FFC 2024/24 DoR Annual Submission

Meeting report

The Chairperson welcomed the Committee and support staff, and acknowledged the apologies.

Dr Patience Nombeko Mbava, Chairperson, Financial and Fiscal Commission (FFC), said that a number of commissioners and researchers joined her. The FFC delegation consisted of Mr Thando Ngozo, Mr Siyanda Jonas, Mr Khutso Makua and Ms Gianni Delle Donne, all researchers at the entity. She would take the Committee through the first part of the presentation, and the researchers would take the Committee through the rest.

FFC overview: Division of Revenue Annual Submission

Dr Mbava said the Commission made recommendations relating to the following sections of the Constitution to Parliament, provincial legislatures and any other authorities determined by national legislation:

• s214(2) Equitable shares and allocations of revenue;
• s218(2) Government guarantees;
• s228(2)(b) Provincial taxes;
• s229(5) Municipal fiscal powers A functions;
• s230(2) Provincial loans; and s230A(2) Municipal loans

Legislation referred to in these sections may be enacted only after the recommendations of the FFC have been considered.

The theme of the submission was ‘Improving service delivery and inclusivity in an environment of expenditure moderation’ within a context where the South African economy was faced with slowing global growth, geopolitical tensions, rising inflation, high unemployment, acute power challenges, inefficiencies in state-owned enterprises (SOEs), and climate change.

Mr Jonas explained the context within which the submission was being tabled. The South African real gross domestic product (GDP) had increased for two consecutive quarters of 2023 --0.4% in the first quarter, and 0.6% in the second, but low growth would likely persist, which would have a defining impact on public finances. This was due to a combination of external and domestic risks such as the electricity crisis and deteriorating infrastructure.

The presentation detailed the country's gross loan debt and budget deficit. The gross load debt would rise from 71.1% of GDP in 2022/23, to 73.6% of GDP in 2025/2026. After this point, it would likely decline.

The February budget had expected that the budget deficit would decrease, but currently, this seemed unlikely due to low revenue collection due to falling commodity prices.

Inflation had shown a slight increase, from 4.7% in July to 4.8% in August. This was still an improvement from the 7.8% inflation rate of July 2022. The increase in interest rates to stabilise prices would increase South Africa’s debt servicing costs, requiring policymakers to strike a balance between growing debt in the face of rising inflation.

The official unemployment rate had decreased to 32.6%, and the expanded unemployment rate had dropped to 40.1%

Escalating global inflation: Sources, spillovers and fiscal sustainability

Mr Ngozo presented chapters one and two of the FFC's presentation, starting with the findings.

COVID-19 and the Russia-Ukraine conflict have made a major impact on inflation globally. Governments across the globe had provided stimulus packages during the pandemic, causing increased deficits and debt. An unbalanced recovery had ensued, characterised by high debt, uncertain inflation and external risks. The effects of the Russia-Ukraine war had sustained inflation pressures.

The findings of this chapter were largely related to the effects of inflation on inequality and poverty.

• High inflation could negatively affect society, and the poor were more vulnerable to its effects.
• Those with significant debt could benefit from inflation, as the real value of their debt decreased.

Findings relating to inflation and public debt dynamics showed that higher inflation rates would increase short-term and maturing long-term debt because they would be refinanced at higher interest rates. Over time, inflation reduces debt by eroding the real value of outstanding medium- and long-term debt.

What were the effects of increases in public debt on economic growth? The findings suggest that when a country’s debt increases significantly, it could cause a decrease in its economic output. This effect was temporary, and the economy would recover over time. Economic growth was negatively affected when a country had high debt compared to its income. If a government could generate more money than it spends, it resulted in a primary surplus which could aid economic growth.

