ATC200717: Report of the Select Committee on Public Enterprises and Communication on the Adjusted Allocation of Budget Vote 10: Public Enterprises, Dated 15 July 2020

NCOP Public Enterprises and Communication

REPORT OF THE SELECT COMMITTEE ON PUBLIC ENTERPRISES AND COMMUNICATION ON THE ADJUSTED ALLOCATION OF BUDGET VOTE 10: PUBLIC ENTERPRISES, DATED 15 JULY 2020

 

The Select Committee on Public Enterprises and Communication, having considered the adjusted allocation of Budget Vote 10: Public Enterprises,on 8 and 15 July 2020, reports as follows:

                                                                                                           

1. INTRODUCTION

 

Section 30(1) of the Public Finance Management Act (No. 1 of 1999) empowers the Minister of Finance to table an adjustment budget in the National Assembly when necessary.  The fiscal and economic impact of the national state of disaster due to the outbreak of the COVID-19 pandemic has made it necessary for the Minister to table a special adjustment budget to revise government’s spending priorities for 2020/21.

 

Section 30(2) of the PFMA specifies the type of spending that the adjustments budget may provide for. The 2020/21 special adjustment appropriation makes provision for:

 

•           Adjustments due to significant and unforeseeable economic and financial events: these adjustments are required due to a significant reduction in government revenues and changes in spending priorities in response to the COVID-19 pandemic.

•           Virements and shifts within the vote: a virement is the use of unspent funds from amounts appropriated under one main division (programme) to defray excess expenditure under another main division (programme) within the same vote. Section 43 of the PFMA, read together with Treasury regulation 6.3 and section 5 of the Appropriation Act (2020), sets out the parameters within which virements may take place. The virements included in this adjustment budget are mainly those intended to respond to COVID-19.

 

All other adjustments not included in this adjustment budget will be implemented in the October 2020 adjustment budget, and the details will be outlined in the Adjusted Estimates of National Expenditure (AENE).

 

This special adjustment budget has a dual purpose. It reports on the COVID-19 fiscal measures, and the resulting adjustments to the division of revenue and departmental allocations. It also sets out government’s commitment to strengthen public finances, and to position the economy for faster and inclusive growth. Public spending priorities as proposed in the 2020 Budget have been reordered in response to the coronavirus pandemic. Government has prioritised saving lives and took the difficult step of severely restricting economic activity at a time when Growth Domestic Product (GDP)of the country has been weakened. The scale of the economic crisis augmented by the outbreak of COVID-19 pandemic as well as the continued uncertainty of epidemiological and economic outcomes, have required rapid decisions in response to fastchanging socio-economic conditions. South Africa, like other middle-income and low-income countries who do not have large savings, has to balance essential public-health interventions – such as prolonged lockdowns – with severe economic effects – such as job losses, lower tax revenue,  poverty and inequality.

 

In March 2020, government initiated a wide-ranging relief package to manage the immediate impact of the virus. This involves scaling up capacity in the public health system and mitigating the effects of restricted economic activity for households and businesses. Concurrently, the Reserve Bank reduced interest rates and provided support to the bond market whilstalso committing itself in playing whatever role is necessary in stabilising the economy. The Covid-19 adjustment budget therefore fast-tracks normal budget processes to provide resources to frontline services, provincial and local government, and firms and households.

 

Without urgent action crafted in the 2021 budget process, a debt crisis will follow andfailure to contain ballooning debt and debt-service costswould damage the country’s long-term economic prospects. Over the medium term, compensation and debt-service costs would be the largest expenditure items, and outstrip the investments government makes in human capital, social and economic infrastructure, and service delivery.

 

2. THE IMPLICATIONS OF THE COVID-19 PANDEMIC ON THE MANDATE OF THE DEPARTMENT

 

The Department of Public Enterprises is the shareholder representative of government for the State-Owned Companies (SOCs) in its portfolio. The Department’s mandate is to fulfil oversight responsibilities at these State-Owned Companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the Medium-Term Strategic Framework (MTSF), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP).

