# HIGHLIGHTS Total consolidated spending willamount to R1.95 trillion in 2020/21,R2.04 trillion in 2021/22 and R2.14 trillion in 2022/23. The bulk of spending is allocated to learning and culture (R396.4 billion),socialdevelopment (R309.5 billion) and health (R229.7 billion). The fastest-growing functions over the medium term are economic development,community development and socialdevelopment. Debt-service costs remain the fastest-growing expenditure item,followed by capitalexpenditure. • • Above-inflation increase in the personalincome tax brackets and rebates. Limit corporate interest deductions to combat base erosion and profit shifting as well as restricting the ability of companies to fully offset assessed losses from previous years against taxable income. Increases of 25c per litre to the fuellevy,which consists of a 16c per litre increase in the generalfuel levy and a 9c per litre increase in the RAF levy. Increase the annualcontribution limit to tax-free savings accounts by R3 000 from 1 March 2020. Increase excise duties on alcoholand tobacco by between 4.4 and 7.5 per cent. Also,government will introduce a new excise duty on heated tobacco products,to be taxed at a rate of75 per cent of the cigarette excise rate with immediate effect. Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020. • • TAX PROPOSALS SPENDING PROGRAMMES • Low growth has led to a R63.3 billion downward revision to estimates of tax revenue in 2019/20 relative to the 2019 Budget. Debt is not projected to stabilise over the medium term,and debt-service costs now absorb 15.2 per cent of main budget revenue. Over the next three years,the 2020 Budget proposes total reductions of R261 billion,which includes a R160.2 billion reduction to the wage bill of nationaland provincialdepartments,and nationalpublic entities. Reallocations and additions totalR111.1 billion over the medium term,of which R60 billion is set aside for Eskom and South African Airways. • These measures narrow the consolidated deficit from 6.8 per cent of GOP in 2020/21 to 5.7 per cent in 2022/23, with debt rising to 71.6 per cent of GOP over the same period. • Along with faster economic growth,fiscalsustainability will require targeted reduction of specific programmes,and firm decisions to rein in extra budgetary pressures,including reform of state-owned companies and the Road Accident Fund (RAF). BUDGET FRAMEWORK • RealGOP is expected to grow at 0.9 per cent in 2020,1.3 per cent in 2021 and 1.6 per cent in 2022. The global outlook has improved marginally,but significant downside risks remain.The outlook for South Africa's key trading partners has weakened in recent months. Government has announced urgent reforms in the electricity sector to ensure adequate supply of power for businesses and households. • Raising South Africa's economic growth rate requires further structuralreforms to reduce costs and encourage investment across the economy. • Weak growth translated into a record unemployment rate of 29.1 per cent in the second half of 2019. ECONOMIC OUTLOOK RSABUDGET2020

ISSUED BY u national treasur =-r__, BUDGET EXPENDITURE • RE IIUCOFSOUTHMRICA I I ON NG a m -Basic education Economic regulation and infrastructure R105.3bn -University transfers R248.6bn Industrialisation and exports R39.0bn R44.8bn -National Student Financial Aid Scheme Agriculture and rural development R37.1bn R28.3bn RZ11.5bn ECONOMIC DEVELOPMENT R396.4bn LEARNING AND CULTURE - - Skills development levy institutions R21.0bn Job creation and labour affairs R22.4bn -Education administration Innovation, science and technology R17.8bn R16.4bn Technical & vocational education and training R13.4bn m B District health services R102.0bn Police services R106.1bn • Central hospital services R44.7bn Defence and state security R51.4bn Provincial hospital services R37.6bn law courts and prisons - R49.6bn RZZ9.7bn RZ17.0bn PEACE AND SECURITY HEALTH Other health services R35.4bn Home affairs R9.9bn Facilities management and maintenanceR10.1bn Municipal equitable share R74.7bn Public administration and fiscal affairs R47.3bn - Humansettlements,water and electrification programmes RSS.7bn Executive and legislative organs R14.6bn External affairs R8.2bn RZ12.3bn COMMUNITY DEVELOPMENT R70.0bn GENERAL PUBLIC SERVICES Public transport R44.7bn Other human settlements and municipal infrastructure R37.2bn 13 I! Social security funds R88.0bn Old-age grant R83.1bn Child-support grant R69.8bn R309.5bn SOCIAL DEVELOPMENT RZZ9.3bn DEBT-SERVICE COSTS Other grants R3S.Obn -Provincial social development R23.3bn Policy oversight and grant administration RlO.Obn R1.15TRILLION R1.95 TRILI CONSOLIDATED GOVERNMENT EXPENDITURE www.treasury.gov.za W #RSABudget2020 11 RSA Budget Tel:(012) 315 5757 www.treasury.gov.za BUDGET2020/21

Foreword Budgets are complex, but the numbers we face are straightforward. Without faster economic growth rates, South Africa cannot raise the revenue we need to fund our ambitious social and economic development agenda. Without sustainable public finances, revenue will increasingly be used to pay interest on debt, which now absorbs 15 cents of every rand government collects. Without financially selfsustaining stateowned companies, taxpayers will be paying for their losses for many years to come. Over the past year, economic growth has been weaker than forecast and is only expected to reach 0.9 per cent in 2020. Electricity shortages have put the economy under great strain, and demands from Eskom and other financially distressed stateowned companies drain public resources. In 2019/20, revenue collected is expected to be R63.3 billion lower than forecast in the 2019 Budget Review. By 2022/23, gross government debt is expected to rise to 71.6 per cent of GDP. Addressing this difficult situation requires two complementary approaches: determined action to reverse the deterioration of the public finances by narrowing the budget deficit and containing debt, and structural reforms to return the economy to faster, sustainable growth. The 2020 Budget proposals mark an important step on the road to fiscal consolidation. In comparison with the 2019 Budget, government proposes to reduce its expenditure by R156.1 billion – primarily through a decrease in its compensation bill. Publicservice employees should be fairly remunerated, but government is obligated to balance its wage bill with the broader needs of society. Other reductions are being applied, wherever possible, to poorly performing or underspending programmes. Reductions of this magnitude will inevitably have negative consequences for the economy and social services. But these shortterm costs are necessary to put the country onto a more sustainable footing. Rapid and sustained economic growth is the central requirement to build a prosperous and equitable South Africa. This remains our core policy objective. Achieving this requires decisive steps to build confidence, promote investment and job creation, reduce anticompetitive practices and eliminate regulatory blockages. The most immediate and crucial reform is to ensure adequate electricity supply for businesses and households. The President has announced the first steps to enable greater privatesector participation in electricity generation. A series of regulatory adjustments will follow. 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 Budget Council and my colleagues across government for their contributions to the 2020 Budget. National and provincial departments deserve much credit for their disciplined budget execution over the past several years. Finally, I want to acknowledge the diligent and dedicated team at the National Treasury, who continue to fulfil their constitutional responsibilities in challenging circumstances. Dondo Mogajane DirectorGeneral: National Treasury vii

Contents Overview…………………………………………………………………………………………………………………………………. Stabilising the public finances…………………………….…………………………………………………………………… Structural reforms for investment and growth….……………………………………………………………….……. Improving spending efficiency and reducing waste….……………………………………………………………… Summary of the budget…….…………………………………………………………………………………………………….. Budget documentation……………………………………………………………………………………………………………. Chapter 1 Consolidation, reform and growth………………………………………………………………………………………. 1 1 3 4 6 6 10 Chapter 2 Economic outlook……………………………………………………………………………………………………………….. Overview…..……………………………………………………………………………………………………………………………. Reforms to boost confidence and investment..………….…………………………………………………………... Global outlook…..……………………………………………………………………………………………………………………. Domestic outlook……………………………………………………………………………………………………………………. Forecast trends…….……………………………………………………………………………………………………………….… Conclusion………………………………………………………………………………………………………………………………. 11 11 12 15 16 18 22 Chapter 3 Fiscal policy………………………………………………………………………………………………………………………… Overview………………………………………………………………………………………………………………………….…….. Changes in tax revenue and expenditure………….……………………………………….……….………………..… Achieving fiscal sustainability…………..…..………………………………………………………………………………… Fiscal framework……………………………..……………………………………………………………………………………… Elements of the consolidated budget……………………………………………………………………………………… Publicsector borrowing requirement…………………………………………………………………………………….. Risks to the fiscal outlook……………………………………………………………………………………………………….. Conclusion………………………………………………………………………………………………………………………………. 23 23 24 26 27 29 31 32 32 Chapter 4 Revenue trends and tax proposals….…………………………………………………………………………………… Overview………………………………………………………………………………………………………………………………… Revenue collection and outlook…………..…………………………………………………………………………………. Tax policy………………………………..……….…………………………………………………………………………………….. Tax proposals……………………………………………….…………………………………………………………………………. Tax policy reviews and research………………………………………………………………………………………………. Measures to enhance tax administration…………………..…………………………………………………………… Conclusion…………………………………………….…………………..……………………………………………………………. 33 33 34 37 40 46 46 46 Chapter 5 Consolidated spending plans………………………………………………………………………………………………. Overview…………………………………………………………………………………………………………………………………. Revisions to main budget spending plans………………………………………………………………………………… Provisional allocations………………………..…………………………………………………………………………………… Consolidated government expenditure………………………………………………………………………………...... Spending priorities by function……………………………………………………………………………………………….. Conclusion………………………………………………………………………………………………………………………………. 47 47 48 50 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 69 72 76 Chapter 7 Government debt and contingent liabilities………………………………………………………………………… Overview………………………………………………………………………………………………………………………………… Financing strategy…………………………………………………………………………………………………………………… Borrowing performance and projections…….…………………………………………………………………………… Government debt and debtservice costs…….…………………………………………………………………………. Contingent liabilities……………………………..…….………………………………………………………………………….. Conclusion………………………………………………………………………………………………………………………………. 77 77 78 79 84 85 87 ix

Chapter 8 Financial position of publicsector institutions…………………………………………………………………….. Overview…………………………………………………………………………………………………………………………………. Stateowned companies ………………..………………………………………………………………………….……………. Development finance institutions………………………….…………………………………………………..…………… Social security funds…………………………………………………..…………………………………………………………… Government Employees Pension Fund……………………………………………………………………………………. 89 89 90 95 96 98 Annexure A Annexure B Annexure C Annexure D Annexure E Annexure F Report of the Minister of Finance to Parliament………………………………………………………………….. Tax expenditure statement…………….…………………………………………………………………………………… Additional tax policy and administrative adjustments…………………………………………………………. Publicsector infrastructure update…..………………………………………………………………………………… Financial sector update…....……………………………………………………………………………………………….. Summary of the budget …………………………………………………………..…….………………………………….. 101 119 125 143 153 157 161 177 Glossary………………………………………………………………………………………………………………………………………………………… Statistical annexure………………………………………………………………………………………………………………………………………. Two annexures are available on the National Treasury website (www.treasury.gov.za): W1 W2 Explanatory memorandum to the division of revenue Structure of the government accounts x

Tables 7.9 7.10 Government guarantee exposure ..................................... 86 Provision for multilateral institutions and other contingent liabilities.......................................................... 87 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 2020/21 revenue ............... Consolidated government expenditure by function ..... Division of revenue ....................................................... 7 7 8 8 9 8.1 Combined balance sheets of state owned companies……………………………………………………………….. ..... 90 Summary of recapitalisation and bailouts of state owned companies………………………………………………… 91 Borrowing requirement of selected state owned companies ........................................................................ 93 Financial position of selected development finance institutions…………………………………………………… ..... 95 Borrowing requirement for development finance institutions ....................................................................... 96 Financial position of social security funds ........................ 97 Selected income and expenditure of GEPF ....................... 98 Breakdown of assets under management by PIC ............. 98 8.2 Projected state debt and debt service costs ................. 10 Combined financial position of public institutions ........ 10 8.3 2.1 2.2 2.3 Economic growth in selected countries ........................ 15 Macroeconomic performance and projections ............. 16 Sector performance ...................................................... 22 8.4 8.5 3.1 3.2 3.3 Macroeconomic performance and projections ............. 23 Revised gross tax revenue projections .......................... 24 Adjustments to main budget non interest expenditure since 2019 Budget .................................... 25 Consolidated fiscal framework...................................... 26 Main budget expenditure ceiling, budgeted estimates and outcomes ............................................... 27 Consolidated operating and capital accounts ............... 28 Main budget framework ............................................... 30 Revisions to main budget revenue and expenditure estimates ……………………………………… ............................. 31 Consolidated budget balances ...................................... 31 Public sector borrowing requirement ........................... 32 8.6 8.7 8.8 3.4 3.5 Figures 1.1 1.2 Gross debt to GDP outlook .............................................. 2 Debt service costs as proportion of main budget revenue ............................................................................ 2 Compensation of employees as share of consolidated expenditure................................................. 2 Financial support provided for state owned companies ........................................................................ 2 3.6 3.7 3.8 1.3 3.9 3.10 1.4 4.1 4.2 4.3 4.4 Budget estimates and revenue outcomes..................... 35 Budget revenue............................................................. 36 Impact of tax proposals on 2020/21 revenue ............... 40 Personal income tax rates and bracket adjustments.................................................................. 41 Estimates of individual taxpayers and taxable income ......................................................................... 41 Transfer duty rate adjustments..................................... 43 Changes in specific excise duties................................... 44 Total combined fuel taxes on petrol and diesel ............ 44 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 Government spending composition ................................. 12 Confidence and private investment.................................. 12 Rising debt in developing countries.................................. 16 Emerging market currencies ............................................ 16 GDP growth scenarios ...................................................... 18 Growth by expenditure, 2019........................................... 18 Growth by sector, 2019 .................................................... 18 Investment contribution................................................... 20 Core inflationary pressures .............................................. 21 Administered price inflation ............................................. 21 4.5 4.6 4.7 4.8 5.1 Adjustments to main budget non interest expenditure since 2019 Budget ....................................................... 48 Reallocations to baselines over the MTEF period ......... 49 Largest baseline reductions over the MTEF period............................................................................ 50 Provisional allocations not assigned to votes................ 51 Consolidated government expenditure by economic classification.................................................................. 51 Consolidated government expenditure by function ..... 53 Learning and culture expenditure ................................. 55 Social protection expenditure ....................................... 56 Average monthly social grant values............................. 57 Health expenditure ....................................................... 58 Community development expenditure ......................... 59 Economic development expenditure ............................ 60 Peace and security expenditure .................................... 62 General public services expenditure ............................. 63 3.1 3.2 3.3 3.4 Main budget revenue and expenditure ............................ 24 Budget deficit ................................................................... 24 Composition of consolidated government spending ........ 26 Average nominal growth in consolidated spending.......... 29 5.2 5.3 5.4 5.5 4.1 Tax burdens for countries at different levels of development .................................................................... 38 Corporate income tax rate movements............................ 39 4.2 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.1 5.2 Average nominal growth in spending………………………....... 52 Consolidated government expenditure by function ......... 52 6.1 6.2 6.3 Transfers increase in line with population growth ........... 67 Municipal operating revenue……… ................................... 74 Funded and unfunded municipal budgets ........................ .75 7.1 7.2 7.3 7.4 Sensitivity of debt and debt service costs ........................ 79 Debt maturity profile........................................................ 80 Ownership of domestic bonds .......................................... 82 Domestic bonds held by foreign investors........................ 82 6.1 6.2 6.3 6.4 Division of nationally raised revenue………………….………. 66 Provincial equitable share………………………………………….. 70 Conditional grants to provinces .................................... 72 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 Borrowing costs of state owned companies and development finance institutions, 2018/19 ..................... .92 RAF liabilities .................................................................... 97 RAF annual deficit............................................................. 97 7.1 Performance against strategic portfolio risk benchmarks ................................................................... 78 Financing of national government gross borrowing requirement................................................................... 81 Domestic short term borrowing .................................... 81 Foreign currency commitments and financing .............. 83 Change in cash balances ................................................ 83 Total national government debt .................................... 84 Analysis of annual increase in gross loan debt............... 84 National government debt service costs ....................... 85 8.3 7.2 8.4 8.5 7.3 7.4 7.5 7.6 7.7 7.8 xi

1 Consolidation, reform and growth Overview Iof the economy, spending plans based on an assumption of economic n 2019, consolidated government spending reached a historic high of Government spending has reached a historic high of 36 per cent of GDP 36 per cent of GDP. This increase reflects downward revisions to the size growth that has not materialised, and increased demands from financially distressed state-owned companies. While government makes a significant contribution to development, this level of spending is unsustainable, and results in continued high deficits and debt accumulation. A year ago, the Budget Review projected real economic growth of 1.5 per cent in 2019 and 1.7 per cent in 2020. We now expect real growth of only 0.3 per cent in 2019 and 0.9 per cent in 2020. The impact of low growth on revenue collection has been considerable. Government expects to collect R63.3 billion less revenue than projected at the time of the 2019 Budget. The state is borrowing at an increased rate to The state is borrowing at an increased rate – not to build infrastructure, but to fund operations 1 In brief •The 2020 Budget proposes total consolidated spending of R1.95 trillion in 2020/21, with the largest allocations going to learning and culture (R396.4 billion), health (R229.7 billion) and social development (R309.5 billion). •The economic outlook is weak. Real GDP is expected to grow at 0.9 per cent in 2020, 1.3 per cent in 2021 and 1.6 per cent in 2022. Achieving faster economic growth requires far-reaching structural reforms. •The public finances continue to deteriorate. Low growth has led to a R63.3 billion downward revision to estimates of tax revenue in 2019/20 relative to the 2019 Budget. Debt is not projected to stabilise over the medium term, and debt-service costs now absorb 15.2 per cent of main budget revenue. •Halting the fiscal deterioration requires a combination of continued spending restraint, faster economic growth, and measures to contain financial demands from distressed state-owned companies. •As a first step, the 2020 Budget makes net non-interest spending reductions of R156.1 billion in total over the next three years compared with last year’s budget projections. This includes large reductions to the public-service wage bill.

