2021 MTBPS: National Treasury briefing, with Deputy Minister

Meeting report

Apologies
The Chairperson asked whether the Committee had received an apology from the Minister, who was not present.

Mr Dondo Mogajane, Director-General, National Treasury, said that the Minister was not available – he was at a doctor’s appointment. He apologised that the Minister’s apology had not been conveyed sooner. However, the Deputy Minister was present.

The Chairperson said that he had been worried – this was a political platform, so either the Minister or the Deputy Minister had to provide a political overview before Treasury briefed the Committee. 

Dr D George (DA) understood that the Minister had a doctor’s appointment, but his absence was “completely unacceptable.” He had belonged to the Committee since 2008, and the Minister of Finance had always briefed the Committee following the medium-term budget policy statement (MTBPS) or budget statement. This meeting had been scheduled for the previous week and postponed, and now the Minister was not available.

The Committees noted apologies from Mr W Wessels (FF+) and Ms D Mahlangu (ANC, Mpumalanga), Chairperson of the Select Committee on Appropriations.

2021 MPBTS: Ministerial overview
Dr David Masondo, Deputy Minister of Finance, said that the main purpose of the meeting was to receive the critical feedback and support that the Committee could provide on behalf of the public. However, he would highlight some key points that the Ministry hoped to convey to the public. South Africa was continuing to battle against the impact of the COVID-19 pandemic, as well as the three key socioeconomic challenges – inequality, unemployment, and poverty – all of which had been exacerbated. Unemployment, in particular, had reached 34.4%. The MTBPS had two main purposes. The first was to provide the nation with updates on the fiscal framework and its implementation, including updates on key macroeconomic variables, the most important of which was economic growth – economic growth was critical, and affected other variables such as unemployment, revenue, and the country’s ability to deal with its debt levels. The second purpose of the MTBPS was to present a picture of the government’s intentions for the immediate economic and fiscal future. That picture would be “firmed up” in the February budget speech. Between now and February, government would deliberate which priorities to target, with special emphasis on job creation, poverty alleviation, and peace and security. That process would also involve assessing opportunities and policy trade-offs.

Deputy Minister Masondo said that the need to address socioeconomic challenges had to be balanced with the need to maintain fiscal sustainability, mainly by dealing with South Africa’s unsustainable debt burden. Debt levels would reach R4.3 trillion in the current year, and debt attracted service costs – there was no such thing as “free debt.” Debt service costs were expected to amount to R303 billion in 2022/23, and to R1 trillion over the medium-term expenditure framework (MTEF). Debt was not in itself bad – it depended on what one was borrowing for – but that R1 trillion in service costs should be going to education, health, and other important expenditure items. Debt crowded out expenditure. It also crowded out private investment, because if all national savings were used to finance the budget deficit, the private sector was left with nothing to invest. High and unsustainable debt levels were not in the interests of economic growth or in the interests of the poor. If one had to borrow, it should be to finance activities that enhanced economic growth, not just for consumption activities. Fiscal consolidation was critical to reducing the public debt burden, restoring investor confidence, and mitigating South Africa’s exposure to global and domestic risks. The MTBPS proposed to “maintain restraint” in public expenditure. Revenues had been higher than expected due to the good performance of the mining sector, but government would not make new long-term spending commitments on the basis of this short-term revenue. 

Over the next three years, government would support economic recovery and reconstruction through a combination of short-term spending measures, rebuilding public finances, and structural reforms. Structural reforms were critical to putting South Africa on a more sustainable economic growth trajectory. Government had made a lot of progress in that regard in the current year, including – current energy supply challenges notwithstanding – in the energy sector. The licensing threshold had been increased from 1 megawatt to 100 megawatts, which government thought would increase the electricity supply. It would allow municipalities to generate their own power or to procure it from independent producers. Through Operation Vulindlela, Transnet had corporatised the National Ports Authority, which would improve competitiveness and incentives for efficiency; and the eVisa system would be rolled out to 15 countries by March 2022. Operation Vulindlela continued to monitor and support the implementation of these reforms, and other reforms were envisaged and would be presented to the Committee at some point. To deal with the challenges that South Africa faced, it was critical that economic growth should be unlocked through such reforms.

He said that the budget was “pro-poor.” It was focused on the social wage, which was the combined public spending on health, education, housing, social protection, employment programmes, and local amenities. The social wage remained very high by global standards, averaging 60% of consolidated non-interest spending over the next three years.

Deputy Minister Masondo said that the Ministry always looked forward to the Committee’s “critical support.” It knew that the Committee’s support was not blind support. Moreover, all participants were working for the interests of South Africans, so the Committee’s criticism was always taken as coming from the right place – as an attempt to make South Africa better for all South Africans. He wanted to reiterate the Minister’s apology for his absence, which was for reasons beyond the Minister’s control, and to apologise that the meeting, originally scheduled for last Thursday, had been postponed.

2021 MTBPS: National Treasury briefing
COVID-19 recovery and economic outlook

Mr Edgar Sishi, Acting Deputy Director-General: Budget Office, Treasury, said that the COVID-19 pandemic had “magnified” pre-existing economic problems and pre-existing “fiscal weakness.” Therefore, fiscal strategy required a balance between providing continued support to the economy in the short-term and rebuilding public finances in the longer term. The economy had recovered more quickly than expected, but the long-run durability of that recovery was uncertain, both globally and domestically. Thus it was important that the policy environment, especially fiscal policy, was prepared to deal with any downturns that arose. There were already significant risks to the fiscal outlook, including risks arising from the debt burden and from the state-owned entities (SOEs). 

On the domestic economic outlook, he highlighted the following:
Treasury projected 5.1% growth in real GDP in 2021, followed by 1.8% and 1.6% in 2022 and 2023 respectively;
Inflation would remain within the target band;
Household consumption had improved but was expected to slow over the MTEF period; and
Investment remained weak, primarily due to low private investment.