 

State-Owned Companies are crucial to driving State’s strategic objectives of creating jobs and enhancing equity and transformation in the various sectors SOCs operate. The Department does not directly execute programmes but seeks to use state ownership to restructure and drive the economy for an inclusive growth for a better life for all South Africans.  The adjusted budget has curtailed the work of the Department in terms of projects and priorities. However, in the period post COVID-19 many of the projects and priorities will be incorporated following the tabling of the new budget which will be presented by the Minister of Finance. These priorities are expected to be included in the Annual Performance Plan of 2021/22.

 

COVID‐19 has turned the global economy upside down. In the February Budget of this year, government expected that the global economy would expand by 3.3 per cent in 2020. Governmenthas nowrevised these projections and expects a global contraction of 5.2 per cent this year.  This will bring about the broadest collapse in per capita incomes since the long economic depression of the 1870s. Throughout the world tens of millions of workers have lost their jobs and South Africa’s unemployment rate has increased by one percentage point, reaching 30.1 per cent in the first three months of this year.

The South African economy is now expected to contract by 7.2 per cent in 2020 and inflation rate is likely to stay at 3 per cent. This is the largest contraction in nearly 90 years. Commodity price will increase and yet, a weaker oil price somehow has softened the blow on prices, but as a small open economy reliant on exports that had been hit hard by both by the lack of demand for commodities and the restrictions on economic activities across sectors.

Government’s COVID‐19 economic support package directs R500 billion straight to the problem – to stabilise the economy as well as to fight the spread of the COVID-19 pandemic. This is one of the largest economic response packages in the developing world. The South African Reserve Bank (SARB) has reduced interest rates and made it easier for banks to lend money. The SARB has also supported liquidity in the domestic bond market. More than 2 million customers have received around R30 billion in relief from commercial banks. Insurers and medical aid schemes have provided premium holidays. Landlords have provided rental relief, and allof this occurred within 100 days of the declaration of the state of disaster.

 

The Department provides oversight of the following SOCs:Alexkor, Denel, Eskom, South African Airways, South African Express, SAFCOLand Transnet. These SOCs were impacted by the novel Corona Virus also known as COVID-19. The detailed analysis in terms of the impact on SOCs is detailed below:

 

3. ANALYSIS OF THE REVISED BUDGET ON EACH PROGRAMME

 

All the programmes within the Department have been affected by the COVID-19 pandemic. The main budget in all programmes has been affected by the suspension of funds for COVID-19. When the President announced a R500 billion stimulus package against the COVID-19 pandemic about R130-billion of this amount had to come from government or departmental savings. In accordance with this call, the Department of Public Enterprises had to cut cost across its three programmes.

 

 

Table 3. (a)

PROGRAMME 1. ADMINISTRATION
ECONOMIC CLASSIFICATION	APPROVED BUDGET	REDUCTION	FINAL BUDGET
	R'00	R'00	R'00
Training & Development	1 294	-294	1 000
Operating payments	3 731	-1 000	2 731
Venues & facilities	1 000	-200	800
Transfer & subsidies	17		17
Municipalities	17		17
Capital assets	3 480		3 480
Machinery & equipment	3 480		3 480
TOTAL	164 315	-28 871	135 444

 

 

Most of the reductions from the adjusted budget result from the programme on administration. The purpose of this programme is to provide strategic leadership, management, and support services to the Department.  The Department’s core functions require significant administrative support, and a substantial portion of the budget is in the administration programme, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications. The Department has cut its budget allocation for the administration programme by R28, 8 million. The budget cuts came mainly from training, booking of venues and operation that were not essential to the running of the Department.

