Municipal Economic Review and Outlook (MERO); Western Cape Adjustments Appropriation Bill, 2022; 2022/23 2nd Quarter Performance (Financial and Non-financial; Medium Term Budget Policy Statement

Meeting report

Presentation on the Municipal Economic Review and Outlook
Ms Nadia Rinquest, acting Director: Local Government Budget Office, Western Cape Provincial Treasury, gave a high-level overview of the 2022 Municipal Economic Review and Outlook (MERO). The presentation covered economic performance, growth trends, growth forecast, trade, tourism, economic opportunities, unemployment, population, education, health, inequality, access to services, and safety in the six regions of the province. It also identified ten key implications for the province’s policy, planning and budgeting.

See document attached for full details
Presentation on 2022/23 second quarter performance, adjustment budget and 2022 medium-term budget policy statement (MTBPS)

2022/23 second quarter performance
Ms Zeenat Ishmail, Chief Director: Strategic Management Information, Western Cape Provincial Government, outlined second quarter performance of the government as a whole. She gave a high-level socio-economic picture of the province regarding jobs, safety and well-being and then presented the performance indicators. Overall, 449 of 536 (84%) of performance targets had been achieved. Among provincial departments, the governance cluster had achieved 93% of targets, the social cluster 77% and the economic cluster 83%. Among public entities, the governance cluster had achieved 100%, and the social cluster 86% and the economic cluster 83%.

Ms Analiese Pick, Chief Director: Provincial Government Public Finance, Western Cape Provincial Treasury, said government had spent 47.1% of its budget at the end of the second quarter. Significant underspending by the Department of Health was due to reduced need for COVID-19-related activities, and overspending by the Department of Transport and Public Works was on the data hub, the e-Merge project and financial assistance for Go George. By economic classification, the underspending was on compensation of employees, transfers and subsidies and payments for capital assets, while overspending was on goods and services. She provided more detailed information on infrastructure spending. 

Adjustment budget
Ms Pick explained that the adjustment budget added R490m to the budget for 2022/23. R278m of this was sourced from roll-overs and R230m was from over-collection in 2021/22 and 2022/23, mostly on motor vehicle license fees. R51.7m was from the province’s equitable share for wage increases, which had been distributed to departments that could not accommodate the wage increase. She provided more detailed information on infrastructure adjustments, drawing attention to the R130m reduction in the Department of Education’s infrastructure budget. These funds had been redistributed to the Departments of Health, Human Settlements and Transport and Public Works.

2022 MTBPS
Dr Roy Havemann, Deputy Director-General (DDG): Fiscal and Economic Services, Western Cape Provincial Treasury, gave an overview of the province’s economy in the national and international contexts. He pointed out that because of the national government’s fiscal stability strategy, allocations to provinces were declining in real terms. The Provincial Equitable Share remained the province’s most important revenue source, accounting for 75% of its total revenue. He summarised the province’s funding envelope according to the 2023 medium-term expenditure framework (MTEF), provincial reserves, conditional grants and spending projections by policy area.

Ms Tarryn Van De Rheede, Director: Provincial Government Budget Office, Western Cape Provincial Treasury, discussed the overall fiscal strategy and budget policy priorities.
 
See document attached for full details
  
Discussion
The Chairperson asked Members to limit their questions to two each.

Mr C Fry (DA) wondered how the provincial government could govern for growth while the ports and transport system were in decline. This was a major worry. Exports were one of the most important parts of the economy and he didn’t see a positive outlook for transport any time soon. He noted that growth in economic opportunities was not keeping pace with the growth of the population. This was going to have severe effects on inequality. What should be done?

Mr R Mackenzie (DA) asked what the different effects of mining on the one hand and agriculture and fishing on the other small towns were. How did changes in these industries affect the allocations to these small towns and their municipalities? For example, there were 68 mining applications in Matzikama. The whole economic outline of this town was going to change over the next five to ten years. Had the allocation to this area been reassessed to meet this demand? Had government looked at the possibility of using aerial drones as monitoring tools, particularly in smaller municipalities?

Ms C Murray (DA) asked whether the saving on compensation of employees was a result of staff vacancies and, if so, what was being done to fill positions. She also asked for clarity on how the decisions were made on MTEF allocations in different policy areas. In particular, why was there going to be a 5.8% average annual decrease in spending on public order and safety? This was concerning.

Ms N Nkondlo (ANC) felt that the limit of two questions was restrictive, given the length of the presentations.

The Chairperson said that if there was time, she should would permit Members to ask more questions.

Ms Nkondlo appreciated the new data areas in the MERO. How had the Provincial Treasury decided on new data areas to include? In the context of jobs and safety, she asked how Treasury responded to infrastructure challenges, particularly e-commerce enabling infrastructure in informal settlements, small towns and rural areas.

Responses
Ms Mireille Wenger, Minister of Finance and Economic Opportunities, Western Cape Provincial Government, acknowledged the problems at ports. Government was doing a lot to improve the efficiency of the entire logistics value chain. A project manager who was a ports expert had been seconded to address problems at the container terminal, and improvements had been seen. The province was lobbying for National Government to allow private sector participation in the port of Cape Town.   