Mr Ngozo said the FFC recommended that National Treasury should:

• Continue to focus fiscal consolidation on an expenditure and revenue mix appropriate for debt reduction. This should be done by targeting a primary surplus.
• Craft a medium-term fiscal framework that must maintain long-term debt sustainability through consolidation, improving debt transparency, advancing debt management functions, and enhancing revenue collection and spending efficiency.
• In conjunction with the Department of Social Development (DSD), design a social security programme to protect those who were vulnerable to the negative impact of rising inflation.

Impact of SOEs and the Basic Income Grant (BIG) on fiscal sustainability

The chapter assesses the state of South Africa’s major SOEs, their role in economic development, their impact on fiscal sustainability, and possible reforms. Because SOEs receive significant support from government, it would impact the government’s ability to implement the BIG.

Secondly, the chapter would assess the fiscal feasibility of implementing the BIG, which was a policy proposal for a permanent social assistance programme extending income support to those with no income.

The FFC had made the following findings:

• The appointment of an Electricity Minister could result in turf wars with other entities with similar responsibilities.
• The exemption of Eskom and Transnet from specific Public Finance Management Act (PFMA) regulations increased the risk of financial mismanagement and corruption.
• The government had paid R162 billion to financially distressed SOEs over the past 12 years, Eskom being the largest benefactor.
• Eskom and Transnet’s profitability and solvency ratios had declined and reflected poor financial health.
• Eskom had incurred a net loss of R18 billion in 2021.
• Transnet had incurred a net loss of R8.4 billion in 2021, and its net value had decreased from R143 million to R129 million.
• Government’s total guarantees to SOEs amounted to 12.4% of GDP, which meant the government was assuming a considerable amount of financial risk by backing the debts of these SOEs.
• There had been 13.5 million social relief of distress (SRD) grant applications. KwaZulu-Natal (KZN) recorded the most SRD grant applications (3.1 million, as at January 2023) followed by Gauteng (2.6 million). There had, however, been a drop in SRD applications in the 2022/23 financial year. This could point to an issue of eligibility requirements and other administrative hurdles.
• The 2023/24 budget presents limited scope for increasing the social assistance budget to include a BIG in the medium term.
• The uneven and non-progressive distribution of personal income taxes means that should personal income taxes be leveraged as a financing option for the inclusion of a BIG, the tax pressure would unfairly prejudice the middle-income group.

Recommendations

National treasury should collaborate with SOE’s parent departments to:

• Reduce fiscal risk from quasi-fiscal activities;
• Prevent excessive resource extraction that could harm the competitiveness of SOEs;
• Mandate the implementation of effective systems to monitor budget execution.

National Treasury should also:

• Establish safeguards to prevent SOEs from becoming too indebted;
• Introduce reforms to improve the transparency of SOEs;
• Create a centralised holding company with strict controls on debt and capital expenditure plans

The Minister of Social Development should:

• Consider adjusting the SRD grant amount, adjusting for the cost-of-living crisis and unemployment;
• Account for the drop in SRD applications in the 2022/23 financial year;
• Develop a policy tool that interlinks with access to complementary social and economic opportunities, with opportunities such as the Expanded Public Works Programme (EPWP).

Review of learner/teacher support materials and learner transport in SA

Ms Delle Donne presented chapters three and four of the presentation.

She said chapter three aimed to review the provision of learner-teacher support materials (LTSM) and learner transport. Failure to provide LTSM was in contravention of the right to basic education.

The findings of the FFC had been:

• The main cost driver in the basic education sector was personnel (75% of spending).
• Finalisation of the LTSM policy, which had been in draft form since 2014, was critical. eLTSM could be strengthened in this policy.
• Funding was not linked to growing the LTSM needs of learners as they progressed to higher grades.
• The provision of LTSM was central to addressing the challenge SA faces in terms of reading for meaning, as 84% of grade four learners could not read for meaning.
• The national Department needed to strengthen oversight of the provincial Education Departments (PEDs) in regard to LTSM.
• PED oversight over schools required an electronic monitoring system.
• There was inconsistency with respect to the actual number of learners qualifying for learner transport reported by the national Department of Transport and the national Department of Basic Education.
• The number of learners qualifying for learner transport was above the number being targeted, while the number of learners benefiting from the programme was above the number of learners targeted.

