Exhibit 99.H
Budget Review 2019 National Treasury Republic of South Africa 20 February 2019
ISBN: RP: 978-0-621-47022-2 18/2019 The Budget Review is compiled using the latest available information from departmental and other sources. Some of this information is unaudited or subject to revision. To obtain additional copies of this document, please contact: Communications Directorate National Treasury Private Bag X115 Pretoria 0001 South Africa Tel: +27 12 315 5944 Fax: +27 12 407 9055 The document is also available on the internet at: www.treasury.gov.za. ii
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KEY Afull set of 2019 Budget data can be found in the statistical tables at the back of the Budget Review.The data on this page may differ from the statistical annexure due to classification, definition and rounding. '. -BUDGET REVENUE 2019/20 Note:Payments for financialassets are not shown in the table,but are included in the row totasl. Non-interest allocation 1115.81159.01242.31327.61 443.51 539.51 647.1 PERCENTAGE SHARES aldepartments 48.9% 48.0% 47.7% 48.1% 48.1% 48.0% 47.8% Provinces 42.2% 43.2% 43.3% 43.1% 43.0% 43.0% 43.1% overnment 8.8% 8.9% 8.9% 8.8% 8.9% 9.0% 9.2% R billion TAX REVENUE 1422.2 Nation Localg of which: Personalincome tax 552.9 Corporate income tax 229.6 Value-added tax 360.5 Taxes on internationaltrade and transactions 61.3 Non-tax revenue 31.5 Less:SACU payments -50.3 Main budget revenue 1403.5 Provinces,socialsecurity funds and public entities 180.3 Consolidated budget revenue 1583.8 As percentage ofGDP Tax revenue 26.3% Main budget revenue 25.9% # RSABUDGET2019 BUDGET STATISTICS
BUDGET EXPENDITURE MIUCA I o Es EXPENDITURE • a rl -Basic education Economic regulation and infrastructure R101.3bn -University transfers R250.4bn Industrialisation and exports R37.5bn R37.0bn -National Student Financial Aid Scheme Agriculture and rural development R30.7bn - R33.3bn R209.2bn ECONOMIC DEVELOPMENT R386.4bn LEARNING AND CULTURE - Job creation and labour affairs R23.2bn Skills development levy institutions R217 bn Innovation, science and technology Education administration R16.Sbn R17.6 bn • Technical & vocational education and training R12.7 bn m B Police services District health services R104.2bn R98.2bn • Defence and state security Central hospital services -law courts and prisons RSO.Obn R43.1bn R48.4bn Provincial hospital services R36.7bn R211.0bn PEACE AND SECURITY R222.6bn - HEALTH Home affairs R8.4bn Other health services R35.6bn Facilities management and maintenanceR8.8bn Municipal equitable share R69.0bn Public administration and fiscal affairs R41.6bn Executive and legislative organs R16.2bn Humansettlements,water and electrification programmes RS6.4bn External affairs R7.6bn R65.3bn GENERAL PUBLIC SERVICES R208.5bn COMMUNITY DEVELOPMENT Public transport R43.6bn Other human settlements and municipal infrastructure R39.6bn e m Old-age grant R77.0bn Social security funds R71.3bn - Child-support grant R6S.Obn R202.2bn DEBT-SERVICE COSTS R278.4bn SOCIAL DEVELOPMENT Other grants R33.2bn -Provincial social development R22.3bn Policy oversight and grant administration R9.6bn R1.10TRILLION R183 TRILLION www.treasury.gov.za In RSA Budget I - #RSABudget2019 Tel:(012) 315 5757 www.treasury.gov.za :;: : al treasury (I) = ISSUED BY BUDGET2019/20
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Foreword The 2019 Budget addresses immediate risks to the economy and the public finances, and outlines measures to build the capacity of the state and renew economic growth. South Africa continues to confront a challenging economic environment in which global growth is slowing and trade tensions are mounting. The medium-term economic outlook has been revised down and tax revenues have significantly underperformed. In recent months it has become clear that Eskom requires urgent financial support and operational reforms. To tackle the Eskom risk, government is restructuring the electricity sector. Relative to the 2018 Medium Term Budget Policy Statement (MTBPS), departments’ budget baselines have been reduced by R50.3 billion, with roughly half of this amount relating to compensation. These reductions are offset by provisional allocations of R75.3 billion over the next three years, mainly for Eskom’s reconfiguration. As a result, the expenditure ceiling is increased by R16 billion over the next three years. Government remains committed to managing the budget deficit and containing public debt at sustainable levels. Changes to the medium-term expenditure framework result in the main budget deficit widening to 4.7 per cent of GDP in 2019/20 and then narrowing to 4.3 per cent of GDP by 2021/22. As a percentage of GDP, gross loan debt increases over the next three years and stabilises at 60.2 per cent in 2023/24, which is marginally above the 2018 MTBPS estimates. Economic growth is projected to improve moderately from 1.5 per cent in 2019 to 2.1 per cent in 2021. In the longer term, the country requires higher and more inclusive growth to address unemployment and poverty. Government has begun implementing growth-enhancing reforms in line with the President’s economic stimulus and recovery plan. Additional steps to strengthen policy certainty, improve the effectiveness of infrastructure spending and rebuild public institutions will encourage private-sector investment and bolster confidence. Despite new spending pressures and reductions, the Budget remains strongly redistributive. About 68 per cent of consolidated expenditure goes towards social commitments, including education, health, social grants and basic services. These services and transfers, provided by all spheres of government, enable South Africans to access opportunities and live with dignity. Addressing the challenges we face, and accelerating reforms to encourage economic growth, will require difficult adjustments. In the past year, signs of a durable social compact between government, business and labour have emerged. This compact will be essential to addressing our challenges in a fair and fiscally responsible manner. I would like to thank Cabinet, the Minister and Deputy Minister of Finance, Parliament’s Portfolio Committee on Finance, the Standing Committee on Appropriations, the Technical Committee on Finance, the Ministers’ Committee on the Budget, the Budget Council and my colleagues across government for their contributions to the Budget. I appreciate the hard work of the National Treasury team in preparing this Budget in line with our constitutional responsibilities. Dondo Mogajane Director-General: National Treasury vii
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Contents Overview…………………………………………………………………………………………………………………………………. Narrowing the budget deficit and stabilising debt…………………………………………………………………… Restructuring the electricity sector…………………………………………………………………………………………. Implementing growth-enhancing reforms.……………………………………………………………………………… Summary of the budget…….…………………………………………………………………………………………………….. Budget documentation……………………………………………………………………………………………………………. Chapter 1 Risk, renewal and growth……………………………………………………………………………………………………. 1 1 3 3 4 5 9 Chapter 2 Economic overview……………………………………………………………………………………………………………… Overview…..……………………………………………………………………………………………………………………………. Implementing reforms to boost growth..………………………………………………………………………………... Global outlook…..……………………………………………………………………………………………………………………. Domestic outlook……………………………………………………………………………………………………………………. Sector performance………………………………………………………………………………………………………………… Conclusion………………………………………………………………………………………………………………………………. 11 11 13 14 16 22 24 Chapter 3 Fiscal policy………………………………………………………………………………………………………………………… Overview………………………………………………………………………………………………………………………….…….. Changes in tax revenue and the expenditure ceiling.………………………………………….………………..… Managing the public-service wage bill…..………………………………………………………………………………… Fiscal framework…………………………………………………………………………………………………………………….. Elements of the consolidated budget……………………………………………………………………………………… Public-sector borrowing requirement……………………………………………………………………………………… Conclusion………………………………………………………………………………………………………………………………. 25 25 27 29 30 31 33 34 Chapter 4 Revenue trends and tax proposals….…………………………………………………………………………………… Overview………………………………………………………………………………………………………………………………… Tax policy considerations………..…………..…………………………………………………………………………………. Revenue collection and outlook……….…………………………………………………………………………………….. Tax proposals……………………………………………….…………………………………………………………………………. Tax policy reviews and research………………………………………………………………………………………………. Conclusion………………………………………………………………………………………………………………………………. 35 35 36 37 40 45 46 Chapter 5 Consolidated spending plans………………………………………………………………………………………………. Overview…………………………………………………………………………………………………………………………………. Revisions to main budget spending plans………………………………………………………………………………… Consolidated government expenditure…………………………………………………………………………………… Spending priorities by function……………………………………………………………………………………………..... Conclusion………………………………………………………………………………………………………………………………. 47 47 48 51 52 63 Chapter 6 Division of revenue and spending by provinces and municipalities……………………………………… Overview…………………………………………………………………………………………………………………………………. Division of revenue…………………………………………………………………………………………………………………. Provincial revenue and spending…………………………………………………………………………………………….. Municipal revenue and spending…………………………………………………………………………………………….. Conclusion………………………………………………………………………………………………………………………………. 65 65 66 68 71 76 Chapter 7 Government debt and contingent liabilities………………………………………………………………………… Overview………………………………………………………………………………………………………………………………… Financing strategy……………………………………………………………………………………………��…………………… Borrowing performance and projections…….…………………………………………………………………………… Government debt and debt-service costs…….…………………………………………………………………………. Contingent liabilities……………………………..…….………………………………………………………………………….. Conclusion………………………………………………………………………………………………………………………………. 77 77 78 79 83 85 88 Chapter 8 Financial position of public-sector institutions…………………………………………………………………….. Overview…………………………………………………………………………………………………………………………………. State-owned companies ………………..………………………………………………………………………….……………. Development finance institutions………………………….…………………………………………………..…………… 89 89 90 94 ix
Social security funds…………………………………………………..…………………………………………………………… Government Employees Pension Fund……………………………………………………………………………………. Conclusion………………………………………………………………………………………………………………………………. 96 97 98 Annexure A Annexure B Annexure C Annexure D Annexure E Annexure F Annexure G Report of the Minister of Finance to Parliament………………………………………………………………….. Tax expenditure statement…………….…………………………………………………………………………………… Additional tax policy and administrative adjustments…………………………………………………………. Public-sector infrastructure update…..………………………………………………………………………………… Public-private partnerships..……………………………………………………………………………………………….. Building a financial services sector that serves all South Africans…….………………………………….. Summary of the budget…………………………………………………………….………………………………………… 101 117 123 139 151 157 161 165 181 Glossary………………………………………………………………………………………………………………………………………………………… Statistical annexure………………………………………………………………………………………………………………………………………. Three annexures are available on the National Treasury website (www.treasury.gov.za): W1 W2 W3 Explanatory memorandum to the division of revenue Structure of the government accounts Fiscal support for electricity market reform x
Tables 7.6 7.7 7.8 7.9 Total national government debt .................................. 84 Analysis of annual increase in gross loan debt............. 84 National government debt-service costs ..................... 85 Government guarantee exposure ................................ 86 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Macroeconomic outlook – summary ....................... Consolidated government fiscal framework ............ Impact of tax proposals on 2019/20 revenue .......... Consolidated government expenditure by function Division of revenue .................................................. Projected state debt and debt-service costs............ Combined financial position of public institutions .. 6 6 7 8 8 9 9 8.1 Combined balance sheets of state-owned companies……………………………………………………………….. 90 Borrowing requirement of selected state-owned companies………………………………………………………………… 92 Financial position of selected development finance institutions…………………………………………………… 94 Borrowing requirement for development finance institutions…………………………………………………… 96 Financial position of social security funds…………………. 96 Selected income and expenditure of GEPF.................. 97 Breakdown of assets under management by PIC ........ 98 8.2 2.1 2.2 2.3 2.4 Economic growth in selected countries ................... 15 Macroeconomic performance and projections ....... 16 Assumptions used in the economic forecast .......... 21 Sector performance ................................................. 23 8.3 8.4 8.5 8.6 8.7 3.1 3.2 3.3 3.4 Macroeconomic performance and projections ....... 26 Consolidated fiscal framework ................................ 26 Revised gross tax revenue projections .................... 27 Adjustments to the expenditure ceiling since 2018 Budget ............................................................ 28 Main budget expenditure ceiling ............................. 28 Consolidated operating and capital accounts .......... 31 Main budget framework ......................................... 32 Revisions to main budget revenue and expenditure estimates……………………………………………………………… 33 Consolidated budget balance ................................. 33 Public-sector borrowing requirement.…………………. 34 Figures 3.5 3.6 3.7 3.8 1.1 1.2 1.3 1.4 Real GDP growth rate .................................................. 2 Performance of state-owned companies .................... 2 Gross debt-to-GDP outlook ......................................... 2 Per capita social development spend .......................... 2 3.9 3.10 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 Global Competitiveness Index ..................................... 13 Commodity price trends .............................................. 15 Composition of investment growth ............................. 17 Composition of current account balance….................. 18 Trends in administered price inflation......................... 19 Growth in formal non-agricultural employment ......... 19 REIPPP price trends ..................................................... 20 Eskom estimated price trends ..................................... 20 GDP growth scenarios ................................................. 22 4.1 4.2 4.3 4.4 Budget estimates and revenue outcomes ............... 38 Budget revenue ....................................................... 39 Impact of tax proposals on 2019/20 revenue .......... 40 Personal income tax rates and bracket adjustments ............................................................ 41 Estimates of individual taxpayers and taxable income .................................................................... 42 Changes in specific excise duties ............................ 43 Total combined fuel taxes on petrol and diesel....... 44 4.5 4.6 4.7 3.1 3.2 3.3 Revenue and non-interest spending............................ 26 Gross and net debt outlook ......................................... 26 Number of personnel (excluding SANDF) .................... 29 5.1 Adjustments to main budget non-interest expenditure since 2018 Budget .............................. 48 Largest baseline reductions over the MTEF period.. 49 Largest additions to baselines over the MTEF period ...................................................................... 50 Provisional allocations not assigned to votes .......... 51 Consolidated government expenditure by economic classification ............................................................ 52 Consolidated government expenditure by function 54 Learning and culture expenditure............................ 55 Social protection expenditure ................................. 56 Average monthly social grant values ....................... 57 Health expenditure .................................................. 58 Community development expenditure.................... 59 Peace and security expenditure .............................. 60 Economic development expenditure....................... 62 General public services expenditure........................ 63 4.1 4.2 Gross tax revenues as a percentage of GDP ................ 36 VAT refunds paid by SARS ........................................... 40 5.2 5.3 5.1 5.2 Average nominal growth in spending……………………….. 53 Consolidated government expenditure by function .... 53 5.4 5.5 6.1 6.2 6.3 Division of revenue by function................................... 67 Provincial personnel headcount and wage costs……… 70 Municipalities differ in terms of context and performance ................................................................ .72 Debts owed to municipalities ...................................... 74 Growth in debts owed to municipalities ..................... 74 Debts owed by municipalities (>90 days) .................... 74 Amounts owed to municipal creditors ........................ 74 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 6.4 6.5 6.6 6.7 7.1 7.2 7.3 Loan debt maturity profile .......................................... 80 Ownership of domestic government bonds ................ 82 Sensitivity of debt and debt-service costs ................... 85 6.1 6.2 6.3 6.4 Division of nationally raised revenue……………………… 66 Provincial equitable share……………………………………… 68 Conditional grants to provinces ............................... 70 Transfers to local government ................................. 73 8.1 8.2 Negative cash flows at state-owned companies ......... 91 Debt maturity profile of major state-owned companies ................................................................... 92 Quality of major development finance loan book assets ........................................................................... .95 7.1 Performance against strategic portfolio risk benchmarks .............................................................. 79 Financing of national government gross borrowing requirement ............................................................. 80 Domestic short-term borrowing............................... 81 Foreign-currency commitments and financing......... 82 Change in cash balances........................................... 83 8.3 7.2 7.3 7.4 7.5 xi
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1 Risk, renewal and growth Overview Oinvestment in the economy. New partnerships with the private ver the past year, government has worked to end the policy inertia Government has strengthened policy certainty, developed new investment partnerships, and is reconfiguring Eskom and uncertainty that have undermined confidence and constrained sector have led to large-scale investment commitments. As several commissions probing allegations of corruption and wrongdoing continue their work, a special directorate is being established to investigate and prosecute serious crimes that have been brought to light. Government is reforming state-owned companies, with Eskom as its immediate focus. The environment remains challenging. The medium-term economic outlook has been revised down, with GDP growth forecast to reach 1.5 per cent in 2019, rising to 2.1 per cent in 2021. Weak economic performance and residual problems in tax administration have resulted in 1 The 2019 Budget outlines a series of economic and fiscal measures intended to move the economy onto a new trajectory and reduce the long-term risks to South Africa’s public finances. Government’s central economic policy goal is to accelerate inclusive growth and create jobs. Its main fiscal objective is to ensure sustainable finances by containing the budget deficit and stabilising public debt. The Budget proposals support these goals. The Constitution requires the national budget and budgetary processes to promote transparency and accountability, along with effective management of the economy, debt and the public sector. This year’s Budget underlines the National Treasury’s continued commitment to these requirements in a difficult environment in which economic growth remains weak, public debt and debt-service costs have accelerated, and governance and operational concerns are manifest across the public sector. The 2019 Budget confronts these challenges by addressing the central risks to South Africa’s economy and its public finances, supporting growth-enhancing reforms and maintaining real growth in expenditure on social and economic priorities. Education, health, social development and community development account for the majority of spending, and continue to grow strongly over the next three years. Over the past two decades, real government spending on social services has doubled, from R8 700 per person in 1996/97 to R16 500 per person in 2017/18.
2019 BUDGET REVIEW large revenue shortfalls. The deteriorating financial position of state-owned companies has put additional pressure on the public finances. In light of these considerations, the 2019 Budget priorities are to: Fiscal sustainability, restructuring electricity sector and renewing economic growth are at heart of budget • • Narrow the budget deficit and stabilise the national debt-to-GDP ratio. Support restructuring of the electricity sector, and reduce the immediate risks Eskom poses to the economy and the public finances. Renew economic growth by strengthening private-sector investment, improving the planning and implementation of infrastructure projects, and rebuilding state institutions. • As the State of the Nation Address noted, faster growth is needed to expand employment and raise the revenues needed to support social development. While progress is being made on various short-term initiatives, South Africa needs to implement a range of structural reforms that will bolster confidence, investment and economic growth. The state’s capacity to implement policy also needs to be strengthened. 2 Figure 1.1 Real GDP growth rateFigure 1.2 Performance of state-owned companies Figure 1.3 Gross debt-to-GDP outlookFigure 1.4 Per capita social development spend* *Annual per capita general government spending, including education, health, social protection, community development, economic development as well as recreation and culture Source: South African Reserve Bank and National Treasury
CHAPTER 1: RISK, RENEWAL AND GROWTH Narrowing the budget deficit and stabilising debt In the current year, the expenditure ceiling has been maintained, and national and provincial compensation is likely to be lower than budgeted. In light of the deteriorating economic environment and the need to address the considerable risks posed by Eskom, the 2019 Budget proposes reprioritisation of expenditure and tax measures to contain the budget deficit and stabilise debt. Since the 2018 MTBPS, government has revised its baseline expenditure down by R9 billion in 2019/20, R19.7 billion in 2020/21 and R21.6 billion in 2021/22. About half of these reductions are applied to compensation budgets, reflecting faster-than-expected declines in headcounts, as well as the anticipated effects of other interventions, including early retirement without penalties. These reductions are offset by provisional allocations for Eskom, the new infrastructure fund and the 2021 Census. As a result, the expenditure ceiling is revised upwards by R14 billion in 2019/20, R1.3 billion in 2020/21 and R732 million in 2021/22. In addition, government proposes tax measures amounting to R15 billion in 2019/20 and R10 billion in 2020/21. As Figure 1.3 shows, the revised fiscal framework results in a slightly higher debt-to-GDP ratio than was projected at the time of the 2018 MTBPS. Gross debt-to-GDP stabilises at 60.2 per cent of GDP in 2023/24, marginally above the MTBPS estimates. Several other state-owned companies are also in financial distress and have requested government support. As a result, the contingency reserve has been revised up by R6 billion in 2019/20, and any funding provided will be offset by the sale of non-core assets. Additional reforms to strengthen the governance, finances and operations of state-owned companies will be announced in the months ahead. Expenditure ceiling maintained in current year, and compensation likely to be lower than budgeted Debt-to-GDP increases slightly relative to MTBPS, and gross debt stabilises at 60.2 per cent of GDP in 2023/24 Restructuring the electricity sector Government’s immediate focus is to address the substantial risks that Eskom poses to the economy and the public finances. In its current form, South Africa’s state-owned power utility is not financially sustainable, nor can it meet the country’s electricity needs. The State of the Nation Address emphasised the urgent need to restructure the electricity sector, including separating Eskom into three divisions. The depth of the financial crisis at Eskom requires government to support the utility’s balance sheet, with amounts of R23 billion per year provisionally allocated over the medium term. These amounts will allow Eskom to service its debts and meet redemption requirements, while making resources available for urgent operational improvements. Establishing a more competitive electricity sector will improve business and consumer confidence, encourage private investment and reduce upward pressure on prices. Over time, this reform will encourage the expansion of renewable energy sources in the country’s energy mix. To date, government’s renewable energy power producer programme has procured 6 422MW of electricity from 112 independent power producers. Government addressing major risks posed by state-owned companies, beginning with Eskom Competitive electricity sector will encourage expansion of renewable energy and create jobs 3
2019 BUDGET REVIEW Implementing growth-enhancing reforms The 2018 MTBPS announced the first steps to implement the President’s economic stimulus and recovery plan. To date: Progress has been made on reforms affecting tourism, mining, telecommunications • Progress has been made on growth-enhancing reforms, including preparations to allocate telecommunications spectrum, reform visa requirements and remove barriers to mining investment. Spending has been reprioritised to support black commercial farmers, revitalise townships and industrial parks, and rebuild the South African Revenue Service (SARS). The design of a blended-finance infrastructure fund is under way. Funding has been provided to address urgent matters in health and education, including filling critical medical posts and completing school sanitation projects. Changes are being made to local government infrastructure grants to incentivise investment from other sources for municipal infrastructure projects, and to improve operations and maintenance. • • • • Improving infrastructure planning and delivery South Africa’s public infrastructure investments over the past two decades amounted to about R3 trillion. The speed, quality and efficiency of many of these projects, however, has not matched the level of investment. Project planning at all levels, including for long-term maintenance, has proven inadequate. Several initiatives are under way to improve planning and value for money in capital expenditure: • The Budget Facility for Infrastructure is a technical task team that reviews complex capital projects. It has already strengthened state capacity to consider and budget for large infrastructure projects, and to turn down projects that do not represent value for money. The Development Bank of Southern Africa (DBSA), the Government Technical Advisory Centre and the Presidential Infrastructure Capacity to assess, plan and budget for complex capital projects has strengthened 4 Fiscal support for electricity market reform As announced during the State of the Nation Address, Eskom is being reconfigured. The utility will be split into three viable operating entities under a single state-owned holding company. The Eskom board is developing a sustainable operational plan for each business. Government will give consideration to these proposals within the next three months. The first step in the separation process will be to transfer a portion of Eskom’s assets to a new transmission company. In line with the President’s statement, the new company will invite the participation of strategic equity partners that will provide capital for the business and strengthen oversight. The financial support package, with strict conditions attached, will enable Eskom to restore positive cash flows, and secure the necessary liquidity to undertake urgent maintenance to restore stable electricity supply. Further steps in restructuring the electricity market will be announced in the months ahead. Government will require Eskom’s board to sign a new shareholder compact. Executive remuneration will be tied to performance and streamlining of mid-level management will continue. Additional information is provided in Annexure W3: Fiscal support for electricity market reform, on the National Treasury website.
CHAPTER 1: RISK, RENEWAL AND GROWTH Coordinating Commission receive R625 million for project preparation and implementation. Local government infrastructure grants are being changed to increase flexibility and incentivise private financing. Municipal borrowing policy is being reviewed, and well-governed cities are encouraged to expand borrowing for infrastructure projects. Regulation of development charges is being reformed, with the potential to increase local government capital spending by as much as R20 billion per year. Government’s urban reforms aim to promote faster growth and densification. Metropolitan municipalities have identified integrated public land development programmes that will generate mixed-use, mixed-income living environments. The intention is to attract substantial contributions from the private sector over the long term. Taken together, seven priority programmes under way in the metros are worth an estimated R32.6 billion. • • Summary of the budget Economic outlook The economic outlook has weakened since the 2018 MTBPS, with growth now projected to increase from 1.5 per cent in 2019 to 2.1 per cent in 2021. The revisions take into account weaker investment outcomes in 2018, a more fragile recovery in household income and slower export demand than expected due to moderating global growth. Consumer price index inflation is expected to average 5.2 per cent in 2019, up from 4.7 per cent in 2018, in response to rising food prices. The global outlook is becoming less supportive of South Africa’s economy, with signs of slower growth in China and Europe. GDP growth outlook revised down to 1.5 per cent in 2019, with global trends becoming less supportive 5 Expanding partnerships to build infrastructure Government is stepping up its infrastructure build programme by partnering with the private sector, development finance institutions and multilateral development banks to create an infrastructure fund. The fund will increase the number of blended-finance projects to enhance oversight, improve the speed and quality of spending, and reduce costs in public infrastructure. The fund will draw on global expertise to strengthen project preparation and implementation. Discussions are already under way with the DBSA, the World Bank and the New Development Bank. Over the next three years, general government infrastructure investment plans amount to R526 billion. Work is under way to support some existing projects and programmes with blended finance. Government will seek out private-sector skills in the design, construction and operation of key projects. Government intends to commit at least R100 billion to the fund over the coming decade to leverage private-sector and development finance funding for well-planned capital projects. The support will take different forms, including blended co-funding, capital subsidies, and long-term interest rate subsidies and guarantees. As a first step, the DBSA, in partnership with the National Treasury, will step up infrastructure lending. Blended-finance projects ready for implementation – including student housing projects – will be expanded, with R1 billion added in 2019/20 for this purpose. A further R4 billion is added in the outer year of the fiscal framework for projects that have complied with the requirements of the Budget Facility for Infrastructure. The DBSA’s experience with independent power producers suggests that the blended-finance approach can be applied in wastewater treatment, broadband connectivity and public transport. The National Treasury will review existing legislation to determine how existing processes may be able to incorporate blended-finance arrangements. The National Treasury has begun the process of drafting legislation to support the fund.
2019 BUDGET REVIEW Chapter 2 provides an economic overview. It reports on progress made in reducing policy uncertainty in several sectors. Structural reforms and a more capable state are required to improve confidence in the economy and raise the economic growth rate. Table 1.1 Macroeconomic outlook – summary Structural reforms and more capable state needed to improve confidence and raise growth rate Across all tables in the Budget Review, the use of "0" refers to a value of small magnitude that is rounded up or down to zero. If a value is exactly zero, it will be denoted by "–". If data is not available it is denoted by "N/A" Source: National Treasury Fiscal policy The budget deficit is projected to narrow from an estimated 4.2 per cent of GDP in 2018/19 to 4 per cent of GDP in 2021/22. Gross debt is projected to stabilise at 60.2 per cent of GDP in 2023/24, with net debt stabilising at 57.3 per cent of GDP a year later. The main risks to the fiscal outlook are uncertainty in the growth and revenue forecasts, the contingent liabilities of state-owned companies and the public-service compensation budget. The medium-term expenditure framework (MTEF) reflects progress in slowing growth in the wage bill and reducing compensation as a share of expenditure. Table 1.2 Consolidated government fiscal framework Budget deficit projected to narrow over medium term and gross debt to stabilise in 2023/24 Source: National Treasury Revenue trends and tax proposals Chapter 4 discusses revenue trends and tax policy. The tax revenue estimate for 2018/19 has been revised down by R15.4 billion, relative to the 2018 MTBPS. The revision reflects a weaker economic outlook, and further increases to value-added tax refunds. Despite several years of tax increases, the tax-to-GDP ratio is declining. Problems with tax administration, as highlighted in the findings of the Commission of Inquiry into Tax Administration and Governance by SARS, partly explain revenue shortfalls. These problems are being addressed. The process to appoint a new SARS Commissioner is under way and the institution has begun implementing operational reforms to improve its Despite several years of tax increases, the tax-to-GDP ratio has declined 6 2018/19 Revised R billion/percentage of GDPestimate 2019/202020/212021/22 Medium-term estimates Revenue1 455.2 28.8% Expenditure1 665.4 32.9% 1 583.81 696.41 836.6 29.3%29.2%29.4% 1 826.61 948.92 089.0 33.7%33.5%33.4% Budget balance-210.2 -4.2% -242.7-252.6-252.4 -4.5%-4.3%-4.0% 2018 Real percentage growthEstimate 201920202021 Forecast Household consumption1.5 Gross fixed-capital formation-0.2 Exports2.0 Imports3.8 Real GDP growth0.7 1.52.02.3 1.52.13.0 2.32.72.8 1.73.23.3 1.51.72.1 Consumer price index (CPI) inflation4.7 Current account balance (% of GDP)-3.5 5.25.45.4 -3.4-3.8-4.0
CHAPTER 1: RISK, RENEWAL AND GROWTH performance. SARS governance reforms will be considered in amended legislation. Tax measures amounting to R15 billion in 2019/20 and R10 billion in 2020/21 are proposed to offset the combined effect shortfalls and additional expenditure. Table 1.3 Impact of tax proposals on 2019/20 revenue1 of revenue R million Gross tax revenue (before tax proposals) 1 407 208 Budget 2019/20 proposals 15 000 Direct taxes Taxes on individuals and companies Personal income tax Revenue from not fully adjusting for inflation Revenue if no adjustment is made Partial bracket creep for personal income tax No adjustment to medical tax credit Indirect taxes General fuel levy adjustment Introduction of carbon tax on fuel Additional VAT zero-rated items Increase in excise duties on tobacco products Increase in excise duties on alcoholic beverages 13 800 13 800 12 800 14 000 -1 200 1 000 1 200 -500 1 800 -1 100 400 600 Gross tax revenue (after tax proposals) 1 422 208 1. Revenue changes are in relation to thresholds that have been fully adjusted for inflation Source: National Treasury Medium-term spending plans Consolidated government expenditure is set to increase from R1.67 trillion in 2018/19 to R2.09 trillion in 2021/22. Real growth in non-interest expenditure averages 2 per cent per year. The fiscal framework continues to provide for real growth in social expenditure, including health, social grants and community development. The fastest-growing area of spending is community development, which includes funding for free basic services and human settlements. Over the next three years, more than half of government spending will be allocated to basic education, community development, health and social protection. At the time of the 2018 MTBPS, funding was prioritised to improve service delivery, mainly in informal settlements and in road, transport and educational infrastructure. The 2019 Budget proposes additional spending of R75.3 billion over the next three years, of which R69 billion is a provisional allocation for reconfiguring Eskom, R5 billion is for the infrastructure fund and R1.3 billion is for the 2021 Census. To partially offset these increases, medium-term baselines have been reduced by R50.3 billion, and the contingency reserve has been decreased by R2 billion in aggregate over the period. Despite fiscal constraints, real expenditure growth averages 2 per cent over medium term 7
2019 BUDGET REVIEW Table 1.4 Consolidated government expenditure by function 1. Consisting of national, provincial, social security funds and selected public entities See Annexure W2 on the National Treasury website for a full list of entities included Source: National Treasury Division of revenue Over the MTEF period ahead, after budgeting for debt-service costs and the contingency reserve, 47.9 per cent of nationally raised funds are allocated to national government, 43 per cent to provinces and 9.1 per cent to local government. Provinces continue to balance rising costs and growing demand for services within tight budgets. Sound financial management by provincial treasuries, and national interventions where necessary, have ensured that provincial finances remain sustainable. Financial management in local government has deteriorated, as reflected in the widespread adoption of unfunded budgets across all types of municipalities. National government has stepped up its commitment to assist with a series of remedial actions. Table 1.5 Division of revenue Remedial actions designed to address widespread disarray in municipal finances Source: National Treasury 8 R billion2018/19 2019/20 2020/21 2021/22 National allocations638.2 Provincial allocations572.2 Equitable share470.3 Conditional grants101.9 Local government allocations117.3 Provisional allocations not– assigned to votes 684.7733.1777.7 612.3657.1701.0 505.6542.9578.6 106.7114.2122.4 127.3137.9149.5 19.211.418.9 Total allocations1 327.6 1 443.51 539.51 647.1 Percentage shares National 48.1% Provincial 43.1% Local government 8.8% 48.1%48.0%47.8% 43.0%43.0%43.1% 8.9%9.0%9.2% 2018/192019/20 RevisedBudget R billionestimateestimate Average growth 2018/19 – 2021/22 Learning and culture354.8386.4 Health208.8222.6 Social development256.9278.4 Community development186.4208.5 Economic development192.4209.2 Peace and security203.5211.0 General public services65.065.3 Payments for financial assets15.529.8 7.6% 7.0% 7.3% 9.3% 7.0% 4.6% 5.8% Allocated expenditure1 483.21 611.3 Debt-service costs182.2202.2 Contingency reserve–13.0 7.4% 10.7% Consolidated expenditure11 665.41 826.6 7.8%
CHAPTER 1: RISK, RENEWAL AND GROWTH Government debt and contingent liabilities Government’s medium-term financing strategy reflects a prudent approach to managing debt in an environment of great uncertainty. The strategy maintains a broad range of funding instruments in the domestic and global markets. It includes measures to manage refinancing risk by adjusting the composition and maturity of the debt portfolio. Over the past year, government’s gross borrowing requirement has risen by R15.3 billion to R239.5 billion. This was mainly the result of lower-than-expected revenue collection. The domestic capital market finances most of government’s borrowing requirement. Net debt is expected to reach R2.52 trillion in 2018/19, or 49.9 per cent of GDP, increasing to R3.47 trillion or 55.5 per cent of GDP by 2021/22. Net debt is expected to stabilise at 57.3 per cent of GDP in 2024/25. Debt-service costs rise to 4 per cent of GDP by 2021/22. Borrowing strategy uses broad range of funding instruments in domestic and global markets Table 1.6 Projected state debt and debt-service costs Source: National Treasury Financial position of public-sector institutions Several large state-owned companies and the Road Accident Fund confront severe financial and administrative difficulties. Over the year ahead, government will initiate reforms to strengthen the governance, financial management and operations of state-owned companies. In the interim, these institutions continue to pose risks to the public finances and the economy. Table 1.7 Combined financial position of public institutions R billion/net asset value 2015/16 2016/17 2017/18 State-owned companies Development finance institutions1 Social security funds Other public entities2 360.4 120.2 -4.6 625.3 355.5 126.8 -19.9 675.0 368.3 133.2 -26.6 714.8 1. Institutions listed in schedule 2 of the PFMA 2. State-owned institutions without a commercial mandate and listed in either schedule 1 or 3 of the PFMA such as the National Library of South Africa Source: National Treasury Budget documentation The 2019 Budget Review accompanies several other documents and submissions tabled in Parliament on Budget Day. These include: • • • • The Budget Speech The Division of Revenue Bill The Appropriation Bill The Estimates of National Expenditure. 9 R billion/percentage of GDP2018/19 2019/202020/212021/22 Gross loan debt2 814.3 55.6% Debt-service costs182.2 3.6% 3 042.93 357.83 683.6 56.2%57.8%58.9% 202.2224.1247.4 3.7%3.9%4.0%
2019 BUDGET REVIEW These and other fiscal and financial publications, including the People’s Guide to the Budget, are available at www.treasury.gov.za. As part of the National Treasury’s commitment to transparent budgeting, it has worked with civil society organisations to expand the vulekamali.gov.za budget data portal. On Budget Day, the portal launches As part of commitment to transparent budgeting, new online infrastructure tool is unveiled a new tool that allows users to see the geographic position, budget allocationandimplementation infrastructure projects. stage of national government 10
2 Economic overview Overview SMTBPS. The weaker outlook projects a slow improvement in outh Africa’s GDP growth forecast for 2019 has been revised to Economic growth expected to rise slowly from 1.5 per cent in 2019 to 2.1 per cent in 2021 1.5 per cent, from an estimated 1.7 per cent at the time of the 2018 production and employment following poor investment growth in 2018, and a moderation in global trade and investment. The medium-term outlook is subdued, with GDP growth projected to reach 2.1 per cent in 2021, supported by a gradual improvement in confidence, more effective public infrastructure spending, and a better commodity price outlook than previously assumed. Following a decade of economic weakness, there are positive signs that the economy has begun to gain lost ground. The policy inertia and uncertainty that have constrained investment and confidence have begun to lift. The reconfiguration of Eskom is a major step in the broad reform of state-owned companies. Several commissions are probing allegations of widespread corruption in the public and private sectors. The President’s investment drive has yielded pledges of R300 billion in investment. Separating Eskom is major step in broad reform of state-owned companies 11 In brief •GDP growth has been revised down since the 2018 Medium Term Budget Policy Statement (MTBPS) due to a fragile recovery in employment and investment, and a less supportive global trade environment. Real GDP growth in 2019 is expected to reach 1.5 per cent, improving moderately to 2.1 per cent in 2021. •Gradual improvements in business and consumer confidence, and more effective public infrastructure spending, will be partially offset by slower global growth. While there has been progress on economic reforms, more effective implementation is needed. •Government’s efforts to stabilise state-owned companies – including the reconfiguration of Eskom – and infrastructure reforms are expected to support faster growth and investment in the years ahead. •Measures to relieve policy uncertainty and blockages have begun to yield results that will support investment in mining, telecommunications and tourism. •To achieve higher, more inclusive growth and create jobs, South Africa needs to strengthen the capability of the state and enact comprehensive structural reforms.
2019 BUDGET REVIEW Over the next three years, general government infrastructure investment is projected at R526 billion. Interventions are already under way to improve the efficiency of this pipeline. In addition, government will contribute R100 billion to a blended-finance infrastructure fund over the next decade in the form of new spending, reprioritisation and guarantees. The fund will allow the public and private sectors to work together to finance sustainable social and economic infrastructure projects. Government is acting decisively to mitigate the risks that Eskom poses to the economy and the public finances. The restructuring of the electricity sector and state support for Eskom’s balance sheet are central to a transparent and credible reform of the utility’s business model. Over the long term, this will support the transition to a more sustainable and resilient economy. The President’s economic stimulus and recovery plan, announced in September 2018, aims to restore policy certainty and boost confidence in the near term. Efforts to implement the growth-enhancing reforms outlined in the plan have made some headway. Government will contribute R100 billion to infrastructure fund over next decade Eskom reforms will support longer-term transition to sustainable, resilient economy Raising the economic growth rate, and achieving inclusive and shared growth, requires a range of short-term interventions and long-term reforms, along with improved capacity to implement them. South Africa’s macroeconomic policy framework provides a strong platform for the success of these measures. Macroeconomic policy promotes low and stable inflation, a flexible exchange rate, and a sustainable fiscal framework. In combination, these policy commitments reduce uncertainty and risk in investment decisions, and support business and consumer confidence. The Constitution entrenches the rule of law – including a commitment to secure property rights. It commits South Africa to transparent public finances accompanied by expenditure controls, and a central bank that executes its functions independently to protect the value of the currency in the interest of balanced and sustainable economic growth. Policy promoting low inflation, flexible exchange rate and sustainable fiscal framework supports investment 12 Update on the President’s economic stimulus and recovery plan •Telecommunications spectrum: Licensing for high-demand spectrum will take place this year, with the process expected to be completed in 2020/21. •Visa amendments: Gazetted amendments to the Immigration Act (2002) will waive the requirement of an unabridged birth certificate for children traveling from certain countries. Revised requirements for business visas clarify the documentation and accreditations required. An e-visa system will be launched with New Zealand as the pilot case. It will then be rolled out to other countries. The scarce skills list will be updated by March 2019. •Mining policy: Government issued a new Mining Charter. The Minister of Mineral Resources has signalled that controversial amendments to the Mineral and Petroleum Resources Development Act (2002) are no longer in keeping with the policy intent. Separate legislation for the regulation of oil and gas is being developed and consultations with various stakeholders are under way. •Administered price review: The Department of Energy has invited the public to comment on the basic fuel price review until 31 March 2019. Stakeholder consultations are under way to identify ways to improve the efficiency and reduce the costs of ports and rail, making the country’s exports more competitive. •Procurement: The Public Procurement Bill is being finalised. It will consolidate various procurement laws into one national legislative framework. Provisions in the bill will encourage participation from black-, youth-and women-owned businesses in state procurement. •Measures to safeguard industry: Government imposed a 35.3 per cent tariff on frozen bone-in chicken imports from Europe, as allowed by the terms of South Africa’s Economic Partnership Agreement with the European Union.
CHAPTER 2: ECONOMIC OVERVIEW Implementing reforms to boost growth Increasing the long-term growth rate to sharply reduce unemployment and raise the revenues needed for social and economic development requires far-reaching structural reforms. A wide range of policies considered by government offer clear benefits that would boost economic activity and reduce exclusion. Yet policy inertia, poor implementation capacity and inadequate prioritisation continue to hinder the achievement of key developmental goals. These factors have also eroded the country’s global competitiveness. Bold structural changes required Breaking from the pattern of anaemic economic growth and achieving the vision outlined in the National Development Plan (NDP) requires government to implement bold reforms. South Africa’s low savings rate means that export-led growth is critical for earning revenue to fund investment and redistribution. There are various areas where the South African economy enjoys a clear competitive advantage. These include high-value manufacturing exports (motor vehicles), agricultural exports (fresh fruits and nuts) and tourism. Many of these sectors, such as horticulture and tourism, are also labour-intensive. 13 Reversing the competitive slide A country’s economic competitiveness measures its ability to efficiently produce and trade goods and services. This is strongly linked to its ability to raise living standards over time. In recent years, policy inertia and a deterioration in the relationship between government and the private sector have reduced South Africa’s global competitiveness. South Africa has fallen from 44th (2007) to 67th (2018) on the Global Competitiveness Index. And between 2008 and 2018, South Africa’s ranking fell from 35th to 82nd in the World Bank’s Ease of Doing Business report. Over the same period, countries such as Kenya and Rwanda have been able to make significant gains in competitiveness by implementing rapid reforms. Kenya’s rollout of e-visas has considerably boosted tourism. Rwanda has enacted regulatory changes, enabling investments in broadband that improve quality, reduce costs and expand access. Figure 2.1 Global Competitiveness Index Source: Global Competitiveness Reports South Africa’s slide in competitiveness reflects both a failure to implement key reforms domestically, and the speed at which peer nations have implemented their own reforms. The deterioration is also in response to corporate scandals, auditing firm failures, widespread corruption in both the public and private sectors, and the perceived erosion of government’s commitment to macroeconomic stability. Government aims to reverse this slide urgently, and move to the top 50 countries in the Ease of Doing Business rankings within the next three years.
2019 BUDGET REVIEW The country’s special economic zones can be used more effectively in support of these sectors. However, faster export growth on its own is unlikely to result in a large increase in employment given the changing nature of the global economy, which has become increasingly skills-intensive. Under these conditions, government needs to implement effective strategies to create opportunities for large numbers of unemployed workers, prioritise interventions in skills development and education, and promote policies that facilitate skilled immigration. These interventions would increase GDP, raise per capita income and boost tax revenues. Getting public education right – a central element of the NDP – is at the heart of improving the country’s economic potential. Government is prioritising reading comprehension through an early grade reading strategy and tackling infrastructure backlogs that negatively affect learning in basic education. In higher education and training, the focus is on expanding access to universities and technical and vocational colleges, and improving student performance. More determined implementation of integrated development plans to promote densification, greater investment in public transport and housing programmes, and more mixed-income developments can reshape cities as engines of economic growth. Crucially, the NDP emphasises the need for a capable state, including well-functioning state-owned companies, to anchor sustainable, inclusive and shared growth. Many of the problems experienced at state-owned companies can be addressed by introducing more competition, strengthening independent regulatory authorities and introducing strategic equity partners. Complementary efforts to reorganise the state will enhance the capacity of government to implement reforms that can raise living standards for all. Priority should be given to creating opportunities for unemployed workers, and boosting education and skills Capable state, including effective state-owned companies, is needed for inclusive growth Global outlook The global economy continues to grow, but signs of slowing growth have emerged. The International Monetary Fund (IMF) has lowered its projection for global growth to 3.5 per cent in 2019 and 3.6 per cent in 2020, from a prior estimate of 3.7 per cent in both years. Over the past six months, GDP growth projections for the United States, China and Europe have been revised down. Trade tensions between the US and China have contributed to weaker confidence and growth outlooks, and lower crude prices have reversed recent optimism about prospects for oil-exporting economies. World trade is expected to expand by 4 per cent over the medium term, down from 5.3 per cent in 2017. In developed economies, growth is returning to lower long-term averages. The potential for tariff increases and retaliation among large economies still poses a risk to global trade. Nevertheless, US demand remains strong, oil prices have eased and monetary policy tightening is becoming less aggressive, which will offer some support to medium-term global growth. In developing countries, growth is expected to decline from 4.6 per cent in 2018 to 4.5 per cent in 2019, mainly due to lower oil prices and trade risks, before rising to 4.9 per cent in 2020. The weak performance of sub-Global economic growth projected at 3.5 per cent in 2019 and 3.6 per cent in 2020 Monetary policy tightening in developed economies is becoming less aggressive 14
CHAPTER 2: ECONOMIC OVERVIEW Saharan Africa’s two largest economies – Nigeria and South Africa – continues to weigh on the region. The IMF projects Nigeria to grow by 2 per cent this year and 2.2 per cent in 2020. Economic growth for most economies in the region, including Kenya and Rwanda, is expected to exceed 4 per cent over the next five years. Developing countries remain vulnerable to swings in investor sentiment. Financial market conditions, which stabilised in the middle of last year, have become more volatile since the end of 2018. Short-term uncertainty has added to concerns about trade tensions and slower global growth. Table 2.1 Economic growth in selected countries 1. National Treasury forecast Source: IMF World Economic Outlook, January 2019 and IMF World Economic Outlook database Commodity prices Commodity price movements were volatile in 2018. Although robust global growth supported higher energy prices, rising US tariffs and weaker demand for industrial metals led to lower iron ore and platinum prices. Figure 2.2 Commodity price trends Source: Bloomberg 15 Region/country2010-2017 PercentagePost-crisis 2018201920202021-2023 Average GDP forecast World3.8 Advanced economies2.0 United States2.2 Euro area1.3 United Kingdom2.0 Japan1.5 Developing countries5.3 China8.0 India7.3 Brazil1.4 Russia1.8 Mexico3.1 Sub-Saharan Africa4.3 South Africa1 2.0 3.73.53.63.6 2.32.01.71.6 2.92.51.81.5 1.81.61.71.5 1.41.51.61.6 0.91.10.50.5 4.64.54.94.9 6.66.26.25.8 7.37.57.77.7 1.32.52.22.2 1.71.61.71.4 2.12.12.22.9 2.93.53.64.0 0.71.51.72.4
2019 BUDGET REVIEW From the third quarter of 2018, concerns over weaker growth and expectations of supportive US monetary policy bolstered gold prices, even as oil prices declined. The improvement in Chinese growth in the second half of 2018 supported a recovery in the iron ore price. While recent increases in iron ore and gold prices, and lower oil prices, support an improvement in South Africa’s terms of trade, global demand for industrial and safe-haven commodities remains uncertain. Domestic outlook South Africa’s GDP growth slowed from 1.3 per cent in 2017 to an estimated 0.7 per cent in 2018. The medium-term outlook is weaker than projected in the 2018 MTBPS. Economic growth is expected to reach 1.5 per cent in 2019, rising to 2.1 per cent by 2021. The revisions take into account weaker investment outcomes in 2018, a more fragile recovery in household income and slower export demand than expected due to moderating global growth. Consumer inflation has also been revised down due to lower oil prices and food inflation than previously assumed. GDP growth estimated at 0.7 per cent in 2018, rising to 2.1 per cent in 2021 Table 2.2 Macroeconomic performance and projections Sources: National Treasury, Reserve Bank and Statistics South Africa Forecast trends Household consumption Over the first nine months of 2018, household spending grew by 1.9 per cent, on par with the same period in 2017. This was driven by increased demand in the first quarter of the year, carried by a stronger rand, higher confidence and low inflation of durable and semi-durable goods. Household spending growth lost momentum as the year progressed due to subdued wage and employment growth, reduced confidence, and rising petrol and electricity prices. Household consumption is forecast to grow by 1.5 per cent in 2019. Weak employment growth and further declines in real wages are expected to constrain household incomes this year. Household wealth is also expected to remain under pressure in 2019, following a sharp decline in equity prices at the end of 2018, and limited growth in house prices. Over the medium term, household spending is expected to benefit from a recovery in economic activity and net wealth, and lower levels of indebtedness. Household spending expected to benefit from gradual recovery in economic activity and lower indebtedness 16 201520162017 Percentage changeActual 2018 Estimate 201920202021 Forecast Final household consumption1.80.72.2 Final government consumption-0.31.90.6 Gross fixed-capital formation3.4-4.10.4 Gross domestic expenditure2.1-0.91.8 Exports2.81.0-0.1 Imports5.4-3.81.6 1.5 0.9 -0.2 1.2 2.0 3.8 1.52.02.3 0.20.90.7 1.52.13.0 1.31.92.2 2.32.72.8 1.73.23.3 Real GDP growth1.30.61.3 0.7 1.51.72.1 GDP inflation5.16.85.5 GDP at current prices (R billion)4 051.44 350.34 651.8 CPI inflation4.66.35.3 Current account balance (% of GDP)-4.6-2.8-2.4 5.8 4 957.9 4.7 -3.5 5.85.45.3 5 323.15 708.16 135.9 5.25.45.4 -3.4-3.8-4.0
CHAPTER 2: ECONOMIC OVERVIEW Investment Investment growth remains subdued. Investment fell by 0.3 per cent year-on-year in the first three quarters of 2018, following a 0.7 per cent expansion in the same period in 2017. Investment by private businesses and general government declined. Figure 2.3 Composition of investment growth* Investment by private business and general government have declined *First three quarters Source: Statistics South Africa As a percentage of GDP, investment has persistently declined, reaching a 13-year low of 17.7 per cent in the third quarter of 2018. The combination of low growth in employment, investment and productivity continues to restrain economic growth. Investment growth is projected to rise from 1.5 per cent in 2019 to 3 per cent in 2021 as confidence gradually increases, worn-out capital is replaced and the state improves its ability to execute capital projects. However, concerns about electricity supply and slower global growth pose risks to the near-term outlook. The Investment Summit affirmed that South Africa remains an attractive investment destination, with R300 billion in investments pledged across a variety of sectors. Efforts by the President’s investment envoys yielded another $28 billion in investment pledges. R300 billion in investments pledged at Investment Summit across a range of sectors Exchange rate Developing-country currencies depreciated sharply during 2018 due to higher risk aversion, trade tensions and rising US interest rates. The JP Morgan Emerging Markets Currency Index fell by 11.1 per cent over the year. The rand performed in line with these trends, depreciating by 13.3 per cent against the US dollar and 9.8 per cent against the euro. Risk aversion and volatility remain high, although the rand has partially recovered. Between September 2018 and January 2019, the rand appreciated by 11.5 per cent against the US dollar. Despite the weaker nominal exchange rate, South Africa’s inflation remains higher than that of trading partners. The real effective exchange rate Rand’s depreciation against dollar and euro during 2018 was in line with global trend 17
2019 BUDGET REVIEW appreciated by 2.4 per cent over the first 11 months of 2018, signalling a loss of export competitiveness. Balance of payments The current account deficit as a percentage of GDP widened to 3.8 per cent in the first three quarters of 2018, compared with a deficit of 2.3 per cent over the same period in 2017. Over the medium term, the deficit is expected to widen from 3.4 per cent of GDP in 2019 to 4 per cent in 2021. The trade surplus declined from an average of 1.5 per cent of GDP in the first nine months of 2017 to 0.3 per cent over the same period in 2018. South Africa’s terms of trade deteriorated by 2 per cent over the period. Figure 2.4 Composition of current account balance Current account deficit as percentage of GDP widened in 2018 due to lower trade surplus Source: Reserve Bank Net foreign direct investment rose, while net portfolio investment fell, during 2018 The balance on the financial account increased to 3.5 per cent of GDP in the first three quarters of 2018, up from 1.5 per cent in the same period in 2017. For the first time since 2013, net foreign direct investment rose over the three-quarter period, as foreign parent companies increased their holdings of South African subsidiaries, and as foreign acquisitions by South African firms slowed. Inward foreign direct investment rose by R70 billion in the first three quarters of 2018. Net portfolio investment fell by 31 per cent in the first three quarters of 2018. Inflation Headline inflation slowed from 5.3 per cent in 2017 to 4.7 per cent in 2018, as lower food and services inflation offset high petrol inflation in the second half of the year. Fuel inflation rose to 20.1 per cent in the second half of 2018 due to higher oil prices, putting upward pressure on public transport and freight costs. As a result of these large fuel price increases, the Department of Energy is reviewing the basic fuel price formula. Consumer price index (CPI) inflation is expected to reach 5.2 per cent in 2019 in response to rising food inflation associated with higher fuel and agricultural input prices. Electricity inflation is also expected to increase. The National Treasury assumes an annual adjustment of 10 per cent in electricity prices in each of the next three years, effective from July 2019. Inflation remains well within 3-6 per cent target range, but fuel prices have risen sharply CPI inflation expected to reach 5.2 per cent in 2019 as food inflation rises 18
CHAPTER 2: ECONOMIC OVERVIEW Core inflation – which excludes the impact of food, electricity and fuel prices – remains stable at about 5 per cent over the medium term. Figure 2.5 Trends in administered price inflation Source: Statistics South Africa Employment Private-sector employment growth has been slowing since 2011. Job Job creation remains stagnant and unemployment rate averaged 27.1 per cent in 2018 creation remains stagnant. The unemployment rate declined marginally from an average of 27.5 per cent in 2017 to 27.1 per cent in 2018. However, this is largely the result of a 16.8 per cent growth in the number of discouraged work seekers, who are not counted in the unemployment rate. The labour market obstructs easy entry into employment, particularly for young people. Figure 2.6 Growth in formal non-agricultural employment* *First nine months Source: Statistics South Africa Net employment rose by 225 000 in 2018, mostly due to an increase in the informal non-agricultural sector. Private-sector employment growth was flat over the first three quarters of 2018. Lower industrial employment has 19
2019 BUDGET REVIEW been partially offset by stronger growth in services. Employment in gold mining has fallen during seven of the last eight quarters ending September 2018. Mining employment is expected to remain under pressure, with several companies announcing restructuring or mine closures. The national minimum wage and other legislative amendments have come into effect, providing much-needed certainty in the labour market. Through the National Economic Development and Labour Council, business and labour have committed to support job creation and retention. Exemptions and shifts in working hours are expected to limit the job losses from upward wage adjustments as a result of the national minimum wage. Risks to the growth outlook There are pronounced risks to the economic outlook. The main risks concern Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth. 20 Declining renewables prices point toward long-term shifts in electricity generation In the context of rising electricity tariffs, and the falling cost of renewables, it is increasingly cost-effective for households and businesses to switch to renewable energy sources. The estimated average portfolio cost for all technologies under the Renewable Energy Independent Power Producer Programme, for example, was initially R2.79/kilowatt-hour (kWh). Today, the cost has fallen to R0.92/kWh, which is similar to Eskom’s average tariff. The figures below chart the declining average unit price of electricity since 2012 across the first four bid windows for independent power producers, as well as the projected future cost of Eskom-generated power. It compares those prices with the levelised cost of electricity for Eskom’s new Medupi and Kusile power stations, new baseload coal stations, and the utility’s current average tariff. The levelised cost is the net present value of the unit-cost of electricity over the lifetime of a generating asset. While this is an imperfect measure to compare price, it is a key investment planning indicator. This suggests that, relative to coal-generated power (both in terms of Eskom’s current build programme as well as new baseload coal), renewables are becoming increasingly cost-competitive. *Renewable Energy Independent Power Producer Programme Source: Independent Power Producer office and Council for Scientific and Industrial Research (2016, 2018). All prices as of April 2017. Recent research suggests that South Africa may soon reach a tipping point at which, due to the combination of rising electricity tariffs and falling costs of other generation technologies, many industrial, commercial, and household customers could soon leave the national electricity grid.1 This would threaten the financial sustainability of many municipalities, which rely on electricity sales as a major source of revenue. For Eskom, it would accelerate a vicious cycle, where it would have to share costs among a steadily declining pool of customers. 1 Goliger & McMillan, 2018, and Goliger & Cassim, 2018, both available at sa-tied.wider.unu.edu Figure 2.7 REIPPP* price trendsFigure 2.8 Eskom estimated price trends
CHAPTER 2: ECONOMIC OVERVIEW Other near-term risks to growth include load-shedding, higher electricity prices than assumed in the forecast, prolonged industrial action in the mining sector, and adverse weather conditions, which could undermine agricultural production. Weaker-than-expected growth in China, which is South Africa’s largest trading partner, could negatively affect the price and demand for South Africa’s export commodities. In addition to slower growth and trade frictions, key catalysts for market volatility in 2019 include the terms of Brexit and potential banking sector risks in Europe. Weaker-than-expected growth in China, which would affect export commodities, is a risk to economic outlook Economic assumptions The economic projection is a forecast underpinned by various assumptions. Updated assumptions appear in Table 2.3. Table 2.3 Assumptions used in the economic forecast 1. Combined growth index of South Africa's top 15 trading partners (IMF World Economic Outlook, January 2019) 2. Bloomberg futures prices between 24 December 2018 and 21 January 2019 Source: National Treasury Major revisions since the 2018 MTBPS include a lower oil price assumption, and higher gold, coal and iron ore prices. A weaker growth outlook in developing economies, and perceptions of higher risk – including elevated contingent liability risks in South Africa – result in a higher risk premium assumption over the medium term. Short-term food inflation has been revised down. Revisions to assumptions since October 2018 include a lower oil price, and higher gold, coal and iron ore prices 21 20162017 Percentage changeActual 2018 Estimate 201920202021 Forecast Global demand14.14.2 International commodity prices2 Brent crude oil (US$ per barrel)44.254.8 Gold (US$ per ounce)1 247.91 257.7 Platinum (US$ per ounce)988.3950.4 Coal (US$ per ton)64.478.9 Iron ore (US$ per ton)58.670.6 4.4 71.0 1 269.6 880.6 96.3 66.4 4.34.44.3 61.663.163.7 1 300.71 336.61 367.6 813.8826.6834.0 97.199.5100.4 69.065.264.7 Food inflation10.56.9 Electricity inflation9.24.7 3.7 5.3 5.16.06.0 9.010.010.0 Sovereign risk premium3.22.7 (percentage point) Real public corporation investment-0.7-1.3 3.0 -0.1 3.23.13.0 -0.31.12.2
2019 BUDGET REVIEW Sector performance Mining In the first three quarters of 2018, real value added in the mining sector contracted by 1.4 per cent compared with the same period in 2017, lowering overall GDP growth by 0.1 percentage points. Policy and regulatory uncertainty have contributed to the sector’s weak performance in recent years. The President’s economic stimulus and recovery plan has resolved much of this uncertainty. As a result of government’s efforts, relations between the industry and the Department of Mineral Resources have improved, fuelling hope of greater investment. At the Investment Summit in October 2018, mining commitments amounted to about R100 billion. Mining commitments of R100 billion at Investment Summit 22 Alternative scenarios The National Treasury has modelled four alternative scenarios quantifying some of the risks to the baseline forecast. Figure 2.9 GDP growth scenarios Source: National Treasury •In Scenario A, short-term reforms outlined in the 2018 Budget are implemented quickly and effectively, and long-term reforms that reduce barriers to entry begin to take shape. Reforms lower the cost of doing business and facilitate market access, boosting confidence, investment and competitiveness. The risk premium eases by 35 basis points, and long-term government bond yields fall by nearly one percentage point. Structural reforms and lower risk aversion towards South Africa supports growth of 2.1 per cent in 2019 and 2.9 per cent by 2021. •Scenario B assumes that some policy decisions are made but implementation is slow. Policy certainty leads to higher confidence and a lower risk premium, which eases by an average of 15 basis points. Borrowing costs decline by an average of 35 basis points over the medium term. GDP growth reaches 1.7 per cent in 2019, accelerating to 2.4 per cent in 2021. •In Scenario C, Eskom’s average energy availability factor falls to between 65 and 70 per cent for 18 months, leading to demand restrictions and extended load-shedding. This negatively affects output in energy-intensive sectors, and productivity generally. Eskom addresses supply constraints and integrates power procured from independent producers, leading to a recovery from late 2020. GDP growth weakens to 0.2 per cent in 2019, driven by a 3.5 per cent decline in exports. As electricity capacity is restored, GDP growth recovers to 1.9 per cent in 2021. •In Scenario D, persistently weak growth, widening fiscal deficits and an inability to stabilise Eskom’s finances and improve its performance lead to a fiscal crisis and a local currency downgrade. Risk aversion towards South Africa rises sharply, with the risk premium rising by 210 basis points and long-term government bond yields rising by an average of 180 basis points. The weaker exchange rate contributes to an increase in inflation, which breaches the target range in 2019 and 2020. GDP falls by 1.2 per cent in 2019 and 0.2 per cent in 2020.
CHAPTER 2: ECONOMIC OVERVIEW The mining sector is expected to remain under pressure over the medium term, largely as a result of low commodity prices. Agriculture In the first three quarters of 2018, real value added in the agriculture, forestry and fishing sector contracted by 3.2 per cent compared with the same period in 2017. The contractions reflect more subdued activity following record production of maize and soybeans in the second half of 2017. Exports of certain agricultural products have grown appreciably in recent years, particularly in new Asian markets. Trade promotion, market access and water interventions are crucial to attract investment in key crops such as apples, table grapes, citrus, avocados, macadamia and pecan nuts, and beef, which hold significant export potential. Industry and government are working together to expand export market access. Industry and government working to expand export market access and promote trade Table 2.4 Sector performance 20181 Percentage change 2013 2014 2015 2016 2017 Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water Construction Trade, catering and accommodation Transport, storage and communication Finance, real estate and business services General government services Personal services GDP 4.5 4.0 1.0 -0.6 4.6 2.0 2.9 2.6 3.2 2.6 2.5 6.8 -1.7 0.3 -1.0 3.5 1.4 3.5 2.7 3.2 1.8 1.8 -6.4 3.1 -0.4 -1.7 1.8 1.9 1.4 2.6 1.0 1.0 1.3 -10.2 -4.2 0.9 -2.3 1.1 1.7 0.8 2.3 1.4 1.5 0.6 17.7 4.6 -0.2 0.2 -0.3 -0.6 1.5 1.9 0.3 1.2 1.3 -3.2 -1.4 0.9 0.9 -1.2 0.4 0.9 2.2 0.8 1.0 0.8 1. First three quarters Source: Statistics South Africa Manufacturing Real value added in manufacturing increased by 0.9 per cent in the first three quarters of 2018 compared with the same period in 2017. An upturn during the third quarter was driven by food and beverages, and motor vehicles and parts. Trade performance also improved. Exports, led by base metals and vehicles, grew by 8.2 per cent in 2018 compared with 2017. While sentiment in the sector was marginally up towards the end of 2018, the Absa Purchasing Managers’ Index remains below the neutral 50-point mark, indicating that manufacturers remain under pressure. Financial and business services Growth in real value added by the finance, insurance, real-estate and business services sector edged up to 2.2 per cent in the first three quarters of 2018 compared with 1.8 per cent in the same period of 2017. The sector’s contribution to GDP growth increased slightly from 0.4 percentage points in 2017 to 0.5 percentage points in the first three quarters of 2018. Contribution to growth from financial and business services edged up in 2018 Construction Value added in the construction sector fell by 1.2 per cent in the first three quarters of 2018 compared with the same period in 2017. Construction 23
2019 BUDGET REVIEW activity and employment has weakened due to declining investment in civil construction and residential buildings. The lack of demand continues to stifle confidence, particularly in the civil construction sector. Transport and telecommunications Growth in transport services weakened from 1.4 per cent over the first three quarters of 2017 to 0.9 per cent in the same period of 2018. Growth was dampened by derailments on the iron ore line, a decline in overseas tourist arrivals and aircraft movements, and a national bus strike. Conclusion Economic growth is expected to improve moderately over the medium term. Government has taken steps to restore policy certainty and confidence. To achieve significantly higher, more inclusive economic growth, create jobs and raise living standards, a range of structural reforms is needed. State capacity also needs to be strengthened. Structural reforms and capable state required to raise economic growth rates over long term 24
3 Fiscal policy Overview Tthen, economic growth has remained subdued and the domestic GDP he 2018 MTBPS noted that weak economic performance and revenue shortfalls had contributed to some slippage in fiscal projections. Since outlook has been revised down. In the current year, tax revenue will be R15.4 billion below the 2018 MTBPS estimate. Funding pressures from Eskom and other financially distressed state-owned companies have increased, with several requesting state support to continue operating. In this context, the 2019 Budget proposes a series of tax and expenditure measures aimed at narrowing the deficit and stabilising the debt-to-GDP ratio. Over the medium term, additions to spending amount to R75.3 billion, consisting mainly of transfers to support the reconfiguration of Eskom. These additions are partially offset by reductions to baselines and proposed savings from compensation adjustments totalling R50.3 billion. Tax measures raise an additional R15 billion in 2019/20 and R10 billion in 2020/21. Budget proposes tax and spending measures to narrow deficit and stabilise debt-to-GDP ratio 25 In brief •The economic and revenue outlook has deteriorated since the October 2018 Medium Term Budget Policy Statement (MTBPS), and funding pressures from state-owned companies have increased. •Given these developments, the 2019 Budget proposes large-scale expenditure reprioritisation and tax measures that narrow the deficit from 4.5 per cent of GDP in 2019/20 to 4 per cent by 2021/22. Gross national debt is projected to stabilise at 60.2 per cent of GDP in 2023/24. •Relative to the 2018 MTBPS, baselines have been reduced by R50.3 billion, with about half of this amount relating to compensation. These reductions are offset by provisional allocations of R75.3 billion over the next three years, mainly for Eskom’s reconfiguration. In total, the expenditure ceiling has been raised by R14 billion in 2019/20, R1.3 billion in 2020/21 and R732 million in 2021/22. •The contingency reserve has been raised by R6 billion in 2019/20 to reflect the risk of additional fiscal support for smaller state-owned companies. Any support will be funded through the sale of assets, and will not affect the budget balance.
2019 BUDGET REVIEW Table 3.1 Macroeconomic performance and projections Source: National Treasury In combination, these measures are expected to narrow the consolidated budget deficit from a projected 4.5 per cent of GDP in 2019/20 to 4 per cent of GDP in 2021/22. Gross national debt is projected to stabilise at 60.2 per cent of GDP in 2023/24. Net loan debt (gross loan debt excluding government’s cash balances) stabilises at 57.3 per cent of GDP in 2024/25. Table 3.2 Consolidated fiscal framework Source: National Treasury As Figure 3.2 shows, government debt has grown considerably since 2009. Without intervention, a continued increase in debt and debt-service costs will crowd out economic and social expenditure. If economic growth does not strengthen in the period ahead, more difficult fiscal adjustments will be required to return the public finances to a sustainable path. 26 Figure 3.1 Revenue and non-interest spending*Figure 3.2 Gross and net debt outlook *Excludes financial transactions Source: National Treasury 2015/162016/172017/18 Outcome R billion/percentage of GDP 2018/19 Revised estimate 2019/202020/212021/22 Medium-term estimates Revenue1 215.31 285.91 353.5 29.4%29.1%28.7% 1 455.2 28.8% 1 583.81 696.41 836.6 29.3%29.2%29.4% Expenditure1 366.31 443.01 543.8 33.1% 32.7%32.7% Non-interest expenditure1 227.91 288.61 374.0 29.8%29.2%29.1% 1 665.4 32.9% 1 476.7 29.2% 1 826.61 948.92 089.0 33.7%33.5%33.4% 1 617.21 716.21 833.1 29.9%29.5%29.3% Budget balance-151.0-157.0-190.3 -3.7%-3.6%-4.0% -210.2 -4.2% -242.7-252.6-252.4 -4.5%-4.3%-4.0% 2015/162016/172017/18 Percentage changeActual 2018/19 Estimate 2019/202020/212021/22 Forecast Real GDP growth0.60.91.3 Nominal GDP growth6.86.97.0 CPI inflation5.26.34.7 0.7 7.2 4.9 1.51.92.1 7.07.47.5 5.25.55.4 GDP at current prices (R billion)4 127.04 412.74 721.0 5 059.1 5 413.85 812.46 249.1
CHAPTER 3: FISCAL POLICY Changes in tax revenue and the expenditure ceiling Tax revenue projections Tax revenue is expected to underperform by R15.4 billion in 2018/19 compared with 2018 MTBPS estimates. This creates a lower base for revenue projections in the outer years. In addition, major tax bases have been revised downwards. Table 3.3 shows that over the next three years, gross tax revenue shortfalls total R16.3 billion compared with 2018 MTBPS estimates. The 2019 Budget proposes tax increases of R15 billion in 2019/20 and R10 billion in 2020/21 relative to the 2018 MTBPS estimates. The additional revenue in 2019/20 will be raised primarily from limiting relief for the effects of inflation on personal income tax. The increases will partially offset projected revenue shortfalls in each year of the medium-term expenditure framework (MTEF). Table 3.3 Revised gross tax revenue projections Tax revenue underperforms by estimated R15.4 billion in 2018/19 R billion 2018/19 2019/20 2020/21 2021/22 MTBPS 2018 Revised estimate including tax proposals Deviation against 2018 MTBPS including tax proposals 1 317.6 1 302.2 1 430.1 1 422.2 1 548.9 1 544.9 1 674.8 1 670.4 -15.4 -7.9 -4.0 -4.4 Source: National Treasury Expenditure ceiling adjustments Since 2012, despite considerable spending pressures, the main budget expenditure ceiling has anchored fiscal policy. At the time of the 2018 MTBPS, a total of R33.4 billion was reprioritised over the MTEF period to support policy priorities, including the President’s economic stimulus and recovery plan, and some non-discretionary and infrastructure spending pressures. These changes did not affect the expenditure ceiling. Relative to the 2018 MTBPS, the 2019 Budget’s proposed adjustments to spending plans will affect the expenditure ceiling as follows: Baselines reduced by R50.3 billion, while spending additions total R75.3 billion • Baseline spending reductions amount to R50.3 billion over the MTEF period. The largest proportion of these reductions – 54 per cent – fall on compensation. Goods and services budgets for selected public entities will also be reduced by 1 per cent. Allocations to specific programmes that have accumulated surpluses or require significant reform will be cut. The contingency reserve is increased by R6 billion in 2019/20, and is lowered by R8 billion in the two outer years of the framework. Initial reforms to reconfigure the state are also expected to reduce spending on compensation, and on goods and services. Spending additions totalling R75.3 billion over the MTEF period, of which R69 billion is a provisional allocation for reconfiguring Eskom, R5 billion is for the infrastructure fund and R1.3 billion is for the 2021 Census. The 2018 MTBPS allocated R5 billion to South African Airways (SAA), R1.2 billion to South African Express Airways and R2.9 billion to the South African Post Office (SAPO) in the current year. An additional • • 27
2019 BUDGET REVIEW R1.5 billion is allocated to SAPO over the MTEF period. Other state-owned companies, including SAA, the South African Broadcasting Corporation and Denel, have requested fiscal support to continue operating. Government has revised the contingency reserve for 2019/20 to respond to possible requests for financial support. Any financial support agreed on will be raised from the sale of non-core assets and will be excluded from the expenditure ceiling. Table 3.4 Adjustments to the expenditure ceiling since 2018 Budget MTEF spending changes 1. Baseline reductions and changes to provisional allocations 2. Allocation for Census 2021 and provisional allocations for Eskom and infrastructure fund 3. Provision for SOC funding in 2019/20 through the sale of assets, NRF payments and International Oil Pollution Compensation Fund Source: National Treasury After taking account of the various adjustments to non-interest spending, the expenditure ceiling will increase by R14 billion in 2019/20, R1.3 billion in 2020/21 and R732 million in 2021/22 relative to 2018 MTBPS estimates. Table 3.5 Main budget expenditure ceiling1 1. Non-interest spending financed from the National Revenue Fund, excluding skills development levy, special appropriations in 2015/16 for Eskom and the New Development Bank, debt management and Gold and Foreign Exchange Contingency Reserve Account transactions and the International Oil Pollution Compensation Fund Source: National Treasury Risks to the fiscal outlook The primary risks to the fiscal outlook stem from the macroeconomic forecast. A sharp rise in bond yields, exchange rate depreciation or lower economic growth could widen the deficit and delay debt stabilisation. The main expenditure risk to the fiscus stems from state-owned companies. Several major companies are in financial distress. If reforms to restore their financial sustainability are unsuccessful, risks from associated Main expenditure risk stems from state-owned companies in financial distress 28 R million2015/162016/172017/18 2018/19 2019/202020/212021/22 2017 Budget Review1 074 9701 144 2251 229 823 2017 MTBPS1 141 9781 233 722 2018 Budget Review1 232 678 2018 MTBPS1 225 455 2019 Budget Review 1 323 553 1 316 553 1 315 002 1 314 865 1 310 156 1 435 408 1 420 4081 524 222 1 416 5971 523 762 1 416 5971 523 7621 630 026 1 430 5951 525 0521 630 758 R million2019/202020/212021/22 MTEF total 2018 Budget non-interest expenditure1 434 9071 543 5931 651 638 Skills development levy adjustment459618706 4 630 138 1 783 2018 MTBPS non-interest expenditure1 435 3661 544 2111 652 345 Budget 2019 Baseline adjustments1-9 002-19 711-21 568 Changes to contingency reserve6 000-2 000-6 000 Additions to spending224 00023 00028 300 National Revenue Fund payments135–– adjustment 4 631 922 -50 281 -2 000 75 300 135 2019 Budget non-interest expenditure1 456 5001 545 5001 653 077 4 655 076 Change in non-interest expenditure from 2018 Budget21 5921 9071 438 Less: Skills development levy-18 759-20 437-22 307 Other adjustments3-7 146-11-12 24 938 -61 503 -7 168 2019 Budget expenditure ceiling1 430 5951 525 0521 630 758 4 586 405 Change in expenditure ceiling from 2018 Budget13 9981 289732 16 019
CHAPTER 3: FISCAL POLICY contingent liabilities, alongside requests for fiscal support, may materialise. In 2019, the National Treasury will publish an update to its long-term fiscal model. The model assesses the affordability of current public expenditure commitments and new policy priorities using a range of economic and demographic assumptions. In addition to the expenditure ceiling, the National Treasury is investigating the feasibility of other measures to anchor fiscal sustainability, such as rules to protect the composition of spending and limit the pace of debt accumulation. It will draw on global best practice to develop recommendations. National Treasury investigating measures to anchor fiscal sustainability Managing the public-service wage bill Compensation accounts for more than 35 per cent of consolidated public spending and has been a major driver of the fiscal deficit. Spending reductions have typically fallen on goods and services, and capital investment. Over time, compensation as a share of consolidated spending has increased for most departments. Following last year’s wage agreement, the 2018 MTBPS projected a shortfall of about R30 billion over the 2018 MTEF period if departments’ employee numbers remained static. Recent data shows that employee numbers are declining at a rate sufficient to absorb wage agreement pressures, owing to natural attrition. Monthly payrolls in 2018 showed an average of about 16 000 fewer employees than in the corresponding months of 2015. In addition, new employees tend to be younger and lower ranked than employees who are leaving. As a result of these trends, projected national and provincial compensation spending is likely to be lower than budgeted for 2018/19. Figure 3.3 Number of personnel (excluding SANDF)* Projected compensation spending likely to be lower than budgeted for 2018/19 *Average for January to August Source: National Treasury (PERSAL data) 29
2019 BUDGET REVIEW Over the medium term, government will take additional steps to manage growth in compensation. The combination of natural attrition and active measures allows for a reduction of compensation budgets by R5.3 billion in 2019/20, R11 billion in 2020/21 and R10.7 billion in 2021/22. Government has decided to scale up early retirement without penalties. Where feasible, older employees will be allowed to retire early, with younger employees taking their place. Departments are required to realise permanent savings of 50 per cent of the cost attributable to early retirement cases. In December 2018, there were 126 710 public service employees between the ages of 55 and 59 years old. This initiative is expected to save an estimated R20.3 billion over the 2019 MTEF period, assuming that 30 000 employees take up the offer. This measure contributes to a more sustainable wage bill. Funding will be provided for associated once-off penalties and other retirement-related costs. The estimated cost of this intervention is about R16 billion over the next two years, of which a portion will be funded from the contingency reserve, and the balance by the Government Employees Pension Fund. The fund’s contribution will be repaid by the state over a longer period. The Department of Public Service and Administration has announced a change to performance bonus payments. In recent years, government has paid out about R2 billion per year in performance bonuses. Government proposes to progressively phase out this bonus over the next four years, and to replace it with other performance management measures. Additional measures to contain the wage bill, including active management of overtime and progression payments, are under consideration. Early retirement penalties to be funded from contingency reserve and state pension fund Fiscal framework The consolidated operating and capital accounts are summarised in Table 3.6. The consolidated deficit in 2018/19 (4.2 per cent of GDP) is wider than the 2018 Budget estimate by 0.6 percentage points. This is mainly a result of lower tax revenue, partially offset by projected underspending and higher surpluses of social security funds and public entities. Compared with the 2018 Budget, the consolidated deficit estimates for 2019/20 and 2020/21 are wider on average by 0.9 percentage points, mainly due to lower tax revenue and higher consolidated spending. The provisional allocation of R23 billion per year for Eskom is the main driver of higher consolidated spending. The consolidated deficit is projected to narrow from 4.5 per cent of GDP in 2019/20 to 4 per cent of GDP in 2021/22. Over the MTEF period, consolidated non-interest spending will grow at an annual real average rate of 2 per cent. Compensation as a share of total expenditure is projected to decline from 35.5 per cent in 2017/18 to 35.1 per cent in 2018/19, and 34.2 per cent in 2021/22. Over the next three years, the consolidated wage bill is projected to grow at a nominal annual average of 6.8 per cent. Consolidated deficit of 4.2 per cent of GDP in 2018/19 Compensation as share of total expenditure declines to 35.1 per cent in 2018/19 30
CHAPTER 3: FISCAL POLICY Table 3.6 Consolidated operating and capital accounts 1. Transactions in financial assets and liabilities Source: National Treasury Over the medium term, the composition of spending gradually improves. In line with the President’s economic stimulus and recovery plan, initiatives to boost infrastructure spending are under way. The capital financing requirement, which is the sum of capital payments, transfers and receipts, is expected to remain in deficit, at about 3 per cent of GDP, over the medium term. Capital payments and transfers grow by a nominal annual average of 8.3 per cent. The current deficit – the gap between revenue and current spending – is projected to narrow over the MTEF period. Elements of the consolidated budget The consolidated budget includes the main budget framework and spending by provinces, social security funds and public entities financed from their own revenue sources. Main budget framework Table 3.7 summarises spending financed from the National Revenue Fund. The main budget deficit, which is the government’s net borrowing requirement, has exceeded the 2018 Budget estimate of 3.8 per cent of GDP in 2018/19 by 0.6 percentage points. The wider deficit is mainly attributable to tax revenue shortfalls, partially offset by lower expected spending. Consequently, net borrowing increases by R33.4 billion in the current year. The main budget deficit is projected to widen to 4.7 per cent of GDP in 2019/20 before narrowing to 4.3 per cent of GDP in 2021/22. Main budget deficit projected to widen in 2019/20, then narrow to 4.3 per cent of GDP in 2021/22 31 2015/162016/172017/18 Outcome R billion/percentage of GDP 2018/19 Revised estimate 2019/202020/212021/22 Medium-term estimates OPERATING ACCOUNT Current revenue1 172.21 267.21 333.7 Current payments1 179.51 285.71 375.6 Compensation of employees473.2511.6547.4 Goods and services197.9218.9227.5 Interest payments138.5154.4169.8 Current transfers and369.9400.8431.0 subsidies 1 439.8 1 495.5 585.2 242.6 188.7 478.9 1 568.71 687.11 826.3 1 610.31 731.01 855.7 627.1667.6713.1 251.0268.3293.5 209.4232.7255.9 522.7562.4593.3 Current balance-7.3-18.5-41.9 -0.2%-0.4%-0.9% -55.6 -1.1% -41.6-43.8-29.4 -0.8%-0.8%-0.5% CAPITAL ACCOUNT Capital receipts0.30.50.5 Capital payments90.379.075.2 Capital transfers65.469.772.6 0.3 84.2 70.3 0.30.30.3 98.5103.1111.0 75.078.585.4 Capital financing requirement-155.4-148.2-147.3 -3.8%-3.4%-3.1% -154.2 -3.0% -173.2-181.3-196.1 -3.2%-3.1%-3.1% Financial transactions111.79.7-1.1 Contingency reserve––– -0.4 – -14.9-21.4-20.9 13.06.06.0 Budget balance-151.0-157.0-190.3 -3.7%-3.6%-4.0% -210.2 -4.2% -242.7-252.6-252.4 -4.5%-4.3%-4.0%
2019 BUDGET REVIEW Table 3.7 Main budget framework 1. Southern African Customs Union. Amounts made up of payments and other adjustments. The estimates for the outer two years include projected forecast error adjustments for 2018/19 and 2019/20, respectively Source: National Treasury Compared with 2018 MTBPS estimates, non-tax revenue and National Revenue Fund receipts have been revised upwards due to higher-than-anticipated collections for mineral and petroleum royalties, and revaluation profits on foreign-currency transactions. Payments to the Southern African Customs Union are projected to increase sharply between 2019/20 and 2020/21 due to rising imports and estimated underpayments. Real growth in main budget non-interest expenditure will increase from 1.9 per cent in 2018/19 to 4.3 per cent in 2019/20, largely due to the provisional allocation of R23 billion for reconfiguring Eskom. Table 3.8 shows revisions to the main budget revenue and expenditure estimates since the 2018 Budget. Debt-service costs are higher than the 2018 Budget estimates by R2.1 billion in the current year, R4.5 billion in 2019/20 and R10.2 billion in 2020/21. Debt-service costs increasing above 2018 Budget estimates 32 2015/16 2016/17 2017/18 Outcome R billion/percentage of GDP 2018/19 Revised estimate 2019/20 2020/21 2021/22 Medium-term estimates Revenue Gross tax revenue after proposals1 070.01 144.11 216.5 Non-tax revenue42.919.019.3 SACU1-51.0-39.4-56.0 National Revenue Fund receipts14.414.216.6 1 302.2 19.8 -48.3 11.7 1 422.21 544.91 670.4 27.021.122.3 -50.3-65.8-65.4 4.55.05.6 Main budget revenue1 076.21 137.91 196.4 26.1%25.8%25.3% 1 285.4 25.4% 1 403.51 505.11 632.9 25.9%25.9%26.1% Expenditure National departments 546.1 555.7 592.7 Provinces 471.4 500.4 538.6 Local government 98.3 102.9 111.1 Contingency reserve – – – Provisional allocation not – – – assigned to votes 638.2 572.2 117.3 – – 684.7733.1777.7 612.3657.1701.0 127.3137.9149.5 13.06.06.0 19.211.418.9 Non-interest expenditure1 115.81 159.01 242.3 Debt-service costs128.8146.5162.6 1 327.6 182.2 1 456.51 545.51 653.1 202.2224.1247.4 Main budget expenditure1 244.61 305.51 405.0 30.2%29.6%29.8% 1 509.9 29.8% 1 658.71 769.61 900.5 30.6%30.4%30.4% Main budget balance-168.4-167.6-208.6 -4.1%-3.8%-4.4% Primary balance-39.6-21.1-45.9 -1.0%-0.5%-1.0% -224.5 -4.4% -42.3 -0.8% -255.2-264.4-267.6 -4.7%-4.5%-4.3% -53.0-40.4-20.2 -1.0%-0.7%-0.3%
CHAPTER 3: FISCAL POLICY Table 3.8 Revisions to main budget revenue and expenditure estimates 1. Southern African Customs Union. Amounts made up of payments and other adjustments Source: National Treasury Social security funds, public entities and provincial balances Social security funds, provinces and public entities are projected to have a combined cash surplus in the current year and over the MTEF period, partially offsetting the main budget deficit. Social security funds are discussed further in Chapter 8. Table 3.9 Consolidated budget balance 1. Reconstruction and Development Programme Fund Source: National Treasury Public entities registered a cash surplus of R8.4 billion in 2017/18, driven mainly by the Passenger Rail Agency of South Africa’s lower spending on planned capital projects. Over the next two years, the combined surplus of public entities averages R4.3 billion per year. Public-sector borrowing requirement The public-sector borrowing requirement includes the borrowing needs of government as a whole, as well as those of state-owned companies. It 33 R billion2015/162016/172017/18 2018/19 2019/202020/212021/22 Main budget-168.4-167.6-208.6 Social security funds10.18.29.4 Provinces0.6-2.50.7 Public entities7.65.08.4 RDP Fund1-1.0-0.2-0.3 -224.5 10.3 -0.9 4.7 0.2 -255.2-264.4-267.6 8.05.45.1 1.01.62.1 3.65.08.0 -0.1-0.1-0.1 Consolidated budget balance-151.0-157.0-190.3 -210.2 -242.7-252.6-252.4 2018/19 20182019 R billion/percentage of GDPBudgetBudget 2019/20 20182019 BudgetBudget 2020/21 20182019 BudgetBudget Revenue Gross tax revenue1 345.01 302.2 Non-tax revenue18.319.8 SACU1-48.3-48.3 National Revenue Fund receipts6.211.7 1 454.81 422.2 19.327.0 -46.3-50.3 –4.5 1 581.91 544.9 20.521.1 -60.1-65.8 0.45.0 Main budget revenue1 321.11 285.4 26.3%25.4% 1 427.81 403.5 26.5%25.9% 1 542.71 505.1 26.6%25.9% Expenditure Current payments409.8417.0 of which: Compensation of employees163.6163.4 Goods and services65.971.3 Debt-service costs180.1182.2 Transfers and subsidies1 069.51 063.3 Payments for capital assets14.315.6 Payments for financial assets4.613.9 Provisional allocation not6.0– assigned to votes Contingency reserve8.0– 443.5452.9 175.8175.6 69.974.9 197.7202.2 1 159.71 153.4 14.315.4 4.74.8 2.319.2 8.013.0 477.1492.2 188.7188.5 74.379.5 213.9224.1 1 248.01 238.8 15.316.2 4.94.9 2.111.4 10.06.0 Total expenditure1 512.21 509.9 30.1%29.8% 1 632.61 658.7 30.3%30.6% 1 757.51 769.6 30.3%30.4%
2019 BUDGET REVIEW excludes the borrowing activity of development finance institutions. The public-sector borrowing requirement will be R330.1 billion or 6.5 per cent of GDP in 2018/19. Compared with 2018 Budget estimates, the borrowing requirement has been revised upwards in the current year and over the next two years, mainly due to a larger main budget deficit. Local government borrowing outcomes have been restated and the projections have also been revised up in their budgets. This reflects the continued effort by municipalities to address backlogs, as well as new infrastructure identified in integrated development plans. Public-sector borrowing requirement revised up over next two years due to larger main budget deficit Table 3.10 Public-sector borrowing requirement1 1. A negative number reflects a surplus and a positive number a deficit 2. Includes Eskom, South African Airways, Transnet, Airports Company South Africa and Denel Source: National Treasury As discussed in Chapter 8, the medium-term borrowing estimates for state-owned companies have been revised down as capital programmes are completed and these institutions find it more difficult to source funding. Eskom continues to be the significant driver of state-owned company borrowing. A large proportion of state-owned companies’ borrowing over the medium term will refinance debt. Conclusion The fiscal framework underlines government’s commitment to narrowing the budget deficit and stabilising debt. In the context of weak economic growth and the need to address the large risk posed by Eskom, the 2019 Budget proposes large-scale expenditure reprioritisation and tax measures that narrow the deficit from 4.5 per cent of GDP in 2019/20 to 4 per cent by 2021/22. Gross national debt is projected to stabilise at 60.2 per cent of GDP in 2023/24. Fiscal consolidation sees deficit narrowing to 4 per cent by 2021/22 34 2015/162016/172017/18 Outcome R billion/percentage of GDP 2018/19 BudgetBudget 20182019 2019/202020/212021/22 Medium-term estimates Main budget168.4167.6208.6 Social security funds-10.1-8.2-9.4 Provinces-0.62.5-0.7 Public entities-7.6-5.0-8.4 RDP Fund1.00.20.3 191.1224.5 -9.6-10.3 -0.30.9 -1.0-4.7 0.3-0.2 255.2264.4267.6 -8.0-5.4-5.1 -1.0-1.6-2.1 -3.6-5.0-8.0 0.10.10.1 Consolidated government151.0157.0190.3 3.7%3.6%4.0% Local authorities8.08.413.6 0.2%0.2%0.3% State-owned companies2120.588.599.4 2.9%2.0%2.1% 180.5210.2 3.6%4.2% 13.016.2 0.3%0.3% 104.0103.7 2.1%2.1% 242.7252.6252.4 4.5%4.3%4.0% 16.116.016.0 0.3%0.3%0.3% 74.773.875.8 1.4%1.3%1.2% Borrowing requirement279.5254.0303.3 6.8%5.8%6.4% 297.6330.1 5.9%6.5% 333.5342.3344.2 6.2%5.9%5.5%
4 Revenue trends and tax proposals Overview TR27.4 billion compared with the estimate published in the 2018 he economy’s performance continues to weigh heavily on tax Economic weakness has fed through to lower personal income tax and corporate income tax receipts revenues. The 2018 MTBPS projected a 2018/19 revenue shortfall of Budget. This shortfall is now R42.8 billion compared with the 2018 Budget estimate. Economic weakness has fed through to lower personal income tax and corporate income tax receipts. Administrative weaknesses in collection were a contributing factor. Total tax collections for 2018/19 are estimated to be R1.3 trillion. The large tax revenue shortfall and new expenditure pressures require further tax policy and spending interventions. In the context of economic weakness, the 2019 Budget tax proposals are designed to minimise the negative impact on growth. Over the medium term, tax policy adjustments will be made as needed to strengthen fiscal consolidation. The 2019 proposals are estimated to raise tax revenue by R15 billion in 2019/20. Further tax changes are proposed to raise an additional R10 billion in 2020/21, the details of which will be set out in the 2020 Budget. The main tax proposals for 2019/20 are: 35 In brief •Revenue collection continues to underperform as a result of weak economic growth and tax administration concerns. The revised tax revenue estimate for 2018/19 is R15.4 billion lower than the 2018 Medium Term Budget Policy Statement (MTBPS) estimate. •Tax policy proposals are designed to raise R15 billion in additional tax revenue in 2019/20. The proposals reflect government’s commitment to narrow the budget deficit and stabilise debt. •The Commission of Inquiry into Tax Administration and Governance by the South African Revenue Service (the SARS Commission), has recommended steps to improve governance at the agency. SARS is strengthening its operations by re-establishing the Large Business Centre and setting up a dedicated unit to tackle syndicated tax evasion. •The Minister of Finance will introduce legislative amendments to implement the recommendations of the SARS Commission and to strengthen tax administration and the capacity of SARS.
