2022 Division of Revenue Bill: Financial and Fiscal Commission Input

Meeting report

The Chairperson, Mr S Buthelezi (ANC), greeted and welcomed Committee Members and Officials to the meeting. He asked if there were any apologies and it was confirmed that there were no apologies for the meeting. He then gave the floor to Dr Nombeko Mbava, Chairperson, Financial and Fiscal Commission (FFC). The delegation from the FFC consisted of commissioners and the research team. The FFC had come to the meeting to comment on the 2022 Division of Revenue (DoR) Bill. The order of the presentation was as follows: The Director of Research would give the background details, the technical team would go through the presentation in detail, and at the end, Dr Mbava would give a high-level overview.

Submission on the 2022 Budget: Division of Revenue Bill

The following delegation members took the Committee through the presentation: Mr Chen Tseng, Director: Research, Financial and Fiscal Commission; Mr Siyanda Jonas Specialist: Macroeconomics, Financial and Fiscal Commission; Ms Sasha Peters, Programme Manager: National Appropriations, Financial and Fiscal Commission; Mr Eddie Rakabe, Programme Manager: Division of Revenue - Provinces, Financial and Fiscal Commission; and Ms Nomonde Madubula, Senior Researcher: Division of Revenue - Local Government, Financial and Fiscal Commission.

 The presentation covered the following:
1. Background
2. Fiscal Framework and Revenue Proposals
3. 2022 Appropriation Bill
4. 2022 Division of Revenue Bill – Provinces
5. 2022 Division of Revenue Bill – Local Government
6. Balancing economic and social recovery with ensuring sustainable public finances
7. Concluding remarks

The document detailed the FFC’s submission on the 2022 budget (including tables and graphs) – please refer to the attached for the details.

Background

Mr Tseng presented this section and expanded on the presentation text. The DoR Bill was premised on the dual-pronged approach of economic and social recovery while maintaining a sustainable fiscus. That can and must be achieved through a productive division and reprioritisation across the spheres of the nationally raised scarce resources, specifically of the 41 national budget votes, the nine provincial governments, and amongst the 257 municipalities. He recalled that in the FCC's annual submission for the 2022/23 division of revenue, tabled ten months ago, the FCC concluded with evidence and research that it was improbable that the economy would return to pre-pandemic productivity levels in the short-term, due to both standing and emerging risks on both the supply and the demand sides. More specifically, these risks include the devastating effects of escalating inflation and unemployment. The structural impacts thereof depreciates and eliminates, respectively, households' and fellow citizens' purchasing power to survive. With the official Fourth Quarter 2021 Gross Domestic Product (GDP) data that came out the previous day, the FFC’s inferences were proven accurate. South Africa’s economy, despite growth in the last quarter, had yet to recover the productivity lost due to COVID-19 and the civil unrest. SA’s economy was comparable to a level last seen in 2017. Notably, the industries of electricity, gas and water supply continued to be the “Achilles’ heel” to SA’s economy, as these were down the largest, by 3,4 % in that quarter, with productivity hampered by load-shedding and infrastructure problems. The short, medium and long-term were all pointing towards a recovery that was likely to be much longer than any projection.

2. Fiscal Framework and Revenue Proposals

Consolidated Government Fiscal Framework

Mr Jonas delivered the presentation.

• A consolidated budget deficit of 6% GDP is projected for 2022/23, narrowing to 4.2% GDP in 2024/25.
• Debt servicing costs will exceed R300 billion per year from 2022/23, becoming the fastest-growing spending item.
• The poor and inefficient financial performance of State-Owned Entities (SOEs) still weighs heavily on public expenditure.
• A narrowing tax base due to rising unemployment may put pressure on public spending, increase the budget deficit, and increase borrowing requirements.

Mr Jonas added that the narrowing tax base was a potential threat to the projection of 4.2%.

The increase in debt-servicing costs would have a crowding-out effect on social spending. That was especially in the context of rising inflation, where a rise in inflation would be followed by a rise in interest rates. The latter meant that the debt servicing costs had the potential to go higher again.

Allocations by Economic Classification

• Over the MTEF period, capital payments will receive an allocation of R327.7 billion representing an average growth of 12.2% over the 2022/23 to 2024/25 period.
• Capital transfers will receive a total allocation of R260 billion over the MTEF period, representing an average growth of 7.9%.
• Employees' compensation average growth will be 1.8% over the MTEF period, and the average growth of goods and services will be 2,6% over the MTEF.

Allocations by Functional Classification

• Allocations across functions support the implementation of existing policy priorities around protecting the vulnerable.
• However, over the MTEF period, the learning and culture decreased by -1.1% and the social development decreased by -2.5%.
• Only the Community development and Economic development increase over the MTEF.
The budget cuts must consider the effect of these cuts on employment. A balance between budget cuts and employment preservation must be maintained.

Tax Revenue

• Gross tax revenue for 2021/22 is R61.7 billion above projections. The upward revision shows an improvement in Personal Income Tax (PIT), Company Income Tax (CIT), and Value Added Tax (VAT).

Mr Jonas added that there was a "windfall" coming from an output growth when it came to SA's mineral exports. But the FFC cautioned that that growth would not be sustained in the long run, and therefore expenditure commitments should not be made on that temporary windfall. The FFC also noted the reduction that had been proposed in terms of a percentage point CIT. But it was important to understand what the other drivers of investment were if that tax cut was done to encourage investment.

3. 2022 Appropriations Bill

Appropriations Bill

Ms Peters delivered this part of the presentation.

Ms Peters noted that the section on the Appropriations Bill emphasised some highlights from the 2022 Appropriations Bill, so the focus was more on the national departments. When one looked at the Bill in its totality, it would allocate R1.057 trillion across 41 votes for the 2022/23 financial year. That figure represented a nominal increase of 3% when compared to the revised estimate for 2021/22. (See the attached document for the full details.) She added that the largest allocation across national votes was the Social Development vote. Three key developments drove the 2022/23 increases over the MTEF:
Extension of the social relief of distress (SRD) grant for 12 months (2022/23),
Extension of the child support grant (CSG) to cater for double orphans (which would start in the 2023/24 financial year) and
Social security grants to be linked to inflation (which would also start in 2023/24). The cost of the extension of the SRD grants would come at a cost of R44 billion and was enabled by the revenue windfall.