2020 BUDGET REVIEW fund operations, with the deficit projected at 6.3 per cent of GDP this year. Debt-service costs now absorb 15 cents of every rand government collects. By 2022/23, interest payments will exceed health spending. As a major step towards fiscal sustainability, government has reduced the main budget expenditure baseline by R156.1 billion over the next three years in comparison with 2019 Budget projections. This is approximately 1 per cent of GDP per year. The net reduction is mainly the result of the following changes over the medium term: • Reductions to baselines of R261 billion, which includes a R160.2 billion reduction to the wage bill of national and provincial departments, and national public entities. • Reallocations and additions totalling R111.1 billion, of which R60.1 billion is set aside for Eskom and South African Airways (SAA). Non-interest expenditure is forecast to grow at 3.8 per cent over the next three years, down from an average of 8.4 per cent over the past three years. Despite slower growth in spending, the deficit is forecast to remain in excess of 6 per cent of GDP next year, as a result of lower economic growth and tax revenue projections. The scale of the challenge requires fundamental changes to support economic growth, continued restraint in spending growth and improved spending efficiency. Baseline expenditure reductions of R261 billion partially offset by R60 billion set aside for Eskom and SAA 2019 Budget 2020 Budget 20 69. 14 12 61.6 59.7 56.7 58.9 56.2 53.0 55.6 6 4 48.9 36.5 36 35.6 60 35.5 2 Per cent Per cent of GDP 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 R billion Per cent 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Figure 1.1 Gross debt-to-GDP outlookFigure 1.2 Debt-service costs as proportion of main budget revenue 72 71.6 18 16 65.6 64 10 56 57.8 8 50.5 48 2 0 Figure 1.3 Compensation of employees as share ofFigure 1.4 Financial support provided for consolidated expenditurestate-owned companies 37 80 South African Broadcasting Corporation 70 South African Express 35.7 35 35.2 50 34.6 40 34 30 33 32.9 33.2 20 32.6 32.7 10 32 0 Source: National Treasury Denel South African Airways Eskom 1

CHAPTER 1: CONSOLIDATION, REFORM AND GROWTH To achieve faster economic growth, South Africa requires structural reforms in a number of areas. Most urgently, the regulatory path should be cleared to enable the private sector to generate electricity, contributing both financial and technical capacity to the country’s energy needs. In other areas, cumbersome and unpredictable regulatory frameworks are undermining private investment. The President’s State of the Nation Address made several announcements in this regard, and more decisive steps will be required in the months ahead. Most urgent structural reform is to clear path for private-sector electricity generation Stabilising the public finances Achieving fiscal sustainability requires a combination of continued spending restraint, faster economic growth and measures to contain extra-budgetary pressures – including reform of state-owned companies. Since 2012/13, government has taken steps to reduce spending growth and raise tax revenue. As a result of lower nominal GDP and revenue growth, however, these interventions have not stabilised debt. Revenue and expenditure are near or at historic highs as a share of GDP. Over the same period, the composition of spending has deteriorated. Debt-service costs have been the fastest-growing area of spending, rising from 9.8 per cent of main budget revenue in 2010/11 to 15.2 per cent in 2019/20. The wage bill has grown strongly over this period, averaging 35.4 per cent of total consolidated expenditure. Over the past five years, the majority of efforts to reduce the deficit have come through tax increases. The 2020 Budget centres the consolidation effort on expenditure, by reducing compensation growth. The aim is to reduce spending as a share of GDP, and improve the composition of spending. Government will not raise additional revenue from tax proposals for 2020/21. Debt-service costs have been fastest-growing category of expenditure Towards a sustainable wage bill Government recognises that public-service employees should be fairly remunerated, but is obligated to balance compensation demands with the broader needs of society as reflected in the budget. Civil servants’ salaries have grown by about 40 per cent in real terms over the past 12 years, without equivalent increases in productivity. Growth in the wage bill has begun crowding out spending on capital projects for future growth and items that are critical for service delivery. The 2020 Budget Review includes R160.2 billion in medium-term reductions to the wage bill. This will affect national and provincial departments, and national public entities that receive transfers from government. Government has tabled an agenda item on the management of the public-service wage bill at the Public Service Co-ordinating Bargaining Council, and will discuss with unions options for achieving the required reduction. This target can be achieved through a combination of modifications to cost-of-living adjustments, pay progression and other benefits. The proposed wage reductions will see consolidated compensation spending contract by 1 per cent in real terms over the medium term. Goods and services and capital budgets will continue to grow in real terms. Government is obligated to balance fair compensation with needs of broader society 3

2020 BUDGET REVIEW Revenue considerations In preparing the 2020 Budget, government considered but decided against proposing tax increases. The main factors in this decision were the weakness of the economy and, in the context of the muted growth outlook, the elevated tax-to-GDP ratio of 26.3 per cent. Government’s short-term focus is to rebuild the capacity of the South African Revenue Service (SARS) and public trust in the institution. No overall tax increase proposed for 2020/21 State-owned companies Over the past 12 years, government has allocated R162 billion to financially distressed state-owned companies, of which Eskom accounts for 82 per cent. Fiscal support for Eskom, as outlined in Annexure C of the 2019 Medium Term Budget Policy Statement (MTBPS), remains unchanged. The roadmap on Eskom, published by the Minister of Public Enterprises, outlines the reform process. Eskom has begun the process of separating its three operating activities – generation, transmission and distribution – each of which will soon have its own board and management structure. These are the first steps in the necessary restructuring of South Africa’s electricity sector for the 21st century. SAA’s board placed the airline into voluntary business rescue in December 2019 as a result of its inability to meet financial obligations. Since 2008/09, SAA has incurred net losses of over R32 billion. Government has set aside R16.4 billion for SAA over the medium term to repay the airline’s guaranteed debt and to cover debt-service costs. The costs of this adjustment are still being finalised, and will be financed from existing provisional allocations for state-owned companies. R16.4 billion set aside for SAA to repay guaranteed debt and cover debt-service costs Structural reforms for investment and growth South Africa needs much faster economic growth to promote investment, create jobs, and enable the state to sustainably grow the revenue that pays for social and developmental programmes. These objectives underpin Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa – a discussion document released by the National Treasury in August 2019. The barriers to economic growth are complex and require structural reforms. In other words, the cost of doing business, the cost of finding or conducting work, and the cost of living must be meaningfully reduced. Such reforms will help to transform the economy by improving the profitability of existing businesses, encouraging the start-up of new enterprises, boosting private-sector investment, creating jobs and reducing unemployment, and improving the purchasing power of all households. South Africa’s macroeconomic policy provides a sound platform for the success of structural reforms. Government is committed to low and stable inflation, a flexible exchange rate and a sustainable fiscal framework. These policy commitments in turn reduce uncertainty and risk in investment decisions, and support business and consumer confidence. The Constitution entrenches the rule of law, and commits South Africa to transparent public finances, accompanied by expenditure controls, and a central bank that executes its functions independently. Reforms needed to promote investment, create jobs and enable state to sustainably grow revenue Low and stable inflation, flexible exchange rate, rule of law and transparent public finances promote certainty 4

CHAPTER 1: CONSOLIDATION, REFORM AND GROWTH Government is committed to building partnerships with the private sector to provide infrastructure. The Infrastructure Fund has a project pipeline with potential investments of more than R700 billion over the next 10 years, including both government and non-government contributions. Urgent attention is required to implement structural reforms to South Africa’s network industries. Alongside implementation of the reform agenda outlined in the discussion document, these efforts will help to lay the foundation for higher confidence and growth. Government is committed to partnerships with private sector to provide infrastructure Electricity The most pressing reform is to ensure that all businesses and households have sufficient and dependable electricity supply. Government can expand private-sector power generation by rapidly implementing the commitments made in the President’s State of the Nation Address. These include acquiring additional electricity from existing independent power producers, opening bid window 5, procuring an additional 2 000 to 3 000 megawatts (MW) of emergency power for the national grid within three to 12 months from approval, and allowing municipalities to procure power from the private sector. The speed with which the related procurement processes are undertaken is critical. Regulatory processes need to be simplified to meet deadlines for responses to licensing applications. Self-generation could reduce demand pressures and boost overall supply. Accordingly, government should implement previously announced commitments to make changes to schedule 2 of the Electricity Regulation Act (2006). All businesses and households must have sufficient and dependable electricity supply Ports Urgent regulatory reforms are needed in the ports sector to reduce the cost of trading. The corporatisation of the National Ports Authority should be accelerated. The authority, which regulates port operators and undertakes infrastructure investment, currently operates as a division within Transnet. Corporatising the authority would allow for better independent regulation of South Africa’s ports and increased competition in terminal operations. It would also support greater investment in ports from operating profits, free from Transnet group considerations. Corporatisation of National Ports Authority, provided for in law, should be accelerated Telecommunications The issuance of rapid deployment guidelines would enable the private sector to invest more quickly in telecommunications infrastructure. Enforcement of existing open-access conditions would avoid duplication of infrastructure. Digital migration should be accelerated and work to release spectrum through the auction process should continue. Freight rail The Economic Regulation of Transport Bill, which was approved by Cabinet for submission to Parliament, will improve third-party access to freight rail. This, in turn, can generate efficiencies in the rail sector. Regulatory reforms that promote freight rail efficiency should be complemented by the removal of implicit subsidies in road freight transport, ensuring a level playing field for competition. Reforms needed to level the playing field for competition in land-based freight transport 5

2020 BUDGET REVIEW Improving spending efficiency and reducing waste Government’s contribution to the economy is not matched by adequate spending efficiency. Reports by the Auditor-General have consistently highlighted patterns of wasteful expenditure. Reforms under way include: Reforms under way to improve procurement, strengthen provincial grants, reduce claims against the state • Procurement – The state maintains a complex and often ineffective procurement system. Some measures have had the unintended effect of severely hampering government’s ability to efficiently contract for goods and services. Many of these regulations can be reformed to make legitimate procurement easier without undermining the necessary anti-corruption safeguards. As a first step, the draft Public Procurement Bill has been gazetted for public comment. • Provincial unfunded municipal grants – Government has made progress in reducing municipal budgets and is piloting initiatives to improve revenue collection. Following a review, government is introducing several changes to the provincial grant system. Medico-legal claims – Medical malpractice claims and litigation against the state have increased rapidly in recent years. Although in many cases the quality of care is insufficient, the increase in claims is inconsistent with certain indicators of health outcomes in the public sector. Work has begun to limit unreasonable claims against the state. Public office bearers – There will be no increase in the salaries of public office bearers in 2020/21. This follows a reduction in benefits stemming from changes to the Ministerial Handbook. • • Over the period ahead, the following interventions will be undertaken: Tax incentives to be reviewed and expenditure to be assessed to improve efficiency • South Africa’s tax incentive system favours incumbents and those able to afford specialist tax advice. Over the medium term, government will conduct a review of such incentives, repealing or redesigning those that are redundant, inefficient or inequitable. The National Treasury and the Department of Planning, Monitoring and Evaluation will undertake a new round of expenditure reviews to identify cost savings and improve efficiency. Government will publish a new law this year introducing a remuneration framework for public entities and state-owned companies. One goal of this legislation is to eliminate excessive salaries and bonuses being awarded to executives and managers. • • Over the next year, the National Treasury and the Department of Public Service and Administration will improve the wage-setting mechanism; report on the causes of unauthorised and wasteful expenditure; and examine ways to reduce state litigation, accommodation and information technology costs. Summary of the budget Economic outlook The economic growth outlook has weakened since the 2019 MTBPS, following lower-than-expected growth in the second half of the year. 6

CHAPTER 1: CONSOLIDATION, REFORM AND GROWTH Electricity shortages are expected to constrain growth over the next few years. GDP is estimated to have grown by only 0.3 per cent in 2019. Over the medium term, economic growth projections have been revised down to 0.9 per cent in 2020, rising to 1.6 per cent in 2022. In 2020, the global economy is expected to recover moderately from its recent slowdown, supported by low interest rates and reduced trade tensions between the United States and China. Electricity shortages expected to constrain growth over medium term Table 1.1 Macroeconomic outlook – summary 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 consolidated budget deficit is estimated at 6.3 per cent in 2019/20. A key driver of the widening deficit has been a sharp decline in nominal GDP since 2018/19 and associated tax revenues. Nominal GDP is projected to fall below the 2019 MTBPS estimates by an average of R131 billion per year over the medium term. As a result, tax revenue is expected to be significantly lower. Requests for support from financially distressed state-owned companies have continued to mount. The 2020 Budget proposes measures to reduce public spending as a share of GDP and improve the composition of spending by reducing growth in the wage bill. Over the medium term, spending baselines will be reduced by R261 billion. The consolidated budget deficit is expected to narrow from 6.8 per cent in 2020/21 to 5.7 per cent of GDP in 2022/23. Table 1.2 Consolidated government fiscal framework Sharp decline in nominal GDP and associated tax revenues has widened consolidated budget deficit Source: National Treasury Revenue trends and tax proposals Government expects to collect tax revenue of R1.43 trillion (26.3 per cent of GDP) in 2020/21. Given the weak economic outlook, no overall tax increase is proposed for next year. Tax revenue is projected to grow by No overall tax increase is proposed for 2020/21 7 2019/20 Revised R billion/percentage of GDPestimate 2020/212021/222022/23 Medium-term estimates Revenue1 517.0 29.4% Expenditure1 843.5 35.7% 1 583.91 682.81 791.3 29.2%29.2%29.2% 1 954.42 040.32 141.0 36.0%35.4%34.9% Budget balance-326.6 -6.3% -370.5-357.5-349.7 -6.8%-6.2%-5.7% 2019 Real percentage growthEstimate 202020212022 Forecast Household consumption1.1 Gross fixed-capital formation-0.4 Exports-2.1 Imports0.2 Real GDP growth0.3 1.11.31.6 0.21.31.9 2.32.62.8 1.82.52.8 0.91.31.6 Consumer price index (CPI) inflation4.1 Current account balance (% of GDP)-3.4 4.54.64.6 -3.4-3.5-3.7

2020 BUDGET REVIEW 4.9 per cent. Reflecting the weak economic environment and reductions in state compensation, gross tax buoyancy is expected to fall to 0.93. The main tax proposals include personal income tax relief through inflation adjustments in all brackets, along with inflation-adjusted increases in the fuel and Road Accident Fund (RAF) levies. The revitalisation of SARS is expected to contribute to increased tax revenue over the medium term. Table 1.3 Impact of tax proposals on 2020/21 revenue1 Personal income tax relief through inflation adjustments in all brackets, and increases in fuel and RAF levies R million Gross tax revenue (before tax proposals) 1 425 418 Budget 2020/21 proposals – Direct taxes Taxes on individuals and companies Personal income tax Increasing brackets by more than inflation Revenue if no adjustment is made Higher-than-inflation increase in brackets and rebates Indirect taxes Carbon tax Plastic bag levy -2 000 -2 000 -2 000 12 000 -14 000 2 000 1 750 250 Gross tax revenue (after tax proposals) 1 425 418 1. Revenue changes are in relation to thresholds that have been fully adjusted for inflation Source: National Treasury Medium-term spending plans Total consolidated spending amounts to R1.84 trillion in the current year, rising to R2.14 trillion by 2022/23. Largest spending areas are learning and culture, health and social development 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 In 2020/21, the largest areas of spending by function are learning and culture (R396.4 billion), health (R229.7 billion) and social development (R309.5 billion). Over the medium term, aside from debt-service costs, the 8 2019/202020/21 RevisedBudget R billionestimateestimate Average growth 2019/20 – 2022/23 Learning and culture385.6396.4 Health222.0229.7 Social development284.5309.5 Community development201.7212.3 Economic development198.9211.5 Peace and security214.4217.0 General public services66.370.0 Payments for financial assets65.273.6 4.0% 5.1% 6.2% 6.3% 6.6% 2.2% 3.7% Allocated expenditure1 638.51 720.2 Debt-service costs205.0229.3 Contingency reserve–5.0 12.3% Consolidated expenditure11 843.51 954.4 5.1%

CHAPTER 1: CONSOLIDATION, REFORM AND GROWTH fastest-growing areas of expenditure are economic development and community development. Slow growth in learning and culture, health, and peace and security reflects the effect of proposed wage bill reductions on these labour-intensive functions. Division of revenue Over the medium-term expenditure framework period, after budgeting for debt-service costs, the contingency reserve and provisional allocations, 48.2 per cent of nationally raised funds are allocated to national government, 43 per cent to provinces and 8.8 per cent to local government. The share allocated to national government was somewhat larger than in 2019/20, mainly as a result of increased transfers to state-owned companies. These shares will change significantly as wage reductions are applied, although the exact distribution is yet to be determined. These changes will be considered during the course of the year and included in the October adjustments budget. As outlined in the 2019 MTBPS, most conditional grants have been lowered as part of efforts to reduce growth in government expenditure and ensure public debt is sustainable. To manage the effect on services, these reductions take into account past performance and whether there has been significant real growth in allocations in recent years. Grants that have persistently underperformed have been reduced by larger amounts. Effect of wage reductions on division of revenue to be set out in adjustments budget Table 1.5 Division of revenue Source: National Treasury Government debt and contingent liabilities Over the past year, government’s gross borrowing requirement has increased by 21.4 per cent to R407.3 billion. Borrowing is expected to reach R497.5 billion in 2022/23. The steep increase reflects the worsening fiscal position, and an increase in domestic bond redemptions. Government’s long record of prudent debt management has enabled the National Treasury to consistently match higher borrowing requirements without dramatically increasing the cost of debt. Nonetheless, prudent debt management cannot substitute for sustainable public finances and a growing economy. The risk to South Africa’s remaining investment-grade credit ratings has become more pronounced. Gross borrowing requirement expected to reach R497.5 billion in 2022/23 9 R billion2019/20 2020/21 2021/22 2022/23 National allocations739.5 Provincial allocations612.8 Equitable share505.6 Conditional grants107.3 Local government allocations125.0 Provisional allocations not– assigned to votes 757.7768.9797.8 649.3692.0730.7 538.5574.0607.6 110.8118.0123.1 132.5142.4151.4 -7.8-16.1-34.9 Total allocations1 477.3 1 531.71 587.21 645.1 Percentage shares National 50.1% Provincial 41.5% Local government 8.5% 49.2%48.0%47.5% 42.2%43.2%43.5% 8.6%8.9%9.0%

2020 BUDGET REVIEW Table 1.6 Projected state debt and debt-service costs Source: National Treasury Financial position of public-sector institutions The financial performance of state-owned companies has deteriorated sharply. Liability growth has outpaced that of assets, with a consequent decline in net asset value. This erosion of financial value is largely a result of weak revenue growth, high compensation costs and rapidly growing debt-service costs. The net asset value of the three largest development finance institutions – the Development Bank of Southern Africa, the Industrial Development Corporation and the Land Bank – increased by 4.7 per cent in 2018/19 to R139.4 billion. With the exception of the RAF, the financial positions of the social security funds and the Government Employees Pension Fund are strong. They are able to meet their long-term obligations. Net asset value of state-owned companies has declined sharply in recent years Table 1.7 Combined financial position of public institutions R billion/net asset value 2016/17 2017/18 2018/19 State-owned companies Development finance institutions1 Social security funds Other public entities2 354.0 126.8 1.0 674.9 362.1 133.1 -27.0 719.0 342.0 139.4 -90.2 751.7 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 2020 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. These and other fiscal and financial publications, including the People’s Guide to the Budget, are available at www.treasury.gov.za. 10 R billion/percentage of GDP2019/20 2020/212021/222022/23 Gross loan debt3 176.1 61.6% Debt-service costs205.0 4.0% 3 561.73 978.14 383.6 65.6%69.1%71.6% 229.3258.5290.1 4.2%4.5%4.7%

2 Economic outlook Overview MThis remains government’s core policy objective. Higher growth ore rapid and sustained economic growth is the central Decisions required that build confidence and boost investment to create jobs and raise growth requirement to build a prosperous and equitable South Africa. would also reduce pressure on the public finances. Achieving this requires decisive steps to build confidence, promote investment and employment, reduce anti-competitive practices and eliminate regulatory blockages. The economic outlook has weakened since the 2019 MTBPS, following lower-than-expected growth in the second half of the year. Real GDP is estimated to have grown by only 0.3 per cent in 2019, partly as a result of electricity supply failures. Weak growth translated into a record unemployment rate of 29.1 per cent in the second half of 2019. Economic growth projections have been revised down to 0.9 per cent in 2020, rising to just 1.6 per cent in 2022. Electricity shortages are expected to constrain the economy over the forecast period. Global growth is expected to rise moderately over the forecast period, but considerable downside risks remain. The outlook for South Africa’s key trading partners has weakened in recent months. 11 In brief •Since the 2019 Medium Term Budget Policy Statement (MTBPS), economic growth has been revised lower, in part due to electricity supply shortages. Real GDP is expected to grow at 0.9 per cent in 2020. •Global growth is expected to rise moderately over the forecast period, but considerable downside risks remain. The outlook for South Africa’s key trading partners has weakened in recent months. •Government has announced urgent reforms in the electricity sector to ensure adequate supply of power for businesses and households. •Raising South Africa’s economic growth rate requires structural reforms, including substantial changes in the network industries, to reduce costs and encourage investment across the economy.

