- Despite weak economic growth, Treasury has maintained fiscal discipline and is on track for another primary budget surplus, with borrowing costs falling 1.5 percentage points due to restored credibility.
- Public sector infrastructure investment has dropped to multi-year lows despite a promised R1-trillion spending programme, even as private sector investment accelerates.
- The Auditor-General found municipal infrastructure projects are delayed by an average of 21 months due to capacity constraints, poor planning and weak contract management.
- Operation Vulindlela’s focus on local government and the Public Service Amendment Bill aims to rebuild institutional capacity and reduce political interference in public sector management.
The medium-term budget policy statement this week is another opportunity for government to signal real progress in improving the management of the country’s finances. It can cement the positive sentiment that was helped by the removal of South Africa from the FATF grey list and show that we are worthy of a credit-rating upgrade.
The remarkable story is that despite our extremely weak economic growth levels, government has managed to keep tight control of both expenditure and revenue. Indeed, many economists are expecting better numbers than were tabled when the Budget was finally passed earlier in the year, after the debate over a potential VAT increase was resolved.
Without extra VAT, Treasury has relied on increased collections by SARS and the MTBPS will reveal how well that has gone. It has also been keeping tight control of spending through its expenditure reviews, going through government departments and assessing the quality of spending. Early indicators are that it has been able to fill the gap left by the lack of new taxes and that it will be able to confirm it is on track to deliver another primary budget surplus this year. That means its non-interest spending will be less than revenue, leaving a modest amount to start chipping away at our huge debt pile.
Treasury has been rebuilding the credibility lost during state capture when our debt levels blew out massively, and I expect ratings agencies will start to see that this is now reliable. Investors are already convinced – yields have fallen about 1.5 percentage points since the budget earlier this year, helped by a global rally in emerging markets. That means the interest cost on the more-than R500bn of debt that Treasury will raise this year will be about 15% cheaper than it was. That is the reward for fiscal discipline, freeing up cash that can be used on real spending.
However, one key spending area reveals ongoing challenges. In the budget, government promised a R1-trillion spending spree to turn South Africa into a construction site. But the figures suggest that is not happening. Public sector infrastructure investment appears to have fallen to a multi-year low, even while the private sector has been picking up its investment levels.
In part, we should expect that as the private sector has taken on projects in electricity and is set to invest in logistics too. That means that investment that might otherwise have been made by Transnet and Eskom is being made instead by companies. But the key concern is the spending by government itself on the myriad infrastructure requirements from local roads to sewerage plants.
This is where delivery is simply falling short of Treasury’s spending hopes. That appears to be a real struggle, with projects not getting off the ground or being completed on time.
The lack of spending is bound up in the skills crisis, particularly in local government. The Auditor-General earlier this year reported on an assessment of projects intending to deliver critical electricity, housing, road, sanitation and water infrastructure in municipalities. She found on average that projects were delayed by 21 months, reflecting poor management on the back of a lack of institutional capacity, ineffective planning, weaknesses in procurement and contract management practices and a lack of accountability for poor performance, among much else.
That is the reality on the ground, far from the offices of Church Square, where Treasury must add up lines in spreadsheets. Treasury can and will do much to make investment easier, including by the private sector. But solving our infrastructure and investment challenges must have a whole-of-government solution.
Operation Vulindlela’s new focus on local government delivery is a welcome step to find ways to improve management of revenues, projects and maintenance in local government. This is critical work that will take time, but it addresses the fundamental capacity constraints holding back delivery.
Another key step is the ongoing professionalisation of the public service. Last week the National Council of Provinces approved the Public Administration Management Bill, one of three pieces of legislation that will implement the professionalisation framework. It is now ready for the president’s signature. It will do much to ensure that the state capture era destruction of capacity in the public sector can never happen again. A key change is to prohibit government employees from conducting business with the state. Other legislation will make the directors general of departments responsible for hiring and firing, and not their ministers, and ban directors general from holding political office in political parties. The Public Service Commission is also to get more powers to investigate and enforce the law in the public sector.
The result should significantly reduce political interference in the day-to-day operations of government departments, creating the conditions for professional, accountable public sector management.
The MTBPS will be another mark of progress from the destruction of the state capture era. I will be watching closely to see whether Treasury can indeed confirm the primary surplus, what the updated debt trajectory looks like and whether there is any clearer plan for accelerating infrastructure delivery. Together with the many other reforms ongoing across government, and the clear wins that are being racked up as they happen, we can breathe slightly more easily.
It is right to regain confidence that the country is moving in the right direction. The pathway is leading us to deliver the economic growth that will turn around our unemployment crisis and enable our people to build the lives they want. We must stay steadfast and accelerate reform wherever we can. But this week, it will be comforting to see another proof point that we are on track.
