National Treasury Quarter 3 2021/22 Performance for national departments and identified SOEs & agencies

Standing Committee on Appropriations

15 February 2022
Chairperson: Mr S Buthelezi (ANC)
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Meeting Summary

The Standing Committee on Appropriations was briefed in a virtual meeting by National Treasury on the 2021/22 third quarter expenditure reports for national departments and other identified state-owned companies and agencies.

Some of the national departments had either higher or lower spending on their budgets, due to a variety of factors. Among the highest spending departments was the Department of Social Development, which had spent R171 billion by the end of the third quarter, mainly due to spending on the special COVID-19 social relief of distress grant. The Department of Transport had a lower level of spending of R1.0 billion, which was 11% lower than projected due mainly to the non-payment of the public transport network grant to several municipalities, which had not yet complied with their milestones per the conditional grant framework.

The Committee was also given an update on state-owned entities such as the Land Bank, Eskom, the South African Post Office, DENEL, the Passenger Rail Agency of South Africa (PRASA) and South African Airways, regarding operational, structural and other challenges.

The Committee voiced its displeasure at the failure to resolve issues at the Land Bank. It said the socio-economic costs were huge for the farmers, both emerging and commercial. Parliament had appropriated R7 billion to capitalise the bank. The Committee called upon the Minister of Finance and National Treasury to be involved in the negotiations with the creditors, and get a speedy resolution to the impasse.  

The Committee noted with concern that PRASA seemed to perennially under-spend on its capital expenditure, despite the poor state of its infrastructure, and wanted to know what measures were being taken to stop a recurrence of this. It called on the entity's Board and the Minister of Transport to resolve that problem.

The Committee noted the challenges facing the South African Post Office and stressed its importance, especially among the poorest of the poor and rural communities, so it was important to ensure that it remained fully functional. Members observed that there were people who had applied but had not received their social relief grants through the Post Office. Some had applied and been declined and had then appealed successfully, but there had been no assistance thereafter. Some of the notable challenges with the SAPO were that the entity had struggled to define itself as a commercial enterprise, while changes in the ICT environment had also contributed to its many difficulties in positioning itself as a viable entity.

The Committee was briefed on the operational, financial and structural challenges that continued to plague Eskom. According to the Treasury, Eskom remained the biggest risk to the fiscus, as well as to government’s economic recovery plans. The Chairperson said that the people who were bailing out Eskom were the taxpayers, and they were the ones who were bearing the brunt of higher tariffs again.

Meeting report

Quarterly Expenditure of public entities

Dr Mampho Modise, Deputy Director-General (DDG): Public Finance, National Treasury (NT), said the types of entities being reported on were constitutional institutions, such as the Public Protector (Schedule 1); major public entities, such as ESKOM (Schedule 2); and Schedule 3 entities such as

  •  national government public entities, e.g. Iziko Museums;
  • National government business enterprises, e.g. the Passenger Rail Agency of South Africa (PRASA);
  •  Provincial public entities, e.g. EC Parks & Tourism Agency; and
  •  Provincial business enterprises e.g. Ithala Development Finance Corporation

The presentation showed tables of the 2021/22 approved budget, the quarter two forecast, the quarter two year-to-date (YTD) spending, and over/under collection/spending for various public entities. After each table of figures, a text summary was presented for each entity.

Compensation Fund (CF)

The Fund generated its revenue from an assessment levy on employers the Fund received R727.2 million less than projected due to employer earnings being less than projected owing to businesses recovering from the impact of COVID-19 and the poor economic conditions.

The largest spending item was cash paid to households for Compensation for Occupational Injuries and Diseases Act (COIDA) claims. These amounted to R2.4 billion, which was R656 million less than forecast. This was mainly attributed to glitches with the CompEasy system recovery of overpayment before processing further claims, and the rejection of medical invoices due to non-compliance by some medical service providers.

Spending on the compensation of employees (CoE) was R114.5 million less than forecast, as a result of delays in paying the Department of Employment and Labour (DEL) expenditure claims for August and September. These claims would be paid in the third quarter.

Spending on goods and services was R968.9 million, which was R2.4 billion lower than projected. Most of the activities that drive spending on goods and services had been put on hold due to COVID-19 restrictions. There were also delays with the billing for the e-COID project, and payment of claims to the DEL for August and September 2021.

Cash available at the end of the quarter amounted to R7.4 billion, which was R3 billion more than projected. This was mainly due to slow spending on goods and services and compensation of employees.

Legal Aid South Africa (LASA)

At the end of the second quarter, revenue collection amounted to R1.025 billion against a projection of R1.021 billion. This was was higher by R4.6 million, primarily due to higher than expected interest earned from investments held with the Corporation for Public Deposits.  

Expenditure in the second quarter amounted to R973.3 million, against a projection of R975.1 million.

The lower than planned expenditure of R 1 8 million, mainly on goods and services, could be attributed to reduced spending on travel and subsistence, owing to less travelling by officials.

National Empowerment Fund (NEF)

The (NEF) derived its revenue from interest from loans, rent on land, loans and other receipts.

Revenue collected during the second quarter was R1.9 billion, compared to projected revenue of R312 million. Higher than forecast revenue for the second quarter was due to the R1.3 billion which was received from the Department of Transport (DOT)for the Taxi Relief Fund, and R400 million from the Department of Trade, Industry and Competition (DTIC) to support businesses that were affected by the unrest in KwaZulu-Natal (KZN) and Gauteng in July.

Spending on goods and services was R26.4 million lower than projections since most funding activities were COVID 19 deals which did not require the appointment of professional consultants. On the other hand, spending on CoE was R22.9 million higher than projections due to the appointment of additional resources temporarily to process applications for funding under the programme for businesses that were affected by the July unrest. The aim was to increase the turnaround times for the processing and disbursements of funds.

Payment for financial assets was higher than projections by R11 million. This was mainly driven by

 an amount of R292 million disbursed towards businesses that were affected by the unrests.

National Health Laboratory Service (NHLS)

The NHLS cash balance increased from R2.7 billion at the end of quarter 1 to R3.5 billion at the end of quarter 2. This was considerably higher than its projection of R2.6 billion for quarter 2. This was a result of an increase in COVID-19 tests during the third wave, emanating in higher than projected income in cash receipts from stakeholders  -- R6 billion being received against a projection of R5.2 billion.

While revenue had increased substantially, the payments to stakeholders were only moderately higher than projected. The CoE was higher than projected -- R2.6 billion paid against a projection of R2.2 billion -- due to a 4% increase in non-managerial post salaries. Goods and services spending was lower than projected, with R2.6 million paid against a projection of R2.8 million, as the entity had purchased excess material in the previous financial year.

National Research Foundation (NRF)

The NRF's main source of revenue consisted of the transfer payment from the Department of Science and Innovation (DSI), and the remainder -- “unclassified revenue” -- included contract revenue from other government departments and entities and interest received on funds invested.

Revenue from transfers was projected at R3 billion for the financial year 2020/21. R2.9 billion had been received during the second quarter, which constituted 97.1 per cent of projected revenue for the year. The entity received R50.8 million in other revenue through the sale of goods and services and interest.

Goods and services expenditure of R327.5 million at the end of the second quarter was R54.9 million higher than the projected spending of R272.6 million. This was attributed to higher spending on grants and bursary payments for scholarships and bursaries than anticipated.

National Skills Fund (NSF)

The NSF's income was primarily from the skills development levy (SDL), with other revenue generated from interest on investments.

Total receipts at the end of the second quarter increased by R478.1 million, mainly due to the over-collection of the SDL and the increase in the entity’s investment portfolio with the Public Investment Corporation (PIC).

Spending on compensation of employees was lower than projected by R35.9 million, due to vacant posts that were not filled as projected. The slow spending of R39.7 million on goods and services was due to savings realised on consumables, such as stationery, printing and office supplies, and travel and subsistence, as employees continued to work remotely as a result of COVID-19 restrictions. Spending on transfers and subsidies was lower than projected by R136.6 million, due to delays in the submission of quarterly reports by service providers and the implementation of new projects. Spending on capital assets was lower than projected by R301.1 million as a result of delays in the procurement of capital assets and the slow pace in the construction of technical and vocational education and training (TVET) colleges as a result of COVID-19 restrictions.

A surplus of R991.4 million had been realised, compared to a deficit forecast of R486.7 million, which was due to the slow implementation of new projects, over-collection of the SDL, and delays in the payment processes.