The following national votes were covered as well: Higher Education and Training; Basic Education; Cooperative Governance; Water and Sanitation; and Transport. Ms Peters added that with the latter two, the FCC supported the targeting of funds towards those two votes because water is critical for the health and safety of SA's people and fundamental to growth and development. Likewise, with transport, good road infrastructure enables and facilitates trade of goods and services which is critical for economic growth and development. A key there would be that infrastructure projects were rolled out. There was a need for an awareness of infrastructure management challenges that had been a long-standing challenge that could really inhibit the possible gains that could be derived from infrastructure investment.

Recommendations

• The Commission supports government’s decision to prioritise funding for social protection alongside increases for key votes within the economic development cluster.
- The fact that a number of the increases are temporary and enabled by the revenue windfall cannot be overemphasised
- Increases across certain sectors will create future funding obligations for Departments – this includes the National Student Financial Aid Scheme (NSFAS) funding for existing bursary holders/new entrants to institutions of higher learning as well as the R24.6 billion allocated to hire teachers.
• Should the recovery of revenue not be realised, departments will be under severe pressure come 2023/24. Already projections for total allocation by vote show a decline for 2023/24.
• The Commission therefore advises departments to be aware of this potential threat and to be proactive in terms of developing contingency plans to fund commitments should this scenario arise.
• In particular, we emphasise the urgency of ensuring that the processes related to the introduction of the new higher education funding model unfold swiftly and are concluded in time for introduction in 2023.

4. 2022 Division of Revenue Bill – Provinces

Mr Rakabe presented on the 2022 Division of Revenue Bill-Provinces.

Overview of Provincial Government Allocations

• The 2022 budget proposes a total allocation of R682 billion or R2.0 trillion over the MTEF to the provincial fiscal framework.
• The 2020 allocation represents a slight improvement to the 202l Medium Term Budget Policy Statement (MTBPS) estimate of R658 billion.
- The upward adjustment is largely a result of the R53 billion added to the Public Employment Services (PES) to address teacher and Learning and Teaching Support Material (LTSM) shortages, hire education assistants and strengthen COVID-19 responses.
• Notwithstanding the upward adjustment in 2021 and 2022, the 2022 MTEF allocations remain below pre-COVID 19 projections.
- Conditional grant allocations are beginning to catch up to pre-COVID-19 levels – albeit at a slower growth rate.
- Average growth of total conditional grants of the MTEF allocation over the pandemic period is 6% in nominal terms.

On the conditional grants MTEF allocation, Mr Rakabe added that when one factored in inflation, that took one to around 1% in real terms.

Recommendation

• The Commission recommends that provinces identify selected delivery indicators and provide assessments of service levels using the 2020 financial year as a point of reference to determine the impact of stagnant allocations on service delivery. The assessments must also incorporate Provincial conditional grant delivery targets set out in the 2020 Division of Revenue Act (DoRA) in comparison to the year of assessment.

Key Provincial Conditional Grants

• Consistent reprioritisation has had a negative impact on the Human Settlements Development Grant (HSDG) – (between 2020/21 and 2021/22, there was a negative year-on-year growth rate of 46.3%).
- A significant decrease of the HSDG in recent years and marginal growth over the 2022 MTEF imply a further delay in reducing housing backlogs and improving housing conditions.
• The HIV/AIDS, TB, Malaria and Community Outreach grant/District Health Programmes grant has shown significant growth – between 2020/21 and 2021/22, an increase of R5.7 billion – and growth by R1.3 billion between 2021/22 and 2022/23. While the Commission commends the protection of the District Health Programmes grant, it is of the view that prioritisation on spending should be on preventative measures and programmes.

Mr Rakabe mentioned the agriculture conditional grant, especially the Ilima and Comprehensive Agricultural Support Programme (CASP) grants. When one looked at the graph on page 17, the allocations given to those particular grants were "minuscule". That questioned the alignment between SA's goal for using agriculture as one of the economic recovery levers relative to how much those grants were being allocated. The FFC saw a “bit of a disjuncture” that needed to be corrected going forward.

Recommendations

• The Commission recommends that provinces identify selected delivery indicators and provide assessments of service levels using the 2020 financial year as a point of reference to determine the impact of static allocations on service delivery. The assessments must also incorporate provincial conditional grant delivery targets set out in the 2020 DoRA in comparison to the year of the evaluation as the benchmark.
• The Commission notes that despite the R24.6 billion allocated over the 2022 MTEF for Provincial Education Departments to address the shortage of teachers, the Commission recommends that the Government consider the carry-through cost for teachers going forward.

5. 2022 Division of Revenue Bill – Local Government

Ms Madubula presented on the 2022 Division of Revenue Bill – Local Government.

Introduction

• 2022 will be a challenging year for municipalities as the political landscape has changed drastically after the municipal elections with governance and fiscal challenges which have the potential to impact the delivery of basic services.

• All these changes are taking place against the backdrop of COVID-19, which amplified challenges related to access to basic services (water, electricity, and sanitation) with wider fiscal gaps, municipalities (68%) are in financial distress.
- In addressing some of these challenges, the Commission notes and welcomes the review of the Local Government Capacity Building system, which started in 2021 with its implementation envisaged to kick start in 2023. The Commission is of the view that such initiatives will enhance municipal performance and move the local government sector forward and quicken the recovery process.

• Another welcomed development in the local government sphere is strengthening municipal revenue through development charges, which plays a critical role in financing infrastructure-related projects and boosting economic growth.

The Commission welcomes this approach as it aligns with the FFC 2020/21 submission on the Division of Revenue for supplementary revenue sources to supplement municipal revenue. The Commission further stresses that these reviews should be synchronised with the District Development Model (DDM), which seeks to address critical issues of municipal finance service delivery failures.

Local Government Equitable Share

• The share of local government allocations is expected to increase over the MTEF, from 9% in 2022/23 to double-digit of 10% in 2023/24 compared to the previous two financial years (2019/2020 and 2020/2021).

• The Commission is of the view that for municipalities to fulfill their constitutional mandate of providing these basic services they will need to improve on efficient spending with cooperative governance support from national and provincial governments.

Local Government Transfers

• Total local government transfers will increase by 4% over the MTEF.
• The increase in Local Equitable Share (LES) allocation, in turn, has resulted in a positive (6%) real average.
• The Commission welcomes government's efforts to keep LES growth rates above inflation through increased allocation. The positive real growth rate of the LES will go a long way in offsetting the ever-increasing costs of basic services, thereby enabling the sector to provide basic services to poor households.
• Likewise, the steady positive real growth rate on conditional grants over the 2022 MTEF, is in line with government's partly infrastructure-driven economic recovery plan, although in the last outer year, a negative growth rate is noted with concern.

