2018 MTBPS; Adjustments Appropriation Bill & SAX; Special Appropriation Bill: public hearings

Meeting report

Ms Phosa welcomed everyone and indicated that processing the Adjustments Appropriation Bill and the Special Appropriation Bill was a critical part of the two Committees’ work. Submissions from stakeholders would add value to the work of the Committees.

Briefing by National Treasury, South African Express Airways (SAX) and Department of Public Enterprises on Adjustments Appropriation Bill allocation to SAX
Ms Avril Halstead, Acting DDG: Transport Enterprises, Department of Public Enterprises, highlighted the position of SA Express Airways following the appointment of a new board by the Minister of Public Enterprises early this year. The board has been instrumental in getting the airline back into full operation by looking at the various aspects of the business such as its financial, technical and operational viability. The ongoing recruitment exercise to fill critical vacant posts would go a long way in bringing about stability in the airline’s operations. SAX was at an advanced stage of appointing a permanent CEO and CFO which would bring about the stability necessary for a successful turnaround. Forensic investigations that were instituted were almost complete and the board would provide feedback after following due process. SAX was on a drive to attract back its customer base. She told the Joint Committee that engagements with banks were underway to extend loans for a couple of months in case the money allocated by the budget policy statement did not flow through in time. The remaining debt was staggered over seven years, but the Department wanted to have an upfront payment of the debt because some of it was at high interest rates.

Ms Siza Mzimela, Interim CEO, SA Express Airways, said the return to profitability will be the fruit of the turnaround strategy being implemented by the new board and the introduction of new regional airlines.

She briefed the Committees on the need for the R1.249 billion bailout allocated in the medium-term budget policy statement. The bailout will be used to repay the government guaranteed debt, and the total amount of the government guarantee will be reduced by the same amount as the bailout. The financial challenges faced by the airliner included a weak balance sheet, long outstanding debts, frozen credit lines, liquidity, monthly cash-burn and a high cost structure. On the corporate side, the challenges included low staff morale, high staff turnover, a high number of management vacancies, onerous contracts, zero accountability by management and a shortage of skills. Skilled specialists had now been appointed in key posts. Amongst the measures to improve profitability were the introduction of high-yield regional routes such as Lubumbashi and Walvis Bay and the consolidation of OR Tambo International Airport as the airline’s main hub. Lease costs had been reduced, some monthly rentals had been terminated, all charter flights had been cancelled and all overtime had been terminated. The airline’s on-time performance of the company’s aircraft had exceeded targets and reached 94% from the previous 64%. Aircraft reliability had been improved from 77% to 95%, and by March the airline will have 15 aircraft operational from the eight flying on November 22. It has added three routes to its network, bringing the total to seven. It will introduce four more routes by the end of December:  from Johannesburg to Port Elizabeth, Port Elizabeth to Durban and a return loop.

Mr Mpho Selepe, Acting CFO, SA Express Airways, said finance costs for the 2018/2019 financial year were projected at R97 million, which was expected to fall to R33 million in 2019/2020 and R17 million in 2020/2021 as a result of the reduction in debt. R117 million was the cash burn per month, of which interest charges made up about R10 million. Currently the airline was being charged an interest rate of about 12.75% because of its weak financial position. The cash injection would allow SA Express to renegotiate the terms of its loans.

Ms Mampho Modise, DDG: Public Finance, National Treasury, told Members that in deciding on the medium-term budget policy statement allocation, the Treasury had looked at the debt maturity profile of SA Express. Treasury was not sure whether the airline would be able to pay back the debt due at the end of November. Rather than allowing SA Express to default on its debt — in which case it would be a charge against the National Revenue Fund under the guarantee —the Treasury decided to allocate the money to the department of public enterprises to pay to SA Express when the debt became due in an orderly manner instead of causing panic. One of the conditions of the bailout is that it could not be used to repay any debt other than the debt guaranteed by the state, including the R222 million owed by SA Express to Transnet.

Discussion
Ms Phosa appreciated the presentation and noted the efforts to fill the vacant senior positions at SA Express. She expressed optimism and confidence in the airline. She invited questions and comments from Members. 

Mr De Beer asked in what way Treasury exercises its oversight role on SA Express. SA Express had not indicated when it would achieve financial sustainability. He wanted to know if the monies misappropriated for the past ten years were going to be recovered.

Mr A Lees (DA) said there was notable progress at SA Express. He asked what the current position of its cash balances was. Was the airline discounting ticket prices to try and buy back market share? How was SA Express going to fund the rest of its debt if it was to receive the R1.2 billion from Treasury? Treasury was doing at SA Express what it should be doing at SAA, but not fully. Why were all guarantees not being withdrawn?