National Student Financial Aid Scheme (NSFAS)

The Scheme’s source of revenue was transfers from the DHET for bursary funds and the administration fees charged for bursaries administered on behalf of other government institutions.

Total receipts at the end of the second quarter were higher than projected by R2.8 billion, due to over-collections on financial transactions in assets and liabilities resulting from reimbursements from institutions when students either de-registered for certain subjects or dropped out. Transfers received by the Scheme were higher than expected by R2.6 billion as a result of an additional R3 billion that was received earlier than projected from the DHET.

The slow spending on CoE by R9.9 million was a result of the moratorium on the filling of vacant posts issued by the board until the finalisation of the organisational structure review. The slow spending of R22.9 million on goods and services was attributed to savings on travel and subsistence due to the delay in the opening of the 2022 bursary application period, and lower spending on debt collection commission paid to debt collectors. The spending on transfers and subsidies was higher than projected by R3.1 billion, due to the early transfer from the DHET, which was used to pay bursary claims earlier than initially planned.

Cash at the end of the quarter amounted to R1.4 billion, which was R256.7 million lower than projected due to the higher than expected disbursement of bursaries to students.

Passenger Rail Agency of South Africa (PRASA)

PRASA generates revenue from the sale of train and bus tickets, rental income from property leasing, and transfers from the national Department of Transport.

Total receipts of R5.4 billion were R2.8 billion lower than the projection of R8.2 billion for the quarter. This was mainly due to the withholding of transfer payments to the agency by the Department due to non-compliance with reporting requirements, lower passenger numbers caused by a deteriorating service offering (low train service availability, poor on-time performance, low customer satisfaction etc) and frequent service interruptions because of mechanical failures, maintenance issues, theft and vandalism etc.

Total payments of R6.5 billion were R7.9 billion lower than the projection of R14.3 billion for the quarter, mainly due to slow spending on the agency’s capital programme as a result of long-standing supply chain management and governance challenges, and lower operational costs as a result of a lower than expected staff headcount, delays in the implementation of salary increases, slow recovery of commuter rail services and continued suspension of long-distance passenger services.

The net result of total receipts and total payments was a cash deficit of R1.1 billion, which was R5.1 billion lower than the cash deficit projection of R6.1 billion for the quarter.

Road Accident Fund (RAF)

The RAF generates its revenue from the fuel levy, which is dependent on the volume of fuel sales, and the bulk of it is used to pay claims from road accident victims.

Total receipts of R23 billion were R808.9 million higher than the projection of R22.2 billion for the quarter, mainly due to higher than expected fuel sales, resulting in a higher fuel levy collection.

Total payments of R21.8 billion were R1.3 billion lower than the projection of R23 billion for the quarter, mainly due to the in-sourcing of certain functions of the Fund and limited administration-related business activities due to COVID-19 workplace protocols, and lower claims paid as the Fund looks to shift to an installment-based claims payment system.

The net of total receipts and payments was a cash surplus of R1.2 billion, which was R2.1 billion higher than the cash deficit projection of R848 million for the quarter.

South African National Parks (SANParks)

SANParks generates revenue from gate fees, accommodation, conservation fees, activities and transfers from the Department of Forestry, Fisheries and the Environment (DFFE).

Revenue from these sources was projected at R2.1 billion for 2021/22, with R925.9 million received by the end of the second quarter. This constituted 44% of projected revenue for the financial year. The entity generated R126 3 million less than projected in the second quarter due to less than anticipated transfers received from the Department for the Expanded Public Works Programme (EPWP). The DFFE had transferred R222.1 million, or 33.8% of the R657.4 million allocation for 2021/22 to SANParks. Transfers constituted 24% of the total cash receipts from stakeholders.

Spending on goods and services at the end of the second quarter was higher than projected by R51.9 million, compared to the projected spending of R585.2 million. This was attributed to higher spending on combating wildlife poaching within the parks.

South African Revenue Service (SARS)

SARS’ revenue was comprised of transfers from the National Treasury, commission fees and interest income from excess funds.

Total receipts were R22 million higher than the forecast for quarter 2, mainly due to administration fees earned from the Unemployment Insurance Fund (UIF) and the SDL on behalf of the DEL and DHET, as well as higher interest income earned.

Current payments were R488 million lower than the forecast in quarter 2. Goods and services were R536.9 million lower than forecast, mainly due to a time lag which caused delays in payments for administration fees, advertising, consultations, computer services and communication costs, which were expected to be cleared in the coming months. Other attributable factors to the lower than forecasted spending were COVID-19 restrictions.

The CoE was R48.8 million higher than the forecast due to leave gratuities paid out to employees that had resigned. Payments for capital assets were R74.9 million lower. Buildings under construction were R39.5 million lower, mainly due to SARS’s commitment to the reduction of its corporate real estate footprint, which was key to enabling a critical cost reconfiguration. Machinery and equipment expenditure was R35.4 million down, mainly due to delays in the procurement of computers and information communication technology (ICT) equipment and other machinery because of the limited availability of the required items.

The total cash surplus at the end of the quarter was R584.9 million higher than the forecast for the quarter.

South African National Roads Agency Limited (SANRAL)

SANRAL operates two distinct businesses -- the toll and the non-toll road network. The Agency generates its revenue mainly from transfers from the national DOT and by charging toll road fees.

Total receipts of R14.2 billion were R1.6 billion lower than the projection of R15.8 billion, mainly due to higher than anticipated road traffic volume numbers resulting in higher toll revenue.

Total payments of R8 billion were R1.9 billion lower than the projection of R9.9 billion. This was mainly due to delays and cancellations in procurement processes for various road construction and maintenance projects.

The net result of total receipts and payments was a cash surplus of R6.3 billion, which was R334.4 million higher than the projected cash surplus of R5.9 billion for the quarter.

South African Social Security Agency (SASSA)

R7.5 billion had been appropriated in the 2021 Appropriation Act for transfer to SASSA for 2021/22. Monthly transfers from the Department of Social Development (DSD) were its main source of revenue.

R3.7 billion had been received by end of quarter 2, which was on par with the receipts forecast.

R3.2 billion was spent in the quarter, which was R592.2 million lower than the forecast of R3.8 billion at the beginning of the quarter. The spending forecast had included a portion of the surplus approved in June 2021. The lower payment was mainly a result of slow payment to the South African Post Office (SAPO) for the distribution of social grants. According to SASSA, the SAPO had not been able to satisfactorily reconcile beneficiary payments by the payment channel. SASSA required the reconciliation by payment channel because each of the three channels attracts a different fee.

South African Tourism (SAT)

SAT derives its income primarily from transfers made by government as a contribution to operations, with other revenue generated through Tourism Marketing South Africa's voluntary levies allocated through the Tourism Business Council of South Africa, interest on investment, grading income, and sundry sources, such as income from exhibitions like INDABA and Meetings Africa.

Revenue from transfers had been projected at R786.6 million, with R778.2 million (98.9%) received. Slower than anticipated spending was due to projects such as hosting and bid support programmes being postponed due to the COVID-19 pandemic and travel restrictions.

Expenditure on goods and services was R 288 million, which was R94.3 million lower than the projected amount of R382.2 million. Actual CoE was R106.3 million, which was R8.2 million lower than the projected expenditure of R114.5 million. The slower spending was due to vacant positions due to the anticipated merger between Brand SA and SAT.

Unemployment Insurance Fund (UIF)

The UIF generates its revenue from a specific purpose tax on employers and employees of equal contributions of 1% of salaries, and from interest on investments.

Cash receipts were R3.7 billion more than projected due to higher investment income as a result of the sale of investment instruments to fund the COVID-19 Temporary Employer/Employee Relief Scheme (TERS) and a higher collection of contributions by SARS than expected.

The largest spending item was cash paid to UIF beneficiaries, which amounted to R13.1 billion. This was R22.9 billion less than forecast, mainly due to delays in paying the reassessment benefit due to prioritising COVID-19 TERS payments, and outstanding information on COVID-19 TERS claims which had to be provided by claimants. Slow spending on CoE was due to a high vacancy rate of 8.1% by the end of the quarter, which included new posts budgeted for but not yet filled. Spending on goods and services amounted to R597 million, which was R965.1 million less than projected. This was because the COVID-19 restrictions had resulted in the delivery of UIF mobile centres being delayed. In addition, an advertising tender had been cancelled due to the recommended service provider being non-compliant. The Fund would utilise the Government Communication and Information Service (GCIS) to advertise the UIF's services.

