National Treasury on Quarter 4 Expenditure & SOC performance

Meeting report

The Chairperson welcomed everyone in attendance.

The Committee Secretariat noted apologies from Mr A Emam (NFP), who said he would be late, and Ms N Ntlangwini (EFF) who had a political party engagement to attend.

Briefing by National Treasury – Fourth Quarter Spending Outcomes

Dr Mampho Modise, Deputy Director-General: Public Finance, National Treasury, presented the fourth quarter spending outcomes for government departments in the 2019/20 financial year. She stated that government overspending was R2.8 billion – 0.3% of the available budget of R939.2 billion. The overspending was mainly due to responses to the COVID-19 pandemic, such as the R12 billion overspending in transfers and subsidies due to the early payment, in March, of social grants under the Department of Social Development (DSD) for April 2020. She highlighted that there was underspending in goods and services, payment of capital assets and payment of financial assets by R6.4 billion, R3.1 billion and R674.5 million respectively.

The most significant overspending was in the following departments:

• Social Development, due to the early payment of social grants for April 2020;
• Statistics South Africa, due to the compensation of employees in unfunded filled positions.

The following departments showed the most significant underspending for the 2019/20 financial year:

• Cooperative Governance and Traditional Affairs (COGTA), due to the Local Government Equitable Share (LGES) being withheld in order to offset unspent conditional grants that were not approved for rollover and where the municipality failed to deposit the funds into the National Revenue Fund.
• Water and Sanitation, mainly due to incomplete verification of work undertaken by service providers for the implementation of the Bucket Eradication Programme, drought relief measures in the Eastern Cape, Northern Cape and the Free State, and the incomplete implementation of COVID-19 interventions across all municipalities;
• National Treasury due to slow spending in the Integrated Financial Management System (IFMS) project pending the finalisation of the procurement plan and common design. Added to this is the delayed appointment of professional service providers to implement the Infrastructure Development Management System (IDMS)

Dr Modise highlighted developments in the personnel spending for the departments of Defence, Correctional Services and Police. Treasury asked the Committee to take note of the lower than anticipated expenditure in the Department of Public Service and Administration’s Administration programme for operating leases. Additionally, the Committee should note the overspending by the Department of International Relations and Cooperation (DIRCO) for compensation of employees for 2019/20.

Dr Modise pointed out the spending outcomes regarding Votes 1: The Presidency; 5: Home Affairs; 6: International Relations and Cooperation; 10: Public Service and Administration; 11: Public works; 14: Basic Education; 15: Higher Education and Training; 28: Labour; 37: Arts and Culture; Vote 40: Sport and Recreation; 13: Women; and Vote 16: Health. The underspending of R389.2 million by the Department of Health is due to poor spending in the National Health Insurance (NHI) indirect grants in programme 2, and as a result of unfilled posts during the year. The R14.9 billion overspending in Vote 17: Social Development was due to early payment, in March, of social grants due in April. This will be addressed through a separate Finance Bill in line with section 34 of the Public Finance Management Act (PFMA).

She also highlighted the spending outcomes of departments regarding Votes 18: Correctional Services, 19: Defence; 21: Justice and Constitutional Development and Vote 23: Police. On spending outcomes related to economic services, Treasury highlighted the expenditure of departments regarding Votes 9: Public Enterprises; 24: Agriculture, Forestry and Fisheries; 25: Economic Development; 27: Environmental Affairs; 29: Mineral Resources; 30: Science and Technology; 31: Small Business Development; 33: Tourism; 34: Trade and Industry; and Vote 39: Rural Development and Land Reform. Lastly, Dr Modise summarised the spending outcomes related to urban development and infrastructure in Votes 4: Cooperative Governance and Traditional Affairs; 26: Energy; 32: Telecommunications and Postal Services; 35: Transport; 36: Water and Sanitation; and Vote 38: Human Settlements.

