africa, responding to and containing
this health crisis and its wide-ranging socio-economic impacts continue to dominate government’s
plans and priorities. This is set to continue over the foreseeable future. Budget 2022 reiterates the priorities underpinning the Budget 2021 and the 2021 MTBPS – the achievement of economic and social recovery alongside fiscal sustainability. This submission comments on progress towards achieving these priorities.

In terms of global outlook, the International Monetary Fund estimated that global output increased by 5.9% but is expected to moderate in 2022 to 4.4%. The first half of 2022 is anticipated to show moderate growth in both emerging and developing economies and advanced economies due to the disruptions brought on by the ever-mutating Covid-19 strains. Inflation is expected to continue rising in 2022. Price pressures in 2022 will average about 3.9% in advanced economies and 5.9% in emerging market and developing economies. Inflationary pressure seems to be derived mainly from a transitory set of factors, such as the pandemic-related reallocation of spending from services to goods and supply-chain and other disruptions to production.

As for the unemployment rate, the official unemployment rate rose by 0.5 of a percentage point from 34.4% in the second quarter of 2021 to 34.9% in the third quarter of 2021 - the highest recorded unemployment rate in South Africa. According to the expanded definition of unemployment, the unemployment rate increased by 2.2 percentage points to 46.6% in quarter three of 2021, compared to quarter two of 2021.

The consolidated fiscal framework outlined a consolidated budget deficit of six percent of GDP projected for 2022/23, narrowing to 4.2% of GDP in 2024/25. Debt servicing costs will exceed R300 billion per year from 2022/23, becoming the fastest-growing spending item. Gross tax revenue for 2021/22 is R61.7 billion above projections. The upward revision shows an improvement in Personal Income Tax (PIT), Company Income Tax (CIT), and Value Added Tax (VAT). Total appropriation by vote amounts to R1.057 trillion in 2022/23 (or R3.1 trillion over the next three years); this represents a nominal increase of three percent compared to the revised estimate for 2021/22.

Allocation to the Higher Education and Training (DHET) vote will increase from R98 billion in 2021/22 to R110 billion in 2022/23. Additional funding of R32.6 billion was allocated to the National Student Financial Aid Scheme (NSFAS) for strengthening fee-free higher education; this was made possible for additional funding because of the revenue windfall.

There is growth projected for allocations to Basic Education vote over the next three years. Commission welcomes the additional R24.6 billion allocated to provinces to address teacher shortages. Should teachers be hired, a future funding obligation must be created for provinces. Should the sector face slower or negative growth over the coming years, Education Department budgets will be under severe pressure.

There is strong growth projected for the Cooperative Governance vote. Increased funding of R28.9 billion is directed at equitable share allocation to municipalities. Given the role that municipal services such as water, sanitation, electricity and refuse removal play in social and economic development, the Commission welcomes the government's efforts to protect this funding pool.

Water and Sanitation vote: there will be an additional allocation of R5.3 billion over the medium term for capital projects involving water resources and regional bulk infrastructure. On average, the transport vote will increase by 7.8% from R69.1 billion in 2022/23 to R81.6 billion in 2024/25. A large fraction of the vote allocation (R76.4 billion) is transferred to the South African National Roads Agency (SANRAL) to upgrade, strengthen and maintain the national road network. Of this amount, 59.3% (R45.3 billion) will be used to fund the upgrading, strengthening, and refurbishing the national non‐toll roads network over the next three years.

Trade, Industry and Competition vote received additional allocations amounting to R2.1 billion in
2021/22. Of this amount, R800 million was to create work opportunities through the presidential
employment initiative, and R1.3 billion was to respond to the social unrest in July 2021 and the negative impact of the Covid‐19 pandemic.

Employment and Labour vote will receive R677.2 million over the first two years of the MTEF period for the pathway management network, a presidential employment initiative.

In terms of guarantees for state-owned enterprises, in 2022/23, contingent liabilities will reach R1.17 trillion, accounting for 18.11% of GDP due to tenacious SOE cash shortfalls and stringent borrowing requirements. Guarantees primarily drive contingency liabilities to SOEs, which account, on average, for more than 50 % of the total contingency liabilities. If all the SOE guarantees were to materialise, government debt would increase to more than 100% of GDP by 2026, highlighting the urgency and importance of reforming SOEs, considering the immediate risk they pose to the fiscus.