Cash available at the end of the quarter amounted to a deficit of R696.3 million, which was R28.2 billion less than forecast, as the fund had delayed the drawdown of cash from the bank to cover expenditure due to lower benefit payments than forecast. There had also been delays in filling vacant posts and slow spending on goods and services.

Update on State-Owned Companies (SOCs)

Mr Ravesh Rajlal, Chief Director: Sectoral Oversight, National Treasury, and Mr Lefentse Radikeledi, Director: Development Finance Institutions, Asset and Liability Division, National Treasury, provided an update on SOCs.

Land Bank

Mr Radikeledi said that in December 2021, the Minister of Finance had appointed a new Land Bank Board, which would oversee the restructuring of the Land Bank.

The finalisation of the bank's liability solution was still underway. It included several initiatives aimed at strengthening its ability to deliver on its development mandate and enhance its long-term sustainability while seeking to prevent any financial losses to lenders. It involved negotiations between the Land Bank and its lenders, with the support from National Treasury. The Land Bank had requested the Minister to provide it with more time to conclude the liability solution since agreement with the lenders was taking longer than initially planned. The R7 billion recapitalisation transfer to the Land Bank would not happen until the bank and the lenders agree to the liability solution.

Mr Radikeledi added that the Lank Bank was “technically owned by the lenders,” because it had defaulted on its debt through the cross-default clause. As such, all the loan books of the bank belonged to the lenders. The liability solution was more about making sure that the lenders did not take the books and sell them, which would leave the Land Bank with nothing. The amount of R7 billion had not flowed. If that amount could flow before a solution was reached, it would "fall under the lenders", who would take it, so Treasury was trying to protect that money -- hence the delay in the R7 billion recapitalisation.

The Land Bank’s annual financial statements had been signed off by the Auditor-General (AG) on

 22 December 2021. It would conclude the annual report soon, and it would be shared with Parliament before the end of March.

Despite still being in default, the bank had managed to maintain interest payments to all its lenders and had repaid about 28% of capital outstanding over the last 18 months. As of October 2021, the amount owed to the lenders had been reduced to R 29.2 billion from approximately R40 billion.

Eskom

Mr Radikeledi referred to Eskom's operational and financial challenges and said the entity remained the single biggest risk to the fiscus, as well as a risk government’s economic recovery plan (ERP). It faced strategic, operational, financial and structural challenges which had resulted in an increase in funding requirements and led to extraordinary fiscal commitments being provided to Eskom over and above the increase in debt from external funders.

Eskom relied on three funding sources to operate its business -- internally generated revenue from the tariffs, shareholder equity and borrowings. It had been dependent on borrowings and shareholder support to remain a going concern, and the missing link had been the tariffs that covered the efficiently incurred costs and allowed for a fair return on assets. It was unable to service its debt as it did not generate sufficient operational cash flows to cover its debt servicing costs, which places more pressure on its liquidity.

To date, the government had provided Eskom with equity support of R136.7 billion from the R230 billion. This was made up of R49 billion in 2019/20, R56 billion in 2020/21 and R31.7 billion in 2021/22. To enable Eskom to execute its borrowing plan, the Minister of Finance had approved a special dispensation to allow it to access additional guaranteed debt of R42 billion in 2021/22 and R25 billion in 2022/23, which fell within its existing guarantee facility. On 31 December 2021, R310 billion had been committed from the R350 billion government guarantee facility granted to Eskom, leaving R40 billion unallocated for future funding.

Work was also underway to review Eskom’s Just Energy Transition (JET), with the conclusion of the feasibility study for the Komati Power station as the flagship project.

Revenue challenges and unbundling process

The high court ruled that the National Energy Regulator of South Africa (NERSA) had acted unlawfully in rejecting Eskom's revenue application, which was submitted on 2 June 2021. NERSA was directed to evaluate the application for the 2022/23 financial year per the Multi-Year Price Determination (MYPD) methodology and announce its decision by 25 February. Eskom was still pursuing part B of the case, which deals with setting aside the entire NERSA decision concerning the remaining two years of the revenue application. NERSA had concluded its public hearings following the court decision and was now undertaking its internal governance approval processes before announcing its decision on 25 February, as per the court order. NERSA’s decision on the set date was critical to enable the Minister of Public Enterprises to table the revised tariffs on 15 March in Parliament. Failure to meet this timeline would result in the tariffs not being implemented in the 2022/23 financial year, and this would have a significant negative impact on Eskom’s financial position.

Eskom had made progress with its unbundling plan by establishing a transmission company that was now registered with the Companies and Intellectual Property Commission (CIPC). It had also applied for a transmission licence, which was being considered by NERSA. The Department of Public Enterprises (DPE) was also embarking on the process of developing the founding legislation for this transmission company. The deadline of 31 December 2021 to complete the legal separation of this unit had been missed, as lenders had not yet approved the proposed restructuring. The generation and distribution entities' legal separation was expected by 31 December 2022.

Compliance with equity conditions

For 2021/22, the 18 conditions attached to the equity allocation that had been imposed on Eskom were clustered as follows -- financial 14, operational three, and restructuring one. To monitor progress towards complying with these conditions, a weekly monitoring task team comprising of officials from National Treasury, the DPE and Eskom had been established. In reviewing compliance with these conditions, National Treasury considers areas where Eskom fully complied, had not complied or partially complied with the required information. Fully complied meant that all the required information was provided, not complied meant the information was not provided or dates were not met and partially complied meant that the information provided did not meet National Treasury’s requirements and therefore Eskom had to submit additional supporting information to fully comply with the conditions.

As of 31 January 2022, Eskom had complied with all these conditions and provided the required information.

Denel

Denel continued to under-recover on expenses as a result of significant reductions in sales and low operational activity due to ongoing liquidity challenges. Government had allocated it R 3.035 billion in 2021/22 to settle guaranteed obligations that fell due in the year.

As of 31 December 2021, Denel’s total revenue amounted to R970 million, which was 57% below the budget of R2.3 billion. Cash available amounted to R498 million, with R333 million ring-fenced in escrow accounts and project finance structures. Its net loss position amounted to R871 million, against the budgeted net loss position of R348 million.

Denel was currently technically insolvent. Its net equity at the end of 2021was reported at a negative R1 billion. Broader alignment was required between the Department of Defence, the Department of

 Public Enterprises, National Treasury and other relevant stakeholders to agree on the future state of Denel. This would enable it to pursue a strategy of revising its operating model, consolidating operations, disposing of non-core assets and executing identified strategic equity partnerships to alleviate its financial pressure.

South African Special Risk Insurance Association (Sasria)

Claims relating to last July's unrest were estimated to amount to R32 billion. As of 31 December, Sasria had settled a portion of the claims amounting to R14.9 billion through its capital and reinsurance reserves. The claims amount surpassed the capital available to the entity, resulting in a R22 billion shortfall.

Sasria reported that its total assets at the end of 2021 stood at R5.9 billion, compared to its total liabilities of R26.3 billion. The decline in assets was mainly due to the liquidation of certain assets to aid in settling claims from the July unrest. In line with the substantial increase in claims which had contributed to the declining profits, Sasria forecast a net loss of R28.6 billion, compared to a budgeted profit of R240 million.

Mr Rajlal said that while Sasria had forecast a net loss of R28.6 billion as at 31 December 2021, this was before the amount of R14.9 billion had been transferred, which had been done after the end of December. In terms of future support for Sasria, there was still a shortfall of R7.1 billion, which would be finalised at the end of the current financial year.

South African Post Office (SAPO)

SAPO had historically struggled to define its strategic role as a commercial enterprise, operating within a rapidly changing ICT environment, whilst balancing its distinct developmental mandate. A number of reforms had been implemented, and SAPO’s mandate had been strengthened through an amendment of the Postal Services Act. Although the reforms provide the basis for the turnaround of SAPO, the entity continued to struggle with its commercial revenues. Government had to decide whether SAPO had a role to play as a delivery arm to government. If not, it must be drastically restructured, as it would not be able to continue in its current form without yearly funding from government to cover its losses. The shareholder department needed to urgently restructure and repurpose the entity.

National Treasury had advised the Department of Communications and Digital Technologies (DCDT) to undertake a market study to determine whether and the extent to which government involvement was required in the postal sector, and Treasury had assisted with the terms of reference for the study. The outcome of this study should determine the extent to which SAPO was restructured. No government guarantees currently were in place for SAPO.