(See presentation)

Quarterly Expenditure Reporting for Public Entities

Dr Modise presented the quarterly expenditure reporting for public entities up to the end of the Third Quarter 2019/20. She stated that the Compensation Fund and Legal Aid South Africa’s expenditure indicate financial stability, with higher than projected revenue by the end of quarter three. The National Empowerment Fund (NEF) is at risk because its actual revenue is lower than projected due to lower loan distributions. The National Health Laboratory Service is financially stable and received higher than anticipated receipts from provinces for lab tests performed. It is still going to bill provinces for COVID-19 tests conducted. Dr Modise stated that the National Research Foundation (NRF) and the National Student Financial Aid Scheme (NSFAS) have not been impacted by the COVID-19 pandemic so far and are both financially stable. The National Skills Fund (NSF) has been underspending due to slow payments and project delays.

The Passenger Rail Agency of South Africa (PRASA) has more governance issues than financial ones. Capital transfers from the National Department of Transport were shifted to the agency’s operational budget, to settle long overdue trade and other payables such as electricity bills and a court settlement invalidating the dismissal of employees. PRASA is sitting on a surplus and needs to improve its capital expenditure. The Road Accident Fund continues to struggle due to the nature of the fund. This has been worsened by lower than anticipated revenue due to the COVID-19 pandemic. She pointed out that the South African National Parks and Tourism are still financially stable despite the decline in revenue due to COVID-19.

Treasury has sent the requested report on the South African Revenue Services’ (SARS) progress with Information Communication Technology (ICT). The South African National Roads Agency Limited (SANRAL) has lower than expected cash flow from investing activities. It receives transfers from the National Department of Transport for the non-toll network. Sustaining its liquidity is a challenge. The Road Accident Fund continues to struggle as revenue from fuel levies declined as a result of COVID-19. The nature of the fund is the main issue. The Bill addressing this is still with the committees.

The South African Social Security Agency’s (SASSA) cash receipts were R927 million higher than forecasted. The Unemployment Insurance Fund’s (UIF) cash receipts were R437.2 million lower than projected, due to less contributions collected as a result of increasing unemployment, less profit from the sale of investment instruments due to weak market conditions and the weak rand. It also had slow spending problems.

(See presentation)

Update on State-Owned Companies (SOCs)

Mr Ravesh Rajlal, Chief Director: Sector Oversight, National Treasury, presented an update on the performance of SOCs, with information on the funding or support that has already been provided, the impact of COVID-19 and the support required, challenges in the companies and proposed solutions.

Mr Rajlal stated that Eskom faced an increase in municipal debt and there was no increase in load. Treasury is meeting with Eskom on a weekly basis to engage on more cost-saving opportunities as it believes the entity can do more to ensure it does not exceed the R65 billion funding support.

The historic performance of the Airports Company South Africa (ACSA) shows that it accumulated profits of R7.9 billion between 2013/14 and 2019/19. It paid cumulative dividends of R1.5 billion to shareholders. COVID-19 has negatively impacted its revenue with air traffic volume decreasing. It forecasts cumulative losses of R5 billion over next 3 years. It is looking at reducing operational expenditure by 1.2 billion per annum and has contained its capital expenditure to help with its liquidity for the next fiscal year. ACSA has requested the Minister of Transport for a 3 year R3.5 billion guarantee. The total funding assistance it will need is R10 billion-R11 billion over the next 5-6 years. ACSA will be unable to repay the guaranteed debt without an equity injection from shareholders.

Denel has received government guarantee facilities amounting to R6.93 billion, recapitalisation of R1.8 billion in 2019/20 and further funding of R576 million will be allocated in 2020/21, to reduce guaranteed debt. The required support due to COVID-19 is subject to further discussions with Denel and its respective shareholder department as no formal request has been received by Treasury. One of Denel’s creditor’s has served the entity with a demand for payment in terms of Section 345 of the Companies Act. There could be more claims to be made against Denel in future as the entity has not been in a financial position to pay creditors. This could result in Denel being placed under business rescue or even in liquidation. Its pre-COVID-19 performance shows slow implementation of the reform plan.

