FFC on 2023/24 Division of Revenue Bill Submission

Meeting report

The Chairperson welcomed all members to the Committee’s first meeting in this new term. He welcomed the Financial and Fiscal Commission (FFC) and was looking forward to the Commission’s presentation. The Chairperson set out the agenda of the meeting and asked the FCC to start their presentation. He said the FFC would have 40 minutes to complete their presentation.

Briefing by FFC

Dr Patience Nombeko Mbava, Chairperson, FFC, thanked the Chairperson and Committee. She outlined the constitutional mandate of the FFC. She said over the past two years, government has tried to balance the maintenance of fiscal sustainability alongside the need to provide social relief interventions in the face of the pandemic, rising unemployment and widening inequality due to joblessness. This effort has been marred by a myriad of delivery shortcomings, irregularities, fruitless and wasteful spending, and a deepening of corruption, exacerbating the country’s already vulnerable fiscal position.  The FFC submission will focus on three areas: combating corruption and unemployment, economic and fiscal monitoring and reviewing and refining the division of revenue instruments.

Mr Chen-Wei Tseng, Head of Research, FFC, briefed the Committee.

Strategies for Preventing Corruption in Public Services and Funding for Anti-Corruption Agencies
Corruption is a global problem that exists in varying degrees in different countries and South Africa is no exception. Numerous corruption indicators and reports suggest that the challenge of corruption in South Africa is vast and deep-seated. Although South Africa has put together a range of laws, strategies, and institutions to combat corruption, corruption levels remain on the rise and have contributed to, among others; income inequalities, the inequitable distribution of resources, and inefficient social welfare programmes. The COVID-19 pandemic created an additional opportunity for corruption in South Africa, where individuals took advantage of concessions made for emergency procurement using irregular and corrupt practices.

Recommendations
The Presidency, in line with political commitment at the top, needs to renew the governance structure of the anti-corruption agencies through the National Anti-Corruption Strategy, on the need for reconfiguration and coordination among the existing institutional arrangements to repel duplication of these anti-corruption institutions for optimum results. Including a reconfigured or dedicated funding framework for the anti-corruption agencies/institutions as a sign of commitment toward the support of anti-corruption agencies.

The Presidency should consider establishing a Public Procurement Authority (PPA) that is mandated to show greater transparency and standardisation of government contracts, to organise and manage the public procurement process (rules, regulations, guidelines and policies) and implement a general public procurement policy on behalf of the government, guided by the principles of transparency, fairness and equity, as contained in the Constitution.

Youth Unemployment and Intergovernmental Fiscal Relations: The Case of South Africa
Labour market interventions (e.g., EPWP, the Jobs Fund, ETI) have resulted in some economic opportunities at a micro-level for the youth, but they have no significant impact on reducing the high unemployment rate.

Recommendations
The proportion of gross fixed capital expenditure in the composition of the budget should be systematically increased. Consumption expenditure should be reduced, and there is a need to remove structural and institutional rigidities that impact private investment in reducing unemployment.
To better target and increase the impact of the incentive, the Commission recommends revising the employee eligibility age from 18 to 29 years old. The age group 24–34 years has a relatively high rate of individuals not in education, employment or training (NEET) compared to 15- to 24-year-olds. National Treasury can also consider deepening the ETI to encourage hiring young women whose NEET rate is relatively higher than that of their male counterparts for both youth categories.

The Department of Employment and Labour, the Department of Higher Education and Training, and the Department of Women, Youth and Persons with Disabilities should coordinate all labour markets and skills programmes. The Department of Women, Youth and Persons with Disabilities has a mandate to enable the empowerment and socio-economic upliftment of youth and women. Well-coordinated labour market interventions could bolster the impact of existing labour market programmes through more significant integration and leveraging of initiatives.

Assessing Debt Sustainability in South Africa
Debt-to-GDP has doubled over the last ten years, reaching 70.7% in 2020/21. Rising debt service costs continue to crowd out expenditure on basic services. Although debt levels are below those of many advanced economies, South Africa’s interest rates (i.e., cost of debt) are substantially higher.

Recommendations
The fiscus, through the Minister of Finance, must strive to rein in rising debt service costs, which comprise a substantial portion of the budget, detracting from allocations for the provision of essential services. The Commission supports pro-growth fiscal consolidation and efforts to reduce the borrowing requirement

The Minister of Finance must exercise and maintain fiscal discipline via active debt management and regular reporting regarding debt accumulation, costs and sustainability under the current strained debt conditions. Such discipline should be exercised throughout all spheres of government.