Recommendations

• The Minister of Basic Education must finalise and approve the draft LTSM policy.
• Funding for LTSMs should be prioritised, especially in quintile 1, 2 and 3 schools.
• National funding norms need to be developed to guide spending on LTSM per child.
• The Minister of Basic Education must fund a programme aimed at improving reading for meaning that is uniformly implemented across the nine provinces.
• The Minister of Basic Education must expand the modules contained in the South African School Administration and Management System (SA-SAMS) to include LTSM.
• The national and provincial Transport and Basic Education Departments should improve data collection and reporting.
• Infrastructure delivery should be coordinated to ensure that the need for learner transport is kept to a minimum.
• A new funding model for learner transport needed to be developed.

Assessing climate change responses in local government

This chapter aimed to assess the climate change responsiveness in the local government sphere to make recommendations for the government to integrate climate change into their respective projects and budgets.

Findings

• South Africa had the legislation, policies and institutional frameworks in place to assist in achieving international and national commitments concerning climate change, but the translation of the commitments and policies into initiatives and targets remained weak.
• Municipalities were aware of climate change and its effects, but still failed to integrate it with their plans.
• There was a lack of understanding regarding climate change science, technical skills, capacity, funding and dedicated units responsible for climate change.
• Municipal responses to climate change have been reactionary.
• In municipalities that did have a budget for climate change response, the budget was insignificant.
• Infrastructure maintenance plays a significant role in addressing climate change, yet municipalities spend less than the required amount on this.

Recommendations

• The national Department of Forestry, Fisheries & Environment (DFFE) and Cooperative Governance and Traditional Affairs (COGTA) should spearhead the integration, coordination, and implementation of climate change responses.
• The Department of Monitoring and Evaluation (DPME) and the Presidential Climate Commission (PCC) must monitor, evaluate and report on the progress made in integrating climate change responses into government planning.
• Committees at the legislatures and municipal councils should exercise oversight, ensuring integration, coordination, and implementation of climate change responses.
• National Treasury, together with COGTA and the national Department of Public Works and Infrastructure (DPWI), should revise formats for the infrastructure grant frameworks to include climate change response specifications.
• The Minister of Finance should create an enabling framework to ensure government budgets are climate-sensitive.

Investigating spatial inequalities and efficacy of municipal spending in driving local economic development

Mr Makua presented chapters five and six of the presentation.

He said that the FFC had made the following findings:

• Many municipalities struggled to fulfil their basic service delivery mandate and have been unable to drive local economic development (LED).
• It was crucial for municipalities to collect their own revenue to sustain the municipal finance system, but many municipalities were struggling to do so.
• There was a need to reevaluate the local government fiscal framework in South Africa’s rapidly changing economic climate.
• Rural municipalities tended to have higher poverty rates and lacked the capability to raise sufficient revenue, so they had become dependent on intergovernmental transfers from the fiscus.
• There was an unhealthy balance between core and non-core spending priorities, which undermined the basic service delivery mandate of municipalities.
• There was gross underspending and poor performance of municipal infrastructure grants.
• Rural municipalities received predominantly municipal infrastructure grant (MIG) funding to address backlogs in service delivery.
• There was a positive relationship between the Integrated City Development Grant (ICDG), the National Electrification Program Grant (INEP), National Development Partnership Grant (NDPG) and LED. The results were, however, negative for B2 and rural municipalities when they were underspent.
• A 1% increase in LED in municipalities leads to a 137% and 94% increase in employment in metropolitan and B1 municipalities respectively.

Recommendations

• The Minister of CoGTA and Minister of Finance should review the local government fiscal framework.
• CoGTA and National Treasury should develop a funding plan to enhance the capacity of municipalities to spend conditional grants effectively.
• Future framework development on LED should include an aspect of skills development.