The South African Post Office (SAPO) received R2.974 billon support in 2018. R1.5 billion was allocated to its developmental mandate. It has no government guarantee support. Its services have been negatively impacted by COVID-19 resulting in expenses of R163 million and a projected revenue loss of R1.49 billion. SAPO is at a critical juncture. The entity’s management structures are in disarray, the entity currently has an acting COO, CFO and CEO. There has been no accountability in respect of the poor implementation of its strategy. If the shareholder department does act to restructure and repurpose the entity, SAPO will collapse. Unless it is drastically restructured, the entity will require yearly funding from government to cover its losses. A lot of work needs to be done to ensure its management is permanent and to ensure it implements the reform plan.

The South African Broadcasting Corporation (SABC) received R3.2 billion in 2019/20. It is now requesting R1.5 billion support. The entity’s operations have been significantly impacted due to COVID. Given that the SABC has to provide additional coverage of current events, this leads to the displacement of its content line-up and as a result a loss in advertising revenue. It is also assisting through the provision of educational content on its platform.

The Chairperson stated that there was a briefing with Treasury on the Land Bank and requested Ms Ngwenya to please give an update on recent events.

Ms Unathi Ngwenya, Chief Director: Asset and Liability Management, National Treasury, stated that the Land Bank is currently doing auditing. Treasury is expecting no improvements in results from what was reported to the Committee in May 2020. Its main source of revenue and operational profits have been shrinking. Its cost to income ratio and non-performing loans ratio have been increasing. Treasury is working with the Land Bank on short-term solutions. It has access to R4.3 billion worth of guarantees that have not been utilized. It is in a defaulting position and payment of its entire debt portfolio (approximately R45

billion, of which R5.2 billion is guaranteed) has been accelerated and is due. The principle being upheld with the lenders is that no debt will be serviced by the Land Bank and no lender will make a claim with the Land Bank whilst a long-term solution is being negotiated. She pointed out that in seeking out long-term sustainability, it is highly likely additional shareholder support will be required in the form of guarantees and recapitalisation.

Discussion

Mr Z Mlenzana (ANC) said that the presentation made reference to COVID-19 several times, and asked if Treasury is lobbying for the coming Adjustment Budget? Vote 2 is included in the report yet it is left blank [slide 9]. Why is it included if it does not fall under Treasury’s responsibility? He requested details on the following reported challenges in Eskom:

1. Outdated operating mode i.e. not fit for purpose
2. Delays, defects and cost-overruns in the capex programme.

Ms Ulrike Britton, Chief Director: Urban Development and Infrastructure, National Treasury, responded by saying that Treasury is not lobbying for the new budget. Instead it is showing how things changed rapidly in the fourth quarter as a result of COVID-19. Vote 2 [Parliament’s budget] is left blank because it is not reported on in the same way due to the legal framework around it. It is included because it is in the Appropriation Act.

Mr Rajlal stated that the restructuring of Eskom’s business model requires the unbundling of three entities. The board have been appointed and the next step is finalising the legal separation. The problem with a lot of the SOEs is that their cost structure is higher than the revenue generated and so the entities need to look at how to address cost issues. The delays and cost overruns refer to the build programme for Kusile and Medupi [power stations]. He proposed that there be another meeting to go over this in detail.

Ms D Peters (ANC) said she does not think the DSD’s acceleration of grant payments, as per the announcement of the President, is a problem because it straddles between the two financial years. Some of the payments have fallen in the previous financial year and the remainder into the new one.

She stated that the Committee and South African Local Government Association (SALGA) cautioned against the approach of withholding funds from COGTA, as it would have an impact on services. Why did Treasury proceed with this approach?

Regarding water and sanitation, why was there a delay in payment because of the verification of service providers? Did the department not have the full details of its suppliers? Why is the IFMS problem re-occurring annually? Ms Peters stated that she is worried about the slow spending in the jobs fund when there’s an employment crisis in the country.

The police vacancy rate is worrying considering the challenges faced by communities who do not have access to police services, especially given the escalation in crime and gender-based violence (GBV). There are cases of women who tried to call the police without success.

The issue of SOCs not being able to pay salaries and third parties indicates that there is an issue of governance and equally an issue of Management. Managers must be held accountable.

She asked if the Post Office has the capacity for the mandates it has been given? The mandates range from the recent additional social grant collection, transport licenses, and the collection of set-top boxes?