2020 BUDGET REVIEW To jump-start growth, South Africa requires stronger investment by, and partnerships with, the private sector. Recent network industry failures – in particular in electricity, but also in ports – have increased the cost of doing business. Yet these failures also offer opportunities to draw in private-sector skills and investment, reduce operating costs and build confidence. The 2019 MTBPS noted that policy certainty and a conducive business environment are critical to support the confidence of business and households. South Africa’s monetary policy framework has provided certainty. Enhancing the state’s contribution to the economy requires greater spending efficiency and a shift in the composition of spending from consumption towards capital infrastructure. It also requires a clear vision for the role of state-owned companies within a robust framework for financial and operational management. The macroeconomic framework needs to be complemented by a range of reforms that are within government’s control, many of which do not require significant funding. The overriding priority is to enact structural reforms that enable the economy to break from the spiral of low growth and deteriorating public finances. Private-sector skills and investment can expand electricity generation and improve ports’ performance 60 15 Reforms to boost confidence and investment The foundations for economic growth include prudent and credible fiscal and monetary policy, reliable electricity supply, a well-functioning financial system and respect for the rule of law. The speed at which an economy can grow will then be determined by factors affecting the costs of doing business, including the regulatory environment, support for innovation and competition, and the quality and cost of infrastructure. As highlighted in the 2019 MTBPS, government is focused on structural reforms to support competitiveness, investment and employment, by: Structural reforms needed that lower costs of living and of doing business • Reducing costs for households and businesses by modernising and reforming network industries, restructuring inefficient state-owned companies and inviting private-sector participation. Increasing exports through evidence-based, export-orientated industrial policy, and supporting labour-intensive sectors such as agriculture and tourism. Promoting competition and supporting small business. • • 12 Index level 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Annual growth (per cent) Figure 2.1 Government spending compositionFigure 2.2 Confidence and private investment RMB/BER Business Confidence Index Private investment (RHS) 50 10 5 40 0 30 -5 20 -10 -15 10 -20 0 -25 Source: Statistics South Africa and National Treasury calculationsSource: Global Insight

CHAPTER 2: ECONOMIC OUTLOOK Initial steps to expand electricity supply Facilitating faster private-sector involvement in the power sector will catalyse confidence and growth more broadly. The President announced a set of urgent reforms to address the Eskom crisis in his February 2020 State of the Nation Address. To facilitate large-scale additional power production, the Department of Mineral Resources and Energy is assessing information to procure 2 000 to 3 000 megawatts of power through its risk mitigation programme. This power will be connected to the national grid within three to 12 months from approval. Efforts are under way to acquire additional electricity from existing independent power producers (IPPs). Government has committed to open bid window 5 and make it possible for municipalities in good financial standing to buy electricity from IPPs. These efforts will be supported by operational changes announced by the new Eskom CEO, which include separating the utility into three divisions, resuming scheduled maintenance practices, fixing defects at Medupi and Kusile, and buying energy from entities with excess supply. Eskom will also reinstate its demand management strategy, with a clear schedule that allows users to mitigate the most disruptive effects of unplanned outages. Awareness campaigns will help to reduce pressure on the national grid. A commitment to minimum response times by the National Energy Regulator of South Africa would be supported by introducing simpler, standardised and more transparent licensing requirements for connecting to the grid. This in turn would support the emergence of smaller electricity providers. Efforts are under way to acquire additional electricity from existing IPPs Simpler and more transparent licensing arrangements needed from energy regulator Clearing blockages in transport, logistics and communications In other network industries, work continues to expand access, draw in private investment and reduce the costs of doing business. These include: • Rail transport reforms – In November 2019, Cabinet approved the Economic Regulation of Transport Bill for submission to Parliament. The bill – which consolidates economic regulations for the aviation, marine, rail and road transport sectors – will improve third-party access to rail. • Spectrum licensing – The broadband spectrum licensing plan was released in November 2019. Government is acting to make additional spectrum available from analogue television users. 13 The economic impact of Eskom supply disruptions Eskom, which has a near monopoly on South Africa’s electricity supply, is taking a large toll on the economy. Industry estimated that power cuts caused losses of about 0.1 per cent of GDP in the fourth quarter of 2019. However, without intervention, the impact of supply disruptions on growth will be greater in 2020. Power cuts – even scheduled ones – restrict production and investment, lower trade, increase the cost of doing business and put pressure on profits and employment. This in turn tends to reduce technology uptake and modernisation, particularly in small businesses. An uncertain and declining supply of electricity also contributes to low levels of confidence and investment, as well as lost capacity due to damage from power surges. The size of Eskom’s balance sheet and its dominance in the energy sector affect the cost of borrowing for government, which in turn affects the cost of borrowing for the entire economy. Taken together, these factors structurally lower South Africa’s competitiveness, employment and exports.

2020 BUDGET REVIEW Supporting competition, trade and policy certainty Actions to boost investment, trade and policy certainty include: • Reforms to benefit small business – The Companies and Intellectual Property Commission website now includes a single platform for company registration, including registering with social security funds and the South African Revenue Service. In addition, the Competition Commission made rulings in December 2019 that imply a decrease in data costs. Investment promotion – In support of the President’s initiative, R664 billion of investment commitments have been made. South Africa’s foreign-exchange control system will be modernised over the next year to support investment and the country’s position as a hub on the continent, as outlined in Annexure E. The Upstream Petroleum Development Bill, which will guide oil and gas exploration and production, was released for public comment in December 2019. • • Industrial policy – Government and industry continue to work master plans to raise growth and exports in 15 key sectors. on Maximising the long-term growth impact of the fiscal framework Government is exploring ways to maximise the long-term growth impact of the fiscal framework. This includes: • Improving the composition of spending, by rebalancing spending towards capital expenditure rather than compensation. 14 A just transition: Avoiding short-term policy responses that harm long-term growth South Africa’s low growth levels and high unemployment reinforce the desire to protect existing industries and jobs. All governments consider a range of trade-offs in such matters. However, policy decisions should not lock the economy into production patterns that will limit long-term growth. To achieve higher living standards, South Africa needs to adjust to global market demand. Climate change is starting to shape the manner in which the largest markets regulate imported and domestic products. Support for industries with high carbon emissions is likely to threaten long-term export demand and growth, and could lock South Africa into a position of a low-value exporter. Climate challenges also represent opportunities to generate new economic activity. Jobs and investment can be created by drawing on private-sector skills and capital, while demand for carbon-intensive products can be managed with incentives and penalties. Industrial policy should support businesses that can respond to these challenges – including producing new food technologies, electric cars, renewable-energy equipment, or energy-and water-saving devices. Targeted social interventions, including re-skilling and financial support, should be directed to workers in sunset industries, rather than providing support to affected companies. Future-focused policy that takes cognisance of climate change would support efforts to raise youth employment, as announced in the State of the Nation Address, in sectors such as business-process outsourcing, tourism and technology. Swift regulatory action to clear backlogs and modernise ports Commercial ports’ efficiency has declined sharply over the past year. This is the combined result of poor management, inadequate maintenance and resulting equipment failures, and industrial action at container terminals. Delays in modernising ports and digitising operations have compounded these problems. Backlogs for those importing and exporting container cargo have increased sharply, raising costs and damaging export competitiveness. South Africa needs a modern and efficient ports system to reduce the costs of living and of doing business, and to maintain its position as one of Africa’s main trading hubs. Swift and decisive regulatory action is needed. The corporatisation of the National Ports Authority, provided for in the National Ports Act (2005), should be accelerated. The authority, which regulates ports operators and undertakes infrastructure investment, currently operates as a division of Transnet. Corporatising the authority should allow for better regulation of all port operators, including Transnet Port Terminals. It would also support greater reinvestment of operating profits back into ports, free from Transnet group considerations.

CHAPTER 2: ECONOMIC OUTLOOK • Initiating a review of departmental spending to maximise the impact of existing programmes. Reforming procurement regulations to remove unnecessary complexity that delays infrastructure spending and discourages small firms from doing business with government. Reviewing tax incentives and other non-cash disbursements, with the aim of repealing redundant, inefficient or inequitable incentives. • • Global outlook In 2020, the global economy is expected to recover moderately from its recent slowdown, supported by low interest rates and reduced trade tensions between the United States (US) and China. Although improved growth in developing countries is expected to support the recovery over the long term, the aggregate growth forecast for South Africa’s main trading partners has been revised down over the next three years. Table 2.1 Economic growth in selected countries Moderate improvement in global economic growth outlook, but forecast for main trading partners is down 1. National Treasury forecast. Note: final numbers are for 2022, not an average 2. Average based on IMF World Economic Outlook database, October 2019 Source: IMF World Economic Outlook, January 2020 and IMF World Economic Outlook database Over the medium term, global growth is expected to average 3.4 per cent, below average growth of 3.8 per cent between 2010 and 2018. Inflation is expected to remain subdued, with advanced-economy inflation rising from a forecast 1.4 per cent in 2019 to 1.9 per cent in 2021, and developing-economy inflation declining from 5.1 to 4.5 per cent over the same period. In 2019, global trade slowed, growing by just 1 per cent, in response to rising trade policy uncertainty and tariffs. Trade growth is expected to rise to 2.9 per cent in 2020 and 3.7 per cent in 2021 as trade relations normalise, although serious risks remain to global supply chains. Trading under the African Continental Free Trade Agreement is due to begin on 1 July 2020, marking an important offset to increased protectionism. Low interest rates, particularly in Europe, have supported asset prices in financial markets. Since September 2019, bond yields in advanced economies have started to rise gradually, but remain below 2018 levels. As a result, the impact on developing economies has been muted. African Continental Free Trade Agreement, which will boost intra-African trade, to take effect on 1 July 2020 15 Region/country2010-2018 PercentagePost-crisis 2019202020212022-20242 GDP forecast World3.8 Advanced economies2.0 United States2.3 Euro area1.4 United Kingdom1.9 Japan1.4 Developing countries5.2 Brazil1.4 Russia2.0 India7.4 China7.8 Sub-Saharan Africa4.2 South Africa11.8 2.93.33.43.6 1.71.61.61.6 2.32.01.71.6 1.21.31.41.4 1.31.41.51.5 1.00.70.50.5 3.74.44.64.8 1.22.22.32.3 1.11.92.01.9 4.85.86.57.4 6.16.05.85.6 3.33.53.54.1 0.30.91.31.6

2020 BUDGET REVIEW Rand/dollar exchange rate In 2019, developing-country risk premiums and bond yields continued to fall. In aggregate, developing-country currencies remained largely stable against the US dollar. Countries with high levels of debt and policy uncertainty, such as South Africa, faced considerably more volatility. On average in 2019, the rand’s nominal exchange value fell 5.4 per cent in trade-weighted terms and 1.9 per cent in real terms. Near-term global risks have moderated since the 2019 MTBPS, but the risk of lower growth remains elevated due to trade tensions, in particular between the US and its major trading partners. Debt levels in developing countries have risen sharply since the global financial crisis, and are projected to grow. Debt levels in advanced economies also remain elevated. High levels of government debt will limit fiscal and monetary policy responses to economic shocks. Global trade tensions remain a risk to growth Domestic outlook Real GDP growth slowed from 0.8 per cent in 2018 to a projected 0.3 per cent in 2019. The National Treasury forecasts economic growth of 0.9 per cent in 2020, 1.3 per cent in 2021 and 1.6 per cent in 2022. Table 2.2 Macroeconomic performance and projections Sources: National Treasury, Reserve Bank and Statistics South Africa 16 Rands per dollar Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018 Jul 2018 Oct 2018 Jan 2019 Apr 2019 Jul 2019 Oct 2019 Jan 2020 Indexed (Jan 2016=100) 201620172018 Percentage changeActual 2019 Estimate 202020212022 Forecast Final household consumption0.62.11.8 Final government consumption2.20.21.9 Gross fixed-capital formation-3.51.0-1.4 Gross domestic expenditure-0.91.91.0 Exports0.4-0.72.6 Imports-3.91.03.3 1.1 2.0 -0.4 1.0 -2.1 0.2 1.11.31.6 1.6-0.61.2 0.21.31.9 0.71.31.6 2.32.62.8 1.82.52.8 Real GDP growth0.41.40.8 0.3 0.91.31.6 GDP inflation7.25.33.9 GDP at current prices (R billion)4 359.14 653.64 873.9 CPI inflation6.35.34.7 Current account balance (% of GDP)-2.9-2.5-3.5 4.0 5 086.4 4.1 -3.4 4.54.54.6 5 359.35 676.46 035.1 4.54.64.6 -3.4-3.5-3.7 Figure 2.3 Rising debt in developing countriesFigure 2.4 Emerging-market currencies 18110 EM currency index (RHS) 16 100 14 90 12 Currency weakness against the dollar 1080 Source: Bloomberg and National TreasurySource: Bloomberg

CHAPTER 2: ECONOMIC OUTLOOK Downward revisions to domestic and global demand mean that average growth is projected at 1.3 per cent over the next three years, well below the 1.8 per cent average from 2010 to 2018. With the population growing at 1.4 per cent over the next three years, per capita GDP is set to decline. Serious risks to the forecast include further deterioration in the financial condition of state-owned companies, with attendant demands on the Per capita GDP set to decline over next several years fiscus;unreliablepowersupply; implementation of structural reforms. and policy inertia and slow Scenarios The National Treasury has modelled two economic growth scenarios. • In scenario A, mounting distress at state-owned companies erodes the fiscal position further, raising borrowing costs and reducing confidence and investment. This is coupled with worsening global growth due to deteriorating international trade relations and less favourable bilateral trade conditions. In scenario B, reforms outlined in the discussion document Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa are implemented at a moderate pace and help to raise growth. However, weak levels of confidence and continued load-shedding reduce the impact of these reforms. Faster implementation of electricity-sector reforms could result in even higher growth. • 17 Macroeconomic assumptions The assumptions outlined below are incorporated in the forecast. Since the 2019 MTBPS, metals prices have been revised higher across the forecast period, while energy prices have been revised slightly lower, other than for 2020. Food inflation has been revised lower given continued subdued price pressures globally and locally. Public-sector investment in 2019 was lower than forecast, creating base effects that have resulted in a rise in 2020 growth. Deterioration in the public finances and state-owned company balance sheets will constrain growth over the forecast period. South Africa’s sovereign risk premium is now assumed to remain elevated in 2020 and 2021. Assumptions used in the economic forecast 20172018 Percentage changeActual 2019 Estimate 202020212022 Forecast Global demand14.84.4 International commodity prices2 Brent crude oil (US$ per barrel)54.871.0 Gold (US$ per ounce)1 257.71 269.3 Platinum (US$ per ounce)950.4880.7 Coal (US$ per ton)84.1103.7 Iron ore (US$ per ton)71.267.0 3.4 64.1 1 392.8 863.7 80.0 91.6 4.14.14.0 59.456.155.1 1 571.61 599.31 618.6 990.01 012.61 037.0 73.470.971.8 83.573.567.2 Food inflation6.93.6 3.4 4.24.14.5 Sovereign risk premium3 (percentage2.73.1 point) Real public corporation investment-11.7-12.5 3.2 -2.3 3.43.13.0 1.71.32.1 1. Combined growth index of South Africa's top 15 trading partners (IMF World Economic Outlook, January 2020) 2. Bloomberg futures prices at 5 February 2020 3. The JP Morgan EMBI South African Global Spread is used as an estimate of the risk premium. It is calculated as the difference between the yield on the US dollar-denominated South African debt, and an interpolated US Treasury curve Source: National Treasury, Bloomberg, Statistics South Africa

2020 BUDGET REVIEW Figure 2.5 GDP growth scenarios Source: National Treasury Forecast trends Real GDP growth declined by 0.6 per cent in the third quarter of 2019, with six of the 10 production sectors contracting sharply. Drought, subdued global and domestic demand, high production costs and unreliable power supply contributed to the decline. Annual electricity sector production declined by 1.4 per cent in 2019. Eskom’s energy availability factor, which measures the ratio of available power to the maximum amount that could be produced on a scale of 100, fell from an average of 71.8 in 2018 to 67 in 2019 – and below 60 in December 2019. A range of factors contributed to the decline, including operational failures at Medupi and Kusile, unreliable coal and diesel supply, and weather-related problems. Six of 10 production sectors contracted in the third quarter of 2019 Scheduled power cuts are expected to persist over the next 18 months as Eskom conducts urgent maintenance. 12 to Household consumption Imports Gross fixed-capital formation Exports Per cent Per cent 18 Figure 2.6 Growth by expenditure, 2019*Figure 2.7 Growth by sector, 2019* Finance, real estate and business services General governmentGeneral government services Personal services1.1 Transport, storage and communication Trade, catering and accommodation Manufacturing Electricity, gas and water Mining and quarrying Construction Agriculture, forestry and fishing -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 -10 -8 -6 -4 -2 0 2 4 *First three quarters of 2019 Source: Reserve Bank and National Treasury 1.5 1.1 0.0 -0.7 -1.2 -0.1 2.6 1.5 0.8 0.1 -1.4 -2.2 -2.6 -9.1

CHAPTER 2: ECONOMIC OUTLOOK Consumption Household consumption growth averaged 1.1 per cent in the first nine months of 2019, down from 2.1 per cent in the same period of 2018. This was a result of weaker employment, low growth in disposable income, fragile consumer confidence and high administered prices. The consumer confidence index remained at -7 index points in the second half of 2019, its lowest level since late 2017. Real disposable income growth decelerated sharply in the third quarter to 0.1 per cent as nominal compensation growth slowed in line with moderating inflation. Annual growth in credit extended to households, which averaged 6.4 per cent in 2019 compared to 4.6 per cent in 2018, continued to support consumption. Reductions in the prime lending rate have not been fully matched by declining debt-service costs. This is likely driven by debt growth outpacing growth in disposable income, and by rapid growth in costly unsecured credit (10.2 per cent), compared with growth in secured credit (5.3 per cent). Over the next three years, household consumption is expected to recover gradually. A sustained increase in consumption requires faster growth in economic activity, employment and net wealth, and a reduction in household debt. Household consumption growth averaged 1.1 per cent in first nine months of 2019 Credit supporting household consumption as income growth remains low Employment Job creation and wage growth are not easily achievable in the context of low economic growth. In 2019, formal non-agricultural employment fell 0.7 per cent, bringing total employment to 11.3 million people. Annual private-sector wage growth per worker was just 2.4 per cent in the first nine months of 2019, compared with public-sector wage growth of 7.2 per cent. Total wage growth has outpaced profit growth since 2008. Just 11.3 million people had formal, non-agricultural jobs in 2019 Investment Investment contracted by 0.7 per cent in the first nine months of 2019, due to slowing private-sector investment growth and continued contractions in public investment. Weak balance sheets have contributed to pervasive capital underspending, and the winding down of construction activity at Medupi and Kusile has also reduced investment. Growth in private-sector capital spending is expected to have declined from 2.1 per cent in 2018 to 1.7 per cent in 2019. Private-sector investment, which is expected to average 12.6 per cent of GDP in 2019, is forecast to recover moderately, reaching 12.8 per cent of GDP in 2022. This pattern will be supported by improved global growth, the need to replace capital stock and an uptick in confidence over the forecast period. Large investment projects, such as the renewable energy bid window 4 projects, provide further support. Although investment in state-owned companies is expected to remain constrained, initiatives such as the Infrastructure Fund are expected to crowd in private and public investment towards the end of the forecast period. Renewable energy projects and need to replenish capital stock expected to support private-sector investment 19