Local Government Conditional Grant

• The graph on page 23 of the presentation shows a steady decline in real growth rates of the infrastructure grant over the MTEF, while the capacity grants are at a standstill and even recording a negative growth rate in 2023/24.
• The Commission notes the long-overdue reviews of capacity-building systems and infrastructure grants undertaken by government. Previously, the Commission recommended the need for conditional grants with a similar purpose to be streamlined to maximise efficiency.

Conditional Grant Changes

• Additions to the baseline on direct conditional grants for an amount of R3.6 billion are noted over the 2022 MTEF and will be broken down as follows:

- Neighborhood Development Partnership Grant - R1.6 billion,
-Regional Bulk Infrastructure over R1 billion, and
-The Public Transport Network Grant - R621 million.

The Commission welcomes the additions to these infrastructure-related grants as they are in line with the Economic Reconstruction and Recovery Plan (ERRP) set through the infrastructure-led projects meant to boost economic growth and employment opportunities.

• However, during the 2022 MTEF, municipal conditional grant baselines are expected to be reduced by over R1 billion; R875 million from direct conditional grants, and R1.45 million from indirect conditional grants respectively.
• These reductions to the baseline grants due to underspending are a concern. The direct grants are:

- The Public Network Grant of R859 billion and
- The Energy Efficiency Demand of R16 million

While the indirect grants are:
-  The Regional Bulk Infrastructure of R95 million, and
-  The Integrated National Electrification of R50 million

 Additionally, these grants are reprioritised.

• The Commission is of the view these reductions send a negative signal to what government is trying to accomplish by investing in infrastructure catalytic projects.

Recommendations

• The Commission welcomes government's efforts to keep LES growth rates above inflation as it will go a long way in offsetting the ever-increasing costs of basic services and enable the delivery of basic services to poor households.
• The Commission notes and welcomes the reviews of capacity-building systems and infrastructure grants. It is of the view that such initiatives will enhance municipal performance and move the local government sector forward and quicken the recovery process.
• The Commission further stresses that these review initiatives should be synchronised with the District Development Model (DDM), which seeks to address critical issues of municipal finances service delivery failures.
• Lastly, the Commission stresses that municipalities must improve the efficiency of spending with cooperative support from the national and provincial spheres of government through monitoring, reporting and evaluation to fulfill their constitutional mandates.

6. Achieving a Balance between Economic and Social Recovery and Sustainable Public Finances

 Mr Rakabe delivered the presentation, noting that before and after the budget was presented, there were concerns about the overall fiscal stance of the budget, specifically whether it was pro-growth or pro-poor. The overall stance was about stabilisation.

Balancing Recovery and Fiscal Sustainability

South Africa’s initial response to the COVID-19 pandemic holds lessons for a balanced and synchronised approach to recovery while maintaining stable public finances.

A three-pronged approach for returning to normality entailed:
- Overcoming the COVID-19 health crises through social distancing requirements and inoculation measures,
- Protecting livelihoods in the face of devastating income losses and
- Supporting businesses with tax deferrals, operational loans and payment holidays.

The 2022 budget placed stronger emphasis on being people-centred or social recovery by allocating over R1.1 trillion, providing consumption and investment boost and retaining economic function expenditure.

The bi-directional impact of these interventions on the economy needs to be well understood to inform the national fiscal framework in the future.

On the last point, Mr Rakabe added that the fiscal stance for the next financial year needed to be more synchronised, so that SA knew that it was prioritising recovery first. In turn, there would then be more growth to fund SA's social programme should it continue with the stance of maintaining stability while making sure that there was growth, while in the long run knowing that it would still be able to afford its social programmes. There was a need to understand all of those dynamics more, via rigorous research partly done by the FFC, but also the Ministry of Finance.

The Commission is of the view that the composition of economic function expenditure is not well aligned to the Economic Reconstruction and Recovery Plan (ERRP). Whereas the plan identifies infrastructure roll-out, localisation through industrialisation and food security as crucial interventions for job creation, associated allocations are declining.

- Infrastructure spending is marred by delivery and management deficiencies.
- The manufacturing incentives and the product and systems development allocations programmes (under the Department of Trade, Industry and Competition [DTIC]) are projected to decrease by 9% and 6.3% over the MTEF.
- Allocation to the food security and agrarian reform program under programme 3 of the Department of Agriculture, Land Reform and Rural Development (DALRRD), declines by 10.5% when compared to 2021/23 appropriation.

The Infrastructure Fund (with an allocation of R100 billion) is one of the ERRP instruments to crowd-in private investments and fast-track approval process for large infrastructure projects.
- The Fund should operate within the confines of Intergovernmental Fiscal Relations (IGFR) Act principles in respect of equitable distribution of projects and being assigned to a vote.

The figure on page 29 showed the disaggregated budget allocation. Specifically, it showed that economic regulation and infrastructure accounted for a relatively larger share (52%). Mr Rakabe added that what was not very clear was what type of infrastructure was indicated because the different types of infrastructure impacted growth differently. The manner in which allocations were made needed to be more mindful of making greater allocations towards infrastructure that was much more supportive to growth.

The Commission recommends that the budget process for 2023/24 focus on aligning the allocations to the ERRP, informed by comprehensive budget and expenditure reviews.

7. Concluding Remarks

The Commission supports Budget 2022 and government’s continued commitment to consolidating public finances while providing support for the pandemic response, job creation and social protection. The Commission further emphasised the following points:

I. In terms of South Africa’s growth prospects, the Commission’s view is that it is improbable that the economy will return to pre-pandemic production levels within the year.

II. Regarding revenue and tax policy, the Commission supports government’s approach of focusing on broadening the tax base, improving administration and lowering tax rates.

III. The Commission welcomes government's decision to use a portion of the revenue windfall to lower the gross borrowing requirement and reduce debt issuances. However, the Commission cautioned that debt stabilisation risks remain elevated and pose significant challenges to public finances.

IV. The Commission supports the decision to use the revenue windfall to improve pro-poor and growth-inducing allocations in non-interest spending over the MTEF period.