2019 BUDGET REVIEW • Increasing the tax-free threshold for personal income taxes from R78 150 to R79 000. No changes will be made to personal income tax brackets. Increasing the fuel levy by 29c/litre, consisting of a 15c/litre increase in the general fuel levy, a 5c/litre increase in the Road Accident Fund (RAF) levy and the introduction of a carbon tax on fuel of 9c/litre. Increasing excise duties on alcohol and tobacco products by between 7.4 per cent and 9 per cent. Increasing the eligible income bands for the employment tax incentive. • • • Tax policy considerations Consistent revenue shortfalls, alongside new expenditure commitments such as fee-free higher education, led to significant tax increases over the past four years. Since 2015/16, measures have been introduced to raise additional amounts of R16.8 billion, R18.1 billion, R28 billion and R36 billion per year. Rates for personal income tax, dividend withholding tax, capital gains tax and value-added tax (VAT) have all been increased. Notwithstanding these large tax increases, tax revenue as a proportion of GDP has started to decline. To limit the negative impact on economic growth, the 2019 Budget proposals will not increase tax rates in any category. Instead, they will increase collections by not adjusting for inflation. Figure 4.1 Gross tax revenues as a percentage of GDP* Despite substantial increases over past four years, tax revenue as a proportion of GDP has started to decline 2019 Budget proposals will not increase tax rates *2018/19 is an estimate Source: National Treasury Problems with tax administration, as highlighted in the findings of the SARS Commission, partly explain poor revenue-collection performance. Improving collections hinges on restoring the efficiency of SARS. In the short term, such improvements may be more effective in raising revenue than further substantial tax increases. Improving SARS efficiency may be more effective than further substantial tax increases 36
CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Ensuring transparency in tax administration To raise the revenue needed to fund its social and economic policy commitments, South Africa requires its tax administration to be efficient, effective and impartial. Reports by the SARS Commission highlight maladministration and abuse of tender procedures that occurred at the entity between 2014 and 2017. The Commission’s main finding is that these failings stem from a “massive failure of governance and integrity” after the appointment of the entity’s previous commissioner in 2014. Government has started implementing the most urgent recommendations, as discussed below. A new commissioner is expected to be appointed in the near future. The Minister of Finance intends to introduce legislative amendments this year giving effect to a number of the Commission’s governance recommendations. These matters will be included in this year’s draft tax legislation. Recommendations relating to the creation of an inspector-general for tax administration will be considered in a discussion document. Commission report highlights “massive failure of governance and integrity” at SARS Revenue collection and outlook Revenue collection has deteriorated since the 2018 MTBPS. Compared with the 2018 Budget estimate, the projected revenue shortfall for 2018/19 is R42.8 billion – considerably higher than the revised estimate of R27.4 billion published in the 2018 MTBPS. Persistently weak economic activity has led to a moderation in corporate income tax receipts – predominantly from reduced production in mining and quarrying, and from the financial sector. Job losses, lower wage settlements and reduced bonuses have put pressure on withholding taxes on earnings. Higher diesel refund payments to electricity generation plants and primary producers, such as farmers and mining companies, have slowed fuel levy collections. Tax collections relating to trade performed better in the latter half of the year, with higher estimated revenue from customs duties and import VAT. Domestic VAT also performed as expected after the increase in the VAT rate. However, net VAT collections have been considerably lower since October, when SARS accelerated payments of VAT refunds. Weak economic activity has led to a moderation in corporate income tax receipts 37 Implementing the SARS Commission recommendations Government is considering a comprehensive response to the SARS Commission’s report. In the interim, it is implementing the Commission’s most pressing recommendations, including the following: •The Presidency has started the recruitment process for a new SARS Commissioner, who will have to consider the Commission’s recommendations concerning management of the revenue service. •SARS is re-establishing a division that will focus on large businesses. This process, which includes the recruitment of specialists, is expected to be completed by April 2019. •In August 2018, SARS launched an Illicit Economy Unit to investigate syndicated tax evasion schemes in high-risk sectors, including the tobacco trade. This unit has also begun to investigate potential tax-related offences in relation to some of the activities highlighted by various commissions of inquiry. •SARS has taken steps to strengthen the management of its information technology systems, rebuild its technical prowess, and harness opportunities arising from information-sharing agreements between national tax authorities. •Through internal processes, SARS is implementing recommendations concerning inappropriate actions, fruitless and wasteful expenditure, unfair labour practices and maladministration. •SARS is reviewing contracts that breached public procurement regulations and will act to recover funds spent.
2019 BUDGET REVIEW Table 4.1 Budget estimates and revenue outcomes1 1. A more disaggregated view is presented in Tables 2 and 3 of the statistical annexure 2. Budget Review 2018 estimates 3. Percentage change between outcome in 2017/18 and revised estimate in 2018/19 4. Includes interest on overdue income tax, small business tax amnesty levy and interest withholding tax 5. Includes turnover tax for micro businesses, air departure tax, plastic bags levy, electricity levy, CO2 tax on motor vehicle emissions, incandescent light bulb levy, Universal Service Fund, tyre levy and International Oil Pollution Compensation Fund 6. Includes mineral and petroleum royalties, mining leases, departmental revenue and sales of capital assets 7. Southern African Customs Union. Amounts made up of payments and other adjustments Source: National Treasury 38 2017/18 R million Budget2 Outcome Deviation 2018/19 Budget2 Revised Deviation Percentage change3 Taxes on income and profits 712 853 711 703 -1 150 Personal income tax 460 968 460 953 - 15 Corporate income tax 218 109 217 412 - 697 Dividend withholding tax 29 037 27 894 -1 143 Other taxes on income and 4 739 5 444 705 profits4 Skills development levy 15 771 16 012 242 Taxes on property 16 047 16 585 537 Domestic taxes on goods 423 616 422 248 -1 367 Value-added tax 299 058 297 998 -1 061 Specific excise duties 37 275 37 356 81 Health promotion levy – – – Ad valorem excise duties 3 796 3 781 - 16 Fuel levy 71 340 70 949 - 391 Other domestic taxes 12 146 12 165 19 on goods and services5 Taxes on international 50 193 49 939 - 254 trade and transactions Customs duties 49 011 49 152 141 Health promotion levy on imports – – – Diamond export levy 95 87 - 8 Miscellaneous customs 1 087 701 - 387 and excise receipts 772 991 751 846 -21 146 505 845 497 451 -8 393 231 219 218 436 -12 783 30 829 30 341 - 488 5 099 5 618 519 16 929 17 312 383 17 311 16 035 -1 276 484 826 460 287 -24 539 348 110 325 917 -22 192 40 652 40 276 - 376 1 685 2 396 711 4 188 4 163 - 25 77 509 75 374 -2 135 12 683 12 161 - 522 54 050 56 722 2 672 52 601 55 638 3 037 245 78 - 167 101 87 - 14 1 103 918 - 185 5.6% 7.9% 0.5% 8.8% 3.2% 8.1% -3.3% 9.0% 9.4% 7.8% – 10.1% 6.2% -0.0% 13.6% 13.2% – – 31.1% Gross tax revenue 1 217 307 1 216 464 - 843 Non-tax revenue6 33 229 35 886 2 657 of which: Mineral and petroleum 7 522 7 617 95 royalties Less: SACU7 payments -55 951 -55 951 – 1 344 965 1 302 201 -42 763 24 470 31 473 7 003 7 986 8 340 354 -48 289 -48 289 – 7.0% -12.3% 9.5% -13.7% Main budget revenue 1 194 585 1 196 399 1 814 Provinces, social security 159 044 157 110 -1 934 funds and selected public entities 1 321 146 1 285 386 -35 760 169 570 169 831 261 7.4% 8.1% Consolidated budget revenue 1 353 629 1 353 509 - 120 1 490 716 1 455 217 -35 499 7.5%
CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Table 4.2 Budget revenue1 1. A more disaggregated view is presented in Tables 2 and 3 of the statistical annexure 2. Includes secondary tax on companies/dividend and interest withholding tax, interest on overdue income tax and small business tax amnesty levy 3. As announced in the 2018 Budget, medical tax credits will be adjusted below inflation over the next two years to fund additional expenditure for national health insurance. Additional revenues required over the next two years amount to R0.65 billion and R0.58 billion respectively. These are included in the outer-year estimates for personal income taxes 4. Includes mineral and petroleum royalties, mining leases, departmental revenue and sales of capital assets 5. Southern African Customs Union. Amounts made up of payments and other adjustments Source: National Treasury and SARS Clearing the VAT refund backlog The 2018 MTBPS announced that SARS would pay out overdue VAT refunds, which rose from R30.4 billion at the beginning of the fiscal year to R41.8 billion in September 2018. In subsequent months, SARS has been working to reduce the VAT credit book, which shows the total amount of refunds owed, by paying out an average of R22.2 billion each month. By end-January 2019, the credit book had decreased from R41.8 billion to R31 billion. In October 2018 SARS estimated that the credit book should be about R19 billion if verified VAT refunds are paid out without delay. After further analysis, it has revised that estimate to about R22 billion as a result of rising VAT refund claims, a higher-than-anticipated level of taxpayers who are not submitting the required documents, and suspected fraud. The extent of VAT refunds submitted to SARS will also be influenced by general economic conditions, such as imports. 39 2015/162016/172017/18 R millionOutcome 2018/19 Revised 2019/202020/212021/22 Medium-term estimates Taxes on income and606 821664 526711 703 profits2 of which: Personal income tax 3 388 102424 545460 953 Corporate income tax191 152204 432217 412 Skills development levy15 22015 31516 012 Taxes on property15 04415 66116 585 Domestic taxes on goods385 956402 464422 248 and services of which: VAT281 111289 167297 998 Taxes on international46 94246 10249 939 trade and transactions Revenue measures - 2020 Budget––– 751 846 497 451 218 436 17 312 16 035 460 287 325 917 56 722 – 820 342885 502958 242 552 877602 693658 917 229 608242 440256 335 18 75920 43722 307 17 15919 05220 863 504 649543 698586 889 360 471389 889422 746 61 30066 17971 356 –10 00010 751 Gross tax revenue1 069 983 1 144 081 1 216 464 1 302 201 1 422 208 1 544 868 1 670 408 Non-tax revenue4 57 27633 26935 886 of which: Mineral and petroleum3 7085 8027 617 royalties Less: SACU5 payments-51 022-39 448-55 951 31 473 8 340 -48 289 31 53726 02827 905 8 7669 2569 787 -50 280-65 778-65 389 Main budget revenue1 076 236 1 137 901 1 196 399 Provinces, social security139 074148 041157 110 funds and selected public entities 1 285 386 169 831 1 403 464 1 505 118 1 632 925 180 347191 265203 673 Consolidated budget revenue1 215 310 1 285 943 1 353 509 1 455 217 1 583 811 1 696 382 1 836 598 As percentage of GDP Tax revenue25.9%25.9%25.8% Main budget revenue26.1%25.8%25.3% 25.7% 25.4% 26.3%26.6%26.7% 25.9%25.9%26.1% GDP (R billion)4 127.04 412.74 721.0 Tax buoyancy1.271.000.91 5 059.1 0.98 5 413.85 812.46 249.1 1.311.171.08
2019 BUDGET REVIEW Figure 4.2 VAT refunds paid by SARS Source: South African Revenue Service SARS expects to bring the credit book down to the target during 2019/20. Clearing the VAT refund backlog will reduce net revenue collections in 2018/19, and the estimated amount of refunds to pay out has increased by R8 billion compared with the 2018 MTBPS estimate. Similarly, personal income tax refunds have been revised upwards. Although these interventions have reduced tax revenues for 2018/19, the normalisation of refund payments will minimise the risk of fiscal shocks in future, and provides business with more certainty about cash flow. It will also provide greater certainty about revenue projections. Normalising refund payments reduces net in-year revenue, but improves certainty of revenue projections Tax proposals The tax measures for the 2019 Budget are designed to raise an estimated R15 billion in additional revenue in 2019/20. Table 4.3 Impact of tax proposals on 2019/20 revenue1 R million Gross tax revenue (before tax proposals) 1 407 208 Budget 2019/20 proposals 15 000 Direct taxes Taxes on individuals and companies Personal income tax Revenue from not fully adjusting for inflation Revenue if no adjustment is made Partial bracket creep for personal income tax No adjustment to medical tax credit Indirect taxes General fuel levy adjustment Introduction of carbon tax on fuel Additional VAT zero-rated items Increase in excise duties on tobacco products Increase in excise duties on alcoholic beverages 13 800 13 800 12 800 14 000 -1 200 1 000 1 200 -500 1 800 -1 100 400 600 Gross tax revenue (after tax proposals) 1 422 208 1. Revenue changes are in relation to thresholds that have been fully adjusted for inflation Source: National Treasury 40
CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Nearly all of the increase in revenue is effected through direct taxes, with no rate increases. Government proposes a small increase in personal income tax rebates, with no inflationary adjustments to the tax brackets, and no inflationary increase in medical tax credits. Indirect taxes make a smaller contribution through the increase in the general fuel levy, after the large increase in indirect taxes as a result of the one percentage point increase in VAT announced in the 2018 Budget. Personal income tax The primary, secondary and tertiary rebates will be increased by 1.1 per cent, providing a small amount of relief for inflation. The change in the rebate will increase the tax-free threshold from R78 150 to R79 000. Personal income tax brackets, however, will remain unchanged and will not be adjusted for inflation. This is expected to raise R12.8 billion in revenue, as individuals with an inflationary increase in their taxable income face a larger tax burden. Table 4.4 shows the proposed personal income tax schedule for 2019/20. Personal income tax rebates increased by 1.1 per cent, providing small amount of inflation relief Table 4.4 Personal income tax rates and bracket adjustments Source: National Treasury Table 4.5 shows how much tax is expected to be paid by individuals at different levels of taxable income for 2019/20. 41 2018/19 Taxable income (R)Rates of tax 2019/20 Taxable income (R)Rates of tax R0 - R195 85018% of each R1 R0 - R195 85018% of each R1 R195 851 - R305 850R35 253 + 26% of the amount above R195 850 R195 851 - R305 850R35 253 + 26% of the amount above R195 850 R305 851 - R423 300R63 853 + 31% of the amount above R305 850 R305 851 - R423 300R63 853 + 31% of the amount above R305 850 R423 301 - R555 600R100 263 + 36% of the amount above R423 300 R423 301 - R555 600R100 263 + 36% of the amount above R423 300 R555 601 - R708 310R147 891 + 39% of the amount above R555 600 R555 601 - R708 310R147 891 + 39% of the amount above R555 600 R708 311 - R1 500 000R207 448 + 41% of the amount above R708 310 R708 311 - R1 500 000R207 448 + 41% of the amount above R708 310 R1 500 001 and aboveR532 041 + 45% of the amount above R1 500 000 R1 500 001 and aboveR532 041 + 45% of the amount above R1 500 000 Rebates PrimaryR14 067 SecondaryR7 713 TertiaryR2 574 Tax threshold Below age 65R78 150 Age 65 and overR121 000 Age 75 and overR135 300 Rebates PrimaryR14 220 SecondaryR7 794 TertiaryR2 601 Tax threshold Below age 65R79 000 Age 65 and overR122 300 Age 75 and overR136 750
2019 BUDGET REVIEW Table 4.5 Estimates of individual taxpayers and taxable income, 2019/20 proposals 1. Registered individuals with taxable income below the income-tax threshold Source: National Treasury Medical tax credits The 2018 Budget Review announced that medical tax credits would be increased below the rate of inflation over a three-year period to help fund the rollout of national health insurance. To generate additional revenue of R1 billion in 2019/20, there will be no change in the monthly medical tax credit for medical scheme contributions. Employment tax incentive In 2018, government extended the employment tax incentive by 10 years. In addition, the eligible income bands will be adjusted upwards to partially cater for inflation. From 1 March 2019, employers will be able to claim the maximum value of R1 000 per month for employees earning up to R4 500 monthly, up from R4 000 previously. The incentive value will taper to zero at the maximum monthly income of R6 500. Employment tax incentive, which benefits young workers, extended to February 2029 42 Employment tax incentive boosts job creation The employment tax incentive was introduced on 1 January 2014 to share the cost of hiring young, inexperienced workers between employers and government. The incentive was reviewed and extended in 2016 and 2018. The most recent review found that the incentive’s positive benefits are more pronounced in small firms. In 2015/16 about 31 000 employers claimed the incentive for 1.1 million individuals. The tax expenditure associated with the incentive amounted to R4.3 billion in 2017/18. The National Economic Development and Labour Council conducted a review of the incentive, drawing on independent research on the effects of the programme in 2014/15 and 2015/16. The review found that: • The number of employees and employment growth rates increased significantly in firms claiming the incentive. • Effects were most pronounced in firms with less than 50 employees, though positive effects held for all firm sizes. • There is no significant evidence that the incentive displaces older workers. •The incentive improves employment growth in firms that were growing before claiming, and firms with shrinking employment, demonstrating that it also plays a role in halting job losses. •Employers tend to retain workers after the two-year eligible period passes because the employees have gained experience and on-the-job training. Young workers indicated that the incentive created opportunities they would not otherwise have. An additional incentive for special economic zones came into force during 2018. This enables employers to claim for all eligible workers hired in these zones, taking into account wage criteria but not age. Taxable bracket R thousand Registered individuals Number % Taxable income R billion % Income tax payable before relief R billion % Income tax relief after proposals R billion % Income tax from medical tax credits R billion % Income tax payable after R billion % R0 - R701 6 369 806 – 183.4 – – – – – – – – – R70 - R150 R150 - R250 R250 - R350 R350 - R500 R500 - R750 R750 - R1 000 R1 000 - R1 500 R1 500 + 2 385 046 31.2 1 949 150 25.5 1 169 590 15.3 984 790 12.9 610 331 8.0 261 631 3.4 161 868 2.1 120 751 1.6 254.0 10.0 387.4 15.2 349.9 13.7 408.5 16.0 367.1 14.4 224.7 8.8 193.9 7.6 362.7 14.2 10.3 1.9 36.4 6.6 49.6 9.0 75.9 13.7 89.1 16.1 66.1 12.0 65.8 11.9 159.8 28.9 -0.34 28.5 -0.32 26.9 -0.19 15.8 -0.16 13.2 -0.10 8.2 -0.04 3.5 -0.03 2.2 -0.02 1.6 0.05 5.0 0.20 23.1 0.21 22.1 0.23 21.9 0.15 14.3 0.07 6.1 0.05 4.4 0.04 3.2 10.1 1.8 36.2 6.5 49.7 9.0 76.0 13.7 89.2 16.1 66.2 12.0 65.8 11.9 159.8 28.9 Total 7 643 157 100.0 2 548.1 100.0 553.0 100.0 -1.18 100.0 1.00 100.0 552.9 100.0 Grand total 14 012 963 2 731.5 553.0 -1.18 1.00 552.9
CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Excise duties on alcohol and tobacco Excise duties on alcoholic beverages are determined based on a percentage of the weighted average of their retail price. The targeted excise tax burden for wine, beer and spirits is 11 per cent, 23 per cent and 36 per cent respectively. Since 2002, tax rates on these beverages have increased above inflation each year, alongside above-inflation retail price increases, to maintain taxes at the targeted level. Government proposes to increase excise duties on alcoholic beverages by between 7.4 per cent and 9 per cent in 2019/20. The adjustments will lead to an excise burden slightly above the targeted levels. The targeted excise tax for tobacco products is 40 per cent of the retail selling price of the most popular brand within each product category. Government proposes to increase the excise duties on tobacco products by between 7.4 per cent and 9 per cent. Cigarette makers appear to have absorbed most of the increases last year rather than increasing prices. As a result, the excise burden for cigarettes is likely to remain slightly above the target level. Excise duties on alcoholic beverages and tobacco to increase above inflation Table 4.6 Changes in specific excise duties, 2019/20 Source: National Treasury Additional zero-rating for VAT A one percentage point increase in the VAT rate took effect on 1 April 2018. To mitigate the effects of this increase on low-income households, the 2018 MTBPS announced that the list of zero-rated items, where VAT is charged at 0 per cent, would be expanded. From 1 April 2019, the list will include white bread flour, cake flour and sanitary pads. White bread flour, cake flour and sanitary pads to be zero-rated Increase in health promotion levy The health promotion levy was implemented on 1 April 2018. It applies to beverages with more than 4 grams of sugar content per 100ml. A tax of 2.1 cents per gram is applied for every gram of sugar beyond the first 43 Current excise Productduty rate Proposed excise duty rate Percentage change NominalReal Malt beerR95.03 / litre of absolute alcohol (161,56c / average 340ml can) R102.07/ litre of absolute alcohol (173,51c / average 340ml can) 7.42.2 Traditional African beer7,82c / litre 7,82c / litre –-5.2 Traditional African beer34,70c / kg powder 34,70c / kg –-5.2 Unfortified wineR3.91 / litre R4.20 / litre 7.42.2 Fortified wineR6.54 / litre R7.03 / litre 7.42.2 Sparkling wineR12.43 / litre R13.55 / litre 9.03.8 Ciders and alcoholic fruit R95.03 / litre of absolute beveragesalcohol (161,56c / average 340ml can) R102.07/ litre of absolute alcohol (173,51c / average 340ml can) 7.42.2 SpiritsR190.08 / litre of absolute alcohol (R61.30 / 750ml bottle) R204.15 / litre of absolute alcohol (R65.84 / 750ml bottle) 7.42.2 CigarettesR15.52 / 20 cigarettes R16.66 / 20 cigarettes 7.42.2 Cigarette tobaccoR17.44 / 50g R18.73 / 50g 7.42.2 Pipe tobaccoR4.94 / 25g R5.39 / 25g 9.03.8 CigarsR82.31 / 23g R89.72 / 23g 9.03.8
2019 BUDGET REVIEW 4 grams, which are levy-free. To avoid an erosion in the value of the tax due to inflation, the levy rate will increase to 2.21 cents per gram in excess of 4 grams of sugar per 100ml from 1 April 2019. Fuel taxes South Africa has three main fuel taxes that apply to petrol, diesel and biodiesel: the general fuel levy, the customs and excise levy and the RAF levy. These levies fund general government expenditure, support environmental goals and finance the RAF. From 5 June 2019, a carbon tax of 9c/litre on petrol and 10c/litre on diesel will become effective. Diesel refunds cannot be claimed against this tax. The general fuel levy will be increased by 15c/litre for petrol and diesel from 3 April 2019. The increase is slightly below inflation. Government also proposes to increase the RAF levy by 5c/litre from 3 April 2019. Below-inflation increase in general fuel and RAF levies, and carbon tax introduced Table 4.7 Total combined fuel taxes on petrol and diesel 1. The carbon tax on fuel is effective from 5 June 2019 2. Average Gauteng pump price for the 2017/18 and 2018/19 years. The 2019/20 figure is the Gauteng pump price in February 2019. Diesel (0.05% sulphur) wholesale price (retail price not regulated) Source: National Treasury RAF levy diesel refunds The farming, forestry and mining industries are refunded levies paid when they buy diesel. This refund is intended to offset the RAF levy these users pay. However, these diesel users still receive benefits from the RAF if they experience accidents involving motor vehicles, even if the accident is off-road. It is proposed that the RAF levy diesel refund benefit for these primary production industries be limited to ensure that diesel users in these sectors equitably contribute towards their RAF indemnity. Environmental taxes Energy-efficiency savings tax initiative The energy-efficiency savings tax incentive was introduced in November 2013 to offset the tax burden on industry from the introduction of the carbon tax. The incentive expires on 31 December 2019. It provides companies with a tax deduction for energy-efficient investments, contributing to environmental goals while reducing energy costs. To encourage additional investment in energy efficiency, government proposes to extend the incentive to 31 December 2022. During 2019, government will review the design and administration of the incentive to improve its ease of use, effectiveness and economic impact. Energy-efficiency incentive extended to December 2022 44 2017/18 93 octaneDiesel Rands/litrepetrol 2018/19 93 octaneDiesel petrol 2019/20 93 octaneDiesel petrol General fuel levy3.153.00 Road Accident Fund levy1.631.63 Customs and excise levy0.040.04 Carbon tax1–– 3.373.22 1.931.93 0.040.04 –– 3.523.37 1.981.98 0.040.04 0.090.10 Total4.824.67 Pump price213.5511.96 5.345.19 15.3014.20 5.635.49 13.8613.14 Taxes as percentage of35.6%39.0% pump price 34.9%36.5% 40.6%41.8%
CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Repeal of tax exemption for certified emissions reduction South Africa is committed to tackling climate change and subscribes to international agreements to reduce greenhouse gas emissions. In 2009, government introduced a tax exemption for income generated from the sale of certified emission-reduction credits. After the introduction of the carbon tax, emission-reduction credits could be used to reduce carbon tax liabilities. To avoid a double-benefit scenario, where the same emission reduction leads to both an income tax exemption and reduced carbon tax liabilities, the tax exemption will be repealed from 1 June 2019. To avoid double benefit, exemption for certified emission reductions to be repealed Ad valorem excise duty on motor vehicles Because of the way ad valorem excise duty is calculated, vehicles produced locally are taxed at a higher rate than imported vehicles. To remove this anomaly, government proposes to align the tax treatment. Gambling tax The 2012 Budget proposed a gambling tax in the form of a 1 per cent levy to fund rehabilitation and awareness-raising programmes to mitigate the negative effects of excessive gambling. Government intends to publish draft legislation for public comment during 2019. Tax policy reviews and research Combating base erosion and profit shifting In recent years, South Africa has taken steps to protect its tax base by closing loopholes exploited by multinationals to artificially shift profits and avoid paying tax. South Africa has played an active role in these efforts through the Organisation for Economic Co-operation and Development/ Group of Twenty Inclusive Framework, and intends to expand the work already under way to combat base erosion and profit shifting. Domestic legislation is already aligned with some measures recommended by the framework, such as limiting double deductions. Although South Africa has measures in place to curb excessive debt financing, which erodes the tax base, government is reviewing these rules against best practice. It is important to strike a balance between attracting capital and investment, and adequately protecting the corporate tax base. South Africa is committed to following best practice in combating base erosion and profit shifting 45 Update on implementation of carbon tax The carbon tax will be implemented on 1 June 2019. It gives effect to the polluter-pays principle, prices greenhouse gas emissions and aims to ensure that businesses and households take these costs into account in their production, consumption and investment decisions. The tax will assist in reducing emissions and ensuring South Africa meets its commitments under the 2015 Paris Climate Agreement. It will be reviewed after three years. SARS and the Department of Environmental Affairs will jointly administer the tax. To ensure a smooth administration, SARS will publish draft rules for consultation by March 2019. These rules will complement three sets of regulations: •A draft Regulation on the Carbon Offsets was published in June 2016. A revised regulation, taking public comments into account, was published for further consultation in November 2018. A consultation workshop will be held in March 2019 to finalise the regulation. •Trade exposure regulations, which provide for higher allowances based on trade intensity, will be published before the end of February 2019, following extensive consultations on methodology. •Benchmarking regulations will be published in March 2019 for further consultation. A review of the proposed benchmarks will be undertaken in consultation with stakeholders under the Partnership for Market Readiness.
2019 BUDGET REVIEW Review of the urban development zone tax incentive This incentive was introduced in 2003 to encourage investment in urban development zones in 16 municipalities. It is due to expire on 31 March 2020. Government will review the incentive in 2019 to determine whether it should be extended. Review of tax treatment of oil and gas activities Taxation of the oil and gas industry is currently governed by the tenth schedule to the Income Tax Act (1962), which makes provision for the Minister of Finance to approve a fiscal stability agreement to any qualifying company. A fiscal stability agreement guarantees that both the headline rates of tax and the rules behind the calculation of tax liabilities will continue to apply for the duration of a company’s oil and gas right. Government has not approved any fiscal stability agreements in the past five years. South Africa will review its oil and gas tax regimes in 2019. South Africa to review tax treatment of oil and gas companies Taxation of electronic cigarettes and tobacco heating products The use of electronic cigarettes and tobacco heating products has increased in recent years. Government intends to start taxing these products. The National Treasury and the Department of Health will consult on the appropriate mechanisms, structure and timing of the tax. Taxation of e-cigarettes and similar products to be implemented Definition of fuel levy goods The fuel levy is currently imposed on petrol, diesel and biodiesel. Fossil fuels such as mineral ethanol, illuminating paraffin, aviation kerosene, liquefied petroleum gas, compressed natural gas – as well as biofuels such as bioethanol and biogas – are not subject to fuel taxation. Yet they are used as transport fuels. This creates a discrepancy: claims can be made to the RAF for damages arising from accidents involving motor vehicles operating on fossil fuel sources, but these fuels are not subject to the RAF levy. To address this anomaly, government will review the scope and definition of fuel levy goods in the Customs and Excise Act (1964). Environmental fiscal reform policy The National Treasury will publish a draft Environmental Fiscal Reform Policy Paper in 2019. It will outline options to reform existing environmental taxes to broaden their coverage and strengthen price signals. The paper will also consider the role new taxes can play in addressing air pollution and climate change, promoting efficient water use, reducing waste and encouraging improvements in waste management. Government will also investigate a tax on “single-use” plastics including straws, caps, beverage cups and lids, and containers to curb their use and encourage recycling. It will also review the biodiversity tax incentive. Treasury to publish draft Environmental Fiscal Reform Policy Paper in 2019 Conclusion The 2019 Budget introduces measures to increase revenue to improve the fiscal position, without resorting to higher tax rates. Government is taking action to strengthen SARS and improve collections over the medium term. 46
5 Consolidated spending plans Overview Tinfrastructure, health services, access to his chapter outlines government’s spending plans over the next three Risks from Eskom and adverse economic conditions have required adjustments to spending plans years. Government remains committed to prioritising education and social social protection. Since the 2018 MTBPS, risks from Eskom and adverse economic conditions have required substantial spending adjustments. These are accompanied by other adjustments to contain the budget deficit and stabilise debt. To limit growth in public debt and respond to poor revenue performance, baselines have been reduced by R50.3 billion over the next three years relative to the 2018 MTBPS. Proposed spending increases total R75.3 billion, of which R69 billion is set aside for reconfiguring Eskom. As a result, non-interest expenditure has been increased by R21.6 billion in 2019/20, R1.9 billion in 2020/21 and R1.4 billion in 2021/22. Government expenditure is set to increase on average by 7.8 per cent over the MTEF period, from R1.67 trillion in 2018/19 to R2.09 trillion in 2021/22. Expenditure continues to grow above inflation, with real expenditure growth averaging 2.4 per cent. Funding has been reprioritised to improve Government spending continues to rise in real terms, with funds reprioritised to improve service delivery 47 In brief •Total consolidated government spending over the 2019 medium-term expenditure framework (MTEF) period is expected to be R5.87 trillion, with budgets amounting to R1.83 trillion in 2019/20, R1.95 trillion in 2020/21 and R2.09 trillion in 2021/22. The bulk of spending is allocated to learning and culture, social development, health and community development. •Since the 2018 Medium Term Budget Policy Statement (MTBPS), proposed new allocations amount to R75.3 billion over the medium term, mainly reflecting the provisional allocations for reconfiguring Eskom, which amount to R69 billion. •This is partially offset by baseline reductions, mainly for national and provincial government, amounting to R50.3 billion over the three-year period. As a result, non-interest expenditure is increased by R25 billion over the medium term. •Compensation of employees remains the largest category of spending, accounting for an average 34.4 per cent of allocated expenditure over the MTEF period. The 2019 Budget introduces measures to contain growth in the wage bill that are expected to reduce compensation by R27 billion over the medium term.
2019 BUDGET REVIEW service delivery, mainly in health, roads, public transport and educational infrastructure. In addition, R5 billion is set aside for the infrastructure fund. Provisional allocations of R4.3 billion have been made, mainly for road maintenance and broadband. Compensation of employees remains the largest category of spending, accounting for an average 34.4 per cent of expenditure over the MTEF period. Government is implementing measures to contain the public-sector wage bill, which will produce some savings and assist in rebalancing the composition of expenditure. Measures to contain public-sector wage bill will help rebalance composition of spending Revisions to main budget spending plans The 2018 MTBPS proposed reprioritisation of R33.4 billion over the next three years, while leaving the expenditure ceiling unchanged. Of this total, R16.9 billion was allocated to infrastructure programmes (including in schools), clothing and textile incentives, and public employment programmes. The remaining R16.5 billion was allocated to various programmes that assist in building capacity and delivering services. Adjustments to main budget non-interest expenditure since 2018 Budget Table 5.1 1. Details of baseline adjustments by department provided in the Estimates of National Expenditure 2. Change in non-interest expenditure differs from the change in expenditure ceiling due to the addition of NRF payments, SDL adjustments and the provision for SOC funding in 2019/20 Source: National Treasury Since the 2018 MTBPS, however, serious risks have materialised that require immediate attention to protect the public finances and limit the increase in public debt. As a result, the 2019 Budget proposes further baseline reductions. Even with these reductions, the expenditure ceiling will be raised by R16 billion over the medium term, mainly to finance the reconfiguration of Eskom. To ensure service delivery is not negatively affected, the baseline reductions target specific national departmental programmes. Salaries for members of Parliament and provincial legislatures will be frozen. Public entities are also encouraged to freeze salary increases for senior employees. The contingency reserve is reduced in the outer two years. 48 R million2019/202020/212021/22 MTEF total 2018 Budget non-interest expenditure1 434 9071 543 5931 651 638 2018 MTBPS1 Reprioritisation from slow spending programmes-8 176-10 347-6 798 Changes to contingency reserve and provisional-1 779-603-5 671 allocations not assigned to votes Reallocations to: National and provincial programmes4 5474 7307 189 Infrastructure: grants, build and maintenance5 4086 2195 280 Skills development levy adjustment459618706 4 630 138 -25 321 -8 052 16 466 16 908 1 783 2018 MTBPS non-interest expenditure1 435 3661 544 2111 652 345 2019 Budget1 Baseline adjustments-9 002-19 711-21 568 Changes to contingency reserve6 000-2 000-6 000 Additions to spending24 00023 00028 300 National Revenue Fund payments adjustment135–– 4 631 922 -50 281 -2 000 75 300 135 2019 Budget non-interest expenditure1 456 5001 545 5001 653 077 4 655 076 Change from 2018 Budget 221 5921 9071 438 24 938
CHAPTER 5: CONSOLIDATED SPENDING PLANS Baseline reductions In the 2019 Budget, most baselines have been reduced, with some funds reprioritised to infrastructure grants for municipalities and provinces. These changes respond to weak economic performance and revenue outcomes, as well as the reconfiguration of Eskom. Table 5.2 Largest baseline reductions over the MTEF period Most baselines reduced, with some funds reprioritised 1. Change to performance bonus payments, active management of overtime and progression payments and savings from reconfiguration of the state 2. Reduction in public entity goods and services, savings from reconfiguration of the state and adjustment of unallocated amounts 3. Selected information on large baseline reductions and reprioritisation over the MTEF period, details provided in the Estimates of National Expenditure Source: National Treasury As far as possible, the expenditure allocations have been lowered in line with the goal of improving the effectiveness and composition of spending. Reductions mainly affect specific departmental programmes and transfers to public entities. Over the medium term, government will take additional steps to manage growth in compensation. The combination of natural attrition and active measures allow for a reduction of compensation budgets by R5.3 billion in 2019/20, R11 billion in 2020/21 and R10.7 billion in 2021/22. Wage increases for members of Parliament and provincial legislatures are frozen in 2019/20. In addition, public entities are encouraged to freeze salaries of employees earning R1.5 million or more a year in 2019/20, while those earning between R1 million and R1.5 million a year should receive a below-inflation increase of 2.8 per cent. This follows several years of below-inflation increases for senior management in national and provincial government. Government has reduced allocations to specific programmes as shown in Table 5.2. The Special Defence Account, which manages the acquisition and upgrading of main weapon systems and technology for the Wage freeze for members of Parliament and provincial legislatures in 2019/20 Special Defence Account reduced by R5 billion in 2021/22 49 R million2019/202020/212021/22 MTEF total 2019 Budget baseline adjustments-9 002-19 711-21 568 Compensation of employees-5 284-10 998-10 718 Savings from early retirement-4 800-7 500-8 000 Other compensation measures 1-484-3 498-2 718 Specific programmes-1 500-3 300-8 000 Agricultural Land Holding Account: Land reform–-500-500 Land restitution grants–-500-500 Transfers to the Special Defence Account––-5 000 Human settlements development grant–-1 000-2 000 Passenger Rail Agency of South Africa-1 500 -800– Integrated National Electrification Programme–-500– Other adjustments2 -2 218-5 413-2 850 2018 MTBPS baseline adjustments3 Passenger Rail Agency of South Africa:-2 404-2 014-1 542 Slow progress on capital programmes National health insurance indirect grant:-686-1 148-1 122 Personal services component Social grants: Delay in implementing-500-500– extended child support grant Integrated national electrification programme-265-268-282 -50 281 -26 999 -20 300 -6 699 -12 800 -1 000 -1 000 -5 000 -3 000 -2 300 -500 -10 481 -5 960 -2 956 -1 000 -815
2019 BUDGET REVIEW Department of Defence, was reduced by R5 billion in 2021/22. Goods and services budgets in public entities are lowered by 1 per cent. Baseline adjustments proposed in the 2018 MTBPS focus mainly on slow and underspending programmes, like the capital programme in the Passenger Rail Agency of South Africa. These resources have been reassigned to other programmes that require immediate funding. Details of the largest reprioritisations are also provided in the 2019 Estimates of National Expenditure. Changes to medium-term allocations Over each of the next three years, R23 billion is set aside for reconfiguring Eskom. This is the most significant change to the medium-term allocations. The Eskom separation is discussed in Chapter 1 and Annexure W3, which is published on the National Treasury website. Over the MTEF period, the majority of reprioritised funds are moved to improve infrastructure, which enhances the ability to deliver services or increase production. These include allocations to maintain roads, eradicate pit latrines at schools, and expand the integrated public transport network. Other reprioritisations support health services in provinces and the South African Post Office. R23 billion set aside for Eskom over each of next three years Table 5.3 Largest additions to baselines over the MTEF period 1. Selected information on baseline reductions and reprioritisation of more than R1 billlion over the MTEF period, details provided in the Estimates of National Expenditure Source: National Treasury Government is improving the efficiency of infrastructure spending through the Budget Facility for Infrastructure. Some projects recommended by the facility have been approved over the 2020 MTEF period. These include the construction of the Limpopo Academic Hospital and the expansion of the 50 2019/202020/212021/22 R million MTEF total 2019 Budget additions to baseline24 00023 00028 300 Provisional allocation for Eskom restructuring23 00023 00023 000 Infrastructure fund not assigned to votes1 000–4 000 Census 2021––1 300 2018 MTBPS baseline adjustments1 South African National Roads Agency Limited:2 0001 500– Non-toll network infrastructure Public transport network grant: City of Cape Town for3541 0451 433 phase 2A of the integrated public transport network School infrastructure backlogs indirect grant:7008001 300 Eradication of pit latrines Health: Human resources capacitation grant6061 0631 127 South African Post Office: Universal services475501528 Health infrastructure indirect grant:247653498 Limpopo Academic Hospital South African Revenue Service: Goods and services399479513 Provincial equitable share: Provincial uptake of the287373394 substance abuse treatment grant, social worker employment grant and food relief functions HIV, TB, malaria and community outreach grant:––1 000 Community outreach services component Provincial equitable share:––1 000 Medical interns training programme and sector internships 75 300 69 000 5 000 1 300 3 500 2 832 2 800 2 796 1 504 1 398 1 390 1 054 1 000 1 000
CHAPTER 5: CONSOLIDATED SPENDING PLANS integrated public transport network to the southeastern regions of Cape Town. Provisional allocations In some cases, allocations are conditional on finalising policies or building capacity. This spending is provisionally allocated and will be confirmed once the conditions have been met. Provisional allocations include R600 million for Township and Rural Enterprise Fund • In 2021/22, R600 million is set aside to establish a Township and Rural Enterprise Fund. The fund’s conditions are yet to be finalised. In 2021/22, R1 billion is allocated to road maintenance. This amount will be confirmed once the reassignment of the secondary and strategic road network is finalised. An allocation of R500 million in 2021/22 will fund one monthly ATM withdrawal for each social-grant beneficiary. In 2021/22 an amount of R125 million is set aside for the Competition Commission to investigate cartels and anticompetitive behaviour. This amount will be confirmed after the Economic Development Department completes its forensic investigation of previous irregularities in the Commission. Over the three-year period, R793 million is provisionally allocated to implement turnaround plans for municipalities in financial distress. • • • • • The provisional allocation for SA Connect Phase 2 requires an implementation model to roll broadband out to public buildings. This amount may be confirmed in the 2020 Budget, after the Department of Telecommunications and Postal Services completes the detailed institutional framework required for the second phase. Table 5.4 Provisional allocations not assigned to votes 1. Includes provisional allocation for the Municipal Demarcation Board Source: National Treasury Consolidated government expenditure Government spending is expected to grow from R1.67 trillion in 2018/19 to R2.09 trillion in 2021/22. Expenditure will grow by an annual average rate of 7.8 per cent. On average over the medium term, wages and salaries account for 34.4 per cent of this spending. Transfers to households, mainly for social grants, make up about 17 per cent of spending, while transfers to provinces and municipalities account for 7.7 per cent of the total. Spending grows by an average 7.8 per cent annually between 2018/19 and 2021/22 51 R million2019/20 2020/21 2021/22 MTEF total Municipal turnaround plans–360433 Public entity: South African––500 Social Security Agency Competition Commission––125 Township and Rural––600 Enterprise Fund Broadband (SA Connect Phase 2)––1 231 Roads asset management for––1 000 the secondary and strategic road network Other1101715 793 500 125 600 1 231 1 000 42 Total103763 904 4 290
2019 BUDGET REVIEW Consolidated government expenditure by economic classification1 Table 5.5 1. The main budget and spending by provinces, public entities and social security funds financed from own revenue Source: National Treasury Controlling growth in employees’ salaries is central to government’s efforts to increase productive investment and improve service delivery. The public-service wage agreement negotiated in 2018 resulted in additional, unbudgeted compensation costs. Departments were required to absorb this salary increase within their current compensation ceilings. There is a risk that some departments, particularly labour-intensive departments, may breach these ceilings. Government will continue to manage the wage bill by helping departments to fund pension penalties for employees who retire early. This upfront spending is expected to reduce future compensation costs. These and other compensation adjustments are discussed in Chapter 3. Transfers to households are mostly for social-grant payments, which support the poorest and most vulnerable groups in South Africa. Payments for capital assets, which include infrastructure, grow by an annual average of 9.6 per cent. Payments for capital assets grow by annual average of 9.6 per cent Spending priorities by function Government spending is allocated to function groups according to their general purpose. The largest function group is learning and culture, which receives an allocation of R1.24 trillion, or 24.1 per cent of consolidated expenditure, over the MTEF period. The learning and culture, social 52 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Economic classification Current payments1 016 525 Compensation of employees585 193 Goods and services242 605 Interest and rent on land188 726 of which: Debt-service costs182 218 Transfers and subsidies549 202 Municipalities128 929 Departmental agencies and accounts25 838 Higher education institutions42 004 Foreign governments and2 544 international organisations Public corporations and private31 764 enterprises Non-profit institutions34 927 Households283 197 Payments for capital assets84 229 Buildings and other capital assets66 820 Machinery and equipment17 409 Payments for financial assets15 469 1 087 5681 168 5931 262 444 627 126667 624713 095 251 043268 266293 473 209 399232 702255 877 202 208224 066247 408 597 694640 826678 647 138 651150 216162 428 28 05929 73327 754 46 64248 72450 902 2 4092 5422 456 35 92435 77540 528 37 43740 49442 774 308 573333 341351 807 98 457103 121110 994 76 30977 82183 779 22 14825 30027 215 29 83330 40730 928 60.3% 34.4% 13.9% 12.0% 11.5% 32.8% 7.7% 1.5% 2.5% 0.1% 1.9% 2.1% 17.0% 5.4% 4.1% 1.3% 7.5% 6.8% 6.6% 10.7% 10.7% 7.3% 8.0% 2.4% 6.6% -1.2% 8.5% 7.0% 7.5% 9.6% 7.8% 16.1% Total1 665 425 Contingency reserve– 1 813 5531 942 9472 083 014 13 0006 0006 000 100.0% 7.7% Consolidated expenditure1 665 425 1 826 5531 948 9472 089 014 7.8%
CHAPTER 5: CONSOLIDATED SPENDING PLANS development, health and community development functions make up more than half of government expenditure. The function with the fastest-growing allocation is community development, which grows from R186.4 billion in 2018/19 to R243.7 billion in 2021/22, at an annual rate of 9.3 per cent. This includes funding for free basic services and human settlements. Peace and security services, which funds defence and the police, is the slowest-growing function, with growth of 4.6 per cent a year, driven mainly by a reduction of R5 billion in the allocation to the Special Defence Account in 2021/22. Community development is fastest-growing function Learning and culture This function receives the largest share of spending. It provides access to basic and higher education, develops skills, provides training and contributes to social cohesion. Priorities in this function include improving school and student housing infrastructure, and providing bursaries for tertiary students from poor and working-class families. Spending grows from R354.8 billion to R442.6 billion over the medium term, at an average annual growth rate of 7.6 per cent. Learning and culture receives largest share of spending Basic education Basic education accounts for the largest share of expenditure over the MTEF period. On average, employee compensation in provincial education departments absorbs 52.7 per cent of the function’s expenditure and 79 per cent of total provincial education budgets. The education infrastructure grant is allocated R34.3 billion over the three-year spending period to build new schools and maintain schooling infrastructure. An additional R2.8 billion is allocated to the school infrastructure backlogs grant to replace pit latrines at over 2 400 schools. This grant will also replace 147 inappropriate and unsafe schools, and provide water to 352 schools over the MTEF period. An amount of R19 billion is provided for learner and teacher support material, and R3.9 billion is allocated to fund 38 000 Funza Lushaka bursaries for prospective teachers in priority subject areas such as mathematics, science and technology. About 9 million learners at over 20 000 schools will receive daily meals through the national school R34.3 billion allocated to build new schools and maintain schooling infrastructure 53 Figure 5.1 Average nominal growth in spending,Figure 5.2 Consolidated government expenditure by 2019/20 — 2021/22function, 2019/20 — 2021/22 Source: National Treasury
2019 BUDGET REVIEW nutrition programme grant, which is allocated R23 billion over the MTEF period. Consolidated government expenditure by function1 Table 5.6 1. The main budget and spending by provinces, public entities and social security funds financed from own revenue Source: National Treasury Post-school education and training The 2018 Budget rolled out higher education and training bursaries for students from poor and working-class families. Spending on these bursaries grows at an annual average rate of 13.9 per cent over the medium term. Bursary spending is expected to rise from R27.1 billion in 2018/19 to R40 billion in 2021/22. Thiswill cover over 1.3 million undergraduate students at universities and over 1.5 million students at technical vocational education and training colleges. As recommended by the Budget Facility for Infrastructure, a further R105 million is allocated in 2019/20 to complete three student accommodation projects at Nelson Mandela University, Sefako Makgatho 54 2018/19 Revised estimate R million 2019/20 2020/21 2021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Learning and culture 354 826 Basic education 246 593 Post-school education and training 97 652 Arts, culture, sport and recreation 10 581 Health 208 777 Social development 256 874 Social protection 192 714 Social security funds 64 160 Community development 186 375 Economic development 192 418 Industrialisation and exports 32 952 Agriculture and rural development 29 977 Job creation and labour affairs 21 423 Economic regulation 92 632 and infrastructure Innovation, science and technology 15 433 Peace and security 203 482 Defence and state security 49 040 Police services 99 205 Law courts and prisons 45 699 Home affairs 9 539 General public services 64 986 Executive and legislative organs 15 849 Public administration 41 218 and fiscal affairs External affairs 7 919 Payments for financial assets 15 469 386 398 415 186 442 618 262 355 282 303 302 813 112 695 121 333 127 590 11 349 11 550 12 215 222 572 238 837 255 486 278 396 298 902 317 081 207 064 222 728 238 661 71 332 76 174 78 420 208 542 225 112 243 686 209 213 219 896 235 862 37 548 39 092 40 970 30 674 31 253 32 767 23 186 24 027 25 471 101 264 108 348 118 857 16 542 17 176 17 797 211 044 222 902 233 002 49 977 52 720 51 211 104 214 110 347 117 830 48 434 51 052 54 398 8 419 8 784 9 563 65 345 67 640 76 942 16 180 16 585 17 320 41 605 43 058 51 365 7 561 7 996 8 257 29 833 30 407 30 928 24.1% 16.4% 7.0% 0.7% 13.9% 17.3% 12.9% 4.4% 13.1% 12.9% 2.3% 1.8% 1.4% 6.4% 1.0% 12.9% 3.0% 6.4% 3.0% 0.5% 4.1% 1.0% 2.6% 0.5% 7.6% 7.1% 9.3% 4.9% 7.0% 7.3% 7.4% 6.9% 9.3% 7.0% 7.5% 3.0% 5.9% 8.7% 4.9% 4.6% 1.5% 5.9% 6.0% 0.1% 5.8% 3.0% 7.6% 1.4% Allocated by function 1 483 207 Debt-service costs 182 218 Contingency reserve – 1 611 345 1 718 880 1 835 606 202 208 224 066 247 408 13 000 6 000 6 000 100.0% 7.4% 10.7% Consolidated expenditure 1 665 425 1 826 553 1 948 947 2 089 014 7.8%
CHAPTER 5: CONSOLIDATED SPENDING PLANS Health Sciences University and Vaal University of Technology as part of the Student Housing Infrastructure Programme. Table 5.7 Learning and culture expenditure 1. Learner and teacher support material 2. Includes some provision for LTSM and property payments for schools that manage their own budgets 3. Total payments made from all income sources including Funza Lushaka teacher bursaries and debt repayments from students 4. Spending of the 21 SETAs and the National Skills Fund Source: National Treasury Spending from the skills development levy is projected to increase by 3.6 per cent annually over the medium term. Sector education and training 55 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Basic education246 593 Compensation of employees190 989 of which: Provincial compensation of190 342 employees Goods and services24 665 of which: Property payments3 373 Workbooks and LTSM 14 958 National school nutrition6 802 programme Transfers and subsidies18 840 of which: Subsidies to schools 215 565 Education infrastructure10 094 backlog grant School infrastructure2 121 backlogs grant Post-school education and training97 652 of which: University subsidies33 737 of which: University infrastructure4 351 National student financial aid27 078 scheme 3 Technical and vocational10 694 education and training of which: Compensation of employees6 258 Subsidies4 288 Community education and2 358 training of which: Compensation of employees2 114 Skills development levy19 442 institutions 4 Arts and culture, sport and10 581 recreation 262 355282 303302 813 204 369219 008234 074 203 684218 280233 298 26 20628 27630 232 3 9633 8384 104 5 5156 5926 919 7 1867 6968 165 19 73521 05222 126 16 58917 66118 607 10 51411 46712 327 1 8701 6292 191 112 695121 333127 590 36 98439 46141 649 4 6724 8945 145 33 29037 90239 986 12 69814 42215 409 6 7357 2177 702 5 5696 7377 213 2 5272 6992 877 2 2742 4162 573 21 74821 10321 613 11 34911 55012 215 68.1% 52.8% 52.7% 6.8% 1.0% 1.5% 1.9% 5.1% 4.2% 2.8% 0.5% 29.1% 9.5% 1.2% 8.9% 3.4% 1.7% 1.6% 0.7% 0.6% 5.2% 2.8% 7.1% 7.0% 7.0% 7.0% 6.8% 11.8% 6.3% 5.5% 6.1% 6.9% 1.1% 9.3% 7.3% 5.7% 13.9% 12.9% 7.2% 18.9% 6.9% 6.8% 3.6% 4.9% Total354 826 386 398415 186442 618 100.0% 7.6%
2019 BUDGET REVIEW authorities will fund skills programmes, learnerships, internships and apprenticeships, and workplace experience. These funds will help an estimated 30 000 new artisans to register for training by 2019/20. The number of qualified artisans and work-based learning opportunities is projected to increase respectively from 22 000 and 135 000 in 2018/19 to 25 000 and 140 000 in 2021/22. Arts, sports, recreation and culture These sectors continue to focus on social cohesion. Over the medium term, R35.1 billion will be spent on heritage legacy and job creation projects in the arts sector. School sports, the indigenous games and transformation in sports will also be supported. Funding for heritage legacy and job creation in arts sector Social development Government’s social protection system works to reduce poverty and inequality by issuing social grants to and providing social welfare services for vulnerable groups. Spending on this function will rise from R192.7 billion in 2018/19 to R238.7 billion by 2021/22, growing at an average rate of 7.4 per cent a year. Social protection expenditure Table 5.8 1. Includes war veterans Source: National Treasury Social grant coverage grows by about 2 per cent per year. Spending will rise from R162.6 billion in 2018/19 to R202.9 billion in 2021/22, at an average annual growth rate of 7.6 per cent. Over the same period, the number of beneficiaries is expected to increase from 17.9 million to 18.6 million. By 2021/22, the old age grant will reach 4 million beneficiaries. 56 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Social protection expenditure192 714 of which: Social grants162 642 of which: Child support60 603 Old age70 453 Disability22 032 Foster care5 202 Care dependency3 094 South African Social Security8 372 Agency Provincial social development20 199 207 064222 728238 661 175 156189 274202 868 64 96770 33675 723 76 95184 18990 792 23 07824 17225 340 5 0814 9475 023 3 4303 7624 021 7 9978 4678 831 22 34923 54224 957 100.0% 84.9% 31.6% 37.7% 10.9% 2.3% 1.7% 3.8% 10.6% 7.4% 7.6% 7.7% 8.8% 4.8% -1.2% 9.1% 1.8% 7.3% Total192 714 207 064222 728238 661 100.0% 7.4% Social grants as percentage of GDP3.2% Social grant beneficiary numbers by grant type (Thousands) Child support12 508 Old age13 538 Disability1 052 Foster care365 Care dependency151 3.2%3.3%3.2% 12 69812 89613 100 3 6643 7963 935 1 0521 0491 050 351334318 154158162 70.7% 20.8% 5.8% 1.8% 0.9% 1.6% 3.6% -0.1% -4.5% 2.2% Total17 616 17 92018 23518 564 100.0% 1.8%
CHAPTER 5: CONSOLIDATED SPENDING PLANS The child support grant will reach an estimated 13.1 million beneficiaries by 2021/22. However, in 2019/20 and 2020/21 funding decreases by R500 million each year due to legislative delays in implementing the Cabinet-approved extended child support grant for orphans who have lost both parents. Social grants are adjusted in line with inflation projections to maintain their real value, as shown in Table 5.9. Spending on grant administration will grow at an average annual rate of 1.8 per cent, from R8.4 billion in 2018/19 to R8.8 billion in 2021/22. This includes the costs of payment services provided by the South African Post Office. Future savings are expected as paypoints are consolidated and more recipients are paid through the National Payment System. Table 5.9 Average monthly social grant values To maintain their real value, social grants are adjusted in line with inflation Source: National Treasury The early childhood development conditional grant is allocated R518 million in 2019/20, R553 million in 2020/21 and R583 million in 2021/22. This grant will continue to subsidise about 60 000 poor children and improve between 600 and 800 early childhood development centres. Both the social worker employment grant and the substance abuse treatment grant will be incorporated into the provincial equitable share from 2019/20. Provinces are ready to operate four new substance abuse treatment centres as part of the latter grant. The National Food Relief Programme, which is funded through direct transfers from the Department of Social Development to non-profit institutions, will be handed over to provinces from 2020/21. Amounts to be shifted to provinces over the MTEF period include R679 million to employ social workers, R237 million to treat substance abuse and R138 million to provide food relief. Provinces allocated funds to employ social workers, treat substance abuse and provide food relief Health The health function aims to ensure access to healthcare services for all people in South Africa through a caring and quality health system. Spending in this function grows by an annual average of 7 per cent over the medium term. Implementing national health insurance (NHI) is a policy priority for the sector. However, government needs to address staff shortages and other problems in public health facilities before the policy can be fully rolled out. Over the MTEF period, R2.8 billion is reprioritised from the NHI indirect grant (personal services component) to the new human resources capacitation grant to help provinces fill critical posts, including intern and community service posts. In addition, R1 billion is added to the provincial equitable share in 2021/22 to fund the permanent appointment of medical interns. Government addressing public health staffing and infrastructure problems 57 2018/192019/20 Rand Percentage increase State old age1 6951 780 State old age, over 751 7151 800 War veterans1 7151 800 Disability1 6951 780 Foster care9601 000 Care dependency1 6951 780 Child support405425 5.0% 5.0% 5.0% 5.0% 4.2% 5.0% 4.9%
2019 BUDGET REVIEW In line with the country’s broad disease burden, the comprehensive HIV, AIDS and TB grant has been renamed the HIV, TB, malaria and community outreach grant and restructured around these four components. The HIV/AIDS and malaria components receive an additional R1 billion in 2021/22 mainly to fund increased antiretroviral uptake, while the community outreach component receives an additional R1 billion to implement the minimum wage for community health workers in provinces. In line with the health sector’s ambition to eliminate malaria by 2023/24, the malaria component is allocated R318.8 million over the MTEF period. A further R30 million is allocated in 2020/21 and 2021/22 to co-finance a regional malaria prevention project in Mozambique. Over the next three years, an additional R1.4 billion is allocated to the health facility revitalisation component of the NHI indirect grant to construct the new Limpopo Academic Hospital in Polokwane. Some of this funding will improve existing tertiary hospitals in Limpopo. Support to fund increased uptake of antiretrovirals and pay minimum wage to community health workers Table 5.10 Health expenditure 1. Excludes grants and transfers reflected as expenditure in appropriate sub-functional areas Source: National Treasury Community development This function provides access to adequate and affordable public transport, housing and basic services, and facilitates urban development and spatial transformation. Expenditure occurs largely through transfers to public entities, the local government equitable share and conditional grants to provinces and municipalities for infrastructure. Expenditure is expected to grow from R186.4 billion in 2018/19 to R243.7 billion in 2021/22. 58 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Health expenditure208 777 of which: Central hospital services40 701 Provincial hospital services34 636 District health services90 954 of which: HIV, TB, malaria and19 922 community outreach Emergency medical services7 666 Facilities management and9 372 maintenance Health science and training5 219 National Health Laboratory Service7 542 National Department of Health 16 383 222 572238 837255 486 43 14345 98748 772 36 74039 17441 394 98 203106 085114 427 22 03924 40827 753 8 3568 8239 279 8 8459 45810 115 5 7465 9296 739 7 4657 9988 567 7 1668 1658 558 100.0% 19.2% 16.4% 44.5% 10.4% 3.7% 4.0% 2.6% 3.4% 3.3% 7.0% 6.2% 6.1% 8.0% 11.7% 6.6% 2.6% 8.9% 4.3% 10.3% Total208 777 222 572238 837255 486 100.0% 7.0% of which: Compensation of employees129 620 Goods and services61 019 Transfers and subsidies7 440 Buildings and other fixed structures6 361 Machinery and equipment4 259 140 771150 407160 588 64 65169 99475 073 6 0896 3916 834 6 1557 4337 965 4 8724 5834 931 63.0% 29.3% 2.7% 3.0% 2.0% 7.4% 7.2% -2.8% 7.8% 5.0%
CHAPTER 5: CONSOLIDATED SPENDING PLANS The Department of Human Settlements will continue to focus on improving access to adequate housing, which includes upgrading informal settlements and providing affordable financing for housing. In 2020/21, two new grants will be introduced to upgrade informal settlements through partnerships between the communities, and provinces and municipalities. Funding for the grants was reprioritised from the human settlements development grant to provinces and the urban settlements development grant to metropolitan municipalities. In 2020/21 and 2021/22, the grants are expected to receive funding totalling R14.7 billion and affect 231 000 households. In addition, R814.5 million is shifted from the Integrated National Electrification Programme to the urban settlements development grant to improve implementation in the electrification of households in informal settlements in metropolitan municipalities. The National Housing Finance Corporation is allocated R950 million to administer housing subsidies linked to finance. The public transport network grant will receive R354 million in 2019/20, R1 billion in 2020/21 and R1.4 billion in 2021/22. These amounts will be used to implement phase 2A of the Cape Town integrated public transport network in the southeastern regions of the city. Funds are allocated to improve the safety and reliability of the passenger rail network, including R1.5 billion reprioritised to maintain rolling stock and rail infrastructure. New grants to upgrade informal settlements for 231 000 households Funds allocated to expand integrated public transport network in Cape Town Table 5.11 Community development expenditure Source: National Treasury Peace and security This function allocates funding to the justice, crime prevention and security cluster. Its medium-term priority is to implement an integrated strategy to 59 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Community development186 375 of which: Human settlements34 940 Public transport, including33 031 commuter rail Municipal equitable share60 518 Municipal infrastructure grant15 288 Regional and local water and10 740 sanitation services Electrification programmes5 333 208 542225 112243 686 40 49442 79844 653 43 60348 34153 174 68 97375 68382 162 14 81615 66016 831 10 65111 24012 060 5 5325 3516 270 100.0% 18.9% 21.4% 33.5% 7.0% 5.0% 2.5% 9.3% 8.5% 17.2% 10.7% 3.3% 3.9% 5.5% Total186 375 208 542225 112243 686 100.0% 9.3% of which: Compensation of employees16 110 Goods and services12 340 Transfers and subsidies149 819 Buildings and other fixed structures6 170 Machinery and equipment1 822 17 25418 27419 833 12 29912 96113 656 162 802175 412189 804 9 1598 1118 526 6 74710 18211 594 8.2% 5.7% 78.0% 3.8% 4.2% 7.2% 3.4% 8.2% 11.4% 85.3%
2019 BUDGET REVIEW fight crime and ensure national security. Spending grows by 4.6 per cent over the MTEF period, driven largely by employee compensation. The Integrated Justice System Modernisation Programme is a key component of the integrated strategy to fight crime. Over the medium term, R853 million is shifted from the South African Police Service to the Department of Justice and Constitutional Development, where the programme is currently governed. To enable the State Capture Commission of Inquiry to continue with its work, which has been extended to February 2020, an additional R272.9 million is allocated. Over the period ahead, R84 million is reprioritised to establish the Border Management Authority under the Department of Home Affairs. This authority will facilitate and manage the legitimate movement of people and goods across borders and through other ports of entry. Through funding legal aid for the poor, this function also ensures access to fair court representation. An additional R309.2 million is allocated to Legal Aid South Africa to retain public defenders. Additional funds enable State Capture Commission to continue its work until 2020 Table 5.12 Peace and security expenditure Source: National Treasury Economic development The economic development function aims to increase economic growth by improving access to loans for small business intermediaries, providing industrial business incentives, accelerating land reform and developing infrastructure. Spending in this function grows by 7 per cent over the MTEF period. An additional R165 million is allocated to the Presidential Infrastructure Coordinating Commission over the three-year spending period to improve capacity for preparing projects. Government will launch a Small Business and Innovation Fund in 2019/20. The fund will receive R3.2 billion over the medium term, which it will lend to small business intermediaries, such as fund managers and incubators. These intermediaries will fund and support ideation and start-up companies, and small businesses focusing on innovation. Small Business and Innovation Fund to be launched in 2019/20 60 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Defence and state security49 040 Police services99 205 Law courts and prisons45 699 Home affairs9 539 49 97752 72051 211 104 214110 347117 830 48 43451 05254 398 8 4198 7849 563 23.1% 49.8% 23.1% 4.0% 1.5% 5.9% 6.0% 0.1% Total203 482 211 044222 902233 002 100.0% 4.6% of which: Compensation of employees137 044 Goods and services45 825 Transfers and subsidies12 985 Buildings and other fixed structures3 006 Machinery and equipment4 283 144 762153 616163 948 46 33948 62352 331 12 65513 1999 010 2 9993 1793 316 4 0494 0664 318 69.3% 22.1% 5.2% 1.4% 1.9% 6.2% 4.5% -11.5% 3.3% 0.3%
CHAPTER 5: CONSOLIDATED SPENDING PLANS A medium-term allocation of R19.8 billion supports industrial business incentives. Of this amount, 48 per cent goes to manufacturing development, including R600 million reprioritised for the Clothing and Textile Competitiveness Programme. Government has allocated R400 million to the Agricultural Research Council over the MTEF period to finalise the establishment of a foot-and-mouth vaccine facility at Onderstepoort. This facility will help to minimise repeat outbreaks of the disease. Despite the baseline reduction in 2020/21 and 2021/22, R18.4 billion is allocated to accelerate land reform over the medium term. This will help finalise more than 1 700 restitution claims and acquire more than 325 000 hectares of land for landless South Africans. In addition, government has allocated R138 million to help resettled farmers to purchase equipment and develop farms over the medium term. As part of the President’s economic stimulus and recovery plan, government and organisations representing farmers of different commodities will implement 262 priority land-reform projects at a cost of R1.8 billion. A blended-finance model, which aims to support emerging black farmers under the Black Producer Commercialisation Programme, will receive a further R887 million over the medium term to help them to access finance. The Waste Management Bureau is allocated R1.3 billion over the medium term to help it become operational. The bureau is tasked with recycling, monitoring the implementation of industry waste management plans, and managing the disbursement of revenue from waste management charges. The 2019 Budget reprioritises R315 million to refurbish infrastructure at the National Zoo and upgrade the South African Weather Service’s long-range early warning system. R19.8 billion allocated to industrial business incentives over MTEF period R18.4 billion allocated to accelerate land reform Job creation and labour affairs Over the three-year spending period, R61.4 billion is allocated to public employment programmes, including the Expanded Public Works Programme. Between April 2009 and March 2018, this programme created over 4 million jobs of varying duration, and aims to create another 2 million jobs by the end of 2020/21. Public employment programmes allocated R61.4 billion over MTEF period Economic regulation and infrastructure The South African National Roads Agency Limited is allocated an additional R3.5 billion between 2019/20 and 2021/22 for its non-toll national roads portfolio. This will allow the agency to resurface an additional 3 300 km and strengthen 1 500 km of national roads. Spending to manage national water resources is expected to grow at an average annual rate of 11.8 per cent. This will fund new bulk water infrastructure projects and maintain other projects, including an acid mine drainage project, the Lesotho Highlands water project, and the Mokolo Crocodile water augmentation project. To subsidise universal access to postal services, R1.5 billion is allocated to the South African Post Office. An amount of R539.2 million is allocated to help decontaminate and decommission nuclear waste. Spending to manage national water resources grows at annual average of 11.8 per cent 61
2019 BUDGET REVIEW Table 5.13 Economic development expenditure 1. Includes the Expanded Public Works Programme, the Community Works Programme and the Jobs Fund Source: National Treasury General public services This function group focuses on building a capable state that can implement policy effectively. Its baseline grows by an annual average of 5.8 per cent over the medium term, from R65 billion in 2018/19 to R76.9 billion in 2021/22. On average, 47.9 per cent of the baseline is allocated to compensation of employees and 33.1 per cent is allocated to goods and services. The South African Revenue Service receives an additional allocation of R1.4 billion to support its operations. Statistics South Africa is allocated R145.3 million in 2019/20, R854.9 million in 2020/21 and R2.2 billion in 2021/22 to conduct the population census in 2021/22. The Research and Policy Advisory Unit in the Presidency is allocated R45.3 million over the medium term. The unit provides technical support to the Presidency and Cabinet. In addition, South Africa’s contribution to the African Union is expected to increase by R200 million in 2019/20 and Additional funds allocated to SARS to support its operations 62 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Economic regulation and92 632 infrastructure of which: Water resource and bulk24 066 infrastructure Road infrastructure44 389 Job creation and labour affairs21 423 of which: Employment programmes 118 074 Industrialisation and exports32 952 of which: Economic development and14 020 incentive programmes Innovation, science and technology15 433 of which: Environmental programmes5 976 Agriculture and rural development29 977 of which: Land reform1 390 Agricultural land holding account1 752 Restitution3 364 Farmer support and development4 110 101 264108 348118 857 27 05129 69833 617 47 31150 03053 670 23 18624 02725 471 19 65620 30321 486 37 54839 09240 970 15 11016 05715 670 16 54217 17617 797 6 6446 9037 307 30 67431 25332 767 1 4881 6031 696 1 210916986 3 6083 3373 552 4 1024 3714 643 49.4% 13.6% 22.7% 10.9% 9.2% 17.7% 7.0% 7.7% 3.1% 14.2% 0.7% 0.5% 1.6% 2.0% 8.7% 11.8% 6.5% 5.9% 5.9% 7.5% 3.8% 4.9% 6.9% 3.0% 6.9% -17.4% 1.8% 4.1% Total192 418 209 213219 896235 862 100.0% 7.0% of which: Compensation of employees49 759 Goods and services59 170 Transfers and subsidies39 015 Buildings and other fixed32 603 structures Machinery and equipment4 673 53 48355 82059 520 62 18466 77275 788 41 78443 31444 183 39 45240 29943 091 4 3764 4514 209 25.4% 30.8% 19.4% 18.5% 2.0% 6.2% 8.6% 4.2% 9.7% -3.4%
CHAPTER 5: CONSOLIDATED SPENDING PLANS by R213.3 million in 2020/21 due to an increase in membership fees. Negotiations and a methodology review are under way to determine a new assessment method for country membership fees to the African Union. From 2019/20, government has allocated R157 million through the provincial equitable share for free sanitary products for learners from low-income households. The project will target girls in the country’s poorest schools (quintiles 1, 2 and 3). Results from this year will be used to forecast the total project costs over the medium term and determine budget allocations for 2020/21 and 2021/22. R157 million allocated to provide free sanitary products to learners in low-income schools in 2019/20 Table 5.14 General public services expenditure Source: National Treasury Conclusion Despite a constrained fiscal environment, government spending continues to grow in real terms. It remains focused on continuous and improved service delivery over the MTEF period. Nonetheless, further reductions to baselines were necessary to address the risk from Eskom and consolidate public-sector debt. Measures to contain the public-sector wage bill are central to fiscal consolidation. Over the medium term, government remains committed to improving the efficiency and effectiveness of its spending. Baselines cut to support Eskom and consolidate debt, but focus remains on improved service delivery 63 2018/19 Revised estimate R million 2019/202020/212021/22 Medium-term estimates Percentage of total MTEF allocations Average annual MTEF growth Executive and legislative organs15 849 Public administration and fiscal affairs41 218 External affairs7 919 16 18016 58517 320 41 60543 05851 365 7 5617 9968 257 23.9% 64.8% 11.3% 3.0% 7.6% 1.4% Total64 986 65 34567 64076 942 100.0% 5.8% of which: Compensation of employees29 719 Goods and services21 880 Transfers and subsidies9 844 Buildings and other fixed structures1 776 Machinery and equipment1 068 31 58333 39335 615 21 28122 77225 379 9 8829 20113 389 1 7391 4881 750 682625653 47.9% 33.1% 15.5% 2.4% 0.9% 6.2% 5.1% 10.8% -0.5% -15.1%
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6 Division of revenue and spending by provinces and municipalities Overview Onational government takes steps to reverse this pattern by ver the past decade, all spheres of government experienced an Government is working with provinces and municipalities to rebuild governance and administration erosion of capacity and a weakening of institutional integrity. As strengthening state capacity and exposing corruption, it will also work with provinces and municipalities to rebuild their governance and administration structures. Where necessary, national government will use the powers granted by the Constitution, the Public Finance Management Act (1999) and the Municipal Finance Management Act (2003) to ensure that distressed provinces and municipalities return to financial health. Provinces are responsible for basic education and health services, roads, housing, social development and agriculture. Local governments provide basic services such as water, sanitation, electricity reticulation, roads and Weak governance and financial controls jeopardise the provision of basic services 65 In brief •Over the next three years, after providing for debt-service costs, the contingency reserve and provisional allocations, 47.9 per cent of nationally raised funds are allocated to national government, 43 per cent to provincial government and 9.1 per cent to local government. •The division of revenue remains strongly redistributive, with taxes raised mainly in wealthier areas funding poorer provinces and municipalities. •Changes to provincial allocations since the 2018 Medium Term Budget Policy Statement (MTBPS) include a wage freeze for political office holders, increased funding for the rollout of free sanitary products for learners from low-income households, and a reduction in the human settlements development grant, which requires reform. •Local government equitable share allocations, which fund free basic services for low-income households, grow faster than inflation to account for household growth and higher costs of services. New conditional grant incentives encourage improved municipal performance in the construction and maintenance of infrastructure. •Medico-legal claims are putting pressure on provincial health budgets, and a pattern of unfunded budgeting persists in local government. National government is working with provinces and municipalities to address these concerns.
2019 BUDGET REVIEW community services. Where governance and financial controls are weak, these services are jeopardised. Division of revenue Over the medium-term expenditure framework (MTEF) period, after budgeting for debt-service costs, the contingency reserve and provisional allocations, 47.9 per cent of nationally raised funds are allocated to national government, 43 per cent to provinces and 9.1 per cent to local government. Table 6.1 Division of nationally raised revenue Source: National Treasury The division of revenue is strongly redistributive. Services benefiting poor South Africans in every province and municipality are funded by taxes raised mainly in wealthier urban areas. For example, over the past 10 years residents of Limpopo have paid less than 4 per cent of national income tax, yet the province received an average of 12.2 per cent of provincial equitable share allocations over the same period. The Explanatory Memorandum to the Division of Revenue, published on the National Treasury website as Annexure W1 to the Budget Review, sets out the provincial and municipal allocations, details the equitable share 66 2015/162016/172017/18 Outcome R billion 2018/19 Revised estimate 2019/202020/212021/22 Medium-term estimates Average annual MTEF growth Division of available funds National departments546.1555.7592.7 of which: Indirect transfers to3.53.63.8 provinces Indirect transfers to10.48.17.8 local government Provinces471.4500.4538.6 Equitable share386.5410.7441.3 Conditional grants84.989.797.2 Local government98.3102.9111.1 Equitable share49.450.755.6 Conditional grants38.340.943.7 General fuel levy10.711.211.8 sharing with metros 638.2 4.7 7.9 572.2 470.3 101.9 117.3 60.5 44.3 12.5 684.7733.1777.7 4.65.05.7 7.27.18.2 612.3657.1701.0 505.6542.9578.6 106.7114.2122.4 127.3137.9149.5 69.075.782.2 45.148.252.2 13.214.015.2 6.8% 6.3% 1.2% 7.0% 7.2% 6.3% 8.4% 10.7% 5.6% 6.8% Provisional allocation not––– assigned to votes – 19.211.418.9 Non-interest allocations1 115.81 159.01 242.3 Percentage increase9.7%3.9%7.2% 1 327.6 6.9% 1 443.51 539.51 647.1 8.7%6.7%7.0% 7.5% Debt-service costs128.8146.5162.6 Contingency reserve––– 182.2 – 202.2224.1247.4 13.06.06.0 10.7% Main budget expenditure1 244.61 305.51 405.0 Percentage increase10.0%4.9%7.6% 1 509.9 7.5% 1 658.71 769.61 900.5 9.9%6.7%7.4% 8.0% Percentage shares National departments48.9%48.0%47.7% Provinces42.2%43.2%43.3% Local government8.8%8.9%8.9% 48.1% 43.1% 8.8% 48.1%48.0%47.8% 43.0%43.0%43.1% 8.9%9.0%9.2%
CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES formulas, and explains how the division incorporates the recommendations of the Financial and Fiscal Commission. Sustainable and efficient public finances Figure 6.1 shows how medium-term allocations in the main budget, for the functions described in Chapter 5, are shared across government. The budgets of national departments are dominated by four functions (peace and security, social development, learning and culture and economic development) that account for 88 per cent of allocations. In provinces, learning and culture, and health, account for 75 per cent of the budget. Ninety-nine per cent of local government transfers are for community development, which includes water, sanitation and electricity. Figure 6.1 Division of revenue by function, 2019 MTEF period* Peace and security, and social development, account for lion’s share of national spending *Function breakdown for provinces includes estimates of how equitable share funds will be allocated Source: National Treasury Local government receives the smallest share of the division of nationally raised revenue because it has significant own revenue-raising powers. Any changes to the structure of the division of revenue would have implications for functions in all spheres of government. Strengthening the sustainability of the public finances will make more funds available for social and economic development. For example, to service its debt over the next three years, government will spend 62 per cent more on debt-service costs than transfers to local government. This is one of the reasons government is committed to moving towards a primary balance, thereby reducing its need to borrow funds and incur interest costs. Local government raises about 70 per cent of its own revenue, but would be able to raise more if municipalities improved revenue collection. In 2017/18, almost half of all municipalities collected less than 80 per cent of their billed revenue. Government to spend 62 per cent more on debt-service costs than transfers to local government 67
2019 BUDGET REVIEW Past performance Underspending has stabilised across national and provincial government. In 2017/18, national expenditure, excluding direct charges to the National Revenue Fund, amounted to R768.8 billion out of a total adjusted appropriation of R781.5 billion. This represents underspending of 1.6 per cent. Provincial government underspent its adjusted budget of R561.8 billion for 2017/18 by R5.8 billion (1 per cent), compared with R4.7 billion (0.9 per cent) in the prior year. Provincial conditional grant spending has exceeded 97 per cent over the past four years, with several grants fully spent. But full expenditure can mask inefficient spending. For example, in 2017/18, 99 per cent of the human settlement development grant was spent, but only 77 per cent of delivery targets were met. Spending outcomes for 2017/18 varied across the 257 municipalities. Many local governments adopted unrealistic spending plans. As a result, National and provincial underspending has stabilised, but full expenditure can mask inefficient spending Many municipalities continue to adopt unrealistic budgets 217 municipalities underspent their operating budgets and 220 municipalities underspent their capital budgets. Of the R30 billion in conditional grants transferred to municipalities in 2017/18, R28 billion (93 per cent) was spent – an improvement from 86.8 per cent in 2016/17. Provincial revenue and spending Transfers from national government constitute over 95 per cent of provincial government budgets. The provincial equitable share accounts for 80 per cent of all transfers to provinces. Despite a constrained fiscal environment, the equitable share has continued to grow in real terms. Over the last eight years, after taking inflation into account, provincial allocations have grown by 2.1 per cent, compared with average annual population growth of 1.8 per cent. Table 6.2 Provincial equitable share Source: National Treasury Allocations to each province are calculated largely on the basis of demand for major public services, such as the number of school enrolments, and visits to public clinics and hospitals. The different rates of growth in the provincial equitable share allocation for each province respond to changes in these demographic factors. Together with provincial treasuries, the National Treasury is reviewing the formula to ensure it is responsive to data and policy developments, and balances the needs of all provinces. These considerations are discussed in the Explanatory Memorandum to the Division of Revenue. 68 2018/19 R million 2019/202020/212021/22 Medium-term estimates Average annual MTEF growth Eastern Cape65 500 Free State26 178 Gauteng93 384 KwaZulu-Natal99 264 Limpopo55 179 Mpumalanga38 468 Northern Cape12 475 North West32 392 Western Cape47 447 68 82472 74476 293 28 18730 33832 411 102 448111 636120 700 106 014113 370120 324 58 96562 98666 779 41 42844 47547 389 13 42414 38815 309 34 97337 69440 325 51 29155 27859 115 5.2% 7.4% 8.9% 6.6% 6.6% 7.2% 7.1% 7.6% 7.6% Total470 287 505 554542 909578 645 7.2%
CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Changes to provincial allocations Since the 2018 MTBPS, the following changes have been made to provincial allocations: Changes since MTBPS include wage freeze for political office holders • A wage freeze for political office holders will save R132.8 million of the amount transferred through the provincial equitable share over the MTEF period. The amount allocated to accelerate the rollout of free sanitary products for learners from low-income households has been increased from R78 million to R157 million. The human settlements development grant, which requires reforms to improve spending efficiency, has been reduced by R1 billion in 2020/21 and R2 billion in 2021/22 to limit growth of the fiscal deficit. Over the next three years, R887.3 million has been shifted from the comprehensive agricultural support programme grant to the Land Bank to support an increase in the number of emerging black commercial farmers able to access affordable loans. Funds earmarked for transfers to provinces to upgrade school sanitation will now be spent by the Department of Basic Education on their behalf through the school infrastructure backlogs grant. Allocations to hire more health professionals have been increased by a further R1.6 billion over the MTEF period. Funds will now be transferred to provinces through a new human resource capacitation grant, rather than the national department contracting these professionals. • • • • • Two social development grants have been absorbed into the provincial equitable share because these services have been entrenched in provinces. The grants previously funded substance abuse treatment facilities and employed social work graduates. Previously, housing budgets focused on building government-subsidised houses for low-income citizens. Government is now targeting a broader set of housing market interventions with lower unit costs to improve the living standards of more South Africans. This involves shifting administration of the Finance-Linked Individual Subsidy Programme (which supports individual home-buyers in the affordable housing sector) from provinces to national government, reducing allocations to the human settlements development grant and introducing funding mechanisms dedicated to upgrading informal settlements. Within both the human settlements development grant to provinces and the urban settlements development grant for metros, funds have been ring-fenced in 2019/20 to upgrade informal settlements. These upgrades will be undertaken in partnership with communities. The lessons learnt will be applied to the design of separate informal settlement upgrade grants that will be introduced from 2020/21. Budget will shift from government-subsidised units to broader housing market interventions 69
2019 BUDGET REVIEW Table 6.3 Conditional grants to provinces Source: National Treasury Managing spending pressures in provinces Provinces continue to balance rising costs and growing demand for services within tight budgets. Sound financial management by provincial treasuries, and national interventions where necessary, have ensured that provincial finances remain sustainable. Compensation, which accounts for 61 per cent of provincial spending in 2018/19, continues to increase above inflation. Figure 6.2 Provincial personnel headcount and wage costs Compensation costs continue to increase above inflation Source: National Treasury 70 2018/19 Adjusted R millionbudget 2019/202020/212021/22 Medium-term estimates MTEF total Direct conditional grants Comprehensive agricultural support programme2 019 Ilima/Letsema projects552 Community library services1 424 Education infrastructure10 094 Maths, science and technology370 National school nutrition programme6 802 HIV, TB, malaria and community outreach19 922 Health facility revitalisation6 057 Health professions training and development2 784 National tertiary services12 401 Human settlements development18 267 Informal settlements upgrading partnership– Provincial roads maintenance11 036 Public transport operations5 990 Other direct grants4 215 1 5381 6761 814 583615653 1 5011 5841 679 10 51411 46712 327 391413436 7 1867 6968 165 22 03924 40827 753 6 0076 3606 858 2 9403 1023 273 13 18614 06914 843 18 78015 93715 397 –3 0154 322 11 38212 09313 021 6 3266 7507 121 4 3395 0214 694 5 028 1 852 4 764 34 308 1 241 23 047 74 200 19 225 9 315 42 097 50 114 7 337 36 496 20 196 14 054 Total direct conditional grants101 932 106 712114 206122 355 343 274 Indirect transfers4 730 School infrastructure backlogs2 272 National health insurance indirect2 458 4 5614 9805 675 2 0271 7692 339 2 5343 2113 336 15 216 6 135 9 081
CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Provinces have managed these costs by limiting growth in personnel and saving in other areas. The number of provincial employees declined from 923 646 in 2012/13 to 881 228 in 2017/18, returning the total number of provincial employees to a level slightly lower than in 2010/11. However, the cost of those employees has increased from 58.5 per cent to more than 60 per cent of provincial spending over the same period. Unpaid invoices owed by provinces, which totalled R25.1 billion in 2017/18, remain a major financial challenge. Health departments account for 57 per cent of these unpaid bills. Provinces continue to implement cost-containment measures agreed with the Minister of Finance in January 2016. These measures focus on improving revenue collection, merging or closing provincial entities with duplicated functions, reducing non-essential administrative personnel, and cutting spending on non-core goods and services. The purchase of buildings currently under lease is being considered. In addition, provinces have identified several new initiatives that can boost revenue, such as selling redundant vehicles. Provinces have accumulated R25.1 billion in unpaid invoices Municipal revenue and spending Legislation governing local planning and budgeting emphasises community participation in decision-making. The partnership between municipalities and communities relies on the public recognising the value of, and paying for, municipal services. While government subsidises municipal services for low-income households, these services are only sustainable if people who can afford them – and use larger quantities – pay their bills. Over the period ahead, equitable share allocations, which fund free basic services for low-income households, grow faster than inflation to account for household growth and higher costs of services. But, for most Sustainable municipal finances depend partly on efficient revenue collection 71 Responding to rising medical negligence claims Government is committed to providing accessible, quality and cost-effective health services in line with the Constitution. Patients have the right to compensation for injuries resulting from medical negligence. However, the number and value of claims lodged against provincial departments of health in recent years appear to have risen disproportionately. Claims against health departments grew from R28.6 billion in March 2015 to R80.4 billion in March 2018. Over the same period, payments for claims increased from R498.7 million to R2.8 billion. The mounting value of claims puts enormous pressure on provincial health budgets, with departments increasingly forced to divert funding from service provision to pay these claims. Medico-legal claims have risen because of inadequate quality of care, weaknesses in administration (including patient record management and legal capacity), and increasingly litigious behaviour from law firms. To address the apparent rise in unjustified or excessive claims, government is: • Prioritising improvements in areas where claims of negligence are more prevalent. • Improving medical record-keeping and recruiting more specialist medical personnel. •Inspecting public healthcare facilities regularly (through the Office of Health Standards Compliance) to ensure they adhere to norms and standards. •Strengthening the medico-legal units in provincial departments of health, and recruiting national teams of experts to provide specialist support. • Referring possible fraudulent cases to the Special Investigations Unit. Government is also considering legislative amendments to allow periodic settlement payments instead of lump-sum payments, which would help provincial budgets manage these costs. Most importantly, government continues to improve the quality of public healthcare. Together, these measures will help stabilise the growth in claims and allow provinces to budget more realistically for them.
2019 BUDGET REVIEW municipalities, own revenues are a larger proportion of their funding than transfers. Their sustainability depends on how they collect and spend their own revenues. Figure 6.3 shows the large range in the revenue-collecting capacity of metros and local municipalities. In general, urban municipalities have higher revenues from property rates. However, there are several towns and intermediate cities with significant revenue bases. Figure 6.3 Municipalities differ in terms of context and performance Several towns and intermediate cities have significant revenue bases *Figures are for 2018/19 **Identified by the Department of Cooperative Governance (2018) Source: National Treasury, Department of Cooperative Governance and Statistics South Africa Governance and financial management challenges affect both urban and rural municipalities. For example, the adoption of unfunded budgets is widespread across all types of municipalities. In some ways, municipalities with little capacity to raise their own revenue have an easier task when budgeting, because most of their budget is funded from transfers, which are stable and predictable. The redistributive nature of the division of revenue also means that, on a per household basis, transfers to rural municipalities are more than twice as large as those to metros. New incentives in conditional grants encourage improved municipal performance. In 2019/20, seven intermediate cities will move from the municipal infrastructure grant to the new integrated urban development grant, which encourages cities to maximise their investments from non-grant funding and to maintain assets. These cities qualified through good governance, spending and reporting. Three of these municipalities financed more than 70 per cent of their capital budgets from non-grant sources, demonstrating the potential for non-metropolitan municipalities to fund significant infrastructure investments from their own revenue and borrowing. An incentive is also introduced in the public transport network grant, which rewards municipalities for using their own revenues to help subsidise public transport systems. New incentives reward good governance and spending on municipal infrastructure projects 72
CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Since the 2018 MTBPS, the indirect integrated national electrification programme (Eskom) grant in 2020/21 has been reduced by a further R500 million as part of government’s fiscal consolidation efforts. Table 6.4 Transfers to local government Source: National Treasury Strengthening municipal financial management The National Treasury’s State of Local Government Finances report found that 128 municipalities were in financial distress at the end of 2016/17. The Auditor-General noted a continued pattern of deterioration, with only 145 of 257 municipalities achieving unqualified audits in 2016/17. At the end of 2017/18, 40 municipalities had negative cash balances. 73 2018/19 Adjusted R millionbudget 2019/202020/212021/22 Medium-term estimates MTEF total Equitable share and related62 732 General fuel levy sharing12 469 with metros Direct conditional grants44 771 Municipal infrastructure15 288 Integrated urban development– Urban settlements development11 306 Informal settlements– upgrading partnership Integrated national electrification1 904 programme (municipal) Public transport network6 287 Water services infrastructure3 769 Regional bulk infrastructure1 957 Other direct grants4 260 68 97375 68382 162 13 16714 02715 182 45 14948 17152 154 14 81615 66016 831 8579391 013 12 0459 7179 373 –2 9854 384 1 8631 9772 131 6 4687 4958 367 3 6693 8714 161 2 0662 1802 344 3 3633 3463 550 226 819 42 376 145 473 47 307 2 809 31 135 7 369 5 972 22 330 11 702 6 590 10 259 Total direct transfers119 971 127 289137 881149 498 414 668 Indirect transfers7 887 Integrated national electrification3 262 programme (Eskom) Regional bulk infrastructure2 887 Other indirect grants1 738 7 2087 1098 167 3 3743 0633 821 3 0383 2073 447 797840899 22 485 10 257 9 692 2 536 Principles for reforming the local government infrastructure grant system The National Treasury, together with the Department of Cooperative Governance, the South African Local Government Association, and the Financial and Fiscal Commission, have reviewed the local government infrastructure grant system. Reforms are being implemented in three areas: •Consolidating the number of grants, and differentiating urban and rural challenges more clearly. For example, a new grant for intermediate cities is being introduced and fewer grants are directed to metros as a result of incorporating the integrated national electrification programme (municipal) grant allocations for metros into the urban settlements development grant. •Using grants to renew infrastructure, and providing incentives to improve asset management and maintenance. For example, grant conditions have changed to allow funding of asset renewal, and the incentive component of the new integrated urban development grant rewards up-to-date asset management plans and maintenance spending. •Strengthening national management of the grant system. This involves clarifying the roles of national departments, improving their oversight and advisory capacity, and streamlining reporting requirements. For example, Municipal Finance Management Act Circular 88 introduces a consolidated performance reporting system for metropolitan municipalities.
2019 BUDGET REVIEW Problems in revenue management are the largest contributor to financial distress in local government. Households, followed by commercial customers and government, owe the largest share of outstanding municipal revenues. There are two notable trends: • Collection rates have declined. In the first quarter of 2016/17, 65 municipalities collected over 95 per cent of their bills; by the same period in 2018/19 this had fallen to 52 municipalities. • Weak revenue collection affects payments to suppliers and the sustainability of services. At the end of September 2018, municipalities had outstanding debts older than 90 days totalling R24 billion, of which R12.8 billion was owed to Eskom and R6.4 billion to the water boards. In turn, outstanding revenues have affected the financial positions of those institutions. The graphs below show the profile of municipal debt, a growing portion of which is older than 90 days and will be difficult to collect. They also highlight differences in performance, with municipalities in four of nine Declining collection rates and weak revenue collection undermine municipal finances provinces demonstrating payments. a better record of managing outstanding For the July 2018 to June 2019 municipal financial year, 113 municipal councils adopted unfunded budgets, up from 83 the prior year. These municipalities do not have credible revenue projections to match planned 74 Figure 6.4 Debts owed to municipalitiesFigure 6.5 Growth in debts owed to municipalities Figure 6.6 Debts owed by municipalities (>90 days)Figure 6.7 Amounts owed to municipal creditors* Source: National Treasury, MFMA Section 71 reports for Q1 2018/19 All figures are as at 30 September 2018 *By age
CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES expenditure. In four provinces – the same ones that have the highest levels of outstanding amounts owed to creditors – more than half of councils adopted unfunded budgets. National and provincial treasuries engage all municipalities on their draft budgets and advise them on changes to avoid adopting unfunded budgets. Nonetheless, the power to adopt a budget rests solely with the elected municipal council. When a municipality is unable to perform its functions, or is in a state of financial crisis, the constitutional remedy is for provincial or national government to intervene and assist – or in severe cases, to take over its responsibilities. The record of such interventions, however, shows that they have rarely resulted in sustained improvements, partly due to weaknesses in the capacity of the intervention team and a lack of willingness to cooperate on the part of municipal officials. The 2019 Budget provides funds to increase provincial treasuries’ capacity to manage financial interventions, and for the National Treasury’s Municipal Financial Recovery Service to develop financial recovery plans. These changes aim to improve the effectiveness of interventions in municipalities. Recently promulgated amendments to the Public Audit Act (2004, amended 2018) increase the powers of the Auditor-General. New powers include setting binding remedial actions if previous recommendations are not implemented, referring material irregularities for further investigation, and issuing a certificate of debt where an accounting officer has failed to recover money. These more robust powers will complement the work of the recently established municipal public accounts committees, which are responsible for improving accountability. National government spends more than R2.5 billion per year on capacity support for municipalities. During 2019, this system will be reviewed and improvements will be implemented from 2020/21. Budget provides funds for Municipal Financial Recovery Service to assist troubled administrations Increasing municipal borrowing Most municipalities fund the majority of their operations from their own revenues.Well-run municipalities should finance infrastructure investment by borrowing against future revenues generated by that infrastructure. Over the past 10 years, however, the share of municipal capital budgets financed through borrowing has declined, from 24 per cent 75 Leveraging private funding to retrofit municipal infrastructure and save energy Government aims to draw on private-sector funding and expertise to help solve public infrastructure challenges. This approach can be applied to municipal infrastructure upgrades if municipal service revenues are used to pay back the funds invested by the private sector. In 2019/20 the Department of Energy is piloting this approach. It aims to create a market for private companies to invest in retrofitting municipal infrastructure with energy-efficient technologies that also reduce energy losses in the distribution system. The private firms will be paid back from the savings realised. This approach is expected to lead to energy and cost savings on a much larger scale than the current grant-funded rollout of energy-saving measures, helping to improve the long-term viability of municipal electricity distribution. A portion of the existing energy efficiency and demand-side management grant will be used to develop the market and a project pipeline. This approach supports South Africa’s commitment to mitigating climate change and allows municipalities to benefit from related donor financing. A guarantee fund from the Nationally Appropriated Mitigation Action facility has been established with funding from the German and UK governments to help private energy service companies obtain loans to implement the programme.