2020 BUDGET REVIEW Figure 2.8 Investment contribution Public corporations investment *Year to date Source: Statistics South Africa and National Treasury Balance of payments The current account deficit averaged 3.6 per cent of GDP in the first three quarters of 2019, as rising export prices offset the impact of declining export volumes. Net trade subtracted 0.3 percentage points from growth over the period, as exports contracted due to unreliable electricity supply and weak business conditions, while import growth slowed alongside domestic activity. The current account deficit is expected to average 3.5 per cent of GDP over the forecast period. Over the next three years, imports and exports are expected to grow gradually, in line with investment and consumption trends. Portfolio inflows are expected to fund the majority of the current account deficit over the medium term, although the President’s investment drive should help to raise direct investment. To some extent, low interest rates in the US and Europe are expected to encourage savers in these countries to invest in South Africa, which offers comparatively higher interest rates. Current account deficit forecast to average 3.5 per cent of GDP Inflation Weak domestic demand continues to limit firms’ ability to pass higher prices on to consumers – a trend reinforced by low global inflation. Consumer price index (CPI) inflation and core inflation averaged 4.1 per cent in 2019. CPI inflation is expected to rise to 4.5 per cent in 2020, mainly due to rising meat and electricity prices, and is forecast to remain about 4.6 per cent over the medium term. Inflation expectations remain well-anchored. There is a risk that higher administered prices and exchange-rate depreciation could put upward pressure on inflation. Downward pressure could emanate from weaker-than-expected global inflation and continued pressure on retailer margins. Low domestic inflation reinforced by weak demand and low global inflation 20 Percentage points contribution to investment 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 *2019 Per cent of GDP 1525 10 520 0 -515 -10 Total investment as a share of GDP (RHS) -1510 Pr ivate investment General government investment

CHAPTER 2: ECONOMIC OUTLOOK Water supply Assessment rates Core goods Core services 12 lnflation target - upper band lnflation target - lower band Sector performance Mining Mining production contracted by 2.2 per cent in the first three quarters of 2019 compared with the same period a year earlier. Strikes, electricity shortages and weaker Chinese and Indian growth mean the sector is likely to contract for a second consecutive year. Production is likely to remain constrained over the medium term amid low confidence, insufficient demand, difficulties securing water for operations and electricity supply cuts. Strikes, electricity shortages and lower Chinese demand may result in mining contraction Agriculture Agricultural production is expected to contract for the second consecutive year in 2019 as a result of drought conditions and outbreaks of foot-and-mouth disease. Production fell by 9.1 per cent in the first three quarters of 2019 compared with the same period in 2018. Weather conditions in late 2019 suggest higher crop output in 2020, although non-tariff barriers and policy uncertainty remain challenges over the medium term. Agricultural production expected to contract again in 2019 due to drought and disease Manufacturing Manufacturing production contracted by 0.1 per cent in the first three quarters of 2019 compared with the same period in 2018. Food and beverages, and vehicles were the only components to raise output. Manufacturing exports grew by 6.8 per cent over the same period. Manufacturing performance is likely to remain subdued over the next few years as high operating costs and electricity shortages weigh on demand. Financial and business services Over the first three quarters of 2019, real value added in financial and business services grew by 2.6 per cent relative to the same period in 2018, in line with its long-term average. However, this sector has been losing momentum as activity continues to slow across the economy. Financial and business services still growing, but losing momentum Construction Real value added in construction contracted 2.6 per cent in the first three quarters of 2019. Moderate government spending and weak economic conditions will continue to act as a drag on construction activity, although 21 Per cent 2014 2015 2016 2017 2018 2019 Per cent 2014 2015 2016 2017 2018 2019 Figure 2.9 Core inflationary pressuresFigure 2.10 Administered price inflation 18 9 15 Core inflation 6 9 3 6 3 0 0 Source: Statistics South Africa Electricity Inflation target upper bound

3 Fiscal policy Overview Iestimates. Adding to fiscal pressures, requests for support from n recent months, economic growth has continued to decline. As a result, tax revenue is expected to be significantly lower than the 2019 MTBPS financially distressed state-owned companies have increased. The 2019 MTBPS proposed achieving a main budget primary balance, excluding financial support to Eskom, by 2022/23. This target is now out of reach, and debt is not expected to stabilise over the medium term. Table 3.1 Macroeconomic performance and projections Source: National Treasury 23 2016/172017/182018/19 Percentage changeActual 2019/20 Estimate 2020/212021/222022/23 Forecast Real GDP growth0.81.30.6 Nominal GDP growth7.16.34.7 CPI inflation6.34.74.6 0.6 4.8 4.2 0.91.41.7 5.36.16.4 4.44.64.6 GDP at current prices (R billion)4 419.44 698.74 921.5 5 157.3 5 428.25 759.06 126.3 In brief •The economic and revenue outlook has deteriorated since the 2019 Medium Term Budget Policy Statement (MTBPS). As a result, gross national debt is expected to increase to 71.6 per cent of GDP by 2022/23. •Government remains committed to achieving fiscal sustainability, measured as stabilisation of the debt-to-GDP ratio, by moderating spending as a share of GDP and reducing the wage bill as a share of overall spending. •Relative to last year’s Budget, the 2020 Budget proposes net non-interest spending reductions totalling R156.1 billion over the medium-term expenditure framework (MTEF) period. •These measures narrow the consolidated deficit from 6.8 per cent of GDP in 2020/21 to 5.7 per cent in 2022/23. •Departments remain within published spending limits, showing budget discipline. But slowing growth and extra-budgetary pressures from state-owned companies in particular have widened the budget deficit.

2020 BUDGET REVIEW Large downward revision of nominal GDP plays a central role in fiscal outlook The fiscal challenge – a widening gap between revenue and expenditure – is clearly indicated in Figure 3.1. Revenue remains broadly stable at about 26 per cent of GDP. Expenditure has grown as a share of GDP since 2007/08. The spike in the ratio in 2019/20 reflects lower economic growth, a significant increase in support to state-owned companies and a downward revision to nominal GDP. To contain the budget deficit and move towards debt stabilisation, the 2020 Budget proposes a significant reduction in government expenditure growth, mainly as a result of lower growth in the public-service wage bill. These steps will moderate spending as a share of GDP and improve the composition of expenditure, but will not stabilise debt. Options to increase taxes are limited in the current economic environment. Along with faster economic growth, fiscal sustainability requires targeted reduction of specific programmes, and firm decisions to rein in extra-budgetary pressures, including reform of state-owned companies and the Road Accident Fund. Further across-the-board spending cuts that affect core government programmes would severely harm service delivery. Firm decisions required to reform state-owned companies and Road Accident Fund Changes in tax revenue and expenditure Tax revenue Tax revenue estimates for the current year have been revised down by R10.7 billion compared with 2019 MTBPS estimates. In addition, government has chosen not to apply additional revenue measures of R10 billion for next year that were projected in last year’s budget. Lower revenue collection has a knock-on effect, reducing projections over the three-year spending period ahead. Table 3.2 Revised gross tax revenue projections R billion 2019/20 2020/21 2021/22 2022/23 2019 MTBPS Revised estimate Deviation against 2019 MTBPS 1 369.7 1 358.9 -10.7 1 460.9 1 425.4 -35.4 1 555.7 1 512.2 -43.5 1 658.2 1 609.7 -48.5 Source: National Treasury 24 Figure 3.1 Main budget revenue and expenditureFigure 3.2 Main budget deficit* *Figures may differ from Table 3.7 due to rounding Source: National Treasury

CHAPTER 3: FISCAL POLICY No further changes to tax rates are assumed in revenue projections, except annual adjustments in personal income tax brackets, levies and excise duties in line with inflation. These assumptions result in tax revenue projections that are lower than the 2019 MTBPS estimates by R35.4 billion in 2020/21, R43.5 billion in 2021/22 and R48.5 billion in 2022/23. Main budget non-interest expenditure adjustments After the 2019 Budget, two additional spending pressures emerged. First, government increased support to financially distressed state-owned companies by R60.1 billion over the MTEF period. Over the next three years, government will transfer R112 billion to Eskom to enable the utility to meet its short-term financial obligations. An amount of R16.4 billion has been set aside for South African Airways (SAA) to repay guaranteed debt and interest costs. Second, government largely reversed the savings from early retirement and other interventions. The 2019 MTBPS proposed to reduce goods and services, current transfers and capital baselines, and reprioritise funds towards critical priorities. The 2020 Budget takes the additional step of reducing the wage bill by R160.2 billion over the next three years. Net reductions to main budget non-interest spending from the 2019 Budget to the 2020 Budget total R156.1 billion over the MTEF period. Since 2019 Budget, government has agreed to large increases in transfers to Eskom and SAA Table 3.3 Adjustments to main budget non-interest expenditure since 2019 Budget 1. Includes reversal of savings from wage bill measures and national macro-reorganisation of government, adjustments due to lower CPI and early retirement savings in police Source: National Treasury In aggregate, these measures are expected to narrow the consolidated budget deficit from 6.8 per cent of GDP in 2020/21 to 5.7 per cent of GDP in 2022/23. Gross national debt is estimated to increase from 65.6 per cent of GDP in 2020/21 to 71.6 per cent of GDP in 2022/23. 25 R million2020/212021/222022/23 MTEF total 2019 Budget non-interest expenditure1 545 5001 653 0771 736 538 Skills development levy adjustments-1 025-1 722-500 Change in contingency reserve-1 000-1 000-1 000 Baseline reductions and reallocations-66 045-88 149-106 801 Programme baseline reductions-28 238-33 219-39 341 Wage bill reductions-37 807-54 929-67 460 Baseline allocations59 29329 98121 843 Financial support for state-owned companies44 04214 3091 777 Net change in adjustments announced in 20197 7537 62011 953 Budget1 Programme allocations7 4998 0518 113 4 935 115 -3 246 -3 000 -260 995 -100 798 -160 196 111 117 60 128 27 326 23 663 2020 Budget non-interest expenditure1 536 7241 592 1861 650 080 4 778 991 Change in non-interest expenditure since 2019 Budget-8 776-60 890-86 458 -156 124

2020 BUDGET REVIEW Table 3.4 Consolidated fiscal framework Source: National Treasury Achieving fiscal sustainability Achieving fiscal sustainability requires public spending levels to be closely aligned with the revenue-raising potential of the economy. In 2012, government introduced the main budget expenditure ceiling, with the goal of controlling spending growth and stabilising debt. Between 2013/14 and 2018/19, in response to lower economic and revenue growth, government repeatedly reduced the expenditure ceiling. Most of the reductions were applied to goods and services and capital budgets, while leaving the wage bill relatively unchanged. Current transfers have grown as a result of increased support for higher education and larger Unemployment Insurance Fund payments. As a result, the composition of spending has moved away from capital towards consumption. Spending discipline within national and provincial departments introduced by the expenditure ceiling has not translated into debt stabilisation. Figure 3.3 Composition of consolidated government spending* Composition of spending has moved away from capital towards consumption *For selected years Source: National Treasury In recent years, financial demands from state-owned companies – especially Eskom – have mounted, even as economic growth and revenues 26 2016/172017/182018/19 Outcome R billion/percentage of GDP 2019/20 Revised estimate 2020/212021/222022/23 Medium-term estimates Revenue1 285.61 351.41 445.4 29.1%28.8%29.4% 1 517.0 29.4% 1 583.91 682.81 791.3 29.2%29.2%29.2% Expenditure1 442.61 541.91 642.8 32.6% 32.8%33.4% Non-interest expenditure1 286.01 368.91 450.6 29.1%29.1%29.5% 1 843.5 35.7% 1 628.5 31.6% 1 954.42 040.32 141.0 36.0%35.4%34.9% 1 715.01 771.61 840.3 31.6%30.8%30.0% Budget balance-157.0-190.5-197.4 -3.6%-4.1%-4.0% -326.6 -6.3% -370.5-357.5-349.7 -6.8%-6.2%-5.7%

CHAPTER 3: FISCAL POLICY have fallen short of projections. As a result, the deficit has increased and additional resources have been prioritised away from national and provincial departments towards state-owned companies. Table 3.5 Main budget expenditure ceiling, budgeted estimates and outcomes 1. Outer year baselines announced in MTBPS 2014 to MTBPS 2018 Source: National Treasury Reducing wage bill growth From the mid-2000s, a series of wage policy reforms and generous wage settlements increased compensation spending as a share of consolidated spending. Public-service compensation has grown by about 40 per cent in real terms over the past 12 years, and remuneration growth is increasingly out of line with the rest of the economy. The wage bill remains the largest component of spending by economic classification. The 2019 Budget announced wage-bill measures amounting to R27 billion over the 2019 MTEF period. These included provision for early retirement and savings from the national macro-reorganisation of government. Take-up of the early retirement initiative has been slower than anticipated, and only the Department of Police has finalised implementation during 2019/20. Other departments have submitted proposals, which are being processed and may result in further adjustments to baselines. At this stage, the anticipated savings have been largely reversed. The 2020 Budget proposes a reduction in the compensation budgets of national and provincial departments, and entities that receive transfers directly from national government. These reductions amount to R37.8 billion in 2020/21, R54.9 billion in 2021/22 and R67.5 billion in 2022/23. The revised amounts will guide government in forthcoming talks in the Public Service Co-ordinating Bargaining Council. These reductions can be achieved through a combination of modifications to cost-of-living adjustments, pay progression and other benefits. Wage bill growth outside the public service is also contributing to fiscal pressure. During 2020, government will legislate a remuneration framework for public entities and state-owned companies. The framework will improve alignment of pay scales with the public service, and contain excessive salaries and other payments. Take-up of early retirement initiative has been slower than anticipated Excessive salaries at public entities to be addressed in new remuneration framework Fiscal framework The consolidated operating and capital accounts are summarised in Table 3.6. The consolidated deficit in 2019/20 has risen relative to the 2019 Budget estimate. This is mainly due to a larger main budget deficit, reflecting lower revenue and higher projected spending, and the estimated Consolidated deficit projected to narrow from 6.8 per cent of GDP in 2020/21 to 5.7 per cent in 2022/23 27 R billion2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Baselines announced in previous1 0911 1681 2501 354 budgets1 2019 Budget Review1 0751 1421 2251 310 2019 MTBPS1 1421 2251 307 2020 Budget Review1 0751 1421 2251 307 1 435 1 408 1 405 1 409 1 5241 630 1 5021 608 1 4931 5911 674 1 4581 5391 605 Outcomes / estimates compared-16-26-25-47 to original baselines -26 -66-91-69

2020 BUDGET REVIEW deficit for social security funds. These deficits are partially offset by higher surpluses of public entities. Compared with the 2019 Budget, the consolidated deficit estimates for 2020/21 and 2021/22 are larger by an average of two percentage points. The consolidated deficit is projected to narrow from 6.8 per cent of GDP in 2020/21 to 5.7 per cent in 2022/23. Over the next three years, consolidated non-interest expenditure will contract at an annual real average rate of 0.4 per cent. This is largely the result of proposed reductions to the wage bill and other baseline spending. The consolidated wage bill is projected to grow largely in line with inflation in the two outer years of the MTEF period. While the share of the wage bill and of goods and services to total expenditure is projected to decline over the MTEF period, the share of current transfers will increase. Beginning in 2020/21, the composition of spending will improve over the medium term as capital budget reforms boost infrastructure spending and new projects are rolled out. Consolidated non-interest expenditure contracts at annual real average rate of 0.4 per cent over medium term Table 3.6 Consolidated operating and capital accounts 1. Balance of transactions in financial assets and liabilities Source: National Treasury 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 MTEF period. Capital payments and transfers grow by a nominal annual average of 7.4 per cent over the next three years. The current deficit – the gap between revenue and current spending – is projected to narrow from 2.6 per cent of GDP in 2020/21 to 2.2 per cent of GDP in 2022/23. Financial transactions amount to R52.1 billion in 2019/20 and R61 billion in 2020/21. The majority of these amounts reflect financial support for Eskom and SAA. 28 2016/172017/182018/19 Outcome R billion/percentage of GDP 2019/20 Revised estimate 2020/212021/222022/23 Medium-term estimates OPERATING ACCOUNT Current revenue1 266.91 331.71 429.8 Current payments1 285.21 371.81 483.8 Compensation of employees511.7548.1584.8 Goods and services217.6221.3235.0 Interest payments156.5172.9192.2 Current transfers and subsidies399.4429.5471.9 1 503.6 1 622.0 629.2 251.7 215.0 526.1 1 571.01 674.41 782.0 1 712.11 811.11 915.0 638.9667.8697.1 265.1281.5288.5 239.5268.7300.7 568.7593.1628.7 Current balance-18.3-40.1-54.0 -0.4%-0.9%-1.1% -118.5 -2.3% -141.2-136.8-133.0 -2.6%-2.4%-2.2% CAPITAL ACCOUNT Capital receipts0.50.50.4 Capital payments79.177.469.9 Capital transfers69.872.373.4 0.3 82.8 73.5 0.30.30.3 92.1101.4109.0 71.578.784.7 Capital financing requirement-148.3-149.2-142.8 -3.4%-3.2%-2.9% -156.0 -3.0% -163.4-179.8-193.4 -3.0%-3.1%-3.2% Financial transactions19.7-1.1-0.5 Contingency reserve––– -52.1 – -61.0-36.0-18.3 5.05.05.0 Budget balance-157.0-190.5-197.4 -3.6%-4.1%-4.0% -326.6 -6.3% -370.5-357.5-349.7 -6.8%-6.2%-5.7%

CHAPTER 3: FISCAL POLICY Figure 3.4 Average nominal growth in consolidated spending1 1. 2020/21 – 2022/23 Source: National Treasury 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 Spending financed from the National Revenue Fund is summarised in Table 3.7. The main budget deficit, forecast at 4.7 per cent in the 2019 Budget, reached 6.5 per cent of GDP in 2019/20. The deficit is expected to reach 6.8 per cent of GDP in 2020/21 before narrowing to 5.9 per cent of GDP in the outer year. Since the 2019 MTBPS, non-tax revenue has been revised upwards over the medium term, mainly due to higher projected interest on investments and the R3.5 billion in expected revenue from the sale of assets in 2020/21. The R7 billion projected revenue from the sale of non-core assets in 2019/20 has been reversed. Projections of National Revenue Fund receipts for the two outer years have declined significantly compared with 2019 MTBPS estimates due to lower revaluation profits on foreign currency transactions. Payments to the Southern African Customs Union are projected to decrease between 2020/21 and 2021/22, mainly due to estimated error adjustment of overpayments in 2019/20. Main budget non-interest expenditure is projected to increase in real terms by 7 per cent in 2019/20, from 1.9 per cent in the prior year, largely due to financial support for Eskom. In total, real main budget non-interest expenditure contracts by an annual average of 0.8 per cent over the medium term, largely due to compensation and other spending reductions. Main budget deficit to reach 6.8 per cent of GDP in 2020/21, narrowing to 5.9 per cent in outer year Real main budget non-interest expenditure contracts by annual average of 0.8 per cent 29