As of 31 December 2021, SAPO had launched its voluntary severance package (VSP) programme, and 482 employees had applied to leave the entity at the end of January.

Revenue of R825 million was R361 million (30%) below budget, reflecting a decrease from the previous year of R114 million (12%). Actual expenditure was R1 427 million, which was below the expenditure budget of R1 731 million by R304 million, and had decreased from the prior year by R299 million).

There was a net loss position of R473 million against the projected net loss of R403 million, a negative variance of R69 million. This net loss position had improved against the previous year by R160 million. SAPO creditors, including accruals, amounted to R4.1 billion and included a salary debt of R150 million for the period from April 2020 to February 2021.

SAPO continued to face serious liquidity challenges and did not seem to have a plan in place to address the serious liquidity constraints which posed a serious risk to it. There was a request for additional funding of R23 billion over the 2022 medium-term expenditure framework (MTEF).

South African Airways (SAA)

National Treasury had requested quarterly updates to Parliament on the utilisation of the R2.7 billion allocation to SAA subsidiaries, which formed part of the R10.5 billion that was allocated to SAA during the 2020 Medium Term Budget Policy Statement (MTBPS). However, the Second Adjustments Appropriation Act had specifically and exclusively earmarked the entire R10.5 billion for the implementation of SAA’s business rescue plan, so the R2.7 billion could not be transferred to the SAA subsidiaries, since the subsidiaries were not under business rescue.

The Special Appropriation Act had provided the following funding for each subsidiary:

  • South African Airways Technical SOC Ltd (SAAT) - R1.663 billion
  • Mango Airlines SOC Ltd  - R819 million; and
  • Air Chefs SOC Ltd - R218 million.

SAA had exited business rescue on 30 April 2021, but it had remained under care and maintenance until 23 September 2021, when it resumed operations. It had been making losses since resuming operations. As of December 2021, the SAA Group had incurred a year-to-date loss of R2 7 billion against a budgeted loss of R2.3 billion. At the end of December, it had operated a total of 1 023 flights in the domestic and regional market since resuming operations.

Mango

On 10 August 2021, the South Gauteng High Court had granted the Board of Directors’ application to place Mango under voluntary business rescue. The business rescue plan was initially published on 29 October 2021b and was subsequently amended and published on 25 November.

Of the R819 million which was allocated to Mango as part of the R2.7 billion Special Appropriation Bill, the DPE had disbursed R420 million for salaries, developing a business rescue plan, and voluntary severance packages (VSPs). The remaining balance of R399 million would be utilised to restructure the airline after consensus had been reached between Mango’s business rescue practitioners and the DPE.

Since entering Business Rescue, Mango had not operated any flights, which had contributed towards the recorded loss of R931 million as at 31 December 2021 against a budgeted loss of R856 million. This was mainly due to Mango continuing to incur staff costs and aircraft lease expenditure while in business rescue.

South African Airways Technical (SAAT)

SAAT had incurred a loss of R848 million as at 31 December 2021. The company had anticipated generating positive cash flows from December 2021, as its major customers, Comair and SAA, resumed operations. However, SAAT’s revenues remain low, despite the return of the major customers.  SAAT had indicated that it was currently in a position to source components needed to perform maintenance checks regularly to meet operational demand.

The full R1.663 billion allocated to SAAT had been transferred to the entity. R704.2 million was used to pay long outstanding salaries to employees for the period September 2020 to July 2021, R79 million was for the purchase of spares. and R879 million would complete the restructuring process and provide working capital for the business.

Air Chefs

Air Chefs had incurred a loss of R195 million as at 31 December 2021. An improvement in profitability was expected in periods to come, as its largest expense, staff costs, was expected to significantly reduce due to the finalisation of the VSP programme in October 2021.

The full R218 million had been transferred to Air Chefs and R107 million had been used for the payment of employee salaries for the period April 2020 to July 2021, and R111 million had gone towards the restructuring of the entity.

Discussion

Mr O Mathafa (ANC) had an overarching question that spoke to both Treasury and the public entities. Could Treasury indicate if, as expenditure was tracked, the Committee could see whether spending was in line with some of the President’s injunctions? As an example, one of the uppermost key focus areas for the President and South Africa was the implementation of the Economic Reconstruction and Recovery Plan (ERRP) and the District Development Model (DDM). He recalled that the ERRP was anchored on certain sectors and certain key focus areas. His interest was to find out if it was possible to track if the spending was in line with the priorities identified by the President, and by extension Cabinet.

His second point was on comparisons of the current reporting period, as contained in the presentation, to the same reporting period in the previous financial year. The budget allocations may have been different, and he was not interested in “rand for rand comparison”, but with the overall spending pattern. How did it compare generally, as far as the whole basket of the Department and the public entities which were reporting? Was there an improvement in the spending, was there efficiency, was there mitigation of those areas that had been identified as problematic in the past? One of those areas was wasteful expenditure, as well as delaying processes as far as procurement was concerned. The presentation had referred to delays in procurement, implementation for the pilot and lead sites concerning the integrated financial management system. This issue was something that was repeating itself. What would Treasury advise, so that it could be sped up to ensure that it was finalised? As he had indicated earlier, the Committee had been raising certain issues, and if those stubborn issues were able to be identified, he thought that it was important that Treasury came on board and tried to assist. The Committee had spoken with various municipalities the previous week on the impact of grants that were unspent and had been withdrawn by Treasury. Treasury was able to assure the Committee that that particular spending did not necessarily impact on the residents, as it was expected by the residents to receive that service. As and when grants were advanced, there should be a way that before the grant was withdrawn, Treasury came on board to try and assist the affected departments to ensure that no service delivery was hampered.

The Land Bank issue had been discussed for quite some time in terms of the creditors and the Bank's efforts to find a liability solution to ensure that the funders did not call up their facility. That issue did not have a clear indication of its resolution. Since the previous board had failed to meet deadlines in the restructuring of the Bank, were there any new timeframes that Treasury had put in place to ensure that this time around there would be no failure on the part of the Land Bank and the shareholders? The Committee would be able to assess how far it could intervene, and how far it could assist. An open-ended process of that nature not only further exacerbated uncertainty but was also draining on the resources of the Bank.

He asked about SAPO's salary debt. There was an unspent amount, or would be overspent, that spoke to salary debt. What did that mean? Was it salaries that were not yet paid, or salaries that were paid and were not supposed to have been paid, which had caused the SAPO to have excess payments as far as salaries were concerned?

Ms N Hlonyana (EFF) said that Members were worried about the Land Bank's progress. A new board had been appointed, but one could hear from the presenter’s voice that even he was worried, because he had “absolutely nothing to report” further to the Committee’s last engagement. What drastic measures would Treasury take to make sure that the issue of the Land Bank was resolved, and it was stabilised? There should be something drastic that Treasury could think of that needed to be done immediately because the situation could not be allowed to continue like that.

When was the Committee expecting the finalisation of the Mango business rescue, and the timelines? When would the airline go back to normality? This was another issue that the Committee had been dealing with for quite some time.

What did Treasury think could be done to fight the issue of overspending or under-spending by its entities? It was never a case of just doing well -- either they overspend or under-spend. What did Treasury think could be done? Perhaps training, for example. Perhaps some people could be fired, and new people hired.

Mr A Sarupen (DA) commented that SAA had a larger loss than projected – approximately R2.7 billion had been lost since resuming operations when the projected loss was R2.3 billion. Based on the performance of SAA, did Treasury anticipate that SAA would require further equity and if so, what was that going to look like? If so, what amount of equity was going to be available from the equity partners as well, going forward?

SAPO was requesting additional funding of R23 billion over the 2022 MTEF – what conditions or reforms was Treasury going to look at imposing if it was to get the additional funding, as it was a “tremendous amount of money.”

Referring to Eskom, he said South Africa was going to be reaching the final year of the special appropriation. Eskom had got its ten years’ worth of financial support in the main appropriation. There had been a special appropriation over three financial years after the current term in 2019. Did Treasury anticipate, based on what Eskom was saying, that it would be asking for any additional special appropriations over and above the ten-year R20 billion per year support?

Regarding Denel, SAA and others, he said that previously those entities had not been paying over their pay-as-you-earn (PAYE) tax for their employees to SARS. Had that situation been resolved considering the amount of equity that those entities had been taking from the state? The Land Bank had lost two senior executives recently – had that affected negotiations with creditors?