The Commission believes that this is an approach that does not jeopardise the path to deficit reduction and fiscal consolidation.

It should however be noted that certain elements of funding within Budget 2022 will create future funding obligations (e.g. NSFAS funding for low-income students, hiring of additional teachers). Should revenue not recover, this will place Departments under significant pressure.

On point II, Mr Rakabe added that the issue of lowering the tax rate would need to be understood very carefully in the context of what the implications would be, and how firm the response to lowering the taxes should be, considering the context of the South African economy. Did firms necessarily invest when the taxes were lower, or did they put that money into their profits? That was something that needed to be investigated so that it informed SA's fiscal framework going forward.

V. The Commission applauds the efforts and outcomes associated with government’s attempts to stimulate employment through numerous interventions. However, this has not changed the macro-level picture of unemployment. In this regard, more significant structural reforms focused on artisanal skills are required to address unemployment in the long run.

VI. The Commission welcomes and awaits the finalisation of processes underway to find a more permanent alternative to the SRD grant. A key consideration for the Commission when evaluating a potential replacement will be the long-run viability and effects that a replacement will have on the fiscus.

Given that the SRD will be stopped in March 2023, it would also be useful for the government to have a definite timeline around this issue's decision-making process.

VII. Given the role that municipalities play in delivering free basic services to indigent households, the Commission supports the growth in the allocation to this sphere.

The Commission stresses the need for municipalities to improve the efficiency of spending and value for money. This must be done with the support of the national and provincial spheres of government through monitoring, reporting and evaluation.

On point V, Mr Rakabe added that there was a need for more rigorous evidence related to those particular employment programmes, to understand the impact on job creation, and also on the expenditure pattern regarding those programmes. The FFC heard the week prior to the meeting that some Departments that were ear-marked for those types of job interventions returned the money because the programmes were poorly-designed, or departments did not understand where to use the money with respect to job creation. It was an issue of planning, but also aligning one’s long-term objectives with one’s resource allocation, so that one did not put resources where one did not need them, because one did not plan properly on using the resources.

VIII. Fraud, corruption and fiscal mismanagement (in the form of fruitless and wasteful expenditure) remain rampant. Government must take decisive and prompt actions against the perpetrators of these wastages and leakages to send a clear message that government is serious about addressing this challenge.

IX. Regarding progress towards the goals of economic and social recovery alongside fiscal sustainability, the Commission is of the view that Budget 2022 has placed stronger emphasis on being people-centred or social recovery by allocating over R1.1 trillion of the total budget to social wage programmes.

Budget 2022 further provides for expenditure side economic recovery levers through the economic functions, which is set to receive R227 billion in 2022/23.

Much emphasis on infrastructure is required. To this end, infrastructure management and delivery flaws are key factors hampering the potential gains to the economy that can be derived from infrastructure spending.

Note the misalignment between the prioritisation of spending within the economic function relative to the priorities identified as high impact job creation interventions in the ERRP, namely, infrastructure roll-out, localisation through industrialisation and food security.

Dr Mbabva made concluding remarks. She had been largely covered by the team through the concluding remarks. The FFC then opened to take questions on the presentation.

Discussion

Ms D Peters (ANC) asked the FFC that taking into consideration the fact that the country was only eight years from the NDP Vision 2030 target dates: What in the FFC’s opinion needed to be done to put the GDP on the above 5% target that was envisaged in the NDP?

In the FFC’s opinion, when would the South African government safely be able to implement a basic income grant? For that grant to be sustainable, at what level should the tax brackets be placed? What would the impact of that grant be on the economy?

Another question related to the NDP was the fact that at present, SA supported approximately 3 197 822 children, which was almost 3.2 million children, in Early Childhood Development (ECD). There was a target of 3.6 million children for 2024. In the FFC’s opinion, was government adequately funding the provision of ECD services? ECD was very important as a foundation for children. The Committee had been informed that children who went through good quality ECD did not drop out of school before matric.

In his speech, the Minister of Finance raised alarm on 175 out of the 257 municipalities (about 68%) being in financial distress. Did the DoR Bill support the local government sphere to remedy that situation, or was it likely that there would be an increase in municipalities with unfunded mandates, or an inability to deliver services (i.e. to be in financial distress)? When did the FFC think that the provinces and municipalities would be able to harness their own capacity to raise revenue? For example in provinces, the patient fees, as well as vehicle licenses, and municipalities focusing on surcharges on services, rates and taxes. She believed that it was important to consider that, for example, in the Northern Cape, the Committee was informed that about 82% of the provincial equitable share was spent on salaries. That was truly not sustainable. If the FFC could go into all the other provinces, it would find that that problem was widespread. Did the FFC support the notion of service providers, i.e. consultants, from other Provinces to remotely supervise the Expanded Public Works Programme (EPWP) and the Community Work Programme (CWP)? Was there value for money in that service? It was about providing income for the neediest, but most of the money went to those consultants. It is important that municipalities can rely on the EPWP and the CWP for cleaning the community and environment. In many towns, CWPs made vegetable gardens and supported soup kitchens. It was an important service, but it did not have good quality supervisory services. Communities saw people in those programmes as just sitting under trees or drinking coffee and smoking the whole day.

Mr Z Mlenzana (ANC) said that the FFC raised a fundamental issue on the reduction of direct conditional grants, such as the Public Transport Network Grant, energy efficiency demand, original bulk infrastructure, etc. There had been consistent underspending on those projects for some time now. The Committee had been “crying” about that. Projects had not been implemented whilst there had been funds, due to incapacity to spend. How should government respond to the challenge of incapacity? Specifically, to give realisation of the practical expression of the commitment to invest in infrastructure projects. He was raising that issue because the Chairperson had been raising it for the past year. Government could not afford a situation where there would be those cuts. At the same time, the Committee understood that people needed infrastructure-based projects for many reasons. One, to invest in infrastructure and two, for economic reasons. Economic renewal, economic input into SA’s people, etc but now there was an incapacity to spend.

Speaking on the SRD grant he asked that concerning the permanent investment of the SRD grant with the Basic Income Grant, what would the Committee see from the FFC perspective going forward. Would there be an ultimate increase in taxes, when the Minister was saying for now that there had not been increases? Did the FFC see an ultimate increase in taxes, when SA would not see tax increases this financial year? If that was not the case, how would the general economic wellbeing of the country do if it continued with such grants in the form of the Basic Income Grant without increasing the taxes?