Although economic growth forecasts, in South Africa and globally, had improved since February, South Africa was expected to experience “scarring” from the pandemic, and there were risks emerging. Risk factors included monetary and fiscal policy support; the emerging challenge of high inflation; and global vaccine access, which had confidence-building effects as well as health effects.

Mr Sishi said that structural reform initiatives were “gathering pace,” including through Operation Vulindlela. He provided updates on structural reform initiatives in electricity, transport, tourism, water supply, telecommunications, and infrastructure.

Fiscal framework and strategy

Government remained committed to addressing fiscal imbalances by reducing the budget deficit and stabilising the debt-to-GDP ratio, though those aims would be balanced with the aim of supporting the economy. In the 2021/22 consolidated fiscal framework, Treasury projected:
Revenue of R1.65 trillion (about 26.7% of GDP);
Expenditure of R2.13 trillion (about 34.5% of GDP);
For a budget deficit of R479.7 billion (7.8% of GDP); and
Total gross loan debt of R4.3 trillion (69.6% of GDP).

The debt burden had increased from R3.9 trillion in 2020/21, but, due to increased revenue and “expenditure discipline,” the debt-to-GDP ratio had decreased from 2020/21, when debt had been 70.7% of GDP. The consolidated budget deficit was expected to continue to narrow, reaching 4.9% of GDP in 2024/25, and a primary budget surplus was projected by the same year, barring any major new shocks or unbudgeted spending commitments. Expenditure on interest payments had risen significantly over time, with debt service costs in 2020/21 amounting to 4.2% of GDP and about 20% of revenue.

Revenue projections had been revised upwards due to the surge in the prices of commodity exports, but those prices were now declining and expected to continue declining. The current projections also remained lower, by R284.7 billion until 2022/23, than Treasury’s pre-COVID-19 projections. Because of the changes in the terms of trade, tax buoyancies were being lowered over the MTEF. However, Mr Sishi added that projections for tax revenue could be revised if improved tax collection and administration by the South African Revenue Service (SARS) – facilitated by increases to SARS’s budget – was paired with improved economic growth. 

Since the February budget, non-interest expenditure in 2021/22 had been revised upwards by R59.4 billion, both to accommodate spending on supporting the economy and to provide for the wage bill settlement reached in August. He also discussed the fiscal response to the COVID-19 pandemic and to the civil unrest in July – the revised framework included, among other things, R3 billion in the contingency reserve for additional vaccine purchases, and an additional provisional allocation of R11 billion to the South African Special Risk Insurance Association (Sasria) for risk coverage. Additional resources for social protection would be considered if the fiscal situation improved by February 2022.

Over the medium-term, non-interest expenditure was projected to increase by R31.9 billion in 2022/23 and by R29.6 billion in 2023/24. As Deputy Minister Masondo had said, the social wage – dominated by healthcare, education, and social protection – would account for nearly 60% of consolidated non-interest spending over the MTEF period.

Debt and borrowing

Mr Sishi said that, as outlined in annexure A of the MTBPS, there were factors other than the fiscal deficit which affected the borrowing requirements and financing requirements of government. Thus, though Treasury expected the fiscal deficit to decline over the medium-term, the gross borrowing requirements of national government – amounting to R409.9 billion in 2021/22 – would remain high over that period. The government would continue to issue new bonds and switch existing bonds in order to reduce redemptions due. However, due to the narrowing budget deficit – in turn achieved by controlling the growth of non-interest expenditure – gross loan debt was expected to stabilise at 78.1% of GDP in 2025/26, a slight downward revision from the 80.5% projected for that year in the February budget.

Expenditure priorities

Consolidated government expenditure over the MTEF period was dominated by spending on learning and culture, which in turn was dominated by spending on basic and higher education. The second biggest item by function was debt service costs – for the first time, government would be spending more than R1 trillion on debt service costs over the MTEF period. Debt service costs were also the fastest growing spending item over that period.

Over the MTEF period, the share of both provinces and local government in non-interesting spending would be increased to 42% and 9.6% respectively, leaving 48.4% for national departments.

Risks and spending pressures

Mr Sishi said that there were significant risks to the medium-term fiscal framework, including:
A slowdown in global and domestic economic growth;
The evolution of COVID-19 and slow progress in vaccine roll-out;
Slow implementation of structural reforms;
Further credit rating downgrades;
Pressure on the government wage bill and the related legal process;
The poor financial condition of several municipalities; and
The poor financial condition and operational performance of several SOEs.

He added that, as outlined in annexure A of the MTBPS, Treasury projected that contingent liabilities, mainly arising from guarantees to SOEs, would exceed R1 trillion by 2023/24. Although the fiscal framework did not include any additional support to SOEs, several might request further bailouts.

(See Presentation)

Discussion
Dr George said that the Minister’s MTBPS speech had mentioned “tough love” for the SOEs. He understood that to mean that there would be no further additional allocations or bail-outs for the SOEs, but could Treasury clarify exactly what it entailed?

Mr Mogajane replied that the government had given substantial support to the SOEs over the last ten years, without much demonstrable “value and returns.” The challenges faced at the SOEs, and the fact that many were collapsing, suggested that a very different approach was needed. The new approach had first been used two years ago, when conditions had been attached to support given to Eskom. The language of “tough love” meant that at some point, government should “say no” to the SOEs, and that, at some point, it should demand value and returns from the SOEs it supported.

Dr George asked whether the “tough love” approach would be extended to the public sector wage bill. The wage bill was “bloated” and was the largest contributor to the “spiralling debt.” The former Minister had often said that action would be taken in that regard. What did the current Minister plan to do about it?

