PANEL DISCUSSION: FINANCIAL SUSTAINABILITY AND FISCAL RESILIENCE ACROSS GOVERNMENT

1. PANEL DISCUSSION: FINANCIAL SUSTAINABILITY AND FISCAL RESILIENCE ACROSS GOVERNMENT

2. INTRODUCTION • The current economic climate characterised by low growth, rising unemployment, increasing fuel and food prices, above-inflation increases in water and electricity tariffs and greater taxation, is placing a great strain on the finances of consumers and their ability to pay their bills and taxes due to lower disposable income. Hence, personal loan are increasing. • This is impacting on the cash collection rates, cash flow and liquidity of municipalities, entities and departments. • The constrained environment described above, coupled with the service delivery backlogs, high rate of urbanisation, and growing demand for free basic services, education, health and housing are threatening the financial sustainability and viability of government finances. The impact of the new NHI is still not fully known as this stage. • There is also cross subsidization. • The SOE’s are performing poorly. SARS is under-collecting. • Is this situation sustainable? What can we do about it? What can we do to ensure the fiscal sustainability and resilience of government?

3. THE BASICS • Obtain an unqualified / clean audit report. • Achieve an investment-grade credit rating – sovereign rating under threat. • Your budget must be sustainable, relevant, as well as strategically aligned and led. • Budget for a surplus to fund additional capital expenditure and maintain reserves. • Increase income. Achieve a collection of 95% or above. Revenue completeness is key. • Explore alternate sources of funding to close any funding gap, such as a local business tax, development levies, bond issuance, land value capture, etc. • Ensure daily cash flow management with strong liquidity and cash on hand of 60-90 days. • Low gearing - well below the National Treasury benchmark of 45%. Reduce cost of borrwings. • Eliminate irregular, unauthorized, fruitless & wasteful expenditure. • Zero tolerance to fraud and corruption, and non-compliance. • Be strong on consequence management in terms of disciplinary hearings and blacklisting.

4. EXPENDITURE • Reduce expenditure. Top 10 items of expenditure must be closely monitored (monthly). • Ensure no over-spend on operating expenditure items. There must be no deficits. • Take cost containment and austerity measures seriously – National Treasury circulars. Report on savings on a monthly basis. • Improve productivity. • ROI or cost-benefit analysis must be demonstrated before a project is approved. For example, smart city projects must show a reasonable ROI or turnover period. • Ensure value for money – get better bang for our buck on our procurement spend: • - SCM benchmarking of prices – ensure not over-charged • - SABS standards • - transversal contracts • - supplier performance - check that contractors deliver what they are being paid for • Financial modelling must have a long-time horizon for fiscal planning.

5. TARIFFS & CHARGES • Tariffs and charges must be cost reflective. • Tariffs and charges must be inflation linked. • The principle of everyone pays needs to be looked at. A flat rate for informal settlements can be explored. • Cross subsidization is not sustainable. • The issue of bulk water and electricity tariff increases above inflation need to be addressed. Salary increases also above inflation. • Review the cost of your indigent support package on an annual basis in terms of its impact on financial sustainability.

6. ECONOMIC DEVELOPMENT • In the State of the Nation address (SONA) the President gave an honest, clear and sobering outline of the current economic situation. He stated: “Our economy is not growing. Not enough jobs are being created”. He thereafter called on all of us as leaders to focus on “those actions that will have the greatest impact…” and those actions that will “catalyze faster movement forward…”. • We need to create a conducive environment for economic development, job creation, existing and new business. Make it easier for new businesses to open and operate. • Need a balance between economic, social and rehabilitative spends. • Whilst cities are the engines of the economy and growth, the impact of state-owned enterprises, such as Eskom, on the economy must be taken into account. All levels of government are responsible for the growth of the economy. • Need to attract foreign direct investment. Need to grow the rates base. Investor are our great hope to reduce unemployment and ensure we decrease the deficit on tax collecting (Stanlib). • Multiplier effect of events needs to be critically evaluated. Are we getting bang for our buck?

7. ECONOMIC DEVELOPMENT • Key interventions to grow the economy as identified by the Governor of the Reserve Bank: • - Increase employment and the tax base • - Improve education outcomes and skills development • - Increase productivity • - Enhance the efficiency and quality of public service delivery • President Ramaphosa outlined a package of 5 measures to stimulate the economy and ensure growth and job creation: • - Implementing growth-enhancing economic reforms. • - Reprioritising public spending to support job creation and economic development. • - Establishing an Infrastructure Fund. • - Addressing urgent matters in education and health. • - Investing in municipal social infrastructure improvement • What else can we do? Are we doing enough on economic development and job creation?

8. STATE OWNED ENTERPRISES • The issue of SOE’s is critical with Eskom posing the biggest risk due to financial problems. • Load shedding and the bailout of SOE’s are having a huge impact on the economy. Is this sustainable? Can we afford to allow this to continue? • National Treasury have identified the following key interventions that it will be driving: • - Promote policy certainty • - Resolve SOE challenges to restore financial sustainability • - Ensure security and reliability of electricity supply • - Attract investment • - Streamline and make government regulations more effective while making it easier for business to register, innovate, export and create jobs. • Boards must be increasingly accountable for the financial and operational performance, as well as repositioning of SOE’s. • Is this enough? What else can we do? We need decisive action. "It's going to be a huge struggle ahead of us to actually overcome this crisis. We'll get it right in the next year or two.“ – PRAVIN Gordhan, March 2019 on Eskom