Does the SABC need the 3 channels that were established during apartheid, which perpetuated a segregationist form of entertainment and communication? This will also be raised with the Department of Communication and she encouraged Treasury to engage with the department as well.

Ms Britton responded by saying that Treasury only withholds funds for two reasons, namely:

• If there is persistent underspending
• If money is transferred and is not spent. The Division of Revenue Act (DORA) requires Treasury to ensure that in the conditional grants, rolled over money goes towards projects that have commitments. If there are no commitments, Treasury has to take the money back. If municipalities do not pay the money back, it has to be offset against the equitable share.

She explained that the issue in the Department of Water and Sanitation relates to a time lag which is common in infrastructure projects. The process is as follows: work is done and then the service provider invoices the department. Before the department pays, it wants to verify that the service provider’s work has been done and this is where the delay occurs.

She agreed that the Post Office is failing the country when it comes to providing services it has been mandated with. The problems seem to be governance related. There is also the failure to adapt fast enough to a changing environment and this is the same problem with the SABC. Policy changes need to adapt to environmental change.

Dr Rendani Randela, Chief Director: Justice and Protection Services, National Treasury, stated that the Police and Correctional Services departments would ideally like to have full-employment however people drop out during the six month training programme that all recruits undergo. In the Police Department, at least 600 people leave the department within a year which results in there being a vacancy at any point in time. Unlike other departments that can advertise and hire immediately, recruits to the police have to go through the 6 month training before filling vacancies.

Mr Rajlal agreed that the three channels need to be reviewed. He stated that this is part of the ongoing discussion with the SABC on its repurposing.

Mr D Joseph (DA) asked if SASSA’s amount for transfers and subsidies was taken out, what would be the financial status in the last quarterly report. He expressed concern over the unfunded posts and thought government no longer allowed it to happen as a matter of principle. He requested more information on why Denel cannot meet its financial obligations. He agreed with Treasury that the board would need support to be able to manage the mandates of the Post Office. What is the reason for the SABC’s forecast of a loss of R1.5 billion?

He requested Treasury to confirm the amount the Land Bank will ask Parliament for? What was the amount it requested and received 3 years ago?

Dr Mark Blecher, Chief Director: Health and Social Development, National Treasury, stated there was general government overspending of R2 billion. If the R15 billion had not been paid on 28 March, there would have been a R13 billion underspending across all the departments. SASSA split the payment into two days. There are concerns over whether SASSA should split the payments over more days in a month to address the long queues. The early payment helped with the underspending problem in March, however, once SASSA’s financial statements are complete, Treasury will have to bring a Finance Bill to Parliament to authorise the technical underspending in March.

Ms Ngwenya stated that the Land Bank has applied for R3 billion for its recapitalisation. The support is in two parts, the immediate response to liquidity needs, which is where the R3 billion will go, and the sustainability of the entity. This support is to come in the form of guarantees and additional recapitalisation.

Ms M Dikgale (ANC) noted the issues presented in the report. She asked what Treasury has done to assist the SOCs. What is Treasury’s duty when it comes to assisting SOCs? Has Treasury sat with the leadership of the problematic public entities to ensure the leaders understand where the funds come from?

Dr Modise responded by saying that the country’s SOCs suffer from a ‘too big to fail’ attitude. There has not been a position in which the existence of entities is questioned, it is always supported. If entities are not rationalized, the state will end up funding all these entities which may not be as strategic. Government needs to push for how it will rationalise these entities and how to make sure they remain sustainable. She remarked that there is no point in running an SOC like a government department yet the executive earns 5 times the salary of government employees. Rather make it a division in the department and deal with the cost structure. Treasury does sit with departments and try to help however, the department reminds Treasury that it (the department) is the accounting officer [responsible and accountable under the legislation].

Mr Joseph asked who is responsible for this process of rationalising these public entities. What is the view of the other committees that are in direct operational contact with the departments related to these entities?

Dr Modise responded by saying that the different departments will make proposals on this and Cabinet will make a decision on which entities will be rationalised. In December 2019, Cabinet approved for departments to start the process of rationalising their SOCs and the other 350+ public entities.