Mr L Nzimande (ANC, KwaZulu-Natal) hoped the airline’s turnaround strategy would produce expected outcomes going forward. How would introducing new routes to its network going to assist in revenue saving?

Dr D George (DA, Western Cape) identified problems at SA Express as stemming from lack of accountability as personnel kept changing. What accountability was there for those responsible for the turnaround? What steps was Treasury taking to make sure creditors do not rush to get their funds back? How was Treasury and the airline ensuring that taxpayers’ money was not being wasted?

Mr N Gcwabaza (ANC) noted an upward trend in the airline’s business operations. He wanted to know what its largest operational cost drivers were. To what extent was the airline curbing losses?

Ms Halstead, in response, said the Minister of Public Enterprises undertook a comprehensive evaluation of the airline’s board following his appointment. People with a lot of experience had been appointed to its board. A review of shareholder compacts was also underway to ensure the attention towards the turnaround strategy was not distracted. There were ongoing interactions and engagements with banks and other stakeholders and the anticipation was that the financial injection would improve the airline’s position and strengthen its balance sheet. With time, the airline would be able to rope in lenders without the need for government guarantees.

Ms Modise said the existing stock of guarantees to entities were currently under review and would be sent to Cabinet for approval. The general understanding was that guarantees would not be extended for operational purposes going forward. It would be ensured that they are linked to capital projects so that investment pays for the debt rather than the State. There were issues about the position of government, the regulatory environment which is unclear, the delimitation of the dual mandate, bloated staff, and oversight monitoring. These were reforms that Treasury would be reporting on before Committee going forward.

Ms Mzimela said the airline was not discounting any ticket prices but was sprucing up its revenue management capacity. The board and management was working on a number of scenarios and going back to basics which meant doing what the airline was initially set out for. The key focus was on consequence management and drawing up performance agreements which were missing previously. Also, significant progress had been made in reducing the legacy debt.

Ms Phosa was pleased to note that the airline was improving in key performance areas, foremost being reduction of the legacy debt and revenue performance. She urged the board and management to continue on this positive trajectory and assured them of the Committees’ support.

Mr De Beer welcomed submissions on the Adjustment as well as Special Appropriations Bills from stakeholders.

Budget Justice Coalition submission
Ms Sibabalo Gcibitshana, Equal Education, highlighted areas that were in need of concerted interventions in relation to budgeting, and planning following the tabling of the Medium Term Budget and Policy Statement (MTBPS), and Adjustment Appropriations Bill by the Minister of Finance. The basic education government expenditure, according to the budget review for the 2018/19 financial year, was R230.4 billion. This was almost R20.3 billion less than the projected spending two years ago. A look at the previous MTBP statements revealed that there will be far less funding available to basic education than was previously budgeted for. This decrease in projected allocations was particularly concerning given the 1% VAT increase which came into effect in April this year. This has meant that the cost of textbooks and materials for building schools, amongst other items, have increased, while the sector has less funds to make provision for education resources. While allocations to the Department of Basic Education (DBE) have been increasing, the annual percentage growth is slowing down. Where the Department has been allocated funds, it has struggled to use its entire budget. Spending patterns of the Schools Infrastructure Backlog Grant (SIBG) for the last 5 years show a continuous trend of under-spending on the ASIDI programme. For the past three years the DBE has not met a single target and for a project which should have concluded after a three year period, seven years later, the programme has still not completed its work. Therefore, the Committees, National Treasury and the DBE need to work together to determine which programmes contribute to the underspending of allocated budgets and how to mitigate further underspending in the current and next financial year. There was need for provision of financial management support to DBE and provincial education departments to encourage output driven expenditure, particularly on infrastructure grants. Further, National Treasury should reverse the almost R7 billion cuts to school infrastructure grants announced in the February budget speech.

Similar to the 2017/18 financial year, post-school education and training remains the second fastest growing expenditure item, after debt service costs. This line item will grow by approximately 10% over the medium-term.
The 2018 Adjusted Estimates of National Expenditure (AENE) indicate that an additional amount of approximately R103 million was allocated to Programme 3 (University Education), increasing the allocation from R59.14 billion to R59.25 billion. Unfortunately the consequence of these increases on other social spending budgets, have been dire. The 2018/19 national budget revealed baseline reductions across a number of sectors, including budget cuts to municipal, housing and education infrastructure. Questions remain on how the state intends to address these competing priorities, therefore, sustaining the funding of fee free higher education and ensuring that other social needs are met through appropriate budget allocations. The development by the Department of Higher Education and Training, in consultation with the relevant stakeholders, including National Treasury, of a policy that speaks to the roll-out of fee-free higher education is imperative. In the absence of a guiding document the sustainability of this proposal falls into question. The realisation of fee-free higher education must not compromise the provision of other social services, such as basic education – particularly in relation to budget allocations. With the support of DHET, governance challenges within NSFAS must be addressed as a matter of urgency. The consequences of the disarray within the funding scheme impacts those in need of financial assistance most of all. 