Weak productivity in expenditure should be addressed to create job-enhancing, income-generating growth (i.e., inclusive growth) through quality expenditure and investment-enticing reforms.

Investor confidence must be boosted and promoted by signalling that public debt is sustainable in the long run to reduce sovereign risk ratings and thereby the cost of debt, as well as to ensure the continuation of economic support.

Affluence and Inequality in South Africa’s Labour Market
Well-targeted government grants have played a crucial role in reducing poverty; however, slow and stagnant economic growth over the past decade – alongside suppressed and unequal growth in wages – has limited the extent to which cash transfers can reduce income inequality.

Recommendations
Policies aimed at reducing inequality should, as a point of departure, be targeted at reducing inequality in the labour market. This requires policies that enable large-scale job creation and more equitable wage growth across different sectors of the economy, which, in turn, may require greater investment into labour-intensive industries that can absorb low-skilled workers into the labour market
Statistics South Africa should increase its efforts to enhance data transparency and harmonise datasets to allow for more comparable, accessible and reliable income statistics. Transparency should extend to data collection, data cleaning and imputation methods applied.
 

A Review of the Provincial Equitable Share Formula – Responsiveness to the Changing Social Structure.
Provinces spend a significant percentage on the compensation of employees in these two functional areas - the Eastern Cape spent over 90% of its education allocation from the PES on the compensation of employees in 2020/21.

Key drivers contributing to provinces’ high spending on the compensation of employees include wage bargaining processes outside PES determinations. The other major factor contributing to high personnel costs in provinces identified during stakeholder engagements is the teachers’ skills gap. Since it is difficult to reduce the compensation of employees, provinces reduce funding on goods and services - this compromises the quality of education as a shortage of learner support material affects education quality.

Recommendations
In line with the Commission’s recommendation on a costed norms approach, full costing exercises should be undertaken by all provinces, particularly for the provision of education and health. The costing results will be used to determine allocations by provinces to these key functional areas. This will ensure consistency and fully informed resource allocation.

The national Department of Basic Education, as a custodian of conditional grants (particularly indirect grants and responsible for capital spending), and all provincial departments of Basic Education, as recipients of the PES and being responsible for school infrastructure delivery and maintenance, should improve the coordination of infrastructure delivery plans and programmes to ensure alignment.

(See Presentation)
 
Discussion
Mr A Sarupen (DA) thanked the FFC for the presentation and said youth unemployment is a ticking time bomb. He asked about the impact of various programmes set up by government departments and agencies like the National Youth Development Agency (NYDA).  He remarked that there needs to be a correlation between the funding these agencies receive and their impact on youth unemployment. If there has not been any positive impact, what changes does the FFC propose to these agencies to make a dent in youth unemployment?  He pointed to slide 17 and highlighted that spending and increases in tax have not resulted in a reduction in unemployment, yet government investment and spending on employment have increased. Has the FFC looked at what specific types of Infrastructure investment create the most jobs in the South African economy because if you make investments into the wrong sectors, the government will not really make an impact on youth unemployment? He said when National Treasury presents to the Committee on fiscal sustainability, they always seem optimistic. National Treasury always gets its projections wrong. Where does the FFC see the long-term trajectory in fiscal sustainability and why is National Treasury always wrong and failing to stabilise Debt to GDP?

Mr A Emam (NFP) said state-owned companies and entities are funded by government. He asked if the revenue they generate is diverted back to National Treasury. If this is not the case, why was it so? Where companies and entities are not generating any profits and running a loss, how is National Treasury accounting for that in terms of what these companies and entities receive and any further assistance that the government might be giving them on a month-to-month basis? He asked the FFC if it believes there is a conducive environment in the country to deal with corruption. It’s common knowledge that every political party where they govern benefits from corruption. Why would political parties that control structures stop engaging in corruption? It would mean they won’t be able to sustain themselves. The current political landscape is not conducive to dealing with corruption. Cadre deployment happens in each political party.

He said the issue of unemployment had been used to target foreign nationals. If every foreign national leaves the country the next day, no one will be able to have a haircut because all barbers in the country are foreign nationals.