2019 BUDGET REVIEW in 2008/09 to 15 per cent in 2017/18. The National Treasury recently reviewed the Municipal Borrowing Policy Framework. An update, to be published in 2019, will: • Clarify the role of domestic and global development finance institutions. Lenders should be guided by an investment approach combining social outcomes and financial returns. Encourage a liquid secondary market in municipal debts. Allow project finance, revenue bonds and tax increment financing, and address pooled finance arrangements. • • Limitations on municipal pledges of conditional grant funds have already been removed in line with the updated policy. The National Treasury publishes a quarterly Municipal Borrowing Bulletin on its website. Updates to the Municipal Borrowing Policy Framework will be published in 2019 Conclusion Government is working with provinces and municipalities to rebuild their capacity and improve service delivery. Each province and municipality is accountable for prioritising their resources appropriately and reducing wasteful spending. But government services will only be sustainable if revenue collection is efficient, if households that can afford to pay for services do so, if budgeting is realistic, and if each rand is wisely spent. Sustainable public services depend on efficient revenue collection, realistic budgeting and prudent expenditure 76 Catalytic infrastructure projects to drive transformation of cities Since 2015, metropolitan municipalities have identified integrated public land development programmes that will generate mixed-use, mixed-income living environments. Although significant public investment in infrastructure, including housing, is anticipated, the intention is to attract substantial contributions from the private sector over the long term. Taken together, the seven highest priority catalytic programmes in the metros are worth an estimated R32.6 billion. Cornubia in eThekwini is launching its second phase and the Conradie Hospital Redevelopment in Cape Town has just begun construction. Programme preparation has also advanced in most metros, with detailed feasibility assessments under way for the Louis Botha Corridor in Johannesburg and the Bellville Waste Water Treatment Works in Cape Town. The National Treasury continues to support programme preparation activities through guidelines, technical assistance and independent expert review services. However, progress has been slow due to institutional instability, changes in planning priorities and weak discipline in managing portfolios, programmes and projects.
7 Government debt and contingent liabilities Overview Sand payments for maturing debt, has risen by R15.3 billion. The ince the 2018 Budget, government’s gross borrowing requirement, Gross borrowing requirement expected to reach R335.3 billion in 2019/20 which consists of the difference between revenue and expenditure, increase is due mainly to weaker economic growth and associated revenue shortfalls. The 2018/19 requirement is expected to total R239.5 billion, rising to R335.3 billion in 2019/20. Over the past year, developing economies experienced market volatility emanating from uncertainty over US monetary policy, US-China trade tensions and the terms of Brexit. As a result, borrowing costs and currency volatility rose. Over the medium term, the stock of debt and debt-service costs will continue to increase. Government’s gross loan debt reached an estimated R2.81 trillion or 55.6 per cent of GDP in 2018/19 and is expected to stabilise at 60.2 per cent of GDP by 2023/24. Net debt is expected to 77 In brief •Government continues to manage its debt and meet the country’s financing needs in a sustainable and responsible manner. •Over the past year, government’s gross borrowing requirement has risen by R15.3 billion to R239.5 billion. This was mainly the result of lower-than-expected revenue collection. •The borrowing requirement, which will increase to R335.3 billion in 2019/20, will be financed primarily by domestic capital markets. •Net loan debt is expected to reach R2.52 trillion or 49.9 per cent of GDP in 2018/19, increasing to R3.47 trillion or 55.5 per cent of GDP by 2021/22. Net debt is expected to stabilise at 57.3 per cent in 2024/25. •Contingent liabilities are expected to increase from R879.6 billion in 2018/19 to R1.02 trillion by 2021/22.
2019 BUDGET REVIEW stabilise a year later at 57.3 per cent of GDP. Contingent liabilities – mainly guarantees to public entities – are projected to reach R879.6 billion on 31 March 2019. Guarantees to state-owned companies amount to R529.4 billion, of which Eskom accounts for 55.7 per cent. These guarantees remain a major risk to the fiscus. Despite these pressures, government continues to manage its debt and financing needs in a sustainable and responsible manner. As a percentage of GDP, the gross borrowing requirement is projected to decline from 6.2 per cent in 2019/20 to 5.3 per cent in 2021/22. During 2018, all four credit rating agencies affirmed South Africa’s ratings, with the outlook now held at stable. Favourable ratings support government’s continued access to funding at reasonable rates. However, the agencies’ concerns about South Africa’s tepid growth, rising debt burden and contingent liabilities are reflected in two sub-investment grade ratings. A downgrade would have negative consequences for the economy and the public finances. Government remains focused on restoring investor confidence by narrowing the budget deficit, stabilising debt, enacting structural reforms to boost growth, and improving the financial position of state-owned companies. Government continues to manage debt and financing needs responsibly Government is focused on restoring investor confidence Financing strategy The financing strategy is a framework that ensures government can fund the budget deficit in a sustainable manner. In implementing the strategy, government monitors global and domestic economic trends and regulatory developments. The strategy outlines the amounts to be funded, the funding instruments to be used, and their respective maturities and risk considerations. In 2019/20, government’s total borrowing requirement will be R335.3 billion. To ensure a diversified debt portfolio that spreads risk, the requirement will be funded by short-and long-term borrowing in the domestic market, and foreign-currency loans. Short-term borrowing consists of Treasury bills with maturities of 12 months or less and bridging finance from the Corporation for Public Deposits. Long-term loans include fixed-rate, inflation-linked and retail savings bonds. Foreign-currency loans take the form of foreign bonds. As part of diversifying the debt portfolio, government expects to issue a rand-denominated Islamic bond for the first time in 2019/20. In addition, borrowing from multilateral institutions to fund infrastructure projects will be considered. The main risks to the financing strategy are: • The fiscal position. A widening of the budget deficit in response to unforeseen expenditure or calls on government guarantees would lead to an increase in debt and borrowing costs. • Inflation and exchange rate risk. Unanticipated increases in inflation or depreciation of the exchange rate would increase the cost of outstanding inflation-linked or foreign-currency debt. New debt instruments and innovative borrowing options being explored 78
CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES • Higher global interest rates. Continued monetary policy tightening in developed countries could make South African bonds less attractive by reducing the difference in bond yields, leading to capital outflows or volatility. Government’s strategic portfolio risk benchmarks help to ensure that the debt structure is sustainable. The benchmarks have been reviewed and will remain unchanged. The debt portfolio is expected to remain within the strategic benchmark limits during 2019/20. Government continues to manage refinancing risk through cash accumulation and the bond-switch programme, which exchanges shorter-dated bonds for bonds with longer maturities. Government expects to remain within strategic risk benchmarks in 2019/20 Table 7.1 Performance against strategic portfolio risk benchmarks 1. Excludes borrowing from the Corporation for Public Deposits, retail savings and zero-coupon bonds 2. Indicators without specific benchmarks Source: National Treasury Borrowing performance and projections In 2018/19, the budget deficit increased by R33.4 billion relative to projections in the 2018 Budget. The increase was partially offset by lower domestic bond redemptions of R18.1 billion. As a result, the gross borrowing requirement rose from a projected R224.2 billion to R239.5 billion for 2018/19, or from 4.5 to 4.7 per cent of GDP. Over the next three years, R207.6 billion of domestic and foreign debt is scheduled for redemption. This is a relatively high volume, particularly in 2019/20, due to higher foreign-currency redemptions. In 2018, the bond-switch programme reduced domestic redemptions between 2018/19 and 2020/21 by R44 billion. Pre-funded foreign-currency cash balances will be used to meet foreign-currency bond redemptions in 2019/20. Gross borrowing requirement for 2018/19 was 4.7 per cent of GDP 79 Benchmark Descriptionrange or limit 2018/192019/20 Estimates Benchmark1 Treasury bills as % of domestic debt15 Long-term debt maturing in 5 years as % of fixed-rate and inflation-linked25 bonds Inflation-linked bonds as % of domestic debt20-25 Foreign debt as % of total debt15 Weighted term-to-maturity of fixed-rate bonds and Treasury bills (years)10-14 Weighted term-to-maturity of inflation-linked bonds (years)14-17 Other indicators (weighted average)2 Term-to-maturity of total debt (years) Term-to-maturity of foreign debt (years) 12.511.7 12.511.2 24.024.2 10.19.3 13.413.7 14.314.5 13.213.5 9.910.0
2019 BUDGET REVIEW Figure 7.1 Loan debt maturity profile* *Excludes Treasury bills and borrowing from the Corporation for Public Deposits Source: National Treasury The main budget is expected to approach a primary balance – meaning that non-interest expenditure will no longer exceed total revenue – by 2023/24. As a percentage of GDP, the gross borrowing requirement is expected to decline, reaching 5.3 per cent in 2021/22. Financing of national government gross borrowing requirement1 Table 7.2 1. A longer time series is presented in Table 1 of the statistical annexure at the back of the Budget Review 2. A positive value indicates that cash is used to finance part of the borrowing requirement 3. Differences between funds requested and actual cash flows of national departments Source: National Treasury 80 2017/18 R million Outcome 2018/19 Budget Revised 2019/20 2020/21 2021/22 Medium-term estimates Main budget balance -208 587 Redemptions -28 375 Domestic long-term loans -24 254 Foreign loans -4 121 -191 054 -224 472 -33 192 -15 060 -31 084 -13 019 -2 108 -2 041 -255 243 -264 449 -267 560 -80 088 -63 215 -64 256 -30 596 -51 075 -59 964 -49 492 -12 140 -4 292 Total -236 962 -224 246 -239 532 -335 331 -327 664 -331 816 Financing Domestic short-term loans 33 407 Treasury bills (net) 43 350 Corporation for Public Deposits -9 943 Domestic long-term loans 198 692 Market loans 200 200 Loans issued for switches -1 508 Foreign loans 33 895 Market loans 33 895 Loans issued for switches – Change in cash and other balances2 -29 032 Cash balances -31 538 Other balances3 2 506 14 200 14 000 4 200 14 000 10 000 – 191 000 180 500 191 000 181 000 – -500 38 040 54 198 38 040 54 198 – – -18 994 -9 166 -23 085 -47 498 4 091 38 332 25 000 35 000 36 000 15 000 35 000 36 000 10 000 – – 216 000 244 000 254 000 216 000 244 000 254 000 – – – 28 520 43 050 43 560 28 520 43 050 43 560 – – – 65 811 5 614 -1 744 71 644 930 -6 268 -5 833 4 684 4 524 Total 236 962 Percentage of GDP 5.0% 224 246 239 532 4.5% 4.7% 335 331 327 664 331 816 6.2% 5.6% 5.3%
CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Domestic short-term borrowing Short-term loans are made up of a highly liquid Corporation for Public Deposits borrowing facility and Treasury bills. During 2018/19, government issued an additional R9.8 billion in Treasury bills (relative to 2018 Budget projections) to partly finance the higher borrowing and compensate for lower issuance in domestic bonds. Loans from the Corporation for Public Deposits remained unchanged at R17.3 billion. In 2019/20, net Treasury bill issuance will amount to R15 billion, while borrowing from the Corporation for Public Deposits will increase to R27.3 billion. Table 7.3 Domestic short-term borrowing Source: National Treasury Domestic long-term borrowing Domestic long-term loans consist of fixed-rate, inflation-linked and retail savings bonds. In 2018/19, domestic long-term loans amounted to R180.5 billion. Between April 2018 and January 2019, government issued R147.5 billion in bonds. Fixed-rate instruments, with an average auction-clearing yield of 9.3 per cent, accounted for 81 per cent of this issuance. The auctions were well supported. During 2018, yields increased by an average of 79 basis points, making it more expensive for government to issue debt. The weekly nominal auction amounts rose due to more expensive debt and higher borrowing. Over the medium term, bond issuance will increase from R216 billion to R254 billion. An electronic government bond trading platform was launched in July 2018. Trading on this platform has surpassed expectations. Daily volumes average R2.2 billion, compared with an expected daily trade of R1 billion. The platform is already increasing liquidity and transparency. It collects daily data that will help to assess its effect on primary bond auctions and secondary market pricing. Increasing yields made it more expensive for government to issue debt in 2018 Non-resident holdings Foreign investors remain the largest single category of holders of domestic government bonds. By the end of December 2018, they held 37.7 per cent (R712.9 billion) of domestic government bonds. Foreign investors hold 37.7 per cent of domestic government bonds 81 2018/19 2019/20 2018/192019/20 OpeningNetClosing R millionbalancechangebalance Net Closing changebalance Weekly auction estimates Corporation for17 256–17 256 Public Deposits Treasury bills293 32114 000307 321 91-days27 430-10 43017 000 182-days56 8332 98559 818 273-days88 9489 55698 504 364-days120 11011 889131 999 10 00027 256 15 000322 321 1 20018 200 -6 44853 370 2 896101 400 17 352149 351 8 2559 020 1 0001 400 2 1252 145 2 3952 600 2 7352 875 Total310 57714 000324 577 25 000349 577
2019 BUDGET REVIEW Figure 7.2 Ownership of domestic government bonds Source: Share Transactions Totally Electronic International borrowing Government raises financing in the international capital markets to fund its foreign-currency commitments. In 2018, it issued US$2 billion in foreign bonds, and the transaction was oversubscribed. Further issuance of US$2 billion is expected in 2018/19. Over the next three years, government will raise an additional US$8 billion in global capital markets. Government to raise US$8 billion in global capital markets over medium term Table 7.4 Foreign-currency commitments and financing 1. A positive value indicates that cash is used to finance part of borrowing requirement Source: National Treasury Cash balances Government’s total cash holdings, which consist of deposits Sharp increase in cash balances to prefund large foreign-currency commitments held at commercial banks and the Reserve Bank, stood at R235.8 billion at the end of 2017/18. As Table 7.5 shows, these balances have increased sharply, mainly to prefund large foreign-currency commitments due in 2019/20. In 2018/19, rand cash balances increased by R21.5 billion relative to the 2018 Budget. This is due to a shift in the cash flow of social-grant and interest payments from March to April 2019. Of government’s total cash 82 2017/18 US$ millionOutcome 2018/19 Estimate 2019/20 2020/21 2021/22 Medium-term estimates Commitments Redemptions311 Interest916 Departmental995 154 1 022 1 235 3 471846296 1 2571 2681 426 1 1901 2501 310 Total2 222 2 411 5 9183 3643 032 Financing Loans2 500 Purchases– Interest49 Change in cash balances1-327 4 000 – 86 -1 675 2 0003 0003 000 ––– 868779 3 832277-47 Total2 222 2 411 5 9183 3643 032
CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES holdings for 2019/20, almost 81 per cent, or R171.6 billion, constitutes official foreign exchange reserve deposits made with the Reserve Bank, which is available for government to use as bridging finance. Table 7.5 Change in cash balances 1. A positive value indicates that cash is used to finance part of borrowing requirement 2. Rand values at which foreign currency was purchased or borrowed 3. Deposits in rands and US dollars to meet government’s commitments 4. Deposits in rands and US dollars made with Reserve Bank to increase official foreign exchange reserves Source: National Treasury Government debt and debt-service costs National government debt Government debt, determined primarily by its borrowing requirement, is also affected by changes in inflation and exchange rates. Table 7.6 summarises the distribution and stock of national government debt. Gross loan debt is expected to increase by R869 billion over the medium term. Net debt is expected to stabilise at R4.52 trillion, or 57.3 per cent of GDP, by 2024/25 and gross debt at 60.2 per cent of GDP by 2023/24. Net loan debt expected to stabilise at 57.3 per cent of GDP by 2024/25 83 Distinguishing gross and net loan debt In line with global reporting standards, government discloses its debt on a gross and net basis. Gross loan debt represents the nominal value of all outstanding loan debt, as well as inflation-linked and foreign debt, which are revalued at current and projected inflation and exchange rates. It includes debt that was incurred to accumulate cash balances, which help to increase official foreign exchange reserves and meet future cash flow requirements. Debt-service costs are based on gross loan debt. Net loan debt excludes cash balances. 2017/18 R millionOutcome 2018/19 BudgetRevised 2019/202020/212021/22 Medium-term estimates Rand currency Opening balance110 262 Closing balance123 241 of which: Tax and loan accounts56 084 Change in rand cash balance1-12 979 (opening less closing balance) 112 157123 241 117 157138 657 50 00071 500 -5 000-15 416 138 657117 157117 157 117 157117 157117 157 50 00050 00050 000 21 500–– Foreign currency2 Opening balance93 987 Closing balance112 546 US$ equivalent8 942 Change in foreign currency-18 559 cash balance1 (opening less closing balance) 114 164112 546 132 249144 628 10 00710 617 -18 085-32 082 144 62894 48493 554 94 48493 55499 822 6 7866 5096 556 50 144930-6 268 Total change in cash balances1-31 538 -23 085-47 498 71 644930-6 268 Total closing cash balance235 787 of which: Operational cash 372 194 Official reserves 4163 593 249 406283 285 79 008113 961 170 398169 324 211 641210 711216 979 40 05935 75635 627 171 582174 955181 352
2019 BUDGET REVIEW Table 7.6 Total national government debt1 1. A longer time series is given in Table 10 of the statistical annexure at the back of the Budget Review 2. Estimates include revaluation based on National Treasury's projections of inflation and exchange rates Source: National Treasury Over the MTEF period, the composition of debt is relatively constant. Domestic short-term and foreign-currency debt each account for about 10 per cent of gross loan debt, while domestic long-term debt accounts for the remainder. In 2018/19, the stock of debt increased by R324.7 billion. The main budget deficit accounted for R224.5 billion of this increase. The debt portfolio is sensitive to changes in the value of the currency: rand depreciation increases the value of outstanding foreign debt. This is partly offset by an increase in the rand valuation of government’s foreign cash holdings. Table 7.7 Analysis of annual increase in gross loan debt 1. Revaluation based on National Treasury projections of inflation and exchange rates 2. A negative value indicates that cash is used to finance part of the borrowing requirement Source: National Treasury National government debt-service costs Government debt-service costs are determined by the debt stock, new borrowing and macroeconomic variables such as interest, inflation and exchange rates. In 2018/19, debt-service costs were revised upwards by R2.1 billion due to the higher borrowing requirement. Higher Treasury bill issuance and greater bridging finance increase short-term borrowing costs. As a share of GDP, debt-service costs average 3.9 per cent over the medium term. 84 2017/18 R millionOutcome 2018/19 Estimate 2019/202020/212021/22 Medium-term estimates Budget deficit208 587 Discount on loan transactions22 452 Revaluation of inflation-linked bonds121 491 Revaluation of foreign-currency debt1-24 733 Change in cash and other balances229 032 224 472 17 716 18 801 54 476 9 166 255 243264 449267 560 13 82018 45113 313 29 22635 01439 245 -3 8972 6033 940 -65 811-5 6141 744 Total256 829 324 631 228 581314 903325 802 End of period2017/18 R billionOutcome 2018/19 Estimate 2019/202020/212021/22 Medium-term estimates Domestic loans22 272 Short-term311 Long-term1 961 Fixed-rate1 455 Inflation-linked506 Foreign loans2218 2 494 324 2 170 1 603 567 320 2 7483 0293 311 350385420 2 3982 6442 891 1 7591 9212 136 639723755 295329372 Gross loan debt2 490 Less: National Revenue Fund-229 bank balances2 2 814 -292 3 0433 3583 683 -214-211-212 Net loan debt2 261 2 522 2 8293 1473 471 As percentage of GDP: Gross loan debt52.7 Net loan debt47.9 55.6 49.9 56.257.858.9 52.354.155.5
CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Table 7.8 National government debt-service costs Source: National Treasury Figure 7.3 uses the 2019/20 estimates to illustrate the sensitivity of debt and debt-service costs to changes in selected macroeconomic variables. Figure 7.3 Sensitivity of debt and debt-service costs, 2019/20* *Assuming all other variables remain unchanged. An increase/decrease in inflation, the rand/US dollar rate or interest rates causes an increase/decrease in debt-service costs and debt Source: National Treasury Contingent liabilities Government closely monitors the status of its contingent liabilities – financial obligations that will only result in expenditure if a specific event occurs. Contingent liabilities include guarantees to state-owned Government closely monitoring contingent liabilities companies, independent power producers and public-private partnerships. Government also monitors other obligations, such as the provisions for multilateral institutions. The risks posed by different categories of contingent liabilities vary. Chapter 8 discusses the financial position of state-owned companies and other public-sector institutions. Table 11 of the statistical annexure shows details of contingent liabilities and provisions for multilateral institutions. 85 2017/18 R millionOutcome 2018/19 BudgetRevised 2019/202020/212021/22 Medium-term estimates Domestic loans150 811 Short-term24 954 Long-term125 857 Foreign loans11 834 165 754167 782 22 84825 882 142 906141 900 14 37014 436 184 240205 814226 650 25 34528 86131 202 158 895176 953195 448 17 96818 25220 758 Total162 645 180 124182 218 202 208224 066247 408 As percentage of: GDP3.4 Expenditure11.6 Revenue13.6 3.63.6 11.912.1 13.614.2 3.73.94.0 12.212.713.0 14.414.915.2
2019 BUDGET REVIEW Government guarantees and other liabilities A guarantee is a commitment to take responsibility for a loan in the event of default. It enables the beneficiary to access funding that would otherwise be unavailable, or to borrow at a lower cost. A high level of contingent liabilities can lead to a higher risk premium on (and increased costs of) sovereign debt. Guarantees to some state-owned companies remain a major risk to the fiscus, and government is committed to reducing its guarantee exposure. Guarantees to some state-owned companies remain a major risk to the fiscus Table 7.9 Government guarantee exposure1 1. A full list of guarantees is given in Table 11 of the statistical annexure in the Budget Review 2. Total amount of borrowing and accrued interest for the period made against the guarantee 3. These amounts only include national and provincial PPP agreements Source: National Treasury Changes in the guarantee profile in 2018/19 were as follows: • Eskom used an additional R50 billion of its R350 billion guarantee in 2018/19. Denel was granted a further R1 billion guarantee to help it secure funding for working-capital requirements and alleviate cash flow pressures. This increased the entity’s guarantee and exposure to R3.4 billion for the next five years. Government and the Trans-Caledon Tunnel Authority concluded the guarantee framework agreement for the Vaal River System, which incorporates the Lesotho Highlands Water Project and the Acid Mine Drainage project. This brings the authority’s total guarantee to R43 billion. The National Treasury issued a R336 million guarantee to the Reserve Bank as part of the curatorship of VBS mutual bank. This guarantee is yet to be used. • • • 86 2016/17 R billion Guarantee Exposure2 2017/18 Guarantee Exposure2 2018/19 Guarantee Exposure2 Public institutions 475.7 290.4 of which: Eskom 350.0 202.8 SANRAL 38.9 29.4 Trans-Caledon Tunnel Authority 25.6 20.9 South African Airways 19.1 17.8 Land and Agricultural Bank of 11.1 3.8 South Africa Development Bank of Southern 12.5 4.1 Africa South African Post Office 4.4 4.0 Transnet 3.5 3.8 Denel 1.9 1.9 South African Express 1.1 0.8 Industrial Development 0.4 0.2 Corporation South African Reserve Bank 3.0 – Independent power producers 200.2 125.8 Public-private partnerships3 10.0 10.0 469.8 321.3 350.0 244.7 38.9 30.4 25.7 18.9 19.1 11.1 9.6 3.8 12.2 4.1 4.2 0.4 3.5 3.8 2.4 2.4 1.1 0.9 0.4 0.1 – – 200.2 122.2 10.0 9.6 483.1 372.4 350.0 294.7 38.9 30.3 43.0 14.9 19.1 17.3 9.6 2.5 11.4 4.4 – – 3.5 3.8 3.4 3.4 1.2 0.2 0.5 0.2 0.3 – 200.2 146.9 10.1 10.1
CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Guarantees to independent power producers Power-purchase agreements between Eskom and independent power producers are classified as contingent liabilities in line with global standards. These liabilities can materialise in two ways. If Eskom could not afford to buy power as set out in the power-purchase agreements, government would have to provide the utility with money to honour the agreements. Government would also be liable if it terminated such agreements owing to a change in legislation or policy. Both outcomes are unlikely, and the risk of this contingent liability materialising is low. Government has committed to procure up to R200 billion in renewable energy from independent power producers. The value of signed projects, which represents government’s exposure, is expected to amount to R146.9 billion by March 2019. Exposure is expected to decrease to R139.2 billion in 2021/22. Contingent liability risks for independent power producers are very low Guarantees to public-private partnerships Contingent liability exposure from public-private partnerships (PPPs) arises mainly from contract cancellation or if a project does not generate minimum revenue levels. During 2018/19, contingent liabilities from these partnerships increased by about R510 million to R10.1 billion. Total exposure is expected to decline to R8.1 billion in 2021/22. Additional information appears in Annexure E. PPP contingent liabilities increased by R510 million to R10.1 billion in 2018/19 Provisions for multilateral institutions South Africa subscribes to shares in multilateral institutions such as the International Monetary Fund, the African Development Bank and the World Bank, and contributes capital to the New Development Bank. Government has an obligation to help recapitalise these institutions if they run into financial difficulty by paying for shares that are subscribed but not paid for. The risk of this happening is very low. Provisions for multilateral institutions are R260.6 billion for 2018/19, and are expected to reach R322.2 billion in 2021/22. Provisions for multilateral institutions set to increase to R322.2 billion in 2021/22 Other contingent liabilities Government’s other obligations appear in Table 11 of the statistical annexure. They include a commitment to the Export Credit Insurance Corporation of South Africa, reflecting the net underwriting exposure of the company and its total assets. This commitment is forecast to reach R23.2 billion in 2018/19. The contingent liability for post-retirement medical assistance to government employees is unchanged from the previous year at R69.9 billion. This reflects the estimated present value of government’s future commitment to state employees. Legal claims against government departments are estimated at R28.7 billion. Obligations for the Road Accident Fund have increased by R76.9 billion to R216.1 billion in 2018/19. Net valuation profits and losses Government’s largest contingent asset is the Gold and Foreign Exchange Contingency Reserve Account. This account reflects profits and losses on gold and foreign exchange reserves, held by the Reserve Bank to meet 87
2019 BUDGET REVIEW foreign exchange obligations and to maintain liquidity in the presence of external shocks. The balance on this account is split into transactions with cash flow and non-cash flow valuations. Due to the depreciation of the rand, unrealised gains are expected to amount to R279 billion by end-March 2019, an increase of R85.1 billion compared with 2017/18. In 2018/19, government settled a realised loss of R142 million. Losses of R135.3 million are projected for 2019/20. Conclusion Over the past year, the financing environment remained challenging, and the weakening financial position of some state-owned companies put pressure on government’s financial resources. However, government continues to manage its debt and meet the country’s financing needs in a sustainable and responsible manner, drawing mainly from deep and liquid domestic financial markets. Government continues to manage its debt sustainably and responsibly 88
8 Financial position of public-sector institutions Overview Tand operating economic infrastructure, financing social and his chapter discusses state-owned companies, development finance Public institutions must be well governed, operationally sound and financially sustainable institutions and social security funds. Their mandates include building economic development, and augmenting the country’s social security system. To meet their objectives, these institutions need to be well governed, operationally sound and financially sustainable. As the Budget Review and the Medium Term Budget Policy Statement have noted for several years, the deteriorating financial position of some institutions, particularly several large state-owned companies, is a major risk to South Africa’s economy and its public finances. Several state-owned companies face negative cash flows and are financing operations from debt, which has become increasingly difficult to raise. This 89 In brief •The Public Finance Management Act (1999) requires major state-owned companies to generate sufficient financial resources from their operations to meet their obligations to employees, the public and debt holders. Several state-owned companies are not in a position to meet these obligations, and are in financial distress. •Beginning with a restructuring of the electricity sector, government is initiating a series of major reforms at state-owned companies. These reforms will adjust business models in response to changed economic conditions, restore good governance, bolster operational efficiency, and strengthen financial controls and planning. •To achieve their mandates, which include funding economic and social development, the development finance institutions need to be financially sustainable and supported by efficient governance structures. The combined net asset value of the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC) and the Land Bank increased to R133.1 billion in 2017/18, with allowance for credit losses at 7.5 per cent of the gross loan book. •The financial positions of the Unemployment Insurance Fund (UIF) and Compensation Fund are strong, but they are more than offset by the liabilities of the Road Accident Fund (RAF). By 2021/22, the combined net asset deficit of the social security funds is expected to reach R167.6 billion. •The Government Employees Pension Fund holds assets in excess of R1.8 trillion, which will help it to meet future pension obligations.
2019 BUDGET REVIEW moves them perilously close to default unless they receive some form of recapitalisation. Apart from financial problems, Eskom has experienced serious operational failures, forcing a temporary return to intermittent power cuts across the country. The mounting liabilities of the RAF, expected to reach R413.8 billion in 2021/22, more than offset the accumulated surpluses of the other social security funds. Over the past 12 months, government has taken the first steps to address governance problems in several public institutions. The Commission of Inquiry into Allegations of State Capture has exposed an apparent pattern of widespread corruption across major state-owned companies. Inquiries into the performance of the South African Revenue Service and the Public Investment Corporation, both of which have a large impact on the health of the public finances, have raised additional concerns. Government will initiate a series of far-reaching reforms at state-owned companies over the period ahead. These reforms are aimed at restructuring sectors in response to changed economic conditions, restoring good governance, bolstering operational efficiency, and strengthening financial controls and planning. The immediate focus is Eskom, which is discussed in Chapter 1 and Annexure W3: Fiscal support for electricity market reform, available on the National Treasury website. Reforms affecting the other institutions discussed in this chapter will be shaped by robust engagements with a broad range of parties in the months ahead. The discussion below focuses on the current financial position of these entities. Widespread pattern of corruption alleged at state-owned companies Far-reaching programme of reforms to start immediately with separating Eskom State-owned companies The Public Finance Management Act requires state-owned companies listed in schedule 2 of the act to generate sufficient financial resources from their operations to meet obligations to employees, the public and debt holders. Several entities cannot meet these obligations. As Table 8.1 shows, return on equity has deteriorated to -0.3 per cent. This is largely the result of weak revenue growth and high compensation costs associated with overstaffing. Growing debt-service costs from a decade-long debt accumulation phase also weigh heavily on profitability. Return on equity has deteriorated to -0.3 per cent as result of weak revenue growth and overstaffing Table 8.1 Combined balance sheets of state-owned companies1 R billion/per cent growth 2013/14 2014/15 2015/16 2016/17 2017/18 Total assets 910.9 14.1% 636.3 17.3% 274.6 7.4% 1.7% 1 037.5 13.9% 739.2 16.2% 298.3 8.6% -2.5% 1 178.6 13.6% 818.2 10.7% 360.4 20.8% 0.6% 1 224.2 3.9% 868.7 6.2% 355.5 -1.4% -0.0% 1 266.8 3.5% 898.5 3.4% 368.3 3.6% -0.3% Total liabilities Net asset value Return on equity (average) 1. State-owned companies listed in schedule 2 of the PFMA, excluding development finance institutions Source: National Treasury Cash flows, assets, debt and borrowing Assets have grown in line with capital investment, asset revaluations and capitalised interest. In most cases, however, growth in net asset value has not been matched by an improvement in cash generation. As Figure 8.1 90
CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS shows, after capital investment and debt servicing, most institutions show negative cash flows. Figure 8.1 Negative cash flows at state-owned companies* *Eskom, Transnet, Airports Company of South Africa, Denel, South African Airways, South African National Roads Agency Limited and Trans-Caledon Tunnel Authority Source: National Treasury In 2017/18, state-owned companies spent 85.9 per cent of the R83.8 billion budgeted for capital projects. Eskom accounted for 66 per cent and Transnet for 30.2 per cent of infrastructure spending. Most of Eskom’s expenditure was on the Medupi and Kusile power stations. Transnet reported that 40 per cent of expenditure was for acquisitions of locomotives and pipelines, 31 per cent was for maintenance and 29 per cent for other projects. Some state-owned companies are financing their operations with debt. Capital spending is also financed primarily by debt, with little contribution from operating cash flows (instead of a more conventional mix of debt and equity). Figure 8.2 shows debt falling due for seven of the largest state-owned companies, totalling R630 billion over the next 23 years. Government guarantees 54 per cent of the total debt. Over the medium term, R155 billion in debt falls due, of which government guarantees R61 billion. Given the poor financial condition of several state-owned companies, a substantial share of the debt may need to be refinanced. In the event that the entities are unable to refinance debt, government may be called upon to honour guarantees, with major consequences for the public finances. Increased credit risk has contributed to the high cost of funding for state-owned companies. Interest rates payable on short-to medium-term debt range from 8.4 per cent to 9.8 per cent, even where state guarantees are in place. Some state-owned companies using debt to fund operations Increased credit risk raises funding costs for state-owned companies 91
2019 BUDGET REVIEW Figure 8.2 Debt maturity profile of major state-owned companies* *Eskom, Transnet, Airports Company of South Africa, Denel, South African Airways, South African National Roads Agency Limited, Trans-Caledon Tunnel Authority Source: National Treasury In 2017/18, state-owned companies could raise only 76 per cent of the R135.1 billion they expected, mostly from domestic sources. Financing of long-term capital investments should ideally attract long-dated debt, because the infrastructure is expected to generate positive cash flows over the life of the investment. Given the poor financial position of the borrowing entities, however, most of the new debt was in short-term instruments. Medium-term borrowing estimates have been revised lower in recognition of state-owned companies’ funding difficulties. Most of this borrowing is for refinancing. Eskom accounts for 62 per cent of the planned borrowing. Table 8.2 Borrowing requirement of selected state-owned companies1 1. Airports Company of South Africa, Eskom, SANRAL, SAA, Transnet and Trans-Caledon Tunnel Authority Source: National Treasury Eskom Eskom, which produces and transmits most of South Africa’s electricity, reported a loss of R2.3 billion in 2017/18 following a profit of R0.9 billion in 2016/17. The loss was mainly a result of the increase in net finance costs, lower revenue and high operational costs. The utility’s debt-service coverage ratio fell from 1.3 to 0.85 in 2017/18, meaning it could only 92 2016/17 R billionBudget Outcome 2017/18 Budget Outcome 2018/19 Revised 2019/202020/212021/22 Medium-term estimates Domestic loans (gross)52.856.2 Short-term35.022.7 Long-term17.833.5 Foreign loans (gross)49.543.5 Long-term49.543.5 70.154.4 17.929.4 52.225.0 65.048.8 65.048.8 61.8 20.1 41.7 52.0 52.0 39.549.539.3 14.821.516.5 24.728.022.8 43.434.239.8 43.434.239.8 Total102.399.7 135.1103.2 113.8 82.983.779.1 Percentage of total: Domestic loans51.6%56.4% Foreign loans48.4%43.6% 51.9%52.7% 48.1%47.3% 54.3% 45.7% 47.6%59.1%49.7% 52.4%40.9%50.3%
CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS service 85 per cent of capital and interest payments from operating cash flows. Delays and cost overruns in Eskom’s build programme have contributed to higher debt. The poor performance of existing and new generation plants constrained sales volumes and revenue. High municipal arrears continue to weaken liquidity. Eskom has been able to raise 93 per cent of its funding for 2018/19 and about 22 per cent for 2019/20 has been pre-funded. Inadequate maintenance, along with serious operational problems at Eskom’s two large new coal-fired power stations (Medupi and Kusile), has led to power cuts in early 2019. Chapter 1 sets out initial steps for a major reconfiguration of Eskom, and more detail is provided online in Annexure W3. Transnet Transnet operates South Africa’s port, freight rail and pipeline infrastructure. The group’s net profit increased to R4.9 billion in 2017/18, up from R2.8 billion in the prior year, largely as a result of increases in the volumes of export coal, railed automotive and port containers. Volumes, however, still fell short of targets. Cash generated from operations increased by 12.6 per cent from R31 billion in 2016/17 to R34.9 billion in 2017/18. Total assets improved from R353 billion in 2016/17 to R369 billion in 2017/18, mainly due to the revaluation of rail and port infrastructure. Equity remains healthy at R156 billion. Transnet’s procurement governance and controls have broken down, resulting in a qualified audit report for 2017/18. The new board has hired forensic specialists whose responsibilities include reviewing the contract for the acquisition of 1 064 locomotives. Denel Denel, a producer of military and aerospace equipment, reported a net loss of R1.8 billion in 2017/18. This resulted in negative operating cash flows of R717 million, compared with a positive R376 million in the previous year. Denel financed the shortfall by increasing its borrowing. The group’s gearing ratio increased from 122 per cent to 361 per cent, meaning that its debt is more than triple its equity. Denel’s cost structure is unsustainably high. Since 2017, it has faced severe liquidity problems. Negative operating cash flows have affected the company’s ability to deliver on projects and meet creditor obligations. In September 2018, government provided Denel with a R3.4 billion guarantee to address its liquidity problems and support a turnaround plan. South African Airways South Africa’s national carrier incurred net losses of R1.5 billion in 2015/16 and R5.6 billion in 2016/17. The airline is not generating sufficient cash to repay its maturing debt or cover its working-capital requirements. SAA will have to address its short-and medium-term funding needs to finalise its 2017/18 financial statements on a going-concern basis. SAA has secured a R3.5 billion working capital facility for 2018/19 and will require an additional R4 billion facility for 2019/20. This funding will be acquired through a mix of government-guaranteed debt and Delays and cost overruns in Eskom’s build programme have contributed to higher debt Transnet’s net profit has increased, but procurement controls are a serious concern Denel’s cost structure is unsustainably high and it faces severe liquidity problems 93
2019 BUDGET REVIEW recapitalisation. About R12.7 billion in guaranteed debt matures on 31 March 2019. SAA is negotiating with lenders to refinance this debt. South African Post Office In 2017/18 the South African Post Office (SAPO) incurred a loss of R908 million – a slight improvement from the R987 million loss reported in 2016/17. It continues to implement measures to control costs, but expects to continue incurring losses owing to declining customer numbers and ageing infrastructure. SAPO remains reliant on debt to fund operations. In 2017/18 government recapitalised the Post Office with R3.7 billion to settle maturing debt. In the current year, government provided SAPO with a R2.9 billion recapitalisation to extinguish its entire debt, and ensure continued operations. An additional R1.5 billion is allocated to SAPO over the MTEF period. As of October 2018 SAPO has taken over responsibility for distributing social grants. SAPO forecast to continue incurring losses over medium term Development finance institutions Development finance institutions support inclusive economic growth and the objectives of the National Development Plan by providing loan and equity funding for industry, infrastructure and agriculture. These institutions need to be well governed, developmentally financially sustainable. focused and Table 8.3 Financial position of selected development finance institutions 2015/16 2016/17 2017/18 R billion IDC Total assets Loan book Equity and other investments Total liabilities Net asset value 121.3 23.9 97.4 36.5 84.8 129.8 26.7 103.1 41.5 88.3 137.0 30.7 106.3 44.9 92.1 DBSA Total assets Loan book Equity and other investments Total liabilities Net asset value 82.3 70.8 11.5 53.1 29.2 83.7 76.6 7.1 51.6 32.1 89.2 75.0 14.2 54.9 34.3 Land Bank Total assets Loan book Equity and other investments Total liabilities Net asset value 41.4 36.4 5.0 35.3 6.1 45.4 41.0 4.4 39.0 6.4 49.5 43.4 6.1 42.8 6.7 Source: National Treasury The three largest institutions – the DBSA, the IDC and the Land Bank – increased their total net asset value to R133.1 billion in 2017/18, a 5 per cent increase relative to a 5.6 per cent increase in the previous period, owing to subdued economic growth, a reduced repurchase rate and delayed infrastructure projects. 94
CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS In addition to data on loan disbursements, a useful way to assess development finance institutions’ loan portfolios is to track the allowance for credit losses. This accounting metric captures the expected proportion of capital and interest payments that will not be repaid. The cumulative measure allows lenders to assess borrower repayment patterns over time. Development finance institutions’ allowance for credit losses at 7.5 per cent As Figure 8.3 shows, the percentage of allowance for credit losses 7.5 per cent in 2017/18. Figure 8.3 Quality of major development finance loan book assets* is *Land Bank, IDC and DBSA Source: National Treasury The IDC had R5.2 billion in cumulative credit losses associated with its R35.8 billion gross loan portfolio in 2017/18, owing to higher-than-expected losses by two manufacturing subsidiaries. Improvement in the Land Bank’s allowance for credit losses, which totalled R2.1 billion in 2017/18, resulted from higher agricultural production and favourable exchange rate movements, which boosted export revenues. The DBSA’s allowance for credit losses has steadily increased over the past two years, reaching R4.8 billion in 2017/18, as a result of weaker municipal finances. Borrowing by the three major development finance institutions in 2017/18 (see Table 8.4) was in line with budgeted amounts. The majority of the debt obtained was short term, which increases refinancing risk. Land Bank The Land Bank supports development and transformation of the agricultural sector. It disbursed new loans of R2.4 billion in 2017/18. Over the medium term, the Land Bank anticipates that the average tenure of its liabilities will increase from the current base of less than two years, reducing liquidity risk. Developmental loans are expected to increase from 11.8 per cent to 24.2 per cent of the total loan book by 2020/21. Industrial Development Corporation The IDC finances industrial development. Over the medium term, it will focus on financing and facilitating the adoption of emerging technologies and creating new industries. IDC profits grew by 45.5 per cent, from R2.2 billion in 2016/17 to R3.2 billion in 2017/18, mainly as a result of Reliance on short-term borrowing increases refinancing risk IDC disbursed R15.4 billion in loans and investments during 2017/18, mostly to black-owned companies 95
2019 BUDGET REVIEW capital gains. The corporation disbursed R15.4 billion in loans and investments during the year, the majority to black-owned companies. The loan book grew by 15 per cent to R30.7 billion. Development Bank of Southern Africa The DBSA provides financing for infrastructure projects – including water, sanitation, energy and school infrastructure. It assists clients with project preparation and implementing infrastructure programmes. The DBSA’s profit declined from R2.8 billion in 2016/17 to R2.3 billion in 2017/18, mainly due to interest rate movements, project delays and slow municipal processes. In 2017/18, it disbursed R11.9 billion in developmental loans, and the development loan book increased from R72 billion to R75 billion. DBSA disbursed R11.9 billion in developmental loans in 2017/18 Table 8.4 Borrowing requirement for development finance institutions1 Medium-term estimates2 1. Land Bank, DBSA and IDC 2. Forecast numbers for 2021/22 relating to DBSA were not available Source: National Treasury Social security funds Social security funds provide support for unemployed workers and those involved in road and workplace accidents. Over the medium term the funds will collect R239 billion in contributions and pay R194.3 billion in benefits. Table 8.5 Financial position of social security funds Source: National Treasury 96 2015/162016/172017/18 R billionOutcome 2018/19 Estimate 2019/202020/212021/22 Medium-term estimates Unemployment Insurance Fund Total assets124.7139.5160.1 Total liabilities4.66.413.4 Net asset value120.1133.1146.7 174.0 16.5 157.5 185.1198.1213.6 18.823.027.9 166.3175.1185.7 Compensation Fund Total assets55.262.567.3 Total liabilities34.735.534.3 Net asset value20.527.033.0 53.6 12.2 41.4 56.559.662.9 12.813.514.3 43.746.148.6 Road Accident Fund Total assets9.89.29.8 Total liabilities155.0189.2216.1 Net asset value-145.2-180.0-206.3 10.8 252.6 -241.8 11.611.811.9 295.4348.6413.8 -283.8-336.8-401.9 2016/17 R billionBudget Outcome 2017/18 Budget Outcome 2018/19 Revised 2019/202020/212021/22 Domestic loans (gross)23.458.0 Short-term17.847.7 Long-term5.610.3 Foreign loans (gross)6.59.4 Long-term6.59.4 51.154.0 36.2 39.0 14.9 15.0 9.35.6 9.3 5.6 36.2 23.9 12.3 9.2 9.2 44.438.219.7 27.722.711.8 16.715.57.9 12.110.74.5 12.110.74.5 Total29.967.4 60.459.6 45.4 56.548.924.2 Percentage of total: Domestic loans78.3%86.1% Foreign loans21.7%13.9% 84.6%90.6% 15.4%9.4% 79.7% 20.3% 78.6%78.1%81.4% 21.4%21.9%18.6%
CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS The financial positions of the UIF and Compensation Fund are strong and expected to improve over the medium term. However, they are offset by the liabilities of the RAF. By 2021/22, the combined net asset deficit of the social security funds is expected to reach R167.6 billion. Detailed income and expenditure data for the social security funds is published in the Estimates of National Expenditure. Unemployment Insurance Fund The UIF provides benefits to workers who are out of work due to retrenchment, illness or maternity leave. The fund’s projected benefit payments are expected to grow from R9.3 billion in 2017/18 to R15.9 billion in 2021/22. However, its net asset value continues to grow, and is projected at R185.7 billion in the outer year. Compensation Fund The Compensation Fund provides financial support to employees who have been injured at the workplace or have a work-related illness. The net asset value of the fund is expected to grow from R33 billion in 2017/18 to R48.6 billion in 2021/22. Contributions are projected to grow from R11.8 billion in 2018/19 to R13.6 billion in 2021/22 due to administrative improvements, which will finance higher benefit payments. The fund has also budgeted for an increase in cases of post-traumatic stress disorder, orthotic support and medical rehabilitation to help beneficiaries transition back into the workplace. Road Accident Fund The RAF’s accumulated deficit is expected to deteriorate at an average annual rate of 18.5 per cent over the medium term to R402 billion in 2021/22. On an accrual basis, the fund will have an average annual deficit of R53.3 billion, mainly as a result of claims awarded but not paid. In 2019/20 the RAF fuel levy will increase by 5c/litre. Financial positions of UIF and Compensation Fund are strong, but offset by RAF Compensation Fund’s net asset value expected to reach R48.6 billion in 2021/22 Government Employees Pension Fund In 2017/18, the Government Employees Pension Fund (GEPF) paid out R95 billion in benefits to about 1.3 million employees and 450 000 beneficiaries. In 2017/18, the Minister of Finance approved a pension increase of 5.5 per cent, exceeding consumer price inflation for the same period. Assets invested on behalf of the fund returned 8.5 per cent compared with 4.3 per cent in 2016/17. Table 8.6 Selected income and expenditure of GEPF 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 R billion Revenue Employer contributions Employee contributions Investment income1 Expenditure Benefits paid 30.8 17.1 49.9 33.5 18.7 54.0 36.1 20.3 68.5 38.6 21.7 69.0 42.1 23.4 69.5 45.3 25.1 72.0 43.2 57.9 85.8 83.1 88.3 94.9 1. Dividends on listed equities, interest on bonds and money market instruments and income from unlisted properties and unlisted investments excludes adjustments for value of financial assets Source: Government Pensions Administration Agency 97
2019 BUDGET REVIEW An actuarial valuation completed in December 2018 showed that the GEPF held R1.8 trillion in assets. This is sufficient to cover 108.3 per cent of liabilities on a best-estimate basis, which measures the present value of future pension liabilities. On a stricter liability measure, taking into account the reserve the fund has to hold to make pension payments and remain solvent, assets cover 75.5 per cent of liabilities. On both measures, the GEPF’s position has deteriorated since 2016. The contributing factors are lower-than-expected investment returns, the introduction of new benefits and improvements to existing benefits. In addition, contributions to the fund were lower than actuarial assumptions. The Public Investment Corporation (PIC) manages the financial assets of the GEPF and the social security funds. At the end of March 2018, the PIC had R2.08 trillion in assets under management. On best-estimate basis, GEPF remains fully funded Table 8.7 Breakdown of assets under management by PIC, 2017/18 Government Employees Pension Fund Compensation Fund1 Unemployment Insurance Fund Other Total R billion Asset class Equity Bonds Money market Property Unlisted investments 1 029.5 571.0 54.3 101.3 58.8 37.1 88.4 16.1 5.5 9.7 13.6 39.5 9.5 1.1 1.6 0.3 13.3 32.3 0.2 – 1 080.4 712.2 112.3 108.1 70.1 Total 1 814.9 156.8 65.3 46.1 2 083.1 1. Includes the Compensation Pension Fund Source: Public Investment Corporation and National Treasury The Commission of Inquiry into Allegations of Impropriety Regarding the PIC is expected to submit a final report on 15 April. The PIC’s board resigned on 1 February to allow for an investigation of the fund’s investments. The current board will serve until the Minister of Finance appoints a new board – a process that is under way. Conclusion A number of public-sector institutions, particularly large state-owned companies and the RAF, face serious financial and administrative difficulties, and pose a risk to the public finances. Government is working on a broad reform programme to strengthen the governance, financial management and operations of these entities. Broad reforms to be designed to strengthen governance, financial management and operations of public entities 98
ANNEXURES Three annexures are available on the National Treasury website (www.treasury.gov.za): • Annexure W1: Explanatory memorandum to the division of revenue • Annexure W2: Structure of the government accounts • Annexure W3: Fiscal support for electricity market reform 99
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A Report of the Minister of Finance to Parliament Introduction This annexure fulfils the requirement of section 7(4) of the Money Bills and Related Matters Act (2009). This section of the act prescribes that the Minister of Finance must submit a report to Parliament at the time of the budget explaining how the Division of Revenue Bill and the national budget give effect to, or the reasons for not taking into account, the recommendations contained in: • Budgetary review and recommendation reports submitted by committees of the National Assembly in terms of section 5 of the act. Reports on the fiscal framework proposed in the Medium Term Budget Policy Statement (MTBPS) submitted by the finance committees in terms of section 6 of the act. Reports on the proposed division of revenue and the conditional grant allocations to provinces and local governments set out in the MTBPS submitted by the appropriations committees in terms of section 6 of the act. • • Budgetary review and recommendation reports Section 5 of the act sets out a procedure to be followed by the National Assembly, through its committees, for assessing the performance of each national department before the Minister of Finance introduces the national budget. This procedure provides for committees to prepare budgetary review and recommendation reports, which: • • Must assess the department’s service-delivery performance given available resources. Must assess the effectiveness and efficiency of the department’s use and allocation of available resources. May include recommendations on the planned use of resources. • The budgetary review and recommendation reports were tabled by the relevant portfolio committees in October and November 2018. The National Treasury’s responses to the committees’ recommendations are detailed below. 101
2019 BUDGET REVIEW Portfolio Committee on Agriculture, Forestry and Fisheries The committee recommends that there should be an intervention from the Minister of Finance for additional funding to the Agricultural Research Council (ARC), which is the government’s premier agricultural research institution in the country that is on the verge of collapse due to underfunding. With the challenges that the sector is currently contending with, the collapse of the entity will be costly and risky to agricultural development, innovation and growth as South Africa will be forced to depend on privately-funded and international agricultural research innovations. Additional funding for the ARC is a necessity to give effect to the Malabo Declaration on Accelerated Agricultural Growth and Transformation for Shared Prosperity and Improved Livelihoods that was signed by African Heads of States including South Africa and the members of the African Union in Malabo, Equatorial Guinea in June 2014. The National Treasury is aware of the ARC’s important contribution to research and development. Over the medium term, the Department of Agriculture, Forestry and Fisheries has been allocated an additional R400 million (R130 million in 2019/20, R140 million in 2020/21 and R130 million in 2021/22), which will be transferred to the council for the construction of a foot and mouth vaccine facility at the Onderstepoort Veterinary Institute. The facility is expected to enhance the country’s vaccine research capacity and ensure there is a secure supply of the vaccine. However, government’s ability to provide additional funds to the ARC is limited due to the constrained fiscal outlook. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. Portfolio Committee on Basic Education Together with relevant authorities, the department should fast track the implementation of plans to allocate ring-fenced funds for learner transport. The National Treasury is part of the task team on this issue. The ring fencing can only happen once a policy decision is taken on whether the function lies with the Department of Basic Education or the Department of Transport. Consideration should be made for additional funding for the Accelerated Schools Infrastructure Delivery Initiative (ASIDI) programme given that expenditure on ASIDI projects increased at the end of 2017/18 and that the 2018/19 first quarter report showed that the programme had 83 schools under construction and another five schools had reached partial completion. Based on the current acceleration on the projects, it appears that the budget allocation will not be enough to complete the projects that are currently running. In the 2018 Adjustments Appropriation Act, the ASIDI programme received a further R800 million for 2018/19. Consideration should be made to increase the budget of Umalusi due to its expanded mandate. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. 102
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT Portfolio Committee on Economic Development National Treasury should brief the committee on the procurement processes that the Competition Commission is expected to follow for its sector-specific needs. This should happen before the third quarter of the current financial year. The National Treasury is available to brief the committee on request. Portfolio Committee on Health The Department of Health, National Treasury and provincial treasuries should allocate a certain amount to offset the growing expenditure on accruals. Accruals incurred by provincial health departments have increased significantly in recent years, exceeding R14 billion as at 31 March 2018. Of this, R8 billion is older than 30 days. This partly reflects financial pressures in provinces, but it also reflects poor financial management. While accruals may need to be offset, it is important that provincial departments of health first demonstrate that they have controls in place to stop accrual growth. Once they have been have stabilised, national and provincial treasuries may consider additional allocations to offset existing accruals. It should also be noted that the 2017 Budget included an additional R1 billion to the provincial equitable share to alleviate pressure in medicine budgets, which contributes significantly to accruals in provincial health departments. The Department of Health and National Treasury should provide adequate funding to the Office (Office of the Health Ombud) in line with the recently approved structure for better reporting and functionality. Spending in the Office of Health Standards Compliance, the entity which the Health Ombud falls under, has increased substantially in recent years, from R33.4 million in 2014/15 to R111.6 million in 2017/18. Despite this increase in spending, the entity declared a surplus of R31.8 million in 2016/17 and R35.5 million in 2017/18. The National Treasury approved the retention of these surpluses in both years. The National Treasury and the national Department of Health will continue to work closely with the Office of Health Standards Compliance and, through the annual budget process, ensure that the entity is adequately funded. Portfolio Committee on Higher Education and Training A commitment to build 12 new Technical and Vocational Education and Training (TVET) college campuses by 2020 was made by government. However, only one new TVET college campus was completed and two were nearing completion and their operationalisation costs were funded through the skills fund. This had a negative impact on its sustainability and the rolling out of the skills development interventions. The committee recommends that voted funds be provided for sustainable ways of funding the operationalisation of all the 12 new TVET college campuses. Funding from voted funds has been secured from 2019/20 onwards for the three current sites (approximately R400 million from year 1). The remaining still needs to have a sustainable operational budget secured. The department should pursue discussions with National Treasury and other funders (for example SETAs) to secure the required funding in due course. The National Treasury has added R967 million in the 2019 medium-term expenditure framework (MTEF) period (R200 million in 2019/20, R322 million in 2020/21 and R445 million in 2021/22) for the start-up operational costs of all new TVET colleges. Over the medium term, the Department of Higher Education and Training must ensure that these costs are part of plans for the building of any new TVET college to avoid using funds from the National Skills Fund and the sector education and training authorities. The TVET subsidy will fund ongoing operational costs and the department’s baseline will provide for employee compensation. 103
2019 BUDGET REVIEW Portfolio Committee on Home Affairs Additional funding should be made available to complete the harvesting of addresses during registration and voting as well ensuring that the biometric function of voter registration devices are operational before the National Elections in May 2019. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. National Treasury should consider allocating more funding to the Independent Electoral Commission (IEC) for the completion of its ICT refreshment urgently. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. Portfolio Committee on Justice and Correctional Services The National Prosecuting Authority should be provided with additional funding to address the shortfall on its compensation of employees’ budget, to fill vacancies, and to create capacity at new courts as well as additional funds for the resumption of its Aspirant Prosecutors programme. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. Legal Aid South Africa should receive additional funding to prevent it from having to cut posts with adverse consequences for service delivery and to ensure that it is able to maintain its civil work despite the current fiscal environment. To ensure Legal Aid South Africa remains sustainable, the entity will receive additional funding of R309 million over the medium term for compensation of employees, of which R104.5 million is reprioritised funding from the Department of Justice and Constitutional Development. Portfolio Committee on Labour The committee recommends that additional funding be made available to the Commission for Conciliation, Mediation and Arbitration (CCMA) to enable it to fully implement its statutory obligations in terms of the National Minimum Wage, Basic Conditions of Employment Act and Labour Relations Act. For the 2019 MTEF period, R109 million is added to the CCMA baseline (R30 million in 2019/20, R38 million in 2020/21 and R41 million in 2021/22) to address the increasing caseload arising from the implementation of the national minimum wage and amended labour laws. It will also be used to develop training material for commissioners and assessors to preside over advisory arbitration processes and to conduct balloting and certification processes. Portfolio Committee on Mineral Resources National Treasury should fund the necessary infrastructural upgrade of the Council for Geoscience to ensure compliance with its designation as a national key point. 104
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT The Council for Geoscience receives a total transfer allocation of R1.1 billion over the 2019 MTEF period (R420.9 million in 2019/20, R444.1 million in 2020/21 and R259.9 million in 2021/22) mainly for the entity’s operations. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. National Treasury should provide additional funding to the Department of Mineral Resources to be used in the upgrading of the cadastral system. Cabinet has approved an additional allocation of R188 million in 2019/20 and R198.3 million in 2020/21 through government’s economic competitiveness and support package for the Council for Geoscience’s digital information system, building, equipment and facilities. This support is aimed at improving the services and quality of analytical and research work offered by the council. Portfolio Committee on Police The committee recommends that funds allocated to the Integrated Justice System (IJS) Revamp project should be allocated correctly between operational and non-operational functions. During the 2019 MTEF process, the Peace and Security functional group decided that, with effect from 1 April 2019, the funding allocated to the South African Police Service (SAPS) for the IJS programme will be shifted to the Department of Justice and Constitutional Development. This department, through the IJS Board, is responsible for the governance of the entire programme. This will address the current overlap between the programme’s operational and non-operational functions, ensuring more effective coordination, governance, project prioritisation and spending. SAPS remains a key role player in the implementation of the programme. Although funds for the IJS programme will be shifted to the Department of Justice and Constitutional Development, the SAPS will keep its allocation for the implementation of the criminal justice system seven-point plan over the medium term. National Treasury should consider the application by the Independent Police Investigative Directorate (IPID) for funds derived from other revenue streams, like the Criminal Assets Recovery Account (CARA) to upgrade its ICT infrastructure. The National Treasury does not have the authority to make decisions regarding the use of CARA funds. This authority lies with the CARA committee, which is responsible for providing Cabinet with recommendations on the use of funds and giving advice on specific issues related to the criminal assets recovery process. As part of the 2019 MTEF process, the National Treasury invited representatives from the CARA unit within the Department of Justice and Constitutional Development to present at the Peace and Security functional group on CARA and the process to be followed by departments when making submissions for funding requests. The IPID was also part of this meeting. The Ministers of Finance and Public Works should address the alleged continuation of payments to the owner of the City Forum building despite the lease agreement having been found to be invalid. The National Treasury has been working with the IPID and the Department of Public Works to resolve this matter. The Department of Public Works is procuring alternative accommodation for the IPID. 105
2019 BUDGET REVIEW The Civilian Secretariat for Police should address the challenges regarding inadequate office space. The National Treasury should engage the SAPS to reallocate the funds for office accommodation to the department. The National Treasury supports this recommendation. Through a mediation process including the Civilian Secretariat for Police and SAPS, the National Treasury has facilitated the shifting of R20.3 million over the 2019 MTEF period from SAPS to the Civilian Secretariat for Police for office accommodation. Portfolio Committee on Public Enterprises The Minister of Finance should utilise his vested power to hold the shareholder representatives and others in the state-owned companies to account on financial management as articulated in the Public Finance Management Act (PFMA) of 1999. The National Treasury works closely with shareholder representatives, including the Department of Public Enterprises and state-owned companies, to ensure compliance with the PFMA. In cases where there are audit findings, the National Treasury continuously engages and monitors the entities’ implementation of remedial measures. It also considers continuous breaches of the PFMA when evaluating requests for additional funding. However, it is the responsibility of accounting authorities to take remedial action where breaches such as unauthorised, irregular and wasteful expenditure have taken place. The Minister of Finance should assist the Department of Public Enterprises to identify business and environmental risks associated with state-owned companies. On receipt of the annual reports and corporate plans for state-owned companies from the Department of Public Enterprises, the National Treasury analyses them, after which it provides feedback to the department annually. Where necessary, engagements between the two departments and the state-owned companies may take place. The Minister of Finance should assist government through mechanisms to reduce risks associated with wholesale funding and limit exposure of state-owned companies. The Financial Sector Regulation Act of 2017 lays the foundation of the Twin Peaks model of financial regulation and confers on the South African Reserve Bank (SARB) an explicit statutory mandate to enhance and protect financial stability. The Financial Sector Regulation Act does not apply to the wholesale funding risks to state-owned companies and exposures of state-owned companies, but only to financial institutions. The credit and market risks faced by state-owned companies should be managed by the respective entity’s finance and risk department and reported to the board on a regular basis. The auditors and executive authorities of these institutions must ensure that they have best-practice frameworks to mitigate these risks. The Minister of Finance should introduce a transparent framework in terms of how to run state-owned companies commercially, and compensate them for any development mandate expenditure through budget transfers. The accounting authority of a state-owned company is the board of directors. The board has a fiduciary duty to ensure that institutions operate on a going-concern basis. If the institution fails to remain a going concern, then boards are required by law to begin an orderly winding down of the entity. The National Treasury developed a template for costing developmental mandates, which has been shared with executive authorities. The state-owned companies are completing the framework’s costing template. This is a process that must be overseen by the institution’s board of directors and executive authority. However, funding developmental mandates should be considered alongside other expenditure priorities and the overarching objective of fiscal sustainability in the appropriations process. 106
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT The Minister of Finance should enhance fiscal policy to create buffers against shocks through the development of a framework with threshold levels on the minimisation or avoidance of risky contingent liabilities. The National Treasury has a number of mechanisms in place to monitor government’s guarantee exposures. These include a central register where all national government guarantees are recorded. The register is updated quarterly with the latest issuances and usage of guarantees, and is published in the Budget Review as required by the Constitution. The Fiscal Liabilities Committee assesses government’s contingent liabilities. Once guarantees are issued, the committee reviews credit risk reports on the guarantee portfolio and reports on compliance with guarantee conditions. The National Treasury conducts annual credit risk assessments on all state-owned companies that have been granted guarantees. Each entity with a guarantee is charged a fee, which is deposited into the National Revenue Fund. These fees act as a disincentive for guarantee applications and defray the costs of a call on a guarantee. Ultimately, however, the only way to reduce contingent liability risk to the fiscus from public entities is for these institutions to generate sufficient income to service their guaranteed obligations. This is a process that must be overseen by the boards of these entities. The Minister of Finance should provide leadership on revenue enhancement in state-owned companies with regards to the review of pricing models, selling non-productive assets, and collecting arrears. The legislation governing public entities requires that the boards of state-owned entities develop and approve strategies and turnaround plans for the companies. Routine business activity such as asset disposal and arrear management must be executed by the company’s management. Portfolio Committee on Public Works Engage with the National Treasury taking into account measures contained in the Intergovernmental Relations Framework Act (2005) so that the Independent Development Trust (IDT) can collect management fees and all debt owed to it from client departments. These engagements to be reported to the committee on interventions before the budget vote process in the 2018/19 financial year on regulatory measures and action steps to ensure that all heads of departments (HoDs), Directors-General, and accounting officers of departments and heads of organs in future pay fees owed in the financial year that projects are planned and completed. The National Treasury welcomes the recommendation. The IDT has approached the Department of Public Works and the National Treasury for technical assistance in improving its revenue collection. The National Treasury will engage with the trust and the department to identify suitable ways for the entity to collect management fees on time. The National Treasury is reviewing its Instruction 04 of 2014/15 (management fees to be charged by the IDT) to strengthen areas relating to effective and efficient revenue-collection measures, and to close any gaps in the trust’s revenue and debt management practices. It will continue to discuss revenue and debt management with the IDT, implementing agencies and the Department of Public Works over the medium term. Portfolio Committee on Rural Development and Land Reform The committee recommends that the Minister of Finance should assist the Commission on Restitution of Land Rights (CRLR) to develop and implement strategies for settling the commitment register of R5 billion within the MTEF period. The strategy should also address the suspense account of the Commission. The Department of Rural Development and Land Reform is allocated R3.6 billion in 2019/20, R3.3 billion in 2020/21 and R3.5 billion 2021/22 for its restitution programme. The National Treasury, through the Government Technical Advisory Centre, has been helping the commission to implement strategies for settling land claims quickly. It is also willing to assist the commission in addressing concerns regarding the suspense account, guided by the Minister of Rural Development and Land Reform. 107
2019 BUDGET REVIEW Support the Commission, which meets the criteria for a national public entity in terms of Section 1 of the PFMA, to become a fully autonomous entity as envisaged in the Restitution of Land Rights Act (1994). Autonomy will help the CRLR to comply with the requirements of an entity as well as improve service delivery efficiency. Therefore, the Minister of Finance in consultation with the Minister of Rural Development and Land Reform and the Chief Land Claims Commissioner should consider making budgetary allocation that would allow the CRLR to be an autonomous national public entity accountable to the Minister of Rural Development and Land Reform as well as Parliament. There are ongoing consultations between the CRLR and the National Treasury to establish it as a fully registered entity. During the 2019 MTEF period, the Department of Rural Development and Land Reform submitted an additional funding request of R2.7 billion over the MTEF period for the establishment of a fully autonomous commission. However, due to the constrained fiscal outlook, the scope to provide additional funding is limited. Should the fiscal outlook improve, future recommendations for additional funding may be considered. The commission should meanwhile continue using the Department of Rural Development and Land Reform’s resources. The Minister of Finance should assist the Department of Rural Development and Land Reform and Department of Agriculture, Forestry and Fisheries to develop a comprehensive policy on integrated development support for agricultural land reform in line with the blended finance model involving the National Treasury and the Land Bank. The National Treasury is ready to assist these departments and will be guided by the Minister of Rural Development and Land Reform and the Minister of Agriculture, Forestry and Fisheries. A total of R887 million has been allocated to the Department of Agriculture, Forestry and Fisheries over the medium term to be transferred to the Land Bank for the blended finance mechanism. The Minister of Finance should ensure that the budget is allocated for the Office of the Valuer-General to enable smooth running of the office. Over the 2019 MTEF period, R451.8 million was allocated to the Office of the Valuer-General. By the end of 2017/18, the entity had a surplus of R51.1 million, of which R41.1 million was surrendered to the National Revenue Fund. Portfolio Committee on Science and Technology The Minister of Science and Technology should continue her engagement with the National Treasury to secure additional funding for the science and technology portfolio and that the committee supports all funding requests made in this regard. The National Treasury recognises the importance of science, technology and innovation in growing the economy. The Department of Science and Technology has been allocated R25 billion over the medium term. Of this, the department transfers 92 per cent to its entities to fund research and development programmes that form the strategic foundation for scientific innovation. The department will also receive donor funding amounting to R118.8 million over the 2019 MTEF period for projects relating to the green economy and strengthening the smallholder essential oils value chain. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. The Minister of Science and Technology advises against all proposed funding reductions from the National Treasury and that the regulations regarding the non-acceptance of Memoranda of Agreement for remunerated services be reconsidered in light of the adverse effect it has had on entities like the Council for Scientific and Industrial Research (CSIR) who could not secure its targeted contract income. 108
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT Given the tight fiscal environment and the need for the National Treasury to direct spending to other pressing national priorities that are underfunded, reductions have been effected across all votes, particularly on entities with favourable financial positions and large cash reserves. Baseline reductions to science and technology spending have been kept to a minimum. National Treasury should elaborate on its view that, “the department’s six entities are adequately funded to deliver on their mandate given the yearly applications to the National Treasury to retain surplus funds.” The committee maintains that the performance delivery of the entities has been structured around the budgets that have been allocated to them, and not according to all the responsibilities that they are mandated to fulfil. In 2018/19, the National Treasury applied stringent measures on the retention of surpluses, requiring compelling evidence on the need to retain funds. Entities under the Department of Science and Technology are adequately funded to deliver on their mandate given the amount of transfers they receive in relation to their respective mandates. This is further supported by cash reserves in the entities’ bank accounts that accumulate interest, resulting in the requests to retain cash surpluses. Over the 2019 MTEF period the Department of Science and Technology will transfer the majority of its allocated budget to its entities to execute their mandates, and these entities also generate profits from their activities and the services they render to various stakeholders. Moreover, entities’ performance indicators indicate that they are able to achieve their targets with the allocated budget as shown in the various annual reports and annual performance plans submitted to the National Treasury. Portfolio Committee on Small Business Development The committee had in the past recommended that the department needs to engage National Treasury in order to ascertain how much it would cost to establish necessary institutional support structures such as Co-operatives Development Agency, Co-operatives Advisory Council, Co-operative Development Fund and Co-operatives Tribunal, including discussions with the Department of Higher Education concerning the Co-operatives Training Academy. In light of the present co-operatives mortality rate such institutional support structures are indispensable. Since 2017, the National Treasury has recommended that the Department of Small Business Development consider creating a unit within the department that will execute the functions of the Cooperative Banks Development Agency until the fiscal framework permits the establishment of a standalone agency. Portfolio Committee on Tourism The committee recommends that the Minister of Finance, through the National Treasury develops a tourism funding model for local government through determining a percentage of the budget that could be ring-fenced for tourism in the Division of Revenue allocations, in order to advance destination enhancement, market access, product development, and linkages to the Local Economic Development budget. Government recognises the importance of tourism and the role municipalities play in facilitating its growth. Within the local government fiscal framework, most economic functions are funded from local government’s own revenues. These revenues are raised primarily from the sale of services and property rates and account for 70 per cent of all municipal revenues. These are an appropriate source of funding for economic functions, as increased economic activity – including increased tourism traffic – will result in higher property values and sales of services, thereby helping to fund the cost of these functions. The opportunities for tourism promotion and the type of investment needed are likely to vary widely across South Africa’s 257 municipalities, making it difficult to prescribe a one-size-fits-all approach to how much municipalities should spend in this area. Many activities that are essential to enhancing tourism also overlap with other functions, such as improving public transport, upgrading parks and ensuring the 109
2019 BUDGET REVIEW reliability of basic services. These are core municipal activities that can also improve the tourism potential of an area. Municipal councils are appropriately placed to decide on suitable tourism promotion projects in their areas. The Minister of Finance through the National Treasury should capitalise the Tourism Transformation Fund with the budget commensurate to the transformation imperatives of the tourism sector which still resembles the apartheid patterns of ownership, management and control. The National Treasury acknowledges the importance of tourism and the need for the development and transformation of the sector. However, due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. The Minister of Finance should advise Parliament on the feasibility of introducing a Tourism Tax that could be introduced in South Africa, and whether such a tax would have a substantial impact on the increase of budget appropriated to the Tourism Vote. The South African tourism levy charges the consumer a 1 per cent levy for the use of specific tourism services. The funds collected are primarily used by South African Tourism to promote the country as a preferred travel and tourism destination. Any consideration to introduce other taxes will need thorough evidence-based research. Portfolio Committee on Trade and Industry The Minister of Trade and Industry should consider engaging with the Minister of Finance with a view to make funding available for maintenance, upgrading and investment in new technology for the technical institutions such as the South African Bureau of Standards, the National Metrology Institute of South Africa and the National Regulator for Compulsory Specifications to improve efficiency and ensure modernization during the outer years of the Medium Term Expenditure Framework. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. However, during the 2018 adjustments budget, R100 million was shifted from the special economic zones incentive programme to the South African Bureau of Standards to replace outdated infrastructure. The National Metrology Institute of South Africa and the National Regulator for Compulsory Specifications were also allowed to retain surpluses from 2017/18 to allow the entities to respectively acquire a new building and modernise systems. In addition, the Department of Trade and Industry is considering reprioritising more resources within its baseline to fund critical priorities within the South African Bureau of Standards and the National Metrology Institute of South Africa. Portfolio Committee on Water and Sanitation The Minister of Water and Sanitation and the Minister of Finance should ensure that the Department of Water and Sanitation, in consultation with National Treasury and the Department of Cooperative Governance and Traditional Affairs (CoGTA) where necessary, urgently develops and implements a financial recovery plan for the improvement of the department’s financial position and service delivery performance. Furthermore, National Treasury should consider secondment of the Government Technical Advisory Centre officials to assist the Department of Water and Sanitation with the development and implementation of a financial recovery plan. The National Treasury has supported the Department of Water and Sanitation in drafting a financial recovery plan. This draft plan aims to review control measures related to supply chain, programme and project management, addressing leadership in the department, capital budgeting and staff morale. The 110
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT department’s accounting officer, who is responsible to manage expenditure, revenue, assets and liabilities, in terms of section 38 of the PFMA, should sign off and implement this plan. Portfolio Committee on Women in the Presidency The committee recommends that the funding model for the Commission for Gender Equality (CGE) should be aligned with the rest of the Chapter 9 institutions, in particular the Public Protector, to enable it to optimally give effect to its mandate. The National Treasury has taken note of this recommendation. The funding model for the CGE is similar to that of the Public Protector of South Africa: both are funded through transfer payments in the votes of the Department of Women and the Department of Justice and Constitutional Development respectively. The CGE should be provided with additional funds in order to retain existing staff and attract new staff. Specific emphasis should be placed on the funding of staff for legal clinics, public education and information, communication and legal support. To this end, provinces with the largest case load should be prioritised where offices require additional support. Due to the constrained fiscal outlook, the scope to provide additional funding is limited. Departments, public entities and constitutional institutions are required to reprioritise funds within their existing baselines to fund any emerging priorities. Should the fiscal outlook improve, future recommendations for additional funding may be considered. The National Treasury will continue to engage the CGE as part of the budget process, specifically in relation to the issues highlighted by the committee. Recommendations on the fiscal framework proposed in the MTBPS Recommendations of the Standing Committee on Appropriations on the South African Airways Special Appropriations Bill That the Minister of Finance should ensure the following conditions are implemented: i) Impose conditions to be met by the SAA before any part of the amount is transferred; ii) Impose conditions to be met by the SAA after the transfer of any part of the amount; and iii) Stop the use of the amount in respect of which conditions have been imposed in terms of subparagraph (ii), until such conditions are met. The Minister of Finance has set the following conditions: Before transfer of funding: (i) The entire R5 billion should only be used to repay government guaranteed debt. (ii) SAA should submit to the National Treasury and Department of Public Enterprises the maturity profile of government guaranteed debt together with the negotiation plans to extend the rest of the airline’s government guaranteed debt and to manage other short-term debt with different lenders. (iii) The exact amount of the maturing debt should be transferred two days before maturity date by the Department of Public Enterprises. (iv) The department should not transfer more than the amount of the maturing debt at a time. After transfer of funding: 111
2019 BUDGET REVIEW (v) By 28 February 2019, SAA must report on the progress made on the initiatives that have been implemented to improve working capital management and reduce reliance on short-term government guarantees. Updates on these initiatives should be provided on 30 April 2019, 31 July 2019, 31 October and 31 December 2019. Thereafter, updates should be provided by the last day of each quarter. (vi) On a quarterly basis, SAA must provide financial performance reports including progress on debt repayment and progress on the implementation of measures in condition (v). That any future considerations for recapitalisation of SAA and other entities are benchmarked against comprehensive assessment of the utilisation of bailout funds within the context of key performance indicators. Ordinarily, a state-owned company maintains its status as a going concern if it is able to generate sufficient internal resources to cover its operations and new investments. A bailout only becomes necessary when a firm is no longer able to service commitments falling due that are guaranteed by the state. To prevent future bailouts, the boards of state-owned companies must develop and implement strategies that return these institutions to profitability. That National Treasury in its review of the Supply Chain Management Reforms considers the extent to which laws and regulations enable profitability and competitive edge for state owned entities. The turnaround of SAA is led by the airline’s board, with oversight provided by the Department of Public Enterprises. This turnaround includes strategies to enable the airline to return to financial sustainability, which focus on efficient, equitable and value for money supply chain management. Due to the separation of powers, government departments do not amend laws, but implement laws passed by Parliament. Recommendations of the Standing Committee on Appropriations on the 2018 Adjustments Appropriation Bill That the Minister of Finance should ensure that National Treasury investigates and implements mechanisms aimed at supporting the programme participants of the Employment Creation Facilitation Fund to ensure that the fund is utilised optimally for its intended objective. The National Treasury remains an important supporter of job creation in the country and continues to support the efforts of the Jobs Fund. Since its formation in 2011, the Employment Creation Facilitation Fund (now the Jobs Fund) has worked to encourage innovation in job creation through structured partnerships with the private, public and non-profit sectors by awarding once-off grants to organisations through a competitive process. As of December 2018, the Jobs Fund has disbursed R4.6 billion in grant funding to 125 projects and leveraged R8.6 billion in matched funding. These projects have created more than 170 000 permanent jobs and more than 55 000 short-term jobs, in addition to providing training for over 240 000 people and placing more than 20 000 young people in internships. Recommendations of the Standing Committee on Appropriations on the 2018 MTBPS The Committee notes that the MTBPS made no mention of the Mandate Paper, which was introduced as one of the budget prioritisations tool last year, and requires NT to provide greater clarity on this at the next quarterly meeting. The Department of Planning, Monitoring and Evaluation was fully involved in all the meetings of the 2018 Medium Term Expenditure Committee. The mandate paper was discussed and used to guide decisions at these meetings. The allocations made in the 2018 MTBPS reflect the recommendations and implications of the mandate paper. 112
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT That the Minister of Finance should ensure the National Treasury in consultation with Provincial Treasuries and the relevant national departments assists provincial departments of health, education and social development with the development of funding plans for filling of critical frontline posts to mitigate the diversion of resources from frontline services due to the pressure of the wage bill. The education sector uses post provisioning norms – a mechanism for allocating teachers to schools – to ensure schools have enough educators. This process is finalised in September each year, so educators are always prioritised in the wage bill. In addition to this, provinces have continued to prioritise social sectors to ensure that service delivery is not compromised. The health sector is filling 3 139 positions announced by the Minister of Health recently, which covers medical specialists, medical doctors and other health staff. That National Treasury in consultation with Provincial Treasuries and the National Department of Health assists provincial departments of health with the development of medium-term plans for the gradual elimination of unpaid bills and accruals. The Budget Council has endorsed the decision for provincial departments of health to report on the challenges facing the sector, which include accruals on a quarterly basis. This reporting will allow national and provincial treasuries to monitor accruals and gradually reduce unpaid bills. The aim is to have a reasonable level of accruals that are not older than 30 days and are cash-backed. That National Treasury in consultation with relevant stakeholders investigates the possibility for government to invest in an infrastructure delivery inspectorate to ensure that infrastructure projects are delivered in accordance with the required standards and quality. The National Treasury has made funds available to the Development Bank of Southern Africa (R400 million) and the Government Technical Advisory Centre (R60 million) to assist in developing a pipeline of well-prepared, bankable projects that can leverage private sector investment and expertise. In addition, R165 million has been allocated to the Technical Project Management Unit of the Presidential Infrastructure Coordinating Commission to strengthen technical assistance to departments. A process is already under way to hire qualified engineers and quantity surveyors to help public-sector institutions monitor projects and ensure that quality checks are in place before any expenditure is incurred. To standardise procurement, the National Treasury has published the Standard for Infrastructure Procurement and Delivery Management and embarked on an awareness and capacity-building campaign across government. The National Treasury will support provinces and municipalities to improve the effectiveness of agency agreements and the management of control frameworks. It is also introducing an improved reporting system that will provide details of all projects in the general government infrastructure budget, which will consolidate and automate reporting in the public domain. Recommendations on the division of revenue Recommendations of the Standing Committee on Appropriations on the 2018 Division of Revenue Amendment Bill The Minister of Finance should ensure that National Treasury gazettes the following corrections to the Conditional Grant Frameworks as well as the New Conditional Grant Frameworks as set out in annexures 2 and 3 of the Bill, in accordance with section 16(4) of the Division of Revenue Act, 2018. The corrected frameworks will be gazetted together with the details of the revised allocations that were provided through the Division of Revenue Amendment Act (2018). 113
2019 BUDGET REVIEW Recommendations of the Select Committee on Appropriations on the 2018 Division of Revenue Amendment Bill The Committee is of the view that any financial or accounting reform should result in an effective and efficient municipal environment. The Committee recommends that, as required by Section 34 of the MFMA, National Treasury and provincial treasuries, together with Salga (as a recognised organised local government association in terms of Section 163(a) of the Constitution), provide support and ensure that there is necessary capacity to maintain and operationalise the Municipal Standard Chart of Accounts systems with immediate effect. The municipal standard chart of accounts is a key reform for improving efficiency in municipalities. All municipalities had to implement the standard by 1 July 2017. The National Treasury continues to provide extensive support for this reform, including appointing advisors to help provincial treasuries assist municipalities, providing guidance on implementation issues (including budgeting, transacting, reporting and preparing for audits), issuing annual changes to improve the chart, responding to queries and providing training to all stakeholders. Recommendations of the Standing Committee on Finance on the 2018 Revised Fiscal Framework The Committee is concerned about the misalignment of NDP goals and infrastructure spending outcomes in all three spheres of government. The Committee again urges government, including the National Treasury and the Presidential Infrastructure Coordinating Commission, and other stakeholders to address this far more effectively. Over the past 10 years, the public sector has spent more than R2.3 trillion on infrastructure. State-owned companies have been the biggest contributors to public-sector expenditure over this period, spending R1 trillion in total. Municipalities and provincial departments have also increased their infrastructure spending, contributing R453 billion and R542 billion respectively. During this period, one of the biggest challenges in infrastructure has been the weak planning capability to translate strategic objectives into concrete project ideas. A number of initiatives are under way to align infrastructure projects to NDP goals. The Presidential Infrastructure Coordinating Commission is updating its list of priority projects to accurately reflect NDP goals. The Budget Facility for Infrastructure aims to increase the rigour of technical assessment and budgeting of capital, operations and maintenance of large infrastructure projects. Only national priority projects as designated by the Presidential Infrastructure Coordinating Commission can be submitted to the facility. A total of 24 Budget Facility projects have been recommended for funding and are being implemented. The National Treasury is reviewing the Standard for Infrastructure Procurement and Delivery Management to ensure that infrastructure projects are aligned with the NDP and other government strategic planning documents. The Committee recommends that in view of the VAT increase, constant increases in the cost of fuel and increases in the cost of living generally, NT considers a higher increase in grants than is usually the case by reprioritising expenditure and not exacerbating the debt-to-GDP ratio, as increases in debt in these specific circumstances will ultimately affect the poor disproportionately the most. The 2018 Budget included above-inflation increases to social grants to compensate for the VAT increase. This adjustment was factored in over the three years of the MTEF period. The Committee is concerned that continuous bailouts of SOEs are not sustainable and have depleted our contingency reserves. The Committee further notes that debt redemptions are expected to average R66 billion per year over the medium-term and that several SOEs are not able to service their debt obligations. 114
ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT The Committee requires NT to exercise effective oversight over these entities and regularly report to it the progress being made in implementing their turnaround strategies. Where an entity is recapitalised or provided with government guarantees, some of the mandatory conditions include the development of a sustainable turnaround plan and the establishment of committees to monitor the entity’s performance with the intention of returning it to financial sustainability. These committee meetings are generally held weekly, monthly or quarterly depending on the level of severity of the entities financial problems. It is incumbent on the Executive Authority, which is the shareholder representative, to frequently update the committee on its adherence to these conditions and outline tangible mitigation strategies where entities are failing to meet the conditions. We recommend that within the framework of its prescribed role NT conducts better fiscal oversight over other government departments and entities and in turn advocates robust fiscal oversight and monitoring and evaluation of monies transferred to implementing agents and entities at the provincial and local spheres of government. Sections 32 and 71 of the PFMA allow for extensive monitoring of government’s finances. In-year monitoring of national, provincial and local departments is undertaken monthly, tracking financial position, performance and cash flows. The results are reported to the Standing Committee on Appropriations quarterly. Government is also supported by the Reserve Bank, which tracks the same metrics using the Government Finance Statistics framework developed by the International Monetary Fund. An additional R16.5 billion will be allocated to various programmes, including funding to restore much-needed capacity at the South African Revenue Service. The Committee welcomes these allocations, especially to infrastructure and SARS. But the Committee wants to see an implementation plan. NT is required to report on progress on this at its quarterly meetings with the Committee. The National Treasury will liaise with the South African Revenue Service on the initiatives that they will undertake to improve capacity at the revenue authority. Updates on the implementation of these initiatives will be provided to Parliament. The Committee however welcomes the South African Investment Conference 2018 held from 25 to 27 October and the pledges of investment of R290 billion. Even though some of the investments announced may not be new, the Conference has contributed to boosting confidence in the South African economy. Government has to however monitor progress on the implementation of these programmes and report regularly to the relevant parliamentary committees. The Investment Conference 2018 demonstrated renewed confidence in the South African economy and generated investment pledges worth R300 billion. The majority of these pledges are made up of previously unannounced investments. Government acknowledges the importance of monitoring and reporting on progress, and has delegated these operational responsibilities to InvestSA, a division of the Department of Trade and Industry. The department will report on progress to Parliament. 115
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B Tax expenditure statement Introduction The primary aim of the tax system is to generate sufficient revenue to support government’s funding priorities. By providing relief to taxpayers via targeted tax exemptions, deductions or credits, government also encourages socio-economic development. Tax expenditures are estimates of the revenue foregone as a result of this preferential tax treatment. This annexure presents government’s latest estimates of the fiscal cost of tax expenditures, as well as the methodology used to produce these estimates. Tax expenditure documents promote transparency and accountability. They help government and the public to assess the costs, benefits and overall effectiveness of this expenditure. The National Treasury aims to enhance its tax expenditure reporting in future, depending, to a large extent, on the availability of quality data. In 2016/17 – the latest year for which data is available – tax expenditures were estimated at R209 billion or 4.7 per cent of GDP. For 2016/17, 33 tax expenditures were estimated compared to 32 for 2013/14, and the largest four expenditures accounted for more than half of the total. These relate to deductions for pension contributions by employers, vehicle manufacturer incentives, medical tax credits and value-added tax (VAT) relief for basic food items. Tax expenditure estimates The estimates presented in Table B.3 are calculated using the “revenue foregone” method. This entails comparing actual revenue collections with revenue that would have been collected without the incentives in place. Most of the personal income tax and corporate income tax estimates are calculated using administrative data from the South African Revenue Service (SARS). This allows expenditure estimates to be accounted for on an accrual basis. Changes to estimation methods since the 2018 Budget The most significant changes to the tax expenditure methodology since the 2018 Budget relate to the calculation of expenditure estimates for retirement fund contributions. From 1 March 2016, the tax treatment of pension fund, provident fund and retirement annuity fund contributions was harmonised. As a result, retirement fund contributions are deductible up to either 27.5 per cent of gross remuneration or R350 000 per tax year. Employee contributions to provident funds became deductible and employer contributions were treated as though they were made by the employee and taxed as a fringe benefit. For the first time, SARS tax returns included accurate data on employer contributions. This new data allows more accurate calculation of the tax expenditure for retirement fund contributions. The tax expenditure statement now includes provident fund employer contributions and the adjusted 117
2019 BUDGET REVIEW expenditure estimates of employer-provided contributions to pension funds. As a result, previous estimates have been revised significantly higher. Compared to the revised 2015/16 estimates, the personal income tax expenditure estimates for 2016/17 show a marked increase for two main reasons: employee provident fund contributions have become deductible and the allowable deduction for retirement annuity contributions has increased. The estimates, however, do not include the tax that is eventually paid on withdrawals or annuity payments arising from the contributions that received a deduction. The figures thus overestimate the true tax expenditure as they only reflect the upfront tax deduction. More accurate data and estimation methodologies have prompted revisions to the historical tax expenditures estimates in Table B.3. For the first time, tax expenditure estimates are published for the venture capital company tax incentive that was introduced in 2008 through section 12J of the Income Tax Act (1962). These estimates are included from 2014/15. In addition, expenditure estimates for the energy-efficiency savings tax incentive, introduced in 2013 through section 12L of the Income Tax Act, are included from 2013/14. Venture capital company tax expenditure The venture capital company tax incentive increases funding to support small businesses, create jobs, and grow the economy. It allows taxpayers to deduct their investment into a venture capital company from their taxable income for that year of assessment. The venture capital company must then invest in qualifying companies (generally small businesses) for at least five years, otherwise the tax deduction will be recouped. The fiscal cost of this deduction is partially offset through capital gains tax when the taxpayer disposes of the investment. To estimate the tax expenditure accurately, these two events should be reconciled. When the taxpayer disposes of the investment, he or she is liable for capital gains tax where, for tax purposes, the base cost of the asset is assumed to be zero. In this tax incentive, capital gains tax is calculated on two levels: first, on the venture capital company, and second, on the qualifying company. As a result, the effective capital gains tax rate is higher than for a direct investment. If the taxpayer is in the 45 per cent marginal tax bracket, then the capital gains tax rate will exceed 36 per cent. Table B.1 Comparing direct investments with venture capital company investments1 1. Assumption: Taxpayer in 45 per cent marginal tax bracket. CGT = capital gains tax; ROE = return on equity; ETR = effective tax rate Source: National Treasury As Table B.2 indicates, over 80 per cent of the tax expenditure accrues to taxpayers who have a taxable income before the venture capital company deduction of more than R1 million. There are a small number of taxpayers in these income brackets due to some very large single investments. The majority of taxpayers benefiting from the incentive are in the lower income tax brackets and they contribute modestly to overall tax expenditure. This incentive is due to expire in June 2021. It will be evaluated in line with its objectives during 2019/20. 118 Direct investment Venture capital company investment Initial investmentNo tax deduction Tax deduction at 45 per cent Upon disposalCGT at maximum 18 per cent Can exit anytime CGT on base cost of zero, and on two levels ETR > 36 per cent Can only exit after 5 years OverallNot compensated for risk Overall lower ROE and higher overall ETR Cheaper to exit, with more flexibility Compensated for risk Lower ETR and higher ROE Less flexible and more expensive to exit
ANNEXURE B: TAX EXPENDITURE STATEMENT Table B.2 Venture capital company tax expenditures by taxable income in 2016/17 Source: National Treasury Energy-efficiency savings tax expenditure The section 12L energy-efficiency savings tax incentive complements government’s proposed carbon tax by supporting low-carbon technologies. Businesses can claim deductions against their taxable income for verified energy-efficiency savings achieved at a rate of 95c per kilowatt hour. The South African National Energy Development Institute monitors and endorses energy-efficiency savings claims by issuing certificates to compliant taxpayers. To estimate the tax expenditure, the value of the deduction is multiplied by the headline corporate income tax rate (currently 28 per cent). Trends in tax expenditure: 2013/14 – 2016/17 This section uses historical data to analyse trends in tax expenditure between 2013/14 and 2016/17. Including the new estimates for provident fund contributions, and the venture capital company and energy-efficiency savings tax incentives, 33 tax expenditures were estimated for 2016/17. Figure B.1 Share of total tax expenditure per tax type Source: National Treasury Figure B.1 compares the breakdown of tax expenditures between 2013/14 and 2016/17. Personal income tax and VAT expenditures together accounted for about 80 per cent of the total in both periods. Personal income tax expenditures increased as a share of the total mainly due to the introduction of employer and employee provident fund contributions, and the significant upward adjustment in the estimates for employer-provided contributions to pension funds. The employment tax incentive also contributed to higher expenditures in corporate income tax over the same period. 119 Taxable income before 12J deduction (R thousands) Tax expenditureNumber of (R million)taxpayers 50 - 100 100 - 150 150 - 200 200 - 300 300 - 400 400 - 500 500 - 750 750 - 1 000 1 000 - 2 000 2 000 - 5 000 5 000 + 0.7319 8.01 326 9.31 198 8.3823 3.0249 1.788 3.074 3.539 16.795 48.8110 93.161
2019 BUDGET REVIEW The total value of tax expenditures grew by R52 billion or 7.4 per cent between 2013/14 and 2016/17, which exceeds nominal GDP growth of 5.1 per cent over the period. As a result, Figure B.2 shows an increasing share of tax expenditures to nominal GDP. This growth was largely a result of revisions to the tax expenditure estimates for pension and retirement annuity contributions and the inclusion of provident contributions. The addition of the energy-efficiency savings tax expenditures also contributed to the growth, although to a lesser extent. Compared with the 2018 Budget, the average share of tax expenditures to nominal GDP increased significantly, implying much higher foregone revenue. Figure B.2 Tax expenditure as a share of tax revenues and nominal GDP Source: National Treasury Evaluation of tax expenditures Government continues to monitor and evaluate tax incentives to prevent wasteful spending. SARS administrative data estimates the cost of tax incentives more accurately, which allows government to ensure that it is achieving its objectives as expenditures continue to grow relative to GDP. 120
ANNEXURE B: TAX EXPENDITURE STATEMENT Table B.3 Tax expenditure estimates R million 2013/14 2014/15 2015/16 2016/17 Personal income tax Retirement fund contributions1 Pension contributions – employees Pension contributions – employers Provident contributions – employees Provident contributions – employers Retirement annuity Medical Medical contributions & deductions Medical tax credits 2 Interest exemptions Secondary rebate (65 years and older) Tertiary rebate (75 years and older) Donations Capital gains tax (annual exclusion) 49 418 11 999 22 010 – 9 297 6 113 21 874 4 313 17 561 2 216 1 716 153 825 397 53 707 13 019 23 882 – 10 087 6 718 19 341 – 19 341 2 458 1 748 160 965 474 58 980 14 363 26 348 – 11 129 7 141 22 297 – 22 297 2 762 1 939 178 691 510 72 991 15 579 28 578 3 928 12 071 12 835 27 051 – 27 051 2 987 2 041 188 737 591 Venture capital companies – 26 208 196 Total personal income tax 76 599 78 878 87 565 106 782 Corporate income tax Small business corporation tax savings Reduced headline rate Section 12E depreciation allowance Research and development Learnership allowances Strategic industrial projects (12I) Film incentive3 Urban development zones Employment tax incentive Energy-efficiency savings 2 423 2 391 32 219 912 473 36 299 140 690 2 556 2 523 33 209 949 423 13 232 2 420 128 2 669 2 626 42 268 990 479 5 257 4 063 974 2 329 2 293 36 218 926 693 5 126 4 656 1 070 Total corporate income tax 5 192 6 930 9 706 10 022 Value-added tax Zero-rated supplies 19 basic food items 4 Petrol 5 Diesel 5 Paraffin 5 Municipal property rates Reduced inclusion rate for commercial accommodation 49 611 20 107 16 276 2 101 702 10 209 216 51 123 21 503 16 065 2 146 659 10 522 228 55 013 22 793 15 901 1 911 536 13 639 233 56 783 24 411 16 150 1 842 569 13 548 263 Exempt supplies (public transport and education) 1 175 1 256 1 332 1 426 Total value-added tax 50 786 52 379 56 345 58 210 Customs duties and excise Motor vehicles (MIDP/APDP, including IRCCs)6 Textile and clothing (duty credits – DCCs)6 Furniture and fixtures Other customs7 Diesel refund8 18 415 468 156 665 4 955 23 467 539 180 911 5 870 26 936 788 217 1 040 8 175 28 362 725 181 963 3 762 Total customs and excise 24 659 30 967 37 156 33 993 Total tax expenditure 157 237 169 155 190 772 209 007 Tax expenditure as % of total gross tax revenue 17.5% 17.2% 17.8% 18.3% Total gross tax revenue 900 015 986 295 1 069 983 1 144 081 Tax expenditure as % of GDP 4.4% 4.4% 4.6% 4.7% 1. Some of this tax expenditure is recouped when amounts are withdrawn as either a lump sum or an annuity. From 2016/17 onwards provident fund employee contributions became deductible and a higher percentage contribution for all retirement funds was allowed, alongside a monetary cap of R350 000. The estimate for the tax expenditure of provident fund employer contributions (for all years) is included for the first time this year. 2. Medical credits were introduced in 2012/13 to replace income tax deductions for medical scheme contributions 3.Tax expenditure for all years is attributable to allowances under section 24F and exemptions under section 12O 4. VAT relief in respect of basic food items based on 2010/11 Income and Expenditure Survey data 5. Based on fuel volumes and average retail selling prices 6. Motor Industry Development Programme (MIDP), replaced in 2013 by the Automative Production Development Programme (APDP); import rebate credit certificate (IRCC); duty credit certificates (DCC) 7. Goods manufactured exclusively for exports, television monitors and agricultural goods exempted 8. Diesel refund previously offset against domestic VAT has been added Source: National Treasury 121
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C Additional tax policy and administrative adjustments This annexure should be read with Chapter 4 of the Budget Review. It elaborates on some of the proposals contained in the chapter, clarifies certain matters and presents additional technical proposals arising from the annual tax policy process. Personal income tax The proposed tax schedule in Table 4.4 in Chapter 4 partially compensates individuals for the effect of inflation. The effects of these proposals are set out in tables C.1, C.2 and C.3. Table C.1 Annual income tax payable and average tax rates, 2019/20 (taxpayers below 65) Source: National Treasury 123 Taxable income (R) 2018/19 rates (R) Proposed 2019/20 rates (R) Tax change (R) % change Average tax rates Old ratesNew rates 85 000 90 000 100 000 120 000 150 000 200 000 250 000 300 000 400 000 500 000 750 000 1 000 000 1 500 000 2 000 000 1 233 2 133 3 933 7 533 12 933 22 265 35 265 48 265 78 972 113 807 210 473 312 973 517 973 742 973 1 080 1 980 3 780 7 380 12 780 22 112 35 112 48 112 78 819 113 654 210 320 312 820 517 820 742 820 -153 -153 -153 -153 -153 -153 -153 -153 -153 -153 -153 -153 -153 -153 -12.41% -7.17% -3.89% -2.03% -1.18% -0.69% -0.43% -0.32% -0.19% -0.13% -0.07% -0.05% -0.03% -0.02% 1.5%1.3% 2.4%2.2% 3.9%3.8% 6.3%6.2% 8.6%8.5% 11.1%11.1% 14.1%14.0% 16.1%16.0% 19.7%19.7% 22.8%22.7% 28.1%28.0% 31.3%31.3% 34.5%34.5% 37.1%37.1%
2019 BUDGET REVIEW Table C.2 Annual income tax payable and average tax rates, 2019/20 (taxpayers aged 65 to 74) Source: National Treasury Table C.3 Annual income tax payable and average tax rates, 2019/20 (taxpayers aged 75 and over) Source: National Treasury Customs and excise duty Government proposes that the customs and excise duties in the Customs and Excise Act (1964, section A of part 2 of schedule 1) be amended with effect from 20 February 2019 to the extent shown in Table C.4. 124 Taxable income (R) 2018/19 rates (R) Proposed 2019/20 rates Tax change (R) % change Average tax rates Old rates New rates 150 000 200 000 250 000 300 000 400 000 500 000 750 000 1 000 000 1 500 000 2 000 000 2 646 11 978 24 978 37 978 68 685 103 520 200 186 302 686 507 686 732 686 2 385 11 717 24 717 37 717 68 424 103 259 199 925 302 425 507 425 732 425 -261 -261 -261 -261 -261 -261 -261 -261 -261 -261 -9.86% -2.18% -1.04% -0.69% -0.38% -0.25% -0.13% -0.09% -0.05% -0.04% 1.8% 1.6% 6.0% 5.9% 10.0% 9.9% 12.7% 12.6% 17.2% 17.1% 20.7% 20.7% 26.7% 26.7% 30.3% 30.2% 33.8% 33.8% 36.6% 36.6% Taxable income (R) 2018/19 rates (R) Proposed 2019/20 rates (R) Tax change (R) % change Average tax rates Old ratesNew rates 120 000 150 000 200 000 250 000 300 000 400 000 500 000 750 000 1 000 000 1 500 000 2 000 000 – 5 220 14 552 27 552 40 552 71 259 106 094 202 760 305 260 510 260 735 260 – 4 986 14 318 27 318 40 318 71 025 105 860 202 526 305 026 510 026 735 026 – -234 -234 -234 -234 -234 -234 -234 -234 -234 -234 – -4.48% -1.61% -0.85% -0.58% -0.33% -0.22% -0.12% -0.08% -0.05% -0.03% 0.0%0.0% 3.5%3.3% 7.3%7.2% 11.0%10.9% 13.5%13.4% 17.8%17.8% 21.2%21.2% 27.0%27.0% 30.5%30.5% 34.0%34.0% 36.8%36.8%
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Table C.4 Specific excise duties, 2018/19 – 2019/201 125 Tariff item Tariff subheading Article description 2018/19 Rate of excise duty 2019/20 Rate of excise duty 104.00 PREPARED FOODSTUFFS; BEVERAGES, SPIRITS AND VINEGAR; TOBACCO 104.01 19.01 Malt extract; food preparations of flour, groats, meal, starch or malt extract, not containing cocoa or containing less than 40 per cent by mass of cocoa calculated on a totally defatted basis, not elsewhere specified or included; food preparations of goods of headings 04.01 to 04.04, not containing cocoa or containing less than 5 per cent by mass of cocoa calculated on a totally defatted basis not elsewhere specified or included: 104.01.10 1901.90.20 Tra d i ti o n a l Afri ca n b e e r po wd e r a s d e fi n e d i n Add i ti o n a l No te 1 to Ch a pte r 19 34,7c/kg 34,7c/kg 104.10 22.03 Beer made from malt: 104.10.10 104.10.20 2203.00.05 2203.00.90 Tra d i ti o n a l Afri ca n b e e r a s d e fi n e d i n Ad d i tio n a l No te 1 to Cha pte r 22 Othe r 7,82c/l i R95.03/l i a a 7,82c/l i R102.07/l i a a 104.15 22.04 Wine of fresh grapes, including fortified wines; grape must (excluding that of heading 20.09): 104.15.01 2204.10 Sp a rkl i n g wi n e R12.43/l i R13.55/l i 104.15 2204.21 In containers holding 2 li or less: 104.15 2204.21.4 Unfortified wine: 104.15.03 104.15.04 2204.21.41 2204.21.42 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 4.5 p er cen t b y vo l u me b u t n ot e xce e d i n g 16.5 p e r ce nt b y vo l . Othe r R3.91/l i R190.08/l i a a R4.20/l i R204.15/l i a a 104.15 2204.21.5 Fortified wine: 104.15.05 104.15.06 2204.21.51 2204.21.52 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 15 p e r ce n t b y vo l u me but n ot e xce e d i n g 22 pe r ce nt b y vo l . Othe r R6.54/l i R190.08/l i a a R7.03/l i R204.15/l i a a 104.15 2204.22 In containers holding more than 2 li but not more than 10 li: 104.15 2204.22.4 Unfortified wine: 104.15.13 104.15.15 2204.22.41 2204.22.42 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 4.5 p er cen t b y vo l u me b u t n ot e xce e d i n g 16.5 p e r ce nt b y vo l . Othe r R3.91/l i R190.08/l i a a R4.20/l i R204.15/l i a a 104.15 2204.22.5 Fortified wine: 104.15.17 104.15.19 2204.22.51 2204.22.52 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 15 p e r ce n t b y vo l u me but n ot e xce e d i n g 22 pe r ce nt b y vo l . Othe r R6.54/l i R190.08/l i a a R7.03/l i R204.15/l i a a 104.15 2204.29 Other: 104.15 2204.29.4 Unfortified wine: 104.15.21 104.15.23 2204.29.41 2204.29.42 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 4.5 p er cen t b y vo l u me b u t n ot e xce e d i n g 16.5 p e r ce nt b y vo l . Othe r R3.91/l i R190.08/l i a a R4.20/l i R204.15/l i a a 104.15 2204.29.5 Fortified wine: 104.15.25 104.15.27 2204.29.51 2204.29.52 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 15 p e r ce n t b y vo l u me but n ot e xce e d i n g 22 pe r ce nt b y vo l . Othe r R6.54/l i R190.08/l i a a R7.03/l i R204.15/l i a a
2019 BUDGET REVIEW Table C.4 Specific excise duties, 2018/19 – 2019/201 (continued) 126 Tariff item Tariff subheading Article description 2018/19 Rate of excise duty 2019/20 Rate of excise duty 104.16 22.05 Vermouth and other wine of fresh grapes flavoured with plants or aromatic substances: 104.16 2205.10 In containers holding 2 li or less: 104.16.01 2205.10.10 Sp a rklin g R12.43/l i R13.55/l i 104.16 2205.10.2 Unfortified: 104.16.03 104.16.04 2205.10.21 2205.10.22 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 4.5 p er cen t b y vo l u me but n ot e xce e d i n g 15 pe r ce nt b y vo l . Othe r R3.91/l i R190.08/l i a a R4.20/l i R204.15/l i a a 104.16 2205.10.3 Fortified: 104.16.05 104.16.06 2205.10.31 2205.10.32 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 15 p e r ce n t b y vo l u me but n ot e xce e d i n g 22 pe r ce nt b y vo l . Othe r R6.54/l i R190.08/l i a a R7.03/l i R204.15/l i a a 104.16 2205.90 Other: 104.16 2205.90.2 Unfortified: 104.16.09 104.16.10 2205.90.21 2205.90.22 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 4.5 p er cen t b y vo l u me but n ot e xce e d i n g 15 pe r ce nt b y vo l . Othe r R3.91/l i R190.08/l i a a R4.20/l i R204.15/l i a a 104.16 2205.90.3 Fortified: 104.16.11 104.16.12 2205.90.31 2205.90.32 Wi th a n a l co h ol i c s tre n gth o f a t l e a s t 15 p e r ce n t b y vo l u me but n ot e xce e d i n g 22 pe r ce nt b y vo l . Othe r R6.54/l i R190.08/l i a a R7.03/l i R204.15/l i a a 104.17 22.06 Other fermented beverages (for example, cider, perry, mead, saké); mixtures of fermented beverages and mixtures of fermented beverages and non-alcoholic beverages, not elsewhere specified or included: 104.17.03 104.17.05 104.17.07 104.17.09 104.17.11 104.17.15 2206.00.05 2206.00.15 2206.00.17 2206.00.19 2206.00.21 2206.00.81 Sp a rkl i n g fe rme n te d fru i t o r me a d b e ve ra ge s ; mi xtu re s of s pa rkl i n g fe rme n te d be ve ra ge s de ri ve d from the fe rme n ta ti o n of fru i t o r h on e y; mi xtu re s o f s p a rkl i n g fe rme n te d frui t or me a d be ve ra ge s a nd non-a l cohol i c be ve ra ge s Tra d i ti o na l Afri ca n be e r a s de fi ne d i n Addi ti ona l Note 1 to Cha pte r 22 Othe r fe rme n te d b e ve ra ge s , u n fo rti fi e d , wi th a n a l co h o l i c s tre ngth o f l e s s th a n 2.5 p e r ce n t b y vo l u me Othe r fe rme n te d b e ve ra ge s o f n o n -ma l te d ce re al gra in s, u nfo rtifie d , wi th an a lco h olic s tre n gth o f a t le as t 2.5 p e r ce nt b y vo l u me b u t n o t e xce e d i n g 9 p e r ce n t b y vol . Othe r mi xtu re s o f fe rme n te d b e ve ra ge s o f n o n -ma l te d ce re a l gra i n s a nd non-a l cohol i c b e ve ra ge s , unforti fi e d , wi th a n a l co hol i c s tre n gth of a t l e a s t 2.5 pe r ce nt b y vo l u me but n ot e xce e d i n g 9 pe r ce nt by vo l . Othe r fe rme n te d a p p l e o r p e a r b e ve ra ge s , u n forti fi e d , wi th a n a l co hol i c s tre n gth of a t l e a s t 2.5 pe r ce nt b y vo l u me but n ot e xce e d i n g 15 pe r ce nt b y vo l . R12.43/l i 7,82c/l i R95.03/l i a a R95.03/l i a a R95.03/l i a a R95.03/l i a a R13.55/l i 7,82c/l i R102.07/l i a a R102.07/l i a a R102.07/l i a a R102.07/l i a a
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Table C.4 Specific excise duties, 2018/19 – 2019/201 (continued) 127 Tariff item Tariff subheading Article description 2018/19 Rate of excise duty 2019/20 Rate of excise duty 104.17.16 104.17.17 104.17.21 104.17.22 104.17.25 104.17.90 2206.00.82 2206.00.83 2206.00.84 2206.00.85 2206.00.87 2206.00.90 Othe r fe rme n te d fru i t b e ve ra ge s a n d me a d b e vera ges , i n cl u d i n g mi xtu re s o f ferme n ted b e ve ra ges d eri ve d fro m th e fe rme n ta ti o n o f fru i t or h o n e y, u nfo rti fi e d , wi th a n a l co hol i c s tre ngth of a t l e a s t 2.5 pe r ce nt b y vo l u me but not e xce e d i n g 15 pe r ce nt b y vo l . Othe r fe rme n te d a p p l e o r p e a r b e ve ra ge s , fo rti fi e d , wi th an a lco h o lic s tre n gth o f a t le as t 15 p e r ce n t b y volu me but not e xce e di n g 23 pe r ce nt b y vo l . Othe r fe rme n te d fru i t b e ve ra ge s a n d me a d b e vera ges i n cl u d i n g mi xtu re s o f ferme n ted b e ve ra ges d eri ve d fro m th e fe rme n ta ti o n o f fru i t or h o n e y, fo rti fi e d , wi th a n a l co hol i c s tre ngth of a t l e a s t 15 pe r ce nt b y vo l u me but not e xce e d i n g 23 pe r ce nt b y vo l . Othe r mi xtu re s o f fe rme n te d fru i t o r me a d b e ve ra ge s a nd non-a l co ho l i c b e ve ra ge s , unforti fi e d , wi th a n a l co hol i c s tre ngth of a t l e a s t 2.5 pe r ce nt b y vo l ume but not e xce e d i n g 15 pe r ce nt b y vo l . Othe r mi xtu re s o f fe rme n te d fru i t o r me a d b e ve ra ge s a nd non-a l co ho l i c b e ve ra ge s , fo rti fi e d , wi th a n a l co hol i c s tre ngth of a t l e a s t 15 pe r ce nt b y vo l u me but not e xce e d i n g 23 pe r ce nt b y vo l . Othe r R95.03/l i a a R76.08/l i a a R76.08/l i a a R95.03/l i a a R76.08/l i a a R190.08/l i a a R102.07/l i a a R81.71/l i a a R81.71/l i a a R102.07/l i a a R81.71/l i a a R204.15/l i a a 104.21 22.07 Undenatured ethyl alcohol of an alcoholic strength by volume of 80 per cent vol. or higher; ethyl alcohol and other spirits, denatured, of any strength: 104.21.01 104.21.03 2207.10 2207.20 Und e n a tu re d e th yl a l co h ol o f a n a l coh o l i c s tre n gth by vo l u me o f 80 pe r ce n t vo l . o r h i gh e r Ethyl a l co h o l a n d o th e r s pi ri ts , d e n a tu re d , o f an y stre n gth R190.08/l i a a R190.08/l i a a R204.15/l i a a R204.15/l i a a 104.23 22.08 Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 per cent vol.; spirits, liqueurs and other spirituous beverages: 104.23 2208.20 Spirits obtained by distilling grape wine or grape marc: 104.23 2208.20.1 In containers holding 2 li or less: 104.23.01 104.23.02 2208.20.11 2208.20.19 Bra n d y a s d e fi n e d i n Ad d i ti o n a l No te 7 to Ch a p te r 22 Othe r R171.07/l i a a R190.08/l i a a R183.73/l i a a R204.15/l i a a 104.23 2208.20.9 Other: 104.23.03 104.23.04 2208.20.91 2208.20.99 Bra n d y a s d e fi n e d i n Ad d i ti o n a l No te 7 to Ch a p te r 22 Othe r R171.07/l i a a R190.08/l i a a R183.73/l i a a R204.15/l i a a 104.23 2208.30 Whiskies: 104.23.05 104.23.07 2208.30.10 2208.30.90 I n co n ta i n e rs ho l d i n g 2 l i o r l e s s Othe r R190.08/l i a a R190.08/l i a a R204.15/l i a a R204.15/l i a a 104.23 2208.40 Rum and other spirits obtained by distilling fermented sugarcane products: 104.23.09 104.23.11 2208.40.10 2208.40.90 I n co n ta i n e rs ho l d i n g 2 l i o r l e s s Othe r R190.08/l i a a R190.08/l i a a R204.15/l i a a R204.15/l i a a 104.23 2208.50 Gin and Geneva: 104.23.13 104.23.15 2208.50.10 2208.50.90 I n co n ta i n e rs ho l d i n g 2 l i o r l e s s Othe r R190.08/l i a a R190.08/l i a a R204.15/l i a a R204.15/l i a a 104.23 2208.60 Vodka: 104.23.17 104.23.19 2208.60.10 2208.60.90 I n co n ta i n e rs ho l d i n g 2 l i o r l e s s Othe r R190.08/l i a a R190.08/l i a a R204.15/l i a a R204.15/l i a a 104.23 2208.70 Liqueurs and cordials: 104.23 2208.70.2 In containers holding 2 li or less:
2019 BUDGET REVIEW Table C.4 Specific excise duties, 2018/19 – 2019/201 (continued) 1. The chapter references in this table refer to chapters of the schedule to the Customs and Excise Act (1964) Source: National Treasury 128 Tariff item Tariff subheading Article description 2018/19 Rate of excise duty 2019/20 Rate of excise duty 104.23.21 104.23.22 2208.70.21 2208.70.22 Wi th a n a l co h ol i c s tre n gth b y vo l u me e xce e d i ng 15 pe r ce nt b y vo l . b ut n o t e xce e di n g 23 p e r ce n t b y vo l . Othe r R76.08/l i a a R190.08/l i a a R81.71/l i a a R204.15/l i a a 104.23 2208.70.9 Other: 104.23.23 104.23.24 2208.70.91 2208.70.92 Wi th a n a l co h ol i c s tre n gth b y vo l u me e xce e d i ng 15 pe r ce nt b y vo l . b ut n o t e xce e di n g 23 p e r ce n t b y vo l . Othe r R76.08/l i a a R190.08/l i a a R81.71/l i a a R204.15/l i a a 104.23 2208.90 Other: 104.23 2208.90.2 In containers holding 2 li or less: 104.23.25 104.23.26 2208.90.21 2208.90.22 Wi th a n a l co h ol i c s tre n gth b y vo l u me e xce e d i ng 15 pe r ce nt b y vo l . b ut n o t e xce e di n g 23 p e r ce n t b y vo l . Othe r R76.08/l i a a R190.08/l i a a R81.71/l i a a R204.15/l i a a 104.23 2208.90.9 Other: 104.23.27 104.23.28 2208.90.91 2208.90.92 Wi th a n a l co h ol i c s tre n gth b y vo l u me e xce e d i ng 15 pe r ce nt b y vo l . b ut n o t e xce e di n g 23 p e r ce n t b y vo l . Othe r R76.08/l i a a R190.08/l i a a R81.71/l i a a R204.15/l i a a 104.30 24.02 Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes: 104.30 2402.10 Cigars, cheroots and cigarillos containing tobacco: 104.30.01 104.30.03 2402.10.10 2402.10.90 I mp o rte d fro m Swi tze rl a n d Othe r R3578.94/kg ne t R3578.94/kg ne t R3901.04/kg ne t R3901.04/kg ne t 104.30 2402.20 Cigarettes containing tobacco: 104.30.05 104.30.07 2402.20.10 2402.20.90 I mp o rte d fro m Swi tze rl a n d Othe r R7.76/10 ci ga re tte s R7.76/10 ci ga re tte s R8.33/10 ci ga re tte s R8.33/10 ci ga re tte s 104.30 2402.90.1 Cigars, cheroots and cigarillos of tobacco substitutes: 104.30.09 104.30.11 2402.90.12 2402.90.14 I mp o rte d fro m Swi tze rl a n d Othe r R3578.94/kg ne t R3578.94/kg ne t R3901.04/kg ne t R3901.04/kg ne t 104.30 2402.90.2 Cigarettes of tobacco substitutes: 104.30.13 104.30.15 2402.90.22 2402.90.24 I mp o rte d fro m Swi tze rl a n d Othe r R7.76/10 ci ga re tte s R7.76/10 ci ga re tte s R8.33/10 ci ga re tte s R8.33/10 ci ga re tte s 104.35 24.03 Other manufactured tobacco and manufactured tobacco substitutes; “homogenised” or “reconstituted” tobacco; tobacco extracts and essences: 104.35 2403.1 Smoking tobacco, whether or not containing tobacco substitutes in any proportions: 104.35.01 2403.11 Wa te r p i p e to ba cco s p e ci fi e d i n Su b he a d i n g No te 1 to Ch a p te r 24 R197.73/kg ne t R215.52/kg ne t 104.35 2403.19 Other: 104.35.02 104.35.03 104.35.05 2403.19.10 2403.19.20 2403.19.30 Pi pe to b a cco i n i mme d i a te p a cki n gs of a co n ten t o f l es s th a n 5 kg Othe r p i p e to ba cco Ci ga re tte to b a cco R197.73/kg ne t R197.73/kg ne t R348.77/kg R215.52/kg ne t R215.52/kg ne t R374.58/kg 104.35 2403.99 Other: 104.35.07 104.35.09 2403.99.30 2403.99.40 Othe r ci ga re tte to b a cco s ub s ti tu te s Othe r p i p e to ba cco s u b s ti tu te s R348.77/kg R197.73/kg ne t R374.58/kg R215.52/kg ne t
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Comparative summary of foreign asset regularisation programmes South Africa has implemented two major foreign asset regularisation programmes, namely, the exchange control and accompanying tax measures amnesty in 2003, and the special voluntary disclosure programme in 2016. Both these programmes provided an opportunity for non-compliant South African tax residents to disclose assets held and income earned offshore, thereby growing the tax base. Table C.5 provides a summary of the outcomes of the two programmes. Table C.5 Comparative summary of foreign asset regularisation programmes Source: Reserve Bank and SARS Additional tax amendments Additional tax amendments proposed for the upcoming legislative cycle are set out below. Individuals, employment and savings Refining the foreign employment income tax exemption for South African residents From 1 March 2020, South African residents who spend more than 183 days in employment outside the country will be subject to South African taxation on any foreign employment income that exceeds R1 million. To prevent monthly withholding of income tax both in South Africa and the host country, it is proposed that South African employers be allowed to reduce their monthly local pay-as-you-earn (PAYE) withholding by the amount of foreign taxes withheld on the employment income. Before implementation, a workshop will be held to consult taxpayers on their administrative concerns. Any resulting amendments will be processed during the 2019 legislative cycle. Extending the scope of amounts constituting variable remuneration In 2013, section 7B was introduced in the Income Tax Act (1962) to match the timing between the accrual and payment dates of some forms of variable cash remuneration. Section 7B deems certain amounts to accrue when they are actually paid. However, because the scope of this section is limited, it is proposed that it be extended to include certain qualifying payments. Retirement reforms Exemption relating to annuities from a provident or provident preservation fund: Once a member of a retirement fund retires and receives an annuity as a retirement benefit, any contributions to the retirement fund that did not qualify for a deduction when determining the member’s taxable income are tax-exempt. This exemption does not apply to annuities received from a provident or provident preservation fund. To encourage annuitisation (regular payments in retirement), it is proposed that this exemption be extended to provident and provident preservation fund members who receive annuities. The exemption would apply for contributions made after 1 March 2016. Tax treatment of bulk payments to former members of closed funds: Retirement funds are permitted to make certain extraordinary payments to their members tax free, provided that these payments are approved by the Minister of Finance in a Government Gazette notice. 129 Total number of applications/R billion 2003 Combined SARB and SARS figures 2016 SARB figures 2016 SARS figures To ta l nu mb e r o f a p p l i ca tio ns re ce i ve d 43 681 4 522 2 031 Va l u e of una utho ri s e d fo re i gn a s s e ts re gul a ri s e d 45.0 51.0 26.9 To ta l l e vi e s a n d ta x co l l e cte d 2.9 2.4 4.0
2019 BUDGET REVIEW In 2009, the Minister of Finance issued a notice in Government Gazette No. 32005 approving retirement funds to make tax-free payments of “secret profits”, “surplus calculations” and “unclaimed benefits”. When the notice was issued, some deregistered retirement funds had already paid fund administrators, but the amounts were not yet paid to the affected members and/or beneficiaries. It is proposed that these payments currently held by fund administrators on behalf of deregistered retirement funds qualify as tax-free payments, provided they meet the relevant criteria. Reviewing the tax treatment of surviving spouse pensions: Members of a pension fund can deduct contributions to their retirement funds from their taxable income when determining their monthly employees’ tax and annual income tax payable. Upon the death of a member, the surviving spouse may be entitled to receive a monthly spousal pension from the retirement fund. These spousal pension payments are subject to PAYE by the retirement fund. If the surviving spouse also receives a salary or other income, it is added to the spousal pension to determine his or her correct tax liability on assessment. The result of the assessment is often that the surviving spouse has a tax liability that exceeds the employees’ tax withheld by the employer and retirement funds during the year of assessment, since the aggregation of income pushes them into a higher tax bracket. In most cases, the surviving spouse does not foresee the additional tax liability and does not save money to settle the liability. This creates a cash flow burden and a tax debt for the surviving spouse. It is proposed that: ��� • • Surviving spouses are provided with effective communication relating to tax and financial issues The monthly spousal pension be subject to PAYE withholding at a specified flat rate Tax rebates should not be taken into account in the calculation of spousal pensions. Any PAYE excessively withheld as a result of this proposal will be refunded upon assessment. Reviewing the non-resident employer registration requirement: Every employer who pays remuneration (as defined in the fourth schedule to the Income Tax Act) is required to register with the South African Revenue Service (SARS) and submit monthly and bi-annual tax returns for employees’ tax to SARS. If the employer is not a resident of South Africa, this requirement applies irrespective of whether the employer is obliged to withhold PAYE. It is proposed that this requirement be reviewed to determine whether an exclusion from registration is warranted for this type of employer. Updating the Employment Tax Incentive Act to align with National Minimum Wage Act The wage-regulating measures in the Employment Tax Incentive Act (2013) will be revised in line with the recently promulgated National Minimum Wage Act (2018). Business (general) Addressing abusive arrangements aimed at avoiding the anti-dividend stripping provisions In 2017, the rules governing share buy-backs and dividend stripping were changed to prevent taxpayers from avoiding taxation of share disposals by companies. In 2018, these rules were again adjusted to prevent harm to legitimate corporate reorganisations. However, some taxpayers are now undermining the adjusted rules. These arrangements involve the target company distributing a substantial dividend to its current company shareholder and subsequently issuing shares to a third party. As a result, the value of the current company shareholder’s holding in the shares of the target company is diluted and these shares are not immediately disposed of. This differs from the previous avoidance arrangements that involved disposing of the same shares in return for a tax-exempt dividend. To curb this new form of abuse, it is proposed that the rules governing share buy-backs and dividend stripping be amended. These amendments will take effect on 20 February 2019. 130
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Correcting anomalies arising from applying value-shifting rules Clarifying the effect of deferred tax liability on the market value of issued shares: Current anti-avoidance provisions target value shifting through asset-for-share transactions that apply when the market value of the assets acquired differs from the market value of the shares issued in exchange. However, the current provisions do not include the effect of a deferred tax liability (related to the acquired asset) on the market value of the shares. It is proposed that the Income Tax Act be amended to clarify that any difference in value due to the deferred tax liability should not be subject to the relevant provisions. Clarifying the effect of a capital gain from the operation of the anti-avoidance rules on the base cost of shares acquired in exchange for assets: In 2012, rules were introduced to prevent the transfer of high-value assets to a company in return for shares issued by the company with a different value. These rules trigger a capital gain or a deemed in specie dividend event for one of the parties. Other rules state that a company issuing shares in exchange for assets is deemed to have acquired the assets for expenditure equal to the market value of the shares. However, this deemed acquisition value does not include any capital gains previously triggered by the anti-value shifting rules, thereby resulting in possible double taxation when the company disposes of the assets later. It is proposed that the rules be amended to prevent this. Refining provisions around the special interest deduction for debt-funded share acquisitions Special interest deduction following company reorganisations after an acquisition: Current provisions allow a special interest deduction relating to debt-financed acquisitions of controlling shares in an operating company, but require that the acquirer of those shares assess whether they still qualify for the deduction under certain circumstances. It is proposed that this requirement be reconsidered if the acquirer remains a (direct or indirect) controlling shareholder of the specific entity after certain reorganisation transactions. Anti-avoidance rules targeting shareholders claiming the special interest deduction for start-up companies: Some taxpayers are claiming the special interest deduction for debt-funded capitalisation of newly established companies. This deduction is intended for debt-funded acquisitions of a controlling interest in companies that already generate income. It is proposed that changes be made to ensure that taxpayers do not claim the deduction for unintended purposes. Clarifying the interaction between corporate reorganisation rules and other provisions of the Income Tax Act Clarifying corporate reorganisation rules relating to exchange items and interest-bearing instruments: The current corporate reorganisation rules allow the tax-neutral transfer of assets between companies that are part of the same group. However, the provisions do not specify how exchange items and interest-bearing assets should be treated during corporate restructuring. It is proposed that the legislation clarify that the transfer of these items and assets is excluded from the rules. This is because unrealised values on the date of transfer should be triggered in the transferor companies. Refining the interaction between the anti-avoidance provisions for intra-group transactions: The corporate rollover provisions regarding intra-group transactions contain multiple anti-avoidance measures. However, it is not always clear how these measures interact with each other. In particular, separate measures often cause punitive tax consequences that are not taken into account should another measure subsequently apply, which results in potential double taxation. It is proposed that these provisions be refined by clarifying how the measures interact. 131
2019 BUDGET REVIEW Harmonising the degrouping charge provisions for intra-group transactions and controlled foreign companies: If a company leaves a group but retains an asset acquired within the last six years through the relief provided in the corporate reorganisation rules, a degrouping charge applies. This charge is intended to revoke the tax-neutral status of the original transaction and is designed to deem a capital gain to arise in the year of assessment in which the degrouping takes place. However, provisions relating to controlled foreign companies in sections 9D and 9H of the Income Tax Act determine that the year of assessment in which the degrouping takes place starts and ends on the same day. It is proposed that changes be made to harmonise these provisions across the corporate reorganisation and controlled foreign company rules. Amending rules to allow company deregistration by operation of law In some corporate reorganisation rules, to qualify for the tax-neutral transfer of assets, one or more of the companies involved should cease to exist after the transaction. The legislation lists steps that show a taxpayer meeting this requirement. However, the steps do not take into account deregistration by operation of law. It is proposed that the rules be amended to include this option. Business (financial sector) Study on the tax treatment of amounts received by portfolios of collective investment schemes In 2018, amendments were proposed in the Taxation Laws Amendment Bill to tax the profits of some collective investment schemes as revenue instead of capital. After reviewing the public comments on this draft, government decided that more time is needed for it to work with industry to find solutions that will not negatively affect the relevant groups. This study is proposed for the 2019 legislative cycle. Reviewing the Real Estate Investment Trust (REIT) tax regime Tax treatment of unlisted REITs: The implementation of the Financial Sector Regulation Act (2017) and the establishment of the Financial Sector Conduct Authority allows regulation of unlisted REITs. It is proposed that government consider the regulation and tax treatment of unlisted REITs that are widely held or held by institutional investors, in line with the announcement in the 2013 Budget Review. Clarifying inconsistencies in the current REIT tax regime: The current REIT tax regime contains various inconsistencies, including the definition of rental income as applied to foreign exchange differences and the interaction between the REIT tax regime and corporate reorganisation rules. It is proposed that the legislation be amended to clarify these inconsistencies. Government undertakes to review the efficacy of the current REIT regime. Refining taxation of risk policy funds From 2016, risk policy funds were introduced to tax long-term insurers. However, if a policy allocated to a risk policy fund is paying benefits in the form of an annuity, then the transfer of assets between that fund and the untaxed policyholder fund of the insurer creates an administrative burden. It is proposed that the legislation be amended to address this. Aligning income tax provisions with the Insurance Act The Insurance Act (2017), which came into effect during 2018, replaced provisions of the Long-Term Insurance Act (1998) and the Short-Term Insurance Act (1998). It is proposed that definitions in the Income Tax Act be revised in line with the new Insurance Act. 132
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Business (incentives) Refining the special economic zone regime Reviewing anomalous provisions: As taxation provisions relating to special economic zones preceded implementation of the programme, there is now some misalignment between the provisions and the stated objectives of the programme. Government proposes to review these provisions to clarify the policy intent and address unintended misalignment with the Special Economic Zone Act (2016). Reviewing the anti-avoidance measures relating to transactions between a company and connected persons: Qualifying companies deriving taxable income from within the special economic zone regime can benefit from a reduced corporate tax rate of 15 per cent. To counter potential profit-shifting, a qualifying company cannot claim this benefit if more than 20 per cent of its deductible expenditure or its income arises from transactions with connected persons. This anti-avoidance measure may harm legitimate business transactions as some business models in special economic zones were accepted before the anti-avoidance measure was introduced. It is proposed that the measure be reviewed and clarified to meet its original intent. Reviewing the venture capital company tax regime In 2018, changes were made to the venture capital company tax regime to prevent abuse of various aspects of the system. It has come to government’s attention that some taxpayers are attempting to undermine other aspects of the regime to benefit from excessive tax deductions. It is proposed that these rules be reviewed to prevent this abuse. International Reviewing controlled foreign company rules Reviewing the comparable tax exemption: As noted in the 2018 Budget, the global trend towards reducing corporate tax rates affects the current controlled foreign company comparable tax exemption. It is proposed that the exemption threshold be reduced from the current percentage, taking into account the sustainability of the tax base. Addressing circumvention of anti-diversionary rules: The rules for controlled foreign companies aim to prevent South African taxpayers from shifting income that should be taxed in South Africa to an offshore jurisdiction with a beneficial taxation regime. These rules are inadequate for multi-layered transactions. Government has identified schemes where controlled foreign companies (that are part of a group) are interposed in the supply chain between South African connected parties and independent non-resident customers or suppliers. It is proposed that additional measures be introduced to prevent this circumvention. Reviewing the definition of permanent establishment The current definition of permanent establishment in the Income Tax Act is based on the definition developed by the Organisation for Economic Co-operation and Development (OECD). In November 2017, the OECD expanded this definition. When South Africa signed the OECD multilateral convention, it did not expand the permanent establishment definition. As a result, South African tax treaties use the narrow definition of permanent establishment. However, the definition in the Income Tax Act uses the expanded OECD definition. It is proposed that the permanent establishment definition in the Income Tax Act be reviewed to determine whether a limitation is warranted. 133
2019 BUDGET REVIEW Revising tax relief for blocked foreign funds The Income Tax Act provides tax relief for a South African tax resident when funds are blocked in a foreign country due to currency restrictions or foreign legal limitations. The resident can claim foreign tax credits for foreign taxes paid on foreign income. These credits are lost if the blocked funds are released more than seven years from the tax year in which the foreign income accrued. It is proposed that this seven-year limitation be reconsidered. Amendments to the definition of “domestic treasury management company” The domestic treasury management company regime allows qualifying companies to expand into other African countries. Within this regime, a company is so defined if it is incorporated in South Africa, deemed to be incorporated in South Africa, or effectively managed from South Africa and is not subject to exchange control restrictions. In 2017, the Income Tax Act was amended to remove the incorporation requirement. However, the Reserve Bank definition in Circular 5/2013 still includes this requirement. As a result, the 2017 changes are not aligned with the Reserve Bank requirements. It is proposed that the definition of “domestic treasury management company” is changed in the Income Tax Act to reintroduce the incorporation requirement. Revising the Income Tax Act criteria for recognised exchanges The Income Tax Act defines a recognised exchange as a stock exchange licensed under the Financial Markets Act (2012) or a similar exchange in another country that has been recognised by the Minister of Finance in the Government Gazette. Since 2001, the criteria used to recognise foreign exchanges have not been revised. It is proposed that a review of these criteria be considered. Reviewing the “affected transaction” definition in the arm’s length transfer pricing rules The “affected transaction” definition relating to arm’s length transfer pricing rules in the Income Tax Act applies to transactions between connected persons as defined in the act. However, in the OECD Model Tax Convention, the transfer pricing rules apply to transactions between associated enterprises. Government proposes to review the scope of these rules to determine whether the definition in the act should be changed in line with the OECD definition. Clarifying the interaction of capital gains tax and foreign exchange transaction rules Assets disposed of or acquired in foreign currency are subject to taxation under both the foreign exchange transaction rules and capital gains tax rules. To prevent double taxation of assets, foreign debt is currently excluded from the specific capital gains tax rules. However, it is unclear how the general rules apply if foreign bonds are disposed at a capital gain or loss. It is proposed that these rules be reviewed to prevent potential double taxation. Value-added tax Reviewing the definition of “group of companies” for electronic services regulations From 1 April 2019, regulations prescribing electronic services will expand the scope of electronic services required to pay value-added tax (VAT) in South Africa. These regulations exclude electronic services supplied between companies in a “group of companies”, if a non-resident company supplies such services to a domestic company within the same group. The regulations define “group of companies” to include two or more companies that hold shares in at least one other company such that 100 per cent of equity shares in each controlled company are directly held by the controlling company in the group. However, this 100 per cent shareholding requirement may exclude companies because of employee incentives or other empowerment programmes. It is proposed that the definition be changed to reflect this understanding. The change will come into effect on 1 April 2019. 134
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Clarifying financial services to include the transfer of long-term reinsurance policy The VAT Act (1991) makes provision for the activities of providing or transferring ownership of a long-term insurance policy, or providing reinsurance relating to any such policy, to be deemed to be financial services. However, the act does not specify how to treat the transfer of a long-term reinsurance policy. It is proposed that the act be amended to clarify this treatment. Aligning provisions of the VAT Act with the Insurance Act It is proposed that certain definitions referenced in the VAT Act are revised to align with the Insurance Act. Refining the VAT corporate reorganisation rules In line with the Income Tax Act, the VAT Act provides relief for companies in the same group by treating the supplier and the recipient of goods or services as the same person during corporate reorganisation transactions. If these transactions take place in terms of sections 42 or 45 of the Income Tax Act, VAT relief is only permitted if the transfer relates to a going concern. However, transfers of fixed property under these sections may not always involve a going concern, especially in sale and lease-back situations. It is proposed that the VAT Act be amended to clarify treatment in these instances. VAT treatment of rental stock paid in terms of the National Housing Programme In the VAT Act, a vendor (such as a municipality) is deemed to supply services to any public authority (for example, the Department of Human Settlements) if the vendor is paid or makes a payment in line with the National Housing Programme outlined in the Housing Act (1997). However, it is difficult to interpret the VAT treatment of payments relating to rental stock. It is proposed that the VAT Act be amended to clarify the treatment of rental stock in these instances. Reviewing section 72 of the VAT Act Section 72 of the VAT Act gives SARS discretionary powers to apply provisions relating to the calculation or payment of tax or the application of any provision, exemption or zero rate, in cases where “difficulties, anomalies or incongruities have arisen” due to the business conduct of a particular vendor or vendors. It is proposed that a constitutional review of section 72 of the VAT Act be conducted given the challenges that arose as to its application in respect of mandatory wording of the VAT Act. Refining the VAT treatment of foreign donor-funded projects The VAT Act provides relief for foreign donor-funded projects if they meet specified criteria. However, the criteria and the type of projects that qualify are unclear, especially if the project is sub-contracted to different contractors. It is proposed that these provisions be amended to clarify the policy intention. Customs and excise SARS publication of the excise rewrite discussion document SARS has compiled an excise rewrite discussion document that will be published for public comment as part of redrafting the excise duty legislative framework. The paper outlines the internationally recognised requirements of an excise duty administration. The current duty-at-source system is reviewed to identify possible reforms. A selected country comparison outlines reform options and the conclusion reflects the proposals that SARS supports. After comments are received, SARS will engage representative industry bodies and responsible government departments on reform proposals that require refinement. 135
2019 BUDGET REVIEW Reviewing the tax treatment of duty-free shops Concerns regarding duty-free shops operating within the country have been noted. The legislative framework governing duty-free shops will be reviewed to minimise any abuse and risks that may be occurring. SARS will investigate any alleged abuse and take action if required. Excluding bulk wine movements from the compulsory tariff determination requirement Manufacturers and importers of alcoholic beverages must obtain compulsory tariff determinations before these beverages can be removed from the excise manufacturing warehouse or cleared for home consumption upon the first importation. Bulk wine that is removed from one excise manufacturing warehouse to another is used as an input for further manufacturing and is not the final alcoholic beverage that should be subject to the tariff determination requirement. These bulk wine removals between warehouses will therefore be exempted from the obligation. Extending the fiscal marking, tracking and tracing intervention to include excise and levy goods The 2018 Budget strengthened the fiscal marking, tracking and tracing intervention for tobacco products to comply with South Africa’s obligations under the Illicit Trade Protocol of the World Health Organisation Framework Convention on Tobacco Control. Other excise and levy goods pose similar illicit trade risks causing significant revenue losses. The intervention could also address these concerns in a cost-effective manner. Over time, the intervention will be expanded to include other excise and levy products where feasible. Progress with the review of the diesel refund administration During August 2018, the National Treasury and SARS jointly held extensive consultations on the published discussion paper, “Review of the Diesel Fuel Tax Refund System”, through a series of industry-specific workshops. Discussions focused on defining primary production activities for different sectors, linked to the equipment and vehicles typically used in each sector; a separate diesel refund administration system; fishing and mining authorisations; outsourcing, contraction and partnerships; logbooks and recordkeeping; registration and user profiling; and special dispensations for small-scale users. Stakeholders provided more written inputs based on the workshops for their respective sectors by November 2018. These intensive consultations demonstrated the need for developing industry-specific provisions for each sector for a focused and effective diesel refund administration system. The proposed system will shift the basis from eligible users to eligible activities. The design of the new standalone diesel refund administration will be outlined in draft rules and notes that will be developed and published for public comment during the course of the year. Certain industries and representative bodies may be further engaged during this drafting process if additional consultations are needed to inform the new design. Sharing client-specific information with relevant departments for carbon tax purposes Implementing the carbon tax requires SARS, the Department of Environmental Affairs and the Department of Energy to share client-specific information. Provisions in the Customs and Excise Act that permit information sharing with strict confidentiality will be enhanced for the purposes of carbon taxation and the associated regulation of greenhouse gas emissions and energy efficiency. Ad valorem proposals to consistently apply and extend current items Expanding the computer category: Ad valorem taxes apply to televisions and monitors with screens larger than 45 cm, irrespective of their end use. “Smart” technology items are harder to distinguish and therefore difficult to categorise. To prevent these items from escaping ad valorem tax, it is proposed that the computer category be expanded to include any apparatus with a screen larger than 45 cm. Expanding the gaming category: 136
ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Ad valorem taxes on gaming consoles are currently limited to consoles that use a television screen. However, games are now displayed on many different items. It is proposed that the provisions be amended to include any external screen or surface on which gaming console images can be reproduced. Duty rebates and refunds in circumstances of vis major Government will review provisions relating to duty rebates and refunds in circumstances of vis major (an unpreventable incident caused by a superior external force) in the Customs and Excise Act and its schedules to align them with international best practice. Curbing smuggling and illicit financial flows Government will consider amendments enabling the confidential disclosure of names and associated reference numbers of customs clients, as well as other information necessary to verify legitimate financial flows. The proposed amendment will align the Customs and Excise Act with the similar approach adopted in the Tax Administration Act (2011). Tax administration Model mandatory disclosure rules and non-compliance penalties It has emerged internationally that offshore structures and arrangements are being designed in an attempt to circumvent financial account reporting under the OECD’s Common Reporting Standard. The standard is used for the exchange of information between countries. It is proposed that the OECD’s model mandatory disclosure rules be implemented in South Africa to identify and counter such structures and arrangements, and that similar penalties to those currently in force for non-compliance with the reportable arrangement legislation be imposed for non-compliance with the rules. Tax compliance certificates The legislative provisions relating to tax compliance certificates will be updated to include recent system requirements. Technical corrections In addition to the amendments described above, the 2019 tax legislation will include various technical corrections, which mainly cover inconsequential items – typing errors, grammar, punctuation, numbering, incorrect cross-references, updating and removing obsolete provisions, removing superfluous text, and incorporating regulations and commonly accepted interpretations into formal law. Technical corrections also include changes to effective dates and the proper coordination of transitional tax changes. A final set of technical corrections relate to modifications that account for practical implementation of the tax law. Although tax amendments go through an intensive comment and review process, new issues arise once the law is applied (including obvious omissions and ambiguities). These issues typically arise when tax returns are prepared for the first time after the tax legislation is applied. Technical corrections of this nature are limited to recent legislative changes. 137
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D Public-sector infrastructure update Introduction This annexure provides an update on the status of major infrastructure projects and reports on planned public infrastructure spending. In line with the medium-term strategic framework and the National Development Plan, the 2019 Budget prioritises spending on social and economic infrastructure such as schools, health facilities, roads and transport, energy, and water and sanitation. It also continues to fund programmes to improve the quality of infrastructure spending, and the capacity of government to plan and implement capital projects. Trends in public infrastructure spending Between 1998/99 and 2017/18, the public sector spent R3 trillion on infrastructure. Expenditure increased from R48.8 billion in 1998/99 to R236.2 billion in 2017/18. In real terms, infrastructure spending grew by an annual average of 4.3 per cent. State-owned companies have spent R1.3 trillion on infrastructure over this period. Municipalities and provincial departments have spent R612.8 billion and R705.2 billion respectively to build schools, hospitals, clinics and other community-related infrastructure. From 1998/99 to 2017/18, public-sector infrastructure expenditure as a share of gross domestic product (GDP) averaged 5.9 per cent. Both government agencies and public corporations substantially increased their spending on economic infrastructure over the past decade. However, spending on social infrastructure – which includes schools, hospitals and sanitation – has grown at a slower pace. Slower growth in social infrastructure expenditure is the result of pressure on budgetary resources, including the growth in government’s wage bill and new policy commitments. 139 Definitions of infrastructure spending The annexure presents estimates of infrastructure spending across the public sector, which includes national, provincial and local government, state-owned companies and other public entities, and public funds allocated to public-private partnerships. The data in this annexure may differ from infrastructure or capital expenditure estimates presented elsewhere in the 2019 Budget Review. Here, “infrastructure” is defined broadly, including spending on new assets; replacements; maintenance and repairs; upgrades and additions; and rehabilitation, renovation and refurbishment of assets. Capital and interest payments are also included in the definition. In contrast, “capital spending” typically excludes maintenance and finance charges. The annexure also includes expenditure on public housing as part of infrastructure spending. In accounting terms, housing subsidies are usually defined as transfers rather than capital spending.
2019 BUDGET REVIEW Figure D.1 Public-sector infrastructure spending Source: National Treasury Public-sector infrastructure spending highlights Table D.1 summarises government’s infrastructure plans for the next three years. The data combines infrastructure financed at national, provincial and local government level with spending estimates received from state-owned companies and other public entities. Table D.1 Public-sector infrastructure expenditure and estimates 1. Human settlements includes public housing to households and bulk infrastructure amounting to R57.5 billion over the MTEF period 2. Administration services include infrastructure spending by the Department of International Relations, the Department of Home Affairs, the Department of Public Works, Statistics South Africa and their entities 3. Public entities are financed by capital transfers from the fiscus and state-owned companies are financed from a combination of own revenue, borrowings and private funding Source: National Treasury Public-sector infrastructure spending over the medium-term expenditure framework (MTEF) estimated to total R864.9 billion. period is 140 2015/16 2016/17 2017/18 R billionOutcomes 2018/19 2019/20 2020/21 2021/22 Estimates MTEF total Ene rgy65.967.055.1 Wa te r a n d s a n i ta ti o n31.530.826.8 Tra n spo rt and lo gi sti cs81.370.975.4 Othe r e conomi c s e rvi ce s13.214.317.1 He a l th10.310.49.7 Edu ca ti on18.017.817.6 Huma n s e ttl e me n ts 118.318.314.3 Othe r s o ci a l s e rvi ce s11.910.311.2 Ad mi ni s tra ti on s e rvi ce s 210.910.19.1 50.652.652.852.8 38.342.841.847.4 78.094.8103.8115.3 16.715.114.215.2 12.111.811.111.5 18.518.219.019.7 18.218.819.019.7 10.610.39.910.4 12.311.712.213.1 158.1 132.0 313.9 44.5 34.3 56.9 57.5 30.6 37.0 Total261.2249.9236.2 255.1276.1283.8305.1 864.9 Na ti o na l d e p a rtme nts14.515.814.9 Provi nci a l de pa rtme n ts60.662.662.3 Lo ca l go ve rnme nt54.754.458.8 Pub lic e n titie s 317.817.113.2 Pub li c-p ri va te pa rtne rship s4.34.84.8 Sta te -owne d co mpa ni e s 3109.395.282.2 15.916.016.818.6 61.760.760.463.7 65.966.767.371.0 20.620.822.823.7 5.96.15.55.8 85.2105.8110.9122.3 51.5 184.8 204.9 67.4 17.3 339.0 Total261.2249.9236.2 255.1276.1283.8305.1 864.9
ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE State-owned companies continue to be the single largest contributor to capital investment, spending a projected R339 billion over the next three years. Provinces are expected to spend R184.8 billion on infrastructure over the same period, while municipalities are forecast to spend R205 billion. Public housing and bulk infrastructure constructed through the human settlements development grant and a new grant for informal settlement upgrades in provinces totals R57.5 billion. Although these assets are transferred to homeowners and not retained on the public-sector balance sheet, this spending is a substantial contribution to the built environment by government. Economic infrastructure spending, mainly by state-owned companies, accounts for 75 per cent of the medium-term estimate. These funds are used to expand power-generation capacity, upgrade and expand the transport network, and improve sanitation and water services. Social services infrastructure accounts for 20.7 per cent of the total, of which health and education account for 4 per cent and 6.6 per cent respectively. Energy Energy expenditure is expected to total R158.1 billion over the next three years, accounting for 18.3 per cent of total infrastructure spending. Eskom accounts for R134.3 billion, or 85 per cent, of this amount. Table D.2 Eskom expenditure and estimates R billion 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Me dupi p owe r s ta ti on Kus i l e p owe r s ta ti on I ngu l a pumpe d-s tora ge s che me Ma tl a re furb i s h me n t p roje ct Duvha p owe r station 765kV pro je cts North e rn gri d p ro jects 1 Ca p e gri d pro jects 1 Ce n tra l grid pro je cts 1 Ma jub a ra i l Koeberg s tea m ge ne ra to r re p lace me nt p roject Othe r2 7.4 17.3 2.5 0.4 0.3 1.1 1.3 1.1 1.0 0.7 – 7.2 13.2 – 0.3 0.3 0.9 0.9 0.7 1.0 1.0 1.3 6.6 9.4 – 0.3 0.2 0.6 0.9 0.6 0.9 1.0 1.2 4.9 5.9 – 0.4 0.2 1.2 0.6 1.4 1.1 – 2.0 4.6 3.1 – 0.2 0.3 0.6 0.8 1.0 0.1 – 1.8 – 1.0 – 0.1 0.1 0.3 – 1.1 0.0 – 1.7 25.9 58.9 20.9 47.7 22.1 43.9 27.1 44.9 32.5 44.8 40.3 44.6 Total 1. Grid projects involve installation of transmission lines, new transformers and upgrading of substations 2. Other represents a collection of projects to enhance the system at generation, transmission and distribution level including maintenance projects Source: Eskom The Department of Energy will focus on increasing household access to electricity over the medium term. A total of R17.4 billion has been allocated to support the Integrated National Electrification Programme. The programme will fund an estimated 590 500 new connections to the power grid over the MTEF period. An additional 20 000 households will be provided with non-grid (stand-alone power system) connections per year. Over the medium term, government will transfer R5.9 billion to municipalities and R10.7 billion to Eskom to fund this programme. To increase energy efficiency and reduce reliance on the national grid, the Department of Energy will continue to implement the Solar Water Heater Programme and provide subsidies to municipalities to encourage the use of more energy-efficient technology. To date, the department has produced and installed 87 200 solar water heaters. To support the use of more energy-efficient technology, R719.3 million is allocated to the energy efficiency and demand-side management grant over the medium term. The Department of Energy continues to support the renewable energy market, in line with the national commitment to transition to a low-carbon economy. Government has committed to procuring 14 725 megawatts (MW) of power from renewable energy sources in terms of the Integrated Resource Plan (IRP) 2010 to ensure South Africa has an optimal energy mix. Table D.3 shows the different renewable energy technologies and their associated total capacity allocations in line with the IRP’s policy targets. 141
2019 BUDGET REVIEW Table D.3 Renewable energy technologies Technology Megawatts On s h ore wi n d So l a r p ho tovota i c Co nce n tra ted s ol a r po wer La nd fi l l , h ydroe l e ctri c po we r, bi o ma s s , 6 360 6 225 1 200 940 bi oga s a n d s ma l l (1-5 MW) proje cts Total 14 725 Source: Independent Power Producer Office To date, a total of 6 422 MW has been procured from 112 renewable energy independent power producers over seven “bid windows”, and 3 876 MW of electricity generation capacity from 63 projects has been connected to the national grid. Renewable energy sources have generated about 26 840 gigawatt-hours since November 2013. Private investment in the programme amounts to R201.8 billion to date, of which R48.7 billion is from foreign investors and financiers. Table D.4 Renewable Energy Independent Power Producer Procurement Programme bid window summary Bid window Total number of projects Total MW allocation Number of projects in commercial Total MW grid-connected operation 1 2 3 3.5 4 Sma l l (1S2) Sma l l (2S2) 28 19 17 2 26 10 10 1 425 1 040 1 452 200 2 205 49 50 28 19 16 – – – – 1 415 1 033 1 428 – – – – Total 112 6 422 63 3 876 Source: Independent Power Producer Office Water and sanitation Government will spend R132 billion on water and sanitation over the next three years, accounting for 15.3 per cent of public-sector infrastructure expenditure. The Water Infrastructure Development Programme is allocated R42 billion over the medium term. The majority of this allocation, R29 billion, will be transferred to water boards, the Water Trading Entity, the regional bulk and water services infrastructure grants and the accelerated community infrastructure grant. Disbursements through the regional bulk infrastructure grant and the water services infrastructure grant will total R18.3 billion over the medium term. During this period, 4 mega, 34 large and 295 regional bulk water and sanitation projects will be completed. Infrastructure investment will be prioritised to serve 27 of the poorest district municipalities. Transport and logistics The public sector plans to spend R313.9 billion on transport and logistics over the medium term. This accounts for 36.3 per cent of total infrastructure expenditure during this period. These investments will improve the national transport infrastructure network, enhance the mobility of people and the provision of services, reduce transport costs and facilitate regional trade. Revenue from services provided by state-owned companies will help fund infrastructure investment, complemented by national and provincial allocations for road construction and maintenance of the non-toll network. 142
ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Transnet’s capital expenditure is expected to total R102 billion over the next three years. Table D.5 below shows Transnet’s major projects over a seven-year period. Table D.5 Transnet expenditure and estimates R million 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 Acqui s i ti on o f l o co mo ti ve s (Tra ns ne t fre i gh t ra il) Ne w mu l ti -product pi pe l i ne Othe r p i pe l i n e s Ca p i ta l i s a ti o n o f i n fra s tru ctu re , l o co mo ti ve s a nd wa go n ma i n te na nce Ro llin g s to ck ma in te n a n ce Ro llin g s to ck Wa te rb e rg u p gra d e (s ta ge 2-5) Ma n ga n es e tra n s p o rt p ro ject Acq u i s i ti o n o f tu gs Export coa l e xpa ns i o n Ove rva a l tunn e l d oubl i n g 8 167 6 068 7 178 6 381 6 660 6 498 581 1 331 – 7 086 1 521 – 6 187 1 182 – 6 650 694 1 978 1 035 406 3 075 1 050 1 769 3 812 1 300 57 7 166 1 400 – – – – – – – – 518 – – – – 168 1 590 2 831 356 216 – 433 1 394 2 104 1 493 295 388 – 500 972 1 889 1 864 129 2 362 – 500 1 858 5 045 2 730 21 3 783 – 2 242 Oth e r 13 571 7 139 7 969 8 737 13 127 11 294 15 586 Total 30 155 21 433 23 147 25 645 30 070 33 275 38 611 Source: Transnet Over the MTEF period, major investments in roads and rail include the following: • The South African National Roads Agency Limited has been allocated funds from the Road Transport Programme to upgrade, strengthen and maintain non-tolled national roads. A total of R36.5 billion has been allocated for non-toll roads. In addition, R3.3 billion is allocated for the upgrade of the R573 (Moloto Road), R1.8 billion to compensate for the reduced tariffs for the Gauteng Freeway Improvement Project, R3.2 billion for the construction of two bridges on the N2 Wild Coast project and R19.8 billion for general road strengthening and maintenance. The provincial roads maintenance grant is allocated R36.5 billion to fund the resealing and rehabilitating of provincial roads. This includes R526 million allocated in 2019/20 to maintain coal haulage roads in Mpumalanga. The Passenger Rail Agency of South Africa has been allocated R41.5 billion in capital transfers over the medium term to modernise the rail network. This includes the provision of 125 new trains for Metrorail as part of the rolling stock fleet renewal programme. Over the MTEF period, R6.8 billion has been allocated for signalling upgrades, R5.2 billion to overhaul and refurbish coaches, and R3 billion for other rail-related infrastructure improvements. The public transport network grant funds the integrated public transport networks in 13 cities across the country and has been allocated R22.3 billion over the medium term. • • Human settlements The Department of Human Settlements has been allocated R105.7 billion over the medium term, which will support delivery of more than 520 000 state-provided housing subsidies. The department will facilitate the delivery of state-subsidised housing through implementing agents such as provinces, metropolitan municipalities and related departmental entities. These implementing agents are funded through the Housing Development Finance Programme in the form of conditional grants and transfers amounting to R102.8 billion over the MTEF period. The human settlements development grant, which funds housing and human settlements programmes at a provincial level amounts to R50.1 billion over the medium term. Over the same period, the urban settlements development grant, which funds infrastructure provision for broader urban development in metropolitan municipalities, will receive R31.1 billion. Upgrades to informal settlements will be funded through a new grant to provinces and municipalities, which amounts to R14.7 billion over 2020/21 and 2021/22. 143
2019 BUDGET REVIEW In addition, the institutional arrangements for finance-linked subsidies have changed. From 1 April 2019, the administration and funding of the finance-linked subsidies will be transferred from provinces to the National Housing Finance Corporation. This transfer aims to improve the manner in which subsidies are administered. Over the medium term, the corporation will receive R950 million to support the delivery of 18 185 finance-linked individual subsidies. Health The Department of Health plans to spend an estimated R23.5 billion on healthcare infrastructure in the areas of greatest need. The direct health facility revitalisation grant, which is transferred to provincial health departments, will receive R19.2 billion over the medium term to fund about 15 000 infrastructure projects. These projects include the upgrading, refurbishing and maintenance of existing healthcare facilities, and construction of new facilities. The health facility revitalisation component of the national health insurance indirect grant will receive R4.3 billion over the medium term. A portion of this allocation will fund the planning and construction of an academic hospital in Polokwane, as well as improvements to the nearby Pietersburg and Mankweng hospitals. Education The Department of Basic Education plans to spend R40.5 billion on school infrastructure over the medium term. The education infrastructure grant has been allocated R34.3 billion over this period. The grant helps to fund ongoing infrastructure investment in provinces, including maintenance and construction. The school infrastructure backlogs grant will receive R6.1 billion to complete projects that replace unsafe schools and eliminate backlogs. In 2019/20, the department will use R2 billion to replace 59 inappropriate and unsafe schools, and provide water to 227 schools and sanitation to 717 schools, respectively. Over the medium term, the maths, science and technology grant has been allocated R1.2 billion to help train teachers, and provide equipment and software to schools. Over the same period, R3.3 billion has been allocated to the Department of Higher Education and Training to continue construction at the University of Mpumalanga and the Sol Plaatje University. New facilities include lecture rooms, laboratories, sport and recreation amenities, and student accommodation. In 2019/20 an additional allocation of R120 million, approved through the Budget Facility for Infrastructure (BFI), will help fund student housing programmes at the Nelson Mandela University, Sefako Makgatho Health Sciences University and the Vaal University of Technology. Strategic infrastructure projects The Presidential Infrastructure Coordinating Commission has approved 18 strategic infrastructure projects to support economic development and service delivery in all provinces. Table D.6 lists the projects and their allocations from the fiscus. In many cases, these amounts are augmented by investments financed by state-owned companies, which are not included in the table. 144
ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Table D.6 Allocation from the fiscus to strategic infrastructure projects Source: National Treasury Major infrastructure projects per sector Table D.7 summarises public infrastructure projects per sector. 145 R million2015/162016/172017/18 Audited outcome SIP category 2018/19 Preliminary outcome 2019/202020/212021/22 Forecast SI P 1: Unl ocki ng the393819291 north e rn mi n e ra l b e l t wi th Wa te rb e rg a s ca ta l ys t SI P 2: Durba n, Fre e -Sta te ,188217128 Ga ute ng l ogi s ti cs a nd i ndu s tri a l co rri do r SI P 3: Sou th e a s te rn n od e8 9279 35611 122 a nd corri d or de ve l op me n t SI P 4: Unl ocki n g e co nomi c881496429 opp ortu nitie s in th e North We s t pro vi n ce SI P 5: Sa l da nha -Northe rn196–5 Ca pe d e vel o pme nt corri d or SI P 6: I nte gra te d22 42620 93721 644 muni ci pa l i n fra s tru ctu re proje ct SI P 7: I nte gra te d urb a n49 07549 74947 679 s pa ce a n d pu bl i c tra ns p ort pro gra mme SI P 8: Gre e n e n e rgy i n129137501 s upp ort of the South Afri ca n e con omy SI P 10: El e ctri ci ty3 7693 6644 005 tra nsmi ssi o n a n d di s tri bu ti on for a l l SI P 11: Agri-lo gi s ti cs an d10 03211 27311 739 rura l i nfra s tructure SI P 12: Re vitalis atio n of6 0325 9596 342 pub l i c hos pi ta l s a nd othe r h e alth facilitie s SI P 13: Na ti on a l s ch oo l11 04011 34512 450 build p rogramme SI P 14: Highe r e du cation3 3013 3973 520 i nfra s tru ctu re SI P 16: SKA a n d Me e rka t687653694 SI P 18: Wa te r a n d4 4344 9275 180 s a ni ta ti on ma s te r pl a n 580 110 7 022 363 – 22 001 44 932 147 4 111 12 486 6 894 12 585 3 793 709 5 718 9141 1581 115 11035– 15 08214 29713 753 325419495 268378427 20 22620 70422 298 49 74151 56457 355 159167180 3 5873 7874 058 12 22512 97313 903 7 1437 9558 420 12 77513 50814 953 3 9884 0974 304 687812857 5 9816 6367 159 Total121 510122 929125 729 121 451 133 211138 490149 277
2019 BUDGET REVIEW Table D.7 Major infrastructure projects per sector 146 ImplementingProject R millionagentstage 2018/192019/202020/212021/22 Estimates Water and sanitation Co ns tructi o n o f wa te r s upp l y a n dWa te r a ndCo ns tructi o n s a ni ta ti on s ys te ms i n Li mpo poSa ni ta ti on 4 1903 6823 8864 177 Co ns tructi o n o f bu l k wa te r s u ppl y i n Gi ya ni - Wa te r a ndCo ns tructi o n ph as e 1 an d ph a se 2Sa ni ta ti on 233170361420 Upgra d e o f bu l k wa te r s u pp l y i nWa te r a ndCo ns tructi o n Moga l a kwe na - pha s e 1Sa ni ta ti on 186228250294 Upgra d e o f wa s te tre a tme nt wo rks i nWa te r a ndCo ns tructi o n Se bo ke ng - ph a s e 1 a nd pha s e 2Sa ni ta ti on 110184250300 Co ns tructi o n o f bu l k wa te r s u ppl y a ndWa te r a ndCo ns tructi o n s a ni ta ti on s ys te ms i n the North We s tSa ni ta ti on 141129263150 Co ns tructi o n o f bu l k re gi ona l s e we ra ge i nWa te r a ndFe as ibility Se di b e ngSa ni ta ti on 502115213180 Co ns tructi o n o f re gi on a l b ul k wa s te wa te rWa te r a ndDe s i gn tre a tme nt wo rks i n We s to na ri a /Ra ndfo nte i n Sa ni ta ti on (Zuurb e kom) 6377152220 Upgrad e o f Mad ibe n g bul k wa te r s up ply -Wa te r a ndCo ns tructi o n ph a s e 2Sa ni ta ti on 5670100274 Co ns tructi o n o f The mbi s i l e bul k wa te rWa te r a ndCo ns tructi o n s u pp l y (Los ko p) - pha s e 1 of 3Sa ni ta ti on 6040120155 Co ns tructi o n o f Dri e ko ppi e s bul k wa te rWa te r a ndCo ns tructi o n su pp lySa ni ta ti on 13100100100 Energy1 Co ns tructi o n o f up s tre a m oi l a n d ga sCEFCo ns tructi o n pro ducti o n a s s e ts b y Pe troSA i n Gh a na 525300109224 Mi ne e xpa nsi on programme (T Proje ct)CEFPre -fe a sib ility 10–10593 Kl ippo ortji e mine e xpa ns ion pro je ctCEFFe as ibility 4123533025 Co ns tructi o n o f a l i que fi e d pe trol e um ga sCEFI de nti fi ca ti on pi p e l i n e a nd s to ra ge i n fra s tructure , ta nk re p a i rs a n d te rmi na l e xpa ns i on 128136144152 Th e Re d s to ne Co nce ntra te d Sol a r Th e rma lCEFFe a s i bility Po we r Pl a n t p roje ct 26593172– Ga s tra di n g p roje ct wi th Mo za mbi qu eCEFI de nti fi ca ti on 82020010 Upgra d e s a n d a ddi ti ons to We s t Co a s tCEFI de nti fi ca ti on en ergy i nfra s tru cture 821543229 En ha nce d e ne rgy-p roce s s i ng re fin e ry p roje ctCEFFe as ibility –208–– Acqu i s i ti on of n e w i n fra s tructu re a s s e ts toCEFI de nti fi ca ti on en ha n ce d owns tre a m ma rke t en try i nto ga s sale s 5200–– De ve lopme n t of a n atio na l ga sCEFI de nti fi ca ti on tran smis sio n p ipe l ine ne two rk 1––120 Transport and logistics Ro lling s tock fl e e t re n e wa l pro gra mmePRASACo ns tructi o n 4 6774 9578 0818 526 Si gn alling a nd te le co mmun ication sPRASACo ns tructi o n pro gra mme 2 0242 1452 2652 390 Upgrad e o f a i rport facilitie sACSACo ns tructio n 1686451 6912 669 Ge ne ra l ove rha ul of Me trora i l coa che sPRASACo ns tructi on 1 4091 4941 5691 647 Ne w runwa ys , taxiwa ys an d a pron sACSACo ns tructi o n 2742921 7692 219 Upgra d e s a n d a ddi ti ons to a i rp ort bui l d i ngsACSACo ns tructi o n 2331 8891 281907 Ra i l de pots mod e rn i s a ti on pro gra mmePRASACo ns tructi o n 737781257286 Re furbi s hme n t o f a p rons a nd roa d sACSACo ns tructi o n 43135428516 Se curi ty u pgra de s (s ta ti on s a nd corri d ors )PRASACo ns tructi o n 336356227202 Ca pi ta l i nte rve n ti on progra mme (s a fe ty,PRASACo ns tructi o n emerge n cy & s peci a l ne eds p roje cts ) 301319168191
ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Table D.7 Major infrastructure projects per sector (continued) 147 Implementing Project R million agent stage 2018/19 2019/20 2020/21 2021/22 Estimates Other economic services2 I mp l e me nta ti on o f i n fra s tru cture wi th i n Tra d e a n d On go i n g s p e ci a l e conomi c zon e s In du s try 2 200 2 615 2 775 1 622 Upgra d e of the Cou n ci l for Sci e nti fi c a n d CSI R Co n s tru cti o n I ndus tri a l Re s e a rch Ca mpus 754 688 740 – I n fra s tru ctu re pro je cts to s u p po rt i n ve s tme n t Envi ro n me n ta l Co ns tructi on i n mi n i ng, tou ri s m, ma n u fa cturi ng a n d Affa i rs se rvice s 422 446 470 490 Upgra d e of the Sou th Afri ca n Na ti o n a lEnvi ro n me n ta lCo ns tructi on Bi o di ve rs i ty I n s ti tu te l a b o ra tori e s Affa i rs 134 151 159 167 Upgra d e of tou ri s t a cco mmo d a ti on fa ci l i ti e s Envi ro n me n ta l On go i n g in n ati on a l p a rks Affa i rs 122 125 131 138 Upgrad e of i Si ma n gal iso We tl an d Pa rkEnvi ro n me n ta lCo ns tructi on Au tho ri ty o ffi ce fa cil itie s Affa i rs 183 109 114 120 CSI R group i n ve s tme nt i n prop e rty, pl a n t a nd Cou n ci l for Co ns tructi on e qui pme nt Sci e n tific a nd In du s tri a l Re s e a rch 102 108 114 120 Upgra d e of p e rs o nne l a ccommo da ti on Envi ro n me n ta l Co ns tructi on fa ci l i ti e s a nd e q ui p me n t i n n a ti on a l pa rks Affa i rs 87 92 97 102 Upgra d e of roa ds a nd i nfra s tru cture i n Envi ro n me n ta l Co ns tructi on na ti o n al p arks Affa i rs 73 76 80 84 Se nte ch d i gi ta l te rre s tri a l te le vi s i o nCo ns tructi on Mi gra ti on p rojectSen te ch Li mi ted 60 63 62 70 Health Co ns tru cti on o f th e Li mp o po Aca de mi c He al th Fe asibil ity Hos pi ta l 190 247 653 498 Ma i nte na nce th rough th e Na ti ona l He a l th Co n s tru cti o n He alth I ns urance Backl og Programme 457 231 309 324 Re ha bi l i ta ti on o f Ba mbi s a n a Hos p i ta l i n th e He a l th De s i gn Ea s te rn Ca pe 35 172 179 267 Co ns tru cti on o f th e Si l o a m h os pi ta l i n He a l th De s i gn Li mp op o 138 155 218 238 Re ha bi l i ta ti on o f Zi thul e l e hos pi ta l i n th e He a l th De s i gn Ea s te rn Ca pe 40 150 202 174 Re p l a ce me n t of the Ba l fo ur co mmun i ty He a l th Co n s tru cti o n he al th ce n tre in Mp u mal an ga 2 25 61 120 Re p l ace me n t of the Lu s aka co mmu ni ty He a l th Co n s tru cti o n he a l th ce n tre i n th e Fre e Sta te 13 78 79 45 Re pl a ce me n t of the Che be ng communi ty He a l th Co n s tru cti o n he a l th ce n tre i n Li mp op o 8 18 100 80 Re furb i s h me n t o f th e Di hl a be n g Ho s p i ta l i n He a l th Co n s tru cti o n th e Fre e Sta te 100 80 80 36 Ma i nte na n ce of the Ma me l o d i h o s p i ta l i n He al th Fe asibil ity th e Ga uteng – 18 20 112 Education Co ns tru cti on o f ho s te l s , l e cture h a l l s a nd Hi gh e r Va ri o u s l a b ora to ri e s a t va ri o u s te rti a ry i n s ti tu ti o ns Edu ca ti o n 5 376 5 677 5 975 6 233 Re p l ace me n t of i na p p ro p ri ate infrastructu re Ba s i c Va ri o u s a t p ub l i c p ri ma ry a n d s e co nd a ry s cho o l s Edu ca ti o n 2 121 1 869 1 629 2 191 Co ns tru cti on o f ho s te l s , l e cture h a l l s a nd Va ri o u s l a b ora to ri e s a t th e Un i ve rs i ty o f Hi gh e r Mp u mal an ga Edu ca ti o n 1 277 1 332 1 401 1 476 Co ns tru cti on o f ho s te l s , l e cture h a l l s a nd Hi gh e r Co ns tructi on l a b ora to ri e s a t So l Pl a a tje Uni ve rs i ty Edu ca ti o n 724 757 802 838 Co ns tru cti on o f s tud e nt h o us i n g fa ci l i ti e s a t Hi gh e rCo ns tructi on Va a l Uni ve rs i ty of Te ch n ol o gy Edu ca ti o n 39 40 – – Co ns tru cti on o f s tud e nt h o us i n g fa ci l i ti e s a t Hi gh e rCo ns tructi on Ne l s o n Ma nd e l a Un i ve rs i ty Edu ca ti o n 34 34 – – Co ns tru cti on o f s tud e nt h o us i n g fa ci l i ti e s a t Hi gh e rCo ns tructi on Se fa ko Makga tho He al th Sci e n ce s Un i ve rsity Edu ca ti o n 31 31 – – Procure me nt of mob i l e cl a s s rooms fo r Hi gh e r Co ns tructi on co mmu ni ty e duca ti on a n d tra i ni ng l e a rn e rs Edu ca ti o n 1 – – –
2019 BUDGET REVIEW Table D.7 Major infrastructure projects per sector (continued) 148 Implementing Project R million agent stage 2018/19 2019/20 2020/21 2021/22 Estimates Human settlement Hu ma n s e ttl emen ts d e vel o p me n t Huma n On goi n g progra mme Se ttl e me n ts 36 433 37 613 36 039 15 397 Urba n s e ttl e me nts de ve l o pme nt Huma n On goi n g progra mme Se ttl e me n ts 22 612 23 926 22 251 9 373 I n fo rma l Se ttl e me n ts Upgra d i n g Huma n On goi n g Pa rtne rs hi p Progra mme i mpl e me nte d by Se ttl e me n ts muni ci pa l i ti e s – – 2 985 4 384 I n fo rma l Se ttl e me n ts Upgra d i n g Huma n On goi n g Pa rtne rs hi p Progra mme i mpl e me nte d by Se ttl e me n ts provi n ce s So ci al Hou sing Re gu l ato ry Au th o rity Huma n On goi n g Pro gra mme Se ttl e me n ts – – 3 015 4 322 1 487 1 477 1 541 805 Other social sectors3 Up grad e o f th e n atio n a l arch i ve s b u ild in g Arts a nd Co n s tructi o n i n Pre to ri a Cul ture 65 98 96 119 Co ns tructi on o f a mus e um on the Arts a nd Co n s tructi o n Li b e ra ti on Heri ta ge Rou te Cul ture 25 71 75 157 Co ns tructi on o f th e I s i b hubhu Cul tu ra l Arts a nd Co n s tructi o n Are na Cul ture 56 59 72 65 Co n s tru cti o n o f th e Sa ra h Ba a rtma n Arts a nd Co n s tructi o n Mu s e u m Cul ture 91 85 3 60 Up gra d e of the Ul u nd i a nd Pros pe cti o n La bour Co ns tructi on l a bour ce n tre s 32 32 34 18 Up gra d e of the I ngquza Hi l l Mu s e um Arts a nd Va ri o u s Cul ture 10 4 – 18 Up gra d e of the JL Dube Hous e Mus e u mArts a nd Cu l ture Va ri o us 12 5 – 15 Up gra d e of the OR Ta mb o Me mo ri a l Arts a nd Va ri o u s I n te rp re ta ti ve Ce n tre Cul ture 8 8 – – Re nova ti ons of the I s a ndl a wa na Mu s e um Arts a nd Cu l ture De s i gn 3 3 4 – Co ns tructi on o f th e Afri vi be Ente rta i n me nt Arts a nd Fe asib ili ty I n cub a to r bu i l di n g Cul ture – – 4 2 Justice and protection services Co ns tructi on o f ne w a nd re -e s ta b l i s he d Pol i ce Va ri o u s p ol i ce s ta ti o n s 606 628 645 693 Re furbi s h me n t milita ry ba se s, re pl a ce me n t De fe ns e a nd Co n s tructi o n of me cha ni ca l s ys te ms a nd ground works Military 361 375 381 696 Expa ns i on of the Durba n Hi gh Court Ju s ti ce a nd De s i gn Con s ti tu ti o na l De ve l o pme n t 206 352 371 201 Co ns tructi on o f pol i ce p e rs o nn e l a nd offi ce Pol i ce Co n s tructi o n acco mmod atio n 262 286 325 175 Up gra d e a nd re fu rb i s hme nt of the South De fe ns e a nd De s i gn Afri ca n Mi litary He alth Tra in in g Ce n tre - Military Ph a s e 2 (n u rs e s col l ege) 23 84 308 382 Up gra d e of Li chte nburg co rre cti o na l ce ntre Corre cti o n a l Co n s tructi o n th ro ugh provi s i o n of 234 a ddi ti ona l b e d s Se rvi ce s 32 114 162 80 Co n s tru cti o n o f Kh a ye litsh a Co rre ctio n a l Corre cti o n a l De s i gn Ce n tre Se rvi ce s – – 90 260 Re furbi s h me n t, a dd itio ns to e xis ti n g Corre cti o n a l Co n s tructi o n ma gi s tra te 's bui l d i n gs a nd upgra di ng o f Se rvi ce s se curi ty me a su re s 99 219 69 44 Se curi ty i n s ta l l a ti o ns a t Pi e te rma ri tzb u rg, De fe ns e a nd Co n s tructi o n Ko ks ta d a nd Empa nge n i co rre cti o na l Military ce n tre s 200 106 120 97 Re furbish me n t o f milita ry b a se me sse s D e fe n se a nd Co n s tructi o n Military 78 99 90 130
ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Table D.7 Major infrastructure projects per sector (continued) 1. Only projects of the Central Energy Fund are reported in this table. Eskom projects are reported on separately in Table D.2 2. Other economic services includes agriculture, environmental, trade and industry, science and technology and telecommunications infrastructure 3. Others social sectors include infrastructure such as labour, arts and culture, cooperative governance, rural and social development 4. Central government and administrative services includes international relations, public works, home affairs and communications Note: Passenger Rail Agency of South Africa (PRASA), Airports Company of South Africa (ACSA), Council for Scientific and Industrial Research (CSIR) and Property Management Trading Entity (PMTE) Source: National Treasury Large infrastructure projects under the Budget Facility for Infrastructure The BFI is an institutional process within the national Budget that supports quality public investments by improving the planning and execution of large infrastructure projects. In response to a July 2017 call for proposals for large infrastructure projects, national departments submitted a total of 64 projects with an estimated funding requirement of R138.6 billion. Through the BFI structures, 38 projects met the criteria and underwent detailed technical assessment. Following initial allocations in 2018/19, three projects in the health, education and transport sectors will receive funding of R4.4 billion over the medium term. A second call for proposals, in July 2018, resulted in 63 submissions from national departments with an estimated funding requirement of R203.6 billion. Of these, 33 projects underwent detailed technical assessment, and 13 projects from the higher education and public works sector complied with the BFI requirements. These will be considered for funding in the next budget process. Government is considering a blended-finance approach to these projects. The experience of the BFI indicates the need to scale up skills and capacity within sponsoring departments. Some of the challenges in the infrastructure value chain include a lack of technical expertise and institutional capacity to identify and develop good projects. Over the next three years, government will develop a Project Preparation Facility to build capacity and strengthen project planning, in line with the requirements of the BFI. The new facility will focus on infrastructure in education, health, water, energy and communications. The Development Bank of Southern Africa is allocated R400 million to lead the process, while the Government Technical Advisory Centre and the Presidential Infrastructure Coordinating Commission’s Technical Project Management Unit are allocated R60 million and R165 million respectively. Projects that have been prepared through the Project Preparation Facility will be considered for funding through the BFI. 149 Implementing Project Rmillion agent stage 2018/19 2019/20 2020/21 2021/22 Estimates Central government and administrative services4 Re p a i r of va ri o u s go ve rn me n t o wn e d PMTE Va ri ou s b u ild in gs 612 522 658 529 Re fu rb i s hme n t of va ri o us go ve rnme n t PMTE Va ri ou s o wn e d b u ild in gs 513 558 485 487 Ma in te n a n ce o f variou s corre ction a l PMTE Va ri ou s fa cilitie s 125 362 428 648 Re fu rb is h me n t of vario u s corre ctio n a l PMTE Va ri ou s fa cilitie s 199 231 356 529 Co n s tructi on o f Ne w Yo rk cha nce ry I n te rn a ti ona l Fe as ib ility Re l a ti on s a n d Co op e ra ti o n 194 334 376 28 Re de ve l opme n t of b ord e r p o s t ce n tre s (97 PMTE Va ri ou s proje cts ) 216 229 241 226 Re fu rb is h me n t of vario u s magis trate PMTE Va ri ou s b u ild in gs 299 302 177 157 Up gra d i n g a n d con s tructi on o f pre s ti ge PMTE Va ri ou s a ccommod a ti o n s i te s (57 p roje cts ) 187 197 208 219 Re p a ir of va ri o u s p olice s tation s PMTE Variou s Up gra d i n g a n d con s tructi on o f PMTE Va ri ou s d e p a rtme n tal facilitie s (41 p roje cts ) 297 321 199 101 181 191 201 212
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E Public-private partnerships Introduction This annexure presents an overview of public-private partnerships (PPPs) in South Africa. It provides updates on PPP projects that have been concluded and are in operation, data on contingent fiscal obligations and liabilities arising from PPPs, a list of projects under review, and a summary of the project outlook. Government has spent an estimated R3 trillion on infrastructure since 1998/99 and has allocated R864.9 billion to spend in this area over the MTEF period. Government infrastructure budgets have come under pressure over the past several years due to lower economic growth and a shift in spending towards consumption priorities, such as funding for higher education and compensation of employees. Because government cannot meet growing infrastructure demands on its own, PPPs are an effective way for the public and private sectors to work together to deliver much-needed infrastructure. Regulation of PPPs The Public Finance Management Act (1999) regulates national and provincial PPPs through Treasury Regulation 16. All institutions undertaking such partnerships require approval from the National Treasury in four phases (feasibility study, procurement, value for money and final PPP agreement). All PPPs also go through regulatory tests to check compliance with the regulation before they are implemented. These three tests assess value for money, affordability and risk transfer. Similarly, the Municipal Finance Management Act (2003) regulates municipal PPPs. Municipalities follow a similar process, however, the municipal elected council grants approval and the National Treasury only issues views and recommendations. PPP projects completed Table E.1 shows a list of 34 completed PPP projects undertaken since this type of partnership was first introduced in South Africa in 1998. The total value of all projects amounts to R89.6 billion. There are various types of PPP projects based on the contractual arrangements involved, including: • Design, finance, build, operate and transfer (DFBOT) 151 The difference between PPPs and traditional government infrastructure projects A PPP is defined as a contract between a public-sector institution and a private party, where the private party performs a function that is usually provided by the public sector and/or uses state property in terms of the PPP agreement. Most of the project risk (technical, financial and operational) is transferred to the private party. The public sector pays for a full set of services, including new infrastructure, maintenance and facilities management, through monthly or annual payments. In a traditional government project, the public sector pays for the capital and operating costs, and carries the risks of cost overruns and late delivery.