Regarding the general state of debt by state-owned enterprises (SOEs), he had been given contradicting information in the past about whether debts of the entities like the Land Bank or Eskom would trigger cross defaults. He had been told that if the state did not issue bailouts, this would trigger cross defaults. He seemed to be getting a different answer every time he asked the question, depending on who he was speaking to. On one hand, he had been told that if the state did not issue a bailout to, say, Denel, SAA, or Eskom, and one of those entities defaulted, that it would trigger cross defaults because it would trigger loan guarantees, and creditors would be able to do a debt recall across the state. This would trigger a debt crisis for the state. He asked if that was the case because he had also been told that each of those entities’ debts was self-contained so that if Eskom were to default, for example, it would not trigger cross defaults to others.

Ms N Ntlangwini (EFF) thought that there was not enough effort from the government to ensure that the post offices were working. The people that would be suffering the most from the lack of the SAPO’s services would be SA’s rural communities. In the media, it had been reported that a previous chief executive officer (CEO) had wanted to buy parts in the SAPO, and she argued that “such opportunists must never be allowed to get any part of our post office.” Such people were put there to make the post office work, and they "purposely did not make it work so that they could come and buy shares through the back door.” That was “the norm” that one could see through all of these government entities. These CEOs went in and purposely did not let the entities work, and then let either their friends or themselves buy shares through the back door. Treasury was the main custodian of those funds – what was its role in ensuring that all of those entities were actually working, or did it just give them a credit card or a cheque, and then say to these people they could see it to the finish? She thought that Treasury played a major role because it was the custodian of these funds, which were meant to ensure that all entities were up to standard and working. The SAPO was the most hard-hit one, and the most heartbreaking one. It was the rural communities that would suffer from the incompetence of the CEOs that were previously in the entities, who would then come through a backdoor to buy some shares in them. It was purely a criminal thing to do.

She shared the same sentiments on the Land Bank as her colleagues. The issue of the Bank had been there for a long time. It seemed like things were not moving because it was first this story, then that story. One would have expected those issues would have been sorted out by now. For the past two years, if not three, the issue of the Land Bank had been with the Committee, and every time, it was a different story. More effort was needed from Treasury.

She asked who the current majority shareholder of Mango was, as it stood. She said PRASA was another concern that seemed to not be addressed. It showed throughout; it was there in the last quarter again, showing slow spending on its capital programme. It was worrisome. What steps was Treasury putting into place on those slow spenders and the under-spenders who were repeat offenders? Some form of harsh regulation from Treasury’s side was needed because it was the main custodian of those funds. It seemed that Treasury came to the Committee and acted like “cry-babies,” and then there was not a form of regulation from its side as the main custodian of those funds. Something had to give -- the Committee could not allow slow spending and under-spending year in and year out. Things had been trying to normalise now in the country. People could not come and tell the Committee the story of COVID-19 that they had been telling it throughout the year in 2021 and at the beginning of 2022. Treasury was the main custodian, so it needed to make sure that government money was spent properly, and spent according to the programmes that Treasury had in its strategic plans.

Mr E Marais (DA) said it was amazing that all the staff working in Treasury was not off with depression when they saw all these negative figures. He was previously on the Portfolio Committee on Public Enterprises, and year after year there would be a turnaround strategy and a new business plan, and they never worked.

As Treasury worked with a lot of people in finance, was there a possibility that it could assist Pravin Gordhan to appoint those executives who had resigned at the Land Bank to headhunt people in the marketplace who had the expertise to run the Land Bank?

He did not know how one could build confidence for people to make reservations with SAA again. It was a matter of one day it was flying, and the next day it was off the flight plans. That was what it had come to. One had to have a consistent airline that provided a necessary service.

He asked if Treasury really saw the word “hope” when Denel was R1 billion in the red, to recover to a point where it would be in the green again? He thought that it would be very, very difficult.

Government had bailed out Sasria to pay all its claims after the unrest, but ultimately it had refunded other parastatals through Sasria, by helping it. It had been given additional money for paying claims to parastatals. There must be introspection at a serious level if the government wanted to go ahead with parastatals.

Mr X Qayiso (ANC) appreciated that there had been some progress in the entities with the expenditure reports. He wanted to reflect more on the SOEs. The Committee took note of where progress had been made in as far as the NHLS was concerned, and SARS to some extent. The Committee had hoped for better results in those instances. He also suggested that the Committee needed to meet with PRASA because if PRASA did not move, it meant that the poor communities in the areas where PRASA was operating would be economically disadvantaged. Using rail was the cheapest way of going to work, especially in poor and working-class communities. The more PRASA was having problems, the more suffering there would be for poor and working-class communities as far as going to work was concerned. The Committee needed to meet with PRASA and probe further the crisis that was bedevilling it.

He asked what efforts Treasury had made to assist the SAPO What measures had been put in place between Treasury and the DPE to provide the entity with the support needed to improve its competitive edge, efficiency, and financial sustainability, considering the urgent need to restructure and repurpose the entity? One had seen how the payments of SASSA grants had been very slow at the Post Office. The issue of the SAPO had been talked about several times in meetings. It was a facility that was accessible to the poor. If the SAPO was submerged into those difficulties without the necessary support, it would mean that the same poor would not be able to access their grants and other services there because of post offices not being able to provide the required services. What had been the role of Treasury and the DPE in assisting SAPO?

Eskom had put a huge strain on the country’s stretched public finances. Government had done bailout after bailout at the expense of service delivery imperatives. Were there any measures that Treasury had put in place to gradually reduce the dependency of Eskom on government bailouts? Could Treasury tell the Committee how the Eskom unbundling process would assist with its sustainability and financial viability, and its subsequent reliance on government? Was there any other measure which Treasury could tell the Committee about, such that Eskom would be in a position to raise a profit and manage its finance properly so that it had sustained capability?

He agreed with what other Members had said about Denel. In the 2019/20 financial year, the entity had developed a turnaround plan and had been allocated R1.8 billion, and in the 2020/21 financial year, it was allocated R576 million to address its solvency and liquidity issues. To date, the challenges of the entity persisted, with no prospect of successfully turning it around. What were the practical interventions by the stakeholders to ensure that the entity was saved as a matter of urgency?

The UIF had a serious weakness. A large percentage of the people who were unemployed, or who got retrenched and were kicked out of the system, came from the poor working-class. With the slow spending on CoE due to a high vacancy rate of 8.1%, why was the entity not filling those vacancies? What was the impact on service delivery from Treasury’s point of view?

Ms D Peters (ANC) thanked Treasury for the presentation, although she would have thought that the Committee would get a comprehensive indication of those entities that were not necessarily having challenges currently, but had “red lights flickering”. It was important to be upfront in dealing with some of those challenges. If one looked at the situation at Denel, in 2019/2020 there had been the issue of it not being able to pay salaries, etc. One was asking oneself whether its capacity had been beefed up. She had heard some of her colleagues speak about the role of the DPE, saying it should also be held responsible for some of the challenges of the entities that directly reported to it.

The social relief of distress grant (SRD) was administered by the SAPO, and when she heard the President speaking about the extension of the SRD until March 2023, she had been excited -- yet not excited. She knew that there were people who had applied but had not received their grants. She had raised that concern in 2020, and it was an indictment on all if one found that the R350 grants that had been given by SASSA to the SAPO to administer to the poorest of the poor did not reach the people, and had ended up as under-spending in the books of SASSA. If one went into one’s constituency areas, one would meet people who had applied, were declined and had appealed, but were not getting a positive response. When one intervened as a Member of Parliament, one found a report coming from SASSA that that grant had been approved, but the person had changed numbers, etc. However, the information was there -- some people had submitted their bank details -- but the administration of the grant by the SAPO was not satisfactory. What were Treasury, the DSD and the Department of Telecommunications and Postal Services (DTPS), to whom SAPO reported, doing to make it possible that the administration of the grant actually opened up the convoluted bureaucratic channels that ordinary unemployed people with limited skills would have challenges with? Some of the people who applied for the SRD did not have cell phones, and they were expected to apply on cell phones. The capacity to administer that grant by SAPO, the DTPS, the DSD and SASSA needed to be looked at.

Was Denel salvageable? She asked that, because there were so many South African agencies and SOEs who were “a basket case,” yet there was governance, leadership and administration-level personnel responsible for that. That was an area where she believed the DPE needed to help the Committee find a solution.

A very important UIF issue was related to the fact that people did not have easy access to its offices, yet it had high vacancy rates and unspent funds.  