Similarly, Mr D Ryder (DA, Gauteng) thought that there had been a substantial “step down” in the position of the Treasury and Ministry on the public sector wage bill. The wage bill obviously had a big impact on South Africa’s finances. A large wage increase had been agreed to – though government employees probably would not agree that it was “large,” it was nonetheless an increase that had not been budgeted for. That left a bit of a “hole” in the budget that had to be filled. In the medium-term, he did not envisage much downward movement in the wage bill – he saw it increasing, albeit slightly, over the medium-term. What should be expected in this regard? Would the number of government employees decrease, or would there be zero or very low wage increases over the medium-term?

Ms P Abraham (ANC) also asked about the relationship between the public sector labour unions and government, especially Treasury. What agreements were there currently between the unions and government, and what was currently happening in that regard at Treasury in particular?

To this series of questions, Mr Mogajane replied that it was a separate issue whether “tough love” could be applied to the public sector wage bill. Of course, Treasury was not the lead department in negotiating a settlement with the labour unions. It had fulfilled its role, which was to ensure that there were resources available and that the negotiators were aware of the financing and funding constraints. It had also put R20 billion aside to meet provisions of the existing agreement which would kick in if no settlement was reached before the next cycle. Government had between now and February to engage unions further in order to find a settlement that was acceptable to all parties. As the Minister had said at the National Economic Development and Labour Council (Nedlac), Treasury remained available to engage further and to “open the books” on what it was willing and able to pay. Government’s intent was not an issue, but its ability to pay was. As reflected in the MTBPS, there were currently many pressures on government, all requiring support and funding. It was important to address the wage agreement carefully, and Treasury would of course engage further with labour through both formal and informal channels.

Dr George said that the Minister had not mentioned anything about how government policy would improve the environment for businesses, especially for small, medium and micro-enterprises (SMMEs). How would government promote business and the ease of doing business in South Africa? If the economy did not grow, revenue would not grow, and the government would be unable to provide services, especially to the most vulnerable members of society.

Mr Mogajane replied that Treasury could not present a budget statement to Parliament without talking about improving policy to support business and economic growth. This was reflected throughout the MTBPS. It was about balancing among different priorities, and about “hard choices.” The MTBPS also emphasised several interventions that were critical to enhancing growth, including the accelerated strategic reform programme.

Dr George said that Eskom was “irretrievably broken” – its Chief Executive Officer had said so himself. Government had repeatedly mentioned the possibility of splitting up Eskom in terms of generation, transmission, and distribution, and the Minister had mentioned additional private sector energy generation. What should one expect in the short-run in the energy sector, given the current energy crisis?

Mr Duncan Pieterse, Deputy Director-General: Asset and Liability Management, National Treasury, replied that Eskom and the Department of Public Enterprises (DPE) would be better placed to provide a detailed answer. From Treasury’s point of view, the government had provided significant equity support to Eskom – a few years ago, it had agreed to provide R230 billion over a ten-year period, and R136 billion of that amount had already been disbursed. In addition, Treasury had approved a special dispensation for Eskom to access additional guarantees of R42 billion in the current year and R25 billion in the next fiscal year. One would expect those interventions to provide Eskom with room to undertake the operational reforms needed to address the instability in the power system.

Mr Ryder said that he was “very unimpressed” with the Minister’s absence and apology, though he appreciated Deputy Minister Masondo’s presence. It left “a bad taste in one’s mouth” that the Minister was not present even after the Committee had had to adjust its programme, because the meeting had been postponed last week. It was the Minister’s first budget appearance, effectively, and Mr Ryder thought it “unforgivable” to “start off on a bad foot” in this way.

Mr Ryder said that the Committee had heard about the broadband spectrum auction for quite some time – looking at the former president’s State of the Nation addresses, the auction had been promised for at least ten years, possibly eleven. It was a key means of unlocking funds for government, but it should also contribute indirectly to GDP – an increase in the availability of cheap bandwidth would generally boost the economy, which would in turn increase revenue. He was aware that there were legal challenges to the auction, and this was linked to the question of government’s will to implement the auction. He could easily put his car on the market, but it would not sell if he attached “crazy conditions” to its sale. How much will was there in government to conclude the auction? What was Treasury pushing for? Was the Department of Communications and Digital Technologies (DCDT) being allowed just to “flounder along,” ignoring the President’s instructions, or had more urgency been impressed upon DCDT?

Mr Mogajane replied that Mr Ryder was also correct that DCDT was the lead department on that project – it was the expert – and Treasury could only support the process. Another thing that Treasury could do was highlight, as it had over the years, the inaction and delays in the project. He was pleased that DCDT now said that the auction would take place by March 2022. It was important that the roll-out of the additional spectrum should be attended to, and Treasury had mentioned it in the MTBPS in order to emphasise exactly that. Treasury was not “quiet” in government forums and processes – it continuously raised important issues like this one, and the MTBPS should not be mute on such issues.

Deputy Minister Masondo also agreed that government had to pursue the allocation of the spectrum. The delays to date had had less to do with government than with the fact that, as Mr Ryder had pointed out, government had been taken to court. He had been advised that the parties to the legal dispute had agreed that the spectrum should be auctioned by March 2022. However, one risk to implementation was the pace of digital migration. Currently, a lot of spectrum was used by analogue television, so digital migration would release a lot of spectrum for speedy allocation.  

Mr S Du Toit (FF+, North West) said that the COVID-19 lockdown regulations had contributed to the country’s current fiscal situation, as well as to job losses and the loss of tax revenue. He had asked Dr Nkosazana Dlamini Zuma, Minister of Cooperative Governance and Traditional Affairs (COGTA), whether the Disaster Management Act regulations would be lifted if South Africa reached herd immunity against COVID-19. She had said, in short, no. So economic growth would be slow, because of the continued effect of the regulations. In this context, what did Treasury expect for the uptake of social grants, which were currently received by around 27 million people? How many more people might become social grant recipients over the next two years or so? Ultimately, the “financial footprint” would still be shrinking, because economic growth would be insufficient. South Africa was “basically going backwards.” 