Ms M Dikgale (ANC) asked about education. The Department of Basic Education (DBE) welcomed the increase in education, and the Committee joined it in welcoming the increase. Her wish was that the monies allocated should be spent on schools. When the Committee did its back-to-school campaigns and school visits, the educators were "crying" about the shortage of resources, and the classrooms, and also the shortage of educators. She was sure that the money would assist the schools to do the correct thing. Maybe the Committee could sometimes invite the DBE and talk to it about those issues. She suggested that the DBE should assist the Committee with monitoring because all the time it heard issues of how the money had been allocated but not spent. If a suggestion could be made, she wanted to say that, that money was “too much” to do the work.

She welcomed the efforts being made especially concerning municipalities because it would protect SA’s municipalities. It was “enough pull” if one was looking at it. With municipalities, it was as if there was a focus on urban areas. In urban areas, services were “moving like nobody’s business”. But when it came to the rural areas, there was a problem. What must be done was that the rural areas must not be forgotten. As the Committee did its oversight visits, it needed to make sure that it emphasised that issue to the municipalities. When one visited the rural areas, the roads were a problem, as well as water. She was worried that the allocation was too much. The presentation talked about an equitable share; could it also happen in the rural areas?

Mr X Qayiso (ANC) wanted to draw the Committee’s attention to slide 28 which had a number of recommendations. His focus was on the issue related to economic recovery. That was very important because that was a central thing of all the subjects when it came to economic recovery. It sounded contradictory when one talked about growing the economy but not also focusing on the economic recovery function, which was misaligned. It did not talk to what was actually being said. The FFC said that government must align its economic recovery function to talk to the ERRP, and then the country would get good results. Other than that, it did seem to him that the FFC warned that government would find it very difficult to see the ERRP adjusted so that it would respond properly to the plan itself.

As part of responding to structural reforms, Operation Vulindlela indicated the importance of reforms in the water sector. The water sector was dependent on strong regulation and the establishment of water resource agents by 2023. What would the water resource infrastructure agency do that the Department of Water and Sanitation (DWS) was unable to do in improving water quality and infrastructure?

Another Member had touched on the permanent replacement of the SRD grant with the Basic Income Grant, and the need to stabilise debt over the medium-term and reduce the budget deficit. What would be the impact of such a grant on the economy and the fiscus?

Mr O Mathafa (ANC) asked about lowering taxes. He was interested in finding out whether there was any evidence that suggested lowering taxes was one of the measures or reforms that would stimulate investment by the private sector. As he indicated in a previous meeting, it was “stated with authority” that about R6 trillion was held in South African banking accounts as liquid cash that could be invested in the economy to assist the recovery and reconstruction plan. However, corporates preferred to keep that as cash. Given that at the rate before reduction of Corporate Income Tax (CIT), South Africa was comparable to other developing economies that were growing at a higher rate as compared to SA. Was that the best measure to attract investment by the private sector into the economy? If yes, were there also other measures to be considered? Could the FFC share what other measures SA could implement to ensure that there was an uptake from the private sector to invest in the economy?

On the number of municipalities in distress, Ms Peters spoke to that, specifically where the Minister stated how many there were. His point was based on the Municipal Infrastructure Grant (MIG), which according to the presentation, would grow at 5.6% annually. In the FFC’s opinion, had there been a view that that was efficient and effective in expanding service delivery. How could that grant be used to ensure that the number of municipalities in distress was reduced?

On the issue of housing and unequal spatial patterns, that seemed to be persisting, and “it is our view that it also contributes to issues of inequality”. Mr Mathafa’s question was based on the work that the FFC had done, was there any advice on what needed to be done at both a provincial government and local government level to address that particular issue? Had the conditional grant allocations been an effective instrument to address the social and economic challenges?

The Chairperson asked if the Members had any follow-up questions.

Mr Mathafa had questions on the issue of rising debt and the fiscal framework stance that SA had taken. Where it seemed that fiscal consolidation was not working to reduce debt, was there any advice that the FFC could provide to government on what it could do to increase fiscal revenue, and ultimately reduce the rising debt burden of the country?

Mr A Shaik Emam (NFP) asked whilst government was extending the SRD grant for another year, and possibly longer, at the same time, there was a 2.5% cut in the medium term in the Department of Social Development (DSD). What did that really mean?

Did the FFC anticipate further success in the mining sector given the war between Russia and Ukraine? Did the FFC think that with that additional revenue that SA was getting, would it be able to get that for a much longer period than anticipated, which might help it to come out of where it was?

The FFC understood the challenges that SA was facing in poor implementation when it came to infrastructure, the high unemployment rate in the country, the large imports into the country, and the various forms of corruption and looting. There was also the challenge of mismanagement, where one had to put in direct and indirect grants because people were not able to implement projects. A very great percentage of people went to bed hungry. Given all of that, and the direction SA was moving in at the moment, could the FFC be "bold enough" to tell the Committee that if SA continued in the current form, where did it see SA in five, ten, and 20 years?

He mentioned the Russia-Ukraine war again and said that it offered SA an opportunity to look deeper into what was going on in the country. SA had so much potential to grow its own wheat, etc., but it imported most of its wheat from those countries. Why would a country want to import so many different products which it had the capacity and capability to produce? SA had the human resources, with such a high unemployment rate in the country. Should SA not be investing (in production), or was it something to do with the balance of trade agreements between countries?

SA increased the import duties on sugar. It meant that SA’s price was about 70% higher than the international price. SA increased the import duties so that it could protect the local growers. But SA was importing from Eswatini, which had increased its import duties to over $60 million, which was almost R1 billion since those imports were duty-free. 50% of the shareholders of that Eswatini sugar were companies with a vested interest in SA, who were in the food industry. Such companies had an edge over small food manufacturers in SA. For him, it was a conflict of interest. It was not in the interest of growers in SA, but it looked like it was there to benefit monopoly capitalists that had been in control since 1994. Very little or nothing had actually happened with that.

Another Member had spoken about procurement and value for money. The Committee was “singing that song” every year without fail. What did the FFC believe government should do differently? Who should take responsibility? Nobody wanted to lead the way to try and ensure that more was done with less, given the situation SA was in.

What would the impact of the SRD grant be? What was the alternative given that in SA, 46 million people needed to be on some form of social relief to survive? In the absence of jobs, etc., what did the FFC believe government should do differently, so people did not have to rely on that because if they did not have that grant, they would die of hunger?