He asked if the government has done enough to incentivise small businesses. There are a lot of opportunities but government has not created a mechanism to attract young people to all spheres of the economy. Job creation will come from small businesses, which is where government needs to focus. He asked if the new district model government would yield positive results in overcoming service delivery and unemployment. He asked if this new model would be an added burden on the fiscus.

Mr O Mathafa (ANC) noted that the FFC advises all spheres of government. He asked if the FFC interacts with Cabinet/Executive and whether it shares its recommendations with them. Has Cabinet considered or implemented recommendations made by the FFC? The FFC mentioned the commodity boom and how it equals economic growth. The South African economy did grow but had little impact on the challenges faced by the country, particularly unemployment and inequality. He asked if it was not time for South Africa to move away from being a commodity economy to producing economy. European countries do not have the number of natural resources South Africa has, yet their development and employment rate is much more favourable than South Africa. Has the FFC considered whether the South African economy needs restructuring?

Mr Mathafa said R 488 billion was spent irregularly by provinces. This means corruption has become endemic and the question now is whether the current anti-corruption laws and measures are sufficient to deal with the issue. There needs to be an assessment of why these laws are insufficient to deal with corruption. The Eastern Cape government spends 90% of its budget allocation on wages. This is concerning because educational outcomes in the province are poor, and the province has an issue with pit toilets. Does National and Provincial Treasury do any meaningful oversight of the Eastern Cape Education Department and how they spend their budget?  When budget allocations are made to programmes that deal with youth unemployment, are these allocations supported by clear and measurable indicators?

Mr X Qayiso (ANC) said the impact of corruption runs deep like cancer.  It is important to characterise the role of the corrupt and the “corruptee”. The issue of corruption is majorly focused on the public sector, and it is a problematic phenomenon; the private sector also needs to be looked at closely if the government is serious about making inroads on corruption.  The issue of non-existent consequence management has been raised with the Committee every year; why has this issue not been solved?  He said debt to GDP levels are a serious concern; by 2025, debt will be 70% of South Africa’s GDP. South Africa had a framework policy document to reindustrialise the economy but some of the recommendations in that document were overlooked. He asked if the FFC had researched whether those recommendations were implemented, the economy would have been in a better place. South Africa’s Gini Coefficient is 0.63, far below what it should be. What are the impediments and the reasons for this? South Africa has had the same problem of a huge wage bill since 1993. Lastly, has the FFC considered the Russian-Ukraine conflict and its impact on the country’s projections?

The Chairperson asked two questions on behalf of Ms E Ntlangwini (EFF), who had to leave the meeting early. The FFC proposes a civil organisation to educate on corruption. Would that not be a waste of resources while government departments have monitoring and other systems to deal with corruption?  Secondly, if corruption needs to be fought from the top, why does the President’s office not have an oversight committee in Parliament? What is the FFC’s view on this?
 
The Chairperson also asked questions on behalf of Mr N Kwankwa (UDM).  The FFC speaks about duplication in district municipalities; what is the FFC proposing in this regard? The second question was on unemployment. What structural rigidities have the FFC highlighted that make it difficult to deal with the high unemployment rate?

The Chairperson asked what the FFC hopes to achieve with the presentation and who else will be engaged with it. What next steps will the FFC take to ensure government implements their recommendations? What impact does the inheritance or the lack thereof have on inequality, poverty and unemployment? What is the impact of the latest interest rate on macroeconomic policy? He asked if law enforcement agencies in South Africa are equipped and have the capacity to deal with corruption. On fiscal sustainability, what is the government doing to deal with rising debt? Lastly, has the FFC researched job attrition in South Africa?

Dr Mbava said she would answer some questions and handover to her other colleagues to deal with the rest. The FFC makes recommendations to the Minister of Finance and it is through this mechanism the FFC engages and makes recommendations to Cabinet.  Government will look at the recommendations and give the FFC a response through the Minister of Finance. Recommendations that speak directly to the division of revenue will be responded to through the annual budget speech and other recommendations will be addressed through the budget review process. Recommendations are also forwarded to the relevant Minister, who will respond to those. However, the FFC does not have a mechanism in place to track whether recommendations are implemented or adopted by Cabinet.

In terms of the Constitution, the Committee must consider the FFC’s recommendations in terms of section 214, which deals with the equitable share of revenue. As the Committee engages with the executive on budget proposals, they must consider these recommendations. These presentations will assist the Committee in its engagements with various Departments and their budget allocations. These recommendations are not binding but just recommendations for the Committee to consider.