On social development, there were concerns that potential beneficiaries of the Child Support Grant were being administratively excluded with under spending of over R630 million over the last two years due to “greater efficiency in assessment” and “lower than expected take up”. Despite being a signatory to the International Covenant on Socio Economic Rights, South Africa provides no commitment to social assistance for vulnerable poor people between 18 and 59. Recent VAT increases have significantly impacted on food security of poor people. Its alarming that despite budget allocation in the Food Relief Programme to support 413 000 vulnerable people only 112 806 vulnerable individuals were able to access this support. Therefore the Budget Justice Coalition recommended as follows: require National Treasury to fully integrate pro poor social assistance into economic recovery plans; investigate the administrative exclusion of potential beneficiaries of the child support grant by requiring the department of social development to provide insights into its reported efficiencies in assessment as well as the lower than expected demand despite anecdotal evidence to the contrary; require National Treasury along with the department of social development to investigate the progressive implementation of a Basic Income Grant and prioritise the review of comprehensive social security; and investigate measures to assist Parliament in prioritising the passing of the Social Assistance Amendment Bill to create a CSG top up for orphans in line with the High Court Order.

COSATU submission
Mr Matthew Parks, Parliamentary Coordinator, COSATU, noted government’s 2018 Mid-Term Budget Policy Statement (MTBPS) and the Special Appropriation Bill (SAA) delivered by Finance Minister. COSATU was deeply worried about the way forward after this placid policy statement at a time when it expected a much bolder and decisive leadership from government.  This represented another missed opportunity because what is contained in the statement was nothing new. The deceleration of fiscal spending since 2014 and the outright reduction of spending helped plunged the economy into the doldrums at a time of depressed private sector investment and household spending.

On the public service wage bill, COSATU noted that the MTBPS says the public service wage bill and head count has stabilised at 35% of the budget and not the nonsensical 80% that the Minister has been claiming. COSATU was glad that Treasury has briefed the Minister in this regard. It was unfortunate and very provocative for the Minister to want to blame workers for the fiscal crisis.  It is not workers who looted Eskom, built Nkandla or sent the money to Dubai.  Workers do not fly their spouses all around the world at government expense so they do not expect to hear government complaining about overworked nurses, teachers, police officers wanting to earn a living wage. COSATU did not hear the Minster complaining about the R2.4 million that Ministers earn or the millions they spend flying their spouses on overseas jaunts. Government does not have a coherent plan of reducing the ballooning cabinet head count. Workers do not hear government talking about imposing a freeze on the salaries of SOE CEOs and management. Nothing was heard about how they will reduce the massive wage gap in the public sector. COSATU advised the Minister to avoid the simplistic and narrow view that the public service sector wage bill is bloated and the sector wage bill is putting strain on the country’s coffers. It is not true that paying government servants hampers government from providing basic and essential services. It must be considered that the population has grown, whereas the number of public servants has remained stagnant or declined in some sectors. In light of these facts, the country therefore needed more teachers, doctors, nurses, social workers and police. If ever there was a need for a cut in the public service, this should start with halving the number of cabinet ministers and the senior bureaucracy and not the professionals who are at the coalface.
The Minister should appreciate the outcome of the recent Presidential Job Summit, with a clear accord that says, “No to Job Cuts in the Public Service.” COSATU applauded the commitments to fill critical vacancies in the health and justice departments. It had also hoped to hear the integration of community health workers into the public service and not simply a plan to pay them a minimum wage.

COSATU believed that government can significantly increase revenue and thus providing more resources in support of economic stimulus, job creation and developmental objectives by: fast tracking the SARS Commission of Enquiry; immediately removing the compromised leadership of SARS; fast tracking the engagement on and implementation of progressive tax proposals from the Judge Davis Tax Commission; cancelling the VAT tax hike to 15%; increasing company taxes to 30% or 32% which should generate an additional R13 to R26 billion in revenues; and increasing the estate and inheritance taxes. COSATU hoped that by highlighting the conditions faced by its members’ children and proposals for interventions by Parliament in the bill and regulations will be taken into account during the Committees’ deliberations.