 

Table 3. (b)

PROGRAMME 2. GOVERNANCE ASSURANCE & PERFORMANCE
ECONOMIC CLASSIFICATION	APPROVED BUDGET	REDUCTION	FINAL BUDGET
	R'00	R'00	R'00
Compensation of employees	35 991	-3 000	32 991
Goods & services	18 656	-8 000	10 656
Communication	302		302
Consultants & advisory services	11 040	-5 000	6 060
Legal services	3 080		3 080
Travel & subsistence	4 172	-3 000	1 172
Venues & facilities	62		62
TOTAL	54 647	-11 000	43 647

 

 

The second programme is State-Owned Companies Governance Assurance and Performance. The purpose of this programme is to provide state-owned companies’ governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder to ensure alignment with government priorities. The supplementary budget for this programme has been reduced by R11 million. The budget cuts came mainly from compensation of employees, consultants, advisory services, hotel accommodation and subsistence.During the COVID-19 lockdown travelling has been restricted and this had a positive impact on departmental budgets’ savings as staff and senior employees are no longer required to travel and meeting are held on the digital platform.

 

 

 

 

 

Table 3. (c)

PROGRAMME 3. ENHANCEMENT, TRANSFORMATION & INDUSTRIALISATION
ECONOMIC CLASSIFICATION	APPROVED BUDGET	REDUCTION	FINAL BUDGET
	R'00	R'00	R'00
Compensation of employees	62 819	-12 000	50 819
Goods & services	27 574	-10 000	17 574
Communication	601		601
Consultants & advisory services	19 999	-6 000	13 999
Legal services	6 884	-4 000	2 884
Venues & facilities	90		90
TOTAL	90 393	22 000	68 393

 

The third programme is Business Enhancement Transformation and Industrialisation. The purpose of the programme is to provide sector oversight to ensure that State-owned companies contribute to the advancement of industrialisation, transformation, intergovernmental relations and international collaboration services.  The programme will also support the shareholder in strategically positioning and enhancing the operations of State-owned companies. The main amount was R90million and has received a R22 000 million revision in the supplementary budget. The savings came mainly from the compensation of employees, consultants and advisory services as well as the booking of venues. Overall, the department on its adjusted budget has saved R61 million in contribution to the R130 billion government departments are expected to raise from their savings.

 

4. OBSERVATIONS AND FINDINGS

 

The financial performance of State-owned companies, which has placed considerable pressure on public finances for several years, is likely to deteriorate in the coming 2020/21 financial year. The pandemic and associated economic restrictions are expected to reduce revenues for most entities. Global market volatility may also further limit the ability of State-owned companies to borrow from capital markets and therefore service their debt obligations. The COVID-19 pandemic underlines the urgent need for broad-based reforms at State-owned companies so that they can become efficient and financially sustainable.

 

These reforms include rationalisation (reducing the number of and merging some State-owned companies, and incorporating certain functions into government), equity partnerships, and stronger policy certainty and implementation. Planned transfers from the fiscus will be strictly conditional on improving their balance sheets even though the possibility of launching a new airline (after the demise of SAA) may constitute a new threat to the fiscus.

 

Tables 3. (a), (b) and (c)above describe the changes in budget allocations of the Department’s programmes for the financial year 2020/21 based on the response against COVID-19 and the R500 billion stimulus package to stabilise the economy. From this, the following can be concluded:

 

• Programme 1: Administration, has a nominal decrease by R28 871 million resulting from the suspension of funds for the purposes of COVID-19.
• Programme 2: State-Owned Companies Governance Assurance and Performance, receives the smallest allocation in 2020/21. The programme decreased by R11 million resulting from the suspension of funds for the purposes of COVID-19.
• Programme 3: Business Enhancement, Transformation and Industrialisation, accounts for the largest allocation of the budget.  Programme 3’s allocations have decreased by R22 million due to the suspension of funds for the purposes of COVID-19 in the 2020/21 budget, of the R37 billion allocation during the adjusted budget process in October 2020 to this programme.

 

Overall, the Department of Public Enterprises has managed to save about R61 871 million in the 2020/21 financial year.These savings come from an initial budget of R309 million and the R61 million adjustment (revised or savings) constitute 20% of the department’s overall budget.