As for public infrastructure investment, total public sector infrastructure investment decreased between 2018/19 and 2019/20 from R216.2 billion to R187.4 billion, and it picked up in 2021/22 with an investment of R249.5 billion. Concerning public infrastructure investment, while the share of provinces and municipalities is decreasing, shares of State-Owned Companies and public entities are increasing. The Commission is concerned with decreasing the share of local government, given huge infrastructure backlogs in municipalities (both new infrastructure and rehabilitation and maintenance of existing infrastructure.

[See the presentation for further details]

Discussion
Mr A Sarupen (DA) started by responding to questions about the SOEs. As per the FFC’s presentation slide, contingent liabilities account for 18.11% of GDP, with Eskom being the biggest at 5.6% of the GDP. The FFC commented, highlighting the urgency and importance of reforming SOEs, considering the immediate risk to the fiscus, which is a fair comment. He asked the FFC what reforms they thought were required for SOEs and what steps it would recommend the state take to stabilise and reform SOEs. Secondly, Eskom’s fiscal performance is disturbing, particularly how quickly the net asset value of Eskom declined over the years, specifically in 2019. This is concerning.

On public infrastructure investment, he was concerned about reducing investment by local government in public infrastructure investment. How does this correlate with financial allocations to local government? Is the Commission of the view that the allocations to local government have slowed over the years to help bail out national government and cover the rising cost of debt? Is it necessary for the state to curtail that debt to ensure that its local and provincial government can make public infrastructure investments?

Mr M Mathafa (ANC) commented on the first input about the central bank of the United States and the United Kingdom on increments on the repo rate. In the media, there is talk that the country's monetary policy is likely to increase interest rates; is there any relation to these moves with the US and UK central banks, and is it about the inflation levels linked to the Russia/Ukraine situation? What measures can government put in place to ensure that the impact is not dire for ordinary South Africans if the interest rates are increased? Secondly, on Covid-19: has the FFC conducted a thorough study to determine the impact that Covid-19 has had on fiscal sustainability and its influence on this Appropriation Bill? Thirdly, on elevated debt service costs: what can the government do to create the capacity to address economic shocks while preserving fiscal sustainability?

Fourthly, the floods in KwaZulu-Natal: these floods would have disrupted business activity. How notable and significant will this impact have been on the overall SA economy? What measures can the government implement to ensure that it responds adequately to climate change issues?

Lastly, the stated windfall from current commodity booms is temporary, and it is linked to the conflict between Ukraine and Russia. Should this war end abruptly and the commodity boom no longer present, what actions must the government take to increase its revenue?

Ms M Dikgale (ANC) commented on the move of the ECD to the Department of Basic Education. Is this going to commence as a pilot project? If so, where is it going to commence? If not, and it is just a transfer, will it be monitored to ensure that the ECDs in rural areas are covered and not neglected?

Ms D Peters (ANC) was not pleased with comparing South Africa and the United Kingdom or the United States and wondered if the FFC could consider looking into BRICS countries or compare South Africa with other developing countries. Comparing South Africa with the UK is unfair, and the comparison does not help SA at all. According to the FFC, what could be done to save some SOEs still in green and orange areas? Some of the SOEs need to be reformed and merged. Which SOEs, according to the FFC, should be considered for this? “We have been living with electricity challenges for so many years”, she lamented.

There was a time when the FFC supported devolution of functions but did not mention anything about the budget that should follow those functions. It was one of the matters she had to deal with, where the FFC had written a letter in support of a particular municipality to ask for services that they believed belonged to that municipality. Last week, she asked the Treasury and the PBO about the issue related to the capacity of SANRAL to support provinces regarding road infrastructure. What is the view of the FFC regarding this?

In the Northern Cape, a dam of wastewater emerges from the municipality through a place called Rora Farm; this water used to be sold to mines and the agricultural sector, but that no longer happens. It has now damped and destroyed the roads. Now, people who used to pay R80 from Barclays and the surrounding areas to get to Kimberly have to pay R200 since the roads have been diverted to go via the N12 because of damaged roads. A pensioner in Kimberly struggles to travel to Barclays and surrounding areas because it is now expensive. What is the view of the FFC regarding the function that would help provinces with the capacity that SANRAL must make sure that they can build better quality roads? There is a report on the 750 000 km of roads in South Africa where it shows that more than 10% were good roads at the hands of SANRAL. Many of the roads under SANRAL’s management are of good quality.

Lastly, on the education outcomes: has the FFC done a study on the budget allocated to the education sector from ECD up to higher education and learning?