UNICEF submission
Mr Sanjay Wijesekera, Country Representative, UNICEF, said the downward revisions to spending ceilings over the last six years had produced mixed results for priority expenditure for children. The MTBPS 2018 signalled the first major policy statement in six years that appears to halt centrally-driven cuts, but departments would now have to decide on difficult internal trade-offs. In spite of a general fiscal austerity climate, fiscal space for priority expenditures for children has increased and should continue its upward trend over the 2019 MTEF, albeit at a much slower rate. Fiscal space grew, in part, because of demonstrated efficiencies in some departments, and the government’s own commitment to the country’s social wage. There is a growing record of innovation and efficiencies in government departments, but this needs to be expanded in order to justify the allocation of additional financial resources for social sector departments.

Therefore, UNICEF recommendations for the 2019 MTEF were as follows: provincial governments should develop medium-term sector plans (education, health and social development) for the gradual elimination of spending arrears; priority programmes-such as Violence against Women and Children- that are funded through provinces’ equitable shares, should be reported on in annual budgets; urgently improve the take-up of the Child Support Grant among infants and very young children; the financing of the school sanitation programme should be fully implemented and education planners should carefully balance spending on school sanitation and other parts of the school infrastructure budget; transfers to NPOs have suffered in both national and provincial governments, leading to recurring under-spending. The government should expedite the new NPO financing framework and report on progress in implementing provincial equitable share funding set aside for this purpose.

Rural Health Advocacy Project (RHA) submission
Mr Russell Rensburg, Programme Manager: Health Systems and Policy, RHA, said the leadership transition within the governing party had brought new optimism. A key feature has been increased responsiveness and transparency from government. The largesse of the last nine years had been brutally exposed and the country was beginning to fully understand the impact on public finances. Significant failures in the inter-governmental fiscal arrangements have contributed to the near collapse of the health system. On the MTBPS and health, the health budget declines by R350 million over the three years despite a commitment to health by the President. There was thus need for some reprogramming of existing funds to address immediate priorities. Notably, the National Health Insurance (NHI) Bill was published this year but there had been no commitment in the MTBPS to funding interventions to support implementation of current phase. Instead, budget reductions were effected. Despite significant governance failures in respect of health in a number of provinces (KZN, NW and Free State) there was no attempt to address these in the MTBPS. All these provinces have large rural populations, and the loss of funds had significantly impacted on rural populations who bear a disproportionate burden of the resulting cuts.

Mr Rensburg called for the reform of healthcare funding. Access to health care is a fundamental right that is protected under section 27 the constitution. He noted the country invests 12% of the National Budget on Health. Over the next three years the consolidated health budget was over 724 billion, and 85% would be transferred to provinces through equitable share and a number of conditional grants. What was needed is for provinces to report on the cost differences in rural delivery and ensure that budgets are adjusted accordingly. There were currently over 40000 vacancies in the health system. Rural facilities face a number of constraints in recruiting and retaining healthcare workers, resulting in facilities often being understaffed, and the situation was compounded by ongoing freezing of posts. The recent intervention to redirect R350 million towards priority posts was welcomed although it was unlikely to make significant impact in addressing staff shortages. A rational approach to addressing the HRH crisis would be for Parliament to request the national department of health to submit an analysis of HRH distribution by profession, level of care, district and provinces. Additionally the National Department of Health (NDOH) must develop a prioritisation process to ensure that vacancies as filled on the basis of need and adequate prioritisation is given to rural facilities. To address rural infrastructure inequity, a new approach was needed and RHAP strongly recommended that Parliament request National Treasury to compile detailed overview on the performance of these grants over the last 9 years highlighting the extent to which projects stayed with projected costs. Additionally the NDOH must provide a comprehensive list of projects and engage in a process that prioritises fixing existing infrastructure. Given the transition to the NHI, rural projects must be prioritised as communities are completely reliant on public sector facilities. Lastly, the Committees should request the NDOH to submit a detailed analysis of current it investments along with an assessment on the functionality of current systems.

FairPlay Movement submission
Mr Lionel Adendorf, FairPlay Movement, supported the MTBPS with concerns. He noted the budget policy was done in difficult economic and fiscal conditions, against the backdrop of a technical recession and economic expectations that have not materialised. While understanding this, the needs and demands of the poor and poorer households had not sufficiently been addressed by the MTBPS. A complete review of current zero-rated list had not been done in these difficult economic times to see where there could be possible savings through the elimination of certain products and inclusion of more relevant and products that are more accessible to the poor and consumed by poorer households. The zero-rated list does not adequately address nutritional concerns such as stunting, malnutrition and the dietary and consumption needs of the poor. Chicken remains a popular source of meat protein for poorer households and its exclusion from zero-rating would continue to be to the detriment of the poor.