2019 BUDGET REVIEW • • • • Design, finance and operate (DFO) Design, build, operate and transfer (DBOT) Equity partnerships Facilities management projects. Of the 34 PPP projects, 26 are DFBOT projects, four are DFOs, two are DBOTs, one is an equity partnership and one is a facilities management project. They include hospitals, transport and roads, tourism, and head office accommodation projects. The projects have been funded through a combination of equity, debt and, in some instances, government capital contributions. Most of these projects are already operational, with a few having reached the end of their project term. In some instances, project durations have been extended. Table E.1 List of PPP projects completed Project name Government institution Type Date of Duration Financing structure Project value R million Form of payment close1 Transport SANRAL N4 Ea s t To l l Ro a d SANRAL DFBOT Fe b -1998 30 ye a rs De bt: 80% Eq ui ty: 20% 3 200 Us e r cha rge s SANRAL N3 To l l Ro a d SANRAL DFBOT Nov-1999 30 ye a rs De bt: 80% Eq ui ty: 20% 3 000 Us e r cha rge s SANRAL N4 We s t To l l Ro a d SANRAL DFBOT Aug-2001 30 ye a rs De bt: 80% 3 200 Us e r cha rge s Equi ty: 20% No rthe rn Ca p e fl eet No rth e rn Ca pe De pa rtme n t o f Tra n s port, DFO Nov-2001 5 ye a rs Eq ui ty: 100% 181 Uni ta ry p a yme n t Ro a d s a nd Publi c Works Ch a p ma n ’s Pe a k Dri ve Tol l Roa d We s te rn Ca pe De p a rtme n t DFBOT of Tra ns port a nd Publ i c Ma y-200330 ye a rs De bt: 44% Eq ui ty: 10% 450 Us e r cha rge s a n d gu a ra n tee Works Govt: 46% Fl eet ma n a gemen t Ea s te rn Ca p e De pa rtme n t DFO Aug-2003 5 ye a rs De bt: 100% 553 Uni ta ry p a yme n t of Tra nsport Na ti on a l fl eet ma n a gement Depa rtment o f Tra n s po rt DFO Se p -2006 5 ye a rs Eq ui ty: 100% 919 Se rvi ce fe e ` Ts h wa n e fl e e t ma n a ge me n t Ci ty o f Ts h wa n e DFO Nov-2015 5 ye a rs Eq ui ty: 100% 1 612 Se rvi ce fe e Ga utra i n Ra p i d Ra i l Li nk Ga ute n g De pa rtme nt ofDFBOT Pu bl i c Tra n s po rt, Ro a ds Se p -200620 ye a rs De bt 11% Eq ui ty: 2% 31 800 Us e r cha rge s a n d pa trona ge and Works Go vt: 87% gua ra n te e SANRAL Ga u te ng Fre e wa y SANRAL DFBOT Oct-200720 ye a rs De bt: 100% 20 000 Us e r cha rge s I mp rove me n t Pl an To ll Road Water and sanitation Do l p hi n Coa s t wa te r a n d s a n i ta ti o n co n ce s s i on Kwa-Du ku za Lo cal Mun i ci pa lity DFBOT Ja n -199930 ye a rs De bt: 21% Eq ui ty: 18% 130 Us e r cha rge s Govt: 61% Mb o mb e l a wa te r a nd s a ni ta ti o nMbo mb e l a Loca l DFBOT De c-199930 ye a rs De bt: 40% Eq ui ty: 31% 189 Us e r cha rge s co n ce ssi o n Mun i ci pa lity Govt: 29% Correctional services Ma nga ung a nd Ma kha d o ma xi mu m De pa rtme n t o f DFBOT Aug-200030 ye a rs De bt: 88% 3 600 Uni ta ry p a yme n t secu ri ty p ri s o n s Co rrecti on a l Servi ce s Equi ty: 12% Health I nko si Alb e rt Luth u l i Ho sp ital Kwa Zu l u-Na ta l De pa rtme n t o f He a l th DFBOT De c-200115 ye a rs De bt: 70% Eq ui ty: 20% 4 500 Uni ta ry p a yme n t Govt: 10% Un i ve rsi ta s an d Pe l on o mi Ho sp i tal s co -l ocati on Fre e Sta te De p a rtme nt o f DFBOT He a l th Nov-2002 16.5 ye a rs Eq ui ty: 100% 81 Us e r cha rge s Sta te Va cci n e I ns ti tute De pa rtme n t o f He a l th Eq u i ty Apr-2003 4 ye a rs Eq ui ty: 100% 75 Once -o ff e q ui ty partners hi p co ntri b uti o n Hu ma ns dorp Di s tri ct Ho s p i ta l Ea s te rn Ca pe De pa rtme n t of He a l th DFBOT Jun -2003 20 ye a rs Eq ui ty: 90% Go vt: 10% 49 Uni ta ry p a yme n t Ph a l a b orwa Hos pi ta l Li mpopo De pa rtme n t of DFBOT Jul -2005 15 ye a rs Eq ui ty: 100% 90 Us e r cha rge s He alth a n d So ci al We s te rn Ca p e Re h abilita tio n Ce n tre a n d Le n te ge ur Hos p i ta l We s te rn Ca pe De p a rtme n t Fa ci litie sNov-200612 ye a rs Eq ui ty: 100% 334 Uni ta ry p a yme n t of He a l th ma na ge me n t Po lo kwan e Ho sp ital re n a l d ia lys i s Limp o p o De partme n t ofDBOT De c-200610 ye a rs Eq ui ty: 100% 88 Uni ta ry p a yme n t He alth a n d So ci al Po rt Al fre d a n d Se ttl ers Ho s p i ta lEa s tern Ca p e Depa rtmen t DFBOT of He a l th Ma y-200717 ye a rs De bt: 90% Eq ui ty: 10% 169 Uni ta ry p a yme n t 152
ANNEXURE E: PUBLIC-PRIVATE PARTNERSHIPS Table E.1 List of PPP projects completed (continued) Tourism SANPARKS to u ri s m p roje cts SANPARKS DFBOT Ap r-2000 Va ri o us Equ i ty: 100% 270 Us e r cha rge s ye a rs Eco -tou ri s m Ma nye l e ti th re e s i te s Li mpo p o De p a rtme n t o fDFBOT Fi na nce , Eco nomi c Affa i rs , De c-200130 ye a rs Equ i ty: 100% 25 Us e r cha rge s Tou ri s m Crad le o f Hu ma nkin d I nte rpre ta ti o n Ce ntre Compl e x Ga ute n g De pa rtme nt o f Agri cu l tu re , Con s e rva ti o n, En vi ro nme n t a nd La nd DBOT Oct-2003 10 ye a rs Equ i ty: 100% ope x Go vt: 100% 39 Us e r cha rge s Affa i rs ca p e x We s te rn Ca pe Na ture Co ns e rva ti on We s te rn Ca pe Pro vi nci a l DFBOT Ju l -2005 30 ye a rs Equ i ty: 100% 40 Us e r cha rge s Boa rd Gove rn men t Information technology I nfo rma ti o n s ys te ms De p a rtme n t o f La b ou r DFBOT De c-2002 10 ye a rs Equ i ty: 100% 1 500 Uni ta ry p a yme n t So ci a l gra nt p a yme n t s ys te m Fre e Sta te De pa rtme n t of DFO Ap r-2004 3 ye a rs Equ i ty: 100% 260 Uni ta ry p a yme n t Soci a l De ve l o pment Office accommodation He a d offi ce a ccommoda ti on De pa rtme nt o f Tra de a nd I ndus try DFBOT Au g-200325 ye a rs De b t: 80% Equ i ty: 8% 870 Uni ta ry p a yme n t Govt: 12% He a d offi ce a ccommoda ti on De pa rtme nt o f DFBOT Ja n -200525 ye a rs De b t: 81% 1 959 Uni ta ry p a yme n t I n te rn ation a l Re lati o n s Equ i ty: 19% He a d offi ce a ccommoda ti on De pa rtme nt o f Educa ti o n DFBOT Aug-200927 ye a rs De b t: 90% 512 Uni ta ry p a yme n t Equ i ty: 10% He a d offi ce a ccommoda ti on De pa rtme nt o f En vi ro n me n ta l Affa i rs DFBOT Ma y-201225 ye a rs De b t 49% Equ i ty: 15% 2 731 Uni ta ry p a yme n t Govt: 36% He a d offi ce a ccommod a ti on Sta ti s ti cs So u th Afri ca DFBOT Ma r-201424 ye a rs De b t 54% Equ i ty: 9% 2 533 Uni ta ry p a yme n t Govt: 37% He a d offi ce a ccommod a ti on Ci ty of Ts hwa ne DFBOT Ma r-2015 25 ye a rs De b t: 86% Equ i ty: 14% 2 005Uni ta ry p a yme n t He a d offi ce a ccommod a ti on De p a rtme n t o f Ru ra l De ve l o p me n t DFBOT Fe b -2019 27 ye a rs De b t: 54% Equ i ty: 10% Go vt: 36% 3 991Uni ta ry p a yme n t 1. Refers to a phase in which all contract conditions of the financing established between government, private party and lenders is finally closed Source: National Treasury Note – Govt: government; Capex: capital expenditure; Opex: operational expenditure; Dept: department; Unitary payments: government payments for infrastructure and related services Of the R864.9 billion planned for public-sector infrastructure spending over the next three years (see Annexure D), PPP projects account for R17.3 billion, or 2 per cent of the total public-sector infrastructure budget estimate. Table E.2 shows the unitary payments (government payments for infrastructure and related services) for PPP projects operating over the medium term by sector. Table E.2 Estimated unitary payments of PPPs in operation over the MTEF period by sector Source: National Treasury Most of the PPPs under way are transport and accommodation projects, with a few in the health and correctional services sectors. Municipal solid waste, transport and accommodation projects are starting to play a larger role in PPPs and this trend is expected to continue over the next three years. PPP contingent liabilities PPP contingent liabilities arise only where a contract is terminated. PPP projects involving public-sector unitary payments have contingent fiscal obligations to compensate the private sector if the contract is terminated before its expiry date. PPP agreements can also impose other fiscal obligations on government that are not defined as contingent liabilities. For example, where the private sector collects user charges from the public, government usually guarantees a minimum revenue stream, which imposes 153 R million2018/192019/202020/212021/22 MTEF Tra ns p ort2 2752 3872 5172 656 Accommo da ti on1 5281 6141 6921 785 He a l th1 0161 069175185 Co rre ction a l s e rvice s facilitie s1 0941 0441 0741 133 7 560 5 092 1 430 3 250 Total5 9126 1145 4595 759 17 332
2019 BUDGET REVIEW a fiscal obligation and requires appropriate budget allocations. The National Treasury’s four-stage approval process (discussed above) allows it to ensure that the contingent liabilities in contracts are acceptable. There are various categories of contingent liabilities, depending on whether the termination is the result of private-sector default, government default or force majeure – an event beyond either party’s control. Compensation depends on the reason the contract ended, but termination as a result of government default usually results in the greatest compensation. Table E.3 shows potential termination amounts per sphere of government. Table E.3 Level of potential government contribution to contingent liabilities by category 1. Municipalities are an autonomous sphere of government and therefore their liabilities are not part of the fiscus Source: National Treasury Contingent liabilities for PPPs as a result of contracts terminating due to government default amounted to R13.6 billion in 2018/19 – decreasing from R13.7 billion in 2017/18. This slight decrease was expected as government continues to pay off debt and equity owed to the private sector. It has also been offset by the inclusion of the recently concluded rural development PPP. Of the three spheres of government, national departments account for the greatest exposure, amounting to R5.3 billion in 2018/19. Head office accommodation projects and the Gautrain Rapid Rail Link project are the biggest contributors to government’s exposure to contingent liabilities. Government manages the risk emanating from PPP contingent liabilities by closely monitoring each party’s performance against their contractual obligations and enforcing tight regulatory requirements. PPP projects under review Table E.4 provides a pipeline of PPP projects under review. These include extending the Gautrain rapid rail network, redeveloping six border posts, constructing the Kopanong precinct and building new schools for the Gauteng Schools Programme. These projects will be subject to the necessary approvals before they are implemented. 154 Termination private party default Termination force majeure Termination government default R million2017/182018/19 2017/182018/19 2017/182018/19 Na ti o na l d e p a rtme nts e xpo s ure3 070.53 464.6 Provi nci a l de pa rtme n ts e xp os u re3 803.23 571.3 Pub lic e n titie s e xpo s ure557.0489.2 Muni ci pa l e xpo s ure 12 675.92 274.5 2 777.93 655.9 2 591.32 372.8 555.7414.8 2 269.11 928.8 4 687.65 348.0 4 892.54 742.3 767.0614.4 3 360.92 856.7 Total10 106.59 799.6 8 194.08 372.3 13 708.013 561.4
ANNEXURE E: PUBLIC-PRIVATE PARTNERSHIPS Table E.4 Pipeline of PPP projects under review Project name Implementing Project description Current status agent Transport Exte ns i o n of th e Ga u tra i n Ra p i d Ga ute n g De pa rtme n t of Expa ns i on of the e xi s ti n g Ga u tra i n ra i l Fe as ib il ity Ra i l Li n k Ro a d s and Transport network Ga u tra in : Acq u is iti on of ad d i ti on al rollin g s tock Ga ute n g De pa rtme n t of Ro a d s an d Tran sp ort Procu re me n t o f 48 a d d i ti on a l co a ch e s a n d e xpa n s i on o f d e p ot fa ci l i ty to Fe as ib il ity acco mmod a te i n cre ase d d e mand De Aa r Logi s ti cs Hub No rthe rn Ca p e De pa rtme n t of Tra ns po rt, Sa fe ty a nd Li a i s on Provision of a s u s ta in ab l e tra n s p ort n e twork fo r th e tra n s p orta ti on o f fre i gh t/p ro ducts b y s ma l l mi ne rs a n d Fe as ib il ity fa rme rs Bo rd er p os ts De p a rtment of Ho me Affa i rs Re d evelop me n t of 6 b ord e r p o s ts Fe a s i b i l i ty Procu re me n t of e me rge n cy towi n g Procure me n t o f 2 e me rge n cy towi n g oce a n Fe as ib il ity De pa rtme nt of Tra n s p ort ve h i cl e s ve s s e l s Health Tri-ge n e ra ti on Ch ris Han i Ba ra gwa n a n th Hos p i ta l Ga ute n g De pa rtme n t of I n fra s tru ctu re De ve l op me n t I n s ta l l a ti o n of tri -ge n e ra ti on p l a n ts a t Procu re me n t th e Ch ri s Ha ni Ba ra gwa na nth Hos p i ta l to re du ce d e p e nde nce on the n a ti on a l gri d We s te rn Ca p e Dep a rtmen t De ve l o p men t of Tygerb e rg Hos p i ta l a n d Tyge rb e rg Ho s p i ta l Fe as ib il ity of He a l th e q uipme n t provi s i on Energy Ro ofto p s o l a r proje ct Ga ute n g De pa rtme n t of I n s ta l l a ti o n of s ol a r p a ne l s on Ga ute n g Procu re me n t I n fra s tru ctu re De ve l op me n t p rovi n ci a l gove rn me n t bui l dings Office accommodation Kopa non g Pre ci n ct Ga u te ng D e p a rtme n t of Cons tructi on o f Ga ute n g p ro vi n ci a l I n fra s tru ctu re De ve l op me n t gove rn me n t office to con s oli d a te a d mi n i s tra ti on fu n cti on of 19 b u i l d i n gs i n Fe as ib il ity th e Joha nnes b urg CBD Kwa Zul u -Na ta l Gove rn me nt Pre ci n ct Kwa Zul u-Na ta l De p a rtme n t Cons tructi on o f a n o ffi ce p re ci n ct for KZN Procu re me n t of Pub l i c Wo rks p rovin ci al d e p artme n ts i n Pi eterma ri tzb u rg Bh i s h o Offi ce Preci n ct Ea s tern Ca p e De p a rtmen t of Cons tructi on o f offi ce s for 7 Ea s te rn Ca p e Procu re me n t Ro ad s an d Pu b lic Works de pa rtme nts i n a s i n gl e l oca ti on i n Bhi s h o I nno va ti on Hub Ga ute n g De pa rtme n t of Econ omi c De ve l op me nt De ve l o p me n t of a s ci e n ce p a rk wh e re Procu re me n t e n tre p re ne u rs wi l l n e twork a nd e xcha nge ide a s Ekurhu l e ni Pre ci nct Eku rhul e n i Me tro Mu ni ci pa l i ty Con s ol i d ati on of th e mu n icip ality’s va ri o u s se rvice -d e l i ve ry d e p artme n ts i n to Fe as ib il ity a ce ntra l i s e d mu n i ci p al office Ne w muni ci pa l offi ce p roje ct Bi tou Lo ca l Mu n i ci pa l i ty Cons ol i d a ti on of th e mu ni ci pa l i ty’s va ri o u s se rvice -d e l i ve ry d e p artme n ts i n to Procu re me n t a ce ntra l i s e d mu n i ci pal offi ce De pa rtme nt of Sci e n ce a n d De s i gn a nd co ns tructi on o f ne w bui l d i n g He a d offi ce a cco mmod a ti on Fe as ib il ity Te ch n ol ogy a n d re fu rb i s h me n t of a n e xi s ti ng b uil d i n g Solid waste KwaDu ku za wa ste se rvice s KwaDu ku za Lo ca l Mu ni ci pa l i ty Coll e cti o n a n d d is p os a l of s ol id wa s te fro m h ou s e h ol d s Procu re me n t Sol i d wa s te di ve rs i o n a n d be ne fi ci a ti on op portuni ti e s Ne l s on Ma n d e l a Ba y Mu ni ci pa l i ty De ve l o p men t of wa s te ma n a gemen t i n fra s tru ctu re to tre a t wa s te for Procu re me n t benefi ci a l re u s e o r s a l e Mo sse l Ba y re gi on al l an d fill De ve l o p me n t of a s ol i d wa s te a n d Ed e n Distri ct Mu n i ci p a lity Procu re me n t fa ci lity land fill Wate r and s anitation Pol okwa n e s a n i ta ti o n p roje ct Po l o kwa n e mu n i ci p a l i ty I n cre a s e wa s te wa te r tre a tme n t ca p a ci ty Fe a s i b i l i ty Umhl a thu ze wa s te wa te r s e rvi ce s Umhl a thu ze mu n i ci p a l i ty De ve l o p me n t of a re gi on a l wa s te -wa te r Fe as ib il ity tre a tme n t p l a n t fo r i n d u s tri a l cu s tome rs Education Ga ute n g s choo l s p ro gra mme Ga ute n g Pro vi n ci a l De s i gn a nd co ns tructi on o f ne w s choo l s Fe a s i b i l i ty Gove rn me n t I ku s as a De p artme n t of High e r Ed uca ti o n Stud e n t Fi na nci a l Ai d Progra mme Fe a s i b i l i ty Source: National Treasury 155
2019 BUDGET REVIEW PPP project outlook South Africa has established a flow of successful PPPs over the last decade. The country has a strong, transparent regulatory framework that manages risk and provides returns for private investors. Nonetheless, a number of challenges have arisen over the years, leading to project delays and cancellations in some cases. The number of new PPP transactions has declined from an estimated R10.7 billion in 2011/12 to R4.8 billion in 2017/18. The National Treasury, together with the PPP unit in the Government Technical Advisory Centre (GTAC) has initiated a review of the PPP framework to address these challenges. The review will consider the experiences of other countries and lessons learnt from the PPP framework over the years, and recommend changes to the PPP framework to improve its effectiveness. As part of the review, the following initiatives are being considered: • • Merging some of the approval requirements. Developing a framework for soft PPPs (these projects relate to the provision of “soft” infrastructure facilities and related non-core services). Introducing partnerships that will allow public entities to work with other public-sector organisations on infrastructure projects. This approach is used in many other countries. Reviewing the PPP legislative framework. Putting in place mechanisms to address the affordability gap in PPPs. • • • In 2018, the President announced an Infrastructure Fund initiative that builds on efforts to transform public infrastructure provision. The initiative encourages the public sector to work with the private sector in the planning and implementation of infrastructure projects. Over the medium term, the initiative will focus on developing PPP projects in priority areas that have the potential to crowd-in private sector funding, that can contribute to economic development and that are in line with the country’s strategic planning documents. More information on PPPs and the Infrastructure Fund is available on the websites of GTAC and the Development Bank of Southern Africa. 156
F Building a financial services sector that serves all South Africans Enhancing the Twin Peaks regulatory model With the establishment of the Financial Sector Conduct Authority (FSCA) and the Prudential Authority in April 2018, South Africa has begun operating the Twin Peaks regulatory model. This approach puts equal emphasis on monitoring the prudential and market conduct risks posed by financial institutions. Prudential risks arise when firms are unable to meet their financial obligations. Market conduct risks relate to how financial institutions behave in the market, including how they treat their customers. Both regulators are working to build capacity to achieve their comprehensive mandates, which involve a broad scope of jurisdiction over all South African financial institutions. Other priorities include: • • • Strengthening the regulation and supervision of banking institutions. Implementing prudential regulation and supervision of financial conglomerates. Establishing a framework for significant owners (people who control or materially influence a financial institution). Strengthening the resolution framework to ensure that the failure of a major financial institution is handled in a way that minimises its impact on the economy. Encouraging developments in financial technology (fintech). This will be supported by a fintech policy paper developed by the National Treasury. Supporting an inclusive and transformed financial sector. • • • A stronger legal framework for treating customers fairly In tandem with the creation of the FSCA, market conduct legislation is undergoing significant reform. The Conduct of Financial Institutions Bill proposes to create a single comprehensive law for the financial sector, and repeal myriad laws now in place. The new law will better regulate the behaviour of financial institutions and ensure that they treat customers more fairly. The bill will be subject to extensive consultation and engagement to ensure it is appropriate and effective once enacted. The FSCA will consult on a conduct standard for retail banks, which have historically been subject to limited regulation of customer interactions. It will require banks to treat customers fairly, ensure that appropriate processes govern product design and sales, and manage customer complaints properly. Protecting customers and maintaining financial stability: a comprehensive resolution framework The Financial Sector Laws Amendment Bill will be tabled in Parliament during 2019. Once enacted, it will create a legal framework to ensure financial stability and protect customer funds in the event that banks or any other systemically important financial institutions fail. The Reserve Bank is responsible for financial stability in accordance with the Financial Sector Regulation Act (2017) and will therefore be the 157
2019 BUDGET REVIEW designated Resolution Authority. The authority has the responsibility of taking over the management of a bank if it fails. The bill will introduce South Africa’s first comprehensive Deposit Insurance Fund. The Deposit Insurance Corporation will be established to manage the fund and promote awareness of the protections that it provides. During 2019, South Africa will undergo a Financial Stability Board Peer Review, which will evaluate the country on its approach to the resolution of banks, systemically important non-bank financial institutions and deposit insurance. Diversifying the financial sector The Financial Matters Amendment Bill, tabled in Parliament in January 2019, will allow for the establishment of state-owned banks. Under this legislation, qualifying state-owned companies will be able to register as banks in terms of the Banks Act (1990) once they have met all requirements. Currently, the Banks Act only allows for the registration of public companies as banks. A bank that is not a going concern can pose a significant threat to the stability of the financial system and customer funds. The founding legislation of state-owned firms may allow them to continue operating despite not being a going concern. To mitigate this risk, only qualifying state-owned companies that are financially sound will be able to apply for authorisation to establish a bank in terms of the Banks Act. Enhancing financial market regulation A comprehensive review of the Financial Markets Act (2012) is under way to ensure it remains suitable for the dynamic environment that it regulates. The review will make recommendations concerning the regulatory landscape in light of changes in domestic and global markets. The National Treasury is consulting with various market participants, and collaborating with the Prudential Authority, the FSCA and the Reserve Bank on the review. A consultative paper will be published in the first half of 2019 setting out initial reform proposals and a proposed implementation schedule. Maintaining the integrity of South Africa’s financial system South Africa’s active participation in global efforts to strengthen financial intelligence helps to protect the integrity of the country’s financial system. Beginning in April 2019, the International Monetary Fund, Financial Action Task Force, and Eastern and Southern Africa Anti-Money Laundering Group will conduct a joint evaluation of South Africa’s framework to prevent money laundering and terrorist financing in terms of global standards. South Africa was last assessed in 2009 – a process that culminated in the enactment of the Financial Intelligence Centre Amendment Act (2017). South Africa does not have a formal mechanism in place to conduct coordinated assessments of money laundering and terrorist financing risks. To address this shortcoming, an interdepartmental committee will be established to coordinate the identification and assessment of such risks at a national level. The national risk assessment will assist policymakers, investigators, prosecutors, intelligence services, financial regulators and the private sector to ensure that the country’s efforts to prevent financial crime are risk-based, and commensurate with the identified risks and threats. Financial inclusion Stronger protection of financial customers and meaningful financial inclusion in South Africa are mutually reinforcing objectives. During 2019, the National Treasury will publish a financial inclusion policy paper that proposes establishing two bodies to support policy implementation. An intra-government financial inclusion taskforce, chaired by the National Treasury, will oversee implementation of agreed policies and interventions. A financial inclusion forum will allow industry and other non-governmental stakeholders to engage policymakers and regulators on strategic priorities. A national financial inclusion strategy will be developed from discussion arising from these two bodies. 158
ANNEXURE F: BUILDING A FINANCIAL SERVICES SECTOR THAT SERVES ALL SOUTH AFRICANS Supporting financial sector innovation The Intergovernmental Fintech Working Group has published a consultation paper setting out regulatory considerations for the buying and selling of cryptoassets in South Africa, and using them to make payments. Cryptoassets are digital assets that are accessed and traded electronically, such as Bitcoin. The working group has proposed to develop a regulatory framework that will manage the risks posed by such assets without unnecessarily stifling the positive effects they could have. At the same time, the Reserve Bank, FSCA and Financial Intelligence Centre will explore the possibility of developing a coordinated facility (or “sandbox”) to enable the live testing of innovative new financial products or services in a controlled setting. Retirement fund reform Government, business, labour and civil society have engaged extensively on the first draft of the comprehensive social security paper through the National Economic Development and Labour Council. The process should come to a close in 2019, after which the paper will be revised and released for broader public consultation. The National Economic Development and Labour Council is also engaging on retirement reform issues related to provident fund annuitisation, which has been postponed to 2021. The outstanding conduct standards are being finalised regulations on 1 March 2019. to support the full implementation of the retirement-fund default 159
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G Summary of the budget 161
2019 BUDGET REVIEW Summary of the national budget 4 267 4 545 1) Includes direct appropriations in respect of the salaries of the President, Deputy President, judges, magistrates, members of Parliament, National Revenue Fund payments (previously classified as extraordinary payments), and the International Oil Pollution Compensation Fund. 2) The 2018/19 year includes provision for contingencies related to drought relief in several provinces, support to the water sector and public investmen improved infrastructure planning. Source: National Treasury 162 R million 2018/19 2019/20 2020/21 2021/22 Budget Revised estimate estimate Budget estimate Medium-term estimates REVENUE Estimate of revenue before tax proposals Budget 2019/20 proposals: Direct taxes Taxes on individuals and companies Personal income tax Revenue from not fully adjusting for inflation Revenue if no adjustment is made Partial bracket creep for personal income tax No adjustment to medical tax credit Indirect taxes General fuel levy adjustment Introduction of carbon tax on fuel Additional VAT zero-rated items Increase in excise duties on tobacco products Increase in excise duties on alcoholic beverages 1 388 464 15 000 13 800 13 800 12 800 14 000 -1 200 1 000 1 200 -500 1 800 -1 100 400 600 Estimate of revenue after tax proposals Percentage change from previous year 1 321 146 1 285 386 1 403 464 9.2% 1 505 118 1 632 925 7.2% 8.5% EXPENDITURE Direct charges against the National Revenue Fund Debt-service costs Provincial equitable share General fuel levy sharing with metropolitan municipalities Skills levy and sector education and training authorities Other 1) Appropriated by vote Current payments Transfers and subsidies Payments for capital assets Payments for financial assets Provisional allocations Provisional allocation not assigned to votes2) Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees and other baseline adjustments 683 691 686 212 180 124 182 218 470 287 470 287 12 469 12 469 16 929 17 312 3 883 3 927 814 509 823 645 229 318 231 026 566 436 563 245 14 297 15 632 4 457 13 742 6 000 - 6 000 - - - - - - - 743 850 202 208 505 554 13 167 18 759 4 163 882 648 246 636 615 879 15 424 4 708 19 210 10 1 000 23 000 -4 800 805 706 868 089 224 066 247 408 542 909 578 645 14 027 15 182 20 437 22 307 946 484 1 007 493 263 911 282 640 661 429 702 243 16 230 17 426 4 914 5 184 11 376 18 904 376 3 904 - 4 000 23 000 23 000 -12 000 -12 000 Total 1 504 200 1 509 858 1 645 707 1 763 566 1 894 485 Plus: Contingency reserve 8 000 - 13 000 6 000 6 000 Estimate of national expenditure Percentage change from previous year 1 512 200 1 509 858 1 658 707 9.9% 1 769 566 1 900 485 6.7% 7.4% 2018 Budget estimate of expenditure Increase / decrease (-) 1 512 200 -2 343 1 632 571 26 137 1 757 452 12 114 Gross domestic product 5 025 379 5 059 106 5 413 825 5 812 415 6 249 070
ANNEXURE G: SUMMARY OF THE BUDGET Summary of the consolidated budget 1) Transfers to provinces, social security funds and public entities presented as part of the national budget. 2) Flows between national, provincial, social security funds and public entities are netted out. Source: National Treasury 163 R million 2018/19 2019/20 2020/21 2021/22 Budget Revised estimate estimate Budget estimate Medium-term estimates National budget revenue 1) Revenue of provinces, social security funds and public entities Consolidated budget revenue 2) National budget expenditure 1) Expenditure of provinces, social security funds and public entities Consolidated budget expenditure 2) 1 321 146 1 285 386 169 570 169 831 1 403 464 180 347 1 505 118 1 632 925 191 265 203 673 1 490 716 1 455 217 1 583 811 1 696 382 1 836 598 1 512 200 1 509 858 158 990 155 568 1 658 707 167 845 1 769 566 1 900 485 179 380 188 529 1 671 190 1 665 425 1 826 553 1 948 947 2 089 014 Consolidated budget balance Percentage of GDP -180 473 -210 208 -3.6% -4.2% -242 741 -4.5% -252 564 -252 416 -4.3% -4.0% FINANCING Domestic loans (net) Foreign loans (net) Change in cash and other balances 173 704 180 269 35 912 51 638 -29 143 -21 699 209 992 -20 992 53 742 230 405 232 664 30 889 39 246 -8 730 -19 495 Total financing (net) 180 473 210 208 242 741 252 564 252 416
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W1 Explanatory memorandum to the division of revenue Background Section 214(1) of the Constitution requires that every year a Division of Revenue Act determine the equitable division of nationally raised revenue between national government, the nine provinces and 257 municipalities. The division of revenue process takes into account the powers and functions assigned to each sphere, fosters transparency and is at the heart of constitutional cooperative governance. The Intergovernmental Fiscal Relations Act (1997) prescribes the steps for determining the equitable sharing and allocation of nationally raised revenue. Sections 9 and 10(4) of the act set out the consultation process to be followed with the Financial and Fiscal Commission (FFC), including considering recommendations made regarding the division of revenue. This explanatory memorandum to the 2019 Division of Revenue Bill fulfils the requirement set out in section 10(5) of the Intergovernmental Fiscal Relations Act that the bill be accompanied by an explanatory memorandum detailing how it takes account of the matters listed in sections 214(2)(a) to (j) of the Constitution, government’s response to the FFC’s recommendations, and any assumptions and formulas used in arriving at the respective divisions among provinces and municipalities. This memorandum complements the discussion of the division of revenue in Chapter 6 of the Budget Review. It has six sections: Part 1 lists the factors that inform the division of resources between national, provincial and local government. Part 2 describes the 2019 division of revenue. Part 3 sets out how the FFC’s recommendations on the 2019 division of revenue have been taken into account. Part 4 explains the formula and criteria for the division of the provincial equitable share and conditional grants among provinces. Part 5 sets out the formula and criteria for the division of the local government equitable share and conditional grants among municipalities. Part 6 summarises issues that will form part of subsequent reviews of provincial and local government fiscal frameworks. 1
2019 BUDGET REVIEW The Division of Revenue Bill and its underlying allocations are the result of extensive consultation between national, provincial and local government. The Budget Council deliberated on the matters discussed in this memorandum at several meetings during the year. The approach to local government allocations was discussed with organised local government at technical meetings with the South African Local Government Association (SALGA), culminating in meetings of the Budget Forum (the Budget Council and SALGA). An extended Cabinet meeting involving ministers, provincial premiers and the SALGA chairperson was held in October 2018. The division of revenue, and the government priorities that underpin it, was agreed for the next three years. Part 1: Constitutional considerations Section 214 of the Constitution requires that the annual Division of Revenue Act be enacted after factors in sub-sections (2)(a) to (j) of the Constitution are taken into account. The constitutional principles considered in the division of revenue are briefly noted below. National interest and the division of resources The national interest is captured in governance goals that benefit the nation as a whole. The National Development Plan sets out a long-term vision for the country’s development. This is complemented by the strategic integrated projects overseen by the Presidential Infrastructure Coordinating Council and the 14 priority outcomes adopted by Cabinet in 2014 for the 2014–2019 medium-term strategic framework. Government is expected to adopt a new medium-term strategic framework following the 2019 elections, which will inform allocations in future years. In the 2018 Medium Term Budget Policy Statement, the Minister of Finance outlined how the resources available to government over the 2019 medium-term expenditure framework (MTEF) would be allocated to help achieve government’s goals. Cabinet’s commitment to keeping South Africa’s debt on a sustainable path is coupled with commitments to achieve national priorities that must be supported in the budget. Chapter 4 of the 2018 Medium Term Budget Policy Statement and Chapters 5 and 6 of the 2019 Budget Review discuss how funds have been allocated across the three spheres of government based on these priorities. The framework for each conditional grant allocated as part of the division of revenue also notes how the grant is linked to the 14 priority outcomes. Provision for debt costs The resources shared between national, provincial and local government include proceeds from national government borrowing used to fund public spending. National government provides for the resulting debt costs to protect the country’s integrity and credit reputation. A more detailed discussion can be found in Chapter 7 of the 2019 Budget Review. National government’s needs and interests The Constitution assigns exclusive and concurrent powers and functions to each sphere of government. National government is exclusively responsible for functions that serve the national interest and are best centralised. National and provincial government have concurrent responsibility for a range of functions. Provincial and local government receive equitable shares and conditional grants to enable them to provide basic services and perform their functions. Functions may shift between spheres of government to better meet the country’s needs, which is then reflected in the division of revenue. Changes continue to be made to various national transfers to provincial and local government to improve their efficiency, effectiveness and alignment with national strategic objectives. Provincial and local government basic services Provinces and municipalities are responsible for providing education, health, social development, housing, roads, electricity and water, and municipal infrastructure services. They have the autonomy to allocate resources to meet basic needs and respond to provincial and local priorities, while giving effect to national 2
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE objectives. The division of revenue provides equitable shares to provinces and local government, together with conditional grants for basic service delivery. Growth in allocations to provincial and local government have been safeguarded to reflect the priority placed on health, education and basic services, as well as the rising costs of these services as a result of higher wages, and bulk electricity and water costs. Transfers to local government have grown significantly in recent years, providing municipalities with greater resources to deliver basic services. This is in addition to local government’s substantial own revenue-raising powers. The 2019 division of revenue prioritises the sustained delivery of free basic services in municipalities and adds funds for the expansion of key social welfare programmes in provinces. Fiscal capacity and efficiency National government has primary revenue-raising powers. Provinces have limited revenue-raising capacity and the resources required to deliver provincial functions do not lend themselves to self-funding or cost recovery. Due to their limited revenue-raising potential, and their responsibility to implement government priorities, provinces receive a larger share of nationally raised revenue than local government. Municipalities finance most of their expenditure through property rates, user charges and fees. But their ability to raise revenue varies – rural municipalities raise significantly less revenue than large urban and metropolitan municipalities. Local government’s share of nationally raised revenue has increased from 3 per cent in 2000/01 to 9.1 per cent over the 2019 MTEF period. The local government equitable share formula incorporates a revenue adjustment factor that considers the fiscal capacity of the recipient municipality (full details of the formula are provided in part 5 of this annexure). The mechanisms for allocating funds to provinces and municipalities are continuously reviewed to improve their efficiency. As such, government’s approach to funding provincial infrastructure aims to promote better planning and implementation, and improve efficiency in the delivery of health and education infrastructure. To maximise the effect of allocations, many provincial and local government conditional grants use criteria that consider the recipient’s efficiency in using allocations in the past. Developmental needs Developmental needs are accounted for at two levels. First, in the determination of the division of revenue, which continues to grow the provincial and local government shares of nationally raised revenue faster than inflation, and second, in the formulas used to divide national transfers among municipalities and provinces. Developmental needs are built into the equitable share formulas for provincial and local government and in specific conditional grants, such as the municipal infrastructure grant, which allocates funds according to the number of households in a municipality without access to basic services. Various infrastructure grants and the capital budgets of provinces and municipalities aim to boost economic and social development. Economic disparities The equitable share and infrastructure grant formulas are redistributive towards poorer provinces and municipalities. Through the division of revenue, government continues to invest in economic infrastructure (such as roads) and social infrastructure (such as schools, hospitals and clinics) to stimulate economic development, create jobs, and address economic and social disparities. Obligations in terms of national legislation The Constitution gives provincial governments and municipalities the power to determine priorities and allocate budgets. National government is responsible for developing policy, fulfilling national mandates, setting national norms and standards for provincial and municipal functions, and monitoring the implementation of concurrent functions. 3
2019 BUDGET REVIEW The 2019 MTEF, through the division of revenue, continues to fund the delivery of provincial, municipal and concurrent functions through a combination of conditional and unconditional grants. Predictability and stability Provincial and local government equitable share allocations are based on estimates of nationally raised revenue. If this revenue falls short of estimates within a given year, the equitable shares of provinces and local government will not be adjusted downwards. Allocations are assured (voted, legislated and guaranteed) for the first year and are transferred according to a payment schedule. To contribute to longer-term predictability and stability, estimates for a further two years are published with the annual proposal for appropriations. Adjusted estimates as a result of changes to data underpinning the equitable share formulas and revisions to the formulas themselves are phased in to ensure minimal disruption. Flexibility in responding to emergencies Government has a contingency reserve for emergencies and unforeseeable events. In addition, four conditional grants for disasters and housing emergencies allow for the swift allocation and transfer of funds to affected provinces and municipalities in the immediate aftermath of a disaster. Sections 16 and 25 of the Public Finance Management Act (1999) make specific provision for the allocation of funds to deal with emergency situations. Section 30(2) deals with adjustment allocations for unforeseeable and unavoidable expenditure. Section 29 of the Municipal Finance Management Act (2003) allows a municipal mayor to authorise unforeseeable and unavoidable expenditure in an emergency. Part 2: The 2019 division of revenue The central fiscal objectives over the MTEF period are to stabilise the growth of debt as a share of GDP and to strictly adhere to the planned expenditure ceiling (see Chapter 3 of the 2019 Budget Review). However, the most important public spending programmes that help poor South Africans, contribute to growth and generate employment have been protected from major reductions. The 2019 division of revenue reprioritises existing funds to ensure these objectives are met. Parts 4 and 5 of this annexure set out in more detail how the changes to the baseline affect provincial and local government transfers. Excluding debt-service costs and the contingency reserve, allocated expenditure shared across government amounts to R1.44 trillion, R1.54 trillion and R1.65 trillion over each of the MTEF years. These allocations take into account government’s spending priorities, each sphere’s revenue-raising capacity and responsibilities, and input from various intergovernmental forums and the FFC. The provincial and local equitable share formulas are designed to ensure fair, stable and predictable revenue shares, and to address economic and fiscal disparities. Government’s policy priorities for the 2019 MTEF period To remain within the revised expenditure ceiling set out in Chapter 3 of the 2019 Budget Review, existing budgets need to be reprioritised to meet government’s policy goals. Priorities over the 2019 MTEF period that are funded through reprioritisations in the division of revenue include: Improving the implementation of the Upgrading Informal Settlements Programme by ring-fencing funds within conditional grants. Eradicating pit latrines in schools. Supporting the roll-out of free sanitary products to learners from low-income households. These reprioritisations complement baselines that provide R1.97 trillion to provinces and R414.7 billion to local government in transfers over the 2019 MTEF period. These transfers fund basic education, health, social development, roads, housing and municipal services. 4
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE The fiscal framework Table W1.1 presents the medium-term macroeconomic forecasts for the 2019 Budget. It sets out the growth assumptions and fiscal policy targets on which the fiscal framework is based. Table W1.1 Medium-term macroeconomic assumptions 1. A positive numb er reflects a surplus and a negative numb er a deficit Source: National Treasury Table W1.2 sets out the division of revenue for the 2019 MTEF period after accounting for new policy priorities. Table W1.2 Division of nationally raised revenue Source: National Treasury 5 2015/16 2016/17 2017/18 Outcom e R m illion 2018/19 Re vis e d e s tim ate 2019/20 2020/21 2012/22 M e dium -te rm e s tim ate s Divis ion of available funds National de partm e nts 546 065 555 739 592 686 of which: Indirect transfers to province 3 458 3 636 3 813 Indirect transfers to local 10 370 8 112 7 803 government Province s 471 424 500 384 538 553 Equitable share 386 500 410 699 441 331 Conditional grants 84 924 89 685 97 222 Local gove rnm e nt 98 338 102 867 111 103 Equitable share 49 367 50 709 55 614 Conditional grants 38 313 40 934 43 704 General f uel levy sharing w ith 10 659 11 224 11 785 metros 638 170 4 730 7 887 572 212 470 287 101 925 117 258 60 518 44 271 12 469 684 735 733 128 777 674 4 561 4 980 5 675 7 208 7 109 8 167 612 266 657 115 701 000 505 554 542 909 578 645 106 712 114 206 122 355 127 289 137 881 149 498 68 973 75 683 82 162 45 149 48 171 52 154 13 167 14 027 15 182 Provi s i ona l a l l oca ti on––– not a s s i gne d to vote s – 19 21011 37618 904 Non-inte re s t allocations 1 115 827 1 158 990 1 242 341 Percentage increase 9.7% 3.9% 7.2% 1 327 640 6.9% 1 443 500 1 539 500 1 647 077 8.7% 6.7% 7.0% Debt-service costs 128 796 146 497 162 645 Contingency reserves – – – 182 218 – 202 208 224 066 247 408 13 000 6 000 6 000 M ain budge t e xpe nditure 1 244 623 1 305 486 1 404 986 Percentage increase 10.0%4.9% 7.6% 1 509 858 7.5% 1 658 707 1 769 566 1 900 485 9.9% 6.7% 7.4% Percentage shares National departments 48.9% 48.0% 47.7% Provinces 42.2% 43.2% 43.3% Local government 8.8% 8.9% 8.9% 48.1% 43.1% 8.8% 48.1% 48.0% 47.8% 43.0% 43.0% 43.1% 8.9% 9.0% 9.2% 2018/19 20182019 R billion/pe rce ntage of GDP Budge t Budge t 2019/20 2018 2019 Budge t Budge t 2020/21 2018 2019 Budge t Budge t 2021/22 2019 Budge t Gross domestic product 5 025.4 5 059.1 Real GDP growth 1.5% 0.7% GDP inflation 5.4% 6.4% 5 390.1 5 413.8 1.9% 1.5% 5.3% 5.4% 5 808.3 5 812.4 2.1% 1.9% 5.5% 5.4% 6 249.1 2.1% 5.3% National budge t fram e w ork Re ve nue 1 321.1 1 285.4 Percentage of GDP 26.3% 25.4% Expe nditure 1 512.2 1 509.9 Percentage of GDP 30.1% 29.8% M ain budge t balance 1 -191.1 -224.5 Percentage of GDP -3.8% -4.4% 1 427.8 1 403.5 26.5% 25.9% 1 632.6 1 658.7 30.3% 30.6% -204.8 -255.2 -3.8% -4.7% 1 542.7 1 505.1 26.6% 25.9% 1 757.5 1 769.6 30.3% 30.4% -214.8 -264.4 -3.7% -4.5% 1 632.9 26.1% 1 900.5 30.4% -267.6 -4.3%
2019 BUDGET REVIEW Table W1.3 shows how changes to the baseline are spread across government. The new focus areas and baseline reductions are accommodated by shifting savings towards priorities. Table W1.3 Changes over baseline 2019/20 2020/21 R million -1 193 508 375 -3 423 -340 419 National departments Provinces Local government Allocated expenditure -310 -3 344 Source: National Treasury Table W1.4 sets out schedule 1 of the Division of Revenue Bill, which reflects the legal division of revenue between national, provincial and local government. In this division, the national share includes all conditional grants to provinces and local government in line with section 214(1) of the Constitution, and the allocations for each sphere reflect equitable shares only. Table W1.4 Schedule 1 of the Division of Revenue Bill 1. National share includes conditional grants to provinces and local government, general fuel levy sharing with metropolitan municipalities, deb t-service costs, the contingency reserve and provisional allocations Source: National Treasury The 2019 Budget Review sets out in detail how constitutional considerations and government’s priorities are taken into account in the division of revenue. It describes economic and fiscal policy considerations, revenue issues, debt and financing considerations, and expenditure plans. Chapter 6 focuses on provincial and local government financing. Part 3: Response to the FFC’s recommendations Section 9 of the Intergovernmental Fiscal Relations Act requires the FFC to make recommendations regarding: a) “An equitable division of revenue raised nationally, among the national, provincial and local spheres of government; b) “the determination of each province’s equitable share in the provincial share of that revenue; and c) “any other allocations to provinces, local government or municipalities from the national government’s share of that revenue, and any conditions on which those allocations should be made.” The act requires that the FFC table these recommendations at least 10 months before the start of each financial year. The FFC tabled its Submission for the Division of Revenue 2019/20 to Parliament in May 2018. This submission focuses on the difficulties of sustaining equitable economic growth and development in South Africa in the face of fiscal constraints. Section 214 of the Constitution requires that the FFC’s recommendations be considered before tabling the division of revenue. Section 10 of the Intergovernmental Fiscal Relations Act requires that the Minister of Finance table a Division of Revenue Bill with the annual budget in the National Assembly. The bill must be accompanied by an explanatory memorandum setting out how government has taken into account the FFC’s 6 2019/20 R m illion Allocation 2020/21 2021/22 Forw ard e s tim ate s National1 1 084 180 Provincial 505 554 Local 68 973 1 150 974 1 239 678 542 909 578 645 75 683 82 162 Total 1 658 707 1 769 566 1 900 485
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE recommendations when determining the division of revenue. This part of the explanatory memorandum complies with this requirement. The FFC’s recommendations can be divided into three categories: Recommendations that apply directly to the division of revenue Recommendations that indirectly apply to issues related to the division of revenue Recommendations that do not relate to the division of revenue Government’s responses to the first and second categories are provided below. The relevant national departments are considering the recommendations that do not relate to the division of revenue, and they will respond directly to the FFC. Recommendations that apply directly and indirectly to the division of revenue Chapter 2: Re-engineering the Intergovernmental Fiscal Relations System Recentralisation – implications for service delivery and intergovernmental fiscal relations The FFC recommends, “Developing and strengthening control measures other than earmarked conditional grant funding to improve service delivery and attainment of specific priority outcomes. The control measures should be underpinned by tighter monitoring and reporting of sub-national governments on the use of grant funding and associated outcomes of such spending. National Treasury should ensure that decisive action such as withholding of funds is taken by national sector departments as soon as cases where grant funding is inefficiently and/or ineffectively spent have been detected.” Government response Government recognises the need for appropriate control measures to ensure that conditional grants achieve their intended service delivery and priority objectives. In line with the recommendation, government is focused on monitoring outcomes and outputs, rather than inputs and activities. This reflects a shift towards monitoring the outcomes achieved through the programmes funded by grants, rather than project-by-project monitoring. Nonetheless, the conditional grant system includes a range of grants for different objectives. It cannot be characterised as a “one-size-fits-all” system. While some grants are tightly monitored and reported, others permit greater flexibility in how grants are used (in line with the FFC’s concern about the “recentralisation” of control, expressed elsewhere in this chapter of the recommendations). For example, the review of local government infrastructure grants led by the National Treasury together with the Department of Cooperative Governance, SALGA and the FFC recommended increasing differentiation in local government funding because of the differing municipal contexts. The integrated urban development grant introduced in 2019/20 will extend some of the fiscal reforms implemented in metropolitan municipalities to non-metropolitan cities. This grant allows municipalities discretion in allocating infrastructure investment and ensures that they are accountable for the outcomes achieved. In terms of the annual Division of Revenue Act, the transferring officer of the grant (the department administering a conditional grant) is responsible for monitoring performance and withholding funds where necessary. However, the National Treasury is also empowered by section 216(2) of the Constitution to stop the transfer of funds to any organ of state that commits a serious or persistent breach of the measures prescribed to promote transparency, accountability and the effective financial management of the economy, debt and the public sector. A legislative framework and related policies, including guidelines and circulars, already exists to assist with early detection of issues that warrant withholding funds (by transferring officers or the National Treasury). Chapter 6 of the Budget Review describes complementary efforts to build municipal capacity. 7
2019 BUDGET REVIEW Chapter 3: Provincial Fiscal Adjustment Mechanisms in Times of Protracted Fiscal Constraints – Case of the Health Sector Accommodating maintenance in health infrastructure grants The FFC recommends that, “The Minister of Finance, through the National Treasury, should ensure that the framework for health infrastructure conditional grants (health facility revitalisation grant and National Health Insurance (non-personnel component)) accommodate flexibility during periods of protracted fiscal constraint so that provinces can re-orientate their available capital allocations towards maintenance.” Government response Government acknowledges that failing to maintain an asset significantly reduces its useful life, bringing forward the rehabilitation of assets. Both the health facility revitalisation grant and the national health insurance indirect grant include funds to maintain healthcare facilities. Provincial governments own and operate health facilities, therefore they are responsible for managing these assets. It is appropriate that provinces prioritise maintenance from their own revenues (including the provincial equitable share) and do not rely on transfers from national government to fund this function. Chapter 4: The Incentive Effects of Intergovernmental Grants – Evidence from Municipalities Greater flexibility in the use of grants The FFC recommends that, “The Minister of Finance, through National Treasury, gives municipalities (particularly those in small towns and mostly rural municipalities (categories B3 and B4)) greater flexibility in the use of grants to encourage innovative approaches to resolving local problems.” Government response Government agrees on the principle of applying local solutions to local problems. However, not all municipalities can take advantage of increased flexibility to innovate. As a result, government has reformed the local government fiscal framework to increase flexibility for more capable municipalities and support less capacitated municipalities to perform their basic functions. The review mentioned above concluded that expenditure should be more strictly supervised in less capacitated municipalities (including those in small towns and rural areas) and they should be provided with more support. This will minimise wastage and improve efficiency. National and provincial departments continuously evaluate their supervision methods to strengthen them. In addition, the same review recommends improving management of the grant system as one of its key reforms and this FFC recommendation will inform that work. Fiscal capacity The FFC recommends that, “A fiscal capacity component be introduced to the equitable share formula to make it more efficient and incentivising. The component should incorporate two aspects: Recognising the revenue-raising effort of municipalities, and Capturing the redistributive element of addressing horizontal imbalances.” Government response Government addressed this recommendation when the FFC, SALGA and the Department of Cooperative Governance reviewed the equitable share formula during 2012. The Constitution does not allow national government to reduce transfers to a municipality based on their success in collecting their own revenues. The formula does, however, acknowledge that there are objective differences in how much revenue different 8
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE municipalities are able to raise. The local government equitable share formula addresses redistribution through the community and institutional components. These components allocate larger amounts (per household) to municipalities with a low revenue base to fund basic administrative and governance capacity, and core municipal functions. Chapter 5: Assessing the Efficiency of Provincial Infrastructure Programmes – The Cases of Education, Health and Public Transport Developing clear performance evaluation frameworks The FFC recommends that, “The national sector departments of education, health and public transport develop clear performance evaluation frameworks for the provincial infrastructure grants under their control.” Government response Government welcomes this recommendation and will explore establishing this type of framework for these infrastructure grants. The Division of Revenue Act requires national departments administering schedule 4 to 7 grants to evaluate performance and submit reports to the National Treasury after the end of the financial year. In the past, the National Treasury has provided guidance on these reports, but government has not yet developed a framework for the evaluations. The proposed framework should use information from monitoring systems already implemented through the Infrastructure Reporting Model. The framework can complement performance and expenditure reviews conducted by the National Treasury and the Department of Planning, Monitoring and Evaluation. The National Treasury and the Department of Planning, Monitoring and Evaluation will consult the relevant departments on developing this framework for implementation in the 2020 Budget. Publishing criteria infrastructure grants reductions The FFC recommends that, “The Minister of Finance, through National Treasury, set and publish the criteria to be measured in monitoring and evaluating infrastructure grants. The assessment criteria regarding infrastructure cuts should also be published.” Government response There are grant-specific frameworks that detail the required outputs and conditions. Each grant administrator monitors and evaluates performance against the relevant framework. The criteria used to reduce each infrastructure grant in the 2018 MTEF period were published in parts 4 and 5 of the Explanatory Memorandum to the 2018 Division of Revenue. There are fewer reductions in the 2019 MTEF period, but again the details are set out in parts 4 and 5 of the Explanatory Memorandum to the 2019 Division of Revenue. These reductions are necessary to consolidate the fiscus and would not otherwise be effected. Chapter 6: Assessing the Effectiveness of Intergovernmental Fiscal Relations Instruments in Addressing Water Challenges Review of norms and standards The FFC recommends that, “A review of basic norms and standards for water services and the associated Local Government Equitable Share (LGES) be undertaken by the Department of Water and Sanitation (DWS).” 9
2019 BUDGET REVIEW Government response Government acknowledges this recommendation. Section 27(1)(b) of the Constitution states that, “Everyone has the right to have access to sufficient food and water.” The Water Services Act (1997) defines this right in terms of quantity, quality and assurance of supply. The basic services subsidy in the local government equitable share includes funding to provide free basic water (six kilolitres per poor household per month). This is the prescribed minimum water supply services necessary for households, including households in informal settlements. The amount per household is in line with the World Health Organization standard, which stipulates 25 litres per person per day for a household of eight people. In 2009 the Constitutional Court ruled that the six kilolitres provided by the City of Johannesburg is constitutional. The Department of Cooperative Governance intends to review the national Indigence Policy Framework, including the provision of free basic water. Clearer statements of grant objectives The FFC recommends that, “Clearer statements of grant objectives to achieve defined basic service levels or sustainability of services are established by the DWS.” Government response Conditional grants to local government fund the eradication of backlogs and provision of services in line with government policy. These grants do not prescribe service levels. Grants can only fund existing government policy. The Department of Water and Sanitation’s National Water Policy Review commits the department to the “development, in collaboration with the South African Local Government Association and Cooperative Governance and Traditional Affairs, of clear definitions, norms, standards and criteria for provision of basic water supply facilities to households across a range of settlement types and spatial settings”. The framework for the municipal infrastructure grant specifies that the grant includes providing poor households with basic water and sanitation services. In addition, the framework for the water services infrastructure grant specifies that the grant funds outputs including reticulated water supply, on-site sanitation, water and health, and hygiene awareness and end-user education. Qualified staff and grant allocation The FFC recommends that, “The allocation of conditional grants be made conditional on the employment of appropriately qualified staff with commensurate mandates.” Government response Government agrees that appointing qualified personnel must be prioritised for municipalities to function effectively and efficiently. Individual conditional grants can include employment provisions for municipalities before funds are transferred. The departments responsible for administering individual conditional grants can explore minimum standards for the sector funded through that grant. For example, the integrated urban development grant requires a low vacancy rate among section 57 managers for municipalities to be eligible to join the grant. However, these types of conditions should not compromise equity and service delivery. National and provincial governments are constitutionally required to help municipalities build capacity. Stronger grant conditions The FFC recommends that, “Stronger conditions be attached to financial transfers to ensure compliance and that funds allocated are properly spent for the purposes indicated. Grant funding should be withheld from 10
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE municipalities that do not have the necessary measures to monitor and control water consumption, or which do not meet criteria or have valid abstraction licences. Similar procedures must be applied for water-borne sanitation projects.” Government response Government agrees that it is important to ensure funds are spent on their intended purpose. Withholding funds is one tool to ensure compliance. The Division of Revenue Act requires that the National Treasury and the transferring officer of a grant must follow certain processes before withholding funds. Government allows provinces and municipalities to present their remedies to prevent reoccurrence and avoid the need for withholding. As a result, conditional grants are only withheld after extensive consultation with all related parties. Low water consumption and valid abstraction licences are not currently required in grant frameworks, therefore they are not grounds for withholding transfers. Government’s priority is to confirm appropriate plans for infrastructure delivery before grant funds are transferred. However, the National Treasury will engage the Department of Water and Sanitation on the possibility of including the recommended conditions in future as the grant system moves towards incentivising improved operations and maintenance. Government will also remain cognisant of the FFC’s caution against using conditional grants to limit scope for innovation by municipalities. Resumption of Blue Drop reporting The FFC recommends that, “Roles be clarified and support provided in the following ways: “a) By the DWS providing support to achieve safe water. The resumption of Blue Drop reporting by DWS and associated monitoring and support to municipalities is critical. Conditional grants should only be available to municipalities that can show that there is a feasible programme to achieve compliance with standards.” Government response Government welcomes this recommendation and the Department of Water and Sanitation has committed to resume publishing the Blue Drop report in its Master Plan. Enhancing the quality of municipal reporting “b) By COGTA and NT continuing efforts with sector departments such as DWS to enhance the quality of municipal reporting, with an emphasis on coordinating reporting requirements so that they become an integral part of overall administrative processes. Conditional grant funding should be subject to compliance with this reporting since its absence is a primary indicator that grants are not likely to be effectively and efficiently used.” Government response Government welcomes this recommendation and is looking forward to working with the FFC to improve the quality of municipal reporting. The publication of new municipal reporting requirements for metropolitan municipalities in Municipal Finance Management Act Circular 88 marks a significant step towards coordinated reporting. These requirements, which will be rolled out to non-metropolitan municipalities in future, are informed by a performance reporting reform initiative by the National Treasury; the Department of Cooperative Governance; the Department of Planning, Monitoring and Evaluation; and Statistics South Africa to consolidate municipal reporting requirements. The Auditor-General of South Africa and others were also consulted. The reform process included more than two years of engagement to address fragmentation and duplication across the country, and resulted in a consolidated set of indicators for metropolitan planning and reporting. The Division of Revenue Act requires compliance with reporting requirements and some grant frameworks require specific reports before the transfer of funds can occur. 11
2019 BUDGET REVIEW Part 4: Provincial allocations Sections 214 and 227 of the Constitution require that an equitable share of nationally raised revenue be allocated to provincial government to enable it to provide basic services and perform its allocated functions. National transfers to provinces increase from R572.2 billion in 2018/19 to R612.3 billion in 2019/20. Over the MTEF period, provincial transfers will grow at an average annual rate of 7 per cent to R701 billion. Table W1.5 sets out the transfers to provinces for 2019/20; a total of R505.6 billion is allocated to the provincial equitable share and R106.7 billion to conditional grants, which includes an unallocated R408 million for the provincial disaster relief grant and the provincial emergency housing grant. Table W1.5 Total transfers to provinces, 2019/20 Source: National Treasury The provincial fiscal framework takes account of the different pressures facing each province and allocates larger per capita allocations to poorer provinces, and provinces with smaller populations. Figure W1.1 Per capita allocations to provinces, 2019/20 Source: National Treasury Changes to provincial allocations The budget has been reprioritised in response to the weaker than expected economic and fiscal environment. To protect basic services funded by the provincial equitable share, the bulk of the reduction to provincial transfers (R3 billion) comes from a conditional grant, the human settlements development grant, which has a history of poor performance. This should minimise the impact on service delivery. The remaining R132.8 million of this reduction is from the equitable share as a result of the salary freeze on provincial political office bearers. The provincial equitable share is also increased by R78 million in 2019/20 for the 12 EquitableConditional R millionsharegrants Total transfers Eastern Cape68 82412 079 Free State28 1877 863 Gauteng102 44823 077 KwaZulu-Natal106 01421 137 Limpopo58 9659 061 Mpumalanga41 4288 245 Northern Cape13 4244 483 North West34 9737 551 Western Cape51 29112 809 Unallocated–408 80 903 36 049 125 525 127 151 68 026 49 673 17 907 42 524 64 099 408 Total505 554106 712 612 266
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Sanitary Dignity Project (in addition to the R79 million added for this purpose at the time of the Medium Term Budget Policy Statement). The net changes to the provincial equitable share are an increase of R35.9 million in 2019/20 and decreases of R44.9 million in 2020/21 and R45.8 million in 2021/22. The provincial equitable share grows at an average annual rate of 7.2 per cent over the MTEF period, while conditional grant allocations grow by 6.3 per cent per year. In addition to these baseline reductions, there were also several other reprioritisations and technical changes to direct conditional grants announced in the 2018 Medium Term Budget Policy Statement that will be implemented over the 2019 MTEF period. This includes a reprioritisation of R100 million over the MTEF period from the comprehensive agricultural support grant to the Agricultural Research Council for the construction of the foot and mouth disease vaccine production facility. Amounts of R30 million in 2020/21 and R30 million in 2021/22 are reprioritised from the HIV, TB, malaria and community outreach grant to support malaria control projects in southern Mozambique. The education infrastructure grant, human settlements development grant, provincial roads maintenance grant and expanded public works programme (EPWP) integrated grant for provinces have been reduced by R600 million, R400 million, R119.5 million and R41.8 million respectively over the 2019 MTEF period. These reductions have been made to assist with fiscal consolidation and to fund other government priorities. The school infrastructure backlogs grant, which was due to merge with the education infrastructure grant in 2018/19, was extended and will continue over the 2019 MTEF period. Although the grant’s performance has been sluggish, an assessment of its projects, both current and in the pipeline, revealed that merging the two grants will derail the progress made to date. Accounting for all additions, reprioritisations and fiscal consolidation efforts, the net revisions to the provincial direct conditional grants since the 2018 Medium Term Budget Policy Statement amount to a reduction of R721 million in 2019/20, R1.4 billion in 2020/21 and R3 billion in 2021/22. This includes the impact of some shifts of funds to indirect grants. The provincial equitable share The equitable share is the main source of revenue through which provinces are able to meet their expenditure responsibilities. To ensure that allocations are fair, the equitable share is allocated through a formula using objective data to reflect the demand for services across all nine provinces. For each year of the 2019 MTEF, the following amounts are allocated to the provincial equitable share respectively: R505.6 billion, R542.9 billion and R578.6 billion. The equitable share formula For the 2019 MTEF, the formula has been updated with data from Statistics South Africa’s 2018 mid-year population estimates on age cohorts and the 2018 preliminary data published by the Department of Basic Education on school enrolment from the LURITS database. Data from the health sector and the 2017 General Household Survey for medical aid coverage and from the Risk Equalisation Fund for the risk-adjusted capitation index have also been updated. Allocation changes tend to mirror shifts in population across provinces, which result in changes in the relative demand for public services across these areas. The impact of these data updates on the provincial equitable shares will be phased in over three years (2019/20 – 2021/22). The provincial equitable share formula continues to be reviewed. Further details of this review are discussed in Part 6. Allocations calculated outside the equitable share formula Over the 2019 MTEF period, some of the additional allocations are not in line with the weighted shares the formula produces and are therefore calculated outside of the provincial equitable share formula. These include additions that are in line with reforms in the social development sector, which see the incorporation of the conditional social worker employment and substance abuse treatment grants into the provincial 13
2019 BUDGET REVIEW equitable share. The social worker employment grant, which was created to help reduce the backlog in the number of unemployed social worker graduates, totals R678.9 million (R212.7 million in 2019/20, R226.9 million in 2020/21 and R239.4 million in 2021/22). The substance abuse treatment grant, which was created to build treatment facilities, amounts to R237 million (R74.8 million in 2019/20, R78.9 million in 2020/21 and R83.2 million in 2021/22). This change will enable provinces to fulfil the mandates of the respective grants through the equitable share. In addition, from 2020/21 the national Department of Social Development has agreed to cede the contracts it has with nine provincial food distribution centres and 84 community nutrition development centres to the nine provincial departments of social development. This will add R137.96 million (R66.8 million in 2020/21 and R71.2 million in 2021/22) to the provincial equitable share to allow provincial departments to manage these contracts. To address the skills gap in technical capacity in the infrastructure environment, the Infrastructure Delivery Improvement Programme was introduced to assist provincial treasuries to improve the delivery of infrastructure across the country. As part of the final phase of the programme, the National Treasury provided provincial treasuries with technical assistance to oversee the implementation of the Infrastructure Delivery Management System in provinces. But the need for support will continue over the 2019 MTEF period, which is why a co-funding model has been developed to support the further capacitation of provincial treasuries. As a result, R135 million (R45 million in each of the respective years of the MTEF period) is added to the provincial equitable share. This allocation will be split equally per province. To scale up the Sanitary Dignity Project, R157 million has been added to the equitable share in 2019/20. Of this, R79 million will be split equally among provinces, with the remainder allocated proportionally based on the number of girl learners in Grades 4 to 12 in the poorest schools (quintiles 1–3) in each province. Over the 2019 MTEF period, R268.8 million (R86.8 million in 2019/20, R89 million in 2020/21 and R93 million in 2021/22) has been allocated to augment the capacity of provincial treasuries to support and intervene in municipalities facing financial crises. This allocation will be split equally among provinces. Full impact of data updates on the provincial equitable share Table W1.6 shows the full impact of the data updates on the provincial equitable share per province. It compares the target shares for the 2018 and 2019 MTEF periods. The size of each province’s share reflects the relative demand for provincial public services in each province, and the changes in shares from 2018 to 2019 respond to changes in that demand. The details of how the data updates affect each component of the formula are described in detail in the sub-sections below. Table W1.6 Full impact of data updates on the equitable share Source: National Treasury 14 2018 MTEF2019 MTEF weightedweighted averageaverage Difference Eastern Cape 13.7% 13.2% Free State 5.6% 5.6% Gauteng 20.1% 20.9% KwaZulu-Natal 21.0% 20.8% Limpopo 11.7% 11.5% Mpumalanga 8.2% 8.2% Northern Cape 2.7% 2.6% North West 6.9% 7.0% Western Cape 10.1% 10.2% -0.5% 0.0% 0.8% -0.2% -0.2% -0.0% -0.0% 0.1% 0.1% Total100.0%100.0% 0.0%
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Phasing in the formula Official data used annually to update the provincial equitable share formula invariably affects each province’s share of the available funds. However, it is important that provinces have some stability in their revenue stream to allow for sound planning. As such, calculated new shares informed by recent data are phased in over the three-year MTEF period. The equitable share formula data is updated every year and a new target share for each province is calculated, as shown in Table W1.7. The phase-in mechanism provides a smooth path to achieving these new weighted shares by the third year of the MTEF period. It takes the difference between the target weighted share for each province at the end of the MTEF period and the indicative allocation for 2019/20 published in the 2018 MTEF, and closes the gap between these shares by a third in each year of the 2019 MTEF period. As a result, one-third of the impact of the data updates is implemented in 2019/20, two-thirds in the indicative allocations for 2020/21, and the updates are fully implemented in the indicative allocations for 2021/22. Table W1.7 Implementation of the equitable share weights Source: National Treasury Provincial equitable share allocations The final equitable share allocations per province for the 2019 MTEF are detailed in Table W1.8. These allocations include the full impact of the data updates, phased in over three years. Table W1.8 Provincial equitable share 2019/20 2020/21 2021/22 R million Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 68 824 28 187 102 448 106 014 58 965 41 428 13 424 34 973 51 291 72 744 30 338 111 636 113 370 62 986 44 475 14 388 37 694 55 278 76 293 32 411 120 700 120 324 66 779 47 389 15 309 40 325 59 115 Total 505 554 542 909 578 645 Source: National Treasury 15 2019/20 Indicative weighted shares from 2018 MTEF Percentage 2019/202020/212021/22 2019 MTEF weighted shares 3-year phasing Eastern Cape 13.8% Free State 5.6% Gauteng 20.0% KwaZulu-Natal 21.1% Limpopo 11.7% Mpumalanga 8.2% Northern Cape 2.7% North West 6.9% Western Cape 10.1% 13.6% 5.6% 20.3% 21.0% 11.7% 8.2% 2.6% 6.9% 10.1% 13.4% 5.6% 20.6% 20.9% 11.6% 8.2% 2.6% 6.9% 10.2% 13.2% 5.6% 20.9% 20.8% 11.5% 8.2% 2.6% 7.0% 10.2% Total100.0% 100.0% 100.0% 100.0%
2019 BUDGET REVIEW Summary of the formula’s structure The formula, shown in Table W1.9, consists of six components that capture the relative demand for services across provinces and take into account specific provincial circumstances. The formula’s components are neither indicative budgets nor guidelines as to how much should be spent on functions. Rather, the education and health components are weighted broadly in line with historical expenditure patterns to indicate relative need. Provincial executive councils determine the departmental allocations for each function, taking into account the priorities that underpin the division of revenue. For the 2019 Budget, the formula components are set out as follows: An education component (48 per cent), based on the size of the school-age population (ages 5 to 17) and the number of learners (Grades R to 12) enrolled in public ordinary schools. A health component (27 per cent), based on each province’s risk profile and health system caseload. A basic component (16 per cent), derived from each province’s share of the national population. An institutional component (5 per cent), divided equally between the provinces. A poverty component (3 per cent), based on income data. This component reinforces the redistributive bias of the formula. An economic activity component (1 per cent), based on regional gross domestic product (GDP-R, measured by Statistics South Africa). Table W1.9 Distributing the equitable shares by province, 2019 MTEF Source: National Treasury Education component (48 per cent) The education component has two sub-components, the school-age population (5 to 17 years) and enrolment data. Each of these elements is assigned a weight of 50 per cent. The methodology used to collect school enrolment numbers changed in 2017. Previously, learner enrolment numbers were based on annual surveys of schools. To ensure the formula remains equitable and fair, and reflects the most recent and officially endorsed data, it has used figures from the Department of Basic Education’s data collection system, LURITS, since 2018/19. The system allows data to be verified and learners’ progress to be tracked throughout their school careers. It also allows for duplicates and repetitions to be detected, improving the integrity of the numbers that are reported. The changes are being phased in over three years to ensure provinces’ allocations are stable and fair. Based on a review of the provincial equitable share formula, it was decided that the 2011 Census numbers used to capture the 5–17 age cohort should be replaced with Statistics South Africa’s annual mid-year population estimates. These numbers are more up to date, which will help mitigate the shocks of updating the sub-16 EducationHealthBasic sharePovertyEconomicInstitu-activity tional 48.0%27.0%16.0%3.0%1.0%5.0% Weighted average 100.0% Eastern Cape 14.5% 12.3% 11.3% 14.7% 7.6% 11.1% Free State 5.3% 5.4% 5.1% 5.3% 5.0% 11.1% Gauteng 18.7% 23.6% 25.5% 18.4% 34.6% 11.1% KwaZulu-Natal 22.0% 21.0% 19.7% 22.4% 15.9% 11.1% Limpopo 12.9% 10.1% 10.0% 13.3% 7.2% 11.1% Mpumalanga 8.4% 7.4% 7.8% 9.3% 7.4% 11.1% Northern Cape 2.3% 2.1% 2.1% 2.2% 2.1% 11.1% North West 6.6% 6.7% 6.9% 8.3% 6.4% 11.1% Western Cape 9.2% 11.4% 11.5% 6.3% 13.7% 11.1% 13.2% 5.6% 20.9% 20.8% 11.5% 8.2% 2.6% 7.0% 10.2% Total100.0%100.0%100.0%100.0%100.0%100.0% 100.0%
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE component after a lag between Census updates. These changes will also be phased in over the 2019 MTEF period to ensure stability. Table W1.10 shows the effect of updating the education component with new enrolment and age cohort data on the education component shares. Table W1.10 Impact of changes in school enrolment on the education component share Source: National Treasury Health component (27 per cent) The health component uses a risk-adjusted capitation index and output data from public hospitals to estimate each province’s share of the health component. These methods work together to balance needs (risk-adjusted capitation) and demands (output component). The health component is presented in three parts below. Table W1.11 shows the shares of the risk-adjusted component, which accounts for 75 per cent of the health component. Table W1.11 Risk-adjusted sub-component shares Source: National Treasury The risk-adjusted sub-component estimates a weighted population in each province using the risk-adjusted capitation index, which is calculated using data from the Council for Medical Schemes’ Risk Equalisation Fund. The percentage of the population with medical insurance, based on the 2017 General Household Survey, is deducted from the 2018 mid-year population estimates to estimate the uninsured population per province. The risk-adjusted index, which is an index of each province’s health risk profile, is applied to the uninsured population to estimate the weighted population. Each province’s share of this weighted population is used to estimate their share of the risk-adjusted sub-component. The column on the right in Table W1.11 shows the change in this sub-component between 2018 and 2019. 17 Mid-yearInsuredRisk-Weighted populationpopulationadjustedpopulation estimates index Thousand20182017 Risk-adjusted shares 20182019 Change Eastern Cape6 522 7349.9%96.9%5 691 913 Free State2 954 34814.9%103.3%2 595 869 Gauteng14 717 04025.0%105.4%11 636 144 KwaZulu-Natal11 384 72212.6%98.9%9 841 064 Limpopo5 797 2758.3%91.6%4 871 682 Mpumalanga4 523 87413.9%95.7%3 727 704 Northern Cape1 225 55516.3%100.7%1 032 677 North West3 978 95515.5%102.2%3 437 395 Western Cape6 621 10324.8%104.0%5 179 916 12.8%11.9% 5.3%5.4% 22.8%24.2% 20.8%20.5% 10.4%10.1% 7.7%7.8% 2.2%2.2% 7.1%7.2% 10.8%10.8% -0.93% 0.10% 1.40% -0.29% -0.26% 0.01% -0.06% 0.04% -0.01% Total57 725 60648 014 364 100.0%100.0% – Age cohort 5 – 17 School e nrolm e nt Change s in 2017 2018 e nrolm e nt We ighte d ave rage 2018 M TEF 2019 M TEF Diffe re nce in w e ighte d ave rage Eastern Cape 1 859 255 Free State 679 935 Gauteng 2 458 767 Kw aZulu-Natal 2 825 362 Limpopo 1 566 223 Mpumalanga 1 087 924 Northern Cape 294 073 North West 880 695 Western Cape 1 251 254 1 902 213 1 881 735 -20 478 691 295 696 021 4 725 2 342 025 2 360 207 18 182 2 868 598 2 851 861 -16 737 1 768 125 1 753 297 -14 829 1 080 084 1 068 624 -11 461 291 760 292 800 1 040 827 628 831 886 4 258 1 117 468 1 125 331 7 863 14.9% 5.3% 18.1% 22.3% 13.1% 8.4% 2.3% 6.5% 9.1% 14.5% 5.3% 18.7% 22.0% 12.9% 8.4% 2.3% 6.6% 9.2% -0.38% 0.04% 0.60% -0.27% -0.22% -0.03% -0.02% 0.15% 0.12% Total 12 903 488 12 889 196 12 861 760 -27 436 100.0% 100.0% –
2019 BUDGET REVIEW Table W1.12 Output sub-component shares1 1. Some provincial numbers for patient-days and healthcare visits for 2016/17 have been restated, resulting in small variances from numbers published in 2016/17 Source: National Treasury The output sub-component (shown in Table W1.12) uses patient load data from the District Health Information Services. The average number of visits at primary healthcare clinics in 2016/17 and 2017/18 is calculated to estimate each province’s share of this part of the output component, which makes up 5 per cent of the health component. For hospitals, each province’s share of the total patient-day equivalents from public hospitals in 2016/17 and 2017/18 is used to estimate their share of this part of the output sub-component, making up 20 per cent of the health component. In total, the output component is 25 per cent of the health component. Table W1.13 shows the updated health component shares for the 2019 MTEF period. Table W1.13 Health component weighted shares Source: National Treasury Basic component (16 per cent) The basic component is derived from the proportion of each province’s share of the national population. This component constitutes 16 per cent of the total equitable share. For the 2019 MTEF, population data is drawn from the 2018 mid-year population estimates produced by Statistics South Africa. Table W1.14 shows how population changes have affected the basic component’s revised weighted shares. 18 Risk-adjusted Primary Hospital healthcarecomponent Weight 75.0% 5.0% 20.0% Weighted shares 2018 2019 Change Eastern Cape 11.9% 14.1% 13.7% Free State 5.4% 4.7% 5.4% Gauteng 24.2% 17.6% 22.6% KwaZulu-Natal 20.5% 23.5% 22.5% Limpopo 10.1% 12.3% 9.2% Mpumalanga 7.8% 7.6% 6.2% Northern Cape 2.2% 2.3% 1.8% North West 7.2% 6.3% 5.0% Western Cape 10.8% 11.6% 13.6% 13.1% 12.3% 5.2% 5.4% 22.4% 23.6% 21.5% 21.0% 10.2% 10.1% 7.4% 7.4% 2.1% 2.1% 6.7% 6.7% 11.4% 11.4% -0.80% 0.15% 1.19% -0.42% -0.13% 0.02% -0.01% 0.03% -0.02% Total 100.0% 100.0% 100.0% 100.0% 100.0% – Primary healthcare visits Thousand 2016/17 2017/18 Average Share Hospital workload patient-day equivalents 2016/17 2017/18 Average Share Eastern Cape 18 116 16 418 17 267 14.1% Free State 6 170 5 462 5 816 4.7% Gauteng 22 037 21 132 21 584 17.6% KwaZulu-Natal 29 211 28 403 28 807 23.5% Limpopo 15 269 14 858 15 064 12.3% Mpumalanga 9 449 9 160 9 305 7.6% Northern Cape 2 989 2 689 2 839 2.3% North West 8 010 7 455 7 732 6.3% Western Cape 14 413 14 140 14 277 11.6% 5 531 4 328 4 930 13.7% 1 925 1 976 1 950 5.4% 8 931 7 315 8 123 22.6% 9 117 7 055 8 086 22.5% 3 644 3 014 3 329 9.2% 2 491 1 992 2 242 6.2% 761 563 662 1.8% 2 037 1 573 1 805 5.0% 5 431 4 344 4 888 13.6% Total 125 664 119 717 122 691 100.0% 39 868 32 161 36 014 100.0%
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.14 Impact of the changes in population on the basic component shares Source: National Treasury Institutional component (5 per cent) The institutional component recognises that some costs associated with running a provincial government and providing services are not directly related to the size of a province’s population or factors included in other components. It is therefore distributed equally between provinces, constituting 5 per cent of the total equitable share, of which each province receives 11.1 per cent. This component benefits provinces with smaller populations, especially the Northern Cape, the Free State and the North West, because the allocation per person for these provinces is much higher in this component. Poverty component (3 per cent) The poverty component introduces a redistributive element to the formula and is assigned a weight of 3 per cent. The poor population includes people who fall in the lowest 40 per cent of household incomes in the 2010/11 Income and Expenditure Survey. The estimated size of the poor population in each province is calculated by multiplying the proportion of people in that province that fall into the poorest 40 per cent of South African households by the province’s population figure from the 2018 mid-year population estimates. Table W1.15 shows the proportion of the poor in each province from the Income and Expenditure Survey, the 2018 mid-year population estimates and the weighted share of the poverty component per province. Table W1.15 Comparison of current and new poverty component weighted shares in shares Source: National Treasury 19 Income and Expendi-ture Survey Thousand2010/11 Current (2018 MTEF) Mid-yearPoorWeighted populationpopula-shares estimatestion 2017 New (2019 MTEF) Mid-yearPoorWeighted populationpopula-shares estimatestion 2018 Difference weighted Eastern Cape 52.0% Free State 41.4% Gauteng 28.9% KwaZulu-Natal 45.3% Limpopo 52.9% Mpumalanga 47.3% Northern Cape 40.8% North West 47.9% Western Cape 21.9% 6 7803 52815.6% 2 8641 1865.2% 13 8884 01017.7% 11 0775 01922.2% 5 7913 06113.5% 4 3862 0739.2% 1 2034912.2% 3 8231 8318.1% 6 4021 4006.2% 6 5233 39414.7% 2 9541 2235.3% 14 7174 24918.4% 11 3855 15822.4% 5 7973 06413.3% 4 5242 1389.3% 1 2265002.2% 3 9791 9068.3% 6 6211 4486.3% -0.9% 0.1% 0.7% 0.1% -0.3% 0.1% -0.0% 0.2% 0.1% Total 56 21522 597100% 57 72623 079100.0% – M id-ye ar M id-ye ar population population e s tim ate s e s tim ate s Thous and 2017 2018 Population % change population change Bas ic com pone nt s hare s 2018 M TEF 2019 M TEF Change Eastern Cape 6 780 6 523 Free State 2 864 2 954 Gauteng 13 888 14 717 Kw aZulu-Natal 11 077 11 385 Limpopo 5 791 5 797 Mpumalanga 4 386 4 524 Northern Cape 1 203 1 226 North West 3 823 3 979 Western Cape 6 402 6 621 -257 -3.8% 90 3.1% 829 6.0% 307 2.8% 6 0.1% 138 3.1% 23 1.9% 156 4.1% 219 3.4% 12.1% 11.3% 5.1% 5.1% 24.7% 25.5% 19.7% 19.7% 10.3% 10.0% 7.8% 7.8% 2.1% 2.1% 6.8% 6.9% 11.4% 11.5% -0.76% 0.02% 0.79% 0.02% -0.26% 0.03% -0.02% 0.09% 0.08% Total 56 215 57 726 1 510 100.0% 100.0% –
2019 BUDGET REVIEW Economic activity component (1 per cent) The economic activity component is a proxy for provincial tax capacity and expenditure assignments. Given that these assignments are a relatively small proportion of provincial budgets, the component is assigned a weight of 1 per cent. For the 2019 MTEF, 2016 GDP-R data is used. Table W1.16 shows the weighted shares of the economic activity component. Table W1.16 Current and new economic activity component weighted shares Source: National Treasury Conditional grants to provinces There are four types of provincial conditional grants: Schedule 4, part A grants supplement various programmes partly funded by provinces. Schedule 5, part A grants fund specific responsibilities and programmes implemented by provinces. Schedule 6, part A grants provide in-kind allocations through which a national department implements projects in provinces. Schedule 7, part A grants provide for the swift allocation and transfer of funds to a province to help it deal with a disaster or housing emergency. Changes to conditional grants The overall growth in direct conditional transfers to provinces averages 6.3 per cent over the medium term. Direct conditional grant baselines total R106.7 billion in 2019/20, R114.2 billion in 2020/21 and R122.4 billion in 2021/22. Indirect conditional grants amount to R4.6 billion, R5 billion and R5.7 billion respectively for each year of the same period. Table W1.17 provides a summary of conditional grants by sector for the 2019 MTEF period. More detailed information, including the framework and allocation criteria for each grant, is provided in the 2019 Division of Revenue Bill. The frameworks provide the conditions for each grant, the outputs expected, the allocation criteria used for dividing each grant between provinces, and a summary of the grants’ audited outcomes for 2017/18. 20 Current (2018 MTEF) GDP-R, 2015Weighted (R million) shares New (2019 MTEF) GDP-R, 2016Weighted (R million)shares Difference in weighted shares Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 315 6037.8% 205 3505.1% 1 382 09634.1% 649 12416.0% 289 9407.2% 305 0167.5% 85 2822.1% 264 6166.5% 552 73213.6% 331 0937.6% 217 8495.0% 1 507 08234.6% 692 22215.9% 311 6867.2% 323 7227.4% 90 8832.1% 279 7336.4% 596 04313.7% -0.2% -0.1% 0.5% -0.1% 0.0% -0.1% -0.0% -0.1% 0.1% Total 4 049 760100.0% 4 350 314100.0% 0.0%
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.17 Conditional grants to provinces Source: National Treasury 21 2018/19 Adjusted R millionbudget 2019/202020/212021/22 MTEF total Agriculture, Forestry and Fisheries2 849 Comprehensive agricultural support programme2 019 Ilima/Letsema projects552 Land care programme: poverty relief and infrastructure development278 Arts and Culture1 424 Community library services1 424 Basic Education17 696 Education infrastructure10 094 HIV and AIDS (life skills education)243 Learners with profound intellectual disabilities187 Maths, science and technology370 National school nutrition programme6 802 Cooperative Governance and Traditional Affairs340 Provincial disaster relief324 Provincial disaster recovery16 Health41 364 HIV, TB, malaria and community outreach19 922 Health facility revitalisation6 057 Health professions training and development2 784 Human papillomavirus vaccine200 Human resources capacitation– National tertiary services12 401 Human Settlements19 045 Human settlements development18 267 Title deeds restoration519 Provincial emergency housing260 Informal settlements upgrading partnership– Public Works824 Expanded public works programme integrated grant for provinces416 Social sector expanded public works programme incentive for provinces408 Social Development777 Early childhood development491 Social worker employment197 Substance abuse treatment89 Sport and Recreation South Africa587 Mass participation and sport development587 Transport17 026 Provincial roads maintenance11 036 Public transport operations5 990 2 2042 3782 558 1 5381 6761 814 583615653 828792 1 5011 5841 679 1 5011 5841 679 18 56920 08921 470 10 51411 46712 327 257271286 221243256 391413436 7 1867 6968 165 131138146 131138146 ––– 44 98949 22554 088 22 03924 40827 753 6 0076 3606 858 2 9403 1023 273 211223235 6061 0631 127 13 18614 06914 843 19 60419 82520 030 18 78015 93715 397 548578– 277295311 –3 0154 322 868917968 437462489 431454479 518553583 518553583 ––– ––– 620654690 620654690 17 70718 84320 142 11 38212 09313 021 6 3266 7507 121 7 140 5 028 1 852 261 4 764 4 764 60 128 34 308 813 720 1 241 23 047 415 415 – 148 302 74 200 19 225 9 315 669 2 796 42 097 59 459 50 114 1 126 883 7 337 2 753 1 389 1 365 1 655 1 655 – – 1 964 1 964 56 692 36 496 20 196 Total direct conditional allocations101 932 106 712114 206122 355 343 274 Indirect transfers4 730 Basic Education2 272 School infrastructure backlogs2 272 Health2 458 National health insurance indirect2 458 4 5614 9805 675 2 0271 7692 339 2 0271 7692 339 2 5343 2113 336 2 5343 2113 336 15 216 6 135 6 135 9 081 9 081
2019 BUDGET REVIEW Agriculture grants The comprehensive agricultural support programme grant aims to support newly established and emerging farmers, particularly subsistence, smallholder and previously disadvantaged farmers. The grant funds a range of projects including providing training, developing agro-processing infrastructure and directly supporting targeted farmers. Over the medium term, R5 billion is allocated to this grant. This excludes previously unallocated amounts (R271.5 million in 2019/20, R295.8 million in 2020/21 and R320.1 million 2021/22) that have since been reprioritised out of the grant for the implementation of a new blended finance mechanism developed by the Department of Agriculture, Forestry and Fisheries and the Land Bank to leverage both government and private funds to extend more affordable credit to black farmers. This initiative seeks to create 450 black commercial farmers over the MTEF period. The land care programme grant: poverty relief and infrastructure development aims to improve productivity and the sustainable use of natural resources. Provinces are also encouraged to use this grant to create jobs through the EPWP. Over the medium term, R261 million is allocated to this grant. The Ilima/Letsema projects grant aims to boost food production by helping previously disadvantaged farming communities. The grant’s baseline is R583 million allocated for 2019/20, and a total of R1.9 billion over the MTEF period. Arts and culture grant The community library services grant, administered by the Department of Arts and Culture, aims to help South Africans access information to improve their socio-economic situation. The grant is allocated to the relevant provincial department and administered by that department or through a service-level agreement with municipalities. In collaboration with provincial departments of basic education, the grant also funds libraries that serve both schools and the general public. Funds from this grant may also be used to enable the shift of the libraries function between provinces and municipalities. The grant is allocated R4.8 billion over the next three years. Basic education grants The education infrastructure grant provides supplementary funding for ongoing infrastructure programmes in provinces. This includes the maintenance of existing infrastructure and the construction of new infrastructure to ensure school buildings meet the required norms and standards. The education infrastructure grant’s total allocation for this period is R34.3 billion; R10.5 billion in 2019/20, R11.5 billion in 2020/21 and R12.3 billion in 2021/22. An additional R200.3 million in 2019/20 has also been earmarked in KwaZulu-Natal and the Western Cape for the reconstruction and rehabilitation of school infrastructure affected by natural disasters. Provincial education departments have to go through a two-year planning process to be eligible to receive incentive allocations for infrastructure projects. To receive the 2019/20 incentive, the departments had to meet certain prerequisites in 2017/18 and have their infrastructure plans approved in 2018/19. The national Department of Basic Education and the National Treasury assessed the provinces’ infrastructure plans. The national departments, provincial treasuries and provincial departments of basic education undertook a moderation process to agree on the final scores. Provinces needed to obtain a minimum score of 60 per cent to qualify for the incentive. Table W1.18 shows the final score and incentive allocation for each province. 22
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.18 Education infrastructure grant allocations Source: National Treasury The national Department of Basic Education uses the indirect school infrastructure backlogs grant to replace unsafe and inappropriate school structures and to provide water, sanitation and electricity on behalf of provinces. This grant is allocated R6.1 billion over the medium term in the Planning, Information and Assessment programme, including an additional R2.8 billion to provide safe and appropriate sanitation at schools. An allocation of R2 billion in 2019/20 will be used to replace 59 inappropriate and unsafe schools with newly built schools, provide clean water to 227 schools and provide appropriate sanitation to 717 schools. The national school nutrition programme grant seeks to improve the nutrition of poor school children, enhance their capacity to learn and increase their attendance at school. The programme provides a free daily meal to learners in the poorest schools (quintiles 1 to 3). To provide meals to more children, while still providing quality food, growth in the grant’s allocations over the MTEF period averages 6.3 per cent, with a total allocation of R23 billion. The maths, science and technology grant resulted from the merging of the Dinaledi schools grant and the technical secondary schools recapitalisation grant. This grant, in its fourth year, appears to be gaining some traction. It has increased the provision of ICT, workshop equipment and machinery apparatus to schools around the country, which should lead to better outcomes in maths and science in the long term. The grant’s total allocation is R1.2 billion over the medium term. The HIV and AIDS (life skills education) programme grant provides for life skills training, and sexuality and HIV/AIDS education in primary and secondary schools. It is fully integrated into the school system, with learner and teacher support materials provided for Grades 1 to 9. The grant’s total allocation is R813 million over the medium term. The learners with profound intellectual disabilities grant is in its second year of implementation and aims to expand access to education for learners with profound intellectual disabilities. Over the MTEF period, the grant will provide access to quality, publicly funded education to more than 10 000 such learners by recruiting 230 outreach team members and nine provincial grant coordinators. After starting with an allocation of R72 million in 2017/18, this grant has been allocated R719.9 million over the MTEF period. Cooperative governance grant The provincial disaster relief grant is administered by the National Disaster Management Centre in the Department of Cooperative Governance. It is unallocated at the start of the financial year. The grant allows the National Disaster Management Centre to immediately release funds (in-year) after a disaster is declared, without the need for the transfers to be gazetted first. The reconstruction of infrastructure damaged by disasters is funded separately through ring-fenced allocations in sector grants. Mitigation strategies against the ongoing drought have, in part, been funded by this grant. 23 R thousand Planning assessment results from 2018 2019/20 Final allocation for 2019/20 BasicIncentive Disaster component componentrecovery funds Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 73% 65% 70% 72% 58% 58% 72% 53% 83% 1 397 462188 071– 645 415188 071– 1 286 645188 071– 1 798 773188 071200 319 1 050 160–– 731 792–– 451 747188 071– 902 484–– 921 261188 071– 1 585 532 833 485 1 474 715 2 187 162 1 050 160 731 792 639 817 902 484 1 109 331 Total 9 185 7361 128 423200 319 10 514 478
2019 BUDGET REVIEW To ensure that sufficient funds are available in the event of a disaster, section 21 of the 2019 Division of Revenue Bill allows for funds allocated to the municipal disaster relief grant to be transferred to provinces if funds in the provincial disaster relief grant have already been exhausted, and vice versa. The bill also allows for more than one transfer to be made to areas affected by disasters so that an initial payment for emergency aid can be made before a full assessment of damages and costs has been completed. Over the 2019 MTEF period, a total of R415 million has been allocated to the provincial disaster relief grant. Health grants The national tertiary services grant provides strategic funding to enable provinces to plan, modernise and transform tertiary hospital service delivery in line with national policy objectives. The grant operates in 29 tertiary hospitals across the nine provinces. Patient referral pathways often cross provincial borders and, as a result, many patients receive care in neighbouring provinces if the required services are not available in their home province. The urban areas of Gauteng and the Western Cape receive the largest shares of the grant because they provide the largest proportion of high-level, sophisticated services. The grant is allocated R42.1 billion over the medium term: R13.2 billion in 2019/20, R14.1 billion in 2020/21 and R14.8 billion in 2021/22 and will be used to fund medical specialists, equipment, and advanced medical investigation and treatment according to approved service specifications. The national Department of Health has reviewed the allocation criteria under this grant to ensure continued fairness in allocations to provinces and will be embarking on a consultation process with provinces on the new allocation model. It is anticipated that the new model will be implemented in the 2020 MTEF period. The health facility revitalisation grant funds the construction and maintenance of health infrastructure, including large projects to modernise hospital infrastructure and equipment, general maintenance and infrastructure projects at smaller hospitals, and the refurbishment and upgrading of nursing colleges and schools. Over the 2019 MTEF period, a total of R19.2 billion has been allocated to this grant. The health facility revitalisation component of the national health insurance indirect grant is allocated R4.3 billion over the medium term. Cabinet has approved additional allocations to this component to fund the planning and construction of the planned new academic hospital in Polokwane, in response to the need to strengthen tertiary healthcare services in Limpopo and expand the platform for training new health professionals. Like the education infrastructure grant discussed previously, a two-year planning process is also required for provinces to access this grant. The national Department of Health and the National Treasury conducted an assessment of the provinces’ infrastructure plans, followed by a moderation process between the national departments, provincial treasuries and provincial departments of health to agree on the final scores. Provinces had to obtain a minimum score of 60 per cent to qualify for the incentive. Funds for the incentive component in the outer years are shown as unallocated. Table W1.19 sets out the final score and the incentive allocation per province. 24