Mr X Qayiso (ANC) asked what the underlying reasons were for the delay in personnel spending mentioned on slide 7 of the spending outcomes report. He stated that there has been a strategic decision to give support to SOEs at all times, as SOEs contribute to building a developed state. There are challenges, however there is still a need to support them to play their developmental role. He asked for Treasury’s take on the Post Bank issue.

Ms Britton said government wants to corporatize Post Bank and it is in the process of applying for a banking licence. It will have to fix its security systems to protect its customers.

Dr Blecher said most of the cards issued by SASSA were done through the Post Bank and distributed through the Post Office. There was a security breach on the key codes of the cards, opening the cards to fraudulent actions when stolen. SASSA has been asked to replace the cards over a period of year. There have been difficulties in the relationship between the Post Office and the Post Bank. There is a lack of agreement on reconciliation payment and servicing of the relationship.

Dr Randela explained that the Department of Correctional Services embarked on a project of people retiring early as a way of managing the wage bill. It took longer than anticipated as there where was a delay in assessing who qualifies, hence the delay in payment. It should have been concluded in 2019.

Mr O Mathafa (ANC) asked if Denel is in a position to honour its financial obligations. Is the business model currently followed by Denel responsive to its sector’s prevailing trends? He requested Treasury to provide a list of SOCs likely to face business rescue. He stated that the Financial and Fiscal Commission (FFC) once presented a seven-year horizon on the performance of allocations. Is Treasury able to provide areas of improvement, stagnation and regression amongst departments and SOCs, in order to gauge how these entities respond to recommendations?

Mr Rajlal said the major issues with Denel’s turn-around plan is that there has been a slow pace in executing the sale of non-core assets of about R1.5/.6 billion, and the introduction of strategic equity partners to the value of R2 billion. In the last 2 years, there has been no movement regarding these, even though Treasury has provided R1.8 billion for recapitalisation in the last financial year and another R576 million will be coming in this financial year. Due to the poor market conditions created by COVID-19, many of the sales will not be executed in this financial year. Regarding the non-payment of salaries, Mr Rajlal pointed out that the executive management of Denel has taken a 75% salary cut for 3 months, to ensure lower tier staff are paid. This is an interim measure and will not solve what will happen in September, when it must settle debts.

Mr Rajlal said it will be very difficult for Denel to be able to execute on its obligations. There are ongoing discussions between Denel and the Department of Defence on this and how to move forward. On the likelihood of SOCs being put under business rescue, it can be involuntary, where a creditor puts a business under business rescue such as with South African Express, or it can be voluntary, as for instance, when the board of SAA chose to put it under business rescue.

The Chairperson suggested that if Treasury does not have answers to Members’ questions, then it can ask Denel and write back to the Committee. He requested Treasury to go back to the debates of Members to ensure it responds to some of the concerns. Is it possible that the challenge posed by COVID-19 is being used by departments and SOCs as a “get out of jail” card when it comes to underperformance? The NEF is supposed to play a significant role when it comes to Black Economic Empowerment (BEE). The Chairperson proposed that NEF be called in by the Committee. He stated that the IFMS has been an issue for a long time and proposed that the Committee invite the Director General for an engagement specifically on it. Are there any overlaps with all the funds that are supposed to go towards skills development, such as the National Skills Fund (NSF) and the Skills Education Training Authorities (SETA)? He expressed concern over government’s investment into skills development with minimal returns, as there are always talks of a skills shortage.

PRASA has a lot of capital expenditure however it has an operating expense issue. How can this be dealt with? Can Treasury come up with a resolution for this. Failure by both PRASA and Denel to pay pensions creates the risk of the state being sued. Where is the Public Procurement Bill and can it be presented to the Committee? What is the solution to the SANRAL issue? Why are there still people who are in acting positions in the Post Office [senior management]? This poses an issue of stability like with the Land Bank. The Chairperson requested that in future presentations, problem statements be accompanied with solutions from experts in the relevant fields, so the Committee can engage on supporting them or not.