Mr X Qayiso (ANC) mentioned the impact of the Russia/Ukraine war and the interest rate increments of the US and UK central banks. Has the FFC done its research or study on the extent government can come in to assist citizens on the heavy burdens of commodity increases since the war commenced? What measures does the Commission believe the government could provide some cushion for consumers amid high unemployment rates? Commodity prices have increased significantly, and people can longer afford to sustain their livelihoods.

Secondly, perhaps the Committee could resolve that the composition of economic function should be aligned to speak to the Economic Reconstruction and Recovery Plan. Otherwise, it will be just another plan.

On the foreign direct investment: given that the private sector should play a critical role in assisting the government in rolling out the infrastructure projects, how would this happen, considering the investment boycott or strike by the private sector?

The Chairperson said that reviewing the capital formation slide, public corporations are leading in investments. The President has also hosted a few investment conferences, and companies have made commitments, but nothing seems to be happening.

The corporate income tax has declined by one percentage point, which is expected to translate to gross fixed capital formation and employment creation. What is the view of the FFC on this? Thirdly, on SASRIA, the second adjustment Appropriation Bill: one can see that SASRIA is coming for recapitalisation. Only two provinces were affected by the unrest, and it was always argued that SASRIA is a healthy organisation. However, it came as a surprise for SASRIA to come to government for assistance when collecting the insurance premiums this whole time. When it is time to meet obligations, it approaches the shareholder. He asked the view of the FFC on this.

Despite the many recapitalisation programmes of the government in Eskom and the balance sheet that keeps on witling, the shareholder keeps pumping money into it. Why is the balance sheet continuously witling?

The FFC claimed that it welcomes the centralised model for the SOEs; why does the FFC welcome this centralised shareholder model? What can be done by the shareholder that the boards and structures in these entities could not do?

Responses

Dr Patience Nombeko Mbava, FFC chairperson, said that South Africa should be aware of the global outlook and the impact of the decisions made in the northern hemisphere. Ultimately, the state should peg itself on the emerging markets, especially the economies in Africa.

Prof. Aubrey Mokadi, Commissioner, FFC, responded to economic reforms that have translated to the budget. The difficulty is that unemployment and Covid-19 continue to undermine the budget's impact. No one specific problem can be pointed to as the cause. There are several issues to consider assessing whether there is value for money for the budget. The FFC has commissioned a paper on corruption. They believe that this is one of the biggest challenges of the budget. Perhaps, it would also translate to the budget if it could change. The paper on corruption will be published soon. Various legislations and instruments attempt to stem the tide, but they are now looking at the point of view of changing the mindset of the society and changing the sub-culture that has undermined those instruments and legislation.

On SOEs, as raised by Members, the FFC has raised the issue of pumping money into SOEs without seeing any value, along with all the other pertinent issues surrounding the SOEs in the country. Hopefully, the centralised shareholder model will bring the expected reform in stemming that tide together with the publication of the framework's criteria for government funding regarding SOEs. However, the efficacy of that model was not yet known. Hopefully, Parliament will play that oversight role to ascertain the model's efficacy and bring people to account.

The FFC had paid attention to the issues affecting ECD. Unless there is a proper foundation at the ECD level and there is maximum access in ECD structures, if they do not get this one right, problems will creep up the value chain of the SA education system. Once these challenges go all the way up, they become more expensive to resolve.

On the issue of migration to the Department of Basic Education, it is key to acknowledge that the Department of Basic Education has not managed to produce the quality of education that has been expected. The FFC is uncertain about the level of preparedness of the Department of Basic Education. This will be a teething problem for them, but Parliament should play the role of monitoring and evaluation.

On rural ECD and schools: this is difficult, and the Commission knows that the rural areas always get the raw end of the stick in terms of access to resources. The registration of ECDs in rural areas has always been difficult, and there are a lot of informal ECDs that do not get subsidies or support from government. Through the FFC submissions, registration processes have been eased and softened to allow for greater access for those in the rural areas to have access. Implementation would be an issue unless evaluation and monitoring are strengthened.

Artisanal skills are a bigger challenge, but the entity had very functional and effective artisan programmes in the previous regime. For some reason, TVET colleges have not managed to hone in the infrastructure that existed before. The reforms and changes that have been brought have greatly undermined the artisan training and skills programme. “Therefore, in our submission, we recommended structural reform regarding artisanal skills and training”, he said. This programme could assist a long way in reducing unemployment and poverty.