The Chairperson said that the economy could only grow where growth was across all of the sectors, particularly at the local level. How has the need to stimulate local demand and support the procurement of local products found expression at local level to support the value chains? Related to that question would be: Did the FFC think that municipalities understood their role in the successful implementation of the ERRP? In the FFC’s view, what should municipalities do to ensure successful implementation of the ERRP?

The MIG was important in improving basic service delivery, growth, and social infrastructure for poor households. How effective and efficient had that grant been in expanding service delivery and alleviating poverty in those municipalities? It was one thing to spend the grant, but at the end of the day, the Committee wanted to see the impact on people, especially when one looked at poverty. How successful had it been in alleviating poverty in those municipalities? One of the criticisms of the DDM in some quarters was that introduction of the DDM would be like introducing a fourth layer of government. What was the FFC’s charge on that?

On slide 20, the FFC talked about development charges what was it referring to there?

The FFC made a point (which it had been making for some time) that there was a need to streamline consolidated grants with a similar purpose. He took it that the FFC had raised that matter with National Treasury (Treasury). He wanted to hear from the FFC what Treasury's take on that was. He agreed with the FFC when it came to the issue of consolidated grants because a lot of those grants were disbursed and then ended up not being able to have the optimal impact that they would have had were they streamlined. He had another question on the conditional grants vis-a-vis the direct allocations to provinces and municipalities. There was an argument that said that conditional grants were national allocations. Did the FFC think that was the most efficient and optimal way of dealing with the service delivery challenges in terms of conditional grants? The question was: Why was that money not allocated directly to the sphere of government it was intended for?

There was an increase in capital payments and transfers. Were those increases in real or nominal terms? What was the difference between capital payments and capital transfers?

Responses

Dr Mbava wanted to answer a question before handing over to the research team and the commissioners. On the SRD grant, she said in the current financial year, SA was spending R44 billion on the grants. That R44 billion was a result of the unanticipated revenues which SA received, and so it was able to fund that. The SRD grant benefitted 10.5 million people. In the absence of that grant, 10.5 million people would be [audio cut].

Mr Tseng apologised, and said that Dr Mbava was experiencing some technical difficulties.

Prof Aubrey Mokadi, Commissioner, Financial Fiscal Commission, responded to questions. He started with Ms Peter’s question on ECD. The FFC agreed with her that it was critical. ECD was something for which proper provision had to be made. The FFC agreed that if SA did not sort out the issue of ECD, it would have negative ramifications throughout the education pipeline, in the sense that SA would end up with big dropout rates in high school, as well as eventually at university. It was much more costly to intervene at a higher level of a system that produced poor outputs, rather than investing at the ECD level so that SA could reap the benefits. Studies did confirm throughout the world that it investing in ECD was the best way to go. In the FFC’s submission, it expressed concern that the migration of ECD from the DSD to the DBE should be handled smoothly, and be given the priority that was required. If that was not done, then those ramifications could only be felt “way up” in the value chain. Ms Dikgale had also mentioned the idea of bringing over the DBE for a discussion with the Committee. It would be useful, especially in light of the question of how to ensure that the quality of education could bring necessary results that could improve the economy.

Another issue was the learning and culture allocation of R389.8 billion. Whilst it was positive for the 2021/22 financial year, the FFC was concerned that in the MTEF, in the period 2022 to 2025, it registered a negative. Although that affected other allocations and other functions as well, the FFC was concerned that it was something that needed to be flagged. It was important that the DBE was brought in to discuss how SA would obviate the big issues of the dropout rates, and obviate the issue of catching up the lost time.

Prof Mokadi responded to Mr Mathafa’s mention of the R6 trillion in liquid cash that was held in reserve with regard to the issue of the tax base versus the tax rate. The FFC discussed that within the Commission. Although in its submission it supported the tax base that had been broadened, and as a relief to the society that was going through a difficult time during COVID-19, it was aware that SA would not really benefit as much as it should from tax rate reductions, especially with regard to the private sector. The FFC did suggest in its submission that it was something that needed to be investigated further. The FFC would like to go deeper into that investigation and assess properly how far SA would benefit, and what would need to be done about a disincentive for people keeping huge amounts in reserves. This linked to Mr Emam’s question on the windfall, and whether it could be sustained. The FFC had raised caution that whilst it agreed on how the windfall was allocated, it was concerned that in future, that might not be the case. At the time, the FFC was not aware that there would be an invasion of Ukraine by Russia, which resulted in huge uncertainty about commodity prices. The FFC agreed that it was something that needed to be flagged. “We should not really relax on the windfall, and the future does provide that uncertainty”.

The FFC had expressed concern about corruption in its submission. It had also dedicated a paper to be released at a later stage, which had put a lot of resources into research about corruption and its cost to the fiscus. Although the FFC had not really undertaken scenario planning in terms of ten years or twenty years, it was something that it needed to indicate to show where the weaknesses were, and whether it was on the part of political will, or whether it was the instruments that were introduced to monitor and intervene. As soon as that paper on corruption was completed, it would be released for the benefit of the Committee and the country.

It was critical to address unemployment figures that were continuing to rise, through education. The FFC realised that a lot of graduates were unemployed despite being qualified. The FFC wanted to flag the issue that artisan and trade skills as provided by Technical, Vocational Education and Training (TVET) colleges were a critical component that could contribute to job opportunities. SA had to import skills when building the Medupi power station. For example, welding was something SA did not have in the country, and people had to be sourced elsewhere to fill those gaps. Government needed to ensure that the TVET education output, in quality and alignment to industry, provided the necessary support to economic development and recovery.

Dr Mbava asked if other commissioners had a comment before she handed over to the researchers.

Prof Michael Sachs, Deputy Chairperson, Financial Fiscal Commission, said he did not have additions; Prof Mokadi had covered what he wanted to say.