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.19 Health facility revitalisation grant allocations Source: National Treasury The health professions training and development grant funds the training of health professionals, and the development and recruitment of medical specialists. It enables the shifting of teaching activities from central to regional and district hospitals. The baseline for this grant is protected over the MTEF period, with an allocation of R9.3 billion over the medium term. The HIV, TB, malaria and community outreach grant supports HIV/AIDS prevention programmes and specific interventions, including voluntary counselling and testing, prevention of mother-to-child transmission, post-exposure prophylaxis, antiretroviral treatment and home-based care. In the 2016 MTEF, the grant’s scope was extended to include tuberculosis. In the 2018 Budget, a sub-component for community outreach services was introduced, so that funds used to support community health workers can be explicitly earmarked. This will help ensure that this cadre of workers is better integrated into national health services. This year, two new components are added to the grant. The first aims to strengthen the continued fight against malaria in three provinces. The second component enables the Department of Health to monitor the activities and outcomes of the TB portion of the grant. The grant’s total baseline amounts to R74.2 billion over the medium term. The national health insurance indirect grant continues to fund all preparatory work for universal health coverage, as announced in 2017/18. Over the 2019 MTEF period, this will be done through three components: health facilities revitalisation and two integrated components (personal services and non-personal services). The personal services component funds priority services for national health insurance, which include: Expanding access to school health services, focusing on optometry and audiology. Contracting general practitioners based on a set annual amount per patient instead of fees per service provided. Providing community mental health services, maternal care for high-risk pregnancies, screening and treatment for breast and cervical cancer, hip and knee arthroplasty, cataract surgeries and wheelchairs. However, due to slow spending in the personal services component in 2018/19, R2.8 billion has been reprioritised from this component towards the new human resources capacitation grant over the MTEF period. This leaves the personal services component with allocations of R2.3 billion over the MTEF. Non-personal services will test, and scale up when ready, the technology platforms and information systems needed to ensure a successful transition to national health insurance. The non-personal services component is allocated R2.4 billion over the medium term to continue to fund initiatives to strengthen health information systems, clinics, and centralised chronic medicines dispensing and distribution. 25 R thous and Planning as s e s s m e nt re s ults from 2018 2019/20 Final allocation for 2019/20 Bas ic Ince ntive Dis as te r com pone nt com pone nt re cove ry funds Eastern Cape Free State Gauteng Kw aZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 70% 55% 56% 63% 50% 50% 49% 53% 74% 576 912 498 713 859 028 1 145 421 457 951 344 915 386 706 508 549 604 550 208 076 - - 208 076 - - - - 208 076 - - - - - - - - - 784 988 498 713 859 028 1 353 497 457 951 344 915 386 706 508 549 812 626 Total 5 382 745 624 228 – 6 006 973
2019 BUDGET REVIEW The new human resources capacitation grant, previously a component within the national health insurance indirect grant announced in the 2018 Medium Term Budget Policy Statement, will now be transferred as a direct grant. It will enable provincial departments of health to fill critical posts in health facilities. These posts have been jointly prioritised between the respective provincial departments and the national department. A total of R2.8 billion has been allocated to this grant over the MTEF period. In 2018/19, the human papillomavirus vaccine component of the national health insurance indirect grant became a standalone direct grant to provinces. Over the course of 2017, the national Department of Health worked to ensure that provincial departments were ready to take over the provision of this service and preserve the high coverage ratios that were achieved under this component. Over the 2019 MTEF period, a total of R669 million has been allocated to the human papillomavirus vaccine grant. Human settlements grants The human settlements development grant seeks to establish habitable, stable and sustainable human settlements in which all citizens have access to social and economic amenities. The grant’s baseline is reduced by R3 billion over the MTEF period – R1 billion in 2020/21 and R2 billion in 2021/22 – in order to stabilise the growth of national debt. Over the 2019 MTEF period, a total of R50.1 billion has been allocated to this grant. This grant is allocated using a formula with three components: The first component shares 70 per cent of the total allocation between provinces in proportion to their share of the total number of households living in inadequate housing. Data from the 2011 Census is used for the number of households in each province living in informal settlements, shacks in backyards and traditional dwellings. Not all traditional dwellings are inadequate, which is why information on the proportion of traditional dwellings per province with damaged roofs and walls from the 2010 General Household Survey is used to adjust these totals so that only traditional dwellings that provide inadequate shelter are counted in the formula. The second component determines 20 per cent of the total allocation based on the share of poor households in each province. The number of households with an income of less than R1 500 per month is used to determine 80 per cent of the component and the share of households with an income of between R1 500 and R3 500 per month is used to determine the remaining 20 per cent. Data used in this component comes from the 2011 Census. The third component, which determines 10 per cent of the total allocation, is shared in proportion to the number of people in each province, as measured in the 2011 Census. Table W1.20 shows how the human settlements development grant formula calculates the shares for each province and the metropolitan municipalities within the provinces. Section 12(6) of the Division of Revenue Act requires that provinces must gazette how much they will spend within each accredited municipality (including the amounts transferred to that municipality and the amounts spent by the province in that municipal area). Funds for mining towns and disaster recovery are allocated separately from the formula. 26
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.20 Human settlements development grant formula calculation Source: 2011 Census and General Household Survey Government is committed to intensifying its efforts to upgrade informal settlements in partnership with communities. To promote this objective, a new window with specific conditions relating to informal settlement upgrading will be introduced in the human settlements development grant in 2019/20. This window amounts to 15 per cent of the formula-based grant allocation to each province. The funds ring-fenced for each province will be a minimum expenditure requirement, allowing them to invest more if necessary. This new window will require provinces to work with municipalities to identify and prioritise informal settlements for upgrading in 2019/20 and to submit a plan for each settlement to be upgraded, prepared in terms of the National Upgrading Support Programme’s methodology. The window also requires the use of a partnership approach that promotes community ownership and participation in the upgrades. This window serves as a planning and preparatory platform for the introduction of a new informal settlements upgrading grant in 2020/21. The new grant will be created by reprioritising funds from the human settlements development grant. Initial amounts of R3 billion in 2020/21 and R4.3 billion in 2021/22 have been set aside for this new grant in the outer years of the MTEF period. Further details on the new grant are discussed in Part 6. A similar approach is being taken in the urban settlements development grant, discussed in Part 5, with the creation of an informal settlements upgrading window in 2019/20 and the intention to introduce a separate grant for metropolitan municipalities in the outer years of the MTEF period. In addition to the allocations determined through the formula, a total of R2.5 billion is ring-fenced within the human settlements development grant over the MTEF period to upgrade human settlements in mining towns in six provinces. These allocations respond to areas with significant informal settlement challenges, with a high proportion of economic activity based on the natural resources sector. The human settlements development grant previously had funds ring-fenced for the eradication of the pre-2014 title deeds registration backlog. Given the slow progress to date, along with the impairment it had 27 Components Housing needs component Poverty component Population component Grant formula shares Description Weighted share of inadequate housing Share of poverty Share of population Weighted share of grant formula Component weight 70.0% 20.0% 10.0% Eastern Cape Nelson Mandela Bay Buffalo City Other Eastern Cape municipalities Free State Mangaung Other Free State municipalities Gauteng Ekurhuleni City of Johannesburg City of Tshwane Other Gauteng municipalities KwaZulu-Natal eThekwini Other KwaZulu-Natal municipalities Limpopo Mpumalanga Northern Cape North West Western Cape City of Cape Town Other Western Cape municipalities 10.1% 1.6% 2.2% 6.3% 5.9% 1.4% 4.4% 30.9% 9.1% 10.5% 6.8% 4.5% 18.0% 7.0% 11.0% 4.4% 6.2% 1.9% 10.0% 12.7% 9.3% 3.4% 13.7% 2.1% 1.6% 10.0% 6.2% 1.5% 4.6% 22.6% 6.2% 8.1% 4.8% 3.5% 18.9% 6.2% 12.7% 11.8% 7.9% 2.1% 7.8% 9.0% 5.6% 3.4% 12.7% 2.2% 1.5% 9.0% 5.3% 1.4% 3.9% 23.7% 6.1% 8.6% 5.6% 3.4% 19.8% 6.6% 13.2% 10.4% 7.8% 2.2% 6.8% 11.2% 7.2% 4.0% 11.1% 1.8% 2.0% 7.3% 5.9% 1.5% 4.4% 28.5% 8.2% 9.8% 6.3% 4.2% 18.3% 6.8% 11.6% 6.5% 6.7% 2.0% 9.2% 11.8% 8.3% 3.5% Total 100%100% 100% 100%
2019 BUDGET REVIEW on the functioning on the property market, the title deeds restoration grant has been introduced to accelerate the backlog eradication process. The grant was introduced in 2018/19 and has a baseline of R1.1 billion over the first two years of the 2019 MTEF period. The grant comes to an end in 2020/21 and an indicative allocation of R609.6 million in 2021/22 will be phased back into the human settlements development grant. A provincial emergency housing grant was also introduced in 2018/19 to enable the department to rapidly respond to emergencies by providing temporary housing in line with the Emergency Housing Programme. However, the grant is limited to funding emergency housing following the immediate aftermath of a disaster, and not the other emergency situations listed in the Emergency Housing Programme. In 2019/20, the grant’s purpose has been expanded to fund the repair of houses damaged in disasters, if those repairs are cheaper than the cost of relocating households to temporary shelter that would have been funded through the grant. Over the 2019 MTEF period, a total of R882.9 million has been allocated to this grant. Public works grants The EPWP integrated grant for provinces incentivises provincial departments to use labour-intensive methods in infrastructure, environmental and other projects. Grant allocations are determined upfront based on the performance of provincial departments in meeting job targets in the preceding financial year. The grant is allocated R1.4 billion over the MTEF period. The social sector EPWP incentive grant for provinces rewards provinces for creating jobs in the preceding financial year in the areas of home-based care, early childhood development, adult literacy and numeracy, community safety and security, and sports programmes. The grant’s allocation model incentivises provincial departments to participate in the EPWP and measures the performance of each province relative to its peers, providing additional incentives to those that perform well. The grant is allocated R1.4 billion over the MTEF period. Social development grants The early childhood development grant is now in its third year. It plays a part in government’s prioritisation of early childhood development, as envisioned in the National Development Plan. The grant has two distinct objectives: improve poor children’s access to early childhood programmes and ensure that early childhood centres have adequate infrastructure. The grant baseline totals R1.7 billion over the MTEF period. The social worker employment grant and the substance abuse treatment grant have been phased out, with funding incorporated into the provincial equitable share over the 2019 MTEF period. This will allow provinces to use their equitable share to start operating facilities built through the substance abuse treatment grant, and employ social workers previously funded through the social worker employment grant. Sport and recreation grant The mass participation and sport development grant aims to increase and sustain mass participation in sport and recreational activities in the provinces, with greater emphasis on provincial and district academies. The grant is allocated R2 billion over the MTEF period. Transport grants The public transport operations grant subsidises commuter bus services. It helps ensure that provinces meet their contractual obligations and provide services efficiently. The public transport contracting and regulatory functions may be assigned to certain metropolitan municipalities during 2019/20. If this takes place, funds for this grant will be transferred directly to the assigned municipality. The grant is allocated R20.2 billion over the MTEF period. The provincial roads maintenance grant has three components. The largest component enables provinces to expand their maintenance activities, while the other two allow provinces to repair roads damaged by floods and rehabilitate roads that are heavily used in support of electricity production. The component for heavily 28
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE used roads comes to an end in 2019/20. From 2020/21, the allocation will be part of the grant’s incentive baseline. Grant allocations are determined using a formula based on provincial road networks, road traffic and weather conditions. These factors reflect the different costs of maintaining road networks in each province. The grant requires provinces to follow best practices for planning, and to use and regularly update road asset management systems. The performance indicators for the incentive portion of the grant, based on traffic loads, safety engineering and visual condition indicators, came into effect in 2017/18. The total allocation for the MTEF period is R36.5 billion. Part 5: Local government fiscal framework and allocations This section outlines the transfers made to local government and how these funds are distributed between municipalities. Funds raised by national government are transferred to municipalities through conditional and unconditional grants. National transfers to municipalities are published to enable them to plan fully for their 2019/20 budgets, and to promote better accountability and transparency by ensuring that all national allocations are included in municipal budgets. Over the 2019 MTEF period, R414.7 billion will be transferred directly to local government and a further R22.5 billion has been allocated to indirect grants. Direct transfers to local government over the medium term account for 9 per cent of national government’s non-interest expenditure. When indirect transfers are added to this, total spending on local government expenditure. increases to 9.4 per cent of national non-interest Table W1.21 Transfers to local government 1. Outcome figures for the equitable share reflect amounts transferred after funds have been withheld to offset underspending by municipalities on conditional grants. Roll-over funds are reflected in the year in which they were transferred Source: National Treasury The local government fiscal framework responds to the constitutional assignment of powers and functions to this sphere of government. The framework refers to all resources available to municipalities to meet their expenditure responsibilities. National transfers account for a relatively small proportion of the local government fiscal framework, with the majority of local government revenues being raised by municipalities themselves through their substantial revenue-raising powers. However, the proportion of revenue from transfers and own revenues varies dramatically across municipalities, with poor rural municipalities receiving most of their revenue from transfers, while urban municipalities raise the majority of their own 29 2015/162016/17 2017/18 Outcome R million 2018/19 Adjusted budget 2019/202020/212021/22 Medium-term estimates Direct transfers98 338102 867111 103 Equitable share and related49 36750 70955 614 Equitable share formula144 21145 25949 928 RSC levy replacement4 3374 5674 795 Support for councillor819883891 remuneration and ward committees General fuel levy sharing10 65911 22411 785 with metros Conditional grants38 31340 93443 704 Infrastructure37 04439 25941 888 Capacity building and other1 2681 6751 815 Indirect transfers10 3708 1127 803 Infrastructure10 1198 0937 699 Capacity building and other25119103 119 971 62 732 56 722 5 073 937 12 469 44 771 42 919 1 851 7 887 7 795 92 127 289137 881149 498 68 97375 68382 162 62 64869 01775 136 5 3575 6525 963 9691 0151 064 13 16714 02715 182 45 14948 17152 154 43 25246 16750 039 1 8972 0042 115 7 2087 1098 167 7 0876 9818 032 122128135 Total108 708110 979118 905 127 858 134 497144 990157 666
2019 BUDGET REVIEW revenues. This differentiation in the way municipalities are funded will continue in the period ahead. As a result, transfers per household to the most rural municipalities are more than twice as large as those to metropolitan municipalities. Figure W1.2 Per household allocations to municipalities, 2019/20* *Reflects funds allocated through Division of Revenue Bill. Allocations to district municipalities are reassigned to local municipalities where possible. Source: National Treasury Changes to local government allocations Over the next three years there is strong growth in allocations to the local government equitable share, while growth in conditional grants recovers following significant reductions made in the 2018 MTEF. As a result, total direct allocations to local government grow at an annual average rate of 7.6 per cent over the MTEF period. The changes to each local government allocation are summarised in Table W1.22. 30
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.22 Revisions to direct and indirect transfers to local government 1.Excludes provisional allocation of R514 million in 2020/21 that was provisionally assigned to local government in the 2018 MTEF but has subsequently been reallocated Source: National Treasury In the process of determining the baseline for the outer year (2021/22) of the 2019 MTEF period, the local government equitable share allocation has grown by 8.6 per cent, well above the standard 5.5 per cent baseline increase. This difference is equivalent to an amount of R2.3 billion in that year. This will cover the anticipated increase in the costs of providing free basic services to a growing number of households, and takes account of likely above-inflation increases in the costs of bulk water and electricity. It will also allow for above-inflation increases in the allocations to poorer and rural municipalities through the redistributive components of the equitable share formula. A total of R295.9 million has been cut from direct local government conditional grant allocations for the MTEF period ahead to fund other government priorities. Indirect grants to local government have been reduced by an additional R600 million. An amount of R60.7 million is shifted from the incentive component of the integrated urban development grant in 2019/20 and added to the municipal disaster recovery grant to fund the repair of roads damaged by floods in Joe Gqabi District Municipality in the Eastern Cape. A total of R2.8 billion is added to the public transport network grant for the construction of a new public transport corridor on the MyCiti bus network in Cape Town. This corridor, connecting Mitchells Plain and Khayelitsha to the city, was approved through the Budget Facility for Infrastructure and will be implemented over a nine-year period. 31 2019/202020/212021/22 R million 2019 MTEF Total revisions Technical adjustments-6-54 Direct transfers––– Municipal infrastructure-918-939-1 013 Integrated urban development9189391 013 Urban settlements development265-2 718-4 102 Informal settlements upgrading partnership–2 9854 384 Integrated national electrification programme-265-268-282 Indirect transfers-6-54 Integrated national electrification programme-8-9– Regional bulk infrastructure023 Water services infrastructure211 -7 – -2 870 2 870 -6 555 7 369 -815 -7 -17 5 4 Additions to baselines5481 0451 433 Direct transfers5481 0451 433 Public transport network3541 0451 433 Municipal disaster recovery194–– 3 026 3 026 2 832 194 Reductions to baseline-223-662-12 Direct transfers-173-112-12 Urban settlements development -100 -100 – Integrated urban development -61 – – Expanded public works programme integrated -12 -12 -12 Indirect transfers-50-550– Integrated national electrification programme -50 -550 – -896 -296 -200 -61 -35 -600 -600 Total change to local government allocations Change to direct transfers3759331 421 Change to indirect transfers-56-5554 2 730 -607 Net change to local government allocations3193781 425 2 123
2019 BUDGET REVIEW Technical adjustments to grants include the shifting of: R2.9 billion over the MTEF period from the municipal infrastructure grant to a new integrated urban development grant. R814.5 million over the MTEF period from the integrated national electrification programme (municipal) grant to the urban settlements development grant, as electrification projects in municipal licenced areas in metropolitan municipalities will now be funded as part of this integrated grant. R3 billion in 2020/21 and R4.4 billion in 2021/22 from the urban settlements development grant to create a new informal settlements upgrading partnership grant: municipal. The local government equitable share In terms of section 227 of the Constitution, local government is entitled to an equitable share of nationally raised revenue to enable it to provide basic services and perform its allocated functions. The local government equitable share is an unconditional transfer that supplements the revenue that municipalities can raise themselves (including revenue raised through property rates and service charges). The equitable share provides funding for municipalities to deliver free basic services to poor households and subsidises the cost of administration and other core services for those municipalities that have the least potential to cover these costs from their own revenues. Over the 2019 MTEF period, the local government equitable share, including the RSC/JSB levies replacement grant and special support for councillor remuneration and ward committees, amounts to R226.8 billion (R69 billion in 2019/20, R75.7 billion in 2020/21 and R82.2 billion in 2021/22). Due to previous increases, as well as the revised baseline for 2021/22, the local government equitable share grows at an average annual rate of 9.4 per cent over the MTEF period. Updating the estimated cost of services and household numbers Rising household numbers and the rapid growth in the cost of bulk services are the main drivers of above-inflation cost increases in the local government equitable share. The National Energy Regulator of South Africa (NERSA) will only approve new bulk electricity tariffs for 2019/20 after the Division of Revenue Bill has been tabled, but Eskom has applied for tariff increases significantly above inflation. In the absence of approved tariff increases for the period ahead, the equitable share formula uses the previously approved Multi Year Price Determination of an 8 per cent annual bulk price increase for electricity in its calculations. If higher bulk electricity price increases are approved, these will be offset, at least partially, by slower growth in household numbers. Statistics South Africa has revised and improved its demographic projections. The 2017 General Household Survey (published in June 2018) includes restated figures for household numbers in previous years. These revised figures show population growth that is somewhat slower than previous estimates. Previous editions had estimated annual household growth at between 3.2 per cent and 3.3 per cent between 2012 and 2016, and these estimates had been used in the local government equitable share formula. The revised estimates for the same period estimate annual household growth of between 2.6 per cent and 2.8 per cent, with household growth in 2017 increasing slightly to 2.9 per cent. In recent years, municipalities have benefited from equitable share funding that has grown faster than actual increases in electricity costs (in 2017/18 the formula calculation used a bulk electricity price increase of 8 per cent, but NERSA only approved a bulk price increase of 0.3 per cent for the municipal financial year, and in 2018/19 a bulk increase of 8 per cent was used in the formula, but the actual increase was only 7.3 per cent). Municipalities have also benefited from increased allocations that were provided to cover household growth projections that were higher than the revised estimates in the 2017 General Household Survey. If the increase in the bulk price of electricity for 2019/20 is higher than the 8 per cent used in the formula calculation, then municipalities will be expected to offset this against the benefit they have derived from previous above-cost increases in equitable share allocations. To provide for the possibility of larger cost increases in future, amounts of R1 billion in 2020/21 and R1.1 billion in 2021/22 remain unallocated. 32
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Formula for allocating the local government equitable share The portion of national revenue allocated to local government through the equitable share is determined in the national budget process and endorsed by Cabinet (the vertical division). Local government’s equitable share is divided among the country’s 257 municipalities, using a formula (the horizontal division) to ensure objectivity. Following a review of the previous formula by the National Treasury, the Department of Cooperative Governance and SALGA, in partnership with the FFC and Statistics South Africa, the current formula for the local government equitable share was introduced in 2013/14. The formula’s principles and objectives were set out in detail in the Explanatory Memorandum to the 2013 Division of Revenue. Structure of the local government equitable share formula The formula uses demographic and other data to determine each municipality’s portion of the local government equitable share. It has three parts, made up of five components: The first part of the formula consists of the basic services component, which provides for the cost of free basic services for poor households. The second part enables municipalities with limited resources to afford basic administrative and governance capacity, and perform core municipal functions. It does this through three components: •The institutional component provides a subsidy for basic municipal administrative costs. •The community services component provides funds for other core municipal services not included under basic services. •The revenue adjustment factor ensures that funds from this part of the formula are only provided to municipalities with limited potential to raise their own revenue. Municipalities that are least able to fund these costs from their own revenues should receive the most funding. The third part of the formula provides predictability and stability through the correction and stabilisation factor, which ensures that all of the formula’s guarantees can be met. Each of these components is described in detail in the sub-sections that follow. The basic services component This component helps municipalities provide free basic water, sanitation, electricity and refuse removal services to households that fall below an affordability threshold. Following municipal consultation, the formula’s affordability measure (used to determine how many households need free basic services) is based on the level of two state old age pensions. When the 2011 Census was conducted, the state old age pension was worth R1 140 per month, which means that two pensions were worth R2 280 per month. A monthly household income of R2 300 per month (in 2011) has therefore been used to define the formula’s affordability threshold. Statistics South Africa has calculated that 59 per cent of all households in South Africa fall below this income threshold. However, the proportion in each municipality varies widely. If this 33 Structure of the local government equitable share formula LGES = BS + (I + CS)xRA ± C where LGES is the local government equitable share BS is the basic services component I is the institutional component CS is the community services component RA is the revenue adjustment factor C is the correction and stabilisation factor
2019 BUDGET REVIEW monthly household income is to be shown in 2019 terms, this is equivalent to about R3 530 per month. This threshold is not an official poverty line or a required level to be used by municipalities in their own indigence policies – if municipalities choose to provide fewer households with free basic services than they are funded for through the local government equitable share, then their budget documentation should clearly set out why they have made this choice and how they have consulted with their community during the budget process. The number of households per municipality, and the number below the poverty threshold, is updated annually. From 2019/20, the number of households per municipality used to calculate indicative allocations for the outer years of the MTEF is updated based on the growth experienced between the 2001 Census and the 2016 Community Survey. Provincial growth rates are then rebalanced to match the average annual provincial growth reported between 2002 and 2017 in the annual General Household Survey. Statistics South Africa has advised the National Treasury that, in the absence of official municipal household estimates, this is a credible method of estimating the household numbers per municipality needed for the formula. Statistics South Africa is researching methods for producing municipal-level data estimates, which may be used to inform equitable share allocations in future. The proportion of households below the affordability threshold in each municipality is still based on 2011 Census data. This is because the 2016 Community Survey did not publish data on household incomes. Although the total number of households in each municipality is adjusted every year to account for growth, the share of those households that are subsidised for free basic services through the formula remains constant (but the number of households subsidised increases annually in line with estimated household growth). In 2019/20, a total of 10.1 million households are funded through the basic services subsidy. The basic services component provides a subsidy of R408.61 per month in 2019/20 for the cost of providing basic services to each of these households. The subsidy includes funding for the provision of free basic water (six kilolitres per poor household per month), energy (50 kilowatt-hours per month) and sanitation and refuse removal (based on service levels defined by national policy). The monthly amount provided for each service is detailed in Table W1.23 and includes an allocation of 10 per cent for service maintenance costs. Table W1.23 Amounts per basic service allocated through the local government equitable share, 2019/20 Source: National Treasury The formula uses the fairest estimates of the average costs of providing each service that could be derived from available information. More details of how the costs were estimated can be found in the discussion paper on the proposed structure of the new local government equitable share formula, available on the National Treasury website. The per-household allocation for each of the basic services in Table W1.23 is updated annually based on the following: The electricity cost estimate is made up of bulk and other costs. Bulk costs are updated based on the bulk price determination approved by the National Energy Regulator of South Africa. As the bulk price increase for municipalities for 2019/20 will only be announced after the 2019 Budget is tabled, the 8 per cent annual increase approved for the previous multi-year price determination period has been used 34 Allocation per household below affordability threshold (R per month) Total allocation per service (R million) Energy Water Sanitation Refuse removal Operations Maintenance Total 78.73 121.39 91.19 76.44 8.75 13.49 10.13 8.49 87.48 134.87 101.32 84.94 10 612 16 362 12 292 10 304 Total basic services 367.75 40.86 408.61 49 571
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE to calculate equitable share allocations. Other electricity costs are updated based on the National Treasury’s inflation projections in the 2018 Medium Term Budget Policy Statement. The water cost estimate is also made up of bulk and other costs. Bulk costs are updated based on the average increase in bulk tariffs charged by water boards (although not all municipalities purchase bulk water from water boards, their price increases serve as a proxy for the cost increases for all municipalities). The approved average tariff increase for bulk water from water boards in 2018/19 was 9.9 per cent. Other costs are updated based on the National Treasury’s inflation projections in the 2018 Medium Term Budget Policy Statement. The costs for sanitation and refuse removal are updated based on the National Treasury’s inflation projections in the 2018 Medium Term Budget Policy Statement. The basic services component allocation to each municipality is calculated by multiplying the monthly subsidy per household by the updated number of households below the affordability threshold in each municipal area. Funding for each basic service is allocated to the municipality (metro, district or local) that is authorised to provide that service. If another municipality provides a service on behalf of the authorised municipality, it must transfer funds to the provider in terms of section 29 of the Division of Revenue Act. The basic services component is worth R49.6 billion in 2019/20 and accounts for 79.1 per cent of the value of the local government equitable share. The institutional component To provide basic services to households, municipalities need to be able to run a basic administration. Most municipalities should be able to fund the majority of their administration costs with their own revenue. But, because poor households are not able to contribute in full, the equitable share includes an institutional support component to help meet some of these costs. To ensure that this component supports municipalities with limited revenue-raising abilities, a revenue adjustment factor is applied so that municipalities with less potential to raise their own revenue receive a larger proportion of the allocation. The revenue adjustment factor is described in more detail later in this annexure. This component consists of a base allocation of R7 million, which goes to every municipality, and an additional amount that is based on the number of council seats in each municipality. This reflects the relative size of a municipality’s administration and is not intended to fund the costs of councillors only (the Minister of Cooperative Governance and Traditional Affairs determines the number of seats recognised for the formula). The base allocation acknowledges that there are some fixed costs that all municipalities face. The institutional component accounts for 8.3 per cent of the equitable share formula and is worth R5.2 billion in 2019/20. This component is also complemented by special support for councillor remuneration in poor municipalities, which is not part of the equitable share formula. The community services component This component funds services that benefit communities rather than individual households (which are provided for in the basic services component). It includes funding for municipal health services, fire services, 35 The institutional component I = base allocation + [allocation per councillor x number of council seats] The basic services component BS = basic services subsidy x number of poor households
2019 BUDGET REVIEW municipal roads, cemeteries, planning, storm water management, street lighting and parks. To ensure this component assists municipalities with limited revenue-raising abilities, a revenue adjustment factor is applied so that these municipalities receive a larger proportion of the allocation. The allocation for this component is split between district and local municipalities, which both provide community services. In 2019/20, the allocation to district and metropolitan municipalities for municipal health and related services is R9.85 per household per month. The component’s remaining funds are allocated to local and metropolitan municipalities based on the number of households in each municipality. The community services component accounts for 12.5 per cent of the equitable share formula and is worth R7.8 billion in 2019/20. The revenue adjustment factor The Constitution gives local government substantial revenue-raising powers (particularly through property rates and surcharges on services). Municipalities are expected to fund most of their own administrative costs and cross-subsidise some services for indigent residents. Given the varied levels of poverty across South Africa, the formula does not expect all municipalities to be able to generate similar amounts of own revenue. A revenue adjustment factor is applied to the institutional and community services components of the formula to ensure that these funds assist municipalities that are least likely to be able to fund these functions from their own revenue. To account for the varying fiscal capacities of municipalities, this component is based on a per capita index using the following factors from the 2011 Census: Total income of all individuals/households in a municipality (as a measure of economic activity and earning) Reported property values Number of households on traditional land Unemployment rate Proportion of poor households as a percentage of the total number of households in the municipality. Based on this index, municipalities were ranked according to their per capita revenue-raising potential. The top 10 per cent of municipalities have a revenue adjustment factor of zero, which means that they do not receive an allocation from the institutional and community services components. The 25 per cent of municipalities with the lowest scores have a revenue adjustment factor of 100 per cent, which means that they receive their full allocation from the institutional and community services components. Municipalities between the bottom 25 per cent and top 10 per cent have a revenue adjustment factor applied on a sliding scale, so that those with higher per capita revenue-raising potential receive a lower revenue adjustment factor and those with less potential have a larger revenue adjustment factor. The revenue adjustment factor is not based on the actual revenues municipalities collect, which ensures that this component does not create a perverse incentive for municipalities to under-collect potential own revenues to receive a higher equitable share. Because district municipalities do not collect own revenues from property rates, the revenue adjustment factor applied to these municipalities is based on the RSC/JSB levies replacement grant allocations. This grant replaces a source of own revenue previously collected by district municipalities and it is still treated as an own revenue source in many respects. Similar to the revenue adjustment factor for local and metropolitan municipalities, the factor applied to district municipalities is based on their per capita RSC/JSB levies 36 The community services component CS = [municipal health and related services allocation x number of households] + [other services allocation x number of households]
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE replacement grant allocations. District municipalities are given revenue adjustment factors on a sliding scale – those with a higher per capita RSC/JSB levies replacement grant allocation receive a lower revenue adjustment factor, while those with lower allocations have a higher revenue adjustment factor. Correction and stabilisation factor Providing municipalities with predictable and stable equitable share allocations is one of the principles of the equitable share formula. Indicative allocations are published for the second and third years of the MTEF period to ensure predictability. To provide stability for municipal planning, while giving national government flexibility to account for overall budget constraints and amend the formula, municipalities are guaranteed to receive at least 90 per cent of the indicative allocation for the middle year of the MTEF period. Ensuring the formula balances The formula is structured so that all of the available funds are allocated. The basic services component is determined by the number of poor households per municipality and the estimated cost of free basic services, so it cannot be manipulated. This means that balancing the formula to the available resources must take place in the second part of the formula, which includes the institutional and community services components. The formula automatically determines the value of the allocation per council seat in the institutional component and the allocation per household for other services in the community services component to ensure that it balances. Increases in the cost of providing basic services can result in lower institutional and community services allocations. Details of new allocations In addition to the three-year formula allocations published in the Division of Revenue Bill, a copy of the formula, including the data used for each municipality and each component, is published online (http://mfma.treasury.gov.za/Media_Releases/LGESDiscussions/Pages/default.aspx). Other unconditional allocations RSC/JSB levies replacement grant Before 2006, district municipalities raised levies on local businesses through a Regional Services Council (RSC) or Joint Services Board (JSB) levy. This source of revenue was replaced in 2006/07 with the RSC/JSB levies replacement grant, which was allocated to all district and metropolitan municipalities based on the amounts they had previously collected through the levies. The RSC/JSB levies replacement grant for metropolitan municipalities has since been replaced by the sharing of the general fuel levy. The RSC/JSB levies replacement grant’s value increases every year. In 2019/20 this grant increases by 8.4 per cent for district municipalities authorised for water and sanitation and 2.8 per cent for unauthorised district municipalities. The different rates recognise the various service-delivery responsibilities of these district municipalities and the fact that the allocations to unauthorised municipalities have an average growth rate below inflation. To reduce the inequities in this grant’s allocations, which result from it being based on previous own revenue collections, the 2017 Explanatory Memorandum to the Division of Revenue announced adjustments to redistribute funds to the 13 district municipalities with the smallest allocations from this grant. These adjustments were implemented over a two-year period, from 2017/18 to 2018/19. Special support for councillor remuneration and ward committees Councillors’ salaries are subsidised in poor municipalities. The total value of the support provided in 2019/20 is R969 million, calculated separately to the local government equitable share and in addition to the funding for governance costs provided in the institutional component. The level of support for each municipality is allocated based on a system gazetted by the Minister of Cooperative Governance and Traditional Affairs, 37
2019 BUDGET REVIEW which classifies municipal councils into six grades based on their total income and population size. Special support is provided to the lowest three grades of municipal councils (the smallest and poorest municipalities). A subsidy of 90 per cent of the gazetted maximum remuneration for a part-time councillor is provided for every councillor in grade 1 municipalities, 80 per cent for grade 2 municipalities and 70 per cent for grade 3 municipalities. In addition to this support for councillor remuneration, each local municipality in grades 1 to 3 receives an allocation to provide stipends of R500 per month to 10 members of each ward committee in their municipality. Each municipality’s allocation for this special support is published in the Division of Revenue Bill appendices. As a result of the below-inflation increase in councillor salaries of 4 per cent per year in 2018/19, there is a small surplus on the previously budgeted amounts for councillor remuneration. Amounts of R14 million in 2019/20 and R15 million in 2020/21 are therefore shifted back into the local government equitable share formula to distribute. Conditional grants to local government National government allocates funds to local government through a variety of conditional grants. These grants fall into two main groups: infrastructure and capacity building. The total value of conditional grants directly transferred to local government increases from R45.1 billion in 2019/20 to R48.2 billion in 2020/21 and R52.2 billion in 2021/22. There are four types of local government conditional grants: Schedule 4, part B sets out general grants that supplement various programmes partly funded by municipalities. Schedule 5, part B grants fund specific responsibilities and programmes implemented by municipalities. Schedule 6, part B grants provide in-kind allocations through which a national department implements projects in municipalities. Schedule 7, part B grants provide for the swift allocation and transfer of funds to a municipality to help it deal with a disaster or housing emergency. Infrastructure conditional grants to local government National transfers for infrastructure, including indirect or in-kind allocations to entities executing specific projects in municipalities, amount to R161.6 billion over the 2019 MTEF period. 38
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.24 Infrastructure grants to local government Source: National Treasury Municipal infrastructure grant The largest infrastructure transfer to municipalities is made through the municipal infrastructure grant, which supports government’s aim to expand service delivery and alleviate poverty. The grant funds the provision of infrastructure for basic services, roads and social infrastructure for poor households in all non-metropolitan municipalities. Although the grant’s baseline is reduced by R917.6 million in 2019/20, R939.2 million in 2020/21 and R1 billion in 2021/22 to allow for the creation of the integrated urban development grant, the total allocations for this conditional grant still amount to R47.3 billion over the 2019 MTEF period and grow at an average annual rate of 3.3 per cent. The municipal infrastructure grant is allocated through a formula with a vertical and horizontal division. The vertical division allocates resources between sectors and the horizontal division takes account of poverty, backlogs and municipal powers and functions in allocating funds to municipalities. The five main components of the formula are described in the box below. 39 2015/162016/172017/18 Outcome R million 2018/19 Adjusted budget 2019/202020/212021/22 Medium-term estimates Direct transfers37 04439 25941 888 Municipal infrastructure14 95614 91415 891 Integrated urban development––– Urban settlements development10 55410 83911 382 Informal settlements upgrading––– partnership Integrated city development251267292 Public transport network5 9535 5936 107 Neighbourhood development584592658 partnership Integrated national electrification1 9801 9462 087 programme Rural roads asset management97102107 systems Regional bulk infrastructure–1 8501 829 Water services infrastructure2 3052 8313 305 Municipal disaster recovery18614026 Energy efficiency and demand-side management178186203 42 919 15 288 – 11 306 – 294 6 287 602 1 904 108 1 957 3 769 1 190 215 43 25246 16750 039 14 81615 66016 831 8579391 013 12 0459 7179 373 –2 9854 384 310327352 6 4687 4958 367 621655704 1 8631 9772 131 114120127 2 0662 1802 344 3 6693 8714 161 194–– 227240253 Indirect transfers10 1198 0937 699 7 795 7 0876 9818 032 Integrated national electrification3 6133 5263 846 programme Neighbourhood development131528 Water services infrastructure659298852 Regional bulk infrastructure4 8583 4222 974 Bucket eradication975831– 3 262 29 1 616 2 887 – 3 3743 0633 821 313335 644679730 3 0383 2073 447 ––– Total47 16347 35249 588 50 714 50 33853 14858 072
2019 BUDGET REVIEW Allocations for the water and sanitation sub-components of the basic services component are based on the proportion of the national backlog for that service in each municipality. Other components are based on the proportion of the country’s poor households located in each municipality. The formula considers poor households without access to services that meet sector standards to be a backlog. Table W1.25 sets out the proportion of the grant accounted for by each component of the formula. The constant component provides a R5 million base to all municipalities receiving municipal infrastructure grant allocations. 40 Data used in the municipal infrastructure grant formula 1.Poor household defined as a monthly household income of less than R2 300 per month in 2011 Census data Component Indicator used in the formula Data used (all data is from the 2011 Census) B Number of water backlogs Number of poor households1 that do not have adequate access to water (adequate access defined as piped water either inside their dwelling, in the yard or within 200 meters of their dwelling) Numberof sanitation backlogs Number of poor households that do not have adequate access to sanitation (adequate access defined as having a flush toilet, chemical toilet, pit toilet with ventilation or ecological toilet) Number of roads backlogs Number of poor households Number of other backlogs Number of poor households that do not have access to refuse disposal at Reconstruction and Development Programme levels of service P Numberofpoor households Number of poor households E Numberofpoor households Number of poor households N Number of households in nodal areas Allocated to the 27 priority districts identified by Cabinet as having large backlogs. Allocation is based on total households (not poor households) Municipal infrastructure grant = C + B + P + E + N C Constant to ensure a minimum allocation for small municipalities (this allocation is made to all municipalities) B Basic residential infrastructure (proportional allocations for water supply and sanitation, roads and other services such as street lighting and solid waste removal) P Public municipal service infrastructure (including sport infrastructure) E Allocation for social institutions and micro-enterprise infrastructure N Allocation to the 27 priority districts identified by government
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.25 Municipal infrastructure grant allocations per sector Source: National Treasury The municipal infrastructure grant includes an amount allocated outside of the grant formula and earmarked for specific sport infrastructure projects identified by Sport and Recreation South Africa. These earmarked funds amount to R798.5 million over the MTEF period (R266.2 million in 2019/20, R266.2 million in 2020/21 and R266.2 million in 2021/22). In addition, municipalities are required to spend a third of the P-component (equivalent to 4.5 per cent of the grant) on sport and recreation infrastructure identified in their own integrated development plans. Municipalities are also encouraged to increase their investment in other community infrastructure, including cemeteries, community centres, taxi ranks and marketplaces. Integrated urban development grant In 2019/20, a new integrated urban development grant for urban local municipalities is created to support spatially aligned public infrastructure investment that will lead to functional and efficient urban spaces. The grant will be administered by the Department of Cooperative Governance and extends some of the fiscal reforms already implemented in metropolitan municipalities to non-metropolitan cities. The integrated urban development grant recognises that municipalities differ in terms of their context and introduces a differentiated approach to encourage integrated development in cities. The grant aims to enable and incentivise municipalities to invest more non-grant funding in infrastructure projects in intermediate cities. The conditions for this grant were piloted in two cities through a window in the municipal infrastructure grant framework in 2018/19. In 2019/20, it becomes a separate grant, with seven cities receiving allocations from this grant instead of the municipal infrastructure grant. Under the integrated urban development grant, municipalities will no longer require approval for individual projects to be funded through the grant. Instead, their capital investments must be aligned to a three-year capital programme that is aligned with a 10-year capital expenditure framework. This is a new type of grant in that municipalities must meet certain qualification criteria in order to participate. Municipalities can apply to join the grant in terms of a process set out in section 27(5) of the Division of Revenue Act. The qualification criteria cover the following areas: Management stability (low vacancy rates among senior management) Audit findings Unauthorised, irregular, fruitless and wasteful expenditure Capital expenditure Reporting in terms of the Municipal Finance Management Act. 41 Municipal infrastructureComponent grant (formula) weights Value of component 2019/20 (R million) Proportion of municipal infrastructure grant per sector B-component 75.0% Water and sanitation 72.0% Roads 23.0% Other 5.0% P-component15.0% Sports33.0% E-component5.0% N-component5.0% 10 065 7 247 2 315 503 2 013 664 671 671 67.9% 48.9% 15.6% 3.4% 13.6% 4.5% 4.5% 4.5% Constant 1 130 7.6% Ring-fenced funding for sport infrastructure 266 1.8% Total 14 816 100.0%
2019 BUDGET REVIEW In addition to the two pilot municipalities (Polokwane and uMhlathuze), five local municipalities qualified to participate in the grant from 2019/20: Mogale City, Ray Nkonyeni, Sol Plaatje, Stellenbosch and Drakenstein. Other cities may apply to join the grant in future years. To remain in the grant, cities must continue to meet or exceed the entry criteria. If they do not do so, they will be placed on a performance improvement plan. If they still do not meet the criteria in the subsequent year they will be shifted back to receiving grant transfers through the municipal infrastructure grant, which comes with closer oversight and support from national and provincial departments. The base allocations a municipality receives through the municipal infrastructure grant and the integrated urban development grant will be the same and are determined in terms of the municipal infrastructure grant formula described above. In addition to the basic formula-based allocation, municipalities participating in the integrated urban development grant are also eligible to receive a performance-based incentive component, which is based on performance against the weighted indicators set out below. Linear scale in between dormant in 2019/20 The total allocations for the integrated urban development R939.2 million in 2020/21 and R1 billion in 2021/22. grant are R856.9 million in 2019/20, 42 Performance-based component weighted indicators for integrated urban development grant Indicator Discussion Weight Scores 1. Non-grant capital as a percentage of total capital expenditure Encourages cities to increase their capital investment funded through own revenue and borrowing 40% 1 if 70% or higher 0 if 30% or lower Linear scale in between 2. Repairs and maintenance expenditure as percentage of operating expenditure Rewards cities that take good care of their existing asset base 30% 1 if 8% or higher 3. Asset management plan Must have a plan in place, has been approved by municipal council and updated in the last three years 30% 1 if yes for all three 0 if no for any of the three 4. Land-useapplicationsin priority areas 5. Building plan applications in priority areas Due to the lack of available data, these indicators, which are intended to reward spatial targeting of investment, remain 0% 1 if 50% or higher 0 if 10% or lower
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.26 Formula for integrated urban development grant incentive component 1. Polokwane does not qualify for an incentive allocation as it did not meet all of the qualification criteria for the grant. It remains part of the grant as it was a pilot municipality in 2018/19, but the city must implement a performance improvement plan Source: Department of Cooperative Governance Urban settlements development grant The urban settlements development grant is an integrated source of funding for infrastructure for municipal services and upgrades to urban informal settlements in the eight metropolitan municipalities. It is allocated as a supplementary grant to cities (schedule 4, part B of the Division of Revenue Act), which means that municipalities are expected to use a combination of grant funds and their own revenue to develop urban infrastructure and integrated human settlements. Cities report their progress on these projects against the targets set in their service-delivery and budget implementation plans. From 2019/20, cities will be required to report in line with the requirements of the Municipal Finance Management Act Circular 88. This is the result of a process led by the National Treasury to rationalise and streamline built environment reporting for the eight metropolitan municipalities. Cities will report on one agreed set of indicators that will be used by multiple stakeholders to monitor progress on the integrated and functional outcomes, rather than reporting separately to each department. These reforms will progressively be extended to non-metropolitan municipalities over the medium term. As discussed under the human settlements development grant in Part 4, a new window is being introduced for the upgrading of informal settlements. In 2019/20, this new window amounts to 20 per cent of the urban settlements development grant. The window sets a minimum amount each city must spend on informal settlement upgrades and requires cities to work in partnership with communities. The introduction of this window serves as a planning and preparatory platform for a new informal settlements upgrading grant, planned for 2020/21. Provided the new window is a success, the new grant will be created through the reprioritisation of funds from the urban settlements development grant. Initial amounts of R3 billion in 2020/21 and R4.4 billion in 2021/22 have been set aside for this new grant in the outer years of the MTEF period. Further details on the new grant are discussed in Part 6. Electrification in municipalities, including in the eight metropolitan municipalities, has been funded through the integrated national electrification programme (municipal) grant. However, cities have also been implementing electrification projects in informal settlements using the urban settlements development grant, despite funds not having originally been allocated to the grant for this purpose. To align funding with municipalities’ needs, the integrated national electrification programme (municipal) grant allocations to metropolitan municipalities will be incorporated into the urban settlements development grant from 2019/20. This will allow these funds to also be used for informal settlement upgrades, making use of the skills and experience of the municipalities that implement these projects. In 2019/20, the cities will be allocated their 43 Once-off planning allocation (R 000) Perfomance incentive Total for incentive and planning (R 000) Non-grant Mainten-Asset Land use capital as ance manage-and percent-spend ment building age of plan plans in total priority capital areas spend Weighted score Total incentive (R 000) uMhlathuze Drakenstein Mogale City Polokwane1 Ray Nkonyeni Sol Plaatje Stellenbosch 3 205 1 054 3 513 10 144 1 847 1 494 1 073 72% 10% No - 82% 6% Yes - 19% 0% No - 41% 0% Yes - 22% 0% Yes - 22% 0% No - 81% 0% Yes - 70% 91% 0% 41% 30% 0% 70% 29 957 12 854 - - 7 398 - 10 034 33 162 13 908 3 513 10 144 9 244 1 494 11 107 Total 22 330 60 242 82 572
2019 BUDGET REVIEW indicative integrated national electrification programme (municipal) grant allocations, as was gazetted in the terms of the 2018 Division of Revenue Act. This will ensure cities are adequately funded for any planned commitments for 2019/20. From 2020/21 the funds inherited from the integrated national electrification programme (municipal) grant will be allocated through the urban settlements development grant formula. The urban settlements development grant is allocated R31.1 billion over the medium term. The allocation per municipality is based on the municipal infrastructure grant formula. Up to 3 per cent of the grant may be used to fund municipal capacity in the built environment in line with the capacity-building guideline published by the Department of Human Settlements. Because this grant was reduced by a smaller proportion than the municipal infrastructure grant in the 2018 MTEF period, the urban settlements development grant is reduced by R100 million in 2019/20 and R100 million in 2020/21 in order to fund other government priorities. Integrated city development grant The grant provides a financial incentive for metropolitan municipalities to use their infrastructure investment and regulatory instruments to achieve more compact and efficient urban spaces. The grant’s incentive allocations are based on performance measures of good governance and administration, as well as an assessment of a city’s built environment performance plan. Cities are required to adopt performance plans that provide a strategic overview of their plans for the built environment, and how their infrastructure programmes and projects within their functional mandate and approved integration zones will transform spatial development patterns over time. Including a peer-reviewed assessment score in the allocation criteria for this grant provides a tangible reward for cities that improve the quality of their plans. Total allocations over the 2019 MTEF period amount to R989.2 million and grow at an average annual rate of 6.2 per cent. Public transport network grant The public transport network grant, administered by the Department of Transport, helps cities create or improve public transport systems in line with the National Land Transport Act (2009) and the Public Transport Strategy. This includes all integrated public transport network infrastructure, such as bus rapid transit systems, conventional bus services, and pedestrian and cycling infrastructure. The grant also subsidises the operation of these services. The grant is allocated R22.3 billion over the medium term. A formula-based grant allocation has been implemented since 2016/17. This increases certainty about the extent of national funding that municipalities can expect when planning their public transport networks, and encourages cities to make more sustainable public transport investments. The allocations for this grant are determined through a formula, used to determine 95 per cent of the allocations, and a performance-based incentive component introduced in 2019/20, which accounts for the remaining 5 per cent. A base component accounts for 20 per cent of total allocations and is divided equally among all participating cities – this ensures that smaller cities in particular have a significant base allocation to run their transport system regardless of their size. The bulk of the formula (75 per cent) is allocated based on three demand-driven factors, which account for the number of people in a city, the number of public transport users in a city (the weighting of train commuters is reduced as trains are subsidised separately through the Passenger Rail Authority of South Africa) and the size of a city’s economy. To qualify for an allocation from the performance incentive, a city must have an operational municipal public transport system approved by the national Department of Transport and they must have spent more than 80 per cent of their grant allocation in the previous financial year. Incentive allocations are then calculated based on the coverage of costs from fares, passenger trips and the city’s own financial commitment to the system. Cities must exceed the minimum threshold in at least one of these three indicators. The calculation of the performance incentive allocations for 2019/20 is set out in Table W1.27 below. The raw scores for the cities are weighted using the sum of the base and formula components to account for the size of the city. 44
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.27 Public transport network grant Source: National Treasury Table W1.28 sets out how the final allocation for each municipality is determined, taking account of both the formula and incentive components. Table W1.28 Formula for the public transport network grant allocations1 1. Excludes additional funds for Cape Town allocated through the Budget Facility for Infrastructure Source: National Treasury In addition to the formula and performance incentive, R2.8 billion is added to the public transport network grant over the medium term. This addition is for the City of Cape Town’s new phase of the MyCiti public transport network approved through the Budget Facility for Infrastructure. The facility seeks to support 45 Base 20% Demand-driven factors 75% Subtotal: base and demand driven factors Perfomance 5% 100% Equally shared PopulationRegional Public component gross value transport shares addedusers component component sharesshares Incentive component (R 000) Grant (R 000) Buffalo City Cape Town City of Johannesburg City of Tshwane Ekurhuleni eThekwini George Mangaung Mbombela Msunduzi Nelson Mandela Bay Polokwane Rustenburg 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 3.3%2.8%3.1% 16.3%15.8%13.9% 19.3%25.2%20.5% 12.7%15.0%14.0% 13.8%9.5%14.9% 15.0%15.8%18.0% 0.8%0.5%0.2% 3.3%2.4%3.2% 2.6%1.9%2.4% 2.7%1.5%2.4% 5.0%4.7%3.6% 2.7%1.5%1.3% 2.4%3.5%2.3% 3.8% 13.0% 17.8% 12.0% 11.1% 13.7% 1.9% 3.8% 3.3% 3.2% 4.9% 2.9% 3.6% – 160 487 99 394 – – – 45 831 – – – – – – 234 465 957 645 1 187 518 731 751 679 153 840 549 163 499 229 596 198 919 194 665 298 143 179 433 218 911 Total 100.0% 100.0%100.0%100.0% 95.0% 305 712 6 114 248 Oper-Grant Eligible ational spent in for public 2017/18 incentive transport system Coverage Average City's of direct weekday contri-costs passenger bution from trips (% of (% of farebox population) property rates) Raw scores for incentive Incentive allocation for 2019/20 (R 000) Minimum threshold Yes 80% 35.0% 1% 2% Buffalo City Cape Town City of Johannesburg City of Tshwane Ekurhuleni eThekwini George Mangaung Mbombela Msunduzi Nelson Mandela Bay Polokwane Rustenburg No 26% No Yes 100% Yes Yes 98% Yes Yes 93% Yes Yes 66% No No 67% No Yes 100% Yes No 63% No No 70% No No 83% No Yes 90% Yes No 82% No No 88% No 0.0% 0.00% 0.0% 41.1% 1.48% 5.2% 38.5% 0.95% 3.4% 21.5% 0.24% 1.3% 16.8% 0.13% 2.7% 0.0% 0.00% 0.0% 41.8% 5.61% 4.8% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% 11.4% 0.03% 0.7% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% - 0.287 0.130 - - - 0.555 - - - - - - - 160 487 99 394 - - - 45 831 - - - - - - Total 1.000 305 712
2019 BUDGET REVIEW quality public investments through robust project appraisal, effective project development and execution, and sustainable financing arrangements. The process includes engaging with relevant stakeholders, the National Treasury and the Presidential Infrastructure Coordinating Commission. This additional amount will fund a new public transport corridor for the MyCiti network, linking the underserved areas of Khayelitsha and Mitchells Plain to the city centre. Neighbourhood development partnership grant The neighbourhood development partnership grant supports municipalities in developing and implementing urban network plans. The grant funds the upgrading of identified precincts, with the aim of creating a platform to stimulate third-party public and private investment. In metropolitan municipalities, the focus is on upgrading urban hubs in townships. The National Treasury has led a process, in collaboration with other stakeholders including the Department of Rural Development and Land Reform and the Department of Cooperative Governance, to identify a cohort of non-metropolitan municipalities to implement new projects as part of this grant. The National Treasury will be partnering with these municipalities to identify, plan and implement infrastructure upgrades in targeted urban hub precincts. The allocations for this grant in the 2019 MTEF period amount to R2.1 billion, made up of R2 billion for the direct capital component and R98 million for the indirect technical assistance component. Water services infrastructure grant This grant, administered by the Department of Water and Sanitation, aims to accelerate the delivery of clean water and sanitation facilities to communities that do not have access to basic water services. It provides funding for various projects, including the construction of new infrastructure and the refurbishment and extension of existing water schemes. It has both direct and indirect components. In areas where municipalities have the capacity to implement projects themselves, funds are transferred through a direct grant. In other areas, the Department of Water and Sanitation implements projects on behalf of municipalities through an indirect grant. A total of R4.4 million will be shifted from the department’s accelerated community infrastructure programme, which is being phased out, into the indirect component of this grant over the medium term. This shift will strengthen project management and grant administration. The grant has a total allocation of R13.8 billion over the medium term, comprising R11.7 billion and R2.1 billion for the direct and indirect components respectively. Regional bulk infrastructure grant This grant supplements the financing of the social component of regional bulk water and sanitation infrastructure. It targets projects that cut across several municipalities or large bulk projects within one municipality. The grant funds the bulk infrastructure needed to provide reticulated water and sanitation services to individual households. It may also be used to appoint service providers to carry out feasibility studies, related planning or management studies for infrastructure projects. It has both direct and indirect components. In areas where municipalities have the capacity to implement projects themselves, funds are transferred through a direct grant. In other areas, the Department of Water and Sanitation implements projects on behalf of municipalities through an indirect grant. A parallel programme, funded by the Department of Water and Sanitation, also funds water boards for the construction of bulk infrastructure. Though not part of the division of revenue, these projects still form part of the Department of Water and Sanitation’s larger programme of subsidising the construction of regional bulk infrastructure for water and sanitation. The Department of Water and Sanitation has put a moratorium on new projects funded through this grant so it can prioritise existing projects, particularly those that have been in construction for a long time. A total of R5.3 million is shifted from the department’s accelerated community infrastructure programme into the indirect component of this grant over the medium term to strengthen project management and grant 46
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE administration. In 2019/20, R318.5 million of the indirect portion of the grant will be ring-fenced for the bulk infrastructure needed to complete the eradication of all bucket sanitation systems in formal residential areas that were in existence in 2014. The grant has a total allocation of R16.3 billion over the medium term, consisting of R6.6 billion and R9.7 billion for the direct and indirect components respectively. Integrated national electrification programme grants These grants aim to provide capital subsidies to municipalities to electrify poor households and fund bulk infrastructure to ensure the constant supply of electricity. Allocations are based on the backlog of un-electrified households and administered by the Department of Energy. The grant only funds bulk infrastructure that serves poor households. The national electrification programme has helped provide 91 per cent of all poor households with access to electricity, as reported in the 2016 Community Survey (up from the 85 per cent reported in the 2011 Census). To sustain this progress, government will spend R16.2 billion on the programme over the next three years. A total of R6 billion is allocated to the integrated national electrification programme (municipal) grant over the 2019 MTEF period, after the shift of funds for metropolitan municipalities to the urban settlements development grant (described above). The integrated national electrification programme (Eskom) grant is allocated R10.3 billion over the medium term. It is reduced by R50 million in 2019/20 and R550 million in 2021/22 to fund other government priorities and manage the growth of the national deficit. The reduction was effected on this grant because it has a higher baseline than the integrated national electrification programme (municipal) grant. Energy efficiency and demand-side management grant The energy efficiency and demand-side management grant funds selected municipalities to implement energy-efficiency projects, with a focus on public lighting and energy-efficient municipal infrastructure. From 2019/20, provision is made for municipalities to use funding from the energy efficiency and demand-side management grant for planning and preparing for the Energy Efficiency in Public Infrastructure and Building programme. This programme aims to create a market for private companies to invest in the large-scale retrofitting of municipal infrastructure, and then be paid back through the savings on energy costs achieved. This has the potential to unlock energy and cost savings on a much larger scale. Municipalities can use 15 per cent of their energy efficiency and demand-side management grant funding to develop a project pipeline and thereby strengthen the market for energy service companies that offer this service. This scaling up of energy-efficiency retrofits is a key part of meeting the goals in the National Climate Change Response Strategy and the United Nations Framework Convention on Climate Change (COP21). This new approach will also allow municipalities to benefit from donor financing. A Guarantee Fund from the Nationally Appropriated Mitigation Action Facility has been jointly established with funding from the German and United Kingdom governments to help private energy service companies obtain loans to implement the Energy Efficiency in Public Infrastructure and Building programme. The programme will have significant long-term effects on energy savings, carbon emissions and the market for energy-efficient technologies. The grant is allocated R719.3 million over the 2019 MTEF period. Rural roads asset management systems grant The Department of Transport administers the rural roads asset management systems grant to improve rural road infrastructure. The grant funds the collection of data on the condition and usage of rural roads in line with the Road Infrastructure Strategic Framework for South Africa. This information guides investments to maintain and improve these roads. District municipalities collect data on all the municipal roads in their area, ensuring that infrastructure spending (from the municipal infrastructure grant and elsewhere) can be properly planned to maximise impact. As data becomes available, incentives will be introduced to ensure that municipalities use this information to plan road maintenance appropriately. The municipal infrastructure grant stipulates that municipalities must use data from roads asset management systems to prioritise investment in roads projects. 47
2019 BUDGET REVIEW The Department of Transport will continue to work with the municipal infrastructure grant administrators to ensure that municipal roads projects are chosen, prioritised and approved using roads asset management systems data wherever possible. The grant is allocated R113.9 million in 2019/20, R120.5 million in 2020/21 and R127.1 million in 2021/22. Municipal disaster recovery grant After the initial response to a disaster has been addressed, including through funding from the municipal disaster relief grant discussed below, the repair of damaged municipal infrastructure is funded through the municipal disaster recovery grant. In 2019/20, this grant is allocated R194 million for the repair of damage to municipal infrastructure caused by floods in KwaZulu-Natal and the Eastern Cape. If further disasters occur that require recovery projects to be funded through this grant, additional allocations may be made to it in future. Capacity-building grants and other current transfers Capacity-building grants help to develop municipalities’ management, planning, technical, budgeting and financial management skills. Other current transfers include the EPWP integrated grant for municipalities, which promotes increased labour intensity in municipalities, and the municipal disaster relief grant. A total of R6.4 billion is allocated to capacity-building grants and other current transfers to local government over the medium term. Table W1.29 Capacity building and other current grants to local government Source: National Treasury Local government financial management grant The local government financial management grant, managed by the National Treasury, funds the placement of financial management interns in municipalities and the modernisation of financial management systems. This includes building in-house municipal capacity to implement multi-year budgeting, linking integrated development plans to budgets, and producing quality and timely in-year and annual reports. The grant supports municipalities in the implementation of the Municipal Finance Management Act and provides funds for the implementation of the municipal standard chart of accounts. Total allocations amount to R1.7 billion over the MTEF period and grow at an average annual rate of 5.5 per cent. 48 2015/16 2016/17 2017/18 Outcome R million 2018/19 Adjusted budget 2019/20 2020/21 2021/22 Medium-term estimates Direct transfers 1 268 1 675 1 815 Municipal disaster relief – 118 341 Municipal demarcation transition 4 297 140 Municipal systems improvement – – – Municipal human settlements 100 – – capacity Municipal emergency housing – – – Infrastructure skills development 124 130 141 Local government financial 452 465 502 Expanded public works programme 588 664 691 integrated grant for municipalities 1 851 349 – 23 – 140 141 505 693 1 897 2 004 2 115 335 354 373 – – – – – – – – – 149 159 168 149 158 167 533 562 593 730 771 814 Indirect transfers 251 19 103 92 122 128 135 Municipal systems improvement 251 19 103 92 122 128 135 Total 1 520 1 695 1 919 1 943 2 018 2 132 2 250
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Infrastructure skills development grant The infrastructure skills development grant develops capacity within municipalities by creating a sustainable pool of young professionals with technical skills related to municipal services, such as water, electricity and town planning. The grant places interns in municipalities so they can complete the requirements of the relevant statutory council within their respective built environment fields. The interns can be hired by any municipality at the end of their internship. The grant’s total allocations amount to R474 million over the 2019 MTEF period and grow at an average annual rate of 5.6 per cent. Municipal systems improvement grant The municipal systems improvement grant funds a range of projects in municipalities in support of the Back to Basics strategy, including helping municipalities set up adequate record management systems, drawing up organograms for municipalities and reviewing their appropriateness relative to their assigned functions, implementing the Integrated Urban Development Framework and assisting municipalities with revenue collection plans. From 2019/20, the grant also supports the implementation of the municipal standard chart of accounts. The Department of Cooperative Governance implements the indirect grant. Grant allocations amount to R121.6 million in 2019/20, R128.2 million in 2020/21 and R135.3 million in 2021/22, and R73 million and R80 million is unallocated for 2020/21 and 2021/22. EPWP integrated grant for municipalities This grant promotes the use of labour-intensive methods in delivering municipal infrastructure and services. To determine eligibility for funding, municipalities must have reported performance on the EPWP, including performance in the infrastructure, social and environment and culture sectors and on the full-time equivalent jobs created in these sectors in the last 18 months. A formula then determines allocations on the basis of this performance as well as the labour intensity of the work opportunities created. The number of bands in which labour intensity are recorded in the formula have been expanded from seven to eight, providing an incentive for labour-intense projects to further increase their intensity. The formula is weighted to give larger allocations to rural municipalities. The grant’s baseline is reduced by R11.9 million in 2019/20, R11.7 million in 2020/21 and R11.6 million in 2021/22 in order to fund other government priorities. The impact of these reductions will be spread across municipalities in line with the grant’s formula. The grant is allocated R2.3 billion over the MTEF period. Municipal disaster relief grant The municipal disaster relief grant is administered by the National Disaster Management Centre in the Department of Cooperative Governance as an unallocated grant to local government. The centre is able to disburse disaster-response funds immediately, without the need for the transfers to be gazetted first. The grant supplements the resources local government would have already used in responding to disasters. To ensure that sufficient funds are available in the event of disasters, section 21 of the Division of Revenue Bill allows for funds allocated to the provincial disaster relief grant to be transferred to municipalities if funds in the municipal grant have already been exhausted, and vice versa. The bill also allows for more than one transfer to be made to areas affected by disasters, so that initial emergency aid can be provided before a full assessment of damages and costs is conducted. Over the MTEF period, R1 billion is available for disbursement through this grant. To ensure that sufficient funds are available for disaster relief, clause 20(6) of the Division of Revenue Bill allows funds from other conditional grants to be reallocated for this purpose, subject to the National Treasury’s approval. Municipal emergency housing grant When introduced in 2018/19, the municipal emergency housing grant was intended to enable the Department of Human Settlements to rapidly respond to emergencies by providing temporary housing in line with the Emergency Housing Programme. From 2019/20, the purpose of the grant will be extended to repair damage 49
2019 BUDGET REVIEW to permanent structures following the immediate aftermath of a disaster, in instances where the repairs would be cheaper than the cost of relocation and provision of temporary shelter. The approval of funding for repairs will be subject to an assessment report. The grant remains limited to funding emergency housing and repairs following the immediate aftermath of a disaster, and not the other emergency situations listed in the Emergency Housing Programme. This grant is allocated R149.1 million in 2019/20, R158.8 million in 2020/21 and R167.5 million in 2021/22. Part 6: Future work on provincial and municipal fiscal frameworks The fiscal frameworks for provincial and local government encompass all their revenue sources and expenditure responsibilities. As underlying social and economic trends evolve and the assignment of intergovernmental functions change, so must the fiscal frameworks. The National Treasury, together with relevant stakeholders, conducts reviews to ensure that provinces and municipalities have an appropriate balance of available revenues and expenditure responsibilities, while taking account of the resources available and the principles of predictability and stability. This part of the annexure describes the main areas of work to be undertaken during 2019/20 as part of the ongoing review and refinement of the intergovernmental fiscal framework. Provinces and municipalities will be consulted on all proposed changes. Review of the provincial equitable share formula The Constitution stipulates that provinces are entitled to a share of nationally raised revenue to deliver on their mandates. Provincial funds are allocated using a formula that considers the spread of the burden of service delivery across provinces. The provincial equitable share formula contains weighted elements that reflect government priorities and incorporates elements to redress inequality and poverty across provinces. The periodic review of the formula to assess its continued appropriateness and equity continues in 2019. The Technical Committee on Finance and the Budget Council are consulted as part of this work. Over the course of the year, work on the review of the equitable share will continue. Now that the new data-collection methodology for education is part of the formula, the next step is to interrogate the component’s alignment with government’s education policy vision. Work on the disparity in costs in the delivery of services across the country will also continue, led by the FFC. The National Treasury will work with the national Department of Health and Statistics South Africa to fully understand the available health information data and the dynamics of delivering services in the health sector. Over the course of 2019, the provincial equitable share review task team, with representatives from the National Treasury, Statistics South Africa, provincial treasuries and the FFC, will further explore the poverty component and look into deprivation as a possible measure. This will be coupled with technical changes to the formula to ensure stability. National health insurance policy work South Africa aims to make significant strides towards universal health coverage though the progressive implementation of national health insurance, as outlined in the National Health Insurance White Paper, which government adopted in 2017. Subsequently, the draft bill was released for public comment and government is working on finalising it for tabling to Parliament following Cabinet approval. The bill, when promulgated, will provide the legal foundation for establishing the National Health Insurance Fund. This is likely to have significant implications for provincial finances, which are being discussed through consultative structures like the Technical Committee on Finance. Parallel to the legislative foundation, efforts to strengthen the health system in preparation for national health insurance will continue through developing and piloting provider payment mechanisms, expanding the national insurance beneficiary registry, addressing human resource capacity in public health facilities, and purchasing and providing a prioritised set of health services. 50
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE The role of provinces in promoting economic development Provinces and municipalities play a crucial role in advancing the economic development of their respective precincts. Fully functional, well-equipped schools produce a vibrant and employable workforce. Smarter health systems develop and maintain the health of the workforce. Provincial agriculture departments’ support to farmers can stimulate rural development. The provision of provincial and municipal roads and public transport services ensures mobility for goods and workers, while basic municipal services such as water, electricity and refuse removal, as well as business licencing and environmental health functions, enable businesses to operate and grow. Well-managed procurement can maximise developmental impact without compromising efficiencies. All three spheres of government must work with businesses and other relevant stakeholders to provide an enabling environment for faster and more inclusive economic growth. In 2018, the Budget Council Lekgotla and the Technical Committee on Finance agreed on a strategy for provinces in special economic and industrial development zones. Provinces agreed to assist the special economic zones in strengthening their tenant base so that they can raise more revenue and be less reliant on transfers. In 2019, there may be a need to revise legislation regarding the zones’ scheduling as entities in terms of the Public Finance Management Act so that they can receive more support from government in their early stages and later become self-financing entities. Improving intergovernmental coordination on infrastructure investment Public infrastructure investments can play a major role in transforming South Africa’s spatial development patterns. This requires a significant improvement in intergovernmental coordination in planning and budgeting for infrastructure. The National Treasury is working with provinces to ensure that their investments in schools, roads, health facilities and housing are made in locations that align with the spatial development plans of municipalities. Municipalities must be consulted and agree on the location and bulk services requirements of all provincial infrastructure projects. During 2018, the National Treasury provided support to all provinces with metropolitan municipalities to have joint planning sessions and share plans and information. This process has revealed that there are still a lot of gaps in the alignment of the spatial development frameworks between provincial and municipal government. Work to improve coordination and address these gaps will continue in 2019/20. The National Treasury is also exploring how the budget process can be used to address spatial planning issues. A paper on options to improve the coordination of infrastructure funding with spatial development objectives will be presented to the National Treasury’s intergovernmental structures during 2019. Scholar transport Government conducted a study on the delivery of scholar transport services during 2018. A steering committee with members from the Department of Basic Education; the Department of Transport; the Department of Planning, Monitoring and Evaluation; and the National Treasury has been established to take this work forward. The report revealed several data gaps and inconsistencies in the way services are delivered and reported on in different provinces, making it difficult to establish a common national approach to improving the service. Two work streams will be established during 2019. The first will deal with the data gaps and attempt to determine whether the function should be led by the transport or basic education sector. The second work stream will deal with the costing of the service and will provide input during the 2020 Budget process. New informal settlements upgrading grants for provinces and municipalities Informal settlement upgrades will intensify over the medium term. This is an inclusive process through which informal residential areas are incrementally improved, formalised and incorporated into the city or neighbourhood by extending land tenure security, infrastructure and services to residents of informal 51
2019 BUDGET REVIEW settlements. Following the introduction of dedicated windows to fund informal settlement upgrades in the provincial human settlements development grant and the municipal urban settlements development grant in 2019/20, the Department of Human Settlements is leading the design of two new informal settlements upgrading grants for provinces and municipalities that will be introduced in the 2020 MTEF period. The design of the new grants will draw on the lessons learnt from implementing the grant windows in 2019/20. Provinces, municipalities and other interested stakeholders will also provide feedback on the new grant structures. Indicative baselines have been set aside for the new grant in the outer years of the 2019 MTEF period. These baselines grow from informal settlements upgrading programme windows in the human settlements development grant and urban settlements development grant worth 15 per cent and 20 per cent of each grant respectively in 2019/20, to separate grants equivalent to 30 per cent and 50 per cent of the previous grants by 2021/22. The new grants will fund the progressive upgrading of informal settlements from areas of plight and deprivation into liveable, integrated, functional, inclusive and sustainable human settlements. Local government transfers The system of transfers to local government is continuously being reviewed and refined to improve spending efficiency and the impact achieved through these transfers. Over the period ahead, the National Treasury will continue to examine the funding of, and budgeting by, rural municipalities and how the transfers they rely on can be structured to improve their sustainability and performance. At the same time, urban municipalities will be encouraged to further increase their reliance on own revenue sources to fund their budgets (including borrowing to fund infrastructure investments). Potential future refinements to the local government equitable share formula Government continues to work with stakeholders to improve the local government equitable share formula. Areas of work in the period ahead include: Refining the methodology used to update household growth estimates, taking account of updated data from Statistics South Africa, and possibly using district-level data. Improving the responsiveness of the formula to the different functions assigned to district and local municipalities. This work depends on the availability of credible official records of the functions assigned to each sphere of government. Policy and administrative work under way in the National Disaster Management Centre could help improve the targeting of funding for fire services. Review of local government infrastructure grants As part of the ongoing review of local government infrastructure grants, the National Treasury, the Department of Cooperative Governance, SALGA and the FFC will work closely to implement the reform agenda agreed to through the review, including: Improving the administration of conditional grants by national department. Further consolidating conditional grants. Increasing differentiation in the grant system, so that grants are more aligned to the different circumstances found across the country’s 257 municipalities. Identifying ways to incorporate incentives for improved asset management into the grant system. Review of municipal capacity support system Government invests more than R2.5 billion per year in various forms of capacity-building support to local government. Despite this, an increasing number of municipalities are in some form of distress, financial crisis, state of mismanagement or have been placed under an intervention. This indicates that the current 52
ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE system of capacity support is not producing the intended results. The intention to review this system was announced in the 2018 Medium Term Budget Policy Statement. The review will be conducted during 2019/20 and will examine all aspects of the local government capacity building and support system and how the system operates as a whole. It will identify overlaps, duplications and gaps in the system and propose how these should be rectified. The review is expected to result in proposed changes to the configuration of funding for capacity building as well as the activities funded. Parliament will be updated on the review’s progress in the 2019 Medium Term Budget Policy Statement. Reforms to local government own revenue sources Municipalities play a critical role in boosting economic growth and providing an enabling environment for job creation by providing well-maintained and functioning infrastructure services. However, municipalities are finding it increasingly difficult to build the infrastructure required for growth and meet the demands of rapid urbanisation. The National Treasury continues to explore how cities and other municipalities with a significant own revenue base can use a broader package of infrastructure financing sources to meet their developmental mandate. The National Treasury is implementing the reforms discussed below. Development charges Despite their potential as an alternative option for financing infrastructure, municipalities have not fully used development charges due to uncertainty surrounding the regulatory frameworks. Development charges are once-off infrastructure access fees imposed on a land owner as a condition of approving a land development that will substantially increase the use of or need for municipal infrastructure engineering services. They are based on the concept that urban growth and expanded land use creates the need for additional infrastructure services, therefore the developer should pay the incidence costs. To deal with the regulatory framework’s challenges, the National Treasury is amending the Municipal Fiscal Powers and Functions Act (2007) to incorporate the regulation of development charges. The draft amendment bill will be submitted to Cabinet shortly and is expected to be published for public comment during the second quarter of 2019. Municipal borrowing The original municipal borrowing policy of 1999 has been through an extensive process of review and consultation with various stakeholders. The final draft revised policy will be submitted to Cabinet shortly and is expected to be published in 2019. Among others, the policy framework makes specific recommendations on the role of development finance institutions in financing creditworthy municipalities. It proposes that these finance institutions should play a complementary and supportive role to transactions rather than competing directly with private financiers on price. The framework suggests that development finance institutions should establish clear and measurable development impact indicators for their municipal operations in general, and for specific transactions. The National Treasury continues to publish the Municipal Borrowing Bulletin on a quarterly basis. Copies can be obtained from www.mfma.treasury.gov.za 53
W2 Website annexure to the 2019 Budget Review Structure of the government accounts Introduction South Africa’s national government accounts are presented in the statistical tables that appear at the back of the 2019 Budget Review. The structure of the reporting tables is based on recommendations in the Government Finance Statistics1 (GFS), published in 2014, and the System of National Accounts2 (SNA), published in 2008. Certain modifications to the structure of the accounts and the labelling of the receipt and payment items have been made to take into account specific features of the South African environment. The GFS presentation also differs in some respects from the presentation in Chapter 2 of the Budget Review, which is based on the SNA. This annexure describes the presentation format and structure of the government accounts, and explains deviations between the GFS recommendations and the way government statistics in the national accounts are compiled and presented. It also describes the salient characteristics of the SNA’s section on government statistics. Recording basis Both the SNA and the GFS recommend that items should be recorded on an accrual basis, which means that all government transactions are included in the accounts. This includes transactions that do not give rise to cash flows, such as changes in inventories, depreciation and accrued interest. In accrual accounting, the time of recording should coincide with the underlying economic event. The entry does not necessarily coincide with the timing of the resultant cash flow, but rather with the change of ownership or when economic value is created, transformed or extinguished. For example, debt repayment should be recorded when the debt expires, whether or not this coincides with an actual repayment that gives rise to a cash flow. Government is still committed to the recommendation first made in the 2001 GFS to use accrual accounting for government financial statements. This commitment will be fulfilled when the integrated financial 1 International Monetary Fund, 2014, Government Finance Statistics. Washington, D.C. International Monetary Fund. 2 United Nations, 2008, System of National Accounts. Brussels, Luxembourg, New York, Paris, Washington, D.C. Inter-Secretariat Working Group on National Accounts. 1
2019 BUDGET REVIEW management system, which is based on accrual accounting principles, is fully implemented. Until then, budget data continues to be presented on a cash basis. This means that the transaction is recorded when the cash flow occurs, therefore it does not match the timing of the underlying economic event. In some cases, modified cash principles are applied. This includes recording expenditure at the time of recording the transaction in the cash book (when the transaction is processed in the financial system and the payment is issued) and accruing interest on some types of government debt (zero-coupon bonds). In strict cash accounting, the time of recording should coincide with the actual cash flow. In South Africa, entries for the national budget data are made during the time period in which financial systems capture transactions. After the financial year-end, books remain open so that all year-end procedures can be finalised, such as reconciling actual bank account balances with revenue and expenditure reported, and correcting item classification. The year-end procedures do not influence revenue and expenditure levels, and consist primarily of: Late funding requests by government departments to settle obligations relating to the specific financial year. The surrender of unspent funds by government departments (funds requested but not used). Corrections to revenue, expenditure or financing transactions that were, for example, erroneously classified. Adjustments to expenditure data, for auditing and parliamentary purposes, to show only authorised expenditure for the particular financial year (excluding all unauthorised spending). Economic reporting format The economic reporting format (ERF) was introduced in the 2004 Budget. It is based on the GFS, but adapted for South Africa’s reporting requirements. The budget format is supported by a standard chart of accounts (SCOA), which is fully aligned with the ERF and provides for posting-level details of the budget within the financial system. Each descriptive label in the ERF and the chart reflects the actual content of the item. Labels such as “other” or “miscellaneous” are avoided to improve transparency. This practice ensures that classifications are consistent across all national and provincial departments, improving the quality of information provided to legislatures, assisting in the policy-making process and enhancing accountability. The evolution of accounting and reporting requirements, as well as the pending introduction of an integrated financial management system, led to a review of the SCOA in 2008 and 2013. The changes resulting from the last review were implemented in 2013/14. These changes have improved government’s ability to report on infrastructure spending, provided for better control over departmental programme budgets, enabled the identification of more appropriate spending items in the chart, enhanced asset management through better recording of asset transactions, and allowed government to monitor regional spending. Although no new classification principle changes have been introduced to the chart in recent years, the National Treasury’s SCOA classification committee and call centre still provide support to departments to improve consistency in the application of the classification rules and recommend appropriate amendments to the SCOA and the financial system. The committee issues circulars that provide information and guidance to practitioners on changes made to the chart of accounts, ensuring a consistent approach to classification. Structure of accounts The reporting format organises all government transactions into three broad categories: receipts, payments and financing. The budget balance (deficit or surplus) is calculated as receipts less payments, which is equal to total financing, but with the opposite sign. 2