Mr Mogajane replied that the lockdown regulations had indeed affected tax revenue and thus plans for government spending. Treasury continuously modelled scenarios and projected estimates for the number of recipients of various grants. For example, it had modelled the introduction of a basic income grant – it knew how much the grant would cost, and so on – and it had estimated the number of people who would qualify for grants in future years if the economic outlook did not change. The reality was that reducing dependence on social grants required good economic performance. As Mr Du Toit had said, 27 million people received grants currently. Government wanted to reduce that number, so that people would be working and improving their own living situations, though of course with government’s assistance.

Mr A Shaik Emam (NFP) said that one of South Africa’s major problems was that one in two people were unemployed, which meant that many people depended on the state for social assistance. Was the government doing enough to create conditions conducive to job creation? He did not think it was. The government had not created an environment in which businesses could “thrive.” For example, it was very difficult for manufacturing companies to become competitive, due to high labour costs and pressure from labour unions, and they could not create jobs unless they became competitive. Jobs had to be created in the private sector, not in the public sector. The wage bill was already high and it seemed nothing was being done to reduce it, although government repeatedly said that it would be. The automotive manufacturing sector seemed to be a “success story,” but what about the textiles and leather industry and other industries? Those industries had been affected by cheap imports and stringent labour conditions, but government had not sat down with stakeholders in order to come to a common understanding and agreement, so that some regulations could be relaxed and the industries could become more successful and thus create jobs. Job creation was paramount for economic growth – employed people received income which they spent, thus increasing the amount of money in circulation. 

Mr Shaik Emam said that R200 billion had been made available under the COVID-19 Loan Guarantee Scheme, but only R20 billion had been taken up by small businesses, because the conditions had been too stringent. The only businesses which could meet the conditions were ones which did not need the money in the first place. How would the government ensure that greater support was given to small businesses, so that they could drive economic growth?

Mr Mogajane replied that Mr Shaik Emam and Treasury had been interacting, for many years, on the issues that he had mentioned, such as support to small businesses and job creation, which he correctly said was the solution to South Africa’s economic problems. The MTBPS was about ensuring that government continuously asked itself whether it was creating conditions in which business could thrive. Some of the projects under Operation Vulindlela aimed to improve the ease of doing business. Treasury was always focused on improving the business environment.

Mr Shaik Emam said that economic growth required both water supply and energy supply. Another obstacle to growth was that South Africa faced a “crisis” in both regards. Establishing adequate water infrastructure would take billions of rands, and solving the energy crisis would take one or two years. Thus, in the interim, Treasury’s projections would “fall flat” and its goals would not be achieved. Treasury had good “intentions,” but its projections were contradicted by reality.   

He welcomed the decision not to provide any more funding to the SOEs. However, government had given guarantees. What would happen if an SOE defaulted? Surely Treasury would have to “come to the rescue.”

Similarly, Mr X Qayiso (ANC) noted that the fiscal framework did not “include any additional support to state-owned companies” (see slide 19). He thought that the SOEs played a very pivotal role in economic growth, although several of them were headed in a “downward direction.” What did not providing additional support to SOEs entail? What kind of “additional support” was in question – was it financial support? At the same time, Treasury expected that several SOEs might request bailouts (see slide 19). How was the possibility of future bailouts consistent with the commitment not to provide additional support?

Mr Pieterse replied that, as Mr Mogajane had said, Treasury had already allocated quite a lot of support for SOEs in the baseline fiscal framework. Members would recall that, in the last fiscal year, government had given South African Airways (SAA) about R21 billion; Denel had received R2 billion over the last two years; and, as he had said, Eskom had already received about R136 billion of a R230 billion commitment. Treasury had also committed another R10 billion to the Land Bank in the current year. So the fiscal framework already included a range of support for SOEs. In the MTBPS, Treasury announced two further allocations: R2.9 in support for Denel, to settle debt arising from obligations under its guarantee conditions; and additional funding for Sasria for obligations relating to the civil unrest in July. Beyond the amounts already in the fiscal framework, and the new amounts announced in the MTBPS, there would generally be no further support for SOEs. However, as the Minister had outlined carefully in his MTBPS speech, further support would be considered if there were issues arising from guarantees called by an SOE’s creditors, provided the SOE met certain conditions, and following an assessment of the SOE’s future strategic relevance, as well as the implications for government’s restructuring agenda.

Mr Shaik Emam said that it was not clear how the structural reform at Transnet Freight Rail would be implemented, especially the plan to allow third parties to access the freight rail network.

He said that he thought that it was the first time that the Committee had heard from Treasury that public debt levels were a problem, with gross loan debt expected to reach R5.5 trillion in 2024/25. In the past, the Committee had been told that public debt was normal and that all countries borrowed, with Treasury providing examples like Japan. Treasury was correct that a lot of money, including a lot of what government borrowed, was being used for consumption. How could that situation be turned around, so that that money was used instead on infrastructure development and thus on economic growth? Treasury was also correct that economic growth required infrastructure development. However, Members knew that South Africa had difficulty implementing infrastructure projects. There was underspending and a lack of capacity for implementation.

Mr Sishi replied that turning around the debt problem would require two things in combination. First, it was a matter of addressing South Africa’s severe and longstanding fiscal imbalances, as the fiscal framework sought to. Second, it was a matter of higher economic growth, over the long-term and beyond the current commodities-driven recovery.

Mr Shaik Emam said that there was a revenue “crisis” in South Africa – government’s expenditure far exceeded its revenue. One of the reasons for this was that the government did not get value for money. Yesterday, he had been called into an urgent meeting, and he had been “shocked” to find out that the meeting was with somebody who had found out that the NFP was going to be running municipalities, under coalitions, and therefore wanted to discuss tenders and procurement. Hundreds of billions of rands were being lost through the procurement system. He knew that there was a draft Public Procurement Bill, and he wanted Treasury to act urgently to ensure that government received value for money. Government would save a lot of money if there was a transparent and credible procurement process, from local government upwards, with the prices and recipients of all tenders published publicly. Officials, including former Chief Justice Mogoeng Mogoeng, had said that a large portion of government’s expenditure on goods and services was wasted, because there was no value for money.