The FairPlay movement viewed the VAT issue from a pro-poor perspective. In the debate on which items should be zero-rated for VAT, FairPlay wanted to achieve what is best for lower-income households. The campaign for VAT-free chicken was motivated by FairPlay’’s belief that the inclusion of chicken on the list of zero-rated food items is an essential intervention to address the plight that lower-income households find themselves in.  It will ensure that these vulnerable households have access to affordable, nutritious meals that are rich in protein and iron. The Woolard Panel erred in not making this recommendation, even though they saw decided advantages in zero-rating the chicken portions most consumed by the poor. The Panel deferred this decision to Parliament. FairPlay was supported in its VAT-free chicken campaign by the two major union bodies in the poultry sector, the Food and Allied Workers Union (FAWU) and the Congress of South African Trade Unions (COSATU).

In conclusion, it was a mistake to exclude chicken from being zero-rated despite the fact that during public hearings on the matter, NGO’s and others were in support of it. Ignoring the calls by civil society organisations and the needs of the poor presents government as insensitive to the needs of the poor. The benefits of VAT-free chicken, particularly for lower-income households, are overwhelming. It is South Africa’s most popular meat, it is nutritious and it is the major protein source for poor people. VAT-free chicken will therefore bring immediate economic and nutritional benefits to the poor. There are concerns about the cost of VAT-free chicken. The discussion in Parliament should be about the best way to implement it and relieve the burden on those who suffer most from rising food prices. Members, through this process, have an opportunity to do what is in the best interest of the poor and struggling households and in doing so, they can ensure that poorer households have access to meals that are high in nutrition and protein.

Discussions
Mr D Shackleton (DA) welcomed the informative submissions. Broadly, most of the recommendations would solve the country’s challenges. He wanted to know how uncertainty in the provision of fee-free higher education as suggested by the Budget Justice Coalition could be dealt with. What should be done to address the uncertainty under the prevailing circumstances? Did COSATU believe all state-owned entities were sustainable, on the backdrop of Committees receiving turnaround strategies and requests for bailouts each and every year? Robust monitoring of government spending was crucial.

Mr Gcwabaza asked COSATU to expand on illicit trade and its impact on the economy, and how it could be effectively nipped in the bud. Nothing tangible seemed to be coming through despite continual efforts to address the scourge of illicit trade. He noted the closure of a number of chicken farms around the country, particularly in KwaZulu-Natal. He asked for comments on this in relation to suggestions that chicken imports were killing local industry.

Ms D Senokoanyane (ANC) agreed that chicken is the cheapest source of meat protein. She asked if there was any attempt on the part of FairPlay to actively propose the zero-rating of chicken products. The mid-term budget, in itself was challenging. She appreciated the submissions as they were quite progressive and bringing proposals to the fray.

Mr Parks said workers were demoralised and need some veneer of hope. There were viable business opportunities across all state-owned entities- what was needed was a comprehensive forensic audit. He urged government to move fast and save the ship. The endless bailouts were unsustainable as they would collapse the state. He pointed out opportunities for job creation in new technologies. COSATU has had extensive engagements with industry and other stakeholders on the need to deal with illicit flows. He emphasised the need to see transgressors sitting in prison for illicit financial flows.

Mr Rensburg said it was really discouraging that underperforming programmes were being prioritised at the expense of the proposed national health insurance (NHI). Government should look into how best to deploy resources to prioritise the people in need. The strategic focus on health was crucial gaps needed to be identified and addressed.

Ms Gcibitshana said despite trends of under-expenditure on education, there had not been any legislative instruments to help the fee-free programme go forward. Also, in terms of sustainability, the private sector is the main beneficiary of government-funded graduates but contributes sorry little to cultivating skills development. Incentivise the private sector to participate in the grooming of students.

Mr Adendorf reiterated that the current zero-rated list is not enough if the government is serious about addressing the plight of poor communities. The zero-rated list does not adequately address the nutritional concerns such as stunting, malnutrition and the dietary and consumption needs of the poor. Chicken remains a popular source of meat protein for poorer households and its exclusion from zero rating would continue to be to the detriment of the poor.

Mr De Beer thanked stakeholders and Members for their contributions.

The joint meeting was adjourned.