Ms Nthabeleng Khawe, Commissioner, FFC, touched on the SASRIA matter. Before the July 2021 civil unrest, SASRIA had about 20 people working in their claims department. When the looting occurred, the claims started coming in, and the entity then had to go back because the salary budget was limited and could not allow for more people to be brought in. SANRAL had to ask for more money due to the limited salary budget to deal with the influx of claims. It did not have enough loss adjusters, and there were fraudulent claims that were made as well. By mid-September 2021, it had already paid about R12.6 billion. Its issue had to do more with capacity than funding.

On the SOEs: Eskom has to resolve its maintenance issues because municipalities would claim that if Eskom gives them a certain number of megawatts of electricity. They only receive half of what Eskom claims to have given them due to distribution losses. Therefore, Eskom has to conduct intensive maintenance to ensure that what it distributes is what the municipalities get.

Mr Cheng Tseng, Head of Research, FFC, replied that these are long-term investment vehicles in the world of investments and capital formation infrastructure. They do not just happen. Once one is locked into the contract or the investment, it will only be profitable over some time. The entity approached it with extreme caution – they would look at government's track record and its policies to ascertain whether those policies have been consistent and with good rationale. Low risk and uncertainty also encourage investments. Some countries increase the yield or the return of investments in their countries to attract more foreign direct investment and investors respond to those decisions.

The corporate income tax assists but an investor would consider how temperamental the tax is and other factors that must be considered when investors make investments. Radical policy or uncertainty in government policies affects foreign direct investment.

On the Eskom balance sheet, he explained that it is about the business model of these SOEs apart from the operational deficiencies and disparities. In addition, the multi-year and billions of contracts are incredibly sticky to amend or transform. Reform needs to take place because there are contracts that do not yield value for money. All of it points to the reforms that are on the strategic agenda. He pleaded with Members to look into the contracts that Eskom got into. The lack of consequence management and officials that leave SOEs without facing any consequence for their actions damps the confidence that taxpayers have in SOEs.

Appropriation in terms of financial allocation of resources is not the problem. There is enough money, but the problem is within the allocations made to the departments. The spending and the execution of the budget are what is problematic. Generally, there would be a budget, but spending is not supporting future allocations.

The fact is that Russia was downgraded to junk status once it entered into a conflict with another country. Its investment grade was only then downgraded versus South Africa, which had already fallen deep into the junk status. The framework of risk and reward is very unfair; it is bizarre to compare a country at war and one that is not. Through research, it is misapplied, and it is a policy decision made in error to try and address inflation. The supply-side caused inflation or "pushed inflation" with a monetary policy tool that is effective much more directly on "demand-pull inflation”. That misapplication, error or not, puts South Africa in a difficult position. If South Africa follows its monetary policy, the interest rates will go up. But if it does not follow suit, the best option would be to follow the trail of Turkey, where it decreased its interest rates and the costs of the sovereign debt would be more?

Roads in South Africa stretch thousands of kilometres; the trick is really about data-informed, monitoring and evaluating road conditions.

In the 2023/24 submission, which will be tabled at the end of the month, a chapter is dedicated to educational outcomes concerning budget cuts and value for money. “We utilised the salary data of the teachers and COE costs”, he said.

The Commission sees a problem of inflation but needs to ascertain the nature. It needs to differentiate whether it is cost-push, supply-push or demand-pull inflation, and then it can apply the right tools to the correct problem. It is dangerous for South Africa to be dependent on external factors, but the inefficiencies in the SA economy need to be eliminated; productivity needs to be increased so that the state’s dependency on the external factors can be reduced. “We have improved and become self-reliant as a country”, he added.

Ms Peters replied to a question on the migration of ECD to the Department of Basic Education, indicating that it was underway, and the Minister of Basic Education is responsible for ECD as of 01 April 2022.

Mr Thandokuhle Ngozo, Researcher, FFC, commented on infrastructure investment and said it has been declining in the local government. With implementing the fiscal consolidation exercise, infrastructure spending has been targeted. The implication is that fewer resources have been made available to municipalities to pay for the maintenance of existing infrastructure and provide new infrastructure for the basic service rendered to communities. There is already a backlog of infrastructure projects, but municipalities must get rid of it [the backlog] – even though it is insurmountable, with the little resources.

On the centralised shareholder model for SOEs, he said that they would have a controlling company that will consist of a pool of experts that can thoroughly look at corporate governance issues and how the difficulties experienced with SOEs can be resolved. Issues of accountability and consequence management must be investigated thoroughly across all the SOEs, which is one of the functions of the model.

The Chairperson thanked the FFC delegation. The Committee would now consider and adopt the outstanding Committee minutes.

Minutes dated 03 May 2022 were considered and adopted without any changes.

The meeting was adjourned.