 

5. IMPACT ON THE RECOMMENDATIONS MADE DURING THE BUDGET VOTES AND SERVICE DELIVERY

 

The revised budget is as a result of government’s response to the novel coronavirus. The President made an announcement of a R500 billion relief fund to fight the COVID-19 and to bring relief to sectors of the economy and, also to ensure the welfare of the citizens and workers in general. Government departments were expected to raise about R130-billion of this amount andprovincial departments are expected to raise R30 billion while national departments are expected to raise R100 billion to make it R130 billion.

 

The adjusted budget will no doubt have a negative impact on service delivery as departments are expected to cut costs and the money directed to the immediate threat of the COVID-19 pandemic. Budget cuts on consultants, travel (hotel accommodation) and subsistence is a welcome initiative, and should remain so, if possible, beyond the COVID-19 pandemic. It is imperative that the Department provides oversight of SOCs, however, with the revised budget the service delivery aspects of the Department are going to be constrained. The challenges faced by the entities will require proper staffing within the Department but the challenge of a reduction of the budget on the compensation of employees will mean that the Department will have to find other mechanisms to attract skills.

 

6. RECOMMENDATIONS

 

The Committee recommended that the Minister of Public Enterprises should, within the 2020/21 financial year, ensure that the Department of Public Enterprises:

 

6.1        advise the Committee on the establishment and operationalization of the Presidential SOE Coordinating Council, including the work the council will be doing in the implementation of the recommendations of the 2014 report by the Presidential Review Commission on SOEs. Some of the recommendations were that Government should develop theshareholder management bill and SOE remuneration guidelines to empower the Government in its oversight of SOCs.

6.2        consider introducing a comprehensive plan to expand the corporate social investment of SOCs to rural parts of the country.

6.3        develop a communication strategy for all SOCs in order to promote the companies and educate and inform the public and rural communities about the work of SOCs and opportunities that they offer.

6.4        consider working with the Department of Trade, Industry and Competition and the National Treasury in addressing localization strategies.  These should include resetting of trade and investment cooperation to stimulate and support small businesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments in industrial value chains.

6.5        prioritise the development of programmes with SOCs aimed at equipping young people with appropriate skills for the economy to address youth unemployment.

6.6        provide the Committee with shareholder compacts on an annual basis and quarterly reports on how the SOCs are performing in achieving their targets.

6.7        ensure that SOCs accelerate investment and procurement programmes, promote industrialization and support small and medium enterprises that are owned by women, youth and people with disabilities. 

6.8        ensure that SOCs find a balance between advancing their commercial and public mandates. They should not over-concentrate on the commercial mandate while neglecting the developmental mandate of transforming the economy and improving the quality of lives of South Africans. 

6.9        ensure competent executive and board appointments at SOCsby conducting security clearances, integrity checks, and lifestyle audits.

6.10      collaborate with the Department of Rural Development and Land Reform in addressing long-outstanding issues related to SAFCOL land claims withregular progress reports made (twice a year) to the Committee.

6.12      work with the Department of Transport on the formulation of an aviation strategy/policy for South Africa that can enable the sustainability of national carriers.

6.13      work with the Department of Cooperative Governance and Traditional Affairs and the Departmentof Rural Development and Land Reform to ensure that the Richtersveld Mining Company and Communal Property Association are properly constituted to facilitate the successful implementation of the deed of settlement, and delivery of socio-economic development programmes to the beneficiaries.

6.14      address the financial and governance issues facing the SOCs within the Department’s portfolio and provide regular feedback to the Committee.

6.15      work with the Department of Cooperative Governance and Traditional Affairs and other relevant parties to resolve the municipal debt owed to Eskom and provide feedback to the Committee on this process quarterly.

6.16      ensure that all vacant positions are permanently filled within the Department of Public Enterprises by the end of the financial year.

6.17      develop post COVID-19 strategies, plans and actions and include them in its budget, plans and SOC shareholder compacts.

6.18     report every second quarter to the Committee on progress being made.

 

7. CONCLUSION

 

Having considered the supplementary budget review of the Department of Public Enterprises, the Committee recommends that the Council passes the budget.

 

[The DA reserved its position on the Report and the EFF rejected the Report.]

 

Report to be considered.