Ms Britton responded by saying that the imbalances in PRASA and its management system relate, to the fact that it is running an unprofitable business that creates an operational deficit. This erodes the capital budget without significant changes, thus compromising the modernisation plan. Treasury has requested PRASA to come up with a plan specifying how it will change its operating model, how it will become profitable in its businesses and how it will protect its capital budget? The SANRAL issue is not a technical one but a political one and it is up to the politicians to make the decision in relation to that.

The Chairperson stated that the Committee does not only expect technical answers. For political responses, Treasury should engage with politicians as well and get answers to report on.

[Regarding Vote 2: Parliament], Ms Gillian Wilson, Chief Director: Central Administration and Governance, National Treasury, said Parliament has its own Act which requires it to set up its own structures to report on its monthly and quarterly expenditures. Treasury appropriates money to Parliament. Parliament specifies its own allocations dictated by its act. Treasury only plays an advisory role to government. She stated that the job fund always overperforms in terms of the performance indicators. The flow of funds to projects is sometimes delayed.

She said that the IFMS is a big project that is done across three departments. She agreed that Treasury needs to report back on this.

The Chairperson said he does not think the statement that “the job fund always overperforms” is correct. It can be misinterpreted considering the current climate of unemployment and the fact that there was underspending.

Ms Julia de Bruyn, Chief Director: Public Finance, National Treasury, explained that the SETAs and the NSF are set-up in such a way that there is a specific SETA for an industry and so rationally, there should be no overlaps. However, the landscape has changed as some SETAs have been merged. She agreed that the level of skills is an issue. The difference between the SETAs and NSF is that the NSF is not appropriated and receives its revenue as part of a direct charge from the skills development levy [paid by all employers]. NSF is entitled to that money, irrespective of whether it performs well or poorly.

Ms Lebogang Madiba, Director: Country Risk, National Treasury, stated that initially the National Empowerment Fund (NEF) wanted money from Treasury to respond to the COVID-19 pandemic. Treasury partnered with the NEF and the Department of Trade, Industry and Competition (DTIC) to put together R200 million to assist manufacturers of essential goods to obtain equipment in order to increase production. The entity has also put aside R50 million, of which R30 million went towards giving those companies a payment holiday of 3 months, from April to June [on the loans advanced by the NEF]. The remaining R20 million went towards interest payment. The entity has also helped 4 000+ households with food parcels.

Dr Modise stated that Treasury does listen to the debates of Members and takes note of the concerns raised around the Appropriation Bill. The Special Budget will be presented to the Committee in a format that will clearly show the separate movement of funds due to COVID-19 and not due to COVID. Treasury can also present the performance of public entities before and after COVID-19. The Procurement Bill has been out for public comment for several weeks. The deadline for public comments is the 30th of June. Treasury can come back and report on it when it reports on the IFMS.

On areas for improvement and spending trends, Dr Modise said that when Treasury came for the workshop, it gave the Committee members a book entitled the Estimates of National Expenditure. It contains a seven-year spending trend analysis for each department and for public entities of the department. Every spending line is explained in the book. However, Treasury can come back and explain it again. Treasury has submitted a report to the Committee on the performance of the IFMS and SARS.

The Chairperson remarked that state processes take too long. Decisions are taken in principle but it never happens. The turn-around plans are there but results are lacking. South Africans are tired of the lack of implementation. He requested the SANRAL issue be finalised and that the Committee be given a plan as to when and how it will be finalized.

Adoption of Committee Minutes

Committee Minutes dated 5 June 2020

The Chairperson proposed the adoption of the minutes of 5 June 2020.

Mr Joseph moved for the adoption of the minutes.

Mr Mlenzana seconded the motion.

The minutes of 5 June 2020 were adopted.

Committee minutes dated 9 June 2020

The Chairperson proposed the adoption of the minutes of 9 June 2020.

Ms Peters moved for the adoption of the minutes.

Ms Dikgale seconded the motion.

The minutes of 9 June 2020 were adopted.

Closing remarks

The Chairperson, in closing, thanked the Members for participating and the National Treasury team for its presentation.

The meeting was adjourned.