2020 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 2019/20 and 2020/21, respectively Source: National Treasury Table 3.8 shows revisions to the main budget revenue and expenditure estimates since the 2019 Budget. Debt-service costs are higher than the 2019 Budget estimates by R2.8 billion in 2019/20, R5.2 billion 2020/21 and R11.1 billion in 2021/22. This is mainly driven by the higher budget deficit alongside fluctuations in interest, inflation and exchange rates. Social security funds, public entities and provincial balances Public entities and provinces are projected to have a combined cash surplus in the current year and over the medium term, partially offsetting the deficits of the main budget and social security funds. Higher projected spending by the Unemployment Insurance Fund, especially in 2020/21, is the main driver of the deficits at this level. This higher projected spending is the result of retrospective payments to claimants who were assessed and paid at a rate based on the old legislation, when they were meant to be paid based on higher rates in the amended act. Public entities and provinces expect a combined cash surplus over medium term 30 2016/17 2017/18 2018/19 Outcome R billion/percentage of GDP 2019/20 Revised estimate 2020/21 2021/22 2022/23 Medium-term estimates Revenue Gross tax revenue after proposals1 144.11 216.51 287.7 Non-tax revenue19.019.223.9 SACU1-39.4-56.0-48.3 National Revenue Fund receipts14.216.612.0 1 358.9 26.1 -50.3 10.0 1 425.41 512.21 609.7 30.027.929.3 -63.4-60.6-63.4 6.04.85.3 Main budget revenue1 137.91 196.41 275.3 25.7%25.5%25.9% 1 344.8 26.1% 1 398.01 484.31 580.9 25.8%25.8%25.8% Expenditure National departments 555.6 592.6 634.3 Provinces 500.4 538.6 572.0 Local government 102.9 111.1 118.5 Contingency reserve – – – Provisional allocation not – – – assigned to votes 739.5 612.8 125.0 – – 757.7768.9797.8 649.3692.0730.7 132.5142.4151.4 5.05.05.0 -7.8-16.1-34.9 Non-interest expenditure1 158.91 242.31 324.8 Debt-service costs146.5162.6181.8 1 477.3 205.0 1 536.71 592.21 650.1 229.3258.5290.1 Main budget expenditure1 305.41 404.91 506.6 29.5%29.9%30.6% 1 682.3 32.6% 1 766.01 850.71 940.2 32.5%32.1%31.7% Main budget balance-167.5-208.6-231.3 -3.8%-4.4%-4.7% Primary balance-21.0-45.9-49.5 -0.5%-1.0%-1.0% -337.5 -6.5% -132.5 -2.6% -368.0-366.4-359.3 -6.8%-6.4%-5.9% -138.7-107.9-69.2 -2.6%-1.9%-1.1%

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 Public entities registered a high cash surplus of R26.3 billion in 2018/19 mainly due to lower spending on capital projects in the water and transport sectors. Underspending on capital projects by entities partly reflects unforeseen delays, supply chain management problems and suspension of projects. The Water Services Trading Entity, Passenger Rail Agency of South Africa and South African National Roads Agency Limited are projected to run significant cash surpluses in the current year. Table 3.9 Consolidated budget balances 1. Reconstruction and Development Programme Fund Source: National Treasury Public-sector borrowing requirement The public-sector borrowing requirement includes the borrowing needs of government as a whole, and those of state-owned companies, but excludes development finance institutions. In 2019/20, the requirement is estimated at R410 billion, or 7.9 per cent of GDP. Estimates for the current year and the next two years have been revised upwards compared with 31 R billion2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Main budget-167.5-208.6-231.3 Social security funds8.29.36.8 Provinces-2.50.81.0 Public entities5.08.326.3 RDP Fund1-0.2-0.3-0.2 Consolidated budget balance-157.0-190.5-197.4 -337.5 -3.3 1.2 13.4 -0.2 -326.6 -368.0-366.4-359.3 -9.1-1.0-2.4 -0.42.52.5 7.17.59.5 -0.1-0.1-0.0 -370.5-357.5-349.7 2019/20 20192020 R billion/percentage of GDPBudgetBudget 2020/21 20192020 BudgetBudget 2021/22 20192020 BudgetBudget Revenue Gross tax revenue1 422.21 358.9 Non-tax revenue27.026.1 SACU1-50.3-50.3 National Revenue Fund receipts4.510.0 1 544.91 425.4 21.130.0 -65.8-63.4 5.06.0 1 670.41 512.2 22.327.9 -65.4-60.6 5.64.8 Main budget revenue1 403.51 344.8 25.9%26.1% 1 505.11 398.0 25.9%25.8% 1 632.91 484.3 26.1%25.8% Expenditure Current payments452.9455.6 of which: Compensation of employees175.6175.0 Goods and services74.975.5 Debt-service costs202.2205.0 Transfers and subsidies1 153.41 149.1 Payments for capital assets15.413.6 Payments for financial assets4.864.0 Provisional allocation not19.2– assigned to votes Contingency reserve13.0– 492.2495.0 188.5187.7 79.577.9 224.1229.3 1 238.81 215.9 16.215.3 4.942.6 11.4-7.8 6.05.0 534.6542.4 200.9200.1 86.183.6 247.4258.5 1 318.41 294.0 17.415.8 5.29.5 18.9-16.1 6.05.0 Total expenditure1 658.71 682.3 30.6%32.6% 1 769.61 766.0 30.4%32.5% 1 900.51 850.7 30.4%32.1%

2020 BUDGET REVIEW 2019 Budget estimates, mainly due to a larger main budget deficit. Local government borrowing is projected to increase this year, reflecting municipal infrastructure investment plans. The borrowing requirement for state-owned companies has been lowered because these institutions are finding it more difficult to source financing. Table 3.10 Public-sector borrowing requirement1 1. A negative number reflects a surplus and a positive number a deficit 2. 2018/19 is a pre-audit outcome as at 30 June 2019. 2019/20-2021/22 figures are budgeted estimates adjusted in line with historical borrowing outcomes 3. Includes Eskom, South African Airways, Transnet, Airports Company South Africa and Denel Source: National Treasury Risks to the fiscal outlook Persistently weak economic growth is the central factor limiting improved public finances. Over the period ahead, other risks that could widen the budget deficit and raise debt-service costs include: Persistent low economic growth remains largest risk • Insufficient progress on Eskom reforms and its financial position, and demands from other financially distressed state-owned companies. Outcomes of the renegotiation of the existing wage agreement and the following round of wage talks. The Road Accident Fund is government’s second-largest contingent liability after Eskom. A decision on the Road Accident Benefit Scheme Bill is required to pave the way for a more affordable system. Clarity on government’s position on the user-pay principle as it relates to e-tolls. Declining e-toll revenue will have to be offset by other measures to repay South African National Roads Agency Limited debt. It could also affect funding for other investment projects. • • • Conclusion line with government’s commitment to fiscal sustainability, the In Although debt does not stabilise over medium term, budget deficit narrows 2020 Budget proposes a set of measures to reduce public spending as a share of GDP, improve the composition of spending by reducing growth in the wage bill, and maintain good budget execution. 32 2016/172017/182018/19 Outcome R billion/percentage of GDP 2019/20 BudgetBudget 20192020 2020/212021/222022/23 Medium-term estimates Main budget167.5208.6231.3 Social security funds-8.2-9.3-6.8 Provinces2.5-0.8-1.0 Public entities-5.0-8.3-26.3 RDP Fund0.20.30.2 255.2337.5 -8.03.3 -1.0-1.2 -3.6-13.4 0.10.2 368.0366.4359.3 9.11.02.4 0.4-2.5-2.5 -7.1-7.5-9.5 0.10.10.0 Consolidated government157.0190.5197.4 3.6%4.1%4.0% Local authorities28.36.26.0 0.2%0.1%0.1% State-owned companies388.599.477.1 2.0%2.1%1.6% 242.7326.6 4.5%6.3% 16.19.7 0.3%0.2% 74.773.7 1.4%1.4% 370.5357.5349.7 6.8%6.2%5.7% 10.410.010.2 0.2%0.2%0.2% 73.266.564.2 1.3%1.2%1.0% Borrowing requirement253.8296.1280.5 5.7%6.3%5.7% 333.5410.0 6.2%7.9% 454.1434.0424.1 8.4%7.5%6.9%

4 Revenue trends and tax proposals Overview Pexceeds that of 2009/10, in the immediate aftermath of the global rojected revenue for 2019/20 is now R63.3 billion lower than the Large revenue under-collection generally matches difference in GDP forecast and outcome estimate at the time of the 2019 Budget. This under-collection financial crisis. The shortfall is a consequence of weakening economic growth, and largely matches the lower GDP growth forecast. For example, the 2019 Budget forecast real economic growth in 2019 at 1.5 per cent; the revised forecast is 0.3 per cent. Over the past five years, government has implemented large tax increases. But the difference between projected and collected revenue has grown progressively larger in the face of a persistent slowdown in economic growth and a weakened SARS. In the last 12 months, the new SARS leadership has taken steps to revive the institution, and tax administration has started to recover – but the economy has not. Growth in wages, consumption and business profitability has stagnated in recent years, lowering tax receipts for personal income tax, value-added 33 In brief •Given the weak economic outlook, government will not raise additional revenue from tax proposals in 2020/21. •Tax revenue is projected to grow by 4.9 per cent in 2020/21. •The main tax proposals include personal income tax relief through above-inflation adjustments in all brackets, along with increases in the fuel and Road Accident Fund (RAF) levies to adjust for inflation. Corporate interest deductions will be limited to combat base erosion and profit shifting. •The revitalisation of the South African Revenue Service (SARS) is under way, and this is expected to contribute to increased tax revenue over the medium term. •South Africa aims to strengthen its progressive tax system, while broadening the tax base and removing exemptions. In line with this approach, government will review tax incentives over the medium term, and repeal or redesign those that are inefficient or inequitable.

2020 BUDGET REVIEW tax (VAT) and corporate income tax, which make up more than 80 per cent of total tax revenue. In this context, substantial tax increases are unlikely to be effective. South Africa already has a relatively high tax-to-GDP ratio compared with other countries at a similar level of development. New tax increases at this time could harm the economy’s ability to recover. Consequently, government will not raise additional revenue from tax proposals for 2020/21. Additional revenue from indirect taxes will be offset by personal income tax relief. The main tax proposals for 2020/21 are: Government proposes no overall increase in taxes for 2020/21 • Providing personal income tax relief through an above-inflation increase in the brackets and rebates. Further limiting corporate interest deductions to combat base erosion and profit shifting. Restricting the ability of companies to fully offset assessed losses from previous years against taxable income. Increasing the fuel levy by 25c/litre, consisting of a 16c/litre increase in the general fuel levy and a 9c/litre increase in the RAF levy, to adjust for inflation. Increasing the annual contribution limit to tax-free savings accounts by R3 000 from 1 March 2020. Increasing excise duties on alcohol and tobacco by between 4.4 and 7.5 per cent. • • • • • Revenue collection and outlook Compared with the 2019 Budget estimate, the projected revenue shortfall for 2019/20 is R63.3 billion – significantly higher than the revised estimate of R52.5 billion published in the 2019 Medium Term Budget Policy Statement. The main reason for reductions in projected revenue collection over the past two years has been weaker-than-expected economic growth. Personal income tax collection has been affected by sluggish employment and wage growth. Following the recession in the first half of 2018, the dividends tax has not yielded the expected results, and corporate income tax collection continued to underperform. Growth in VAT collection has moderated following the one percentage point rate increase in 2018/19. Strong growth in VAT refunds also played a role in the lower year-to-date performance. Following the acceleration of VAT refund payments in the past year, SARS reports that the number of fraudulent claims has been increasing. VAT refunds for the last quarter of the fiscal year are expected to moderate as SARS refers more cases for audit or criminal investigation. Tax collections related to trade have slowed in the second half of 2019/20 in line with contracting imports, resulting in lower estimated revenue from customs duties and import VAT. Tax buoyancy – a ratio of tax revenue growth to economic growth – is a useful measure to determine whether revenue collections are performing as expected. For example, gross tax buoyancy was particularly low in Projected revenue shortfall of R63.3 billion stems from weak economic growth Growth in fraudulent VAT claims to be referred for audit or criminal investigation 34

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS 2016/17 and 2017/18, a period in which SARS was severely weakened. Tax increases in those years should have caused revenue to grow faster than nominal GDP, but buoyancy was at or below one. 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. 2019 Budget Review estimates 3. Percentage change between outcome in 2018/19 and revised estimate in 2019/20 4. Includes interest on overdue income tax and interest withholding tax 5. Includes turnover tax for micro businesses, air departure tax, plastic bag levy, electricity levy, CO 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 Analysis of the main components of tax revenue shows that although 2019/20 personal income tax collections are not expected to meet the 2019 Budget forecast, their decline is in line with moderating real wage growth in the economy. Similarly, domestic VAT collections and trade-related taxes are in line with expected outcomes for consumption and imports. Corporate income tax, which is particularly volatile, is expected to significantly underperform. 35 2018/19 R million Budget2 Outcome Deviation 2019/20 Budget2 Revised Deviation Percentage change3 Taxes on income and profits 751 846 738 741 -13 105 Personal income tax 497 451 492 083 -5 368 Corporate income tax 218 436 212 046 -6 390 Dividends tax 30 341 29 898 -443 Other taxes on income and 5 618 4 714 -904 profits4 Skills development levy 17 312 17 439 127 Taxes on property 16 035 15 252 -783 Domestic taxes on goods and services 460 287 460 545 257 Value-added tax 325 917 324 766 -1 151 Specific excise duties 40 276 40 830 553 Health promotion levy 2 396 3 195 799 Ad valorem excise duties 4 163 4 192 29 Fuel levy 75 374 75 372 -1 Other domestic taxes 12 161 12 190 28 on goods and services5 Taxes on international 56 722 55 723 -999 trade and transactions Customs duties 55 638 54 968 -670 Health promotion levy on imports 78 53 -25 Diamond export levy 87 78 -9 Miscellaneous customs 918 624 -295 and excise receipts 820 342 778 280 -42 062 552 877 527 584 -25 293 229 608 216 718 -12 890 31 893 29 144 -2 748 5 964 4 833 -1 131 18 759 18 576 - 182 17 159 16 038 -1 121 504 649 488 711 -15 938 360 471 344 202 -16 269 42 354 46 765 4 411 1 986 2 590 604 4 454 4 112 - 342 82 958 79 277 -3 680 12 426 11 764 - 661 61 300 57 330 -3 971 60 029 56 325 -3 704 245 54 -191 93 90 -3 932 860 -73 5.4% 7.2% 2.2% -2.5% 2.5% 6.5% 5.2% 6.1% 6.0% 14.5% -18.9% -1.9% 5.2% -3.5% 2.9% 2.5% 2.4% 15.9% 37.8% Gross tax revenue 1 302 201 1 287 690 -14 511 Non-tax revenue6 31 473 35 869 4 395 of which: Mineral and petroleum 8 340 8 612 272 royalties Less: SACU7 payments -48 289 -48 289 – 1 422 208 1 358 935 -63 273 31 537 36 142 4 605 8 766 11 952 3 186 -50 280 -50 280 – 5.5% 0.8% 38.8% 4.1% Main budget revenue 1 285 386 1 275 270 -10 116 Provinces, social security 169 831 170 154 323 funds and selected public entities 1 403 464 1 344 796 -58 668 180 347 172 192 -8 155 5.5% 1.2% Consolidated budget revenue 1 455 217 1 445 424 -9 793 1 583 811 1 516 988 -66 823 5.0%

2020 BUDGET REVIEW 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/dividends tax, interest withholding tax and interest on overdue income tax 3. As announced in the 2018 Budget, medical tax credits were adjusted below inflation over the MTEF to fund additional expenditure for national health insurance. The additional amount for 2020/21 is R0.58 billion. This is the last year of that MTEF, and therefore such an amount is not included in the two outer-year estimates for personal income taxes 4. Relative to the estimates published in Table D.4 of the 2019 MTBPS, the forecasts for corporate income tax assume a buoyancy of 0.9, 0.95 and 1 over the next three years 5. Includes mineral and petroleum royalties, mining leases, departmental revenue and sales of capital assets 6. Southern African Customs Union. Amounts made up of payments and other adjustments Source: National Treasury and SARS Tax revenue is projected to grow by 4.9 per cent in 2020/21. Gross tax buoyancy is expected to decrease to 0.93, primarily due to lower personal income tax receipts following the anticipated reduction in the public-service wage bill. After contractions in four of the past seven quarters, economic growth and profitability are expected to remain weak, putting greater pressure on corporate income tax collections. Revenue should improve over the medium term as growth recovers. Efficiency improvements at SARS may bolster revenue further, but such potential gains are not included in the current projections. Strengthening the South African Revenue Service Building a capable state that serves South Africa is integrally linked to the success of SARS. The new Commissioner is focusing on stabilising the organisation, re-establishing integrity and compliance functions, and restoring employee confidence and public trust. Revenue recovery plans include assistance from the re-established Davis Tax Committee to address SARS to renew its focus on illicit and criminal activity 36 2016/172017/182018/19 R millionOutcome 2019/20 Revised 2020/212021/222022/23 Medium-term estimates Taxes on income and664 526711 703738 741 profits2 of which: Personal income tax 3 424 545460 953492 083 Corporate income tax 4 204 432217 412212 046 Skills development levy15 31516 01217 439 Taxes on property15 66116 58515 252 Domestic taxes on goods402 464422 248460 545 and services of which: VAT289 167297 998324 766 Taxes on international46 10249 93955 723 trade and transactions 778 280 527 584 216 718 18 576 16 038 488 711 344 202 57 330 813 588863 888921 375 546 771581 146621 602 230 226243 686258 357 19 41320 58521 970 17 51018 95620 165 514 267543 916576 525 360 555381 859405 598 60 64064 84969 622 Gross tax revenue1 144 081 1 216 464 1 287 690 1 358 935 1 425 418 1 512 194 1 609 657 Non-tax revenue5 33 27235 84935 869 of which: Mineral and petroleum royalties5 8027 6178 612 Less: SACU6 payments-39 448-55 951-48 289 36 142 11 952 -50 280 35 97332 66334 586 12 69713 43914 248 -63 395-60 563-63 366 Main budget revenue1 137 904 1 196 362 1 275 270 Provinces, social security147 700155 015170 154 funds and selected public entities 1 344 796 172 192 1 397 996 1 484 294 1 580 877 185 910198 545210 442 Consolidated budget revenue1 285 605 1 351 378 1 445 424 1 516 988 1 583 905 1 682 839 1 791 319 As percentage of GDP Tax revenue25.9%25.9%26.2% Main budget revenue25.7%25.5%25.9% 26.3% 26.1% 26.3%26.3%26.3% 25.8%25.8%25.8% GDP (R billion)4 419.44 698.74 921.5 Tax buoyancy0.971.001.23 5 157.3 1.15 5 428.25 759.06 126.3 0.931.001.01

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS tax leakages, customs fraud, trade mispricing and harmful tax practices; setting up a new centre focused on wealthy individuals who have complex tax arrangements; and renewing the focus on illicit and criminal activity, including non-compliance of religious public-benefit organisations. SARS is reviewing its procurement processes. Contracts that did not represent value for money have not been renewed. A number of senior officials implicated by the Nugent Commission have left, and experienced staff returned to roles from which they had been displaced. Strengthening SARS will take time, but will result in improved revenue collections in the years ahead. Some experienced SARS staff have returned to roles from which they had been displaced Tax policy Over the past five years, government has increased rates of personal income tax, dividends tax, capital gains tax and VAT, while raising the fuel levy and excise duties on alcohol and tobacco. The tax-to-GDP ratio has steadily increased over this period, reaching 26.2 per cent, which is close to its democratic-era peak of 26.4 per cent in 2007/08. The 2019 Budget announced that an additional R10 billion in tax revenue would be raised in 2020/21 to support fiscal consolidation. At the time, real GDP growth was expected to be 1.5 per cent for 2019 and 1.7 per cent for 2020. Since then, the economy has faltered and growth estimates have been revised down to 0.3 per cent for 2019 and 0.9 per cent for 2020. Substantial tax increases may obstruct short-term recovery. As a result, government will not raise any taxes to collect the additional R10 billion in 2020/21. Even without additional tax increases this year, the projected tax-to-GDP ratio is expected to equal 26.3 per cent over the next three years. South Africa has a relatively high level of tax to GDP compared with other upper-middle-income countries, as shown in Figure 4.1. Higher levels of economic South Africa’s tax-to-GDP ratio is nearing its democratic-era peak South Africa has relatively high level of tax to GDP compared with other upper-middle-income countries 37 Rebuilding governance at SARS The Commission of Inquiry into Tax Administration and Governance by SARS (the Nugent Commission) found a “massive failure of governance and integrity” at SARS under the former Commissioner. The Commission made 27 recommendations. The SARS Commissioner is responsible for implementing non-legislative and organisational recommendations from the report, and the Minister of Finance for policy recommendations. This is in keeping with two guiding principles: • SARS should implement tax laws fairly, without bias and without political interference. • SARS is autonomous but accountable to the Minister of Finance, who determines tax policy. Accordingly, government plans to publish a discussion document by June 2020 setting out proposed legislative amendments to strengthen governance at SARS. These will include an improved appointment and removal process for the Commissioner by the President, and an appointment and removal process for Deputy Commissioners. The Office of the Tax Ombud has proved effective in ensuring that taxpayers are not prejudiced by SARS. Government will strengthen the ombud and separate it financially and operationally from SARS. In addition, government recognises the need for an independent office to oversee governance and conduct within SARS. Accordingly, government will propose an inspector-general to: • Monitor and report conduct and performance metrics to government and the public. • Safeguard whistleblowing by SARS officials in a way that keeps tax information secret. • Empower senior SARS officials to disclose any lapses or findings by the internal audit function. • Provide independent assurance that internal processes are sound and unbiased.