The Chairperson asked about the overspending in the Department of Agriculture, Land Reform and Rural Development (DALRRD). He heard that there was a project to build a new head office. He asked if departments worked with each other because there were government offices – perhaps the Department of Public Works and Infrastructure (DPWI) would know where – that the DALRRD could have taken, rather than building new offices. That would result in efficient spending and saving.

Regarding the withholding of conditional grants, was there a way to be proactive so that the Committee knew that when there was a budget, it had been allocated for those conditional grants? There was a need to be proactive so that the solution did not become reactive. Government was more reactive in making sure that conditional grants had ended up being spent. There were very serious concerns. At the end of the day, people ended up being negatively impacted by not getting a service.

He said Members had made suggestions about the RAF and PRASA. He wanted to ask Dr Modise a question, even if she was unable to answer it herself, about the challenges of SANRAL, which mainly involved the e-tolls in Gauteng. Was there a strategy finalised, rather than “kicking the can down the road” and burying one’s head in the sand, hoping that the problem would disappear? Was there a strategy or negotiations to try and come to a form of finalisation about that matter? From where the Committee was sitting, it was a question of an “ostrich approach,” and waking up the following day with the same problem.

When reading the full reports, he had seen something on vote 23 (Defence) about the devolution of function from the DPWI to the Department of Defence (DOD). He asked what was happening there. The Committee did not understand why the DPWI would be doing work for the DOD, for a number of reasons. On the one hand, the DPWI was asking the DOD to help it solve its problems, but it could not solve public works challenges that affected its department. What was happening exactly? What was the devolution?

The Land Bank reported to Treasury, and since Treasury was a shareholder department, this question came directly to it. There was a new board coming, which may be in a position to finalise a solution to the liability of the Bank. Treasury had come before Parliament and asked for a R7 billion recapitalisation of the Bank, and Parliament had acceded to that, but two years down the line, there was still not a solution to the problem. For him, that should have no longer been an issue, which had depended on which board was there. Treasury should have come in a long time ago and found a final solution. There were many costs involved. He started with the financial costs, saying that as long as that debt issue was not resolved, the Bank would incur interest costs, and those costs were being paid. Even bigger than that were the economic and social costs. When Parliament approved the R7 billion recapitalisation of the Bank, it was because Parliament was saying that at the end of the day, it wanted people to benefit from the Bank -- it wanted people to benefit from the role that the Land Bank played in agriculture, and the role that agriculture played in employment/unemployment alleviation. What was the shareholder department doing to resolve that? There was a new board that still needed to understand what was happening before it started understanding the type of solution that it must come up with. Time and time again, there had been the issue of the Land Bank CEO resigning before the matter was resolved. There was a time when the Committee had been told that there was a light at the end of the tunnel because the Bank had a new CEO. Two years down the line, the Land Bank did not have a new CEO. It meant that the organisation would be on autopilot of some sort.

He asked Mr Rajlal for his honest opinion on a question. What had changed with the recapitalisation of Eskom by Parliament? The question of the increase of tariffs was a problem, and he would hold his views as far as that was concerned. However, with tariffs increasing to the extent that Eskom was looking for under those conditions, were there concerns about their impact and the burden on consumers, particularly consumers who had been affected by COVID-19, and those who were unemployed? There was also the issue of the impact of the increase in tariffs on the businesses that had to try to kick-start the economy.

Treasury had talked about the need to agree on the end state of Denel. It was not something that Parliament should be looking at, as a solution should have been found to that issue. He was unsure what was expected from Parliament because the Executive had the Cabinet and the Minister in the Cabinet. Why was a solution not found one way or the other?

When he had heard that a former CEO of SAPO was talking about buying a stake in the SAPO, he had also become concerned. The Committee was not sure about the end state of the SAPO. Who must decide when a decision had to be taken, so that there was certainty, both to the people who were being served by the Post Office, and South Africans, who had been funding it?

When talking about the Eskom tariffs, it needed to be noted that it was the taxpayers who were bailing out Eskom. Eskom was giving Parliament a challenge by looking for the tariffs it was seeking. He asked Mr Rajlal if such factors were considered when higher tariffs were being pushed for.

He told the presenters was that if there were questions that could not be answered in the meeting, the Committee did not want convenient answers. Presenters needed to say that they were still going to come back to the Committee on particular questions.

Responses

Dr Modise responded to the questions on overspending and under-spending. The year had tended to be unpredictable for departments, and what they had tended to do was to estimate. Treasury was working with the estimates that departments had submitted to it at the start of the year. The estimates were revised in the MTBPS. The overspending or under-spending had depended on what it was for. For example – if a department was under-spending because it was still finalising the invoices, then there was no issue, and it was not a big problem, because it would sort out its estimates in the coming quarter so that it could be fixed. If the under-spending was on capital spending, like PRASA, then that became an issue because it was affecting service delivery.

There were cases where the under-spending had been because of delays in transferring funds. If the delay was because of non-compliance, and the entity or municipality was working on that compliance, then it was fine, because the funds would be transferred in the next quarter. If one saw overspending on social grants because a decision was taken that Treasury was going to increase social grants, then that overspending was fine because Treasury had to pay off the social grants, and the money was appropriated only afterward. When Treasury came back in the next quarter, then that overspending would be corrected.

The reason it became critical was the type of under-spending and the quantity of it. This was especially true in the fourth quarter because it meant that in the fourth quarter, under-spending could not really be fixed, and would go back to Treasury. The quarter that Treasury needed to worry about the most and focus on when it came to underspending was the fourth quarter, but during the year, Treasury also monitored the type of under-spending. If it knew that the under-spending or overspending would be rectified in the next quarter, then it did not worry too much about it. Most of the under-spending and overspending that Dr Modise presented would be corrected in the fourth quarter.

An issue that was a bit difficult from Treasury's perspective was using regulations to force people to do right or to prevent corruption. There was the Public Finance Management Act (PFMA) and the Procurement Bill that Treasury was working on. Each department had a DG as an accounting officer and had a Minister. Those people were responsible for running the department. Treasury tried to make sure that the taxpayer's money went a long way, and in terms of responsibility, it did monitor and bring things to Parliament’s attention. Treasury monitored the spending monthly, and where it saw irregularities, it spoke to the departments and tried to intervene. It was very difficult to use regulations to deal with inefficiencies and non-compliance. That was because one would get to a situation where spending did not move. After all, there were so many regulations that were preventing departments from implementing service delivery. Treasury needed to try and hold accounting officers accountable for not delivering, but if it was an issue of corruption, Treasury officials could not arrest people. The South African Police Service (SAPS) needed to come in and deal with issues of corruption. It was more of Treasury trying as much as it could, but it could not use regulations to deal with issues of corruption. Corrupt people needed to be arrested -- one could not issue a regulation to avoid that. That was a comment on how Treasury saw the under-spending, and what it was doing.

On whether the spending met with the President’s imperatives, he said that before Treasury allocated a budget, it ran a budget process where it got the Department of Planning, Monitoring and Evaluation (DPME) to make sure that there was alignment between the priorities of government and the ruling party, and those would then be implemented through the annual performance plans (APPs) of departments and the strategic planning sessions of the departments. Once Treasury had allocated the funds and monitored that the funds had been allocated, then the DPME’s responsibility was to make sure that the budget matched the outcomes. Treasury worked with the DPME, but the latter was the custodian of the outcomes and data. The DPME could be called by the Committee to explain how it held departments responsible for not having the outcomes that they said they would achieve.

Referring to the grants, she said what Treasury had done in the past to try and assist with the grant payments was first to make sure that the funding was provided, not only for the grants themselves but also for the administration of the grants. In last year’s budget, SASSA had allocated additional funding to deal with repaying or paying the people who had been rejected at first and had then appealed and won the appeal. That funding had been put aside for SASSA to deal with those matters. With processing, Treasury needed to think about whether it was an optimal solution to get the SAPO to disburse the grants. Was there any other alternative that government could consider to make the grant payments so that it was efficient? She was thinking aloud about whether Treasury could start talking to commercial banks about disbursing the funds. If Treasury saw inefficiencies, it was better if it started thinking about ways it could deal with some of those inefficiencies.  Treasury took Members' points, and it had provided the financial resources for SASSA and the DSD to deliver what the President had announced. In the end, it was SASSA and the DSD’s responsibility to ensure that they delivered on what they were supposed to deliver on.