The Chairperson asked if the FFC presented this submission to National Treasury or will it do so after they had engaged with the Committee.

Dr Mbava confirmed that the submission had been made to the Minister of Finance and the recommendations have been sent to the relevant Ministers.

Prof Aubrey Mokadi, Deputy Commissioner, FFC, said the FFC shares the Committee’s sentiment that corruption is a serious problem and runs very deep in South Africa. This is one of the reasons the FFC decided to spend a lot of time on corruption research and trying to find solutions since the South African economy cannot afford these serious leakages.

The reason the FFC proposed a civic education campaign was to educate and raise awareness of the dangers of corruption and what effect it has on South Africa’s development. It has become clear that even with existing legislation, people still find ways to steal public resources so there is a need to change people’s mindset. Civic education in other countries has proven useful in aligning people with government legislation. The FFC also expects the Committee to play its oversight role across all Ministries and Departments regarding fiscal and financial discipline. Eradicating corruption has to do with political will in all spheres of government. The President should establish a Public Procurement Entity to streamline government procurement and establish procurement rules and guidelines that would standardise all government contracts and enforce transparency. There is a lot of unevenness across Government Departments. The President should also coordinate the national anti-corruption strategy to better streamline strategies and measures in place to deal with corruption and make anti-corruption instruments more effective.

The FFC also participates in the Budget Lekgotla and Budget Council and gives recommendations at these forums. The FFC recommended that government start a national registry that would blacklist people involved in corruption. The second recommendation was that CFOs of municipalities should have a minimum qualification in preparing financial statements. Across the sector, this is outsourced and creates a huge dent in the fiscus. Even when outsourced, the financials were not even up to standard.

Mr Tseng said that engaging the executive too much can also become a problem and it was not exactly per mandates set out in the Constitution. The FFC actually submits divisional reviews to Parliament, meaning the Standing Committee on Appropriations. The FFC essentially advises the legislative branch of government and assists Parliament in exercising its oversight duties over the executive. Over the many years of the FFC, the power and authority of the FFC depended heavily on the Minister and the Standing Committee on Appropriations. 
 

Consequence management needs to come from the top if the government wants to deal with corruption effectively and Parliament, in its oversight duties, needs to highlight corruption more and hold Departments accountable.
 
At the end of the financial year, state companies and entities have a net positive cash balance, except for National Government; the question would be why is government still transferring so much of its guarantees to state companies, entities and sub-national government spheres. Both Provincial and Local Government also have positive cash balances at the end of the financial year.

Restructuring the economy towards a producing one is an important aspect that government needs to better coordinate. There has been slow progress in turning from a commodity to a producing economy. There needs to be a focus on a localised product value chain economy.

The Ukraine-Russia war has impacted the global supply chain and China and the USA have scrambled over semiconductor supremacy. The FFC could see the future trajectory of the geopolitical space.

The 0.63 Gini Coefficient still underestimates the extent and depth of inequality in the country because it looks primarily at monetary income and does not consider the fullest extent and impact of inequality. It does not consider other factors such as the entrenchment of inequality and what effects that has on generations of families.

Employment programmes on paper look like they create jobs. However, on the macro level, it ceases to impact unemployment.

The reason Treasury projections are different is because they analyse gross debt and not net debt after and before spending has happened. There is also an underestimation and the carrying effect. South Africa could strengthen its fiscal sustainability if more reprioritising happens rather than cutting.  Reprioritising towards more social spending.

The Chairperson asked if there was enough capacity to deal with complicated financial crimes.

Prof Mokadi replied that it is a very complex question and it is always linked to political will and whether these institutions have enough resources to deal with the system of corruption itself. There is a need to improve these agencies' capacity and skilled personnel. Given the size of the public sector, it is a huge undertaking and most of the agencies tasked with dealing with corruption are not adequately capacitated. However, the system does have important role players in place and these role players need to do more in terms of implementing their objectives. This is where the issue of oversight comes in and people do not understand the role of oversight. The moment the executive and legislative branches see something wrong, they must act immediately.

The Chairperson thanked the FFC’s Commissioners and staff. He said there will always be more questions than answers since these issues are very complex.

Committee Programme
The Committee’s Draft Programme for term 3 of 2022 was adopted.

Committee Minutes
Draft Minutes dated 8 June 2022 was adopted by the Committee.

The meeting was adjourned.