2020 BUDGET REVIEW growth are required for further tax increases to be effective in consolidating the public finances or financing additional expenditure. Figure 4.1 Tax burdens for countries at different levels of development Source: OECD, International Monetary Fund The way in which tax revenue is raised has important implications for fairness and economic growth. South Africa aims to strengthen its progressive tax system by broadening the tax base and eliminating exemptions or deductions where possible. The system should make it easy for individuals and firms to comply, and minimise distortions so that they do not base their decisions on tax. Crucially, the system should continue to generate tax revenue throughout the business cycle. Government seeks to broaden tax base, and eliminate exemptions and deductions where possible Corporate income tax To promote economic growth, government intends to restructure the corporate income tax system over the medium term by broadening the base and reducing the rate. Broadening the base will involve minimising tax incentives, and introducing new interest deduction and assessed loss limitations. Rate reductions will be implemented in a revenue-neutral manner. Government has broadened the corporate income tax base since the early 2000s by taxing foreign dividends, imposing capital gains tax and introducing the controlled foreign company regime. In contrast with many other countries, however, South Africa’s corporate income tax rate has remained unchanged at 28 per cent for more than a decade. As the gap with our trading and investment partners grows, the country’s relative competitiveness declines. India, the United States and the United Kingdom have all recently reduced their corporate income tax rates below 28 per cent. Reducing the corporate income tax rate will encourage businesses to invest and expand production, improve the country’s competitiveness as an investment destination, and reduce the appeal of base erosion and profit shifting. As trading partners reduce their corporate tax rates, South Africa’s relative competitiveness declines 38

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Figure 4.2 Corporate income tax rate movements Source: OECD Do tax incentives work? Tax incentives are subsidies that provide favourable tax treatment to individuals and businesses to encourage specific behaviour or activities. They can compromise the principles of a good tax system by creating complexity and inequities between individuals, sectors and activities. They also reduce the tax base, requiring higher tax rates for the rest of the economy and opening up avenues for aggressive tax avoidance. In many cases, the incentivised investment or action would have taken place anyway, causing a direct loss of revenue with no additional benefit. In addition, tax incentives result in: Tax incentives can undermine the tax system by creating complexity and inequity • Increasingly complicated governing legislation to isolate the specific activity that is being promoted without an undue loss of tax revenue. Greater benefits to larger firms and those who are able to afford specialist tax advice. Additional SARS resources to monitor and audit incentives. • • The 1994 Katz Commission stated that tax incentives “are a form of special pleading, a preferential treatment to a particular group” and as such they should be treated as a subsidy provided by government. It noted that incentives often lead to lobbying by particular groups whose aim is to retain their vested interest. These subsidies do not form part of the annual budget process and are not subject to the same level of annual oversight as government expenditure, although the estimated costs of most tax expenditures are published in Annexure B of the Budget Review. The Katz Commission stated that “the range of incentives should be narrowed as far as possible”. The Davis Tax Committee has proposed a detailed review of corporate tax incentives and the removal of inefficient subsidies. The 2020 Budget applies sunset clauses to several incentives, as described in the tax proposals section. Over the medium term, government will systematically review tax incentives and repeal or redesign those found to be redundant, inefficient or inequitable. This will create a more Katz: tax incentives are ‘a form of special pleading, a preferential treatment to a particular group’ Government to launch systematic review of tax incentives 39 Per cent France Portugal Mexico Australia Germany Japan Belgium Italy Greece New Zealand South Africa Korea Canada United States India Netherlands Spain Chile Turkey Denmark Norway Switzerland Czech Republic Poland United Kingdom Ireland Hungary 5520002019 45 35 25 15 5

2020 BUDGET REVIEW standardised tax treatment of different sectors and individuals, and could allow for lower tax rates. In addition, government will consider publishing information on which companies benefit from tax incentives, and the amount of those incentives, to improve transparency. Tax proposals The tax proposals for the 2020 Budget aim to support a recovery in economic growth, with some relief at the level of personal income tax. They result in no overall change to tax revenue in 2020/21. Table 4.3 Impact of tax proposals on 2020/21 revenue1 Some relief is provided for personal income tax R million Gross tax revenue (before tax proposals) 1 425 418 Budget 2020/21 proposals - Direct taxes Taxes on individuals and companies Personal income tax Increasing brackets by more than inflation Revenue if no adjustment is made Higher-than-inflation increase in brackets and rebates Indirect taxes Carbon tax Plastic bag levy -2 000 -2 000 -2 000 12 000 -14 000 2 000 1 750 250 Gross tax revenue (after tax proposals) 1 425 418 1. Revenue changes are in relation to thresholds that have been fully adjusted for inflation Source: National Treasury Personal income tax The personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 5.2 per cent for 2020/21, which is above expected inflation of 4.4 per cent (Table 4.4). This adjustment provides R2 billion in tax relief. The change in the primary rebate increases the tax-free threshold from R79 000 to R83 100. Medical tax credits Government proposes an increase in the value of medical tax credits in 2020/21 from R310 to R319 per month for the first two beneficiaries, and from R209 to R215 per month for the remaining beneficiaries. This increases the value of the tax credit by 2.8 per cent. It is in line with the announcement in the 2018 Budget Review that the credit would be adjusted by less than inflation to help fund the rollout of national health insurance over the medium term. Medical tax credit adjustment less than inflation to help fund rollout of national health insurance Tax-free savings accounts The annual limit on contributions to tax-free savings accounts will be increased from R33 000 to R36 000 from 1 March 2020. 40

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Table 4.4 Personal income tax rates and bracket adjustments Source: National Treasury Table 4.5 provides a distributional breakdown of the effects of changes to the rebates and personal income tax brackets. Lower-income individuals will receive most of the income tax relief from these inflation adjustments. Table 4.5 Estimates of individual taxpayers and taxable income, 2020/21 proposals 1. Registered individuals with taxable income below the income-tax threshold Source: National Treasury 41 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 payable after R billion% R0 - R801 6 822 326– 218.8– –– –– –– R80 - R150 R150 - R250 R250 - R350 R350 - R500 R500 - R750 R750 - R1 000 R1 000 - R1 500 R1 500 + 2 084 68329.2 1 771 58224.8 1 071 40215.0 1 029 50914.4 615 1778.6 266 1693.7 182 8832.6 125 0291.7 235.39.3 354.314.1 318.312.6 424.116.8 368.214.6 225.79.0 217.28.6 376.414.9 23.84.2 30.95.5 47.28.4 81.014.4 90.416.1 65.911.8 71.012.7 150.626.8 -1.410.2 -2.114.8 -2.014.0 -2.820.0 -2.517.6 -1.39.6 -0.96.6 -1.07.2 22.44.1 28.85.3 45.38.3 78.214.3 87.916.1 64.511.8 70.112.8 149.627.4 Total 7 146 434 100.0 2 519.5 100.0 560.8 100.0 -14.0100.0 546.8 100.0 Grand total 13 968 760 2 738.3 560.8 -14.0 546.8 2019/20 Taxable income (R)Rates of tax 2020/21 Taxable income (R)Rates of tax R0 - R195 85018% of each R1 R0 - R205 90018% of each R1 R195 851 - R305 850R35 253 + 26% of the amount above R195 850 R205 901 - R321 600R37 062 + 26% of the amount above R205 900 R305 851 - R423 300R63 853 + 31% of the amount above R305 850 R321 601 - R445 100R67 144 + 31% of the amount above R321 600 R423 301 - R555 600R100 263 + 36% of the amount above R423 300 R445 101 - R584 200R105 429 + 36% of the amount above R445 100 R555 601 - R708 310R147 891 + 39% of the amount above R555 600 R584 201 - R744 800R155 505 + 39% of the amount above R584 200 R708 311 - R1 500 000R207 448 + 41% of the amount above R708 310 R744 801 - R1 577 300R218 139 + 41% of the amount above R744 800 R1 500 001 and aboveR532 041 + 45% of the amount above R1 500 000 R1 577 301 and aboveR559 464 + 45% of the amount above R1 577 300 Rebates PrimaryR14 220 SecondaryR7 794 TertiaryR2 601 Tax threshold Below age 65R79 000 Age 65 and overR122 300 Age 75 and overR136 750 Rebates PrimaryR14 958 SecondaryR8 199 TertiaryR2 736 Tax threshold Below age 65R83 100 Age 65 and overR128 650 Age 75 and overR143 850

2020 BUDGET REVIEW Curtailing excessive corporate interest deductions Government proposes to restrict net interest expense deductions to 30 per cent of earnings for years of assessment commencing on or after 1 January 2021. This measure will address a typical form of base erosion and profit shifting by multinational corporations. This practice involves artificially inflating company debt and/or the interest rate on that debt to a related party in another jurisdiction with a lower corporate income tax rate. The resulting interest payments are deducted in South Africa, reducing the domestic tax base and effectively shifting profits to be taxed at a lower rate offshore. Consultation on the design of this limitation begins today. A discussion document is available on the National Treasury website and the closing date for comments is 17 April 2020. Proposal to restrict net interest expense deductions to curb base erosion and profit shifting Sunset dates for corporate tax incentives The National Treasury proposes introducing a 28 February 2022 sunset date for tax incentives dealing with airport and port assets, rolling stock, and loans for residential units. Government will review each of these incentives before the sunset date to determine whether they should be extended. Details are provided in Annexure B. The section 12I tax incentive relating to industrial policy projects will not be renewed beyond 31 March 2020. The urban development zone incentive will be extended for one year while a review of the incentive is completed. Government intends to insert sunset dates in additional tax incentives where they do not currently exist to avoid benefits continuing indefinitely without adequate oversight. More details are provided in Annexure B. Given the fiscal position, government does not intend to extend the tax incentives for special economic zones beyond the six zones already approved by the Minister of Finance. Limiting the use of assessed losses to reduce taxable income When a company’s tax-deductible expenses exceed its income, it records an assessed loss. Often, the loss is carried forward to the next year and is offset against taxable income in that year. Over the past few years, there has been an international trend to restrict this practice. Government proposes broadening the corporate income tax base by restricting the offset of assessed losses carried forward to 80 per cent of taxable income, for years of assessment commencing on or after 1 January 2021. This is viewed as a reasonable approach that affects all businesses equally, rather than restricting the number of years for carrying forward assessed losses, which would disproportionately hurt businesses with large initial investments or long lead times to profitability. Growing international trend to restrict use of assessed losses carried forward 42 Taxing the digital economy In today’s digital economy, many businesses are able to generate significant profits in a country, without a physical presence. The Organisation for Economic Co-operation and Development (OECD) secretariat has proposed a unified approach to taxing multinational firms. This approach considers multinationals as a whole, and recognises that consumers and intangible assets contribute to global profits. Under the proposal, multinationals would be required to report a portion of their global profits in all countries where they have a sustained and material market presence. The proposal forms the basis for negotiations and a hoped-for consensus in 2020. South Africa participates in these discussions as a member of the OECD’s inclusive framework steering group.

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Export taxes Export taxes are limited by trade agreements, and lead to winners and losers in the economy. Given these considerations, South Africa has generally avoided such taxes. Government is aware, however, that unfair trade practices have put some key industries under pressure. Government will consult with affected industries on the introduction of export taxes on scrap metal, which could replace the current price preference system. Proposed export taxes will apply to ferrous metals at the rate of R1 000 per tonne, aluminium at R3 000 per tonne, red metals at R8 426 per tonne, and other waste and scrap metals at R1 000 per tonne. This reform aims to improve the availability of better-quality scrap metal at affordable prices for domestic foundries and mills. Consultation will begin today, to be concluded by the end of May 2020, for consideration in the annual tax bills. Given their negative impact on trade, South Africa has generally not used export taxes Transfer duties The brackets to calculate transfer duties on the sale of property, last adjusted in 2017, will be adjusted for inflation from 1 March 2020. No transfer duty will be liable on the purchase of property with a value below R1 million. Table 4.6 Transfer duty rate adjustments Source: National Treasury Taxation of heated tobacco products Heated tobacco products produce aerosols containing addictive substances and other chemicals that are inhaled by users. These products are not currently subject to excise duty. Government will introduce a new category or tariff subheading for heated tobacco products in the schedule of excise duties, to be taxed at a rate of 75 per cent of the cigarette excise rate with immediate effect. Electronic cigarettes Electronic cigarettes are different to heated tobacco products: they do not contain tobacco, but they do contain nicotine or other chemicals. Currently, electronic cigarettes are not taxed. Globally, policymakers are looking at regulating and taxing these products due to concerns about their health effects. Government intends to tax electronic cigarettes in 2021. Government intends to tax electronic cigarettes due to concerns about health effects 43 2019/20 Property value (R) Rates of tax 2020/21 Property value (R) Rates of tax R0 - R900 000 0% of property value R0 - R1 000 000 0% of property value R900 001 - R1 250 000 3% of property value above R900 000 R1 000 001 - R1 375 000 3% of property value above R1 000 000 R1 250 001 - R1 750 000 R10 500 + 6% of property value above R1 250 000 R1 375 001 - R1 925 000 R11 250 + 6% of property value above R1 375 000 R1 750 001 - R2 250 000 R40 500 + 8% of property value above R1 750 000 R1 925 001 - R2 475 000 R44 250 + 8% of property value above R1 925 000 R2 250 001 - R10 000 000 R80 500 + 11% of property value above R2 250 000 R2 475 001 - R11 000 000 R88 250 + 11% of property value above R2 475 000 R10 000 001 and above R933 000 + 13% of property value above R10 000 000 R11 000 001 and above R1 026 000 + 13% of property value above R11 000 000

2020 BUDGET REVIEW Excise duties on alcohol and tobacco Taxes on alcohol and tobacco are determined within a policy framework that targets the excise duty burden. The excise burdens for most types of alcoholic beverages and tobacco products currently exceed the targeted level as a result of above-inflation increases and price fluctuations. Government will increase most excise duties by an amount that matches expected inflation of 4.4 per cent for 2020/21, and by 6 per cent in the case of sparkling wine and 7.5 per cent for pipe tobacco and cigars. Excise duties on alcohol and tobacco increase in line with inflation Table 4.7 Changes in specific excise duties, 2020/21 Source: National Treasury Levies on fuel To adjust for inflation, government proposes to increase the general fuel levy by 16c/litre and the RAF levy by 9c/litre from 1 April 2020. Table 4.8 Total combined fuel taxes on petrol and diesel 1. The carbon tax on fuel became effective from 5 June 2019 2. Average Gauteng pump price for the 2018/19 and 2019/20 years. The 2020/21 figure is the Gauteng pump price in February 2020. Diesel (0.05% sulphur) wholesale price (retail price not regulated) Source: National Treasury 44 2018/19 93 octaneDiesel Rands/litrepetrol 2019/20 93 octaneDiesel petrol 2020/21 93 octaneDiesel petrol General fuel levy3.373.22 Road Accident Fund levy1.931.93 Customs and excise levy0.040.04 Carbon tax1–– 3.543.39 1.981.98 0.040.04 0.070.08 3.703.55 2.072.07 0.040.04 0.070.08 Total5.345.19 Pump price215.3014.20 5.635.49 13.8613.14 5.885.74 15.7114.57 Taxes as percentage of34.9%36.5% pump price 40.6%41.8% 37.4%39.4% Current excise Productduty rate Proposed excise duty rate Percentage change NominalReal Malt beerR102.07/ litre of absolute alcohol (173,51c / average 340ml can) R106.56/ litre of absolute alcohol (181,15c / average 340ml can) 4.4– Traditional African beer7,82c / litre 7,82c / litre –-4.4 Traditional African beer34,70c / kg powder 34,70c / kg –-4.4 Unfortified wineR4.20 / litre R4.39 / litre 4.4– Fortified wineR7.03 / litre R7.34 / litre 4.4– Sparkling wineR13.55 / litre R14.36 / litre 6.01.6 Ciders and alcoholic fruit R102.07/ litre of absolute beveragesalcohol (173,51c / average 340ml can) R106.56/ litre of absolute alcohol (181,15c / average 340ml can) 4.4– SpiritsR204.15 / litre of absolute alcohol (R65.84 / 750ml bottle) R213.13 / litre of absolute alcohol (R68.73 / 750ml bottle) 4.4– CigarettesR16.66 / 20 cigarettes R17.40 / 20 cigarettes 4.4– Cigarette tobaccoR18.73 / 50g R19.55 / 50g 4.4– Pipe tobaccoR5.39 / 25g R5.79 / 25g 7.53.1 CigarsR89.72 / 23g R96.45 / 23g 7.53.1