Mr Tseng responded to the Chairperson's question on stimulating the economy. He recalled that the FFC's previous annual submission emphasised the approach of a product value chain. When the FFC examined the economic growth plan, or the ten-year or twenty-year vision from the Eastern counties as well across the globe, generally, one would then compare that with the result years after. One would see that what made those stimulus plans work was not how much money was thrown at the problem; but more about choosing specific products, and examining how those products linked up with other intermediary or primary goods, or, if the products were on the opposite end i.e. the final goods in that value chain. For example, Eastern countries that manufacture plastic products did not start with plastic; they started with polymers, such as synthetic polymers or natural polymers. Another example was that Eastern countries did not go directly to computer chips or microchips. Such countries started with semiconductors i.e. simple products. The Government intervened in such industries through capital injections and incentives for the private sector to be involved in that stimulus plan. This was not what SA had, which was a big burden on the fiscus. Back then, there were initial capital injections, and after that, one would see a migration of the private sector away from government, because one would want the private sector to thrive and grow on its own. Additionally, one would want the private sector to be "lean and mean" in chasing after profitability and efficiency, for the economy to grow. That was how major international companies such as Samsung started. There was first a government injection, and then companies chose specific products and examined how that value chain linked up with other parts of the economy (e.g. the manufacturing process) to grow. The question would be: "What if we chose a product that does not have upstream or downstream demand for that product?" Then, companies would make their own. For example, back then, when at first – internationally or locally – the demand was not high enough for polymers, companies would expand their operations into that sector to make plastic from the polymer they made. That was how multi-billion Rand corporations grew. Taking all of that, and thinking of municipalities and infrastructure grants as an example there needed to be an understanding that different spheres of Government (especially in the context of SA) had different duties and responsibilities when it came to infrastructure. When one talked about infrastructure at the provincial level, maybe it was more about buildings or schools, i.e. social infrastructure. If it was Local Government, it was basic services. If it was national government, it would be more on the administrative buildings side of things. Different spheres had a different nature of infrastructure. It was difficult to wrap that all together to say that government infrastructure investment was the best for growth. It was very complex. Sometimes the money did not get spent in alignment with its function.

Mr Tseng said that the conditional grant consolidation had been raised and that Treasury had responded to that issue. The issue was that SA had 257 municipalities. Within those municipalities, there were districts, with a local, and a rural-urban divide. Municipalities were also extremely diverse. SA was a huge place. What happened was when one tried to consolidate the grant, one would find that one was more likely to get complaints from certain municipalities that had more diverse needs for that particular grant. It was very difficult to just say cut it off right away. Normally it worked on the basis of fixing or changing it at the margins through expenditure reviews or changing it over the MTEF, or the phasing-out or phasing-in of those grants. However, what that meant was that SA was also sitting with a lot of redundancies, and a very slow follow up of the cash onto spending plans or spending of the municipalities.

On who was holding idle cash, and whose cash was more idle the private sector did hold cash. He invited Members to go on the South African Reserve Bank’s (SARB) database, and look at the net operating cash balance of all the spheres (including financial and non-financial institutions). One would find that Government holds a lot of cash. Such cash sat in various financial instruments and transfers. Mr Tseng also wanted to answer a question on capital transfers. These were basically intergovernmental transfers through the national government which were transferred to another sphere of government, or entity, to acquire capital, physical infrastructure or investment. What happened was that through those various instruments and elements for example, if it was provinces one may more than likely find that some provinces were holding onto a lot of equitable share money that did not get surrendered (as a conditional grant did) after the financial year-end. If one measured those across spheres, one would find that some local governments did hold a lot of cash at financial year-end, and consistently on an increase over the year. For provinces, one was more than likely to find equitable share money, because it was not surrendered. More to do with the capital transfers was that one would wonder how spheres of government moved that amount of idle cash between financial years. It was precisely through instruments such as capital transfers. It was also in terms of capital payments. This was done via the Department in question telling Treasury that it had a commitment over the next 20 or 30 years for some major infrastructure investment project, and that was “committed” money, and so that could not be taken away. Between the private sector and the public sector “idle cash competition”, he thought that in the case of the private sector, if the redundant cash or liquidity sat on the balance sheet without generating some fixed investment rate of ten plus, to at least handle inflation and cost thereof (the cost of money), the stakeholders would complain. Not so in the public sector, because in the public sector, it would be put in the provincial revenue fund, or a municipal bank account, at best at money market rates, unless Public Sector Departments did active investments, which were “frowned upon” by the Public Finance Management Act (PFMA). This was frowned upon because one did not want all 257 municipalities and nine provincial revenue funds to be running “their own investment piggy bank”.

Ms Madubula responded to a question on water development charges. Development charges are mainly used to finance land intensification, whereby a municipality imposes a once-off charge on a landowner applying for land development approval. Currently, municipalities were not taking advantage of that. The FFC was of the view that if municipalities could take that opportunity, they would be able to finance their own priorities. Perhaps one of the reasons that municipalities were not able to do that was because the regulations were not clear on how they would go about implementing that charge, hence the Draft Municipal Fiscal Powers and Functions Amendment Bill, which was in the process of being considered by the Cabinet and Parliament. The FFC was hoping that once the Bill came into effect, it would clearly lay out how Municipalities could go about that. As she had indicated in the presentation, it was what the FFC also recommended in 2020/21 as one of the supplementary forms of revenue that municipalities could use.

She made a general comment on infrastructure grants. There were a plethora of infrastructure grants at the municipal level. With capacity grants, there were approximately 15 grants. With infrastructure grants, there were 15 which were direct and indirect. The FFC was of the view that those should be consolidated. If it was a water infrastructure grant, there should be one grant talking about water infrastructure. If there was an electricity grant, there should be one grant. One would find that there was an indirect grant and a direct grant. One found that especially in the indirect component grants, there had been underspending. The FFC indicated in the past that indirect grants should be used as a last resort, but it saw that now and then when the DoR Act changes were made, the grant would move from direct to indirect. In the end, the FFC was hopeful because the reforms that were currently taking place at the local government level with the development charges, as well as the infrastructure grant reviews and capacity grant reviews, were what the FFC had recommended in the past. It was hopeful that those reviews would be taken into account, as well as its previous recommendation. Treasury had indicated as well in the deliberations with the FFC that when those reviews took place, it would involve the FFC, as some of the things that were currently taking place with reviews were mainly happening due to the previous recommendations that the FFC had tabled in the past.