Mr Qayiso said that he appreciated the explanation that had been provided for the Minister’s absence. It would be unfair to “condemn” the explanation, as Dr George had – if somebody was ill, there was nothing that could be done about it. He appreciated that the Committee had received “very detailed” reasons for the Minister’s absence, and he accepted the Minister’s apology.

He noted that South African GDP growth was expected to jump to 5.1% in 2021, and then to fall to 1.8% and 1.6% in the following years. What factors influenced that sudden drop from 5.1% to 1.8%?

Ms Boipuso Modise, Acting Deputy Director-General: Economic Policy, National Treasury, replied that in the first half of 2021, the economy had expanded by 7.5% on a year-on-year basis. That reflected some of the significant disruptions to economic activity in 2020, caused by the hard lockdowns. At the time of the February 2021 budget, Treasury had expected the budget to contract in the first quarter of 2021, but that had proved not to be the case – the economy was more resilient than Treasury had anticipated. She thought that the better-than-expected performance in the first quarter was likely due to the augmented approach to lockdowns, which allowed more economic activity than had been possible under the hard lockdowns. In addition, there had been a very supportive external environment for growth, with an increase in economic activity globally. Higher demand for South African exports, coupled with higher commodity export prices, had resulted in very strong growth momentum in the first half of 2021.

However, she said that Treasury was particularly concerned about the impact of the civil unrest during the third quarter, as well as about the resurgence of familiar structural constraints on growth, especially the electricity shortages. The latter were expected to limit the pace of growth beyond 2021. Treasury believed that economic growth was likely to contract in the third quarter, due to the impact of the civil unrest, the protracted third wave of COVID-19 infections and associated lockdowns, and the structural constraints. Thereafter, in the fourth quarter, Treasury expected a moderate recovery. The net effect was that Treasury expected 5.1% growth in 2021 overall. She supposed that 5.1% growth was significantly slower than the 7.5% growth observed in the first half of the year.

She said that beyond 2021, Treasury expected decreases in export commodity prices, as well as increases in import commodity prices, especially increases in the oil price. That would have significant negative implications for the terms of trade, which had supported growth in 2020 and 2021. That support would be absent going forward. In that context, Treasury thought it critical to move forward “with haste” on the structural reform agenda outlined in the MTBPS. The MTBPS also presented two different scenarios, one of which – the upside scenario – took into account the potential gains from private sector participation in the economy. Treasury thought that the increase in the licensing threshold for embedded electricity generation could have significant gains if it led to increased private sector participation. Those gains, especially in private sector investment, could significantly improve the economic outlook, not just in 2022 but in the medium-term or generally. 

She added that, as Members were aware, Treasury’s projections for the growth outlook were “policy-neutral.” Treasury did not explicitly include future shocks in its economic forecasts. However, it was very mindful of the potential disruptions to economic growth that could be effected by resurgences of COVID-19 infections. Aware of such risks, it monitored the vaccination rate and the potential of COVID-19 to disrupt economic activity in the future.

Ms Abraham said that the presentation had unpacked the summary of the MTBPS that the Minister had provided in the House. She would start where Mr Sishi had ended: at the end of the presentation, he had mentioned as a risk the fiscal situation in municipalities. There had recently been local elections, preceded by protests in various areas. Given this, what kind of assistance did Treasury give to municipalities, especially in respect of financial controls? The Minister had mentioned that some municipalities – she thought hundreds of them – were in financial distress, and some were even being managed, to a certain extent, by Treasury. What was Treasury doing to assist in the finances of local government?

Mr Mogajane replied that the performance of municipalities, and the way in which they used the funds and grants they received, was a “sore” and “disturbing” issue. It remained an important challenge. However, he was pleased that following the local government elections, there seemed to be focused political support for improving the situation. Treasury would continue to help improve financial management –  including by providing oversight – where it could, given its limited resources. Treasury had a small team, and there were more than 250 municipalities. There was sometimes a tendency for people to expect Treasury to be “everywhere all the time,” which was not possible even if it was desirable. Treasury’s position was that existing accountability systems had to be used efficiently and effectively to hold officials accountable on service delivery. There were oversight bodies at the municipal councils – these would be established as the newly elected councils were constituted. Treasury, COGTA, and provincial COGTA departments also had a role in this oversight. The ongoing deterioration in many municipalities was “very sad.”

Ms Malijeng Ngqaleni, Deputy Director-General: Intergovernmental Relations, National Treasury, said that the Constitution provided a wide range of measures which government could use to respond to the “financial and service delivery crisis” in municipalities and to ensure that municipalities were functional. Government had provided extensive support, and had spent a lot of money on doing so. When that kind of support failed, the next step was financial interventions, which the Constitution also provided for. Treasury had seen that there had been challenges in the application and enforcement of the financial recovery framework. This was partly due to leadership and governance challenges – people did not respect the rule of law.

She said that Treasury had now engaged all stakeholders, including the provincial treasuries and local government departments, in understanding what went wrong in applying the framework, and what needed to happen for it to be applied properly. It had had these engagements last year and at the beginning of the current year, and it would lay out its expectations clearly to the newly elected councils when they were inducted. So Treasury had “geared up.” Part of what it needed to do in the struggling municipalities – there were more than 43 of them – was ensure that the law was enforced and that the financial recovery framework was enforced. The newly elected councils would find that they had no choice – they were taking over municipalities that were in crisis. With the support that Treasury would provide, including through the financial recovery programmes, some of the challenges should be addressed in the new administrations, provided the leadership was committed to serving and to “doing the right thing.” She thought that the key thing was “extracting accountability” and enforcing consequence management. Treasury also didn’t have much choice – the courts had indicated that it had not done enough in the past. Because of a court judgement, national government and Treasury were intervening in Lekwa municipality.