Ms Lebogang Madiba, Chief Director: Economic Services, NT, responded to the questions on the DALRRD accommodation issue. That project started ten years ago. The Department had approached Treasury then to say that it wanted to procure a new office space altogether because it was not getting satisfaction from the DPWI offices it was occupying. The office space that the DALRRD was occupying was dilapidated. The DPWI was neglecting the repair and maintenance of the current office spaces. When the DALRRD paid the municipal bill, it paid through the DPWI. DPWI would then transfer the money to the City of Tshwane. There would suddenly be cut-offs of lights and water since, in the city's view, DPWI was not transferring the money to the municipality. Subsequent to that, Treasury had approved the DALRRD’s request. That was a Preferential Procurement Policy Framework Act (PPPFA) kind of initiative, and the DALRRD was partnering with the private sector in the construction. The National Macro Organisation of the Government (NMOG) was involved in the construction, which meant that through the merger of Agriculture with Land Reform and Rural Development, extra "warm bodies” would be coming in to the merged department. The DALRRD had approached Treasury to say that it would need to expand the office space that it was building to accommodate extra personnel. Treasury had subsequently approved.

The DALRRD was constructing the building and finalising it. In the DALRRD’s plan, the expectation was that it would conclude it in the 2022/23 financial year, but due to the COVID-19 pandemic, Treasury expected that this would be shifted a bit in the outer year, possibly to 2023/24. Treasury was engaging with the DALRRD to make sure that it was certain that 2023/24 would be the date that the DALRRD concluded the construction of the office accommodation. The reason behind the DALRRD wanting to get its own building was so that everyone was under the same roof. The head office was scattered around Pretoria, so it wanted to make sure that everyone was housed under one roof. Treasury understood that one of the reasons for new office space was that DPWI was neglecting its mandate to repair and maintain the building and not paying the City of Tshwane, and secondly to make sure that the DALRRD brought everyone into one office space. That was critical, and Treasury approved.

Regarding the Chairperson’s question about government departments not occupying buildings owned by government and under the administration of DPWI, that was a matter that should be enforced by DPWI. From DPWI's side, it was not maintaining and repairing that building, so that was a sufficient reason for the DALRRD to want to have its own building, hence Treasury had approved that.

Ms Ulrike Britton, Chief Director: Urban Development Infrastructure, NT, answered Mr Mathafa's questions on the withholding of conditional grants. To ensure that Treasury had some kind of administrative justice system and that this did not impact negatively on service delivery, the

 Division of Revenue Act required national transferring officers to notify the receiving officers of an intention to withhold and to provide reasons. That would give provinces and municipalities an opportunity to put together a recovery plan or motivate the national department as to why that should not happen. It helped in a lot of cases where there was significant under-spending, and where the national departments were convinced that provinces and municipalities had a credible plan to recover the plans, they would continue transferring those funds.

Dr Rendani Randela, Chief Director: Finance, NT, answered the question from Ms Hlonyana on under-spending or overspending. Sometimes under-spending was mainly because departments had found better ways of doing business. For example, at this time last year, lower than projected spending on the police vote was about R2 billion. It was mainly because at the time when it had costed the COVID-19 intervention, it had been based on the use of disposable masks. Later on, the police had convinced its members to use reusable fabric masks. As a result, there had been some savings. That was the police had been behind in spending -- because they had found cheaper ways of doing business.

He said the devolution of functions from DPWI to the DOD had been going on for quite some time. It was also a project that had been initiated and supported by the previous Standing Committee on Appropriations. He appealed for the two departments to be invited so that they could share progress with the Committee. In terms of the roadmap, the function was supposed to be fully migrated by 1 April 2022, but “right now, that was not going to happen.” With the process, the issue of function shifts or determination of functions was in the hands of the Department of Public Service and Administration (DPSA), where the Minister of a relinquishing department writes to the Minister of Public Service and Administration. The receiving department would then accept the functions, assets and liabilities. Thereafter, once that had been done, the department would write to Treasury so that that function could also migrate with funds.  Treasury was not yet there. It appeared that there were some delays with the department that was supposed to be relinquishing the function, which was DPWI. Dr Randela said that with the previous Committee, he used to appear before it quarterly for sharing progress, and he appealed to the current Committee to revitalise the monitoring of that project because it had been going on for quite some time, and it was likely that now there would be some delays.

Dr Modise responded to the Integrated Financial Management System (IFMS) question. Treasury had a budget, and it wanted to procure services for the pilot, but the bids had been significantly higher than what Treasury had budgeted for. The IFMS was looking for an alternative way to do that, so it had asked the Sector Education and Training Authority (SETA) to provide a business plan and the costing of its proposal.  Treasury "would definitely be under-spending," because it was moving away from the initial thinking of asking a service provider to provide the service. However,  because of the high cost, the IFMS had decided on something different.

On the UIF under-spending on CoE -- as with any other entity -- she thought that the entity struggled to fill positions, but because of the way Treasury was working, she knew that it had been having that issue for two years. Some entities were still struggling to fill vacancies. The main problem with the UIF was its struggle to fill those positions.

Mr Radikeledi said the common thread in the questions on the Land Bank was what Treasury was doing to make sure that it concluded on the liability solution, and whether it was taking “drastic measures” to conclude the liability solution. There was also a question on the replacement of the resigning executive members. The lenders were focused on the protection of their investments. When the lenders negotiated, they went to the negotiation table not wanting to concede to anything.  Treasury was focusing on making sure that it could get back to a workable situation, and that it was still delivering on its mandate. These were two divergent interests. It became a “very thorny issue” for the lenders when Treasury talked about making sure that it got the Land Bank back to work. The lenders just wanted to see the Land Bank give them back their money, and “pay back their money today.”

He recalled that because the two loan books had defaulted, those members had the power to liquidate the Land Bank at any time. The lenders could even liquidate through the court any time they wanted. Treasury was negotiating to stop that, hence it had come with a liability solution, to make sure that the lenders would commit to supporting the Lank Bank throughout until they were all paid off. The plan was that Treasury needed to pay the lenders off within five years. Most of the lenders wanted their money immediately, so that was the challenge that Treasury was facing. When Treasury reached a stage where the lenders did not want to agree and had decided to withdraw from the liability solution, the Minister and the DG had immediately met with some of the lenders and wanted to know what they really wanted. The Minister and the DG had requested Treasury go back to the table and negotiate with those lenders so that the parties could find common ground. The new board had also met with the lender, and had decided to come up with a new proposal for new timelines on the point at which the process should be completed. The issue was that the new timelines had not yet been shared with the lenders. As they spoke, there was a meeting between National Treasury and the Land Bank to discuss the timelines, so that they could be communicated to the lenders as soon as possible. With the timeline, Treasury was looking at concluding as soon as possible, but the latest date that the Land Bank had proposed to Treasury was September 2022. That had not yet been confirmed with Treasury and the Minister of Finance. The message that Mr Radikeledi was conveying at that time was not yet known by the Minister of Finance, but that was the proposal that the Land Bank had sent to Treasury the previous day.

The challenge Treasury was facing was not that it wanted to conclude -- it was that the Land Bank lenders, every time they reached the timeline, especially a week before Treasury closed, the lenders decided to pull out. The lenders told Treasury about it not guaranteeing the lenders that they would get every cent. He was not sure if in any liquidation one would ever be able to get back every cent invested in an entity. He thought that the lenders “were not negotiating in good spirit,” because they wanted to get back every cent that they had invested in the bank, which was something that Treasury could not currently guarantee. Whether it could go into a more constructive liquidation or a more non-constructive liquidation, there was no guarantee that the lenders would get every cent out of the process. However, Treasury wanted to protect that and was saying in the negotiations that if the lenders went through the liability solution to the five years, then they were likely to get more than they could get if they did not do it more constructively. That was the delay that the lenders wanted because they kept reminding Treasury that it was managing people's money, and people were not patient with Treasury telling them that they could get their money after a certain period. The repayments to the lenders were happening.

Treasury was hoping that at some point, it would reach some agreement. The "drastic measures" he mentioned, which he had discussed with team members that Treasury was sitting with in meetings, was that Treasury needed to put its foot down and decide that it was not going to move and change any other things that it was going to give the lenders. It was up to the lenders whether they signed or not, and what would happen if they did not sign. The next option that Treasury thought the lenders would be looking at was whether they wanted to liquidate the Land Bank. Treasury had not been given a mandate to liquidate the Land Bank. Its mandate was to protect the Land Bank. Treasury would make sure that in its negotiations, it would protect that part of the Lank Bank, which was why the Committee had not seen the R7 billion flowing because it was part of the money that Treasury needed to protect. It also needed to make sure that by the time that money flowed to the Land Bank, Treasury had sealed all of the deals that would actually protect that money, so that it could begin to serve the economy of South Africa.