Commenting on procurement Mr Tseng said that government had a "run-in" with a judgement from the Constitutional Court regarding the Preferential Procurement Policy Framework Act (PPPFA). For example, that issue was "quite devastating" in the broader sense of the processes, procedures and protocols of how government spent. It was clear that government had become an "assistant buyer", rather than doing the work itself. It was "quite devastating" in the policy sense of the procurement, in that the black economic empowerment (BEE) elements of procurement had, through that judgement, "unintended consequences” of that process in government’s procurement. It gave those with the scoring 20% more on the grading of procurement. Even in the FFC’s own procurement processes, it saw a few instances where originally with the BEE, it was paying an additional markup just to give preferential treatment. With the PPPFA in suspension (it was being withheld), as well as no new tender that was both a request for a quotation (RFQ) and a request for proposal (RFP) by government, it would have a big impact on the way government spent and executed the budget. That was one impact he thought the FFC would go back to think more about and examine exactly what that impact was going to be. It was possible that in relation to the Act in terms of compliance, there would be a large increase in findings because the process of procurement would be "warped" by confusion and "murkiness" in the procurement space. The Committee was welcome to submit written questions to the FFC, and it would answer in writing as well.

Dr Mbava wanted to emphasise the issue of management of procurement, especially the poor project management when it came to Government projects. A classic example was Eskom’s Medupi and Kusile build programmes. If one looked back to 2014, the project was estimated to cost R255 Billion. In 2019, it mushroomed to R450 billion, largely due to cost overruns, poor project management, lack of oversight, and a lack of monitoring and evaluation. If one looked at that fiscal mismanagement, and that wastage that was not really adding value to taxpayers, that was money that could be used to add more value to the economy. What was important was to see how government could rein in cost overruns when it came to megaprojects, and how more monitoring and evaluation, as well as proper oversight, could be instituted. It was also important to have a "tight belt" and a rein on SA's public finances because that was where there were fiscal leakages.

The Chairperson recalled that Ms Madubula said she did not hear his question on the DDM. There was a school of thought that said that the DDM approach was as good as adding a fourth layer of government, or that it would not improve service delivery.

With Mr Tseng’s product value chain argument, the Chairperson wanted to check whether the FFC did interact with the DTIC, and what had been the outcome of the interaction.

There was also a question on local government, specifically if it understood its role in the ERRP. From the FFC’s side, what did it think that level of government should be doing to assist with implementation of the ERRP?

Mr Tseng responded to the question on product value chains. The FFC had been conducting research of its own, looking at where SA’s trade product advantages were, in the broader sense, as well as in trade terms. Due to COVID-19 and other disruptions in the market, it was quite difficult, because one had to think if one was going to focus on the environment before COVID-19, or the environment now, where there seemed to be yet another shock to the global layout of this value chain, and if that had any relation to the conflict in the northern hemisphere. On that note, the FFC would go and engage with the DTIC and could collaborate on that front.

The idea of the DDM made sense because it was very clear that SA had very diverse municipalities. Even if municipalities knew about that model, they did not have capacity to do it. That came from even the simplest form of spending grant money or understanding the grant framework to spend the grant money. Municipalities were struggling with that already. Across the globe, what one saw was that regional governments would give that support or a "nudge in the right direction”. E.g. government could point out a good piece of land with good arability where one could plant something, or build a factory on that land. With support from intergovernmental collaborative effort, there would be alignment to the local economic plan and growth plan. The product value chain success stories were generally decided at the national level, and then when manufacturers went about choosing where to put the factory, for example, they would engage with local and regional governments to sort out issues to do with land rights, roads, and other complementary requisites for that growth initiative to take hold. With the DDM, the idea was trying to be an intermediary between national and local government, so that things were more manageable. The only concern from an FFC perspective was that in 2016, its research showed that even the districts had different “colours” to them. If one saw a District Municipality near a metro (something with people and scale), then the District Municipality did not have much of a function. If the District included within it local rural municipalities that were not well capacitated, then the District Municipality had a positive effect and function to support the local municipality. The DDM needed to consider that. It could not be a one-size-fits-all approach. For instance, not all municipalities should have a clothing factory. It depended on if the municipality was close to the ports, if it was importing or exporting, or if it was close to the supply source and demand destinations for those goods.

Ms Madubula responded to the Chairperson’s question which asked if municipalities understood the ERRP. Currently, the inability of municipalities to maintain and manage infrastructure contributed to the municipal service delivery failures. If that was not addressed, then the ERRP would take time to come into effect. There were a plethora of infrastructure grants. There were also a plethora of capacity grants. The FFC was of the view that the reviews currently taking place at Treasury and South African Local Government Association (SALGA) would come up with positive implementation in how Governments would go about it. It had been established that those were the reasons why things were failing. With the capacity system at local government, how should it be done, or how would it be addressed? The FFC was hoping those reviews would bring that to light, so that those infrastructure grants that were currently not working, whether they were in the indirect or direct component, or if it was due to municipalities unable to spend, could then be remedied.

The Chairperson agreed that the question of procurement and the Constitutional Court finding created an issue in the procurement space. It may have an impact when it comes to spending at the end of the financial year. His reading was that the Constitutional Court finding did not find issues with the PPPFA. There were issues with regulations of 2017 emanating from the PPPFA. The Constitutional Court was saying that those regulations were not in line with the PPPFA. It was like rewriting an Act, which was a function of Parliament and not the Executive. That was his reading, and he was sure that the FFC’s legal team would also have an opinion on that. It was more about regulations. But here was the “padkos” to the FFC because of the Public Procurement Bill’s impact on what government was trying to do, to use public procurement as a transformative tool, the Committee wanted the FFC to look into the Public Procurement Bill and see whether, as it stood, it talked to what government was trying to do. Of the monies that Parliament appropriated, it also wanted to use it as a transformative tool, specifically to transform the economy, and to deal with the questions of inequality in SA. He wanted Dr Mbava and her team to look into that because the Committee would be inviting Treasury to talk to those things, so when it invited Treasury, it also wanted to hear what the FFC’s take was.

The Chairperson said that the Committee appreciated having commissioners in the presentations. The commissioners were not just there, but also making valuable inputs and enriching the discussions in the meetings. The team of researchers had also been very helpful.

The Committee would likely be meeting the FFC again when it dealt with the Appropriations Bill.

Adoption of Draft Minutes

Minutes from Wednesday, 2 March 2022

Mr Mathafa moved to adopt the minutes, and Mr Mlenzana seconded the motion.

Announcements

Mr Darrin Arends, the Committee Secretary, gave a reminder that the following week SALGA would brief the Committee on the 2022 DoR Bill.

The Chairperson said that with the issues of local government, the Committee would still persist with them. He thought that the Committee should continue to raise those issues, and make sure that there was some forward movement as far as those issues were concerned.