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS Receipts Government receipts are divided into taxes; sales; transfers; fines, penalties and forfeits; interest, dividends and rent on land; and transactions in financial assets and liabilities. Taxes are classified according to the type of activity on which they are levied, including income, profits, consumption of domestic goods and services, and international trade. Sales are disaggregated into sales of capital assets and other sales. Transfers are unrequited receipts – the party making the transfer does not receive anything of similar value directly in return. These are classified according to unit, for example, other government units, private enterprises and public corporations, households and so on. Fines, penalties and forfeits consists of all compulsory receipts imposed by a court or quasi-judicial body. Interest, dividends and rent on land includes all receipts associated with ownership of financial assets and land. Transactions in financial assets and liabilities covers three financial transactions. The first two transactions are the repayments of loans and advances previously extended to employees and public corporations for policy purposes, and the reduction of equity investments made by government in public corporations. These transactions are recorded as receipts because they are fundamentally different from other financial transactions, which are market oriented and appear as financing items. The third transaction is associated with stale cheques from previous accounting periods. The temporary increase in receipts before a new cheque is issued is recorded as a receipt because the financial system does not allow for a payment in the current accounting period to be reduced due to the cancellation of a payment from a previous period. Remaining financial transactions, such as borrowing and loan repayment in the capital markets, are included under the financing category. Payments Payments are divided into four broad categories: current payments, transfers and subsidies, payments for capital assets and payments for financial assets. Current payments Current payments provides for funds directly spent by a department. Detail is provided on: Compensation of employees: This category includes all current personnel-related payments to government employees – both salaries and wages and social contributions. Social contributions are government-funded service benefits for employees, such as pension or medical scheme contributions. This category excludes capitalised compensation. Goods and services: All government payments in exchange for goods and services used by the department to achieve its mandate, excluding capital assets and goods used to construct and improve capital assets. Generally, this item is the second largest spending item for departments after transfers and subsidies. The details of each department’s purchases are provided, giving an indication of the largest spending items. For example, an education department may list school books, while a health department might list medicines. This level of detail supports improved oversight and analysis. Interest and rent on land: This item is defined as payment for the use of borrowed money (interest on loans and bonds) and land (rent). It is distinguished from the repayment of borrowed money, which is classified under financing. Transfers and subsidies The second part of the payments table provides for funds that are transferred to other government institutions, businesses and individuals and do not constitute a department’s final expenditure. This item includes all of government’s unrequited, non-repayable payments – payments for which no goods or services are received in return. The category transfers and subsidies is subdivided into the various targeted recipients or beneficiaries receiving funding from government, such as other levels of general government, households, non-profit 3
2019 BUDGET REVIEW institutions and public corporations. This allows for the separation of all transfers from payments that departments control directly. Transfers and subsidies includes current and capital transfers. In the past, capital payments included capital transfers, which led to ambiguity because these numbers could overstate government’s actual contribution to capital formation. Including capital transfers with other transfers provides a clearer picture of government’s capital spending. Payments for capital assets Capital payments are identified as a separate item, capturing government’s contribution to capital formation and spending on new infrastructure, as well as upgrades, additions, rehabilitation and refurbishment of existing infrastructure. Capital assets are divided into seven categories: Buildings and other fixed structures Machinery and equipment Heritage assets Specialised military assets Biological assets Software and other intangible assets Land and sub-soil assets. Payments for capital assets also includes own-account construction – when government units engage in capital projects on their own account, such as provincial works and roads departments constructing buildings and roads. In this case, certain payment categories are capitalised (compensation of employees and goods and services). These two payment categories are not capitalised unless payments are directly associated with a capital project. A government unit executes a capital project to construct a new asset, or upgrade, add to, rehabilitate or refurbish an existing capital asset. However, payments on current projects, namely maintenance and repair of existing capital assets, are not capitalised. Payments for financial assets This item includes lending to public corporations or making equity investments in them for policy purposes. The reason for expensing this payment rather than treating it as financing is that, unlike other financial transactions, the purpose of the transaction is not market oriented. Financing As a broad classification category, financing encompasses all financial transactions other than transactions in financial assets and liabilities and payments for financial assets, which are included as part of receipts and payments. Items recorded under financing reflect funding to cover a government deficit or the use of funds available from a government surplus. Government’s gross borrowing requirement, which represents the shortfall between revenue and expenditure plus the repayment of maturing loans, is included in the financing category. The gross borrowing requirement is financed in the domestic and international market through Treasury bills, fixed-income, inflation-linked and retail bonds, foreign loans and the use of government’s cash deposits. Functional classification To be consistent with the GFS, government payments are classified according to their functional and economic characteristics. The items in the economic classification have been described above, under payments. The main function of the economic classification is to categorise transactions according to type of object or input, such as compensation of employees or interest payments. Data must be classified this way 4
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS to calculate the surplus or deficit, as well as government’s contribution to the economy in the form of output, value added and final consumption. The functional classification complements the economic classification. It serves to distinguish transactions by policy purpose or type of outlay. This is also referred to as expense by output. Its main purpose is to facilitate understanding of how funds available to government have been spent on health, education, general public services, public order and safety, and so on. The broad categories in the functional classification are listed below: General public services refers to the administration, operation or support of executive and legislative organs, financial and fiscal affairs, and external affairs. It includes foreign economic aid to developing countries and economic aid through international organisations. The category also covers general services, such as personnel services, overall planning and statistical services, and basic research in the general public service. The cost of state debt is included in this category. Defence includes administration, operation and support of military and civil defence, and the operation of military aid missions accredited to foreign governments or attached to international military organisations. Applied research and development (R&D) related to defence is also included. Public order and safety covers police services, fire protection services, justice and law courts, prisons and related R&D. Economic affairs includes government spending associated with the regulation and more efficient operation of the business sector. This category incorporates general economic affairs; commercial and labour affairs; agriculture, forestry, fishing and hunting; fuel and energy; mining; manufacturing and construction; transport; communication and related R&D. Environmental protection relates to the conservation of biodiversity and landscape – the protection of habitats, including the management of natural parks and reserves, waste management, wastewater management, pollution abatement and related R&D. Housing and community amenities includes the administration of housing and community development affairs and services, water supply, street lighting and related R&D. Health covers spending on services provided to individuals and on a collective basis, including medical products, appliances and equipment, outpatient services, hospital services, public health services and related R&D. Recreation and culture includes recreational and sporting services, cultural services, broadcasting and publishing services, religious and other community services, as well as related R&D. Education includes spending on services provided to individual learners and students, as well as those provided collectively. It includes pre-primary, primary, secondary and tertiary education, as well as subsidiary education services and related R&D. Social protection covers services supplied directly to communities, households or individuals, including transfers for sickness and disability, old age, families and children, unemployment, support to households to meet the cost of housing and related R&D. Expenditure in a particular budget vote may cover more than one function. For example, health expenditure may include spending on education for medical training. The consolidated government account The consolidated government account presents the accounts of national and provincial government, and social security funds. In this account, the National Treasury calculates estimates of general government revenue and expenditure over the medium term. In the 2019 Budget Review, a total of 163 national and provincial departments and 186 central government entities, classified as extra-budgetary agencies, are 5
2019 BUDGET REVIEW included. This also includes some government business enterprises, which either sell most of their goods and services to government institutions or departments at regulated prices, and are therefore not businesses in the true sense of the word, or they are directly involved in infrastructure financing and development. State-owned entities that provide goods at market prices, such as Transnet or Eskom, form part of the public-sector accounts and are excluded from the consolidation. This presentation is broadly in line with the GFS requirement that the accounts of general government be presented on a consolidated basis. In the consolidation process, all relevant spheres of government are included and all intergovernmental transactions are eliminated. This ensures that only the interaction between general government units and non-governmental units is recorded. As a result, the accounts reflect more accurately government’s financial position and the impact of its activity on the economy. To present a true set of consolidated general government accounts, the accounts of both national and provincial departments must be consolidated with their associated public entities. The accounts of the social security funds and local authorities are then added to give the consolidated general government accounts. As a final step, all government business enterprises should be included and consolidated with the general government units to create the consolidated public account. The following dimensions are considered during the consolidation process: Coverage: This refers to the choice of entities to be included in the consolidation. General government entities should be consolidated, followed by all business enterprises. The consolidation of the general government sector includes all entities that are mainly controlled and financed by government, and which provide goods and services at non-market prices. State-owned entities and local authority trading entities providing goods and services at market-related prices, which form part of the broader public sector, are excluded, as are privately owned entities. Elimination of inter-entity transactions: All inter-entity transactions are eliminated in the consolidation process. For this to be accurate, these transactions must be easily identifiable. However, in the accounting systems of government and many of its agencies, not all inter-entity transactions are identified. Elimination is impossible in many cases where goods and services are procured from other government units, because such transactions cannot be separated from other transactions in this category. However, all transactions involving transfers from one government unit to another can be identified and have been eliminated from the consolidation. Basis of accounting: Entity accounts can only be consolidated if they are compiled using the same basis of accounting. National and provincial governments are on a modified cash basis of accounting, while local authorities and public entities use accrual accounting. To provide data for consolidation, the cash flow numbers of the public entities have been used. During consolidation, transfers and other identifiable goods and services are taken out, and the rest of the transactions are aggregated. In future budgets, the National Treasury will endeavour to include more entities to provide the full picture of public-sector spending. The consolidation in this budget includes all the entities listed in Table W2.1. 6
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS Table W2.1 List of public entities included in consolidation 7 Vote De partm e nt Public e ntity 3 4 5 6 7 8 10 11 13 14 Communications Cooperative Governance and Traditional Af f airs Home Af f airs International Relations and Cooperation National Treasury Planning, Monitoring and Evaluation Public Service and Administration Public Works Women Basic Education Brand South Af rica Film and Publication Board Independent Communications Authority of South Af rica Media Development and Diversity Agency Commission f or the Promotion and Protection of the Rights of Cultural, Religious and Linguistic Communities Municipal Demarcation Board Municipal Inf rastructure Support Agency South Af rican Local Government Association Government Printing Works Independent Electoral Commission Af rican Renaissance and International Cooperation Fund Accounting Standards Board Cooperative Banks Development Agency Financial Intelligence Centre Financial and Fiscal Commission Financial Sector Conduct Authority Government Pensions Administration Agency Government Technical Advisory Centre Independent Regulatory Board f or Auditors Of f ice of the Ombud f or Financial Service Providers Of f ice of the Pension Funds Adjudicator Public Investment Corporation Limited South Af rican Revenue Service National Youth Development Agency National School of Government Agrément South Af rica Construction Industry Development Board Council f or the Built Environment Independent Development Trust Property Management Trading Entity Commission f or Gender Equality South Af rican Council f or Educators uMalusi Council f or Quality Assurance in General and Further Education and Training
2019 BUDGET REVIEW Table W2.1 List of public entities included in consolidation (continued) 8 Vote De partm e nt Public e ntity 15 16 17 19 21 23 24 25 26 27 28 Higher Education and Training Health Social Development Def ence and Military Veterans Justice and Constitutional Development Police Agriculture, Forestry and Fisheries Economic Development Energy Environmental Af f airs Labour Consolidated sector education and training authorities (21) Council on Higher Education National Skills Fund National Student Financial Aid Scheme Quality Council f or Trades and Occupations South Af rican Qualif ications Authority Council f or Medical Schemes Medical Research Council of South Af rica National Health Laboratory Service Of f ice of Health Standards Compliance South Af rican Health Products Regulatory Authority National Development Agency South Af rican Social Security Agency Armaments Corporation of South Af rica Limited Castle Control Board Legal Aid South Af rica Public Protector of South Af rica Special Investigating Unit South Af rican Human Rights Commission Private Security Industry Regulatory Authority Agricultural Research Council Marine Living Resources Fund National Agricultural Marketing Council Onderstepoort Biological Products Limited Perishable Products Export Control Board Competition Commission Competition Tribunal International Trade Administration Commission National Energy Regulator of South Af rica National Nuclear Regulator South Af rican National Energy Development Institute South Af rican Nuclear Energy Corporation Limited The National Radioactive Waste Disposal Institute iSimangaliso Wetland Park South Af rican National Biodiversity Institute South Af rican National Parks South Af rican Weather Service Commission f or Conciliation, Mediation and Arbitration National Economic Development and Labour Council Productivity SA
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS Table W2.1 List of public entities included in consolidation (continued) 9 Vote De partm e nt Public e ntity 29 30 31 32 33 34 35 36 Mineral Resources Science and Technology Small Business Development Telecommunications and Postal Services Tourism Trade and Industry Transport Water and Sanitation Council f or Geoscience Mintek Mine Health and Saf ety Council South Af rican Diamond and Precious Metals Regulator State Diamond Trader Academy of Science of South Af rica Council f or Scientif ic and Industrial Research Human Sciences Research Council National Research Foundation South Af rican National Space Agency Technology Innovation Agency Small Enterprise Development Agency National Electronic Media Institute of South Af rica Sentech Limited State Inf ormation Technology Agency Universal Service and Access Agency of South Af rica Universal Service and Access Fund South Af rican Tourism Companies and Intellectual Property Commission Companies Tribunal National Consumer Commission National Consumer Tribunal National Credit Regulator National Empow erment Fund National Gambling Board of South Af rica National Lotteries Commission National Lotteries Commission Distribution Trust Fund National Metrology Institute of South Af rica National Regulator f or Compulsory Specif ications South Af rican Bureau of Standards South Af rican National Accreditation System Cross-Border Road Transport Agency Driving License Card Account Passenger Rail Agency of South Af rica Ports Regulator of South Af rica Railw ay Saf ety Regulator Road Traf f ic Inf ringement Agency Road Traf f ic Management Corporation South Af rican Civil Aviation Authority South Af rican Maritime Saf ety Authority South Af rican National Roads Agency Limited Breede-Gouritz Catchment Management Agency Inkomati-Usuthu Catchment Management Agency Trans-Caledon Tunnel Authority Water boards consolidation (9) Water Research Commission Water Services Trading Entity
2019 BUDGET REVIEW Table W2.1 List of public entities included in consolidation (continued) Source: National Treasury Main adjustments to the consolidated government account The National Treasury regularly reviews the data presented in the consolidated government account to improve its scope and classification. To this end, a more detailed database of departmental financial information has been compiled for the 2019 Budget. This is part of a broader, long-term initiative to improve the quality of government’s financial and budget data. Classification is done at a more detailed level within the accounts of national and provincial departments and public entities. In reclassifying the data, activity-level information was collected and used to inform the functional classification. As a result, some functional breakdowns have been disaggregated into more detail, with some of this detail reclassified into other functions. In addition, detailed analyses of provincial spending and public-entity revenue revealed further inter-entity transactions that can be eliminated in the consolidation process. This is a result of the improvement in information collected and clarity on the flow of transactions between the different spheres of government. The historical data presented in the statistical tables has been updated with these classification adjustments, but care should be taken when comparing these numbers with previous budget publications because the data is not strictly comparable. The functional classification published in the statistical tables is more closely aligned with the classification prescribed in the GFS. However, the stricter application of this classification requires a level of disaggregation of the departmental spending data, which complicates the use of the GFS functional data for budget preparation. As a result, the Budget Review spending data is presented by key spending categories, which group departments and programmes engaged in similar activities. This provides a classification that 10 Vote De partm e nt Public e ntity 37 38 39 40 Arts and Culture Human Settlements Rural Development and Land Ref orm Sport and Recreation South Af rica Arts institutions consolidation (5) Heritage institutions consolidation (13) Library institutions consolidation (2) National Arts Council of South Af rica National Film and Video Foundation of South Af rica National Heritage Council of South Af rica South Af rican Heritage Resources Agency The Pan South Af rican Language Board Community Schemes Ombud Service Estate Agency Af f airs Board Estate Agents Fidelity Fund Housing Development Agency National Home Builders Registration Council National Housing Finance Corporation Limited Social Housing Regulatory Authority Agricultural Land Holding Account Ingonyama Trust Board Registration of Deeds Trading Entity Of f ice of the Valuer-General Boxing South Af rica South Af rican Institute f or Drug-Free Sport
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS is similar to the functional classification presented as part of the statistical tables published at the back of the Budget Review. Format of the consolidated government account Since 2014, the consolidated government account has been presented in the new format shown in Table W2.2. This more transparent and user-friendly presentation clearly distinguishes between government’s operating activities and its plans to invest in capital infrastructure. The balance on the operating account shows the outcome of government’s operating activities, which is a measure of the cost of continuing operations. It is calculated as the difference between current revenue and current expenditure, and the resulting balance shows how much government needs to borrow to run its operations. The current balance demonstrates the sustainability of government operations – a long-term operating deficit is unsustainable, while a positive operating balance allows for investment in future productive capacity. Capital investment activities are presented in the capital account. Government’s capital financing requirement is the outcome of this account, which is calculated as the difference between capital revenue and capital expenditure. The account will mainly be in deficit due to continuous investment in infrastructure and substantial capital outlays. This format separates all transactions in financial assets and liabilities – largely made up of loans extended to public corporations. If cash generated from operations is insufficient to finance investment requirements, government has to borrow. The borrowing requirement is calculated by adding the operating balance, the capital financing requirement, financial transactions and any unallocated expenditure, such as the contingency reserve. This results in the budget balance, or net financing requirement, which is the main outcome of the budget. The chief difference between the new balance and the previous version is the inclusion of extraordinary receipts and payments in the main budget. The introduction of the operating account and the capital account makes extraordinary items obsolete; these are now included in the main transaction categories. The classification principles and categories used in this new format will be the same as those used to classify government transactions. 11
2019 BUDGET REVIEW Table W2.2 Consolidated revenue, expenditure and financing 2019/20 2020/21 M e dium -te rm e s tim ate s 2021/22 R billion Ope rating account Curre nt re ce ipts Tax receipts (net of SACU1 transf ers) Non-tax receipts (including departmental receipts) Transf ers received Curre nt paym e nts Compensation of employees Goods and services Interest and rent on land Transf ers and subsidies 1 568.7 1 464.7 98.6 5.3 1 610.3 627.1 251.0 209.4 522.7 1 687.1 1 574.8 106.7 5.6 1 731.0 667.6 268.3 232.7 562.4 1 826.3 1 703.4 117.2 5.8 1 855.7 713.1 293.5 255.9 593.3 Curre nt balance Percentage of GDP -41.6 -0.8% -43.8 -0.8% -29.4 -0.5% Capital account Capital receipts Transf ers and subsidies Payments f or capital assets 0.3 75.0 98.5 0.3 78.5 103.1 0.3 85.4 111.0 Capital financing re quire m e nt Percentage of GDP -173.2 -3.2% -181.3 -3.1% -196.1 -3.1% Trans actions in financial as s e ts and liabilitie s -14.9 -21.4 -20.9 Continge ncy re s e rve 13.0 6.0 6.0 Budge t balance Percentage of GDP -242.7 -4.5% -252.6 -4.3% -252.4 -4.0% Prim ary balance 2 Percentage of GDP -33.3 -0.6% -19.9 -0.3% 3.5 0.1% Financing Change in loan liabilitie s Domestic short-and long-term loans (net) Foreign loans (net) Change in cas h and othe r balance s (-incre as e ) 210.0 -21.0 53.7 230.4 30.9 -8.7 232.7 39.2 -19.5 Borrow ing re quire m e nt (ne t) 242.7 252.6 252.4 GDP 5 413.8 5 812.4 6 249.1 1. Southern African Customs Union 2. Includes National Revenue Fund receipts and payments (previously extraordinary receipts and payments) Source: National Treasury Budget data by key spending categories The spending framework outlined in Chapter 5 of the Budget Review is based on the allocation of financial resources of departmental programmes and entities to key spending areas. This improves the targeting of budget allocations, because it groups programmes and entities that have a similar purpose together into a single budget decision-making process. To support this approach, data at programme and entity level is grouped into spending categories, which provides for a higher level of aggregation than in the functional classification. These spending categories are different from the functional classification published in the statistical tables, which is more closely aligned to that prescribed in the GFS. The level of disaggregation of the departmental spending data required by the GFS functional data complicates budget preparation. As a result, the Budget Review spending data is presented by key spending categories that group departments and programmes engaged in similar activities. For example, in the functional classification in the statistical tables, local development and social infrastructure activities are presented as distinct individual functions, while in Chapter 5 they are grouped together as a separate category. The fiscal statistics are an outcome of the budget 12
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS process and can only be used as a guide to categorise expenditure for budgeting purposes. They are not used as a framework for presenting budget allocations. Some of the most important differences between the key spending categories presented in Chapter 5 and the more detailed functional classification presented in the statistical tables are as follows: Learning and culture: Expenditure in this category includes spending related to school and tertiary education, as well as arts, culture, sport and recreation. In the statistical tables, this expenditure is included as part of either the education or recreation, culture and religion functions. Economic development: Expenditure related to innovation, science and technology is included in the economic development function group, while in the statistical tables it is classified as research and development according to the function to which it relates. Peace and security: This includes expenditure by defence, police, justice and home affairs. In the statistical tables, the bulk of this expenditure is included in the public order and safety function, with home affairs split between general public services and public order and safety. The statistical tables also distinguish defence expenditure on health from the usual peace and security function. General public services: In the key spending categories, transfers made to international organisations are classified within the category of the paying department. In the statistical tables, they are classified under general public services. Consolidated budget data versus GFS recommendations GFS principles are used for the detailed classification of all transactions. However, there are important differences in the final presentation of the consolidated budget data and the GFS. This is why the presentation of the government accounts in this publication differs from that published in the Reserve Bank’s Quarterly Bulletin, which adheres strictly to GFS recommendations. The differences between the formats used by the National Treasury and the Reserve Bank are mainly in the structure of the accounts presented, as well as the use of different labels for some items. It is possible, however, to accurately convert the South African government tables into a GFS table for international comparison, given that the same classification basis is used at a detailed level. The most important structural difference is that the receipts and payments tables include both current and capital transactions in the South African reporting format. In the GFS presentation of government accounts, current and capital transactions are presented in separate sub-accounts. Differences in item labelling include the following: The South African presentation does not include unclear terms such as “other” and “miscellaneous”. In addition, certain items are labelled more clearly than in the GFS version. For example, instead of using the term “sales of goods and services” for sales of goods and services produced by government, the label used is “sales of goods and services produced by a department”. The term “grant” is not used in the South African budget presentation format. In the GFS, grants include all funds flowing from one level of government to another. However, in the local context, the majority of funds flowing to other levels of government are not appropriated as grants. They are identified as direct charges against the National Revenue Fund and are therefore included under transfers. More detail is provided on various transfer categories in the South African presentation to enhance transparency and facilitate monitoring, especially of payments. Differences in presentation of national budget and national accounts The SNA is a coherent, consistent and integrated set of macroeconomic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules. It provides 13
2019 BUDGET REVIEW a comprehensive accounting framework that enables economic data to be compiled and presented in a format designed for economic analysis, making decisions and formulating policy. The national accounts are compiled for successive periods, providing a continuous flow of information for monitoring, analysis and evaluation of economic performance. The SNA provides a framework for calculating GDP, gross national income, savings, capital formation and other key economic variables. National accounts data covers all resident units in a given economy, which is divided into five sectors (including government). In the national accounts, entries reflect all resident economic units, whereas government accounts reflect government only. This inevitably leads to some differences between the two accounting frameworks. For example, own-account construction is recorded as payments for capital assets in government accounts, with a counter-entry to reflect the use of financial assets or the incurrence of a financial liability to finance the transaction. In the national accounts, the recording of the transaction is not complete until entries also reflect the production of a capital asset and the input in the asset production process. The productive activity is shown as the output in the national accounts and the input is compensation of employees and goods and services. The values for output and compensation of employees/goods and services can be derived from the government accounts for national accounts purposes, but these are not directly shown in government’s financial statements. This implies that there is a difference between the values of compensation of employees and goods and services in the government accounts, and services payable by government in the national accounts. The GFS government accounts differ in many ways from the national accounts, which form the basis for the statistics presented in Chapter 2 of the Budget Review. The most important differences are highlighted in Table W2.3. 14
ANNEXURE W2: STRUCTURE OF THE GOVERNMENT ACCOUNTS Table W2.3 Differences betw een South African reporting format and government statistics in the 2014 GFS a nd 2008 SNA Source: National Treasury 15 Diffe re nce Budge t data GFS SNA Basis of reporting Mainly cash basis; i.e. mainly cash transactions are included in the account. Estimates f or consumption of f ixed capital and remuneration-in-kind are not included in the account. In addition, the time of recording ref lects the cash f low Accrual basis; i.e. including all non-cash transactions, f or example, remuneration-in-kind and consumption of f ixed capital. In addition, the time of recording ref lects the underlying economic event, not the cash f low Accrual basis For example, goods and services are recorded w hen they are purchased For example, goods and services are recorded w hen they are used in the production process, not w hen they are purchased Compensation of employees Does not include compensation of employees paid out to government employees w ho are engaged in government ow n-account construction in association w ith a capital project, but included as part of the capitalised project cost Does not include compensation of employees payable to government employees w ho are engaged in government ow n-account construction in association w ith a capital project Includes compensation of employees payable to government employees, w ho are engaged in government ow n-account construction in association w ith a capital project Goods and services Does not include purchases of goods and services used in connection w ith a capital project w ithin the context of government ow n-account construction, but included as part of the capitalised project cost Does not include the value of goods and services used in connection w ith a capital project w ithin the context of government ow n-account construction Includes the value of goods and services used in connection w ith a capital project w ithin the context of government ow n-account construction Sales by government This item is explicitly show n in the government accounts This item is explicitly show n in the government accounts This item is not show n anyw here in the national accounts. Instead it is used to estimate f inal consumption by government Output, f inal consumption, savings, disposable income These variables are not explicitly show n in the government accounts, but the accounts can be used as a f ramew ork to derive values f or them These variables are not explicitly show n in the government accounts, but the accounts can be used as a f ramew ork to derive values f or them These variables are explicitly show n in the accounts. Estimates f or these variables have been made f rom data in the government accounts
Glossary Accounting officer The public servant who is accountable to Parliament for financial management of a government department, usually the director-general at the national level or head of the department at the provincial level. An accounting convention by which payments and receipts are recorded as they occur, even if no cash flow takes place. Debt used to purchase shares or assets. Taxes levied on commodities as a certain percentage of their value. Presentation to Parliament of the amendments to be made to the appropriations voted in the main budget for the year. Prices set outside ordinary market processes through administrative decisions by government, a public entity or a regulator. The part of the national budget that can be divided between the national, provincial and local spheres of government, after interest and the contingency reserve have been taken into account. An accounting metric that captures the expected proportion of capital and interest payments that will not be repaid. Manufacturing activities that transform raw materials and intermediary goods derived from agriculture into intermediate or final goods. The repayment of a loan by instalments over the duration of the loan. A fixed amount of money paid over a period of time as a return on an investment. A provision aimed at preventing tax avoidance. See principal purpose test. A rule that aims to prevent taxpayers from artificially avoiding permanent establishment status by breaking up a cohesive business into several small operations. The approval by Parliament of spending from the National Revenue Fund, or by a provincial legislature from a provincial revenue fund. A condition occurring when prices for a category of assets rise above the level justified by economic fundamentals. A summary statement of all the international transactions of the residents of a country with the rest of the world over a particular period of time. Corporate tax-planning strategies that exploit the gaps and mismatches in tax laws between countries to shift taxable income to lower or no-tax jurisdictions. See also tax evasion and profit shifting. Reforms developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector. The initial allocations used during the budget process, derived from the previous year’s forward estimates. One hundredth of one per cent. Manufacturing activities that transform raw minerals into higher-value products. Accrual Acquisition debt Ad valorem duties Adjustments estimate Administered prices Allocated expenditure Allowance for credit losses Agro-processing Amortisation Annuity Anti-avoidance rule Anti-fragmentation rule Appropriation Asset price bubble Balance of payments Base erosion and profit shifting Basel III Baseline Basis point Beneficiation 165
2019 BUDGET REVIEW Blended finance The combination of public, private, development and multilateral sources of financing to leverage funding for infrastructure projects. A certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date. Amount by which the purchase price of a bond is greater than its par value. The difference in yield between two bonds. An auction that aims to ease pressure on targeted areas of the redemption profile by exchanging shorter-dated debt for longer-term debt. See switch auction. Increased real tax liability that arises when the personal income tax brackets and rebates are not fully adjusted for inflation. The difference between budgeted expenditure and budgeted revenue. If expenditure exceeds revenue, the budget is in deficit. If the reverse is true, it is in surplus. Property of any kind, including assets that are movable or immovable, tangible or intangible, fixed or circulating, but excluding trading stock held for the purpose of realising a financial or economic return. Spending on assets such as buildings, land, infrastructure and equipment. A flow of investments in or out of the country. A measure of the net increase in the country’s total stock of capital goods, after allowing for depreciation. Tax levied on the income realised from the disposal of a capital asset by a taxpayer. A capital gain is the excess of the selling price over the purchase price of the capital asset. Durable goods used over a period of time for the production of other goods. See also intermediate goods. The cost of borrowing to construct a capital asset, which is then included in the cost of the asset. A financial market where individuals and institutions raise capital or funding in the form of debt or equities. Municipal categories established by the Constitution: Category A, or metropolitan municipalities; Category B, or local municipalities; and Category C, or district municipalities. An asset placed as a guarantee for the repayment of debt, to be recouped in the case of a default. Debt issued by companies through short-term promissory notes. An expert panel established by the President to investigate a specific issue. Bond Bond premium Bond spread Bond-switch programme Bracket creep Budget balance Capital asset Capital expenditure Capital flow Capital formation Capital gains tax Capital goods Capitalised interest Capital markets Category A, B and C municipalities Collateral Commercial paper issuances Commission of inquiry Conditional grants Allocations of money from one sphere of government to another, conditional on certain services being delivered or on compliance with specified requirements. Debt or credit granted by a person/entity to a connected person/entity. In the case of a holding company, for example, a subsidiary company would be a connected person. National, provincial and local government, as well as extra-budgetary government institutions and social security funds. Connected person debt/credit Consolidated general government 166
GLOSSARY Consolidated government expenditure Total expenditure by national and provincial government, social security funds and selected public entities, including transfers and subsidies to municipalities, businesses and other entities. The measure of inflation based on prices in a basket of goods and services. Expenditure on goods and services, including salaries, which are used within a short period of time, usually a year. An amount set aside, but not allocated in advance, to accommodate changes to the economic environment and to meet unforeseeable spending pressures. A government obligation, such as a guarantee, that will only result in expenditure if a specific event occurs. See government guarantee. A foreign business in which South Africans hold a greater than 50 per cent interest, usually of the share capital of a company. The transformation of state-owned enterprises into commercial entities, subject to commercial legal requirements and governance structures, while the state retains ownership. Inflation that is caused by an increase in production costs, such as wages or oil prices. Policy that has the opposite effect on economic activity to that caused by the business cycle, such as slowing spending growth in a boom period and accelerating spending in a recession. The periodic interest payment made to bondholders during the life of the bond. The interest is usually paid twice a year. The probability of financial loss resulting from failure to repay a loan or meet a contractual obligation. An indicator of the risk of default by a borrower or the riskiness of a financial instrument. Credit ratings generally fit into three broad risk categories: minimal or low, moderate and high. These categories indicate the extent of a borrower’s capacity to meet their financial obligations or the probability that the value of a financial instrument will be realised. Investments rated as high risk are considered sub-investment grade (or “junk”). An increase in private investment through the income-raising effect of government spending financed by deficits. A fall in private investment or consumption as a result of increased government expenditure financed through borrowing, thereby competing for loanable funds and raising the interest rate, which curtails private investment and consumption spending. A digital medium of exchange that uses cryptography to secure its transactions, control the creation of additional units and verify the transfer of assets. The potential for a change in the price of a currency that would affect investors with assets, liabilities or operations denominated in other currencies. The difference between total imports and total exports, taking into account service payments and receipts, interest, dividends and transfers. The current account can be in deficit or surplus. See also trade balance. The difference between revenue and current expenditure, which consists of compensation of employees, goods and services, and interest and rent on land. Government expenditure on salaries and goods and services, such as rent, maintenance and interest payments. See also consumption expenditure. Consumer price index (CPI) Consumption expenditure Contingency reserve Contingent liability Controlled foreign company Corporatisation Cost-push inflation Countercyclical fiscal policy Coupon (bond) Credit risk Credit rating Crowding-in Crowding-out Cryptocurrency Currency risk Current account (of the balance of payments) Current balance Current expenditure 167
2019 BUDGET REVIEW Customs duties Debenture Tax levied on imported goods. An unsecured debt instrument backed by general creditworthiness of the issuer rather than by specific assets. The interest on government debt and other costs directly associated with borrowing. The ratio of cash from operating activities available to service debt payments. The set of fixed repayment dates and amounts to which an issuer of debt, such as a preferred stock or bond, has committed to meeting. A consistent decrease in the price of goods and services. The reduction of debt previously used to increase the potential return of an investment. A reduction in the value of fixed capital as a result of wear and tear or redundancy. A reduction in the external value of a currency. A financial asset that derives its value from an underlying asset, which may be a physical asset such as gold or a financial asset such as a government bond. Foreign countries from which income may be exempt from South African tax under certain circumstances. See also double tax agreement. State agencies that aim to meet the credit needs of riskier but socially and economically desirable projects that are beyond the acceptance limits of commercial banks. An economy based on digital computing technologies – increasingly through internet-based markets. Taxes charged on taxable income or capital of individuals and legal entities. A trust where the executor has the choice of whether and how much of the trust’s income or capital is to be distributed to beneficiaries. The beneficiaries have only provisional rights to the income or capital of the trust. Total income less all taxes and employee contributions. An excess of current expenditure, including the depreciation of fixed capital, over current income. The distribution of a portion of a company’s earnings to a class of its shareholders. A tax on dividends that is subtracted and withheld by a company or intermediary before the net dividend is paid to the shareholder. See also withholding tax. The allocation of funds between spheres of government, as required by the Constitution. See also equitable share. The total level of spending in an economy, including imports but excluding exports. An agreement between two countries to prevent income that is taxed in one country from being taxed in the other as well. See also designated countries. The part of the population that is of working age and is either employed or seeking work. The cost of an alternative that must be forgone to pursue a certain action. In other words, the benefits that could have been received by taking an alternative action. Also known as opportunity cost. An increase in the total amount of output, income and spending in the economy. Debt-service costs Debt-service coverage ratio Debt redemption profile Deflation Deleveraging Depreciation (capital) Depreciation (exchange rate) Derivative financial instrument Designated countries Development finance institutions Digital economy Direct taxes Discretionary trust Disposable income Dissaving Dividend Dividend withholding tax Division of revenue Domestic demand Double tax agreement Economically active population Economic cost Economic growth 168
GLOSSARY Economic rent The difference between the return made by a factor of production (capital or labour) and the return necessary to keep the factor in its current occupation. For example, a firm making excess profits is earning economic rent. Actual tax liability (or a reasonable estimate thereof) expressed as a percentage of a pre-tax income base rather than as a percentage of taxable income. In other words, tax rates that take into account not only the statutory or nominal tax rate, but also other aspects of the tax system (for example, allowable deductions), which determine the tax liability. A provision in a contract modifying its cash flows by making them dependent on an underlying measure – such as interest or exchange rates, or commodity prices – the value of which changes independently. A name given by international investors to middle-income economies. The ratio of employment growth to economic growth. The allocation of revenue to the national, provincial and local spheres of government as required by the Constitution. See also division of revenue. Raising money by selling shares of stock to investors, who receive an ownership interest in return. Rules that regulate the flow of currency out of South Africa, or restrict the amount of foreign assets held by South African individuals and companies. A foreign-currency amount relating to a debt, loan or foreign-exchange contract. Funds that track indices, commodities or baskets of assets, and trade like stocks. Taxes on the manufacture or sale of certain domestic or imported products. Excise duties are usually charged on products such as alcoholic beverages, tobacco and petroleum. Public entities not directly funded from the fiscus. The maximum allowable level of expenditure to which government has committed itself. A change in the value of an asset or liability resulting from the periodic reassessment of its expected future economic in-or outflows. A government policy on higher education and training that makes provision for full-cost-of-study bursaries to students below a specified household-income threshold, covering tuition fees, prescribed study material, meals, and a certain level of accommodation and/or travel allowances. A statement of all financial transactions between the nation and the rest of the world, including portfolio and fixed investment flows and movements in foreign reserves. An independent body established by the Constitution to make recommendations to Parliament and provincial legislatures about financial issues affecting the three spheres of government. A body responsible for regulating and supervising the market conduct of financial institutions and market infrastructure. An independent institution established by statute that regulates insurers, intermediaries, retirement funds, friendly societies, unit trust schemes, management companies and financial markets. Effective tax rate Embedded derivative Emerging economies Employment coefficient Equitable share Equity finance Exchange control Exchange item Exchange-traded funds Excise duties Extra-budgetary institutions Expenditure ceiling Fair-value adjustment Fee-free higher training education and Financial account Financial and Fiscal (FFC) Commission Financial Sector Conduct Authority (FSCA) Financial Services Board 169
2019 BUDGET REVIEW Financial Stability Board An international body made up of representatives of financial authorities and institutions, and central banks. It proposes regulatory, supervisory and other policies in the interest of financial stability. The 12 months according to which companies and organisations budget and account. See also fiscal year. An abbreviation of “financial technology”, referring to new technologies and innovations that aim to compete with traditional methods to deliver financial services more efficiently. Policy aimed at reducing government deficits and debt accumulation. The framework that implements government’s macroeconomic policy by providing estimates of revenue, expenditure, borrowing and debt. The detailed legal definition appears in the Money Bills Amendment Procedure and Related Matters Amendment Act (2018). The combined overall economic impact that fiscal policy has on the economy. The outflow of revenue from an economy through tax evasion and avoidance. The process of marking a product with a prescribed identification (or chemical). Marking allows the South African Revenue Service to trace products back to the manufacturers in order to collect excise duties. Policy on taxation, public spending and borrowing by the government. The ability of government’s budget to provide additional resources for a desired programme without jeopardising fiscal or debt sustainability. The 12 months on which government budgets are based, beginning 1 April and ending 31 March of the subsequent calendar year. A bond that pays a specific interest rate over a specified period of time. Spending on buildings, machinery and equipment contributing to production capacity in the economy. See also gross fixed-capital formation. A bond on which the interest rate is reset periodically in line with a money market reference rate. The exchange of principal and/or interest payments in one currency for those in another. The acquisition of a controlling interest by governments, institutions or individuals of a business in another country. The total amount of contracts for the future exchange of foreign currency entered into by the Reserve Bank at any given point in time. Transactions involving an agreed exchange rate at which foreign currency will be purchased or sold at a future date. A benefit supplementing an employee’s wages or salary, such as medical insurance, company cars, housing allowances and pension schemes. An excise tax on liquid fuels. The movement of a function from one departmental vote or sphere of government to another. A pension scheme in which expected future benefits are funded in advance and as entitlement accrues. Reserves held by the Reserve Bank to meet foreign exchange obligations and to maintain liquidity in the presence of external shocks. Financial year Fintech Fiscal consolidation Fiscal framework Fiscal incidence Fiscal leakage Fiscal marking Fiscal policy Fiscal space Fiscal year Fixed-rate bond Fixed investment/capital formation Floating rate notes Foreign currency swaps Foreign direct investment (FDI) Forward book Forward cover Fringe benefit Fuel levy Function shift Funded pension arrangements Gold and foreign exchange reserves 170
GLOSSARY Government debt The total amount of money owed by the government as a consequence of its past borrowing. An assurance made by government to a lender that a financial obligation will be honoured, even if the borrowing government entity is unable to repay the debt. See contingent liability. A policy document intended for public discussion. The sum of the main budget balance, extraordinary receipts and payments (referred to as National Revenue Fund receipts and payments), and maturing debt. The amount is funded through domestic short-and long-term loans, foreign loans and changes in cash balances. A measure of the total national output, income and expenditure in the economy. GDP per head is the simplest overall measure of welfare, although it does not take account of the distribution of income, nor of goods and services that are produced outside the market economy, such as work within the household. A measure of the total increase in prices in the whole economy. Unlike CPI inflation, GDP inflation includes price increases in goods that are exported and intermediate goods such as machines, but excludes imported goods. The addition to a country’s fixed-capital stock during a specific period, before provision for depreciation. The value of output less intermediate consumption. It is also a measure of the contribution to the economy made by an industry or sector. The ratio of company debt to equity capital. An international forum made up of finance ministers and central bank governors from 20 of the world’s largest economies. An action taken by a buyer or seller to protect income against changes in prices, interest rates or exchange rates. A principle in taxation that holds that similarly situated taxpayers should face a similar tax treatment or tax burden. In other words, taxpayers with the same amount of income or capital should be accorded equal treatment. Loans or advances that may not be collected in full. A reduction in the recorded value of a long-lived asset arising from circumstances that prevent the asset from generating the future economic benefits previously expected and recorded. When a firm sells goods locally at the price customers would pay if they were to import the same goods from another country. The portion of the net capital gain derived from the disposal of an asset that will be taxed at the applicable rate. Export-oriented manufacturing sites linked to an international air or sea port, supported by incentives to encourage investment and job creation. An increase in the overall price level of goods and services in an economy over a specific period of time. A monetary policy framework intended to achieve price stability over a certain period of time. The Department of Energy’s long-term plan for the country’s energy mix and generation expansion in order to meet electricity demand. Goods produced to be used as inputs in the production of final goods. Government guarantee Green paper Gross borrowing requirement Gross domestic product (GDP) Gross domestic product inflation Gross fixed-capital formation Gross value added Gearing ratio Group of Twenty (G20) Hedging Horizontal equity Impaired advances Impairment Import parity pricing Inclusion rate Industrial development zone Inflation Inflation targeting Integrated Resource Plan Intermediate goods 171
2019 BUDGET REVIEW Intra-state debt Intergenerational equity Money that different organs of state owe to each other. A value based on ensuring that future generations do not have to repay debts taken on today, unless they also share in the benefits of assets. Stocks of goods held by firms. An increase in inventories reflects an excess of output relative to spending over a period of time. The relative amount of labour used to produce a unit of output. The estimated present value of the per-unit cost of electricity over the lifetime of a generating asset. The ease with which assets can be bought and sold. The amount of liquid or freely convertible assets that banks are required to hold relative to their liabilities for prudential and regulatory purposes. The risk that an asset might not easily and quickly be converted into cash through sale, or the risk to a debtor that it cannot meet its current debt obligations. A one-time payment for the total or partial value of an asset, usually received in place of recurring smaller payments. The broadest definition of money supply in South Africa, including notes and coins, demand and fixed deposits, and credit. The branch of economics that deals with the whole economy – including issues such as growth, inflation, unemployment and the balance of payments. Rules that protect the stability of the financial sector and guard against systemic risk. The rate of tax on an incremental unit of income. A penalty rate of interest charged by the Reserve Bank for lending to financial institutions in the money market in excess of the daily liquidity provided to the money market at the repurchase rate. See also repurchase agreements. Tradable financial securities listed with a securities exchange. A method for determining whether someone qualifies for state assistance. The technical committee responsible for evaluating the medium-term expenditure framework budget submissions of national departments and making recommendations to the Minister of Finance regarding allocations to national departments. The three-year spending plans of national and provincial governments, published at the time of the Budget. The branch of economics that deals with the behaviour of individual firms, consumers and sectors. The political committee that considers key policy and budgetary issues that pertain to the budget process before they are tabled in Cabinet. Policy concerning total money supply, exchange rates and the general level of interest rates. The total stock of money in an economy. The projected revenue and expenditures that flow through the National Revenue Fund. It does not include spending by provinces or local government from their own revenues. A planning framework prepared by the National Planning Commission that aims to eliminate poverty and reduce inequality by 2030. Inventories Labour intensity Levelised cost of electricity Liquidity Liquidity requirements Liquidity risk Lump-sum benefit M3 Macroeconomics Macroprudential regulation Marginal income tax rate Marginal lending rate Marketable securities Means test Medium Term Expenditure Committee (MTEC) Medium-term expenditure framework (MTEF) Microeconomics Ministers’ Committee on the Budget (MinComBud) Monetary policy Money supply National budget National Development Plan (NDP) 172
GLOSSARY National Revenue Fund The consolidated account of the national government into which all taxes, fees and charges collected by the South African Revenue Service and departmental revenue must be paid. Short-term deposit instruments issued by banks, at a variable interest rate, for a fixed period. The main budget balance. Exports less imports. Gold and foreign exchange reserves minus the oversold forward book. The figure is expressed in dollars. The difference between the value of exports and the value of imports. A multilateral lending institution being established by Brazil, Russia, India, China and South Africa. The current rate of exchange between the rand and foreign currencies. The “effective” exchange rate is a trade-weighted average of the rates of exchange with other currencies. The return, or wage, to employees at the current price level. An auction in which an investor agrees to purchase a certain number of securities such as bonds at the average price of all competitive bids over a given period of time. Government-owned or controlled organisations that deliver goods and non-financial services, trading as business enterprises, such as Eskom or Transnet. Total expenditure by government less debt-service costs. Income received by government as a result of administrative charges, licences, fees, sales of goods and services, and so on. Revised salary structures unique to identified occupations in the public service, including doctors, nurses and teachers. The value of that which must be given up to achieve or acquire something. It is represented by the next highest valued alternative use of a resource. An organisation of 36 mainly industrialised member countries. South Africa is not a member. The pay-as-you-earn (PAYE) system of income tax withholding requires employers to deduct income tax, and in some cases, the employees’ portion of social benefit taxes, from each paycheque delivered to employees. Tax an employer withholds and/or pays on behalf of employees based on employee wages or salaries. A fixed place of business from which a company operates. When two countries have a tax treaty, the concept of “permanent establishment” is used to determine the right of one state to tax the profits of the business in the other state. See also anti-fragmentation rule. Additional money in the fiscus to fund new and crucial priorities. Investment in financial assets such as stocks and bonds. The fastest growth an economy can sustain without increasing inflation. A commission established by Cabinet to develop, review and coordinate a 20-year infrastructure plan. Negotiable certificate of deposit Net borrowing requirement Net exports Net open foreign currency position Net trade New Development Bank Nominal exchange rates Nominal wage Non-competitive bid auction Non-financial public enterprises Non-interest expenditure Non-tax revenue Occupation-specific salary dispensation Opportunity cost Organisation for Economic Co-operation and Development PAYE Payroll tax Permanent establishment Policy reserve Portfolio investment Potential growth Presidential Infrastructure Coordinating Commission (PICC) 173
2019 BUDGET REVIEW Price discovery The process of determining the price level of a commodity or asset, based on supply and demand factors. The extent to which changes in price affect consumer purchasing behaviour. The issuance of new bonds in the primary market by means of an auction. The difference between total revenue and non-interest expenditure. When revenue exceeds non-interest expenditure there is a surplus. The market where new securities (bonds or equities) are issued or sold by a company or government in the capital markets for the first time. The agricultural, forestry, fishing, mining and quarrying sectors of the economy. A test where the benefits of a tax treaty are denied if it is reasonable to conclude that obtaining the benefit was one of the principal purposes behind the arrangement or transaction. Credit provided to the private sector. This includes all loans, credit cards and leases. The full or partial sale of state-owned enterprises to private individuals or companies. A measure of inflation based on the prices of production inputs as reported by producers across different sectors. A measure of the amount of output generated from every unit of input. Typically used to measure changes in labour efficiency. The allocation of income and expenses between related corporations or branches of the same legal entity to reduce overall tax liability. The authority responsible for the prudential regulation of banks, insurers, cooperative financial institutions, financial conglomerates and certain market infrastructure. Organisations that are mainly funded by donations from the public and other institutions, which engage in social activities to meet the needs of the general public. Companies, agencies, funds and accounts that are fully or partly owned by government or public authorities and are regulated by law. The act regulating financial management of national and provincial government, including the efficiency and effectiveness of public expenditure and the responsibilities of those engaging with government financial management. Goods and services that would not be fully provided in a pure free-market system and are largely provided by government. A government-owned investment management company that invests funds on behalf of public-sector entities. Its largest client is the Government Employees Pension Fund. A contractual arrangement whereby a private party performs a government function and assumes the associated risks. In return, the private party receives a fee according to predefined performance criteria. See unitary payment. National government, provincial government, local government, extra-budgetary governmental institutions, social security funds and non-financial public enterprises. The consolidated cash borrowing requirement of general government and non-financial public enterprises. Price sensitivity Primary bond auctions Primary deficit/surplus Primary market Primary sector Principal purpose test Private-sector credit extension Privatisation Producer price index (PPI) Productivity Profit shifting Prudential Authority Public-benefit organisations (PBOs) Public entities Public Finance (PFMA) Management Act Public goods Public Investment Corporation (PIC) Public-private partnerships (PPPs) Public sector Public-sector borrowing requirement 174
GLOSSARY Purchasing managers’ index (PMI) A composite index measuring the change in manufacturing activity compared with the previous month. An index value of 50 indicates no change in activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity. An establishment-based survey conducted by Statistics South Africa to obtain information about the number of employees and gross salaries paid. A household-based survey conducted by Statistics South Africa to measure the dynamics of the labour market, producing indicators such as employment, unemployment and inactivity. A company that evaluates the ability of countries or other borrowers to honour their debt obligations. Credit ratings are used by international investors as indications of sovereign risk. See also credit rating. A measure of the rate of exchange of the rand relative to a trade-weighted average of South Africa’s trading partners’ currencies, adjusted for price trends in South Africa and the countries included. Expenditure measured in constant prices after taking account of inflation. The level of interest after taking account of inflation. The return, or wage, to employees, measured at a constant price level. Injection of funds into a company or entity to aid liquidity, either as a loan or in return for equity. A period in which national output and income decline. A recession is usually defined as two consecutive quarters of negative growth. The return of an investor’s principal in a fixed-income security, such as a preferred stock or bond. The repayment of debt at a scheduled time with the proceeds of new loans. The risk that government will not be able to raise money to repay debt at any scheduled point, or that it will have to do so at a high cost. An economic policy intended to boost economic activity in a geographical area extending beyond one country. The costs of personnel, including salaries, housing allowances, car allowances and other benefits received by personnel. Short-term contracts between the Reserve Bank and private banks in the money market to sell specified amounts of money at an interest rate determined by daily auction. The rate at which the Reserve Bank lends to commercial banks. Holdings of foreign exchange, either by the Reserve Bank only or by the Reserve Bank and domestic banking institutions. A tax system in which the worldwide income accruing to a resident of a country is subject to the taxes of that country. A piped water network that ensures that water is collected and treated before it reaches the consumer. The difference between the value of a foreign currency deposit from the original (historical) rate to execution of a trade based on the spot rate. A return that compensates for uncertainty. The difference between income and spending. Quarterly Employment Statistics Quarterly Labour Force Survey Rating agency Real effective exchange rate Real expenditure Real interest rate Real wage Recapitalisation Recession Redemption Refinancing Refinancing risk Regional integration Remuneration Repurchase agreements Repurchase (repo) rate Reserves (foreign exchange) Residence-based income tax system Reticulation scheme Revaluation gain/loss Risk premium Saving 175
2019 BUDGET REVIEW Seasonally adjusted Removal of seasonal volatility (monthly or quarterly) from a time series. This provides a measure of the underlying trend in the data. Market where securities are bought and sold by market participants in the capital market following primary market issuance. The price at which securities are bought and sold in the secondary market. A rebate from income tax, in addition to the primary rebate, that is available to taxpayers aged 65 years and older. The part of the economy concerned with the manufacture of goods. Tax on dividends declared by a company, calculated at the rate of 10 per cent of the net amount of dividends declared. This was discontinued in 2012 and replaced with a 15 per cent dividend withholding tax. Non-profit entities registered in terms of Section 21 of the Companies Act. Institutions funded through skills development levies, responsible for learnership programmes and implementing strategic sector skills plans. Debt backed or secured by collateral to reduce the risk of lending. The pooling of assets into a financial instrument to sell to different types of investors. Services involve transactions of non-tangible commodities, while transfers are unrequited transactions that do not generate a counter-economic value (for example, gifts and grants). A person who directly or indirectly materially controls or influences the business or strategy of a financial institution. Secondary market Secondary market pricing Secondary rebate Secondary sector Secondary tax on companies (STC) Section 21 company Sector education and authorities Secured debt instruments Securitisation training Service and transfer payments Significant owner Skills development levy A payroll tax designed to finance training initiatives in terms of the skills development strategy. Infrastructure that supports social services. Social benefits available to all individuals, funded wholly or partly by the state. A system in which income is taxed in the country where the income originates. An agreement between South Africa, Botswana, eSwatini, Lesotho and Namibia that allows for the unrestricted flow of goods and services, and the sharing of customs and excise revenue. A regional intergovernmental organisation that promotes collaboration, economic integration and technical cooperation throughout southern Africa. Debt issued by a government. An assessment of the likelihood that a government will default on its debt obligations. Planning to influence the geographic distribution of people and economic activity. A designated zone where business and trade laws incentivise trade, investment and employment. A tax on each unit of output or sale of a good, unrelated to the value of a good. Government’s expenditure obligations that do not require a vote or statutory provision, including contractual guarantee commitments and international agreements. Amounts appropriated to be spent in terms of statutes and not requiring appropriation by vote. Social infrastructure Social wage Source-based income tax system Southern African Customs Union (SACU) agreement SouthernAfrican Community (SADC) Sovereign debt Sovereign debt rating Development Spatial planning Special economic zones Specific excise duty Standing appropriations Statutory appropriations 176
GLOSSARY Sterilisation Action taken by the Reserve Bank to neutralise excess cash created in the money market when purchasing foreign currency. A representation of what government revenue and expenditure would be if output were at its potential level, with cyclical variations stripped out. Imbalances in the structure of the economy that hinder growth and development. An auction to exchange bonds to manage refinancing risk or improve tradability. A large loan in which a group of banks work together to provide funds, which they solicit from their clients for the borrower. A period allowed by tax authorities during which taxpayers who are outside the tax net, but should be registered for tax purposes, can register for tax without incurring penalties. When individuals or businesses legitimately use provisions in the tax law to reduce their tax liability. The aggregate value of income, sales or transactions on which particular taxes are levied. The relationship between total tax revenue collections and economic growth. This measure includes the effects of policy changes on revenue. A value above one means that revenues are growing faster than the economy and below one means they are growing below the rate of GDP growth. When individuals or businesses illegally reduce their tax liability. Government revenue forgone due to provisions that allow deductions, exclusions, or exemptions from taxable income. The revenue can also be forgone through the deferral of tax liability or preferential tax rates. A measure of tax evasion that emerges from comparing the tax liability or tax base declared to the tax authorities with the tax liability or tax base calculated from other sources. Specific provisions in the tax code that provide favourable tax treatment to individuals and businesses to encourage specific behaviour or activities. The final distribution of the burden of tax. Statutory incidence defines where the law requires a tax to be levied. Economic incidence refers to those who experience a decrease in real income as a result of the imposition of a tax. Unintended weaknesses in the legal provisions of the tax system used by taxpayers to avoid paying tax liability. The willingness, or motivation, of citizens to pay tax. This is separate from the statutory obligation to pay taxes, but may influence tax compliance. For public finance comparison purposes, a country’s tax burden, or tax-to-GDP ratio, is calculated by taking the total tax payments for a particular fiscal year as a fraction or percentage of the GDP for that year. The time between issuance and expiry. An index measuring the ratio of a country’s export prices relative to its import prices. The part of the economy concerned with the provision of services. An index used to measure the efficiency of all inputs that contribute to the production process. Structural budget balance Structural constraints Switch auction Syndicated loan Tax amnesty Tax avoidance Tax base Tax buoyancy Tax evasion Tax expenditure Tax gap Tax incentives Tax incidence Tax loopholes Tax morality Tax-to-GDP ratio Term-to-maturity Terms of trade Tertiary sector Total factor productivity 177
2019 BUDGET REVIEW Trade balance The monetary record of a country’s net imports and exports of physical merchandise and services. See also current account. The system of tariffs, quotas and quantitative restrictions applied to protect domestic industries, together with subsidies and incentives used to promote international trade. The value of the rand pegged to or expressed relative to a market basket of selected foreign currencies. Short-term government debt instruments that yield no interest but are issued at a discount. Maturities vary from one day to 12 months. When related companies in different countries establish a third entity in another location to take advantage of a favourable tax arrangement. The theoretical level of GDP growth, where growth above the trend rate results in macroeconomic imbalances such as rising inflation or a weakening of the current account. Potential expenditure provision not allocated to a particular use. It mainly consists of the contingency reserve and amounts of money left unallocated by provinces. All those of working age who are unemployed, including those actively seeking employment and discouraged work seekers. Those of working age, who are unemployed and actively seeking work (excludes discouraged work seekers). The payment made to a private party for meeting its obligations in a public-private partnership. The cost of labour per unit of output, calculated by dividing average wages by productivity (output per worker per hour). Debt not backed or secured by collateral to reduce the risk of lending. A loan that is not backed or secured by any type of collateral to reduce the lender’s risk. An assessment by a registered auditing firm or the Auditor-General of South Africa asserting that the financial statements of a department, entity or company are free of material misstatement. The amount of value-added tax (VAT) repayable by SARS to a VAT vendor. In terms of South African regulation, a company whose sole objective is managing investments in qualifying companies (small businesses). Investments in venture capital companies are tax deductible. A doctrine in taxation that holds that differently situated taxpayers should be treated differently in terms of income tax provisions. In other words, taxpayers with more income and/or capital should pay more tax. The transfer of resources from one programme to another within the same department during a financial year. The right to ownership of an asset that cannot be arbitrarily taken away by a third party. An appropriation voted by Parliament. A departmental account that ring-fences revenue from the sale of bulk water and related services to secure funding to manage the sustainability of water resources and infrastructure. Trade regime Trade-weighted rand Treasury bills Treaty shopping Trend GDP growth Unallocated reserves Unemployment (broad definition) Unemployment (official definition) Unitary payment Unit labour cost Unsecured debt instruments Unsecured lending Unqualified audit VAT refund Venture capital company Vertical equity Virement Vested right Vote Water trading account 178
GLOSSARY Weighted average cost of capital The average rate of return an organisation expects to pay to investors in its securities, such as bonds, debt and shares. Each category of security is accorded a proportionate weight in the calculation. Tax on income deducted at source. Withholding taxes are widely used for dividends, interest and royalties. A policy document used to present government policy preferences. A financial return or interest paid to buyers of government bonds. The yield/rate of return on bonds includes the total annual interest payments, the purchase price, the redemption value and the time remaining until maturity. A graph showing the relationship between the yield on bonds of the same credit quality but different years to maturity at a given point in time. Withholding tax White paper Yield Yield curve 179
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STATISTICAL ANNEXURE Statistical annexure Explanatory notes The statistical tables present details of the main budget, consolidated national and provincial expenditure, consolidated government expenditure, the borrowing requirement and financing of government debt, total government debt, and provisions and contingent liabilities. The tables are categorised according to government levels, from the main budget to the consolidated government account. The main budget consists of National Revenue Fund receipts, expenditure either voted by Parliament or allocated by statutory appropriation, and the financing of the deficit. This is the national budget, including transfers to other spheres of government. Consolidated national, provincial and social security funds expenditure consists of the main (national) budget, and the provincial and the social security funds’ budgets or expenditure. These budgets are aggregated and transfers between the three spheres of government are netted out to arrive at a total consolidated expenditure figure. The consolidated government revenue, expenditure and financing budget includes national, provincial and social security funds, the Reconstruction and Development Programme (RDP) Fund and national public entities. This is referred to as the consolidated budget. While government revenues are concentrated at national level, a large proportion of expenditure has shifted to the provinces since 1994. Equitable share transfers to the nine provinces are included as a government statutory commitment on the National Treasury vote, while the local government equitable share is appropriated on the vote of the Department of Cooperative Governance and Traditional Affairs. The consolidated government account consists of all the activities of national and provincial government, and includes most of the listed public entities. The consolidation also includes several national government business enterprises. More than 70 per cent of total national expenditure on the 2019/20 main budget consists of transfer payments to other levels of general government, which means that economic and functional classifications of national budget expenditure are not comprehensive. For the purposes of analysis, it would be preferable to present economic and 183 1 Main budget: revenue, expenditure, budget balance and financing, 2012/13 to 2021/22 2 Main budget: estimates of national revenue – summary of revenue, 2001/02 to 2021/22 3 Main budget: estimates of national revenue – detailed classification of revenue, 2015/16 to 2019/20 4 Main budget: expenditure defrayed from the National Revenue Fund by vote, 2015/16 to 2021/22 5 Consolidated national, provincial and social security funds expenditure: economic classification, 2015/16 to 2021/22 6 Consolidated national, provincial and social security funds expenditure: functional classification, 2015/16 to 2021/22 7 Consolidated government revenue and expenditure: economic classification, 2015/16 to 2021/22 8 Consolidated government expenditure: functional classification, 2015/16 to 2021/22 9 Consolidated government revenue, expenditure and financing, 2015/16 to 2021/22 10 Total debt of government, 1994/95 to 2021/22 11 Net loan debt, provisions and contingent liabilities, 2008/09 to 2021/22
2019 BUDGET REVIEW functional classifications of general government expenditure, but this would require information on expenditure at all levels of general government, its financing through revenue, balances brought forward and transfer payments (mainly from the national budget). This information is not readily available for local government. Historical data on general government finances is, however, published by the Reserve Bank in its Quarterly Bulletin and by Statistics South Africa. Change in recording of extraordinary receipts and payments in the budget tables Since 2014, the consolidated government accounts have been presented in a more transparent format in line with the International Monetary Fund’s Government Finance Statistics manual (2014). This format provides details of operating activities, capital and infrastructure investment, as well as transactions in financial assets and liabilities. The calculation of the budget balance includes all government transactions. Previously, extraordinary receipts and payments were added to the budget deficit to calculate government’s net borrowing requirement. In the new format, there is no longer a difference between the budget balance and the net borrowing requirement. These transactions are now referred to as National Revenue Fund receipts and payments. Treatment of foreign grants to the RDP Fund All international technical assistance and other RDP-related grants are paid to the RDP Fund account, which is separated from government accounts. Departments incur expenditure on RDP-related projects through direct requisitions from this account. However, disbursements of foreign grants and technical assistance are included in the consolidated national and provincial expenditure estimates in Tables 5 and 6, and in the consolidated government expenditure in Table 7. Adjustments due to transactions in government debt As part of the state’s active management of its debt portfolio, government bonds are repurchased or switched into new bonds. In the process, government may make a capital profit, which is a book entry change in the bond discount. This capital profit does not represent actual cash flow and is regarded as a “book profit”, which lowers the outstanding debt. A premium may also be accrued, or payable, in managing the debt portfolio or when entering into new loans. Under the new format, premiums paid or received are included as National Revenue Fund receipts and payments, and no longer categorised as extraordinary receipts and payments. Sources of information The information in Tables 1 to 11 on national and provincial government and public entity finances is obtained from the following sources: • • • • • Reports of the Auditor-General on the Appropriation and Miscellaneous Accounts Printed estimates of revenue and expenditure for the national and provincial budgets The Reserve Bank The South African Revenue Service (SARS) Monthly press releases from the National Treasury, published in terms of section 32 of the Public Finance Management Act (1999). Main budget: revenue, expenditure, budget balance and financing (Table 1) Table 1 summarises the main budget balances since 2012/13 and medium-term estimates to 2021/22. In line with the economic reporting format introduced in 2004/05, the revenue classification shows departmental sales of capital assets separately. Repayments of loans and advances, which were previously shown as negative expenditure, have been reclassified as revenue. Given that revenue increased and expenditure decreased by the same amount, the national budget deficit is unaffected. 184
STATISTICAL ANNEXURE Appropriations by vote are divided into current payments, transfers and subsidies, payments for capital assets and payments for financial assets. Both current and capital transfers are included in transfers and subsidies, in line with the economic reporting format’s requirements. The deficit figures presented in this table differ from those presented in budgets before 1995/96 because a number of items that were previously regarded as “below-the-line” expenditure have been included in total expenditure. In addition, revaluations of foreign loan obligations are excluded from expenditure, in keeping with international practice. Under the “financing” item, domestic short-term loans include net transactions in Treasury bills and borrowing from the Corporation for Public Deposits. Long-term loans include all transactions in domestic government bonds and foreign loans (new loan issues, repayments on maturity, buybacks, switches and reverse purchase transactions). Main budget: estimates of national revenue (Tables 2 and 3) Table 2 presents a summary of revenue and the details are set out in Table 3. Main budget revenue collections are recorded on an adjusted cash basis as the revenue is recorded in the SARS ledgers. Tax revenue is classified according to standard international categories and departmental receipts according to the economic reporting format’s requirements. In Table 3, a large amount of data cannot be reclassified to align with the economic reporting format because departments capture these transactions in their ledgers as miscellaneous receipts. Main budget: expenditure defrayed from the National Revenue Fund by vote (Table 4) Table 4 contains estimates of expenditure on national budget votes for the period 2015/16 to 2021/22. In 2015/16, amounts included in the budget estimate, the adjusted appropriation and the revised estimate on each vote are shown. Historical data has been adjusted to account for function shifts between departments. As a result, the figures presented for some departments may differ from their financial statements. Total expenditure, however, is not influenced by these changes. Consolidated national, provincial and social security funds expenditure (Tables 5 and 6) Tables 5 and 6 show the economic and functional classification of payments for consolidated national and provincial government and social security funds, including the Unemployment Insurance Fund, the Road Accident Fund and the Compensation Funds. Provincial expenditure estimates are preliminary because their budgets are tabled after the national budget. As such, these estimates are subject to change before being tabled in provincial legislatures. The functional classification The functional classification in this annexure is aligned with the classification of government functions set out in the Government Finance Statistics manual. The historical data published in these tables has been reclassified accordingly. Chapter 5 of the Budget Review, which sets out the medium-term expenditure framework, outlines the budget allocations across these function groups. To support this approach, data at programme and entity level is aggregated into spending categories, which provides for a higher level of aggregation than in the functional classification. For example, functional classification tables include local development and social infrastructure as distinct functions. The fiscal statistics are an outcome of the budget process and can only be used as a guide to categorise expenditure for budgeting purposes. Some of the most important differences between the key spending categories presented in Chapter 5 and the more detailed functional classification presented in the statistical tables are as follows: • Learning and culture: Expenditure in this category includes spending related to school and tertiary education, as well as arts, culture, sport and recreation. In the statistical tables, this expenditure is included as part of either the education or recreation, culture and religion functions. 185
2019 BUDGET REVIEW • Economic development: Expenditure related to innovation, science and technology is included in the economic development function group, while in the statistical tables it is classified as research and development according to the function to which it relates. Peace and security: This includes expenditure by defence, police, justice and home affairs. In the statistical tables, the bulk of this expenditure is included in the public order and safety function, with home affairs split between general public services and public order and safety. General public services: In the key spending categories, transfers made to international organisations are classified within the category of the paying department. In the statistical tables, they are classified under general public services. • • Consolidated government revenue and expenditure (Tables 7 and 8) Tables 7 and 8 show the economic and functional classification of payments for the consolidated government budget. This consists of the consolidated national, provincial and social security figures presented in Tables 5 and 6, combined with general government entities, as well as some government business enterprises. The government budget consolidation includes all entities controlled and mainly financed by government revenue, where such revenue is defined as either taxes, levies and administrative or service fees prescribed by government, or direct budgetary support in the form of transfer payments. This consolidation also includes several government business enterprises, based on the principle that they either sell most of their goods and services to government institutions or departments at regulated prices, and are therefore not businesses in the true sense of the word, or they are directly involved in infrastructure financing and development. Accordingly, state-owned entities are broadly identified as one of the following: • Enterprises that sell mainly to government departments or institutions, have no clear competitors and whose prices are therefore not clearly market related. Science councils that conduct research or fulfil a regulatory or advisory function, with government-determined regulatory or administration fees. Government-regulated businesses that are primarily financed by a dedicated tax, administration fee or levy, (the level of which is dictated by government) or that are directly involved in the maintenance or extension of critical infrastructure. • • To present consolidated accounts, all units use the same accounting standards and policies. The format of the accounts, terminology used, classification, transaction coverage and accounting base (cash or accrual) must be the same. In this respect, the consolidated government budget is prepared on an adjusted cash basis of accounting. This is not strictly comparable to the financial information published in the consolidated financial statements, which has two components – a consolidation of departments using the modified cash basis of accounting and a separate consolidation of public entities that apply the accrual basis of accounting. All transactions that occur between units being consolidated are eliminated. A transaction of one unit is matched with the same transaction recorded for the second unit and both transactions are eliminated from the consolidation. For example, if a public entity sells a service to a government department and data for the two units is being consolidated, neither the sale nor the purchase of the service is reported. In this way, only transactions between government and non-government entities are recorded, without inflating total government revenue as a result of internal transactions. Not all intra-entity transactions are eliminated, however, because they are not always identifiable in the accounting systems of government and many of its agencies. Only those that can be identified have been eliminated. These broadly include: • Transactions involving transfers from one government unit to another, including transfers made by national departments to public entities and transfers between public entities (such as Water Trading Entity transfers to water boards). 186
STATISTICAL ANNEXURE • Purchases of goods and services from other government units included in the consolidation (such as transactions between the Trans-Caledon Tunnel Authority, water boards and the Water Trading Entity). As data collection and recording procedures for transactions improve, additional intra-entity transactions will be identified and removed from the consolidated government budget. A total of 163 national and provincial departments and 186 entities are included in the 2019 consolidated government budget. The National Treasury is committed to presenting a full consolidation of the whole of general government over time. Considerable work has been done to align the local government accounts with national and provincial accounts. A classification reporting framework has been developed for municipalities as a first step towards the consolidation of the financial information of all three spheres of government. Consolidated government revenue, expenditure and financing (Table 9) Table 9 presents the government account, which distinguishes between government's operating activities and its plans to invest in capital and infrastructure. The balance on the operating account shows the outcome of government’s operating activities, which is a measure of the cost of ongoing operations. It is calculated as the difference between current revenue and current expenditure, and the resulting balance shows how much government must borrow to run its operations. The current balance demonstrates the sustainability of government operations. Capital investment activities are presented in the capital account. Government’s capital financing requirement is the outcome of this account, which is calculated as the difference between capital revenue and capital expenditure. This account will mainly be in deficit due to continuous investment in infrastructure and substantial capital outlays. Total debt of government (Table 10) Table 10 shows the major components of government debt. Net loan debt consists of total domestic and foreign debt less the cash balances of the National Revenue Fund. The balances on the Gold and Foreign Exchange Reserve Account, which represent net revaluation profits and losses incurred on gold and foreign exchange transactions, are also disclosed. Net loan debt, provisions and contingent liabilities (Table 11) Provisions are liabilities with uncertain payment dates or amounts. The provisions for multilateral institutions are the unpaid portion of government’s subscriptions to these institutions, which are payable on request. Contingent liabilities are obligations that only result in expenditure when an uncertain future event occurs. Both explicit and implicit contingent liabilities are disclosed. Implicit contingent liabilities are mostly the actuarial deficits of social security funds, while explicit contingent liabilities are mostly guarantees for state-owned companies, public-private partnership projects and the Renewable Energy Independent Power Producer Programme. In the case of guarantees for state-owned companies, the exposure disclosed is the amount borrowed against a guarantee, along with any related interest on this amount, if guaranteed. The National Treasury published detailed information on provisions and contingent liabilities in the annual consolidated financial statements of national departments. 187
2019 BUDGET REVIEW Table 1 Main budget: revenue, expenditure, budget balance and financing 1) 1) This table summarises revenue, expenditure and the main budget balance since 2012/13. As available data is incomplete, the estimates are not fully consistent with other sources, such as the Government Finance Statistics series of the Reserve Bank. 2) Mining leases and ownership has been reclassified as non-tax revenue (rent on land). Historical numbers have been adjusted for comparative purposes. 3) Payments in terms of Southern African Customs Union (SACU) agreements. 4) Excludes sales of capital assets, discount and revaluation of foreign loan repayments. Includes receipts for which a department serves as a conduit to deposit funds into the National Revenue Fund. 5) Includes National Revenue Fund receipts (previously classified as extraordinary receipts). 6) Includes interest, cost of raising loans and management cost but excludes discount on the issue of new government debt instruments and the revaluation of foreign loan repayments. 7) Includes direct appropriations in respect of the salaries of the President, Deputy President, judges, magistrates, members of Parliament, National Revenue Fund payments (previously classified as extraordinary payments) and the International Oil Pollution Compensation Funds. Source: National Treasury 188 R million 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Actual outcome Preliminary outcome Main budget revenue Current revenue Tax revenue (gross) 2) Less: SACU payments 3) Non-tax revenue (departmental and other receipts) 4) Financial transactions in assets and liabilities 5) Sales of capital assets Total revenue Main budget expenditure Direct charges against the National Revenue Fund Debt-service costs 6) Provincial equitable share General fuel levy sharing with metropolitan municipalities Skills levy and SETAs Other 7) Appropriated by vote Current payments 8) Transfers and subsidies 9) Payments for capital assets 10) Payments for financial assets 11) Provisional allocation not assigned to votes 12) Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents Total Contingency reserve Total expenditure Main budget balance Percentage of GDP Financing Change in loan liabilities Domestic short-term loans (net) Domestic long-term loans (net) Market loans Loans issued for switches Redemptions Foreign loans (net) Market loans Loans issued for switches Arms procurement loan agreements Redemptions (including revaluation of loans) 13) Change in cash and other balances (-increase) Total financing (net) 786 078.4 813 825.8 -42 151.3 14 403.9 13 969.5 94.3 871 371.8 900 014.7 -43 374.4 14 731.5 15 957.3 37.0 950 046.8 986 295.0 -51 737.7 15 489.4 15 332.7 77.4 1 032 727.7 1 069 982.6 -51 021.9 13 767.0 43 387.6 121.1 1 119 527.6 1 144 081.0 -39 448.3 14 894.9 18 224.8 148.9 1 178 928.8 1 216 463.9 -55 950.9 18 415.8 17 282.7 187.5 800 142.2 424 634.5 88 121.1 310 740.7 9 039.7 11 694.5 5 038.5 540 861.0 159 848.6 364 947.0 13 876.1 2 189.3 – – – – 887 366.2 462 603.0 101 184.7 336 495.3 9 613.4 12 090.2 3 219.4 585 155.6 176 398.4 391 285.2 14 002.7 3 469.4 – – – – 965 456.9 503 253.9 114 798.4 359 921.8 10 190.2 13 838.8 4 504.8 628 646.2 184 544.7 424 144.4 16 200.6 3 756.5 – – – – 1 076 236.4 544 848.0 128 795.6 386 500.0 10 658.9 15 156.4 3 737.0 699 774.9 196 320.3 455 984.7 18 276.3 29 193.5 – – – – 1 137 901.3 588 652.6 146 496.7 410 698.6 11 223.8 15 233.0 5 000.5 716 833.7 209 314.8 487 079.2 15 577.8 4 861.9 – – – – 1 196 399.1 636 140.7 162 644.6 441 331.1 11 785.0 16 293.6 4 086.4 768 845.1 217 696.4 517 505.8 15 213.4 18 429.5 – – – – 965 495.6 1 047 758.6 1 131 900.1 1 244 622.9 1 305 486.2 1 404 985.9 – – – – – – 965 495.6 1 047 758.6 1 131 900.1 1 244 622.9 1 305 486.2 1 404 985.9 -165 353.3 -5.0% -160 392.4 -4.4% -166 443.2 -4.3% -168 386.4 -4.1% -167 585.0 -3.8% -208 586.8 -4.4% 22 555.0 125 767.8 161 557.7 -3 851.8 -31 938.1 -11 622.0 – – 60.6 -11 682.6 28 652.5 23 048.0 149 414.4 172 112.5 -1 135.3 -21 562.8 378.4 19 619.1 – – -19 240.7 -12 448.4 9 569.0 157 014.0 192 414.0 -1 160.0 -34 240.0 8 361.0 22 952.0 – – -14 591.0 -8 500.8 13 075.0 146 172.0 176 795.0 -2 479.0 -28 144.0 -3 879.0 – – – -3 879.0 13 018.4 40 507.1 116 684.3 175 070.5 -1 036.4 -57 349.8 36 380.7 50 959.3 1 111.4 – -15 690.0 -25 987.1 33 407.0 174 438.0 200 200.0 -1 508.0 -24 254.0 29 774.0 33 895.0 – – -4 121.0 -29 032.2 165 353.3 160 392.4 166 443.2 168 386.4 167 585.0 208 586.8 GDP 3 320 753 3 614 459 3 865 925 4 126 999 4 412 749 4 720 955 National Revenue Fund transactions 14) National Revenue Fund receipts National Revenue Fund payments 12 302.8 -2 587.2 11 709.3 -516.3 12 647.0 -1 525.5 14 377.5 -681.7 14 240.6 -1 778.0 16 600.3 -587.1 Net 9 715.6 11 193.0 11 121.5 13 695.8 12 462.6 16 013.2