Ms Abraham asked about the role of the private sector in improving economic growth. Government was concerned about jobs, about inequalities, and about “unending” poverty. How did Treasury facilitate private sector participation in existing government policies and strategies? For example, did government hold bilateral meetings with the private sector?

Deputy Minister Masondo replied that he strongly agreed that public-private partnership was important for development and growth. The government worked with the private sector at various levels – different parts of government, such as individual departments, had relationships with different parts of the private sector, such as individual industries. This kind of engagement required a very skilled and capable public service – government had to engage business from an informed position and in a strategic way, so that it was not easily “captured” by narrow corporate interests. Otherwise, government might acquiesce to industries’ demands even when they generated economic inefficiencies – for example, by establishing high tariffs – and the incentives it offered might become mere “freebies” for businesses. Government had to attach conditions to the incentives it offered. He thought that government departments were capable enough to avoid being captured.

He said that Operation Vulindlela brought government to individual factories. For one example, it had visited a factory which produced fibre. Companies had raised a range of challenges they faced with municipalities, and Treasury was able to facilitate engagement between the companies and the municipalities, and to support the municipalities in doing what they needed to do. So government worked closely with the private sector, and it was “on the ground,” undertaking visits at factories, instead of merely engaging at a high industry level at Nedlac and so on. For another example, it had engaged with some factories around Ekurhuleni. They had complained that electricity was expensive and undermined their global competitiveness, which Treasury agreed with, but Treasury had also noted that they used very inefficient machinery – some of them had last invested in machinery in the 1960s or 1970s. Domestic foundries could not compete with Chinese foundries if they had not invested in energy-efficient technology. Some of the issues that Operation Vulindlela identified, and some of the reforms that it suggested, arose organically from such engagements with the private sector, but Treasury did not necessarily take everything that businesses said at face value – it maintained its autonomy and a critical distance. Its position was that the economy’s potential should be unlocked, because doing so would create jobs and establish better conditions for generating revenue and for addressing fiscal imbalances.

Mr Z Mlenzana (ANC) agreed with Mr Qayiso that there was nothing that the Committee could do if the Minister was ill, except wish him well and pray for his health. Hopefully he would get well soon and would then be able to meet with the Committee.

Mr Mlenzana said that the Minister had been very clear about the Adjustments Appropriation Bill during his MTBPS speech. However, he was interested in hearing details about Treasury’s plans for restructuring the SOEs. Such a restructuring was urgent – the challenges had been longstanding, and had been “draining” the state’s already constrained resources.

On the Division of Revenue Amendment Bill, he said that the Financial and Fiscal Commission felt that the structure of conditional grants should be reviewed. How did the Ministry and Treasury respond to that suggestion?

Ms Ngqaleni replied that Treasury could not respond at present, because it was not aware of that proposal. She would look into the details.

Mr Mlenzana said that the Parliamentary Budget Office had made certain claims – “allegations” was not the right word, because they were claims about things that were visibly occurring. The government was still “lagging behind” in education and healthcare, as well as in land reform outcomes. If land reform was not effected timeously, government was not meeting its targets for expanding access to land. Government was also lagging behind in the appointment of skilled public sector managers.

Mr Sishi replied that Treasury’s argument, reflected in chapters three and four of the MTBPS, was that historically there had been a tendency in government, including among line functions, to create new mandates, functions, and commitments on the assumption that there would always be money with which to meet those commitments. He thought that the impact of the two crises of the last 15 years – the global financial crisis of 2008, and the COVID-19-induced economic crisis of 2020 – called for everybody to take a step back and pause to carefully consider how new mandates were created, and what assumptions and expectations were behind them. Such reflections led to the realisation that when establishing commitments and policy priorities, one had to think carefully about their cost and sequencing, and about the long-run economic performance of the country. Long-run economic performance was a better indication of government’s ability to afford various commitments than short-run improvements in growth and revenue were. But historically in South Africa, policy trade-offs had not been approached in this way. Long-run commitments had been entered into on the basis of short-run improvements in growth and revenue. That had “come back to haunt us.” The new fiscal strategy – which Treasury had been working with since the 2020 MTBPS – said that decisions should be made on the basis of long-run, not only short-run, considerations and constraints. In the meantime, government should fix the long-run structural problems, so that South Africa could reach a different growth and revenue trajectory, on which government would be able to make different spending decisions. But, until that was done, government should not make long-run commitments in response to short-run improvements.

Deputy Minister Masondo added that he agreed with Mr Mlenzana about the importance of hiring skilled public servants. A skilled public service was a critical component of a developmental state and a capable state. He had been advised that the public service professionalisation framework was being finalised, and the Ministry thought that would “add more impetus” to the government’s work in building a capable state. 

Mr Vumile Lwana (ANC, Eastern Cape Provincial Legislature) said that the part of the presentation about the fastest growing expenditure items (see slide 17) had sent “shockwaves through [his] spine.” He had especially noted the unprecedented debt servicing costs, and the contraction in social development and health spending. This led him to wonder whether Treasury could share any lessons it had learned from the civil unrest in July. On the 5.1% growth forecasted for 2021, he said that growth forecasts were always positive, but sometimes circumstances changed and the economy ended up contracting. There had been an undertaking to partner with the private sector in infrastructure development (see slide 5-6), and infrastructure was at the centre of economic growth. However, which parts of the private sector was government partnering with? Were these domestic or international companies, and how many of them were SMMEs?