9. SARS • Tax collection is under-performing in a weak economy with a revenue shortfall of R57 billion in 2018/2019 compared to budget. • The findings of the Nugent Commission have been accepted, but need to be implemented expeditiously. • According to Minister Gordhan, the main issue is a “massive failure of governance and integrity”. • To address this, amendments to the SARS Act have been proposed. • We need to ensure that we once again maximize tax collections to ensure our fiscal sustainability and resilience. • A new e-filing app that is more effective and efficient has been one of the innovations suggested to help taxpayers handle their tax affairs and help improve tax collections. • What innovations do you suggest? “Mboweni’s fixes for SARS include relaunching the business centre unit within two months and re-establishing an "illicit economy" unit to fight the trade in illegal cigarettes and tobacco.” – Financial Mail

10. DEBT & FISCAL RESILIENCE & SUSTAINABILITY • The current economic performance is having a substantial impact on fiscal stability which requires tough and strategic choices. • Debt service costs have increased and consistent poor economic growth exposes us to the risk of re-pricing our debt and the cost of debt becoming unaffordable. • National debt as a % of budget is projected to be 60.2% in 2023/2024, but this was based on growth estimates that will now more likely not be met. It was 44.1% in 2013. • SA government is borrowing R5 billion a day, every day. Meaning the government is over indebted (Stanlib economic outlook). • We need to focus on the issue of rising debt and on stricter controls on the spending side of government finances. • Increases above inflation are not sustainable. The expenditure trends are also difficult to sustain. • Efficiency of spending and procurement are key areas that we need to look at.

11. DEBT & FISCAL RESILIENCE & SUSTAINABILITY • Financial sustainability remains an important factor for South Africa’s sovereign credit rating which is under constant threat to be downgraded. • As a % of GDP, government debt has doubled over the past 10 years and has been identified as a high risk by the IMF. • Key fiscal metrics have continued to deteriorate and fiscal consolidation efforts have been hindered by the debt-burdened SOE’s that have struggled to meet their debt obligations. • This adds to the probability of these contingent liabilities materialising on government’s balance sheet, thereby negatively impacting government debt levels. • Eskom was recently granted a cumulative R69 billion over 3 years in support of its financial position. Despite the support, Eskom’s balance sheet remains stressed and continues to pose a systemic risk to the country’s economy. • How do we stabilise the debt and ensure financial sustainability and fiscal resilience? “The national debt has become a big political issue in recent years because guarantees on loans taken out by state-owned enterprises are not included in the debt figure and these obligations are rising to become a sizeable amount. Obligations to the Government Employees Pension Fund, national pension scheme, & loans by government departments are not included too.”

12. FRAUD & CORRUPTION • We have all listened to the Zondo Commission and the cases of fraud, corruption and state capture. Some cases have been alarming, especially with regard to the SOE’s. • Quantifying the cost of state capture is a Gordian knot. There are some costs that hit immediately, whilst other costs creep on to the balance sheet as “finder’s fees”, “consultancies” and “commissions”, but these are effectively kickbacks. • However, according to the Deputy Director of Public Prosecutions, state capture amounted to R1.5 trillion over the past 4 years and has wiped out a third of South Africa’s R4.9-trillion gross domestic product. This does not even take into account the costs relating to loss of trust, reputation and opportunity. • This is a major threat to financial sustainability and resilience of government. It needs to be eradicated. There needs to be a zero tolerance approach. Need strong controls. • There must be strong leadership and consequence management. Consider lifestyle audits. • What else can we do? Are oversight and controls effective? Is it a policy, system, or people problem?

13. CLIMATE CHANGE • Climate change is resulting in more regular natural disasters, such as storms, flooding, droughts and fires. • Rising sea levels are also causing damage in coastal cities. • The cost of damage is rising and climate change is increasingly becoming a fiscal issue. • It is also displacing people and impeding economic development. • Insurance costs are also going up due to the increased risk. • Climate change is a huge threat to our future financial sustainability and resilience. We need to take action NOW. • Sadly it will impact on the poor the most. Accordingly, we need to commit to the Paris Agreement targets and to zero carbon emissions. • Climate change is a collective responsibility. What innovations have you implemented? “Climate change increasingly poses one of the biggest long-term threats to investments.” – Christiana Figueres, Secretary of UNFCCC.

14. CONCLUSION • We face a daunting task. Economic performance is below the levels required to achieve the objectives of the National Development Plan (NDP). • If we are going to achieve the targets of Vision 2030 we need to take decisive steps to ensure higher economic growth and stabilize our fiscal affairs. • According to Minister Mboweni, “The broad-based decline in economic activity… underlies a lack of confidence, insufficient demand, and a fiscal situation in serious danger due to the financial problems of state-owned entities.” SOE’s need to be sorted out. • Besides the Nugent Commission suggestions, what can we do to improve tax collections? • Need to focus on actions and policy decisions that will result in strong economic activities by attracting investments and making it easier to operate or open a business. • Debt needs to be stabilized. • The effectiveness and efficiency of spend on education and health needs to be reviewed. • We need to send a message that we will get the basics right.

15. CONCLUSION • Need to run a tight fiscal ship where there is efficient spending on the right priorities and a focus on our core mandates. • Fraud, corruption and state capture need to be eliminated. • Fiscal challenges relating to climate change need to be addressed. • Bulk tariff increases must be below inflation. • The cost of free services needs to be reviewed. The principle that “everyone pays” needs to be implemented. • Rising wage bills are a serious risk. • How do we ensure value for money? • How do we improve productivity? • How do we develop people and leaders? • Overcoming these challenges will ensure fiscal resilience and sustainability. But HOW? What can we do differently? How do we turn things around?

16. PANEL DISCUSSION • Each panel member to do a 5-10 minute oral presentation to give their perspective on the issue: • - How can we ensure financial sustainability and fiscal resilience? • - Is what we are doing working? • - What can we do differently? • Then panel members will field questions from the floor - 20 minutes.