Treasury usually did the appointment of the CEO: through the board, but the final person to approve the CEO would be the Minister. Treasury would make sure that any new CEO who was brought in would be the best person to take the job. The appointment of executives under the CEO was a function of the board and the CEO, and he was sure that the Land Bank would do the same in terms of appointing the right people to make sure that there was a better Land Bank in future.

Mr Rajlal responded to questions on the state-owned companies (SOCs). The first question was from Mr Mathafa on the R150 million salary debt of the SAPO and confirmed that this was the amount of outstanding salaries that had not been paid to employees.

The next question was from Ms Hlonyana on the Mango business rescue and when it would be finalised. He thought that that would be best answered by the DPE as the shareholder of SAA and Mango as well. There was a question from Mr Sarupen around SAA and whether it would need further equity, and if so, what amount? With the information that Treasury had, no further support was required for SAA in the next few years. Treasury understood that the reason behind the strategic equity partner (SEP) was to ensure that the new SAA would wean itself off further support, as Treasury did not expect the taxpayer to further bailout SAA when R10.5 billion had already been provided to SAA as part of the business rescue plan. R16 billion in government-guaranteed debt had also been provided, which SAA had not settled over the last three or four years.

On the SAPO’s conditions or reforms, the R23 billion that he had mentioned was still going through the processes. That amount would be announced on 23 February if it was approved to provide any funding for the Post Office. Normally what happened was that Treasury would attach conditions to any support.

He said no additional support was required for Eskom over and above any that had been provided. That still formed part of the R230 billion support package. R136 billion had been disbursed, and there would be a further four disbursements over the next four financial years that would make up the remaining amount of the R230 billion.

There was a question on Denel, and if the issues around SARS had been resolved in terms of the value-added tax (VAT). With SARS payments, there was an amount of over R500 million still outstanding. With the VAT, there was an amount of R84 million still outstanding as of the end of quarter three.

Mr Rajlal clarified Mr Sarupen's question about the mixed messages on the triggers for cross default, and used the examples of SAA and Eskom. If there was a situation where Eskom defaulted, it did not have a cross default clause with SAA. If Eskom defaulted, it did not mean a rippling effect on all the guaranteed debt. However, seeing that the same group of lenders who lent to Eskom and had lent to SAA, that would make the lenders very nervous. Where there was debt that was unguaranteed in some SOCs, for example, lenders would require guarantee or it could trigger lenders into saying that they would also want their debt to be paid. However, this did not necessarily mean a cross default if any of the SOCs defaulted. In the guarantee agreements, Treasury had provision for a step-in clause, which allowed government to step in to avert a default. That was what had happened with Denel, where Treasury had basically stepped into the shoes of the borrower (Denel) to ensure that it did not default on the Domestic Medium Term Note (DMTN) programme, because if it had defaulted on any interest payments or principal amounts, then the whole debt within Denel under the DMTN would have defaulted. To answer Mr Sarupen’s question, there was no cross default from Eskom to SAA to SANRAL, for example.

There was a question on what Treasury did to ensure that monies were spent at SOCs and a remark that more effort was required from Treasury. In its oversight role, Treasury did have weekly, monthly and quarterly meetings where it provided oversight on money that had been allocated, and how it was being spent. Conditions were attached to that, and SOCs did have to report on compliance with those conditions.

There was a question on who the majority shareholder of Mango was. Mango still fell under SAA. SAA was the 100% shareholder of Mango at the moment.

Mr Marais had asked if Treasury saw hope for Denel. The hope lay in the fact that all the stakeholders that Treasury mentioned in the presentations had sat around the table, and had agreed on what to do with Denel regarding its future state. There were a lot of stakeholders that needed to agree because Treasury was currently seeing when it came to Denel that some of the business was non-core to one of the stakeholders, but it could be core to other stakeholders. Alignment needed to be reached there, and then Treasury would also need to understand what sort of strategic equity partnerships could be created. Some were on the horizon for Denel. Some assets were non-core that could be disposed of. Those were all the "self-help initiatives" that Treasury always talked about, and it would want to see the entities implement them. Key to the survival of Denel was to ensure broad alignment between all the stakeholders.

Mr Marais had also asked if all of the SOCs were needed. That was some of the work that had been taken on by the Presidential SOC Council in what had been outlined in the President’s State of the Nation (SONA) address -- to look at what was core, what could be merged, and what could be disposed of. What was strategic and not strategic had also been outlined. That would help Treasury to assist and to understand exactly the funding that should be allocated into what was strategic and not strategic, and to understand what should be merged or consolidated.

Mr Qayiso had asked what effort was required to ensure that the SAPO would survive with support. The historic support provided by government guarantees and recapitalisations had been approximately R10 billion. There was also an annual subsidy that went to the Post Office of about R4 million or R5 million. There had been support provided. It boiled down to the fact around the change in management, the change in the board, and the fact that Treasury did not have a stable turnaround plan. It did not have a commitment on what the repurposed Post Office should be. Treasury had assisted the Department try and carve out terms of reference around what the market study should be, and what was required of those terms of reference. It was meeting with the SAPO quarterly and had raised issues of policy with the SAPO, but a lot of the work was reliant on the DCDT as the shareholder department to see that things were seen through with restructuring.  Treasury met with the SAPO on an ad hoc basis as well.

On the red-flagging of the other SOEs, Mr Rajlal said that in future presentations, Treasury would bring to the Committee some of the other SOCs that it was also looking at, to highlight what stresses those were under, such as Transnet or PetroSA. Treasury would have an internal discussion on what SOCs it could bring to the Committee to report on.

The question of whether Denel was salvageable boiled down to the stakeholders sitting around the table and agreeing on the future state of the entity. There were a lot of self-help initiatives that needed to happen as well at Denel. On whether it had been “beefed up”, Mr Rajlal knew that there had been a few resolutions from the board and that the DPE was currently strengthening the board.

The Chairperson had asked questions on Eskom, and what had changed with the recapitalisation. Had Eskom not received that recapitalisation, he thought that Eskom and even SA would have been in “a very dire situation” because it would have then defaulted on its debt. The recapitalisation that had been provided to Eskom was to ensure that it settled its debt and interest payments. The issue around tariffs was that NERSA had not been providing cost reflective tariffs to Eskom over all those years. That had built up, resulting in Eskom going to the market to borrow to offset the lower tariffs. The impact of tariffs had been taken into account. However, he thought that the unbundling process would ensure that SA would open up the electricity sector to ensure that there were more private sector participants. With the independent transmission company, it would ensure that SA got more players aside from Eskom to ensure security of supply, and could look at pricing in what those players could bring to the system.

On the future status of Denel and the SAPO, a lot was dependent on the executive authorities of those two entities. It would perhaps be beneficial for them to come to the Committee to provide an update on where they were concerning their future.

Dr Modise said that Treasury had responded to all the questions, except for those on SANRAL.

The Chairperson asked if Mango, Air Chefs and SAAT were subsidiaries of SAA.

Mr Rajlal replied that the Chairperson was correct.

The Chairperson asked if a strategic equity partner (SEP) who bought SAA would automatically own the subsidiaries, to the same percentage it owned at SAA.

Mr Rajlal replied that there were conditions in SEP transactions. With Mango, there would be a different condition around whether the SEP would want to have all the subsidiaries. It would best if the DPE responded to that question, just to be clear and so that he did not misrepresent the facts. What was happening at the moment was that the SEP was acquiring 100% of SAA, which technically should have meant that it was acquiring all of the subsidiaries. That was not the case 100% of the time, because Mango was going through a business rescue. That was a separate process. Some conditions were attached to the acquisition of SAA, which included Mango and the other subsidiaries. However, to be fair to the response, it would be best if the DPE provided a more comprehensive response so that he did not misrepresent the facts.

Adoption of draft minutes

Mr Qayiso moved the adoption of the draft minutes of 1 February, and Mr Mathafa seconded.

There were no announcements. The link for the following day’s online meeting would be sent to Members in the next half an hour. It was a meeting with the Office of the Chief Procurement Officer (OCPO) at 09:00.

The meeting was adjourned.

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