Municipal cost recovery and affordability of basic services

Mr Makua said the FFC's had found:

• Rising municipal consumer debt levels posed a threat to the financial viability of municipalities.
• Difficulties with cost recovery may be linked to non-payment, which was linked to affordability.
• The cost coverage ratio between 2017 and 2020 was low for the four trading services (electricity, water, sanitation and refuse).
• The average collection rates for category A municipalities were above 90%, while B4 municipalities were around 60%.

Recommendations

• National Treasury, CoGTA and the South African Local Government Association (SALGA) should urge municipalities to apply effective revenue enforcement and credit control and improve billing and accounting systems, to increase payment and cost coverage.
• CoGTA, in consultation with SALGA, should ensure that the credit control systems of Eskom and municipalities were aligned by a memorandum of understanding (MoU).
• SALGA should increase awareness about the importance of paying for municipal services.
• Municipalities should assess the affordability of the municipal bill as a part of the tariff-setting process.

Dr Mbava thanked all the presenters, and said that she hoped the recommendations would assist the Committee in its oversight role as it considered the budget for 2024.

Discussion

Mr D Ryder (DA, Gauteng) asked if a supporting document accompanied the presentation and went into more detail. The issue around the underspending regarding the SRD grant needed to be noted, as it was concerning amidst calls for the BIG to be implemented. There needed to be clarity on the criteria and how they were being implemented. It appeared that the lack of uptake of the SRD grant was not due to a lack of need, but rather administrative issues around who qualified for the grant.

On the decline in tax morality, there was a relationship between the very public outcomes of the Zondo Commission and the reluctance to pay tax. The government needed to be careful because when it misspends tax money, it encourages people not to pay their taxes and fosters a culture of non-payment that would be irreversible.

On the use of the term ‘climate-sensitivity’, he suggested that the term ‘eco-sensitivity’ rather be considered, as it referred to other important issues such as pollution which was not encompassed by the term ‘climate-sensitivity,’ but may be more relevant to local government contexts.

He asked if SOEs that played a large role in the economy, such as Eskom and Transnet, should be handled a bit differently than the other SOEs, as it may not always be helpful to lump them all together.

He asked Mr Makua to elaborate on his point that wealth distribution had not been properly understood and had brought about the 75/25 revenue split. Was the FFC included in the budget forum meetings? The FFC had made relevant points around the division of revenue and equitable share calculation. SALGA did not necessarily have the capacity to put together the same type of recommendations the FFC was able to, and it would be helpful to have these recommendations and more technical aspects heard in the budget forum.

He asked where the municipality category classifications (B1, B2, B3 and B4) were from.

He referred to the margin squeeze that some of the bigger municipalities were experiencing due to the National Energy Regulator of South Africa (NERSA) allowing Eskom to pass on higher annual increases to municipalities, but allowing municipalities to increase their prices by a lower amount. It was squeezing the margin required for municipalities to fund the reticulation side of the business, and placing the financial model of municipalities under further risk. He noted that this had not been brought up in the presentation, and would like the FFC to comment on the matter.

Mr M Moletsane (EFF, Free State) asked for clarity on slide 17, which stated that the government had paid R162 billion to financially distressed SOEs over the past 12 years, with Eskom receiving 82% of that amount. Did this funding really serve its purpose and bring about improvement in the SOEs?

Ms L Moss (ANC, Western Cape) said that she was concerned about the fact that Eskom was getting such large amounts of assistance while there were other SOEs also struggling with infrastructure and operational problems. She asked where the other 18% of funding had been allocated.

She asked the FFC to elaborate on the reasons behind the underspending of the SRD grant. Were there any awareness programmes on the grant? How long would this grant be available? Would it be increased?