Deputy Minister Masondo said that many of Members’ questions hinged primarily on how the government would grow the economy in order to deal with unemployment. Implicit in those questions was a question about how far government was in implementing what it had said it would do – this was a question about the whole of government, because some of Members’ questions related to departments other than Treasury. And implicit, or even explicit, in those questions were also suggestions about how government should deal with issues like economic growth and unemployment. He thought that everybody agreed that economic growth came from investment – private sector investment, as well as public sector investment. Indeed, growth was mainly a function of private sector investment, which created jobs and generated tax revenue. However, public sector expenditure was also an important part of the equation in creating an environment conducive to growth. Treasury looked at the quality of expenditure over the years, including the quality of, for example, spending on the bailouts of SOEs, and consumption spending on the public sector wage bill. Not all public spending generated and supported economic growth. Moreover, the quality of private spending could also be poor. For example, spending on high-tech sectors such as space exploration did not create a lot of jobs or generate a lot of wealth. Over the years, Treasury had been trying to foreground this issue of the composition and quality of expenditure.

He said that for government, as Mr Shaik Emam had raised, the question was how to encourage and assist the private sector to invest in job-creating industries. Of course, investors could invest their money wherever they wanted, but government was interested in job-creating investment. Mr Shaik Emam was correct that manufacturing had significantly declined, from about 24% of GDP in 1994. However, it was not correct that government was not taking the issue seriously or was not doing anything about it. Treasury supported the work of the Department of Trade, Industry and Competition (DTIC), and had put in place “enormous” incentives for different industries in the manufacturing sector. Government used “both a stick and a carrot” to encourage private sector investment in job-creating industry. For example, in the automotive industry, there were incentives that were conditional on global competitiveness and export performance. In the last few years, government had spent billions of rands to support the clothing and textile industry specifically. Again, the focus in this regard was helping businesses to be competitive, through the supply of machinery and skills, and through improving their labour processes by just-in-time interventions and so on. There was a whole range of things that government was doing to support private investment in job-creating activities. Likewise, on Mr George’s question about SMMEs, there was a lot of government support for SMMEs – DTIC and the Department of Small Business Development could brief the Committee on the details of the exact interventions. Government understood that SMMEs faced barriers to entry, as a result of the high level of concentration in the economy and difficulties accessing markets, skills, and finance. There was a range of packages that government provided to help SMMEs to overcome those barriers to entry.

However, Deputy Minister Masondo agreed that existing interventions might not be enough, and that there were certain further things that government should be doing, some of which would not cost any money. For example, bylaws in certain municipalities were making it very difficult for SMMEs to operate. There were other fiscal-neutral interventions that could increase private spending on investment. For example, on the supply side, there were the Operation Vulindlela projects, as Mr Mogajane had mentioned. Improving electricity supply did not require any funding – it only required changing the regulations, as government had done by changing the licensing threshold. That regulatory change would lead to businesses investing in self-generation, and, by building power generation stations, they would be contributing to fixed direct investment. Another example was Visa regulations, which, without spending any money, could be reviewed to attract more tourists. Some of the interventions that government was undertaking did not cost it anything – it was just a matter of relaxing certain constraints on the economy, to allow the private sector to participate more easily. Some of the interventions would even generate revenue for the state, such as the tourism revenue from adjusting the Visa regulations. Government was also looking at eliminating unnecessary regulations and paperwork – for example, sometimes SMMEs had to fill in an excessive number of forms in order to apply for a tender.

He said that Treasury agreed that unemployment was a major problem. Part of the problem was structural – that is, structural unemployment arising from the mismatch between the existing skills and the skills demanded by the economy. Through Operation Vulindlela, Treasury was talking with the Department of Higher Education and Training about how government could ensure that the education sector supplied the skills that the economy required. In the immediate term, government could take measures to import some of those critical skills.

The Chairperson asked about the plan to bring a private company into the rail sector (see slide 5). Where and how would this be done? Which segment of the sector would this affect? The Passenger Rail Agency of South Africa (Prasa) was responsible for commuter transport, and Transnet for freight transport. He knew that the state had invested a lot in the rail sector – there was a plant in Nigel where Prasa, in partnership with an international group, manufactured locomotives and coaches. Would prices remain affordable for commuters after a private company entered the sector?

Ms Nomvuyo Guma, Chief Director: Microeconomic Policy, Treasury, replied that the plan was to allow private participation in the freight side of the rail sector. Going back to a paper it had published in 2019, Treasury had held that one way to enhance efficiency in this sector would be to increase competition, which Treasury planned to do by allowing third parties to access Transnet’s rail network. To do this, Transnet Freight Rail’s infrastructure would have to be separated from its operations, and then some kind of independence would have to be introduced in the sector, by way of a regulator. Transnet would have to grant some access to its core rail network to third-party users, even while it retained ownership of the assets. In that way, competition could take place at the operational level. People complained that Transnet’s monopoly in freight logistics did not conduce to competitiveness or to the kind of efficiency that a modern economy required. There were related backlogs at the courts, and there were inefficiencies which impacted the mining sector, for one example, quite heavily.

The Chairperson said that the capacity of the SOEs was a challenge. Treasury had been bailing out SOEs over many years, and everybody was concerned. However, when Treasury provided these bailouts, did it also look at the governance of the SOEs? Did it ensure that the board and senior managers had the necessary skills? For example, right now, everybody was complaining about Eskom – loadshedding was affecting production and students’ exams. It was a serious problem for the country. Did Eskom’s board and management have the necessary skills? Did they have the correct backgrounds, with knowledge of and experience in the energy sector, and did they have the requisite managerial skills? One might think that Eskom was not performing, only to find that the people in Eskom’s governing structure had “no clue about electricity.” He was not criticising Eskom’s leadership in particular, but was using Eskom as an example because the public were unhappy about the energy situation, so the Committee had to raise it. Government always had to take responsibility for such failures, but the people in the SOEs’ governing structures did not want to take responsibility. Instead, they made “questionable” comments in public – they spoke as if they were politicians, which was “unacceptable.”