CHAPTER 4: REVENUE TRENDS AND TAX PROPOSALS Carbon tax The carbon tax rate will increase by 5.6 per cent for the 2020 calendar year. This increase includes an annual inflation rate of 3.6 per cent plus two percentage points in line with the Carbon Tax Act (2019). Accordingly, the carbon tax rate will increase from R120 per tonne of carbon dioxide equivalent to R127 per tonne of carbon dioxide equivalent. Purchase tax on motor vehicle emissions and incandescent globe tax In line with global vehicle emission standards and the shift to low-carbon, fuel-efficient vehicles, government proposes to increase the vehicle emissions tax rate for passenger cars to R120 per gram of carbon dioxide emissions per kilometre (gCO2/km) and R160 gCO2/km for double cabs. The threshold will be adjusted from 120 gCO2/km to 95 gCO2/km for passenger vehicles to align with the Euro 6 emission standards. These amendments will take effect from 1 April 2020. Government proposes to increase the incandescent light bulb levy by R2 from R8 to R10, effective 1 April 2020, to encourage the uptake of more energy-efficient light bulbs. Vehicle emission tax to increase in line with global standards and shift to fuel-efficient cars Levies on plastic An estimated 12.7 million tonnes of plastic litters the world’s oceans. While progress has been made in the domestic environment, plastic pollution remains a significant problem, particularly for marine life. The National Treasury will consult on extending the current levy on plastic bags to all single-use plastics used for retail consumption, including plastic straws, utensils and packaging. Changes will be implemented in 2021. Government proposes to raise the plastic bag levy from 12 to 25 cents per bag effective 1 April 2020. A review of the current levy, including a clarification of the tax treatment of compostable bags, will be undertaken. 45 Carbon pricing and environmental taxation Increasingly, governments and businesses recognise that the world faces a climate crisis, and acknowledge the need for partnerships to limit global warming to below 1.5 degrees Celsius. As the Paris Agreement becomes operational in 2020, signatories will submit revised nationally determined contribution commitments to mitigate climate change. A range of legislation and policies is being developed to meet South Africa’s commitments in this regard. South Africa introduced a carbon tax in June 2019 as part of government’s broader climate change mitigation policy. The National Treasury and the Department of Environment, Forestry and Fisheries will jointly consult stakeholders on future mitigation policies, including the integration of the carbon tax and mandatory carbon budgeting for the private sector to provide policy certainty and promote transparency. Government will also continue to monitor developments under Article 6 of the Paris Agreement and their implications for the design and implementation of the domestic carbon offset scheme under the carbon tax. Government will review the design of the carbon tax after it has been in operation for at least three years to ensure that the measure is contributing appropriately to cost-effective emissions reduction. Government is preparing to publish an environmental fiscal reform review paper. It will explore the potential for new environmental taxes and reforms to existing instruments, such as: • Restructuring the general fuel levy to include a local air pollution emissions component. •Alleviating traffic congestion through road pricing charges and design options for an annual carbon dioxide tax on vehicles, in collaboration with the Department of Transport and provincial governments. • Reviewing inefficient fossil fuel subsidies, including the VAT zero-rating of transport fuels. • Considering product taxes on electrical and electronic waste. • Reviewing the tax treatment of company cars to incentivise use of more fuel-efficient vehicles.

2020 BUDGET REVIEW Foreign remuneration exemption Government will increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020. Some advisors have recommended emigration, as recognised by the Reserve Bank, as a way to break tax residency. However, this is only one factor considered by SARS. Government wants to encourage all South Africans working abroad to maintain their ties to the country. Consequently, this concept of emigration will be phased out by 1 March 2021. Details appear in Annexure E. Government wants to encourage all South Africans working abroad to maintain their ties to the country Tax policy reviews and research The fiscal treatment of the upstream petroleum sector The draft Upstream Petroleum Resources Development Bill was recently published for public comment. The National Treasury notes the current public discussion on the bill and will consult with the relevant stakeholders as to the most appropriate fiscal regime for South Africa. Other projects The National Treasury will undertake or complete the following projects during 2020/21: • Examining the regulation and tax treatment of unlisted real estate investment trusts, in line with the announcements in the 2013 and 2019 Budget Review. • Reviewing the tax treatment of amounts received by portfolios of collective investment schemes in line with the announcement in the 2019 Budget Review. Measures to enhance tax administration Pay-as-you-earn and personal income tax administration reform The legal framework and administration of pay-as-you-earn (PAYE) will be reviewed with a view to implementing a more modern, automated process for employers that is easy to understand, access and maintain. The reform is intended to promote accurate and timely withholding from employees and payments to SARS. It is expected to reduce the administrative burden for employers, payroll administrators and SARS. In addition, employees will be able to monitor their tax obligations during the course of the year, and the annual return process for employers will be simplified. Over time, this reform is likely to mean that most individual salaried taxpayers will not have to file personal tax returns. Reforms expected to lead to automated PAYE system that could reduce filing burden Conclusion Revenue collection continues to perform below expectations, driven by a weak economy. The 2020 Budget aims to support economic recovery in the short term by not raising additional taxes. Over time, the strengthening of SARS is expected to lead to increased revenue collection. 46

5 Consolidated spending plans Overview Tsince the 2019 Budget, and spending priorities for each function. his chapter outlines government’s consolidated spending plans over the next three years. It shows changes to medium-term allocations Government spending remains highly redistributive, with 55.4 per cent of the budget allocated to learning and culture, health and social development. Total consolidated government spending is expected to be R6.14 trillion over the medium term. Main budget non-interest expenditure will grow from R1.54 trillion in 2020/21 to R1.65 trillion in 2022/23. Relative to the 2019 Budget, main budget non-interest spending is reduced by R156.1 billion over the medium term. This is largely due to proposed measures, amounting to R160.2 billion, to reduce growth in the public-service wage bill. As discussed in Chapter 6, the way in which compensation reductions affect individual department baselines will only be finalised in 2020/21. Consolidated government spending amounts to R6.14 trillion over the MTEF period 47 In brief •Total consolidated spending will amount to R1.95 trillion in 2020/21, R2.04 trillion in 2021/22 and R2.14 trillion in 2022/23. •Relative to the 2019 Budget, main budget non-interest expenditure will be reduced by R156.1 billion over the medium-term expenditure framework (MTEF) period. As a result, it will grow from R1.54 trillion in 2020/21 to R1.65 trillion in 2022/23. •Funding for new and urgent priorities is provided through reprioritising existing baselines. •To reduce growth in the public-service wage bill, the 2020 Budget proposes reductions to compensation spending totalling R160.2 billion over the MTEF period. •In addition, baseline reductions of R28.2 billion in 2020/21, R33.2 billion in 2021/22 and R39.3 billion in 2022/23, mainly on non-compensation spending, have been implemented. These were partially offset by reallocations to baselines and additional allocations to state-owned companies.

2020 BUDGET REVIEW As noted in the 2019 Medium Term Budget Policy Statement (MTBPS), weak economic performance, revenue outcomes and balance sheets of several state-owned companies have necessitated reductions in government spending over the MTEF period. The 2020 Budget includes baseline reductions of R66 billion in 2020/21, R88.1 billion in 2021/22 and R106.8 billion in 2022/23. These include reductions to compensation ceilings and government programmes. Cost pressures, including new and urgent priorities, have been funded through a combination of reallocations and reprioritisations over the MTEF period. Despite these fiscal measures, government debt as a share of GDP continues to increase. Debt-service costs remain the fastest-growing expenditure item at an annual average rate of 12.3 per cent, and will increase to R290.1 billion in 2022/23. Baselines reduced by R66 billion in 2020/21, R88.1 billion in 2021/22 and R106.8 billion in 2022/23 Revisions to main budget spending plans The 2020 Budget proposes total baseline reductions of R261 billion over the medium term, as shown in Table 5.1. The reductions were partially offset by baseline reallocations and additional allocations to state-owned companies, mainly Eskom. Table 5.1 Adjustments to main budget non-interest expenditure since 2019 Budget 1. Includes reversal of savings from wage bill measures and national macro-reorganisation of government, adjustments due to lower CPI, and early retirement savings in police Source: National Treasury Non-compensation baseline reductions mainly affect conditional grants to provinces and municipalities, and national and provincial programme spending. As far as possible, reductions were made in underperforming or underspending programmes. The largest reductions are made to the human settlements and public transport sectors. Reductions in government programmes imply the need to review programmes, possibly resulting in closure or downscaling over the medium term, and to use allocated budgets more efficiently. In addition, reductions on goods and services may negatively affect maintenance of government facilities and information communications technology infrastructure, and lead to increased accruals. 48 R million2020/212021/222022/23 MTEF total 2019 Budget non-interest expenditure1 545 5001 653 0771 736 538 Less: Contingency reserve6 0006 0006 000 4 935 115 18 000 Allocated expenditure (2019 Budget)1 539 5001 647 0771 730 538 Skills development levy adjustments-1 025-1 722-500 Baseline reductions and reallocations-66 045-88 149-106 801 Programme baseline reductions-28 238-33 219-39 341 Wage bill reductions-37 807-54 929-67 460 Baseline allocations59 29329 98121 843 Financial support for state-owned companies44 04214 3091 777 Net change in adjustments announced in 2019 Budget17 7537 62011 953 Programme allocations7 4998 0518 113 4 917 115 -3 246 -260 995 -100 798 -160 196 111 117 60 128 27 326 23 663 Allocated in 2020 Budget1 531 7241 587 1861 645 080 Plus: Contingency reserve5 0005 0005 000 4 763 991 15 000 2020 Budget non-interest expenditure1 536 7241 592 1861 650 080 4 778 991 Change in non-interest expenditure since 2019 Budget-8 776-60 890-86 458 -156 124

CHAPTER 5: CONSOLIDATED SPENDING PLANS Table 5.2 Reallocations to baselines over the MTEF period 1. Details of other baseline reallocations provided in the Estimates of National Expenditure Source: National Treasury Allocations to the human settlements sector are reduced by R14.6 billion over the MTEF period, implying fewer subsidy houses, serviced sites and related bulk and connector infrastructure. The municipal infrastructure grant is reduced by R2.8 billion over the same period, slowing provision of infrastructure such as water and electricity connections to poor households. Public transport spending is reduced by R13.2 billion over the next three years, mainly on allocations to the Passenger Rail Agency of South Africa and the public transport network grant. The reduced allocation to the agency is mainly due to underspending in previous years, which resulted in huge cash surpluses. The agency is expected to ensure that critical investments are made to stabilise Metrorail. Planning and implementation of integrated public transport networks will be suspended in Buffalo City, Mbombela and Msunduzi as these three cities have progressed the least in launching public transport systems. Accordingly, there will be no allocations to these cities in the 2020 MTEF period. Reductions in basic and higher education infrastructure allocations amount to R5.2 billion over the medium term. These reductions are expected to cause revisions to infrastructure plans and delays in project completion. Spending in the national Department of Health is reduced by R3.9 billion over the MTEF period. This implies that some activities related to national health insurance will be phased in over a longer timeframe. Public transport spending reduced by R13.2 billion over MTEF period 49 R million2020/212021/222022/23 MTEF total 2020 Budget additions to baseline7 4998 0518 113 Post-retirement medical assistance8041 5652 028 Common Monetary Area Compensation340390490 Municipal Revenue Management Improvement Programme330433454 Township Entrepreneurship Fund–500500 Universal Service and Access Fund: New model for broadcasting522604– digital migration Innovation Fund200500500 South African Revenue Service: Infrastructure-related projects400300300 Provincial conditional grants362473582 Other allocations14 5413 2863 259 23 663 4 397 1 220 1 216 1 000 1 126 1 200 1 000 1 418 11 086

2020 BUDGET REVIEW Largest baseline reductions over the MTEF period1 Table 5.3 1. Selected information on large baseline reductions over the MTEF period, details provided in the Estimates of National Expenditure 2. Technical and vocational education and training 3. Mainly includes goods and services reductions in national departments and public entities Source: National Treasury Provisional allocations Provisional allocations are only confirmed once certain requirements have been met. In addition to provisional allocations to Eskom, the 2020 Budget includes provisional allocations of R7 billion in 2020/21, R1.9 billion in 2021/22 and R3.6 billion in 2022/23. These allocations are mainly for financial support to South African Airways and road asset management for the secondary and strategic road network. 50 R million2020/212021/222022/23 MTEF total 2020 Budget baseline adjustments-28 238-33 219-39 341 Programme specific reductions-10 666-10 596-15 742 of which: Passenger Rail Agency of South Africa-4 469-2 780-1 351 New Development Bank––-4 730 Social grants-1 438-1 521-1 245 Public entity transfers-528-1 185-1 367 Police: Reallocation to implement the integrated-824-940-997 criminal justice strategy TVET 2 college: Infrastructure and efficiency grant-688-819-826 South African Social Security Agency-406-517-626 South African National Roads Agency Limited––-1 391 Provincial equitable share-2 349-2 452-2 524 Provincial conditional grants-4 893-5 940-7 202 of which: Human settlements development grant-2 331-1 984-2 402 Provincial roads maintenance grant-500-1 084-1 258 Health conditional grants-446-698-732 Education infrastructure grant-459-616-775 Local equitable share-1 000-1 100-1 100 Local conditional grants-4 622-6 457-7 425 of which: Public transport network grant-1 049-1 570-1 727 Urban settlements development grant-1 420-1 968-2 554 Municipal infrastructure grant-989-894-939 Water services infrastructure grant-426-541-698 Cross-cutting reductions3-4 708-6 674-5 348 -100 798 -37 004 -8 599 -4 730 -4 204 -3 080 -2 761 -2 333 -1 550 -1 391 -7 325 -18 036 -6 717 -2 841 -1 875 -1 850 -3 200 -18 504 -4 347 -5 943 -2 822 -1 665 -16 729

CHAPTER 5: CONSOLIDATED SPENDING PLANS Table 5.4 Provisional allocations not assigned to votes 1. Includes provisional allocation for the Municipal Demarcation Board Source: National Treasury Consolidated government expenditure Total consolidated government spending is expected to grow at an average annual growth rate of 5.1 per cent, from R1.84 trillion in 2019/20 to R2.14 trillion in 2022/23. 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 51 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Economic classification Current payments1 095 868 Compensation of employees629 200 Goods and services251 656 Interest and rent on land215 012 of which: Debt-service costs205 005 Transfers and subsidies599 650 Municipalities137 654 Departmental agencies and accounts26 591 Higher education institutions46 555 Foreign governments and international2 589 organisations Public corporations and private35 361 enterprises Non-profit institutions37 089 Households313 810 Payments for capital assets82 804 Buildings and other capital assets63 727 Machinery and equipment19 077 Payments for financial assets65 223 1 143 4271 218 0081 286 331 638 865667 815697 113 265 078281 465288 525 239 484268 728300 693 229 270258 482290 145 640 225671 805713 436 145 339155 518165 464 28 63927 01228 492 48 27850 34151 873 2 8802 8383 029 35 54039 86543 227 41 02343 69645 849 338 528352 534375 503 92 147101 411108 975 71 52779 61285 692 20 62021 79923 284 73 64644 11627 298 59.6% 32.7% 13.6% 13.2% 12.7% 33.1% 7.6% 1.4% 2.5% 0.1% 1.9% 2.1% 17.4% 4.9% 3.9% 1.1% 5.5% 3.5% 4.7% 11.8% 12.3% 6.0% 6.3% 2.3% 3.7% 5.4% 6.9% 7.3% 6.2% 9.6% 10.4% 6.9% Total1 843 546 Contingency reserve– 1 949 4452 035 3392 136 040 5 0005 0005 000 100.0% 5.0% Consolidated expenditure1 843 546 1 954 4452 040 3392 141 040 5.1% R million2020/212021/222022/23 MTEF total Public entity: South African Social Security Agency – 500 524 South African Airways 6 502 – – Provision for disaster recovery efforts 500 – – Competition Commission – 125 131 Broadband (SA Connect Phase 2) – – 1 289 Roads asset management for the secondary and – 800 1 048 strategic road network Construction of the Tygerberg hospital – 180 235 Construction of the Klipfontein hospital – 130 200 Other1 19 118 147 1 024 6 502 500 256 1 289 1 848 415 330 283 Total7 0211 8533 573 12 447

2020 BUDGET REVIEW Debt-service costs are the fastest-growing expenditure item over the medium term, rising at an annual average rate of 12.3 per cent – more than double the average growth rate for total expenditure. Despite proposed reductions in compensation ceilings, compensation of employees continues to account for the largest portion of total spending, at 32.7 per cent over the medium term. Transfers and subsidies, including transfers to local government and public entities, account for 33.1 per cent of total spending. Public-sector infrastructure spending remains proportionately low, as capital spending continues to be crowded out by rising consumption spending pressures, including the public-service wage bill, and debt-service costs. Social development Health Economic development Spending priorities by function To the degree possible with limited resources, spending across functions supports the implementation of the seven priorities outlined in government’s 2019-2024 medium-term strategic framework. New and urgent government priorities have been funded through the reallocation of budgets within and across functions. Improving efficiency – meaning that government will have to do more with less – is a key theme across all function groups. Government remains committed to improving education and health outcomes, and reducing poverty, as shown by the size of allocations to the learning and culture, health and social development functions over the medium term. 52 Figure 5.1 Average nominal growth in spending,Figure 5.2 Consolidated government expenditure 2020/21 — 2022/23by function, 2020/21 — 2022/23 Debt-service costs Learning and culture Economic development Social development Community development Debt-service costs Health Community development Learning and culturePeace and security General public services General public services Peace and securityContingency reserve 0 2 4 6 8 10 12 0 400 800 1 200 Per cent R billion Source: National Treasury 1 248 970 778 731 683 681 667 217 15 12.3 6.6 6.3 6.2 5.1 4.0 3.7 2.2

CHAPTER 5: CONSOLIDATED SPENDING PLANS 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 Learning and culture Over the medium term, the learning and culture function aims to develop the capabilities of citizens from early childhood by providing access to education, training and skills development, and to strengthen social cohesion. The function will continue to receive the largest share of government spending over the MTEF period, rising from R385.6 billion in 2019/20 to R434.2 billion in 2022/23. Learning and culture continues to receive largest share of spending Basic education Basic education accounts for the largest share of expenditure in the function. The sector will focus on improving early literacy and numeracy of learners, introducing subjects like coding, data analytics and robotics, and improving school sanitation and the quality of teaching. 53 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Learning and culture385 593 Basic education262 458 Post-school education and training112 087 Arts, culture, sport and recreation11 049 Health221 962 Social development284 479 Social protection207 528 Social security funds76 951 Community development201 675 Economic development198 906 Industrialisation and exports37 393 Agriculture and rural development29 608 Job creation and labour affairs21 742 Economic regulation94 467 and infrastructure Innovation, science and technology15 697 Peace and security214 365 Defence and state security50 766 Police services105 163 Law courts and prisons48 448 Home affairs9 988 General public services66 337 Executive and legislative organs14 202 Public administration44 342 and fiscal affairs External affairs7 793 Payments for financial assets65 223 396 422417 767434 166 265 881281 433293 211 118 847124 209128 386 11 69412 12512 569 229 707243 970257 559 309 512320 056340 924 221 483236 319252 037 88 02983 73888 887 212 347228 194242 169 211 531228 224240 911 39 01643 67245 664 28 34229 63730 658 22 43725 15826 555 105 311112 566120 258 16 42517 19117 776 217 001221 291228 804 51 37848 93250 439 106 127110 758114 186 49 60451 99253 641 9 8919 60910 538 70 00973 23874 064 14 57114 44315 028 47 27750 41450 279 8 1618 3818 758 73 64644 11627 298 23.4% 15.7% 7.0% 0.7% 13.7% 18.2% 13.3% 4.9% 12.8% 12.7% 2.4% 1.7% 1.4% 6.3% 1.0% 12.5% 2.8% 6.2% 2.9% 0.6% 4.1% 0.8% 2.8% 0.5% 4.0% 3.8% 4.6% 4.4% 5.1% 6.2% 6.7% 4.9% 6.3% 6.6% 6.9% 1.2% 6.9% 8.4% 4.2% 2.2% -0.2% 2.8% 3.5% 1.8% 3.7% 1.9% 4.3% 4.0% Allocated by function1 638 541 Debt-service costs205 005 Contingency reserve– 1 720 1751 776 8571 845 895 229 270258 482290 145 5 0005 0005 000 100.0% 4.1% 12.3% Consolidated expenditure1 843 546 1 954 4452 040 3392 141 040 5.1%