She welcomed the LTSM programme, reiterating the importance of dealing with the issue of illiteracy in South Africa. There needed to be better monitoring of the infrastructure grant, because it was misspent in many municipalities, with some even using it to pay for salaries.

In the Western Cape, where she did oversight, most of the LEDs did not have training programmes and skills development programmes, and this needed to be rectified.

FFC's responses

Dr Mbava responded to Mr Ryder that there was a printed document on the FFC submission and a technical report and policy briefs on the various chapters. The FFC would compile all these documents into a pack and deliver it to the parliamentary office.

She agreed that there were issues regarding the access to the SRD grant, especially regarding its implementation. The SRD grant would end after March 2024, and there was still no clarity beyond that point. The possibility of the BIG grant was therefore being considered for the period after March 2024.

She confirmed that the FFC was a member of the Budget Forum. Most of the FFC analysis and the associated deliberation happened prior to the Forum. There was another forum called the Technical Budget Forum, which was where FFC researchers and researchers from other entities such as CoGTA, SALGA and National Treasury, discussed technicalities before it went to the Budget Forum, so all of the discussions and recommendations happened before it gets to the political arena. It would be possible for the FFC to ask for an audience at the Budget Forum, where they could present again.

Mr Ngozo responded on the cause of the underspending on the SRD grant, and said analysis had found a huge demand for the grant, so the issue involved access and administration. Another aspect that may be contributing to the problem was the need for access to the internet to access the application for the grant. This was a problem, especially in rural areas.

On the assistance to SOEs, specifically Eskom and Transnet, he said these SOEs were key actors in the South African economy and essential for economic growth, so that was the primary reason the government supported them so much. The key issue was to strike a balance between their strategic importance and the need for transparency, accountability and good governance. The FFC was worried that special treatment could sometimes undermine the principles of fair competition, fiscal responsibility and the efficient allocation of resources.

On Ms Moss’ question on the futility of support to SOEs, the FFC was of the opinion that it was not because they played a strategic role in the economy that they had to be supported. The challenge was that they could not be supported financially and still continue to fail and make a loss. Financial support must therefore go hand-in-hand with the responsibility of being financially prudent and being able to operate in a sustainable manner. There must be accountability from the SOEs' side and, as said in the presentation, financial assistance from the government must be accompanied by conditions that ensure a turnaround in terms of finances and operation.

Mr Jonas agreed with Mr Ngozo that the overreliance of SOEs on bailouts caused significant fiscal risk. In the case of Eskom, the government had to take up some of its debt, which increased the country’s debt-to-GDP ratio and it also affected the debt servicing cost. It could result in some fiscal sustainability issues.

Mr Makua explained the categorisation of municipalities, indicating that B1s were secondary cities which were bigger local municipalities, B2s were large towns, B3s referred to smaller municipalities and B4s were rural municipalities, according to the municipal demarcation board's categorisation of municipalities.

On the 75/25 split, the main question was whether this assumption still held in this time and age. It may still hold for metros and secondary cities, but it differed for smaller and rural municipalities, as their revenue base was small and limited. Bigger municipalities collected revenue from all four trading services, but rural municipalities were characterised by high levels of unemployment and poverty and therefore could not afford the services. This was why there had been calls for the assumptions of the white paper on local government to be reviewed.

On the issue of the margin squeeze, in the current economic climate which was characterised by inflation and high interest rates and consequently high unemployment, this tariff hike may prove to be counterproductive and may harm revenue collection by the municipalities. This was also mentioned in the presentation, where the impact of high municipal tariffs was discussed. This issue was coupled with the impact of load-shedding and the solar panel incentives by National Treasury which may negatively impact municipal revenue and the ability of municipalities to cross-subsidise poor households with electricity.

Closing remarks

The Chairperson thanked the FFC for the presentation and engagement, and excused the team.

The Chairperson requested that the Committee consider the minutes of 20 and 27 September. The minutes were duly adopted.

The meeting was adjourned.