STATISTICAL ANNEXURE Table 1 Main budget: revenue, expenditure, budget balance and financing 1) 8) Includes compensation of employees, payments for goods and services, interest and rent on land. Payment for medical benefits to former employees has been moved to transfers. 9) Includes current and capital transfers and subsidies to business, households, foreign countries and other levels and funds of general government. 10) Includes acquisition and own account construction of new assets and the cost of upgrading, improving and extending to existing capital assets. 11) Consists mainly of lending to public corporations or making equity investments in them for policy purposes. Previously included in transfers and subsidies. 12) The 2018/19 year includes the provision for contingencies related to drought relief in several provinces, support to the water sector and public investment projects supported by improved infrastructure planning. 13) Revaluation estimates are based on National Treasury's projection of exchange rates. 14) National Revenue Fund payments include premiums paid on loan transactions and revaluation adjustments when utilising foreign exchange deposits. National Revenue Fund receipts include proceeds from the sale of state assets, premiums received on loan transactions and revaluation adjustments when utilising foreign exchange deposits. 189 2018/19 2019/20 2020/21 2021/22 R million Budget Revised Deviation estimate estimate Medium-term estimates 1 312 935.3 1 271 421.0 -41 514.3 1 344 964.5 1 302 201.3 -42 763.2 -48 288.6 -48 288.6 – 16 259.4 17 508.4 1 249.0 8 080.1 13 845.4 5 765.3 130.7 119.6 -11.0 1 389 607.8 1 422 208.0 -50 280.3 17 680.1 13 727.0 129.6 1 499 817.8 1 544 868.4 -65 778.4 20 727.8 5 165.7 134.1 1 627 187.1 1 670 408.1 -65 388.7 22 167.6 5 600.6 137.0 Main budget revenue Current revenue 2) Tax revenue (gross) Less: SACU payments 4) Non-tax revenue (departmental and other receipts) 5) Financial transactions in assets and liabilities Sales of capital assets Total revenue Main budget expenditure Direct charges against the National Revenue Fund 6) Debt-service costs Provincial equitable share General fuel levy sharing with metropolitan municipalities Skills levy and SETAs 7) Other Appropriated by vote 8) Current payments 9) Transfers and subsidies 10) Payments for capital assets 11) Payments for financial assets 12) Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents Contingency reserve Total expenditure Main budget balance Percentage of GDP Financing Change in loan liabilities Domestic short-term loans (net) Domestic long-term loans (net) Market loans Loans issued for switches Redemptions Foreign loans (net) Market loans Loans issued for switches Arms procurement loan agreements 13) Redemptions (including revaluation of loans) Change in cash and other balances (-increase) Total financing (net) 1 321 146.1 1 285 386.1 -35 760.0 683 691.2 686 212.1 2 520.9 180 124.0 182 217.9 2 093.9 470 286.5 470 286.5 – 12 468.6 12 468.6 – 16 929.4 17 312.2 382.8 3 882.8 3 927.0 44.2 814 508.9 823 645.4 9 136.5 229 318.4 231 026.0 1 707.5 566 436.4 563 245.2 -3 191.2 14 296.8 15 631.7 1 335.0 4 457.3 13 742.5 9 285.2 6 000.0 – -6 000.0 – – – – – – – – – 1 403 464.4 743 849.6 202 207.8 505 553.8 13 166.8 18 758.5 4 162.7 882 647.8 246 636.3 615 879.5 15 424.2 4 707.9 10.0 1 000.0 23 000.0 -4 800.0 1 505 117.7 805 706.1 224 066.1 542 908.6 14 026.9 20 437.4 4 267.1 946 483.9 263 910.8 661 429.4 16 230.1 4 913.7 376.2 – 23 000.0 -12 000.0 1 632 924.7 868 088.6 247 408.4 578 645.2 15 182.5 22 307.3 4 545.3 1 007 492.6 282 640.4 702 242.5 17 425.7 5 183.9 3 903.9 4 000.0 23 000.0 -12 000.0 1 504 200.2 1 509 857.5 5 657.4 1 645 707.4 1 763 566.2 1 894 485.1 8 000.0 – -8 000.0 13 000.0 6 000.0 6 000.0 1 512 200.2 1 509 857.5 -2 342.6 1 658 707.4 1 769 566.2 1 900 485.1 -191 054.0 -224 471.5 -33 417.5 -3.8% -4.4% -0.6% -255 243.0 -4.7% -264 448.5 -4.5% -267 560.4 -4.3% 14 200.0 14 000.0 -200.0 159 916.0 167 481.0 7 565.0 191 000.0 181 000.0 -10 000.0 – -500.0 -500.0 -31 084.0 -13 019.0 18 065.0 35 932.0 52 157.0 16 225.0 38 040.0 54 198.0 16 158.0 – – – – – – -2 108.0 -2 041.0 67.0 -18 994.0 -9 166.5 9 827.5 25 000.0 185 404.0 216 000.0 – -30 596.0 -20 972.0 28 520.0 – – -49 492.0 65 811.0 35 000.0 192 925.0 244 000.0 – -51 075.0 30 910.0 43 050.0 – – -12 140.0 5 613.5 36 000.0 194 036.0 254 000.0 – -59 964.0 39 268.0 43 560.0 – – -4 292.0 -1 743.6 191 054.0 224 471.5 33 417.5 255 243.0 264 448.5 267 560.4 5 025 379 5 059 106 33 728 5 413 825 5 812 415 6 249 070 GDP 6 185.0 11 685.2 5 500.2 -135.1 -161.5 -26.4 4 488.0 -135.3 4 950.0 – 5 579.0 – 14) National Revenue Fund transactions National Revenue Fund receipts National Revenue Fund payments 6 049.9 11 523.7 5 473.8 4 352.7 4 950.0 5 579.0 Net
2019 BUDGET REVIEW Table 2 Main budget: estimates of national revenue Summary of revenue 1) 1) 2) 3) 4) 5) Includes interest on overdue income tax and small business tax amnesty (in 2006/07, 2007/08 and 2008/09). Levy on payroll dedicated to skills development. The securities transfer tax replaced the uncertificated securities tax from 1 July 2008. The value-added tax (VAT) replaced the general sales tax in September 1991. Includes plastic bag levy (from 2004/05), Universal Service Fund (from 1999/00), levies on financial services (up to 2004/05), CO 2 motor vehicle emissions (from 2010/11), incandescent light bulb levy (from 2009/10), turnover tax for micro businesses (from 2009/10), tyre levy and Interntional Oil Pollution Compensation Fund (from 2016/17). Mining leases and ownership have been reclassified as non-tax revenue. The historical years from 2000/01 have been adjusted for comparative purposes. Source: National Treasury 190 R million 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividend and interest w ithholding tax Tax on retirem ent funds Other1) Taxes on payroll and workforce Skills developm ent levy 2) Taxes on property Donations tax Estate duty Securities transfer tax 3) Transfer duties Domestic taxes on goods and services Value-added tax 4) Specific excise duties Health prom otion levy Ad valorem excise duties Fuel levies Air departure tax Electricity levy Other5) Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges Other6) Stamp duties and fees State miscellaneous revenue7) 147 310.4 90 389.5 42 354.5 7 162.7 6 190.6 1 213.1 2 717.3 2 717.3 4 628.3 20.6 481.9 1 212.8 2 913.0 86 885.1 61 056.6 9 797.2 – 776.1 14 923.2 296.4 – 35.5 8 680.1 8 632.2 – 0.5 47.5 1 767.2 306.7 164 565.9 94 336.7 55 745.1 6 325.6 6 989.7 1 169.0 3 352.1 3 352.1 5 084.6 17.7 432.7 1 205.2 3 429.0 97 311.5 70 149.9 10 422.6 – 1 050.2 15 333.8 324.8 – 30.3 9 619.8 9 330.7 – 0.0 289.1 1 572.4 433.0 171 962.8 98 495.1 60 880.8 6 132.9 4 897.7 1 556.3 3 896.4 3 896.4 6 707.5 17.1 417.1 1 101.1 5 172.1 110 108.6 80 681.8 11 364.6 – 1 016.2 16 652.4 367.2 – 26.5 8 414.3 8 479.4 – – -65.1 1 360.1 -7.1 195 219.1 110 981.9 70 781.9 7 487.1 4 406.1 1 562.2 4 443.3 4 443.3 9 012.6 25.2 506.9 1 365.9 7 114.6 131 980.6 98 157.9 13 066.7 – 1 015.2 19 190.4 412.2 – 138.3 13 286.5 12 888.4 – – 398.1 1 167.7 -130.9 230 803.6 125 645.3 86 160.8 12 277.6 4 783.1 1 936.7 4 872.0 4 872.0 11 137.5 29.5 624.7 1 973.4 8 510.0 151 223.7 114 351.6 14 546.5 – 1 157.3 20 506.7 458.2 – 203.4 18 201.9 18 303.5 – – -101.6 792.8 164.2 279 990.5 140 578.3 118 998.6 15 291.4 3 190.5 1 931.7 5 597.4 5 597.4 10 332.3 47.0 747.4 2 763.9 6 774.0 174 671.4 134 462.6 16 369.5 – 1 282.7 21 844.6 484.8 – 227.2 24 002.2 23 697.0 – – 305.2 615.7 339.2 332 058.3 168 774.4 140 119.8 20 585.4 285.4 2 293.3 6 330.9 6 330.9 11 883.9 27.6 691.0 3 757.1 7 408.2 194 690.3 150 442.8 18 218.4 1 480.5 23 740.5 540.6 – 267.5 27 081.9 26 469.9 – – 612.0 557.1 212.2 TOTAL TAX REVENUE (gross) Non-tax revenue8) Less: SACU payments9) Other adjustment10) 252 295.0 8 331.4 -8 204.8 – 281 939.3 12 995.7 -8 259.4 – 302 442.6 8 309.5 -9 722.7 – 354 978.8 8 695.4 -13 327.8 – 417 195.7 15 602.3 -14 144.9 – 495 548.6 14 281.4 -25 194.9 – 572 814.6 14 542.4 -24 712.6 – TOTAL MAIN BUDGET REVENUE 252 421.5 286 675.6 301 029.4 350 346.5 418 653.1 484 635.1 562 644.4 Current revenue Direct taxes Indirect taxes State m iscellaneous revenue Non-tax revenue (excluding sales of capital assets) 11) Less: SACU paym ents Sales of capital assets 252 417.4 150 530.1 101 458.2 306.7 8 327.2 -8 204.8 4.2 286 617.8 168 368.4 113 137.9 433.0 12 937.9 -8 259.4 57.8 301 012.9 176 293.5 126 156.1 -7.1 8 293.0 -9 722.7 16.5 350 316.3 200 194.5 154 915.3 -130.9 8 665.2 -13 327.8 30.2 418 573.8 236 329.7 180 701.8 164.2 15 523.0 -14 144.9 79.3 484 596.3 286 382.4 208 827.1 339.2 14 242.6 -25 194.9 38.8 562 414.2 339 107.8 233 494.6 212.2 14 312.2 -24 712.6 230.2 National Revenue Fund receipts 12) 4 159.1 8 167.9 1 598.2 2 492.0 6 905.2 3 438.1 1 849.8
STATISTICAL ANNEXURE Table 2 Main budget: estimates of national revenue Summary of revenue 1) 6) Includes miscellaneous customs and excise receipts, ordinary levy (up to 2004/05) and diamond export duties. 7) Includes revenue received by SARS that could not be allocated to a specific revenue type. 8) Includes sales of goods and services, fines, penalties and forfeits, interest, dividends and rent on land (including mineral and petroleum royalties and mining leases and ownership), sales of capital assets as well as transactions in financial assets and liabilities. 9) Payments in terms of SACU agreements. 10) Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement. 11) Excludes sales of capital assets. 12) Previously classified as extraordinary revenue, includes sales of strategic fuel stocks, proceeds from sales of state assets and certain other receipts are, by law, paid into the National Revenue Fund. 191 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 R million Actual collections 383 482.7 195 145.7 165 539.0 20 017.6 143.3 2 637.2 7 327.5 7 327.5 9 477.1 125.0 756.7 3 664.5 4 930.9 201 416.0 154 343.1 20 184.5 – 1 169.5 24 883.8 549.4 – 285.7 22 852.4 22 751.0 – – 101.4 571.8 -27.4 359 044.8 205 145.0 134 883.4 15 467.8 42.7 3 505.9 7 804.8 7 804.8 8 826.4 60.1 759.3 3 324.0 4 683.0 203 666.8 147 941.3 21 289.3 – 1 275.9 28 832.5 580.3 3 341.7 405.7 19 318.9 19 577.1 – – -258.3 49.5 -5.7 379 941.2 226 925.0 132 901.7 17 178.2 2.8 2 933.6 8 652.3 8 652.3 9 102.3 64.6 782.3 2 932.9 5 322.5 249 490.4 183 571.4 22 967.6 – 1 596.2 34 417.6 647.8 4 996.4 1 293.3 26 977.1 26 637.4 – – 339.7 3.1 16.7 426 583.7 250 399.6 151 626.7 21 965.4 6.7 2 585.3 10 173.1 10 173.1 7 817.5 52.7 1 045.2 2 886.1 3 833.6 263 949.9 191 020.2 25 411.1 – 1 828.3 36 602.3 762.4 6 429.7 1 895.8 34 121.0 34 197.9 – – -76.9 -2.9 7.4 457 313.8 275 821.6 159 259.2 19 738.7 0.2 2 494.1 11 378.5 11 378.5 8 645.2 82.1 1 013.0 3 271.9 4 278.3 296 921.5 215 023.0 28 377.7 – 2 231.9 40 410.4 873.1 7 983.9 2 021.4 39 549.1 38 997.9 – – 551.2 0.5 17.2 507 759.2 309 834.1 177 324.3 17 308.8 – 3 292.0 12 475.6 12 475.6 10 487.1 112.8 1 101.5 3 784.3 5 488.5 324 548.2 237 666.6 29 039.5 – 2 363.3 43 684.7 878.7 8 818.9 2 096.5 44 732.2 44 178.7 – – 553.4 31.7 -19.1 561 789.8 352 950.4 184 925.4 21 247.3 – 2 666.7 14 032.1 14 032.1 12 471.5 167.0 1 488.6 4 150.1 6 665.8 356 554.4 261 294.8 32 333.6 – 2 962.3 48 466.5 906.6 8 648.2 1 942.5 41 462.9 40 678.8 – – 784.1 -1.2 -14.6 Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividend and interest withholding tax Tax on retirem ent funds 1)Other Taxes on payroll and workforce 2)Skills developm ent levy Taxes on property Donations tax Estate duty 3)Securities transfer tax Transfer duties Domestic taxes on goods and services 4)Value-added tax Specific excise duties Health prom otion levy Ad valorem excise duties Fuel levies Air departure tax Electricity levy 5)Other Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges 6)Other Stamp duties and fees 7) State miscellaneous revenue 625 100.2 20 819.6 -28 920.6 – 598 705.4 15 323.1 -27 915.4 – 674 183.1 16 474.0 -14 991.3 -2 914.4 742 649.7 24 401.5 -21 760.0 – 813 825.8 28 467.7 -42 151.3 – 900 014.7 30 725.8 -43 374.4 – 986 295.0 30 899.6 -51 737.7 – TOTAL TAX REVENUE (gross) 8) Non-tax revenue 9) Less: SACU payments 10)Other adjustment 616 999.2 586 113.1 672 751.5 745 291.3 800 142.2 887 366.2 965 456.9 TOTAL MAIN BUDGET REVENUE 616 868.0 391 691.9 233 435.6 -27.4 20 688.4 -28 920.6 131.2 586 076.8 367 669.0 231 042.1 -5.7 15 286.8 -27 915.4 36.3 672 716.0 389 440.5 284 726.0 16.7 16 438.5 -17 905.7 35.4 745 176.5 437 854.7 304 787.6 7.4 24 286.8 -21 760.0 114.7 800 047.9 469 787.4 344 021.2 17.2 28 373.4 -42 151.3 94.3 887 329.2 521 449.0 378 584.8 -19.1 30 688.8 -43 374.4 37.0 965 379.5 577 477.5 408 832.1 -14.6 30 822.1 -51 737.7 77.4 Current revenue Direct taxes Indirect taxes State m iscellaneous revenue 11)Non-tax revenue (excluding sales of capital assets) Less: SACU paym ents Sales of capital assets 8 203.4 6 428.6 3 013.9 5 209.2 12 302.8 11 709.3 12 647.0 12) National Revenue Fund receipts
2019 BUDGET REVIEW Table 2 Main budget: estimates of national revenue Summary of revenue 1) 1) 2) 3) 4) 5) Includes interest on overdue income tax and small business tax amnesty (in 2006/07, 2007/08 and 2008/09). Levy on payroll dedicated to skills development. The securities transfer tax replaced the uncertificated securities tax from 1 July 2008. The value-added tax (VAT) replaced the general sales tax in September 1991. Includes plastic bag levy (from 2004/05), Universal Service Fund (from 1999/00), levies on financial services (up to 2004/05), CO 2 motor vehicle emissions (from 2010/11), incandescent light bulb levy (from 2009/10), turnover tax for micro businesses (from 2009/10), tyre levy and Interntional Oil Pollution Compensation Fund (from 2016/17). Mining leases and ownership have been reclassified as non-tax revenue. The historical years from 2000/01 have been adjusted for comparative purposes. Source: National Treasury 192 R million 2015/16 2016/17 2017/18 2018/19 2019/20 Actual collections % change Revised on actual estimates 2017/18 Budget estimates BeforeAfter tax proposals Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividend and interest withholding tax Tax on retirem ent funds Other1) Taxes on payroll and workforce Skills developm ent levy2) Taxes on property Donations tax Estate duty Securities transfer tax3) Transfer duties Domestic taxes on goods and services Value-added tax4) Specific excise duties Health prom otion levy Ad valorem excise duties Fuel levies Air departure tax Electricity levy Other5) Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges Other6) Stamp duties and fees State miscellaneous revenue7) Revenue measures in 2020 Budget 606 820.5 388 102.4 191 151.6 24 152.8 – 3 413.7 15 220.2 15 220.2 15 044.1 134.8 1 982.2 5 530.7 7 396.3 385 955.9 281 111.4 35 076.7 – 3 014.1 55 607.3 941.2 8 471.8 1 733.5 46 942.3 46 250.1 – – 692.2 0.4 -0.8 664 526.4 424 545.2 204 431.8 31 575.7 – 3 973.8 15 314.8 15 314.8 15 661.2 280.3 1 619.5 5 553.2 8 208.3 402 463.9 289 166.7 35 773.8 – 3 396.2 62 778.8 1 003.9 8 457.7 1 886.8 46 102.5 45 579.1 – – 523.4 -0.1 12.2 711 703.0 460 952.8 217 412.0 28 559.6 – 4 778.6 16 012.4 16 012.4 16 584.6 732.1 2 292.0 5 837.5 7 723.0 422 248.3 297 997.6 37 355.9 – 3 780.9 70 948.6 1 086.0 8 501.0 2 578.3 49 939.4 49 151.7 – – 787.7 -0.3 -23.5 751 845.75.6% 497 451.37.9% 218 435.80.5% 31 008.98.6% –– 4 949.73.6% 17 312.28.1% 17 312.28.1% 16 034.8-3.3% 539.0-26.4% 1 895.8-17.3% 6 060.33.8% 7 539.7-2.4% 460 287.39.0% 325 917.59.4% 40 276.47.8% 2 395.8– 4 162.710.1% 75 373.66.2% 1 102.41.5% 8 434.5-0.8% 2 624.51.8% 56 721.813.6% 55 638.313.2% 78.2– –– 1 005.327.6% -0.30.7% –– 806 541.6820 341.6 539 076.9552 876.9 229 608.2229 608.2 32 594.932 594.9 –– 5 261.65 261.6 18 758.518 758.5 18 758.518 758.5 17 158.917 158.9 576.8576.8 2 028.72 028.7 6 485.16 485.1 8 068.28 068.2 503 449.0504 649.0 361 571.3360 471.3 41 353.942 353.9 1 986.11 986.1 4 454.54 454.5 81 657.682 957.6 1 159.21 159.2 8 562.58 562.5 2 703.92 703.9 61 300.461 300.4 60 029.560 029.5 245.2245.2 –– 1 025.61 025.6 -0.3-0.3 –– TOTAL TAX REVENUE (gross) Non-tax revenue8) Less: SACU payments9) Other adjustment10) 1 069 982.6 57 275.7 -51 021.9 – 1 144 081.0 33 268.6 -39 448.3 – 1 216 463.9 35 886.1 -55 950.9 – 1 302 201.37.0% 31 473.4-12.3% -48 288.6-13.7% –– 1 407 208.01 422 208.0 31 536.731 536.7 -50 280.3-50 280.3 –– TOTAL MAIN BUDGET REVENUE 1 076 236.4 1 137 901.3 1 196 399.1 1 285 386.17.4% 1 388 464.41 403 464.4 Current revenue Direct taxes Indirect taxes State m iscellaneous revenue Non-tax revenue (excluding sales of capital assets)11) Less: SACU paym ents Sales of capital assets 1 076 115.3 624 157.7 445 825.7 -0.8 57 154.6 -51 021.9 121.1 1 137 752.4 681 741.0 462 327.8 12.2 33 119.7 -39 448.3 148.9 1 196 211.6 730 739.5 485 747.9 -23.5 35 698.6 -55 950.9 187.5 1 285 266.47.4% 771 592.75.6% 530 608.69.2% –– 31 353.8-12.2% -48 288.6-13.7% 119.6-36.2% 1 388 334.81 403 334.8 827 905.7841 705.7 579 302.3580 502.3 –– 31 407.131 407.1 -50 280.3-50 280.3 129.6129.6 National Revenue Fund receipts12) 14 377.5 14 240.7 16 600.3 11 685.2-29.6% 4 488.04 488.0
STATISTICAL ANNEXURE Table 2 Main budget: estimates of national revenue Summary of revenue 1) 6) 7) 8) Includes miscellaneous customs and excise receipts, ordinary levy (up to 2004/05) and diamond export duties. Includes revenue received by SARS that could not be allocated to a specific revenue type. Includes sales of goods and services, fines, penalties and forfeits, interest, dividends and rent on land (including mineral and petroleum royalties and mining leases and ownership), sales of capital assets as well as transactions in financial assets and liabilities. Payments in terms of SACU agreements. 9) 10) Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement. 11) Excludes sales of capital assets. 12) Previously classified as extraordinary revenue, includes sales of strategic fuel stocks, proceeds from sales of state assets and certain other receipts are, by law, paid into the National Revenue Fund. 193 2019/20 2020/21 2021/22 R million % change% of on revisedtotal budget 2018/19revenue % change after tax proposals Estimates2019/20 % change on Estimates2020/21 9.1%58.5% 11.1%39.4% 5.1%16.4% 5.1%2.3% –– 6.3%0.4% 8.4%1.3% 8.4%1.3% 7.0%1.2% 7.0%0.0% 7.0%0.1% 7.0%0.5% 7.0%0.6% 9.6%36.0% 10.6%25.7% 5.2%3.0% -17.1%0.1% 7.0%0.3% 10.1%5.9% 5.2%0.1% 1.5%0.6% 3.0%0.2% 8.1%4.4% 7.9%4.3% 213.4%0.0% –– 2.0%0.1% –-0.0% –– 885 501.97.9% 602 692.79.0% 242 439.55.6% 34 422.75.6% –– 5 947.013.0% 20 437.49.0% 20 437.49.0% 19 052.211.0% 729.126.4% 2 318.814.3% 7 342.013.2% 8 662.47.4% 543 698.57.7% 389 889.28.2% 44 674.45.5% 2 250.913.3% 4 782.57.4% 89 066.67.4% 1 296.811.9% 8 722.11.9% 3 016.011.5% 66 178.78.0% 64 622.07.7% 281.314.7% –– 1 275.524.4% -0.41.9% –– 10 000.0 958 242.28.2% 658 917.29.3% 256 335.55.7% 36 399.55.7% –– 6 589.910.8% 22 307.39.1% 22 307.39.1% 20 862.69.5% 816.612.0% 2 577.111.1% 8 155.611.1% 9 313.27.5% 586 888.87.9% 422 745.98.4% 47 099.55.4% 2 600.115.5% 5 141.87.5% 95 758.47.5% 1 410.48.8% 8 909.62.1% 3 223.16.9% 71 356.47.8% 69 407.57.4% 312.411.1% –– 1 636.528.3% -0.42.1% –– 10 751.3 Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividend and interest w ithholding tax Tax on retirem ent funds 1)Other Taxes on payroll and workforce 2)Skills developm ent levy Taxes on property Donations tax Estate duty 3)Securities transfer tax Transfer duties Domestic taxes on goods and services 4)Value-added tax Specific excise duties Health prom otion levy Ad valorem excise duties Fuel levies Air departure tax Electricity levy 5)Other Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges 6)Other Stamp duties and fees 7) State miscellaneous revenue Revenue measures in 2020 Budget 9.2%101.3% 0.2%2.2% 4.1%-3.6% –– 1 544 868.48.6% 26 027.7-17.5% -65 778.430.8% –– 1 670 408.18.1% 27 905.27.2% -65 388.7-0.6% –– TOTAL TAX REVENUE (gross) 8) Non-tax revenue 9) Less: SACU payments 10)Other adjustment 9.2%100.0% 1 505 117.77.2% 1 632 924.78.5% TOTAL MAIN BUDGET REVENUE 9.2%100.0% 9.1%60.0% 9.4%41.4% –– 0.2%2.2% 4.1%-3.6% 8.3%0.0% 1 494 983.66.5% 908 987.28.0% 625 881.27.8% –– 25 893.6-17.6% -65 778.430.8% 134.13.5% 1 622 036.48.5% 983 943.28.2% 675 713.78.0% –– 27 768.27.2% -65 388.7-0.6% 137.02.1% Current revenue Direct taxes Indirect taxes State m iscellaneous revenue 11)Non-tax revenue (excluding sales of capital assets) Less: SACU paym ents Sales of capital assets -61.6%0.3% 4 950.010.3% 5 579.012.7% 12) National Revenue Fund receipts
2019 BUDGET REVIEW Table 3 Main budget: estimates of national revenue Detailed classification of revenue 1) The securities transfer tax replaced the uncertificated securities tax from 1 July 2008. 2) Specific excise duties on petrol, distillate fuel, residual fuel and base oil. 194 R thousands 2015/16 2016/17 2017/18 Actual collections Before After Revised Actual tax proposals tax proposals estimate collection Taxes on income and profits Personal incom e tax Tax on corporate incom e Corporate incom e tax Secondary tax on com panies/dividend withholding tax Interest w ithholding tax Other Interest on overdue incom e tax Sm all business tax am nesty Taxes on payroll and workforce Skills developm ent levy Taxes on property Estate, inheritance and gift taxes Donations tax Estate duty Taxes on financial and capital transactions Securities transfer tax 1) Transfer duties Domestic taxes on goods and services Value-added tax Dom estic VAT Im port VAT Refunds Specific excise duties Beer Sorghum beer and sorghum flour Wine and other ferm ented beverages Spirits Cigarettes and cigarette tobacco Pipe tobacco and cigars Petroleum products 2) Revenue from neighbouring countries 3) Health prom otion levy Ad valorem excise duties Fuel levies General fuel levy Carbon tax Taxes on use of goods or perm ission to use goods or to perform activities Air departure tax Plastic bags levy Electricity levy Incandescent light bulb levy CO2 tax - m otor vehicle em issions Tyre levy International Oil Pollution Com pensation Fund Turnover tax for m icro businesses Other Universal Service Fund Taxes on international trade and transactions Im port duties Custom s duties Health prom otion levy on im ports Other M iscellaneous custom s and excise receipts Diam ond export levy Other taxes Stam p duties and fees State miscellaneous revenue 4) 606 820 535 388 102 385 191 151 643 23 934 233 218 540 3 410 974 2 759 15 220 158 15 220 158 15 044 069 134 818 1 982 208 5 530 736 7 396 308 385 955 945 297 422 423 150 744 533 -167 055 546 10 883 223 3 474 2 897 035 5 310 332 13 006 690 566 385 922 234 1 487 356 – 3 014 051 55 607 301 – 941 226 183 328 8 471 774 51 801 1 276 835 – – 22 878 198 612 46 942 318 46 250 125 – 565 358 126 834 403 403 -808 664 526 446 424 545 241 204 431 763 31 129 892 445 770 3 974 356 -575 15 314 761 15 314 761 15 661 246 280 264 1 619 492 5 553 233 8 208 257 402 463 950 321 475 499 149 265 484 -181 574 261 11 713 340 4 126 3 163 411 5 853 935 12 120 468 518 718 871 084 1 528 745 – 3 396 164 62 778 834 – 1 003 904 231 875 8 457 668 70 206 1 208 521 77 242 803 23 339 274 842 46 102 497 45 579 083 – 405 915 117 500 -125 -125 12 213 715 814 097 739 152 580 712 853 093 711 703 019 465 569 180 482 085 864 460 968 306 460 952 841 218 691 794 218 691 794 218 108 686 217 412 046 27 415 115 34 236 915 29 037 024 27 894 315 479 844 479 844 603 146 665 250 3 654 675 3 654 675 4 133 965 4 776 801 3 488 3 488 1 966 1 766 16 641 456 16 641 456 15 770 554 16 012 406 16 641 456 16 641 456 15 770 554 16 012 406 16 956 268 16 508 742 16 047 450 16 584 607 189 699 189 699 388 847 732 086 2 121 479 2 121 479 2 406 543 2 292 015 5 774 756 5 774 756 5 446 798 5 837 511 8 870 334 8 422 808 7 805 261 7 722 996 434 405 608 439 538 710 423 615 679 422 248 282 344 823 321 344 823 321 337 320 987 336 279 470 162 304 155 162 304 155 153 758 235 152 788 760 -194 376 995 -194 376 995 -192 020 901 -191 070 644 11 855 011 12 731 060 13 258 317 13 172 996 4 164 4 164 4 129 3 918 2 949 624 3 026 527 3 769 376 3 771 583 5 614 850 5 942 178 6 472 688 6 442 619 14 425 659 15 038 890 10 906 363 11 067 422 621 683 664 319 459 686 429 271 1 032 882 1 032 882 827 017 829 790 1 430 744 1 430 744 1 577 609 1 638 277 – – – – 3 639 601 3 639 601 3 796 427 3 780 887 67 704 841 70 901 795 71 339 699 70 948 576 – – – – 1 150 911 1 150 911 1 094 201 1 086 040 222 642 222 642 240 226 241 295 8 641 675 8 641 675 8 496 282 8 500 970 90 783 90 783 59 708 55 359 1 661 033 1 661 033 1 414 430 1 336 818 350 000 350 000 570 000 715 997 1 145 1 145 3 019 3 019 24 809 24 809 42 264 33 504 233 070 233 070 225 918 192 357 53 647 268 53 647 268 50 193 335 49 939 408 52 607 508 52 607 508 49 010 662 49 151 743 – – – – 893 076 893 076 1 087 404 700 809 146 683 146 683 95 269 86 856 -572 -572 -437 -337 -572 -572 -437 -337 – – -1 172 924 -23 511 TOTAL TAX REVENUE (gross) 1 069 982 618 1 144 080 988 1 237 464 124 1 265 488 182 1 217 306 750 1 216 463 874 Less: SACU payments 5) Paym ents in term s of Custom s Union agreem ents (sec. 51(2) of Act 91 of 1964) -51 021 909 -51 021 909 -39 448 348 -39 448 348 -55 950 873 -55 950 873 -55 950 873 -55 950 873 -55 950 873 -55 950 873 -55 950 873 -55 950 873 TOTAL TAX REVENUE (net of SACU payments) 1 018 960 709 1 104 632 640 1 181 513 251 1 209 537 309 1 161 355 877 1 160 513 001
STATISTICAL ANNEXURE Table 3 Main budget: estimates of national revenue Detailed classification of revenue 3) 4) 5) Excise duties that are collected by Botswana, Lesotho, Namibia and Swaziland. Revenue received by SARS in respect of taxation that could not be allocated to specific revenue types. Payments in terms of SACU agreements. 195 2018/19 2019/20 R thousands Budget estimates % change on Before After Revised2017/18 tax proposalsestimate actual Before After tax proposals 765 831 359 772 991 359 751 845 673 5.6% 498 334 638 505 844 638 497 451 304 7.9% 231 568 699 231 218 699 218 435 812 0.5% 30 828 968 30 828 968 30 340 674 8.8% 640 367 640 367 668 192 0.4% 4 413 842 4 413 842 4 949 236 3.6% 44 844 44 844 455 -74.2% 16 929 383 16 929 383 17 312 161 8.1% 16 929 383 16 929 383 17 312 161 8.1% 17 160 665 17 310 665 16 034 765 -3.3% 415 821 415 821 539 007 -26.4% 2 573 485 2 723 485 1 895 831 -17.3% 5 824 644 5 824 644 6 060 271 3.8% 8 346 714 8 346 714 7 539 656 -2.4% 457 283 221 484 825 979 460 287 253 9.0% 363 016 755 378 635 762 379 887 172 13.0% 162 191 630 169 472 624 174 030 292 13.9% -199 998 727 -199 998 727 -228 000 000 19.3% 13 986 413 14 576 413 13 450 010 2.1% 4 356 4 356 4 475 14.2% 3 976 375 4 086 375 4 218 846 11.9% 6 828 143 7 038 143 7 466 953 15.9% 11 505 298 11 915 298 11 974 081 8.2% 484 930 494 930 423 477 -1.3% 872 433 872 433 858 724 3.5% 1 664 245 1 664 245 1 879 862 14.7% – 1 684 758 2 395 758 4 059 786 4 187 786 4 162 666 10.1% 76 288 550 77 508 550 75 373 567 6.2% – – – 1 154 290 1 154 290 1 102 354 1.5% 253 419 363 419 310 362 28.6% 8 621 086 8 621 086 8 434 478 -0.8% 60 585 90 585 40 740 -26.4% 1 435 207 1 575 207 1 236 029 -7.5% 601 302 601 302 751 804 5.0% 3 063 3 063 5 939 96.8% 44 844 44 844 17 980 -46.3% 229 236 229 236 261 682 36.0% 52 902 830 54 050 073 56 721 805 13.6% 51 698 819 52 600 819 55 638 279 13.2% – 245 242 78 242 1 103 377 1 103 377 918 427 31.1% 100 634 100 634 86 856 – -443 -443 -339 0.7% -443 -443 -339 0.7% -1 142 473 -1 142 473 – -100.0% 806 541 612 539 076 912 229 608 192 31 892 515 702 368 5 261 140 485 18 758 510 18 758 510 17 158 872 576 793 2 028 737 6 485 122 8 068 219 503 448 985 406 966 584 187 765 494 -233 160 795 14 582 852 4 337 4 175 241 7 132 148 12 251 926 475 214 918 599 1 813 615 1 986 067 4 454 487 81 657 583 – 1 159 215 326 371 8 562 485 41 359 1 254 788 790 583 6 030 19 149 265 654 61 300 363 60 029 486 245 242 932 366 93 269 -344 -344 – 820 341 612 552 876 912 229 608 192 31 892 515 702 368 5 261 140 485 18 758 510 18 758 510 17 158 872 576 793 2 028 737 6 485 122 8 068 219 504 648 985 406 210 232 187 421 846 -233 160 795 14 969 269 4 337 4 210 880 7 310 092 12 627 469 499 671 918 599 1 813 615 1 986 067 4 454 487 81 157 583 1 800 000 1 159 215 326 371 8 562 485 41 359 1 254 788 790 583 6 030 19 149 265 654 61 300 363 60 029 486 245 242 932 366 93 269 -344 -344 – Taxes on income and profits Personal incom e tax Tax on corporate incom e Corporate incom e tax Secondary tax on com panies/dividend withholding tax Interest w ithholding tax Other Interest on overdue incom e tax Sm all business tax am nesty Taxes on payroll and workforce Skills developm ent levy Taxes on property Estate, inheritance and gift taxes Donations tax Estate duty Taxes on financial and capital transactions 1) Securities transfer tax Transfer duties Domestic taxes on goods and services Value-added tax Dom estic VAT Im port VAT Refunds Specific excise duties Beer Sorghum beer and sorghum flour Wine and other ferm ented beverages Spirits Cigarettes and cigarette tobacco Pipe tobacco and cigars 2) Petroleum products 3) Revenue from neighbouring countries Health prom otion levy Ad valorem excise duties Fuel levies General fuel levy Carbon tax Taxes on use of goods or perm ission to use goods or to perform activities Air departure tax Plastic bags levy Electricity levy Incandescent light bulb levy CO2 tax - m otor vehicle em issions Tyre levy International Oil Pollution Com pensation Fund Turnover tax for m icro businesses Other Universal Service Fund Taxes on international trade and transactions Im port duties Custom s duties Health prom otion levy on im ports Other M iscellaneous custom s and excise receipts Diam ond export levy Other taxes Stam p duties and fees 4) State miscellaneous revenue 1 308 964 542 1 344 964 542 1 302 201 318 7.0% 1 407 207 998 1 422 207 998 TOTAL TAX REVENUE (gross) -48 288 636 -48 288 636 -48 288 636 -13.7% -48 288 636 -48 288 636 -48 288 636 -13.7% -50 280 313 -50 280 313 -50 280 313 -50 280 313 5) Less: SACU payments Paym ents in term s of Custom s Union agreem ents (sec. 51(2) of Act 91 of 1964) 1 260 675 905 1 296 675 905 1 253 912 682 8.0% 1 356 927 685 1 371 927 685 TOTAL TAX REVENUE (net of SACU payments)
2019 BUDGET REVIEW Table 3 Main budget: estimates of national revenue Detailed classification of revenue 6) New item introduced on the standard chart of accounts from 2008/09. 7) Mineral royalties imposed on the transfer of mineral resources in terms of the Mineral and Petroleum Resources Royalty Act (2008), which came into operation on 1 May 2009. 8) Mining leases and ownership have been reclassified as non-tax revenue. 9) Royalties, prospecting fees and surface rental collected by the Department of Mineral resources. 10) Includes recoveries of loans and advances. 196 R thousands 2015/16 2016/17 2017/18 Actual collections Before After Revised Actual tax proposals tax proposals estimate collection TOTAL TAX REVENUE (net of SACU payments) 1 018 960 709 1 104 632 640 1 181 513 251 1 209 537 309 1 161 355 877 1 160 513 001 Sales of goods and services other than capital assets Sales of goods and services produced by departm ents Sales by m arket establishm ents 6) Adm inistrative fees Other sales Sales of scrap, w aste, arm s and other used current goods Transfers received Fines, penalties and forfeits Interest, dividends and rent on land Interest Cash and cash equivalents Dividends Airports Com pany South Africa South African Special Risks Insurance Association Vodacom Industrial Developm ent Corporation Reserve Bank (National Treasury) Telkom Other Rent on land M ineral and petroleum royalties 7) M ining leases and ow nership 8) Royalties, prospecting fees and surface rental 9) Land rent Sales of capital assets Financial transactions in assets and liabilities 10) 2 158 711 54 943 1 286 062 779 187 38 519 530 678 965 028 10 112 540 4 487 401 204 514 263 005 828 216 50 000 – 507 263 291 3 707 898 35 490 22 240 6 222 121 142 43 387 616 2 591 658 57 316 1 342 535 1 142 803 49 004 447 576 666 989 11 188 715 3 981 450 255 671 151 200 – 20 000 – 830 813 1 218 5 801 670 111 696 23 616 11 381 148 902 18 224 800 2 107 751 2 107 751 2 184 342 2 628 797 61 215 61 215 61 061 56 385 1 287 097 1 287 097 1 229 011 1 439 548 739 097 739 097 883 568 1 120 839 20 342 20 342 10 702 12 025 541 236 541 236 549 583 287 497 1 174 662 1 174 662 606 086 466 045 11 689 845 11 689 845 11 357 094 12 725 550 3 887 779 3 887 779 2 560 382 3 484 812 268 800 268 800 268 800 266 854 170 668 170 668 170 668 242 979 – – – – 20 000 20 000 20 000 50 000 – – – – 507 263 507 263 602 023 846 603 – – 762 – 6 688 384 6 688 384 7 521 807 7 617 251 119 850 119 850 182 634 179 777 19 016 19 016 12 015 23 387 8 085 8 085 18 003 13 887 83 742 83 742 146 343 187 537 17 282 724 17 282 724 18 385 658 19 590 664 TOTAL NON-TAX REVENUE 11) 57 275 715 33 268 640 32 879 960 32 879 960 33 229 106 35 886 090 TOTAL MAIN BUDGET REVENUE 1 076 236 424 1 137 901 280 1 214 393 211 1 242 417 269 1 194 584 983 1 196 399 091 National Revenue Fund receipts Revaluation profits on foreign currency transactions Premiums on loan transactions Premiums on debt portfolio restructuring (switches) Liquidation of South African Special Risks Insurance Association investment Other 14 377 522 8 869 128 2 873 818 2 564 903 – 69 673 14 240 651 10 710 440 2 594 049 916 990 – 19 172 14 578 000 14 578 000 15 719 600 16 600 255 14 578 000 14 578 000 12 676 000 13 115 597 – – 1 000 000 1 132 995 – – 2 041 000 2 348 375 – – – – – – 2 600 3 288
STATISTICAL ANNEXURE Table 3 Main budget: estimates of national revenue Detailed classification of revenue 197 2018/19 2019/20 R thousands Budget estimates % change on Before After Revised2017/18 tax proposalsestimate actual Before After tax proposals 1 260 675 905 1 296 675 905 1 253 912 682 8.0% 1 356 927 685 1 371 927 685 TOTAL TAX REVENUE (net of SACU payments) 2 298 747 2 298 747 2 381 546 -9.4% 69 234 69 234 63 297 12.3% 1 368 370 1 368 370 1 352 668 -6.0% 850 725 850 725 954 741 -14.8% 10 418 10 418 10 840 -9.9% 571 161 571 161 599 722 108.6% 610 725 610 725 1 161 555 149.2% 12 778 770 12 778 770 13 365 538 5.0% 3 490 316 3 490 316 3 575 114 2.6% 281 434 281 434 280 000 4.9% 160 261 160 261 160 261 -34.0% – – 32 – 20 000 20 000 50 000 – – – – – 600 000 600 000 490 645 -42.0% 1 000 1 000 46 – 7 985 995 7 985 995 8 339 627 9.5% 193 905 193 905 440 537 145.0% 26 956 26 956 24 063 2.9% 18 903 18 903 5 213 -62.5% 130 682 130 682 119 638 -36.2% 8 080 126 8 080 126 13 845 401 -29.3% 2 377 405 72 146 1 411 371 882 933 10 955 602 202 788 825 13 911 644 3 771 836 297 194 171 305 32 50 000 – 600 000 1 046 8 766 175 217 547 24 677 11 832 129 597 13 727 018 2 377 405 72 146 1 411 371 882 933 10 955 602 202 788 825 13 911 644 3 771 836 297 194 171 305 32 50 000 – 600 000 1 046 8 766 175 217 547 24 677 11 832 129 597 13 727 018 Sales of goods and services other than capital assets Sales of goods and services produced by departm ents 6) Sales by m arket establishm ents Adm inistrative fees Other sales Sales of scrap, waste, arm s and other used current goods Transfers received Fines, penalties and forfeits Interest, dividends and rent on land Interest Cash and cash equivalents Dividends Airports Com pany South Africa South African Special Risks Insurance Association Vodacom Industrial Developm ent Corporation Reserve Bank (National Treasury) Telkom Other Rent on land 7) M ineral and petroleum royalties 8) M ining leases and ownership 9) Royalties, prospecting fees and surface rental Land rent Sales of capital assets 10) Financial transactions in assets and liabilities 24 470 211 24 470 211 31 473 400 -12.3% 31 536 691 31 536 691 11) TOTAL NON-TAX REVENUE 1 285 146 117 1 321 146 117 1 285 386 082 7.4% 1 388 464 376 1 403 464 376 TOTAL MAIN BUDGET REVENUE 6 185 000 6 185 000 11 685 236 -29.6% 6 185 000 6 185 000 10 238 138 -21.9% – – 1 000 000 -11.7% – – 444 598 -81.1% – – – – – – 2 500 -24.0% 4 488 000 4 488 000 – – – – 4 488 000 4 488 000 – – – – National Revenue Fund receipts Revaluation profits on foreign currency transactions Premiums on loan transactions Premiums on debt portfolio restructuring (switches) Liquidation of South African Special Risks Insurance Association investment Other
2019 BUDGET REVIEW Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 1) Includes provincial equitable share and conditional grants allocated to provinces. 2) Includes local government equitable share and conditional grants allocated to local government, as well as general fuel levy sharing with metropolitan municipalities. 3) Budget estimate adjusted for function shifts. Source: National Treasury 198 R million 2015/16 2016/17 Expenditureof which on budgettransferstransfers votetoto local outcomeprovinces 1)government 2) Expenditure of which on budget transfers voteto outcomeprovinces 1) 1 The Presidency 2 Parliam ent 3 Com m unications 4 Cooperative Governance and Traditional Affairs of which: local government equitable share 5 Hom e Affairs 6 International Relations and Cooperation 7 National Treasury 8 Planning, M onitoring and Evaluation 9 Public Enterprises 10 Public Service and Adm inistration 11 Public Works 12 Statistics South Africa 13 Wom en 14 Basic Education 15 Higher Education and Training 16 Health 17 Social Developm ent 18 Correctional Services 19 Defence and M ilitary Veterans 20 Independent Police Investigative Directorate 21 Justice and Constitutional Developm ent 22 Office of the Chief Justice and Judicial Adm inistration 23 Police 24 Agriculture, Forestry and Fisheries 25 Econom ic Developm ent 26 Energy 27 Environm ental Affairs 28 Labour 29 M ineral Resources 30 Science and Technology 31 Sm all Business Developm ent 32 Telecom m unications and Postal Services 33 Tourism 34 Trade and Industry 35 Transport 36 Water and Sanitation 37 Arts and Culture 38 Hum an Settlem ents 39 Rural Developm ent and Land Reform 40 Sport and Recreation South Africa 466.7–– 1 693.6–– 1 288.0–– 68 097.535.664 512.1 ––49 366.5 7 343.4–– 6 644.8–– 28 690.8–1 411.8 748.8–– 23 259.7–– 840.9–– 6 281.1551.7587.7 2 273.5–– 188.4–– 20 796.115 631.8– 41 943.4–– 35 984.931 904.7– 136 405.747.5– 20 588.7–– 45 071.5–– 234.2–– 14 971.8–– 767.7–– 76 720.8–– 6 400.52 171.5– 883.7–– 7 142.1–2 158.2 5 937.9–– 2 612.0–– 1 638.5–– 7 437.5–– 1 098.9–– 1 300.1–– 1 777.4–– 9 471.7–– 53 320.814 471.26 049.9 15 557.0–2 305.0 3 762.41 274.3– 30 034.518 302.710 654.3 9 118.0–– 979.9533.2– 475.3– 1 738.9– 1 335.7– 69 852.2– –– 8 143.5– 6 844.9– 28 199.8– 781.2– 253.8– 763.3– 6 403.4761.7 2 461.2– 194.7– 21 476.116 579.6 49 137.6– 38 496.233 981.0 147 342.685.5 21 542.2– 47 197.1– 241.7– 16 039.0– 855.6– 80 984.8– 6 490.82 202.5 665.1– 7 512.8– 6 381.0– 2 761.6– 1 661.1– 7 383.6– 1 197.0– 2 075.7– 1 919.6– 10 349.4– 56 403.715 878.5 15 635.4– 3 958.01 357.1 30 587.218 284.0 10 067.0– 1 023.6555.4 Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and Deputy President salaries (The Presidency) M em bers' rem uneration (Parliam ent) Debt-service costs (National Treasury) Provincial equitable share (National Treasury)4) General fuel levy sharing w ith m etropolitan m unicipalities (National Treasury) National Revenue Fund paym ents (National Treasury) of which: Defrayal of the Gold and Foreign Exchange Contingency Reserve Account losses Revaluation losses on foreign currency transactions Premiums on loan transactions Loss on script lending Skills levy and sector education and training authorities (Higher Education and Training) M agistrates' salaries (Justice and Constitutional Developm ent) Judges' salaries (Office of the Chief Justice and Judicial Adm inistration) International Oil Pollution Com pensation Fund (Transport) 699 774.984 924.287 679.2 5.6–– 440.3–– 128 795.6–– 386 500.0386 500.0– 10 658.9–10 658.9 681.7–– 152.8–– ––– 528.8–– ––– 15 156.4–– 1 721.8–– 887.7–– ––– 716 833.789 685.2 5.7– 436.5– 146 496.7– 410 698.6410 698.6 11 223.8– 1 778.0– 187.2– 525.6– 1 065.2– 0.0– 15 233.0– 1 845.7– 930.7– 3.8– Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes5) Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents 544 848.0386 500.010 658.9 ––– ––– ––– ––– 588 652.6410 698.6 –– –– –– –– Total 1 244 622.9471 424.298 338.1 1 305 486.2500 383.8 Contingency reserve National governm ent projected underspending Local governm ent repaym ent to the National Revenue Fund ––– ––– ––– –– –– –– Main budget expenditure 1 244 622.9471 424.298 338.1 1 305 486.2500 383.8
STATISTICAL ANNEXURE Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 4) Provincial equitable share excluding conditional grants to provinces. 5) 2018/19 includes provision for contingencies related to drought relief in provinces, support to the water sector and public investment projects supported by improved infrastructure planning. 199 2016/17 2017/18 2018/19 R million of which transfers to local government 2) Expenditureof which on budgettransferstransfers votetoto local outcomeprovinces 1) government 2) Adjusted Budget appro-estimate 3)priation – – – 66 178.5 50 709.0 – – 1 454.4 – – – 664.0 – – – – – – – – – – – – – – 2 131.9 – – – – – – – – 5 694.2 4 680.8 – 10 839.5 – – 481.5–– 1 711.9–– 1 419.0–– 76 362.082.372 012.2 ––55 613.7 8 401.7–– 5 996.9–– 39 792.1–1 592.7 866.8–– 250.4–– 856.9–– 6 927.3781.2691.4 2 195.5–– 204.7–– 22 932.017 570.1– 52 295.9–– 42 424.737 570.2– 159 396.6524.4– 22 788.6–– 48 977.2–– 255.3–– 16 607.2–– 997.5–– 86 605.0–– 6 728.12 241.7– 912.1–– 7 944.6–2 290.3 6 590.1–– 2 844.0–– 1 776.7–– 7 489.5–– 1 459.5–– 4 892.1–– 2 134.0–– 9 248.2–– 54 670.716 476.56 214.4 15 106.2–5 134.2 4 141.51 420.0– 33 370.519 969.311 382.2 9 730.2–– 1 060.4585.8– 505.6505.6 1 872.71 872.7 1 513.11 516.2 83 651.985 037.0 –– 7 915.49 047.4 6 552.86 552.8 29 358.429 710.2 927.4958.0 273.96 522.9 956.7950.7 7 453.37 483.3 2 271.72 271.7 230.2230.2 22 722.423 699.6 73 020.673 124.1 47 142.947 508.4 172 901.6172 822.2 23 848.523 849.0 47 949.748 496.2 315.1315.1 17 049.417 458.8 1 119.71 119.7 91 834.291 684.2 7 165.07 732.8 1 072.61 072.6 7 045.07 163.5 7 112.57 430.5 3 295.23 282.9 1 890.71 890.7 7 790.57 958.4 1 488.51 488.5 923.44 006.9 2 261.82 261.8 9 462.69 531.8 59 798.359 831.3 15 571.516 873.7 4 372.34 338.7 32 355.732 455.8 10 425.210 425.2 1 090.81 090.8 1 The Presidency 2 Parliam ent 3 Com m unications 4 Cooperative Governance and Traditional Affairs of which: local government equitable share 5 Hom e Affairs 6 International Relations and Cooperation 7 National Treasury 8 Planning, M onitoring and Evaluation 9 Public Enterprises 10 Public Service and Adm inistration 11 Public Works 12 Statistics South Africa 13 Wom en 14 Basic Education 15 Higher Education and Training 16 Health 17 Social Developm ent 18 Correctional Services 19 Defence and M ilitary Veterans 20 Independent Police Investigative Directorate 21 Justice and Constitutional Developm ent 22 Office of the Chief Justice and Judicial Adm inistration 23 Police 24 Agriculture, Forestry and Fisheries 25 Econom ic Developm ent 26 Energy 27 Environm ental Affairs 28 Labour 29 M ineral Resources 30 Science and Technology 31 Sm all Business Developm ent 32 Telecom m unications and Postal Services 33 Tourism 34 Trade and Industry 35 Transport 36 Water and Sanitation 37 Arts and Culture 38 Hum an Settlem ents 39 Rural Developm ent and Land Reform 40 Sport and Recreation South Africa 91 643.2 – – – – 11 223.8 – – – – – – – – – 768 845.197 221.599 317.5 5.7–– 556.3–– 162 644.6–– 441 331.1441 331.1– 11 785.0–11 785.0 587.1–– 225.4–– ––– 361.8–– -0.1–– 16 293.6–– 1 933.5–– 998.4–– 5.6–– 814 508.9831 572.1 6.76.7 493.2493.2 180 124.0181 099.0 470 286.5470 286.5 12 468.612 468.6 135.1149.9 135.1142.0 --–7.5 –0.5 16 929.417 312.2 2 215.52 215.5 1 022.11 022.1 10.210.2 Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and Deputy President salaries (The Presidency) M em bers' rem uneration (Parliam ent) Debt-service costs (National Treasury) 4) Provincial equitable share (National Treasury) General fuel levy sharing w ith m etropolitan m unicipalities (National Treasury) National Revenue Fund paym ents (National Treasury) of which: Defrayal of the Gold and Foreign Exchange Contingency Reserve Account losses Revaluation losses on foreign currency transactions Premiums on loan transactions Loss on script lending Skills levy and sector education and training authorities (Higher Education and Training) M agistrates' salaries (Justice and Constitutional Developm ent) Judges' salaries (Office of the Chief Justice and Judicial Adm inistration) International Oil Pollution Com pensation Fund (Transport) 11 223.8 – – – – 636 140.7441 331.111 785.0 ––– ––– ––– ––– 683 691.2685 063.9 6 000.0--- - –– Total direct charges against the National Revenue Fund 5) Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents 102 867.1 1 404 985.9538 552.6111 102.6 1 504 200.21 516 636.0 Total – – – ––– ––– ––– 8 000.0– –-2 700.0 –-500.0 Contingency reserve National governm ent projected underspending Local governm ent repaym ent to the National Revenue Fund 102 867.1 1 404 985.9538 552.6111 102.6 1 512 200.21 513 436.0 Main budget expenditure
2019 BUDGET REVIEW Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 1) Includes provincial equitable share and conditional grants allocated to provinces. 2) Includes local government equitable share and conditional grants allocated to local government, as well as general fuel levy sharing with metropolitan municipalities. 3) Budget estimate adjusted for function shifts. Source: National Treasury 200 R million 2018/19 2019/20 of which transfers transfers Revisedtoto local estimateprovinces 1) government 2) of which transferstransfers Budgettoto local estimateprovinces 1) government 2) 1 The Presidency 2 Parliam ent 3 Com m unications 4 Cooperative Governance and Traditional Affairs of which: local government equitable share 5 Hom e Affairs 6 International Relations and Cooperation 7 National Treasury 8 Planning, M onitoring and Evaluation 9 Public Enterprises 10 Public Service and Adm inistration 11 Public Works 12 Statistics South Africa 13 Wom en 14 Basic Education 15 Higher Education and Training 16 Health 17 Social Developm ent 18 Correctional Services 19 Defence and M ilitary Veterans 20 Independent Police Investigative Directorate 21 Justice and Constitutional Developm ent 22 Office of the Chief Justice and Judicial Adm inistration 23 Police 24 Agriculture, Forestry and Fisheries 25 Econom ic Developm ent 26 Energy 27 Environm ental Affairs 28 Labour 29 M ineral Resources 30 Science and Technology 31 Sm all Business Developm ent 32 Telecom m unications and Postal Services 33 Tourism 34 Trade and Industry 35 Transport 36 Water and Sanitation 37 Arts and Culture 38 Hum an Settlem ents 39 Rural Developm ent and Land Reform 40 Sport and Recreation South Africa 505.1–– 1 872.7–– 1 513.7–– 82 823.6339.977 368.7 ––60 518.4 9 047.4–– 6 552.8–– 29 550.0–1 541.5 928.0–– 6 522.9–– 950.7–– 7 475.3824.0692.9 2 271.7–– 230.2–– 23 686.817 689.0– 73 124.1–– 47 008.441 364.1– 172 603.2776.9– 23 849.0–– 48 496.2–– 315.1–– 17 458.8–– 1 110.0–– 91 684.2–– 7 732.82 848.9– 1 072.6–– 7 112.5–2 119.5 6 605.5–– 3 278.9–– 1 890.7–– 7 958.4–– 1 488.5–– 4 005.1–– 2 261.8–– 9 531.8–– 57 290.017 026.06 394.2 15 751.7–5 226.1 4 323.81 423.7– 32 245.819 045.311 446.1 10 425.2–– 1 090.5587.4– 691.4–– 1 993.5–– 1 576.1–– 90 717.8130.985 175.9 ––68 973.5 8 339.7–– 6 508.5–– 30 771.1–1 613.5 956.9–– 293.0–– 1 002.1–– 7 809.0868.2730.0 2 514.4–– 244.4–– 24 504.518 569.2– 89 498.2–– 51 460.744 988.8– 184 792.0518.2– 25 407.6–– 50 513.0–– 336.7–– 18 717.1–– 1 197.7–– 97 595.3–– 7 664.92 203.9– 1 045.4–– 7 440.0–2 090.4 7 529.7–– 3 435.1–– 2 005.2–– 8 151.0–– 2 568.6–– 1 684.6–– 2 392.7–– 10 059.0–– 64 194.217 707.46 582.1 16 440.4–5 735.7 4 617.51 501.2– 33 879.219 604.412 194.5 10 946.2–– 1 153.7620.0– Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and Deputy President salaries (The Presidency) M em bers' rem uneration (Parliam ent) Debt-service costs (National Treasury) Provincial equitable share (National Treasury)4) General fuel levy sharing w ith m etropolitan m unicipalities (National Treasury) National Revenue Fund paym ents (National Treasury) of which: Defrayal of the Gold and Foreign Exchange Contingency Reserve Account losses Revaluation losses on foreign currency transactions Premiums on loan transactions Loss on script lending Skills levy and sector education and training authorities (Higher Education and Training) M agistrates' salaries (Justice and Constitutional Developm ent) Judges' salaries (Office of the Chief Justice and Judicial Adm inistration) International Oil Pollution Com pensation Fund (Transport) 823 645.4101 925.1104 789.1 6.7–– 493.2–– 182 217.9–– 470 286.5470 286.5– 12 468.6–12 468.6 161.5–– 142.0–– -–– 18.8–– 0.8–– 17 312.2–– 2 215.5–– 1 039.8–– 10.2–– 882 647.8106 712.3114 122.1 7.3–– 527.5–– 202 207.8–– 505 553.8505 553.8– 13 166.8–13 166.8 135.3–– 135.3–– -–– -–– -–– 18 758.5–– 2 383.7–– 1 098.5–– 10.4–– Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes5) Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents 686 212.1470 286.512 468.6 -–– -–– -–– ––– 743 849.6505 553.813 166.8 10.0–– 1 000.0–– 23 000.0–– -4 800.0–– Total 1 509 857.5572 211.6117 257.7 1 645 707.4612 266.1127 288.9 Contingency reserve National governm ent projected underspending Local governm ent repaym ent to the National Revenue Fund ––– ––– ––– 13 000.0–– ––– ––– Main budget expenditure 1 509 857.5572 211.6117 257.7 1 658 707.4612 266.1127 288.9
STATISTICAL ANNEXURE Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 3) Budget estimate adjusted for function shifts. 4) Provincial equitable share excluding conditional grants to provinces. 5) The 2018/19 year includes the provision for contingencies related to drought relief in several provinces, support to the water sector and public investment projects supported by improved infrastructure planning. 201 2020/21 2021/22 R million of which transferstransfers Budgettoto local estimateprovinces 1) government 2) of which transferstransfers Budgettoto local estimateprovinces 1) government 2) 610.3–– 2 213.7–– 1 670.1–– 98 494.0138.592 636.4 ––75 683.3 8 743.5–– 6 926.1–– 32 307.7–1 701.9 1 015.2–– 312.8–– 1 081.3–– 8 237.8916.9771.2 3 304.1–– 259.7–– 25 987.620 089.3– 98 739.3–– 56 686.349 224.9– 199 471.5552.9– 27 177.1–– 53 825.1–– 359.4–– 19 656.7–– 1 281.9–– 104 323.3–– 7 923.22 378.2– 1 095.4–– 7 374.7–2 216.9 7 961.3–– 3 670.6–– 2 123.0–– 8 623.2–– 2 713.3–– 1 783.0–– 2 536.2–– 10 627.9–– 68 087.918 842.87 615.7 17 381.4–6 051.0 4 877.11 584.1– 35 132.019 824.612 860.9 10 669.9–– 1 219.3653.9– 647.3–– 2 366.9–– 1 737.9–– 106 592.7146.1100 379.2 ––82 161.8 9 612.7–– 7 118.3–– 34 146.3–1 815.1 1 069.7–– 332.0–– 1 162.0–– 8 919.0968.3814.4 4 912.8–– 274.9–– 28 189.421 469.7– 104 378.9–– 61 939.954 088.3– 213 693.1583.4– 28 962.6–– 52 277.5–– 381.6–– 20 909.9–– 1 359.1–– 111 180.2–– 8 425.62 558.2– 1 186.5–– 8 408.8–2 383.7 8 243.6–– 3 893.4–– 2 042.8–– 8 903.2–– 2 863.3–– 1 673.8–– 2 648.5–– 9 505.9–– 74 501.920 141.98 494.0 18 552.1–6 504.8 5 160.11 679.2– 36 670.820 030.313 924.4 11 355.5–– 1 291.7689.9– 1 The Presidency 2 Parliam ent 3 Com m unications 4 Cooperative Governance and Traditional Affairs of which: local government equitable share 5 Hom e Affairs 6 International Relations and Cooperation 7 National Treasury 8 Planning, M onitoring and Evaluation 9 Public Enterprises 10 Public Service and Adm inistration 11 Public Works 12 Statistics South Africa 13 Wom en 14 Basic Education 15 Higher Education and Training 16 Health 17 Social Developm ent 18 Correctional Services 19 Defence and M ilitary Veterans 20 Independent Police Investigative Directorate 21 Justice and Constitutional Developm ent 22 Office of the Chief Justice and Judicial Adm inistration 23 Police 24 Agriculture, Forestry and Fisheries 25 Econom ic Developm ent 26 Energy 27 Environm ental Affairs 28 Labour 29 M ineral Resources 30 Science and Technology 31 Sm all Business Developm ent 32 Telecom m unications and Postal Services 33 Tourism 34 Trade and Industry 35 Transport 36 Water and Sanitation 37 Arts and Culture 38 Hum an Settlem ents 39 Rural Developm ent and Land Reform 40 Sport and Recreation South Africa 946 483.9114 206.2123 853.8 7.8–– 507.2–– 224 066.1–– 542 908.6542 908.6– 14 026.9–14 026.9 -–– -–– -–– -–– ––– 20 437.4–– 2 560.2–– 1 180.9–– 11.0–– 1 007 492.6122 355.3134 315.8 8.3–– 541.0–– 247 408.4–– 578 645.2578 645.2– 15 182.5–15 182.5 -–– -–– ––– -–– ––– 22 307.3–– 2 726.6–– 1 257.7–– 11.6–– Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and Deputy President salaries (The Presidency) M em bers' rem uneration (Parliam ent) Debt-service costs (National Treasury) 4) Provincial equitable share (National Treasury) General fuel levy sharing with m etropolitan m unicipalities (National Treasury) National Revenue Fund paym ents (National Treasury) of which: Defrayal of the Gold and Foreign Exchange Contingency Reserve Account losses Revaluation losses on foreign currency transactions Premiums on loan transactions Loss on script lending Skills levy and sector education and training authorities (Higher Education and Training) M agistrates' salaries (Justice and Constitutional Developm ent) Judges' salaries (Office of the Chief Justice and Judicial Adm inistration) International Oil Pollution Com pensation Fund (Transport) 805 706.1542 908.614 026.9 376.2–– -–– 23 000.0–– -12 000.0–– 868 088.6578 645.215 182.5 3 903.9–– 4 000.0–– 23 000.0–– -12 000.0–– Total direct charges against the National Revenue Fund 5) Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees and other baseline adjustm ents 1 763 566.2657 114.7137 880.7 1 894 485.1701 000.4149 498.3 Total 6 000.0–– ––– ––– 6 000.0–– ––– ––– Contingency reserve National governm ent projected underspending Local governm ent repaym ent to the National Revenue Fund 1 769 566.2657 114.7137 880.7 1 900 485.1701 000.4149 498.3 Main budget expenditure
2019 BUDGET REVIEW Table 5 Consolidated national, provincial and social security funds expenditure: economic classification 1) 1) These figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank. The numbers in this table are not strictly comparable to those published in previous years due to the reclassification of expenditure items for previous years. Data for the previous years has been adjusted accordingly. 2) Includes equitable share and conditional grants to local government. Source: National Treasury 202 R million 2015/16 2016/17 2017/18 2018/19 % of Outcometotal % of Outcometotal % of Outcometotal Revised estimate Current payments Com pensation of em ployees Goods and services Interest and rent on land Transfers and subsidies M unicipalities of which: local government share2) Departm ental agencies and accounts Higher education institutions Foreign governm ents and international organisations Public corporations and private enterprises Public corporations Subsidies on products and production Other transfers Private enterprises Subsidies on products and production Other transfers Non-profit institutions Households Social benefits Other transfers to households Payments for capital assets Buildings and other fixed structures Buildings Other fixed structures M achinery and equipm ent Transport equipm ent Other m achinery and equipm ent Land and sub-soil assets Softw are and other intangible assets Other assets 3) Payments for financial assets 4) Subtotal: votes and direct charges Plus: Contingency reserve Total consolidated expenditure 710 276.954.5% 428 402.832.9% 152 631.511.7% 129 242.69.9% 507 637.639.0% 105 018.68.1% 87 679.26.7% 100 899.27.7% 26 601.92.0% 1 933.50.1% 44 215.53.4% 35 706.22.7% 26 129.82.0% 9 576.30.7% 8 509.40.7% 4 764.30.4% 3 745.10.3% 26 745.22.1% 202 223.615.5% 46 753.63.6% 155 470.011.9% 55 033.14.2% 44 333.23.4% 20 701.91.6% 23 631.31.8% 9 807.40.8% 4 139.50.3% 5 668.00.4% 209.00.0% 461.20.0% 222.40.0% 30 252.32.3% 772 238.856.2% 462 342.433.7% 163 033.011.9% 146 863.410.7% 544 550.939.6% 109 373.68.0% 91 643.26.7% 110 349.58.0% 28 323.82.1% 2 205.80.2% 45 994.23.3% 33 648.92.4% 27 020.62.0% 6 628.30.5% 12 345.30.9% 5 375.50.4% 6 969.80.5% 28 417.62.1% 219 886.316.0% 51 902.13.8% 167 984.212.2% 49 924.13.6% 39 224.22.9% 21 833.81.6% 17 390.41.3% 9 218.70.7% 3 612.10.3% 5 606.60.4% 139.70.0% 1 198.10.1% 143.40.0% 7 183.10.5% 830 072.056.4% 494 265.133.6% 172 680.411.7% 163 126.411.1% 571 900.338.9% 118 400.48.0% 99 317.56.7% 115 424.87.8% 32 121.62.2% 1 971.80.1% 40 569.42.8% 32 374.22.2% 23 034.41.6% 9 339.80.6% 8 195.20.6% 3 746.20.3% 4 449.00.3% 28 976.92.0% 234 435.415.9% 54 736.33.7% 179 699.112.2% 50 691.73.4% 39 501.12.7% 22 953.81.6% 16 547.41.1% 10 292.70.7% 4 437.10.3% 5 855.60.4% 151.50.0% 665.10.0% 81.30.0% 19 335.71.3% 901 906.7 527 046.6 192 191.7 182 668.4 624 256.6 124 813.8 104 789.1 130 446.4 39 196.7 2 503.9 39 564.0 30 412.9 21 948.7 8 464.2 9 151.1 3 955.0 5 196.1 33 462.7 254 269.2 60 629.1 193 640.1 50 542.9 38 718.8 22 237.1 16 481.7 11 021.8 3 958.5 7 063.3 84.6 606.3 111.3 14 021.1 1 303 199.9100.0% –– 1 373 896.9100.0% –– 1 471 999.7100.0% –– 1 590 727.2 – 1 303 199.9100.0% 1 373 896.9100.0% 1 471 999.7100.0% 1 590 727.2
STATISTICAL ANNEXURE Table 5 Consolidated national, provincial and social security funds expenditure: economic classification 1) 3) Includes biological, heritage and specialised military assets. 4) Includes National Revenue Fund payments previously accounted for separately. 203 2019/20 2020/21 2021/22 R million % of total Budget % of estimatetotal Budget % of estimatetotal Budget % of estimatetotal 56.7% 33.1% 12.1% 11.5% 39.2% 7.8% 6.6% 8.2% 2.5% 0.2% 2.5% 1.9% 1.4% 0.5% 0.6% 0.2% 0.3% 2.1% 16.0% 3.8% 12.2% 3.2% 2.4% 1.4% 1.0% 0.7% 0.2% 0.4% 0.0% 0.0% 0.0% 0.9% 969 363.355.5% 565 365.032.4% 201 334.511.5% 202 663.811.6% 682 804.439.1% 134 350.67.7% 114 122.16.5% 148 223.28.5% 42 851.52.5% 2 362.00.1% 46 267.92.7% 35 565.02.0% 25 260.61.4% 10 304.40.6% 10 702.90.6% 5 261.60.3% 5 441.20.3% 35 714.02.0% 273 035.215.6% 66 713.93.8% 206 321.311.8% 52 465.93.0% 39 976.62.3% 23 145.81.3% 16 830.81.0% 11 604.40.7% 3 943.00.2% 7 661.40.4% 10.70.0% 611.10.0% 263.10.0% 27 849.91.6% 1 041 318.256.0% 601 811.732.3% 214 940.511.5% 224 566.112.1% 731 858.639.3% 145 669.17.8% 123 853.86.7% 159 048.28.5% 45 617.62.5% 2 491.90.1% 47 411.32.5% 35 870.51.9% 26 346.41.4% 9 524.10.5% 11 540.90.6% 5 751.70.3% 5 789.20.3% 38 693.52.1% 292 927.015.7% 70 380.33.8% 222 546.612.0% 54 002.82.9% 41 637.72.2% 25 499.01.4% 16 138.80.9% 11 487.20.6% 4 043.20.2% 7 443.90.4% 199.70.0% 403.20.0% 275.00.0% 27 920.71.5% 1 122 547.556.3% 642 668.132.2% 231 921.611.6% 247 957.912.4% 778 129.639.0% 157 584.47.9% 134 315.86.7% 164 081.98.2% 48 114.32.4% 2 402.70.1% 55 741.92.8% 45 454.12.3% 31 522.61.6% 13 931.50.7% 10 287.90.5% 4 341.90.2% 5 946.00.3% 41 127.92.1% 309 076.515.5% 71 847.53.6% 237 229.011.9% 59 468.63.0% 46 495.92.3% 28 488.81.4% 18 007.00.9% 12 310.20.6% 4 331.20.2% 7 979.00.4% 22.90.0% 339.90.0% 299.90.0% 28 191.31.4% Current payments Com pensation of em ployees Goods and services Interest and rent on land Transfers and subsidies M unicipalities 2)of which: local government share Departm ental agencies and accounts Higher education institutions Foreign governm ents and international organisations Public corporations and private enterprises Public corporations Subsidies on products and production Other transfers Private enterprises Subsidies on products and production Other transfers Non-profit institutions Households Social benefits Other transfers to households Payments for capital assets Buildings and other fixed structures Buildings Other fixed structures M achinery and equipm ent Transport equipm ent Other m achinery and equipm ent Land and sub-soil assets Softw are and other intangible assets 3)Other assets 4) Payments for financial assets Subtotal: votes and direct charges Plus: Contingency reserve Total consolidated expenditure 100.0% – 1 732 483.499.3% 13 000.00.7% 1 855 100.499.7% 6 000.00.3% 1 988 337.099.70% 6 000.00.3% 100.0% 1 745 483.4100.0% 1 861 100.4100.0% 1 994 337.0100.0%
2019 BUDGET REVIEW Table 6 Consolidated national, provincial and social security funds expenditure: functional classification 1) 1) These figures were estimated by the National Treasury and may differ from data published by Statistics South Africa. The numbers in this table are not strictly comparable to those published in previous years due to the allocation of some of the unallocable expenditure for previous years. Data for the previous years has been adjusted accordingly. Source: National Treasury 204 R million 2015/16 2016/17 2017/18 2018/19 Estimated % of outcome total Estimated % of outcome total Estimated % of outcome total Revised estimate General public services 2) of which: debt-service costs Defence Public order and safety Police services Law courts Prisons Economic affairs General econom ic, com m ercial and labour affairs Agriculture, forestry, fishing and hunting Fuel and energy M ining, m anufacturing, and construction Transport Com m unication Other industries Econom ic affairs not elsew here classified Environmental protection Housing and community amenities Housing developm ent Com m unity developm ent Water supply Health Recreation and culture Education Social protection Subtotal: votes and direct charges Plus: Contingency reserve Total consolidated expenditure 209 452.8 16.1% 114 798.4 8.8% 45 151.0 3.5% 122 097.9 9.4% 83 025.5 6.4% 18 483.7 1.4% 20 588.7 1.6% 168 492.0 12.9% 28 919.5 2.2% 17 651.2 1.4% 30 513.4 2.3% 1 477.2 0.1% 75 640.3 5.8% 2 393.7 0.2% 2 805.8 0.2% 9 090.9 0.7% 7 504.9 0.6% 119 948.0 9.2% 32 803.7 2.5% 71 589.4 5.5% 15 554.9 1.2% 154 846.9 11.9% 8 896.5 0.7% 265 130.1 20.3% 201 679.8 15.5% 235 411.7 17.1% 128 795.6 9.4% 47 304.5 3.4% 128 932.6 9.4% 87 545.2 6.4% 19 845.3 1.4% 21 542.2 1.6% 148 036.2 10.8% 25 957.8 1.9% 18 884.7 1.4% 7 726.4 0.6% 1 529.1 0.1% 78 289.5 5.7% 3 194.2 0.2% 3 485.3 0.3% 8 969.2 0.7% 8 044.4 0.6% 122 166.3 8.9% 34 432.7 2.5% 72 099.6 5.2% 15 633.9 1.1% 166 990.4 12.2% 10 450.6 0.8% 287 149.9 20.9% 219 410.3 16.0% 262 572.1 17.8% 146 496.7 10.0% 48 959.8 3.3% 137 600.3 9.3% 94 201.6 6.4% 20 610.2 1.4% 22 788.6 1.5% 151 248.8 10.3% 26 362.8 1.8% 18 641.3 1.3% 8 111.3 0.6% 1 578.4 0.1% 77 350.6 5.3% 6 115.0 0.4% 3 736.0 0.3% 9 353.3 0.6% 8 491.8 0.6% 130 242.9 8.8% 36 210.1 2.5% 78 928.2 5.4% 15 104.6 1.0% 181 813.3 12.4% 11 325.1 0.8% 304 947.6 20.7% 234 797.9 16.0% 274 307.0 163 155.4 48 267.0 145 254.7 99 449.2 21 956.6 23 849.0 164 331.3 27 919.9 20 217.0 7 209.5 1 655.3 88 115.0 5 281.5 4 015.7 9 917.4 8 389.9 136 698.3 34 798.3 86 149.3 15 750.7 197 142.4 11 917.6 342 699.1 261 719.9 1 303 199.9 100.0% – – 1 373 896.9 100.0% – – 1 471 999.7 100.0% – – 1 590 727.2 – 1 303 199.9 100.0% 1 373 896.9 100.0% 1 471 999.7 100.0% 1 590 727.2
STATISTICAL ANNEXURE Table 6 Consolidated national, provincial and social security funds expenditure: functional classification 1) 2) Mainly general administration, cost of raising loans and unallocable capital expenditure, as well as National Revenue Fund payments previously accounted for separately. 205 2019/20 2020/21 2021/22 R million % of total Budget % of estimate total Budget % of estimate total Budget % of estimate total 17.2% 10.3% 3.0% 9.1% 6.3% 1.4% 1.5% 10.3% 1.8% 1.3% 0.5% 0.1% 5.5% 0.3% 0.3% 0.6% 0.5% 8.6% 2.2% 5.4% 1.0% 12.4% 0.7% 21.5% 16.5% 296 379.0 17.1% 180 124.0 10.4% 49 363.3 2.8% 152 997.4 8.8% 104 533.4 6.0% 23 360.5 1.3% 25 103.5 1.4% 191 581.1 11.1% 30 213.3 1.7% 20 728.0 1.2% 30 562.1 1.8% 1 737.4 0.1% 90 701.4 5.2% 3 007.5 0.2% 4 159.9 0.2% 10 471.6 0.6% 9 730.7 0.6% 149 274.7 8.6% 36 793.8 2.1% 96 092.8 5.5% 16 388.0 0.9% 210 663.4 12.2% 12 868.5 0.7% 376 832.5 21.8% 282 792.7 16.3% 321 844.1 17.3% 197 663.6 10.7% 52 138.5 2.8% 161 813.4 8.7% 110 678.5 6.0% 24 497.7 1.3% 26 637.2 1.4% 199 097.6 10.7% 31 866.3 1.7% 20 643.8 1.1% 30 501.7 1.6% 1 817.1 0.1% 95 834.5 5.2% 3 021.4 0.2% 4 277.8 0.2% 11 135.2 0.6% 9 400.0 0.5% 160 209.6 8.6% 38 607.7 2.1% 104 796.7 5.6% 16 805.2 0.9% 226 257.9 12.2% 13 269.1 0.7% 407 835.5 22.0% 303 234.5 16.3% 356 974.2 18.0% 213 859.0 10.8% 50 593.3 2.5% 172 618.7 8.7% 118 149.1 5.9% 26 046.3 1.3% 28 423.4 1.4% 212 574.8 10.7% 33 154.9 1.7% 21 898.5 1.1% 31 542.6 1.6% 1 710.4 0.1% 104 357.5 5.2% 3 924.8 0.2% 4 450.6 0.2% 11 535.5 0.6% 9 699.1 0.5% 171 632.0 8.6% 40 172.0 2.0% 113 608.9 5.7% 17 851.1 0.9% 241 631.5 12.2% 14 113.6 0.7% 436 685.1 22.0% 321 814.8 16.2% 2) General public services of which: debt-service costs Defence Public order and safety Police services Law courts Prisons Economic affairs General econom ic, com m ercial and labour affairs Agriculture, forestry, fishing and hunting Fuel and energy M ining, m anufacturing, and construction Transport Com m unication Other industries Econom ic affairs not elsew here classified Environmental protection Housing and community amenities Housing developm ent Com m unity developm ent Water supply Health Recreation and culture Education Social protection Subtotal: votes and direct charges Plus: Contingency reserve Total consolidated expenditure 100.0% – 1 732 483.4 99.3% 13 000.0 0.7% 1 855 100.4 99.7% 6 000.0 0.3% 1 988 337.0 99.7% 6 000.0 0.3% 100.0% 1 745 483.4 100.0% 1 861 100.4 100.0% 1 994 337.0 100.0%
2019 BUDGET REVIEW Table 7 Consolidated government revenue and expenditure: economic classification 1) 1) Consisting of national and provincial government, social security funds and public entities. Refer to Annexure W2 for a detailed list of entities included. In some cases figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank. 2) Includes National Revenue Fund receipts previously accounted for separately. Source: National Treasury 206 R million 2015/16 2016/17 2017/18 2018/19 % of Outcome total % of Outcome total % of Outcome total Revised estimate Revenue Current revenue Tax revenue (net of SACU) Non-tax revenue 2) Sales of capital assets Total revenue Expenditure Economic classification Current payments Compensation of employees Goods and services Interest and rent on land Transfers and subsidies Municipalities Departmental agencies and accounts Higher education institutions Foreign governments and international organisations Public corporations and private enterprises Non-profit institutions Households Payments for capital assets Buildings and other fixed structures Machinery and equipment Land and sub-soil assets Software and other intangible assets Other assets 3) Payments for financial assets 4) Subtotal: economic classification Contingency reserve Total consolidated expenditure Budget balance Percentage of GDP Financing Change in loan liabilities Domestic short-and long-term loans (net) Foreign loans (net) Change in cash and other balances (-increase) Borrowing requirement (net) GDP 1 214 980.0 100.0% 1 083 973.2 89.2% 131 006.9 10.8% 330.2 0.0% 1 285 399.2 100.0% 1 174 525.2 91.3% 110 874.0 8.6% 543.6 0.0% 1 352 976.9 100.0% 1 234 918.9 91.2% 118 057.9 8.7% 532.5 0.0% 1 454 920.4 1 340 399.3 114 521.1 296.9 1 215 310.2 100.0% 809 582.0 59.3% 473 215.5 34.6% 197 903.9 14.5% 138 462.6 10.1% 435 336.3 31.9% 108 236.9 7.9% 23 435.1 1.7% 29 402.6 2.2% 2 089.6 0.2% 29 047.8 2.1% 29 060.3 2.1% 214 063.9 15.7% 90 302.2 6.6% 70 328.5 5.1% 16 907.4 1.2% 1 109.4 0.1% 1 693.8 0.1% 263.1 0.0% 31 106.6 2.3% 1 285 942.7 100.0% 884 887.0 61.3% 511 554.0 35.5% 218 927.6 15.2% 154 405.5 10.7% 470 516.5 32.6% 112 730.9 7.8% 25 325.4 1.8% 32 048.4 2.2% 2 290.0 0.2% 32 546.8 2.3% 30 535.3 2.1% 235 039.7 16.3% 79 044.0 5.5% 58 834.6 4.1% 16 601.6 1.2% 857.5 0.1% 2 590.3 0.2% 160.0 0.0% 8 533.6 0.6% 1 353 509.4 100.0% 944 602.9 61.2% 547 358.4 35.5% 227 469.1 14.7% 169 775.4 11.0% 503 650.5 32.6% 121 827.0 7.9% 28 798.2 1.9% 36 891.2 2.4% 2 123.3 0.1% 31 340.0 2.0% 31 145.3 2.0% 251 525.7 16.3% 75 204.6 4.9% 56 959.6 3.7% 15 860.3 1.0% 898.9 0.1% 1 400.1 0.1% 85.7 0.0% 20 349.3 1.3% 1 455 217.3 1 016 524.5 585 193.2 242 604.9 188 726.3 549 202.3 128 928.9 25 838.0 42 004.4 2 543.6 31 763.7 34 926.7 283 197.0 84 229.2 64 057.3 17 409.4 923.0 1 714.3 125.3 15 469.1 1 366 327.1 100% – 1 442 981.1 100.0% – 1 543 807.3 100.0% – 1 665 425.1 – 1 366 327.1 1 442 981.1 1 543 807.3 1 665 425.1 -151 016.9 -3.7% -157 038.4 -3.6% -190 298.0 -4.0% -210 207.8 -4.2% 159 285.6 -3 879.4 -4 389.4 151 016.9 4 126 999.0 159 809.2 35 443.9 -38 214.7 157 038.4 4 412 749.0 206 212.9 29 791.5 -45 706.4 190 298.0 4 720 955.0 180 269.0 51 637.9 -21 699.1 210 207.8 5 059 106.3
STATISTICAL ANNEXURE Table 7 Consolidated government revenue and expenditure: economic classification 1) 3) Includes biological, heritage and specialised military assets. 4) Includes extraordinary payments previously accounted for separately. 207 2018/19 2019/20 2020/21 2021/22 R million % of total Budget % of estimate total Budget % of estimate total Budget % of estimate total 100.0% 92.1% 7.9% 0.0% 1 583 542.9 100.0% 1 464 708.3 92.5% 118 834.6 7.5% 268.4 0.0% 1 696 108.8 100.0% 1 574 763.7 92.8% 121 345.1 7.2% 273.5 0.0% 1 836 318.1 100.0% 1 703 362.0 92.7% 132 956.1 7.2% 280.0 0.0% Revenue Current revenue Tax revenue (net of SACU) 2) Non-tax revenue Sales of capital assets Total revenue Expenditure Economic classification Current payments Compensation of employees Goods and services Interest and rent on land Transfers and subsidies Municipalities Departmental agencies and accounts Higher education institutions Foreign governments and international organisations Public corporations and private enterprises Non-profit institutions Households Payments for capital assets Buildings and other fixed structures Machinery and equipment Land and sub-soil assets Software and other intangible assets 3) Other assets 4) Payments for financial assets Subtotal: economic classification Contingency reserve Total consolidated expenditure Budget balance Percentage of GDP Financing Change in loan liabilities Domestic short-and long-term loans (net) Foreign loans (net) Change in cash and other balances (-increase) Borrowing requirement (net) GDP 100.0% 61.0% 35.1% 14.6% 11.3% 33.0% 7.7% 1.6% 2.5% 0.2% 1.9% 2.1% 17.0% 5.1% 3.8% 1.0% 0.1% 0.1% 0.0% 0.9% 1 583 811.3 100.0% 1 087 568.4 60.0% 627 126.2 34.6% 251 043.4 13.8% 209 398.7 11.5% 597 694.0 33.0% 138 650.7 7.6% 28 058.6 1.5% 46 642.0 2.6% 2 409.4 0.1% 35 924.0 2.0% 37 436.5 2.1% 308 572.7 17.0% 98 457.0 5.4% 73 805.0 4.1% 22 148.0 1.2% 597.9 0.0% 1 520.5 0.1% 385.5 0.0% 29 833.4 1.6% 1 696 382.3 100.0% 1 168 593.0 60.1% 667 624.3 34.4% 268 266.4 13.8% 232 702.3 12.0% 640 825.5 33.0% 150 216.4 7.7% 29 732.6 1.5% 48 724.4 2.5% 2 542.0 0.1% 35 775.2 1.8% 40 493.8 2.1% 333 341.1 17.2% 103 121.0 5.3% 75 543.3 3.9% 25 299.8 1.3% 717.6 0.0% 1 138.0 0.1% 422.4 0.0% 30 406.9 1.6% 1 836 598.0 100.0% 1 262 444.2 60.6% 713 094.6 34.2% 293 472.9 14.1% 255 876.7 12.3% 678 647.3 32.6% 162 427.5 7.8% 27 753.7 1.3% 50 901.7 2.4% 2 455.7 0.1% 40 527.9 1.9% 42 773.6 2.1% 351 807.3 16.9% 110 994.1 5.3% 81 579.5 3.9% 27 214.8 1.3% 566.6 0.0% 1 220.3 0.1% 412.9 0.0% 30 928.5 1.5% 100.0% 1 813 552.7 100.0% 13 000.0 1 942 946.5 100.0% 6 000.0 2 083 014.1 100.0% 6 000.0 1 826 552.7 1 948 946.5 2 089 014.1 -242 741.4 -4.5% -252 564.2 -4.3% -252 416.1 -4.0% 209 992.1 -20 992.2 53 741.5 242 741.4 5 413 824.5 230 405.0 30 889.0 -8 729.7 252 564.2 5 812 415.1 232 664.5 39 246.2 -19 494.6 252 416.1 6 249 069.5
2019 BUDGET REVIEW Table 8 Consolidated government expenditure: functional classification 1) 1) Consisting of national and provincial government, social security funds and public entities. Refer to Annexure W2 for a detailed list of entities included. In some cases figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank. Source: National Treasury 208 R million 2015/16 2016/17 2017/18 2018/19 % of Outcometotal % of Outcometotal % of Outcometotal Revised estimate General public services2) of which: debt-service costs Defence Public order and safety Police services Law courts Prisons Public order and safety not elsewhere classified Economic affairs General econom ic, com m ercial and labour affairs Agriculture, forestry, fishing and hunting Fuel and energy M ining, m anufacturing and construction Transport Com m unication Other industries Econom ic affairs not elsew here classified Environmental protection Housing and community amenities Housing developm ent Com m unity developm ent Water supply Housing and com m unity am enities not elsew here classified Health Recreation and culture Education Social protection Subtotal: functional classification Plus: Contingency reserve Total consolidated expenditure 218 026.016.0% 128 795.69.4% 45 938.63.4% 122 980.69.0% 83 575.06.1% 18 649.51.4% 20 588.71.5% 167.3 187 274.013.7% 35 282.02.6% 18 417.71.3% 32 356.52.4% 2 127.00.2% 83 019.56.1% 3 220.90.2% 2 891.20.2% 9 959.10.7% 10 319.70.8% 142 524.310.4% 34 353.72.5% 72 462.85.3% 35 707.82.6% –– 161 025.411.8% 9 319.80.7% 266 575.019.5% 202 343.814.8% 245 540.017.0% 146 496.710.2% 47 495.43.3% 130 553.69.0% 88 656.26.1% 20 152.61.4% 21 542.21.5% 202.6 168 539.811.7% 32 783.92.3% 19 415.41.3% 9 401.60.7% 2 467.30.2% 85 950.26.0% 5 053.40.4% 3 647.90.3% 9 820.00.7% 9 582.70.7% 147 302.410.2% 36 257.22.5% 73 037.65.1% 38 002.62.6% 5.00.0% 173 654.812.0% 10 887.90.8% 288 752.420.0% 220 672.115.3% 270 688.017.5% 162 644.610.5% 49 165.73.2% 139 029.99.0% 95 262.96.2% 20 750.81.3% 22 788.61.5% 227.7 173 501.511.2% 33 002.22.1% 18 996.91.2% 10 239.20.7% 2 560.30.2% 86 644.95.6% 8 171.40.5% 3 970.30.3% 9 916.40.6% 10 453.60.7% 152 217.79.9% 37 675.22.4% 79 770.15.2% 34 761.52.3% 10.90.0% 188 842.812.2% 11 581.60.8% 312 624.320.3% 235 702.115.3% 282 215.8 182 217.9 48 690.2 147 415.5 100 903.2 22 391.2 23 849.0 272.2 185 062.6 34 778.3 21 682.6 9 247.6 2 430.6 95 444.2 6 799.8 4 239.2 10 440.3 10 648.2 160 920.5 37 012.0 87 533.9 36 374.7 – 204 642.6 12 411.1 349 920.2 263 498.4 1 366 327.1100% – 1 442 981.1100% – 1 543 807.3100% – 1 665 425.1 – 1 366 327.1 1 442 981.1 1 543 807.3 1 665 425.1
STATISTICAL ANNEXURE Table 8 Consolidated government expenditure: functional classification 1) 2) Mainly general administration, cost of raising loans and unallocable capital expenditure, as well as National Revenue Fund payments previously accounted for separately. 209 2018/19 2019/20 2020/21 2021/22 R million % of total Budget% of estimate total Budget% of estimate total Budget% of estimate total 16.9% 10.9% 2.9% 8.9% 6.1% 1.3% 1.4% 11.1% 2.1% 1.3% 0.6% 0.1% 5.7% 0.4% 0.3% 0.6% 0.6% 9.7% 2.2% 5.3% 2.2% – 12.3% 0.7% 21.0% 15.8% 304 210.816.8% 202 207.811.1% 49 665.92.7% 155 482.88.6% 106 162.75.9% 23 925.71.3% 25 103.51.4% 290.9 219 040.912.1% 38 260.42.1% 21 564.31.2% 32 982.91.8% 2 566.70.1% 103 331.35.7% 4 721.60.3% 4 395.30.2% 11 218.40.6% 12 411.00.7% 175 778.19.7% 39 289.22.2% 97 070.15.4% 39 418.82.2% –– 218 068.912.0% 13 286.60.7% 381 274.721.0% 284 332.815.7% 330 960.717.0% 224 066.111.5% 52 394.42.7% 164 484.08.5% 112 518.55.8% 25 017.41.3% 26 637.21.4% 310.9 230 671.611.9% 40 182.62.1% 21 649.61.1% 33 134.51.7% 2 666.00.1% 111 899.45.8% 4 756.90.2% 4 524.40.2% 11 858.10.6% 12 079.60.6% 189 826.19.8% 41 753.72.1% 105 773.35.4% 42 299.12.2% –– 234 164.912.1% 13 602.80.7% 410 044.021.1% 304 718.415.7% 368 057.917.7% 247 408.411.9% 50 872.82.4% 175 327.68.4% 119 965.65.8% 26 603.61.3% 28 423.41.4% 335.10.0% 245 587.211.8% 41 990.62.0% 22 697.21.1% 34 418.51.7% 2 572.90.1% 121 003.95.8% 6 053.20.3% 4 710.80.2% 12 140.10.6% 12 530.30.6% 205 232.39.9% 43 562.52.1% 114 626.45.5% 47 043.42.3% –– 250 069.712.0% 14 562.40.7% 437 637.321.0% 323 136.615.5% 2) General public services of which: debt-service costs Defence Public order and safety Police services Law courts Prisons Public order and safety not elsew here classified Economic affairs General econom ic, com m ercial and labour affairs Agriculture, forestry, fishing and hunting Fuel and energy M ining, m anufacturing and construction Transport Com m unication Other industries Econom ic affairs not elsew here classified Environmental protection Housing and community amenities Housing developm ent Com m unity developm ent Water supply Housing and com m unity am enities not elsewhere classified Health Recreation and culture Education Social protection Subtotal: functional classification Plus: Contingency reserve Total consolidated expenditure 100% 1 813 552.7100% 13 000.0 1 942 946.5100% 6 000.0 2 083 014.1100% 6 000.0 1 826 552.7 1 948 946.5 2 089 014.1
2019 BUDGET REVIEW Table 9 Consolidated government revenue, expenditure and financing Source: National Treasury 210 R million 2015/16 2016/17 2017/18 2018/19 Outcome Outcome Outcome Revised estimate Operating account Current receipts Tax receipts (net of SACU transfers) Non-tax receipts (including departmental receipts) Transfers received Current payments Compensation of employees Goods and services Interest and rent on land Transfers and subsidies Current balance Percentage of GDP Capital account Capital receipts Transfers and subsidies Payments for capital assets Capital financing requirement Percentage of GDP Transactions in financial assets and liabilities Contingency reserve Budget balance Percentage of GDP Primary balance Percentage of GDP Financing Change in loan liabilities Domestic short-and long-term loans (net) Foreign loans (net) Change in cash and other balances (-increase) Borrowing requirement (net) GDP 1 172 151.4 1 083 973.2 80 528.8 7 649.4 1 179 498.2 473 215.5 197 903.9 138 462.6 369 916.2 -7 346.9 -0.2% 330.2 65 420.1 90 302.2 -155 392.1 -3.8% 11 722.1 – -151 016.9 -3.7% -12 554.3 -0.3% 159 285.6 -3 879.4 -4 389.4 151 016.9 4 126 999.0 1 267 191.4 1 174 525.2 85 772.3 6 893.9 1 285 678.8 511 554.0 218 927.6 154 405.5 400 791.7 -18 487.4 -0.4% 543.6 69 724.8 79 044.0 -148 225.2 -3.4% 9 674.2 – -157 038.4 -3.6% -2 632.9 -0.1% 159 809.2 35 443.9 -38 214.7 157 038.4 4 412 749.0 1 333 749.7 1 234 918.9 91 305.0 7 525.8 1 375 611.7 547 358.4 227 469.1 169 775.4 431 008.8 -41 862.0 -0.9% 532.5 72 641.7 75 204.6 -147 313.9 -3.1% -1 122.2 – -190 298.0 -4.0% -20 522.6 -0.4% 206 212.9 29 791.5 -45 706.4 190 298.0 4 720 955.0 1 439 825.8 1 340 399.3 94 350.1 5 076.3 1 495 453.4 585 193.2 242 604.9 188 726.3 478 928.9 -55 627.7 -1.1% 296.9 70 273.4 84 229.2 -154 205.7 -3.0% -374.4 – -210 207.8 -4.2% -21 481.5 -0.4% 180 269.0 51 637.9 -21 699.1 210 207.8 5 059 106.3
STATISTICAL ANNEXURE Table 9 Consolidated government revenue, expenditure and financing 211 2019/20 2020/21 2021/22 Budget estimate Budget estimate Budget estimate R million 1 568 657.7 1 464 708.3 98 600.8 5 348.6 1 610 269.7 627 126.2 251 043.4 209 398.7 522 701.3 -41 612.0 -0.8% 268.4 74 992.7 98 457.0 -173 181.2 -3.2% -14 948.2 13 000.0 -242 741.4 -4.5% -33 342.6 -0.6% 209 992.1 -20 992.2 53 741.5 242 741.4 5 413 824.5 1 687 137.0 1 574 763.7 106 728.7 5 644.6 1 730 964.9 667 624.3 268 266.4 232 702.3 562 371.9 -43 827.9 -0.8% 273.5 78 453.7 103 121.0 -181 301.2 -3.1% -21 435.1 6 000.0 -252 564.2 -4.3% -19 861.9 -0.3% 230 405.0 30 889.0 -8 729.7 252 564.2 5 812 415.1 1 826 293.5 1 703 362.0 117 160.6 5 771.0 1 855 698.4 713 094.6 293 472.9 255 876.7 593 254.2 -29 404.9 -0.5% 280.0 85 393.1 110 994.1 -196 107.2 -3.1% -20 904.0 6 000.0 -252 416.1 -4.0% 3 460.7 0.1% 232 664.5 39 246.2 -19 494.6 252 416.1 6 249 069.5 Operating account Current receipts Tax receipts (net of SACU transfers) Non-tax receipts (including departmental receipts) Transfers received Current payments Compensation of employees Goods and services Interest and rent on land Transfers and subsidies Current balance Percentage of GDP Capital account Capital receipts Transfers and subsidies Payments for capital assets Capital financing requirement Percentage of GDP Transactions in financial assets and liabilities Contingency reserve Budget balance Percentage of GDP Primary balance Percentage of GDP Financing Change in loan liabilities Domestic short-and long-term loans (net) Foreign loans (net) Change in cash and other balances (-increase) Borrowing requirement (net) GDP
2019 BUDGET REVIEW Table 10 Total debt of government 1) 1) 2) 3) 4) Debt of the central government, excluding extra-budgetary institutions and social security funds. As projected at the end of January 2019. Includes non-marketable Treasury bills, retail bonds, loan levies, former regional authorities and Namibian loans. Bank balances of the National Revenue Fund (balances of government's accounts with the Reserve Bank and commercial banks). Bank balances in foreign currencies are revaluated using forward estimates of exchange rates. Source: National Treasury and Reserve Bank 212 R million 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 Domestic debt Marketable Government bonds Treasury bills Bridging bonds Non-m arketable 3) Gross loan debt Cash balances 4) Net loan debt Foreign debt Gross loan debt 5) Cash balances 4) Net loan debt Gross loan debt Net loan debt Gold and Foreign Exchange Contingency Reserve Account 6) 225 662 210 191 7 018 8 453 5 705 231 367 -6 665 224 702 263 844 248 877 10 700 4 267 4 700 268 544 -8 630 259 914 290 424 276 124 14 300 – 6 421 296 845 -2 757 294 088 318 773 301 488 17 285 – 2 778 321 551 -4 798 316 753 344 938 325 938 19 000 – 2 013 346 951 -5 166 341 785 354 706 332 706 22 000 – 998 355 704 -7 285 348 419 365 231 339 731 25 500 – 2 382 367 613 -2 650 364 963 8 784 – 8 784 10 944 – 10 944 11 394 – 11 394 14 560 – 14 560 16 276 – 16 276 25 799 – 25 799 31 938 – 31 938 240 151 233 486 279 488 270 858 308 239 305 482 336 111 331 313 363 227 358 061 381 503 374 218 399 551 396 901 4 147 – 2 169 73 14 431 9 200 18 170 Composition of gross debt (excluding deduction of cash balances) M arketable dom estic debt Government bonds Treasury bills Bridging bonds Non-m arketable dom estic debt 3) Dom estic debt Foreign debt 5) 94.0% 87.5% 2.9% 3.5% 2.4% 94.4% 89.0% 3.8% 1.5% 1.7% 94.2% 89.6% 4.6% 0.0% 2.1% 94.8% 89.7% 5.1% 0.0% 0.8% 95.0% 89.7% 5.2% 0.0% 0.6% 93.0% 87.2% 5.8% 0.0% 0.3% 91.4% 85.0% 6.4% 0.0% 0.6% 96.3% 3.7% 96.1% 3.9% 96.3% 3.7% 95.7% 4.3% 95.5% 4.5% 93.2% 6.8% 92.0% 8.0% Total as percentage of GDP Gross dom estic debt Net dom estic debt Gross foreign debt Net foreign debt Gross loan debt Net loan debt 46.5% 45.2% 1.8% 1.8% 48.3% 47.0% 47.6% 46.1% 1.9% 1.9% 49.5% 48.0% 45.5% 45.1% 1.7% 1.7% 47.3% 46.8% 44.8% 44.1% 2.0% 2.0% 46.8% 46.2% 44.7% 44.0% 2.1% 2.1% 46.8% 46.1% 41.4% 40.6% 3.0% 3.0% 44.4% 43.6% 37.6% 37.4% 3.3% 3.3% 40.9% 40.6%
STATISTICAL ANNEXURE Table 10 Total debt of government 1) 5) Valued at appropriate foreign exchange rates up to 31 March 2018 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2019, projected to depreciate in line with inflation differentials. 6) The balance on the Gold and Foreign Exchange Contingency Reserve Account on 31 March 2019 represents an estimated balance on the account. No provision for any profits or losses on this account has been made for subsequent years. A negative balance indicates a profit and a positive balance a loss. 213 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 R million 349 415 331 505 17 910 – 2 030 351 445 -6 549 344 896 350 870 328 820 22 050 – 1 910 352 780 -9 730 343 050 388 300 359 700 28 600 – 1 999 390 299 -12 669 377 630 428 593 394 143 34 450 – 3 498 432 091 -30 870 401 221 457 780 417 380 40 400 – 3 699 461 479 -58 187 403 292 467 864 422 064 45 800 – 3 238 471 102 -75 315 395 787 478 265 426 415 51 850 – 2 555 480 821 -93 809 387 012 Domestic debt M arketable Government bonds Treasury bills Bridging bonds 3) Non-m arketable Gross loan debt 4) Cash balances Net loan debt Foreign debt 5) Gross loan debt 4) Cash balances Net loan debt Gross loan debt Net loan debt Gold and Foreign Exchange 6) Contingency Reserve Account 82 009 – 82 009 74 286 – 74 286 64 670 – 64 670 69 405 – 69 405 66 846 – 66 846 82 581 – 82 581 96 218 – 96 218 433 454 426 905 427 066 417 336 454 969 442 300 501 496 470 626 528 325 470 138 553 683 478 368 577 039 483 230 28 024 36 577 18 036 5 292 -1 751 -28 514 -72 189 80.6% 76.5% 4.1% 0.0% 0.5% 82.2% 77.0% 5.2% 0.0% 0.4% 85.3% 79.1% 6.3% 0.0% 0.4% 85.5% 78.6% 6.9% 0.0% 0.7% 86.6% 79.0% 7.6% 0.0% 0.7% 84.5% 76.2% 8.3% 0.0% 0.6% 82.9% 73.9% 9.0% 0.0% 0.4% Composition of gross debt (excluding deduction of cash balances) M arketable dom estic debt Government bonds Treasury bills Bridging bonds 3) Non-m arketable dom estic debt Dom estic debt 5) Foreign debt 81.1% 18.9% 82.6% 17.4% 85.8% 14.2% 86.2% 13.8% 87.3% 12.7% 85.1% 14.9% 83.3% 16.7% 32.6% 31.9% 7.6% 7.6% 40.1% 39.5% 28.2% 27.4% 5.9% 5.9% 34.1% 33.4% 28.7% 27.8% 4.8% 4.8% 33.5% 32.6% 28.6% 26.6% 4.6% 4.6% 33.2% 31.2% 27.4% 24.0% 4.0% 4.0% 31.4% 27.9% 24.7% 20.7% 4.3% 4.3% 29.0% 25.0% 22.1% 17.8% 4.4% 4.4% 26.6% 22.3% Total as percentage of GDP Gross dom estic debt Net dom estic debt Gross foreign debt Net foreign debt Gross loan debt Net loan debt
2019 BUDGET REVIEW Table 10 Total debt of government 1) 1) 2) 3) 4) Debt of the central government, excluding extra-budgetary institutions and social security funds. As projected at the end of January 2019. Includes non-marketable Treasury bills, retail bonds, loan levies, former regional authorities and Namibian loans. Bank balances of the National Revenue Fund (balances of government's accounts with the Reserve Bank and commercial banks). Bank balances in foreign currencies are revaluated using forward estimates of exchange rates. Source: National Treasury and Reserve Bank 214 R million 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Domestic debt Marketable Government bonds Treasury bills Bridging bonds Non-m arketable 3) Gross loan debt Cash balances 4) Net loan debt Foreign debt Gross loan debt 5) Cash balances 4) Net loan debt Gross loan debt Net loan debt Gold and Foreign Exchange Contingency Reserve Account 6) 527 751 462 751 65 000 – 1 956 529 707 -101 349 428 358 700 532 585 992 114 540 – 4 943 705 475 -106 550 598 925 869 588 733 438 136 150 – 23 133 892 721 -111 413 781 308 1 045 415 890 256 155 159 – 25 524 1 070 939 -130 450 940 489 1 210 834 1 038 849 171 985 – 30 300 1 241 134 -103 774 1 137 360 1 409 718 1 217 512 192 206 – 31 381 1 441 099 -120 807 1 320 292 1 601 499 1 399 282 202 217 – 30 586 1 632 085 -120 304 1 511 781 97 268 – 97 268 99 454 -25 339 74 115 97 851 -58 750 39 101 116 851 -67 609 49 242 124 555 -80 308 44 247 143 659 -84 497 59 162 166 830 -94 404 72 426 626 975 525 626 804 929 673 040 990 572 820 409 1 187 790 989 731 1 365 689 1 181 607 1 584 758 1 379 454 1 798 915 1 584 207 -101 585 -35 618 -28 283 -67 655 -125 552 -177 913 -203 396 Composition of gross debt (excluding deduction of cash balances) M arketable dom estic debt Government bonds Treasury bills Bridging bonds Non-m arketable dom estic debt 3) Dom estic debt Foreign debt 5) 84.2% 73.8% 10.4% 0.0% 0.3% 87.0% 72.8% 14.2% 0.0% 0.6% 87.8% 74.0% 13.7% 0.0% 2.3% 88.0% 75.0% 13.1% 0.0% 2.1% 88.7% 76.1% 12.6% 0.0% 2.2% 89.0% 76.8% 12.1% 0.0% 2.0% 89.0% 77.8% 11.2% 0.0% 1.7% 84.5% 15.5% 87.6% 12.4% 90.1% 9.9% 90.2% 9.8% 90.9% 9.1% 90.9% 9.1% 90.7% 9.3% Total as percentage of GDP Gross dom estic debt Net dom estic debt Gross foreign debt Net foreign debt Gross loan debt Net loan debt 22.0% 17.8% 4.0% 4.0% 26.0% 21.8% 27.7% 23.5% 3.9% 2.9% 31.5% 26.4% 31.6% 27.7% 3.5% 1.4% 35.1% 29.0% 34.8% 30.6% 3.8% 1.6% 38.6% 32.2% 37.4% 34.3% 3.8% 1.3% 41.1% 35.6% 39.9% 36.5% 4.0% 1.6% 43.8% 38.2% 42.2% 39.1% 4.3% 1.9% 46.5% 41.0%
STATISTICAL ANNEXURE Table 10 Total debt of government 1) 5) Valued at appropriate foreign exchange rates up to 31 March 2018 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2019, projected to depreciate in line with inflation differentials. 6) The balance on the Gold and Foreign Exchange Contingency Reserve Account on 31 March 2019 represents an estimated balance on the account. No provision for any profits or losses on this account has been made for subsequent years. A negative balance indicates a profit and a positive balance a loss. 215 2015/16 2016/17 2017/18 2) 2018/19 2019/20 2020/21 2021/22 R million 1 782 042 1 572 574 209 468 – 37 322 1 819 364 -112 250 1 707 114 1 981 627 1 731 657 249 970 – 38 508 2 020 135 -110 262 1 909 873 2 242 894 1 949 573 293 321 – 29 013 2 271 907 -123 241 2 148 666 2 464 614 2 157 293 307 321 – 29 511 2 494 126 -138 657 2 355 469 2 706 331 2 384 010 322 321 – 41 245 2 747 576 -117 157 2 630 419 2 986 330 2 629 009 357 321 – 42 635 3 028 965 -117 157 2 911 808 3 267 980 2 874 659 393 321 – 43 580 3 311 560 -117 157 3 194 403 Domestic debt M arketable Government bonds Treasury bills Bridging bonds 3) Non-m arketable Gross loan debt 4) Cash balances Net loan debt Foreign debt 5) Gross loan debt 4) Cash balances Net loan debt Gross loan debt Net loan debt Gold and Foreign Exchange 6) Contingency Reserve Account 199 607 -102 083 97 524 212 754 -114 353 98 401 217 811 -106 110 111 701 320 223 -153 628 166 595 295 354 -96 768 198 586 328 867 -93 404 235 463 372 075 -95 193 276 882 2 018 971 1 804 638 2 232 889 2 008 274 2 489 718 2 260 367 2 814 349 2 522 064 3 042 930 2 829 004 3 357 832 3 147 271 3 683 635 3 471 285 -304 653 -231 158 -193 917 -278 981 -278 981 -278 981 -278 981 88.3% 77.9% 10.4% 0.0% 1.8% 88.7% 77.6% 11.2% 0.0% 1.7% 90.1% 78.3% 11.8% 0.0% 1.2% 87.6% 76.7% 10.9% 0.0% 1.0% 88.9% 78.3% 10.6% 0.0% 1.4% 88.9% 78.3% 10.6% 0.0% 1.3% 88.7% 78.0% 10.7% 0.0% 1.2% Composition of gross debt (excluding deduction of cash balances) M arketable dom estic debt Government bonds Treasury bills Bridging bonds 3) Non-m arketable dom estic debt Dom estic debt 5) Foreign debt 90.1% 9.9% 90.5% 9.5% 91.3% 8.7% 88.6% 11.4% 90.3% 9.7% 90.2% 9.8% 89.9% 10.1% 44.1% 41.4% 4.8% 2.4% 48.9% 43.7% 45.8% 43.3% 4.8% 2.2% 50.6% 45.5% 48.1% 45.5% 4.6% 2.4% 52.7% 47.9% 49.3% 46.6% 6.3% 3.3% 55.6% 49.9% 50.8% 48.6% 5.5% 3.7% 56.2% 52.3% 52.1% 50.1% 5.7% 4.1% 57.8% 54.1% 53.0% 51.1% 6.0% 4.4% 58.9% 55.5% Total as percentage of GDP Gross dom estic debt Net dom estic debt Gross foreign debt Net foreign debt Gross loan debt Net loan debt
2019 BUDGET REVIEW Table 11 Net loan debt, provisions and contingent liabilities 1) 1) 2) 3) Medium-term forecasts of some figures are not available and are kept constant. Debt of the central government, excluding extra-budgetary institutions and socal security funds. Provisions are liabilities for which the payment date or amount is uncertain. The provisions for multilateral institutions are the unpaid portion of government's subscription to these institutions, payable on request. Source: National Treasury 216 R million 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 Net loan debt2) Provisions3) African Developm ent Bank Developm ent Bank of Southern Africa Governm ent em ployee leave credits International Bank for Reconstruction and Developm ent International M onetary Fund M ultilateral Investm ent Guarantee Agency New Developm ent Bank Contingent liabilities Guarantees4) Agricultural cooperatives Central Energy Fund Denel Development Bank of Southern Africa Eskom 5) Foreign central banks and governments Former regional authorities Guarantee scheme for housing loans to employees Guarantee scheme for motor vehicles – senior officials Industrial Development Corporation of South Africa Independent power producers Irrigation boards Kalahari East Water Board Komati Basin Water Authority Land Bank Lesotho Highlands Development Authority Nuclear Energy Corporation of South Africa Passenger Rail Agency of South Africa Public-private partnerships South African Airways South African Broadcasting Corporation South African Express South African National Roads Agency Limited South African Post Office South African Reserve Bank Telkom South Africa Trans-Caledon Tunnel Authority Transnet Universities and technikons Other contingent liabilities 6) Claims against government departments Export Credit Insurance Corporation of SA Limited Government Employees Pension Fund Post-retirement medical assistance Road Accident Fund Unemployment Insurance Fund Other 525 626 61 869 10 186 4 800 8 503 14 482 23 760 138 – 195 386 63 038 94 130 880 12 348 – 58 206 255 8 1 446 – 43 16 1 453 1 500 524 20 – – 4 460 – – 6 708 – 142 138 19 588 12 895 126 132 348 17 737 13 351 – 56 000 42 500 2 401 359 673 040 81 051 8 091 4 800 9 762 11 187 47 104 107 – 279 137 139 395 94 19 1 850 26 370 46 678 25 190 154 3 952 – 46 16 1 406 2 500 401 20 1 217 10 296 1 351 1 000 – 12 287 – – 108 20 721 11 620 71 139 742 24 064 9 191 – 56 000 45 366 3 728 1 393 820 409 73 693 7 492 4 800 10 815 10 360 40 127 99 – 305 104 160 043 94 – 1 850 25 713 67 057 – 154 104 3 740 – 44 16 1 340 1 750 227 20 468 10 443 1 916 1 000 – 18 605 – – 90 18 489 9 887 33 145 061 31 310 9 614 – 65 348 33 547 3 315 1 927 989 731 98 593 27 300 4 800 11 266 11 703 43 412 112 – 345 865 164 338 94 – 1 850 25 554 77 230 – 138 64 2 646 – 48 15 1 247 1 000 171 20 264 10 414 1 300 889 – 19 426 – – 85 19 886 3 975 20 181 527 42 969 10 025 – 65 348 53 919 3 381 5 885 1 181 607 116 231 32 725 4 800 12 316 15 935 50 321 134 – 436 288 224 768 93 – 1 850 25 497 103 523 – 124 46 1 575 34 356 46 6 1 190 800 132 20 133 10 172 2 238 167 – 19 482 – – 90 20 460 3 757 10 211 520 43 628 12 482 – 65 348 82 838 3 241 3 983 1 379 454 134 045 38 063 4 800 12 924 19 407 58 697 154 – 494 114 288 041 93 – 1 850 25 635 125 125 – 112 26 1 504 68 345 44 – 1 148 1 004 113 20 92 10 127 5 010 – 539 23 866 – – 111 20 516 3 757 3 206 073 45 131 13 780 – 69 938 69 435 3 611 4 178 1 584 207 160 383 43 811 20 000 13 030 23 579 59 786 177 – 579 153 327 169 93 – 1 850 4 030 149 944 – 105 13 1 344 96 159 44 – 986 2 005 82 20 48 10 107 8 419 – 539 27 445 270 – 100 20 807 3 757 1 251 984 48 726 15 308 – 69 938 109 298 3 836 4 878
STATISTICAL ANNEXURE Table 11 Net loan debt, provisions and contingent liabilities 1) 4) 5) 6) Amounts drawn against financial guarantees, inclusive of accrued interest. These estimates are based on Eskom's current structure. Other contingent liabilities as disclosed in the consolidated financial statements of departments published annually by the National Treasury. 217 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 R million 1 804 638 217 960 54 766 20 000 13 454 29 028 91 658 215 8 839 605 608 380 136 93 – 1 850 4 258 174 586 – 98 10 1 243 113 971 39 – 889 5 211 62 20 2 10 337 14 394 – 539 27 204 1 270 – 128 21 173 3 757 1 225 472 30 601 16 395 – 69 938 99 152 4 228 5 158 2 008 274 210 974 49 344 20 000 14 137 26 527 79 535 193 21 238 671 023 426 234 93 – 1 850 3 993 202 825 – 93 8 – 138 125 766 38 – 785 3 712 30 20 – 10 049 17 819 – 827 29 458 3 979 – 108 20 886 3 757 – 244 789 29 481 14 015 – 69 938 119 830 6 826 4 699 2 260 367 211 480 44 119 20 000 13 606 23 993 76 358 173 33 231 724 154 453 137 93 – 2 430 3 975 244 678 – 84 6 – 137 122 188 37 – 619 3 813 3 20 – 9 580 11 059 – 867 30 368 400 – 111 18 912 3 757 – 271 017 28 749 18 192 – 69 938 139 204 9 782 5 152 2 522 064 260 586 53 792 20 000 14 490 28 511 85 702 211 57 880 879 648 529 351 93 – 3 430 4 288 294 713 – 78 6 – 152 146 892 37 – 568 2 437 – 20 – 10 090 17 311 – 163 30 289 – – 125 14 857 3 802 – 350 297 28 749 23 167 – 69 938 216 063 7 228 5 152 2 829 004 275 271 53 011 20 000 15 345 28 097 84 458 208 74 152 931 303 552 275 93 – 3 430 4 419 306 784 – 72 6 – 151 153 784 37 – 568 2 437 – 20 – 9 422 17 311 – 163 30 289 – – 130 19 357 3 802 – 379 028 28 749 21 009 – 69 938 252 471 1 709 5 152 3 147 271 297 812 53 346 20 000 16 281 28 275 84 991 209 94 710 974 001 547 428 93 – 3 430 4 503 302 367 – 66 6 – 153 149 466 37 – 568 2 437 – 20 – 8 724 17 311 – 163 30 289 – – 136 23 857 3 802 – 426 573 28 749 23 808 – 69 938 295 325 3 601 5 152 3 471 285 322 200 53 978 20 000 17 242 28 610 85 998 212 116 160 1 015 994 530 773 93 – 3 430 4 495 296 595 – 58 6 – 150 139 258 37 – 568 2 437 – 20 – 8 066 17 311 – 163 30 289 – – 138 23 857 3 802 – 485 221 28 749 28 546 – 69 938 348 861 3 975 5 152 2) Net loan debt 3) Provisions African Developm ent Bank Developm ent Bank of Southern Africa Governm ent em ployee leave credits International Bank for Reconstruction and Developm ent International M onetary Fund M ultilateral Investm ent Guarantee Agency New Developm ent Bank Contingent liabilities 4)Guarantees Agricultural cooperatives Central Energy Fund Denel Development Bank of Southern Africa 5)Eskom Foreign central banks and governments Former regional authorities Guarantee scheme for housing loans to employees Guarantee scheme for motor vehicles – senior officials Industrial Development Corporation of South Africa Independent power producers Irrigation boards Kalahari East Water Board Komati Basin Water Authority Land Bank Lesotho Highlands Development Authority Nuclear Energy Corporation of South Africa Passenger Rail Agency of South Africa Public-private partnerships South African Airways South African Broadcasting Corporation South African Express South African National Roads Agency Limited South African Post Office South African Reserve Bank Telkom South Africa Trans-Caledon Tunnel Authority Transnet Universities and technikons 6)Other contingent liabilities Claims against government departments Export Credit Insurance Corporation of SA Limited Government Employees Pension Fund Post-retirement medical assistance Road Accident Fund Unemployment Insurance Fund Other
W3 Fiscal support for electricity market reform Summary Eskom faces serious financial challenges. To the extent that the company may not be able to meet its interest and capital payments, government has set aside a provisional allocation of R23 billion per annum in the medium-term fiscal framework. Beyond the medium term, the size of support will depend on several factors, including economic growth, tariffs, and the implementation of Eskom’s strategy. The provisional fiscal allocations will support a fundamental reorganisation of the electricity sector, with an initial focus on establishing an independent transmission company under the existing holding company. In addition, the funding should significantly reduce the immediate risks to the economy posed by Eskom. The annexure provides details on the envisaged reconfiguration process and fundamental re-engineering of the enterprise that must accompany the fiscal support. The intention is to return Eskom and the broader electricity sector to operational and financial sustainability. Over time, in conjunction with a comprehensive operational turnaround, this will restore reliable electricity supply. Challenges and reconfiguration Globally, countries are shifting away from fossil fuels towards renewable energy. Growth in coal consumption is slowing in India and China, and investment in renewable energy is rapidly increasing. There has been a dramatic fall in the prices of solar and wind energy. Energy auctions, rather than administratively determined feed-in-tariffs, have led to record low prices in the Middle East and in countries such as Chile and Mexico where bid prices have been below US$0.02 per kilowatt hour (i.e. less than R0.30 per kilowatt hour). The nature of an efficient electricity system and grid is changing. Systems no longer resemble Eskom’s vertically integrated monopoly model, with central power stations distributing power via grids to consumers. Instead, they have become increasingly decentralised, with electricity flowing from the centre to the periphery and vice versa. 1
2019 BUDGET REVIEW Eskom generates 95 per cent of the South Africa’s electricity, with around 75 per cent coming from coal. The large size and vertically-integrated structure of Eskom means that any challenge experienced by one part of the business threatens the entire company and places the country’s electricity supply at risk. The company’s fleet performance has significantly deteriorated due to a lack of maintenance and refurbishment over the years, greatly compromising the security of supply. The situation was worsened by coal shortages and the supply of sub-standard coal. Most recently this has resulted in rotational load-shedding being implemented in November and December 2018 and again in the second week of February 2019. From a financial perspective, Eskom is not generating sufficient cash to meet its operating costs and service its debt. It has been borrowing to make the principal and interest payments on its loans. Operating costs are excessive and have been increasing while demand for electricity has been declining. Turnaround plan for Eskom generation Eskom has developed a detailed turnaround plan to address its structural, operational and financial challenges. A key pillar anchoring the strategy is a focus on driving efficiency and reducing costs, which will be achieved through the following initiatives: 1. Optimising primary energy costs through prudent long-term coal sourcing, investment in cost-plus mines and reducing the cost of logistics; Refining capital efficiency by reprioritising capital expenditure and optimising contract management; Driving operational and cost efficiency in procurement; Growing revenue with pricing incentives and the pursuit of international sales and other new growth opportunities; and Improving workforce efficiency by optimising personnel costs, rationalising mid-level management, and building skills. 2. 3. 4. 5. During the past few months Eskom has reduced costs by capping its capital expenditure, reducing operating expenditure, freezing posts and stopping bonuses and salary increases at managerial levels. 2 International examples of energy market reform Many other countries have implemented multi-year, complex electricity market reorganisation. In 2002, the State Grid Corporation of China (SGCC) was created through the Power Plant – Grid Separation reform. This reform unbundled the assets of the former State Electric Power Corporation into five power generation groups, which retained the power stations, and five regional grid subsidiaries belonging to SGCC. In 2017, SGCC had nearly 1 million employees, supplied power to 1.1 billion people and reported revenue of $348.9 billion. During the 1990s, Turkey separated the vertically integrated utility TEK into the Turkish Electricity Generation and Transmission Company (TEAS) and Electricity Distribution Company (TEDAS), both of which were state-owned companies. These changes were implemented with the aim of ensuring security of electricity supply at a time when the country was fiscally challenged. By accompanying these changes with the introduction of independent regulation and open access to the electricity network an environment was created which attracted new, private investment in generation capacity without requiring state guarantees. Improvements in operational efficiency through competition resulted in the electricity price declining. During the 1980s the Brazilian electricity utility, Eletrobras, experienced financial distress, halting investment. From 1995, a first wave of reforms was implemented, which saw the establishment of an independent system operator that enabled non-discriminatory access to the grid. The consequence was that the frequency and duration of electricity disruptions halved within a four-year period. The efficiency in the implementation of generation projects also improved, with costs falling by 30 per cent and the time for completing the projects reducing from 6-8 years to 4 years. A second wave of reforms implemented at the start of the century, focussed on clarifying institutional responsibility for planning and ensuring security of supply.
ANNEXURE W3: FISCAL SUPPORT FOR ELECTRICITY MARKET REFORM Overall Eskom is committing to accelerate cost compression to more than R20 billion per year by 2022. These savings exclude reductions to Eskom’s salary bill. Government has already begun consulting labour on these matters. As part of its broader turnaround plan Eskom has developed a nine-point generation recovery plan to deal with escalating unplanned breakdowns and coal shortages.1 The key elements of the plan focus on resolving unplanned breakdowns, addressing the performance and reliability challenges affecting the new units at Medupi and Kusile, improving the coal stock days and strengthening human resource capacity. An independent technical audit team, comprising local and international experts, will be appointed to review the plan and evaluate the state of the power stations. Institutional separation of Eskom Splitting Eskom into separate companies responsible for the different functions – starting with the creation of an independent transmission entity, combined with the system operator – will set the electricity sector on a new path.2 This proposed restructuring is in line with the 1998 Energy Policy White Paper, which intended that Eskom be restructured into separate generation and transmission companies and that independent distributors would be established. The main benefit of separation will be to reduce information asymmetries, mitigate and distribute risks and strengthen incentives for efficiency. The process will: Enable greater management attention to be focused on turning around the different parts of the business and enhance accountability; Improve transparency, reducing the opportunities for fraud, corruption and rent-seeking; Mitigate the risk arising from an Eskom that is “too big to fail” and limit financial contagion from the underperforming parts of Eskom’s generation business, where most of the problems originate; Position the electricity sector to embrace clean technology, distributed generation and respond to other changes taking place in the electricity sector; Diversify the generation of electricity across a multitude of power producers, thereby reducing the country’s reliance on a single supplier; Provide a stable platform for transparently contracting least-cost and secure power; Provide open access to the grid and remove conflicts of interest to the procurement of power, both conventional and renewable, from independent generators; Generate competition in the electricity market that is expected to drive improvements in efficiency and put downward pressure on prices; Crowd private investment into the electricity sector; and Allow lenders to separately fund the different components of the business, allowing debt to be priced more tightly, as it more accurately reflects the unique risks of each individual business. • • • • • • • • • • 1 See: http://www.eskom.co.za/news/Documents/StateSystemBriefing16Nov2018.pdf 2 In the 2019 SONA speech the President stated that “of particular and immediate importance is the entity to manage an independent state-owned transmission grid combined with the systems operator and power planning, procurement and buying functions.” 3
2019 BUDGET REVIEW Creation of a transmission company At this stage, Eskom Holdings is proposing establish separate subsidiaries, each with its own board. The assets, debts, people and licenses of the respective businesses will be migrated to the subsidiaries. In due course, Eskom will be required to provide separate, audited financial results for each of their three businesses on a preliminary basis. Priority will be given to the creation of the transmission company by establishing a subsidiary of Eskom Holdings with an independent board appointed by mid-2019. The new company’s assets will consist of all existing Eskom transmission network assets, including grid and substations and associated infrastructure, national control centre and system operator assets as well as Eskom’s Peaker power stations (pumped storage, hydro and gas turbines). In addition, all transmission servitudes and property rights currently held by Eskom will also need to be migrated to the transmission company. The transmission license will need to be amended to allow for the buying and selling of electricity and transferred to the transmission company. Likewise, supply agreements with existing clients would need to be migrated to the transmission company and supply contracts concluded between the transmission and distribution companies. Following consultation and a new agreement with labour unions, the migration of people into the newly established subsidiaries will be done in terms of the Labour Relations Act and workers’ rights will be respected. Next steps Given the magnitude of the task, many details of Eskom’s turnaround and restructuring will be finalised in the months ahead. The first step will be to appoint a Chief Reorganisation Officer, who will work with the Board and management to implement the Eskom Sustainability Task Team Recommendations. Strict conditions will be attached to the fiscal support to drive the changes that are required, including cost containment measures. Simultaneously, critical maintenance of the power plants must be undertaken and their technical performance improved. The management of the capital expenditure programme needs to be strengthened to ensure that expenditure is optimised, costs are contained and that the quality of work is closely monitored. To this end, the Eskom Board will be required to enter into a new shareholder compact with the Minister of Public Enterprises setting out these requirements. Executive remuneration will be tied to delivering on these commitments, which will be cascaded down throughout the organisation. The corporate restructuring and turnaround will be unprecedented in South Africa. In the process of doing so, extensive consultation with all affected stakeholders will take place and the rights of labour, lenders and independent generators will be protected. 4