He said that, if he understood correctly, Treasury intended to increase private sector participation in the rail sector and in the ports. 70% of the economy was already private. Deputy Minister Masondo had alluded to the concept of a capable and developmental state, as outlined in the National Development Plan. If South Africa did not use the SOEs as building blocks to a developmental state, how would private participation build a developmental state? He did not have a problem with increasing private sector participation, but would that not ultimately lead to privatisation in the long-term, with the SOEs being pushed out by private companies? These were serious policy matters that the Committee had to understand. The Committee also had to ensure that Treasury’s policy was in line with the ANC’s policy. It understood that Treasury was under pressure, but pressure should not lead the country, in the long-run, to a situation in which the whole economy was controlled by the private sector, quite contrary to the aim of a developmental state.

Mr S Buthelezi (ANC), Chairperson of the Standing Committee on Appropriations, said that he had a follow-up to the Chairperson’s questions. Had the decision to pursue these reforms in the rail sector been based on research? He knew that Prasa sometimes struggled to access the rail network, especially during certain hours when Transnet prioritised freight over passenger trains. There were a number of factors to consider, and the decision should be based on proper research, not “gut feel.” He was not claiming that the decision had been based on gut feel, but the Committee had not been furnished with any of Treasury’s research, so that Members could intelligently engage with the decisions and understand which assumptions underlay them. Personally, he did not believe that every problem could be solved through private sector participation. He thought that every case had to be dealt with on its merits, rather than by the application of a blanket policy or strategy.

The Chairperson added that he thought that it would be appropriate for the Deputy Minister to respond, because his and Chairperson Buthelezi’s comments had a political orientation.

Deputy Minister Masondo said that government’s policy, insofar as reform in the rail sector was concerned, was predicated on “the logic of competition,” where increased competition would in turn would increase efficiency and reduce costs for customers. It would also increase reliability – with Transnet’s effective monopoly, it had not always been the case, in the past, that Transnet customers could trust that their products were going to reach their destinations on time. There were times when an SOE was called for, but sometimes there was “state failure” in the relevant sectors. Inefficiencies came from public sector monopolies as well as private sector monopolies – currently, because there was no competition, Transnet had no incentives to invest or to reduce its production costs. Bringing in competitors should make Transnet itself more efficient. The situation was similar with buses – the roads were owned by the state (although the state partnered with the private sector on financing), but several different bus companies, among which consumers could choose, operated on the roads.

He said that Eskom, for example, had been founded in 1923 to address a market failure and, under state regulation, to provide cheap electricity to ensure that South African business could be globally competitive. Currently, there was a “state failure” in that sector – if the country relied on Eskom alone, the energy supply would remain constrained. Households would be without electricity, and the Chairperson was right that students were currently writing exams without consistent electricity supply. That was why government had increased the licensing threshold to allow the private sector to generate electricity. He agreed with Chairperson Buthelezi that such decisions had to be based on research and facts – they should not depend on ideological positions, including either blanket resistance to or blanket support for private sector involvement. He thought that the decision on the rail sector was an evidence-based one. It had arisen initially from a Treasury paper, whose title he could not now remember, which had evolved into the Operation Vulindlela project.

He suggested that perhaps there should be a dedicated discussion, including DPE as well as Treasury, about the SOEs and government’s approach to private sector participation. When there was a market failure in a given industry, the private sector was sometimes needed, but sometimes what was needed was an entrepreneurial state – a state which saw an opportunity and acted as an entrepreneur to create value in areas where the private sector was not present or was not performing optimally. A dedicated discussion could seek to clarify the answer to the question: under what conditions should the state come in, and under what conditions should the private sector come in? Under what circumstances was an SOE needed? That discussion could be had in the context of Members’ other question about what “tough love” meant in practice for SOEs. How would government get the private sector involved in some of the industries in which the state had in the past been the dominant or only actor? If government engaged the private sector, how should it do so – for example, through an equity partnership, or by liberalising the sector as had been done in the aviation sector around SAA? If an SOE failed, would government continue to bail it out, or would “tough love” mean letting private competitors take over that sector? What were the implications of each approach for the fiscus and social spending? Government did have to “think hard” and make some trade-offs – it could not finance everything. The MTBPS highlighted, and future budget statements would continue to highlight, the necessity of these strategic choices. He would not claim that any policy decision could be ideologically neutral – ideology was about one’s values and so on – but he thought that Parliament, Treasury, and other stakeholders should come back to these issues in a future meeting to discuss the criteria that would be applied around SOEs, so that the debate was not purely based on ideological dispositions. That would be better than a “touch-and-go” approach that left government’s approach incomplete.

The Chairperson agreed that the Committee should arrange a meeting in which the Ministry could explain Treasury’s policy in full. Certain statements had multiple possible interpretations. For example, the Minister had spoken publicly about “tough love” for SOEs. In simple terms, what did that mean? Did it mean that there would no longer be bailouts, so that SOEs would be “on their own” even if they collapsed? The Committee did not want to guess at the Minister’s meaning – it would be better for the Ministry to explain in detail. The collapse of the SOEs would be disastrous, not only for the economy but for the public – the country would not be able to “absorb” the socioeconomic impact of such a collapse. These were big entities, which employed many people, managed big assets, and fulfilled a range of other responsibilities. The Committee could not just take the Minister’s statement at face value.

He said that the same applied to the issue raised by Chairperson Buthelezi. He acknowledged Ms Guma’s explanation on the Transnet issue, but what was the decision all about – competition or affordability? If a private partner or entity would be competing with Transnet, would it have its own railway line, or would it use existing government infrastructure? If the latter, at what price? The rail sector had at one point been run by a single entity, which had later been separated into two segments, run by Prasa and Transnet respectively. There were already difficulties running the Gautrain – it was very expensive to run. Treasury should provide the Committee with hard evidence to show what value could be added in the sector by a private competitor.

The Chairperson thanked all participants. He said that the Committee should accept the Minister’s apology, wish him a speedy recovery, and hope that he would be able to meet with the Committee sometime that week. The Committee would meet that evening after the plenary session to receive a briefing from the Parliamentary Budget Office, and again the next morning for public hearings.

The meeting was adjourned.