Mr David Savage, Head of Department, Western Cape Provincial Treasury, added that Cape Town International Airport was an example of a port of entry that was not owned by the province but was run very effectively in partnership with the Airports Company of South Africa (ACSA). He observed that rising inequality could occur alongside economic growth and decline, but rising absolute levels of poverty were very much associated with economic decline. The challenge was that the province was not leveraging the power of in-migration and urbanisation to lift people out of poverty, so there was an urbanisation of poverty that was very different from the trend in most of the world. He said that the MERO was the starting point of each annual cycle of reassessing budgets and responding to changes in local economic conditions. Alongside the MERO was an annual publication on provincial and municipal infrastructure investment. Finding the best response to social problems, such as the rise in teenage pregnancies and school dropouts in the Central Karoo region, required correlating data from social, educational and health perspectives. The MERO did not indicate solutions, however. This was left to specialists in the various departments. The Provincial Treasury itself did not use drones for monitoring, although some other departments such as the Department of Agriculture did. He said that the Treasury listened to feedback from readers of the MERO, including the Committee itself, to determine which data areas to include. It was also important to evaluate the reliability of data streams to ensure that they could be used continuously going forward. New data streams being developed included anonymised tax data and deeds registry data. He acknowledged the infrastructure challenges being faced in small towns. This was something best addressed by individual municipalities but the province did have programmes to support them.
 
Dr Havemann added that another publication, the Additional and Amended Allocations to Municipalities, would give Members more insight into how Treasury allocated funds to municipalities. He noted that the decrease in spending in the public order and safety policy area was mainly accounted for by a big decrease in the third year due to some engagements that Treasury was having.

Ms Rinquest said that informal sector support was mainly the purview of municipalities, although the MERO provided research data, which municipalities did not always have the capacity to produce. Page 42, section A of the MERO, for instance, reflected on the informal sector. She added that the informal sector had been badly affected by COVID-19 and was still recovering. In periods of economic contraction, the informal sector usually picked up the slack from people who had lost their places in the formal economy, but this had not happened in the Western Cape. The Provincial Treasury provided recommendations to local government on supporting the informal sector.

Ms Pick said that the underspending on compensation of employees was due to unpredictable factors such as unforeseen resignations, early retirements and vacancies resulting from internal promotions, but it was not a result of freezing of posts. In the case of the Department of Health, it was also partly due to the fact that some COVID-19-related funds had not been used. She noted that the total spending on compensation of employees in the province was over R40bn, so the underspending was a relatively small amount.

Further discussion
Ms Murray asked if the underspending on compensation was typical or specific to the year under review. She also asked for clarity on how spending on different policy areas was determined.

Ms Nkondlo asked about the effectiveness of the MERO at the planning and execution level at municipalities. This was the intention but was it actually used or did it just gather dust? How could Treasury ensure that it was used effectively?

The Chairperson noted that the South African Revenue Service (SARS) had very sophisticated data-gathering tools and wondered whether it might be possible for the Provincial Treasury to obtain SARS data, albeit anonymously. She thanked the Minister for helping her outside of office hours to respond to two young women in Beaufort West, the Chairperson’s constituency area, who wanted to apply for a ship-building programme. She encouraged the Provincial Treasury to reach out and listen to citizens to find out what people wanted the province to focus on in their area.

Responses
Mr Savage replied that the policy areas were defined by national government and the distribution of spending on different areas could depend on very specific issues. In the case of the dip in spending on public order and safety in 2025/26, for example, discussions about sharing the cost of Law Enforcement Advancement Plan (LEAP) policing with the City of Cape Town were ongoing. The lower spending did not reflect a policy choice. He said that the question of how to ensure that planning and budgeting across the province improved were important, and Treasury was asking itself the same question. How could it ensure not just the quality of its publications but also the quality of its engagements with municipalities? The MERO was just the start of a process. There would shortly be a meeting between Treasury and the Chief Financial Officers (CFOs) of all the municipalities in the province. There were also two standard engagements with municipal leadership every year: a technical engagement on budget implementation and a strategic integrated municipal engagement with individual municipalities. He said that the anonymised SARS data would be accessed through National Treasury’s secure data warehouse. It would be a very valuable resource.

Ms Pick said that the level of underspending on compensation was not the norm. The main driver of this underspending was projections about COVID-19-related spending that had not been borne out.

Consideration of draft Committee Report on the MERO
The Chairperson argued that the increase in teenage pregnancies in the Laingsburg area might be related to prostitution resulting from contractors coming from outside the area to work on the establishment of wind farms. She wasn’t sure what the reason for the increase was in Beaufort West. She commended Treasury on the world-class reports it had produced. She asked the secretariat to share the draft Committee Report on the MERO, which noted that the Committee had completed its deliberations on the 2022 MERO.

The Report was adopted.

The meeting was adjourned.