2020 BUDGET REVIEW Early childhood development is the foundation for success in school. Over the medium term, the Department of Basic Education will work with the Department of Social Development and other partners to shift responsibility for early childhood development from the social development sector to the basic education sector. They will also introduce two years of compulsory pre-schooling before all children enter Grade 1. Provincial expenditure on personnel dominates spending in the sector and function at 76.5 per cent and 51.4 per cent, respectively. Over the medium term, the education infrastructure grant is allocated R35 billion to construct, maintain and upgrade schooling infrastructure. The school infrastructure backlogs grant is allocated R5.6 billion to provide water, sanitation facilities and electricity to schools, and replace schools constructed with inappropriate materials. Of this allocation, R2.8 billion is set aside to provide appropriate sanitation facilities, which accounts for the 15.3 per cent annual average growth rate over the spending period. The national school nutrition programme grant is allocated R24.3 billion over the next three years to provide meals to 9 million learners in almost 20 000 poor schools (quintiles 1 to 3), and identified special schools. Responsibility for early childhood development to shift to basic education sector R35 billion allocated to build, maintain and upgrade schooling infrastructure Post-school education and training The medium-term focus in this sector will be to expand access to universities and technical and vocational education and training (TVET) colleges, improve their performance, develop artisans, support work-based learning, and strengthen the management and governance of community education and training colleges. Expenditure for the National Student Financial Aid Scheme increases at an average annual rate of 7.3 per cent from R33 billion in 2019/20 to R40.8 billion in 2022/23. The institution expects to fund more than 1 million students at universities and more than 870 000 students at TVET colleges over the period. NSFAS expects to fund 1 million university and 870 000 TVET students Arts, sports, recreation and culture This sector will focus on growing cultural and creative industries to create job opportunities and improve social cohesion. Existing infrastructure in the sector will be integrated where possible and new facilities will be constructed to ensure community access. The sector is allocated R36.4 billion over the MTEF period. 54

CHAPTER 5: CONSOLIDATED SPENDING PLANS 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 Social development This function aims to reduce poverty and inequality by providing social welfare services and grants, and to empower women, youth and persons with disabilities. 55 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Basic education262 458 Compensation of employees204 162 of which: Provincial compensation of203 460 employees Goods and services27 187 of which: Property payments3 596 Workbooks and LTSM 15 304 National school nutrition7 186 programme Transfers and subsidies20 058 of which: Subsidies to schools 216 730 Education infrastructure10 514 grant School infrastructure1 330 backlogs grant Post-school education and training112 087 of which: University subsidies42 359 of which: University infrastructure2 489 National Student Financial Aid32 987 Scheme 3 Technical and vocational12 555 education and training of which: Compensation of employees6 987 Subsidies5 205 Community education and2 058 training of which: Compensation of employees1 905 Skills development levy21 986 institutions 4 Arts and culture, sport and11 049 recreation 265 881281 433293 211 205 265214 754224 160 204 559214 018223 400 26 86128 04129 331 3 7243 9284 061 5 3865 4885 825 7 6668 1258 516 22 41925 20125 585 19 07220 40021 441 11 00811 71012 255 1 4912 0372 038 118 847124 209128 386 44 79647 18949 437 2 8412 9213 045 37 09739 11540 777 13 38414 02614 525 6 8647 1457 356 6 0366 3706 639 2 3862 4892 541 2 2242 3192 365 20 98821 20720 930 11 69412 12512 569 67.3% 51.6% 51.4% 6.7% 0.9% 1.3% 1.9% 5.9% 4.9% 2.8% 0.4% 29.8% 11.3% 0.7% 9.4% 3.4% 1.7% 1.5% 0.6% 0.6% 5.1% 2.9% 3.8% 3.2% 3.2% 2.6% 4.1% 3.2% 5.8% 8.5% 8.6% 5.2% 15.3% 4.6% 5.3% 7.0% 7.3% 5.0% 1.7% 8.5% 7.3% 7.5% -1.6% 4.4% Total385 593 396 422417 767434 166 100.0% 4.0%

2020 BUDGET REVIEW Table 5.8 Social protection expenditure 3.1% 1. Includes war veterans Source: National Treasury Social grants The 2020 Budget continues to increase social grants in line with inflation. Due to lower expected inflation over the period, allocations have been reduced as shown in Table 5.3. Over the medium term, the total number of beneficiaries is expected to increase by almost 1 million to approximately 19 million by 2022/23. Over the MTEF period, funds amounting to R714 million are reprioritised from the Department of Social Development to its provincial counterparts for programmes to prevent HIV and AIDS infections, substance abuse, gender-based violence and femicide. Additional funds are reprioritised from the social worker scholarship programme grant, which will end in 2020/21, to provinces to employ 200 social worker graduates. Funds amounting to R406.2 million in 2020/21, R517.3 million in 2021/22 and R626 million in 2022/23 are reprioritised, mainly to the early childhood development conditional grant. As a result, the subsidy rate per child will increase by 23.8 per cent from R15 in 2019/20 to R18.57 in 2022/23. By 56 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Social protection expenditure207 528 of which: Social grants175 156 of which: Child support64 967 Old age 176 951 Disability23 078 Foster care5 081 Care dependency3 430 Grant-in-aid1 238 Social Relief of Distress410 Provincial social development22 292 Women, youth and persons with791 disabilities of which: Women156 Youth523 Persons with disabilities19 221 483236 319252 037 187 836201 347216 027 69 76574 78080 735 83 10690 05397 068 24 39025 48826 522 4 9654 8294 795 3 5693 8094 077 1 6321 9782 421 407407407 23 26424 52525 661 832875915 174184192 551578605 202222 100.0% 85.3% 31.7% 38.1% 10.8% 2.1% 1.6% 0.8% 0.2% 10.3% 0.4% 0.1% 0.2% 0.0% 6.7% 7.2% 7.5% 8.0% 4.7% -1.9% 5.9% 25.1% -0.2% 4.8% 5.0% 7.1% 5.0% 6.2% Total207 528 221 483236 319252 037 100.0% 6.7% Social grants as percentage of GDP3.4% Social grant beneficiary numbers by grant type (thousands) Child support12 777 Old age13 655 Disability1 058 Foster care350 Care dependency155 3.5%3.5%3.5% 12 99113 21013 434 3 7693 8864 003 1 0511 0451 039 326304285 158161164 71.0% 20.9% 5.6% 1.6% 0.9% 1.7% -0.6% -6.7% 1.9% Total17 996 18 29618 60618 926 100.0% 1.7%

CHAPTER 5: CONSOLIDATED SPENDING PLANS 2022/23, government estimates it will provide access to early childhood development services to almost 700 000 children under the age of four. Table 5.9 Average monthly social grant values Source: National Treasury Women, youth and persons with disabilities Over the next three years, this department is allocated an additional R15 million to establish a national council to combat gender-based violence and femicide. Its budget will increase to R853 million in 2022/23, with a focus on strengthening interventions for women’s economic empowerment; promoting the rights of people with disabilities; and supporting youth development. An amount of R651.9 million is allocated through the provincial equitable share over the same period to provide sanitary products to more than half of all female learners in grades 7 to 12 in the country’s poorest schools (quintiles 1, 2 and 3). R15 million allocated to establish a national council to combat gender-based violence and femicide Health The health function aims to ensure access to high-quality healthcare services for all residents. Parliament is considering the National Health Insurance (NHI) Bill. Its enactment is expected to trigger large-scale reforms. Over the medium term, R55.6 million is reprioritised to the Department of Health to strengthen its capacity to phase in NHI. This allocation will be reviewed as NHI is implemented. From 2020/21, the human resource capacitation grant will be merged with the health professions training and development grant to form components of the new statutory human resource and training and development grant. This component is allocated R3.3 billion over the medium term to ensure sufficient medical internships and community service posts for medical students to complete their training. A team convened by the Presidency has developed a National Quality Health Improvement Plan, which aims to improve the quality of healthcare facilities to ensure that they can be accredited for NHI. For this purpose, R25 million is reprioritised in 2020/21 towards the non-personal services component of the NHI indirect grant. Subsequent allocations will be based on progress demonstrated in 2020/21. From 2021/22, allocations for mental health and oncology will also be added as components to the HIV, TB, malaria and community outreach grant, shifting from the NHI indirect grant due to underspending. To address funding shortfalls in the community outreach services component of the grant, R800 million is reprioritised from the HIV/AIDS component in 2020/21. NHI expected to result in large-scale reforms 57 2019/202020/21 Rand Percentage increase Old age1 7801 860 Old age, over 751 8001 880 War veterans1 8001 880 Disability1 7801 860 Foster care1 0001 040 Care dependency1 7801 860 Child support425445 4.5% 4.4% 4.4% 4.5% 4.0% 4.5% 4.7%

2020 BUDGET REVIEW Table 5.10 Health expenditure 1. Excludes grants and transfers reflected as expenditure in appropriate sub-functional areas Source: National Treasury 58 Progress in dealing with medico-legal claims In recent years, medical malpractice claims and litigation have increased rapidly. Although in many cases the quality of care is insufficient, the increase in claims is inconsistent with certain indicators of health outcomes in the public sector. For example, the overall death rate in public hospitals declined from 5.4 per cent in 2013/14 to 4.6 per cent in 2018/19, while maternal mortality in facilities decreased by 20.5 per cent over the same period. Since 2014, contingent liabilities and payments of medico-legal claims in the public sector have increased at an average annual growth rate of 30 per cent and 23 per cent respectively. In 2018/19, medico-legal contingent liabilities reached R99.2 billion, while medico-legal claim payments reached R2 billion. These payments are affecting the budgets of public facilities and, in turn, the delivery of services. Due to large lump-sum payments often awarded in malpractice cases, the effects are unplanned. This is a multifaceted problem, caused by inadequate quality of care, weak capacity in provincial medico-legal teams, poor administration of medical records, and high profitability for law firms specialising in this area. Government aims to stabilise its liability through a range of interventions and has made progress in the following areas: • Funding has been reprioritised in the Department of Health’s budget to pilot the National Quality Health Improvement Plan in 2020/21. •The department has contracted law firms with medico-legal expertise to support claim management and provide legal services in some provinces. • Several provinces are strengthening provincial medico-legal teams, including by contracting external legal capacity. •Parliament is considering the State Liability Amendment Bill, which would introduce periodic payments and provide for compensation in kind, in the form of future medical care in public facilities. • The Special Investigating Unit is probing potential fraud in this area, which has resulted in several arrests. The effect of these interventions on state contingent liabilities still needs to be evaluated. Long-term solutions may require wider legal reform, which the South African Law Reform Commission is exploring. 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Health expenditure221 962 of which: Central hospital services44 129 Provincial hospital services36 385 District health services98 491 of which: HIV, TB, malaria and22 039 community outreach Emergency medical services8 249 Facilities management and9 340 maintenance Health science and training5 401 National Health Laboratory Service7 465 National Department of Health 15 171 229 707243 970257 559 44 70646 63349 207 37 63439 39441 539 101 958108 560113 788 24 38727 93129 405 8 5068 8439 283 10 05810 36310 979 5 7576 4746 918 8 6389 2719 913 6 0746 4686 641 100.0% 19.2% 16.2% 44.4% 11.2% 3.6% 4.3% 2.6% 3.8% 2.6% 5.1% 3.7% 4.5% 4.9% 10.1% 4.0% 5.5% 8.6% 9.9% 8.7% Total221 962 229 707243 970257 559 100.0% 5.1% of which: Compensation of employees141 320 Goods and services62 486 Transfers and subsidies7 071 Buildings and other fixed structures5 668 Machinery and equipment5 350 145 126152 008160 906 67 14271 56174 466 6 0597 4778 692 6 0877 4797 845 5 2645 4215 630 62.6% 29.2% 3.0% 2.9% 2.2% 4.4% 6.0% 7.1% 11.4% 1.7%

CHAPTER 5: CONSOLIDATED SPENDING PLANS Community development This function funds access to affordable housing, basic services and public transport, and facilitates spatial transformation and urban development. Expenditure in the function will rise from R201.7 billion in 2019/20 to R242.2 billion in 2022/23. Table 5.11 Community development expenditure Source: National Treasury Municipalities, provinces and public entities deliver water, sanitation, electricity, housing and public transport. As a result, transfers and subsidies to these entities make up 78.8 per cent of expenditure in this function. The local government equitable share remains the fastest-growing expenditure item at 9.2 per cent over the medium term. The Department of Human Settlements will continue to deliver subsidised housing over the medium term. The introduction of new conditional grants for upgrading informal settlements is postponed until 2021/22 and R20.1 billion is allocated in 2021/22 and 2022/23 for this grant. Economic development This function promotes faster and sustained inclusive economic growth to address the challenges of unemployment, poverty and inequality. Over the medium term, government has allocated R495.1 million to the Department of Agriculture, Land Reform and Rural Development to respond to biosecurity threats, and revitalise laboratories and quarantine stations to strengthen inspection services at ports of entry. This will improve compliance with international standards, and support exports. An additional R500 million is reprioritised over the medium term for the department to finalise outstanding land restitution claims. R500 million reprioritised over the MTEF to finalise land restitution claims 59 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Community development201 675 of which: Human settlements41 140 Public transport, including41 442 commuter rail Local government equitable share66 973 Municipal infrastructure grant14 816 Regional and local water and10 361 sanitation services Electrification programmes5 086 212 347228 194242 169 39 68240 66142 214 44 71849 00852 181 74 68381 06287 213 14 67115 93716 852 11 15311 05211 512 5 1165 2576 074 100.0% 18.0% 21.4% 35.6% 7.0% 4.9% 2.4% 6.3% 0.9% 8.0% 9.2% 4.4% 3.6% 6.1% Total201 675 212 347228 194242 169 100.0% 6.3% of which: Compensation of employees17 822 Goods and services13 647 Transfers and subsidies160 827 Buildings and other fixed structures5 992 Machinery and equipment3 155 17 56018 27819 004 14 96914 58215 525 167 413179 619190 697 8 0859 33210 409 4 0926 1136 267 8.0% 6.6% 78.8% 4.1% 2.4% 2.2% 4.4% 5.8% 20.2% 25.7%

2020 BUDGET REVIEW The Black Business Supplier Development Programme, Cooperatives Incentive Schemes and the National Informal Business Upliftment Scheme are allocated R1.4 billion over the medium term to support small businesses and cooperatives. The Small Enterprise Finance Agency will collaborate with government and the private sector through a blended-finance model involving loans and grants to small and medium enterprises over the medium term. The Small Enterprise Development Agency is allocated R2.8 billion to provide support to small and medium enterprises, including increasing the incubation network in rural areas and townships. An additional R60 million is reprioritised to the Competition Commission over the medium term to implement the Competition Amendment Act (2018). Over the same period, R107.1 million is reprioritised to refurbish 27 industrial parks in various townships. Small Enterprise Finance Agency to support smaller businesses through grants Table 5.12 Economic development expenditure 1. Includes the Expanded Public Works Programme, the Community Works Programme and the Jobs Fund Source: National Treasury To support industry, R18.5 billion is allocated to the Department of Trade, Industry and Competition for business incentives including manufacturing and services sector development, and infrastructure investment. In addition, R1.4 billion is set aside to support the commercialisation of technological innovation and upgrade infrastructure to strengthen the 60 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Economic regulation and infrastructure94 467 of which: Water resource and bulk27 182 infrastructure Road infrastructure46 038 Environmental programmes6 998 Job creation and labour affairs21 742 of which: Employment programmes 120 231 Industrialisation and exports37 393 of which: Economic development and incentive16 106 programmes Innovation, science and technology15 697 Agriculture and rural development29 608 of which: Land reform2 108 Agricultural land holding account2 136 Restitution3 593 Farmer support and development3 853 105 311112 566120 258 31 38336 17739 173 49 50651 62054 593 6 9507 2477 137 22 43725 15826 555 20 75323 38424 754 39 01643 67245 664 16 66815 92916 165 16 42517 19117 776 28 34229 63730 658 1 7081 8651 717 9891 0831 092 3 4063 6103 939 4 0714 3224 504 49.7% 15.7% 22.9% 3.1% 10.9% 10.1% 18.9% 7.2% 7.6% 13.0% 0.8% 0.5% 1.6% 1.9% 8.4% 13.0% 5.8% 0.7% 6.9% 7.0% 6.9% 0.1% 4.2% 1.2% -6.6% -20.0% 3.1% 5.3% Total198 906 211 531228 224240 911 100.0% 6.6% of which: Compensation of employees52 620 Goods and services59 266 Transfers and subsidies40 999 Buildings and other fixed structures31 339 Machinery and equipment3 929 54 33457 20859 879 63 62369 16870 573 42 40845 91350 494 36 06041 04144 935 4 0433 8903 497 25.2% 29.9% 20.4% 17.9% 1.7% 4.4% 6.0% 7.2% 12.8% -3.8%

CHAPTER 5: CONSOLIDATED SPENDING PLANS research and innovation capabilities of the Council for Scientific and Industrial Research and the South African National Space Agency. Economic regulation and infrastructure Over the medium term, the South African National Roads Agency Limited will maintain 22 214 kilometres of roads, and provinces plan to reseal 16 226 kilometres of roads through the provincial roads maintenance grant. To unlock spectrum for high-speed internet, R1.9 billion is reprioritised to subsidise devices that allow analogue televisions to receive digital signals for 2.8 million low-income households, and to compensate the South African Post Office for associated administration costs. A further R100 million signals. is allocated for Sentech to operate analogue and digital Peace and security The peace and security function aims to ensure the safety of the country, in particular through an efficient and effective criminal justice system. Over the medium term, funds have been reprioritised from the South African Police Service – the largest component of this function – to other departments and entities within the function to implement the integrated criminal justice strategy. The Department of Justice and Constitutional Development will receive R1.8 billion, mainly to enhance prosecution capacity in the National Prosecuting Authority (NPA), including the sexual offences and community affairs unit established to address gender-based violence against women and children. These funds will also help to operationalise the Investigative Directorate, capacitate various anti-corruption units and establish five additional specialised commercial crimes courts to ensure their presence in each province. In addition, R985 million is reprioritised to the Directorate for Priority Crime Funds reallocated to enhance capacity at NPA, and investigate and prosecute corruption 61 Responding to climate change and natural disasters Extreme weather events are becoming more frequent as a result of climate change. While parts of South Africa continue to grapple with a years-long drought, severe floods and storms in KwaZulu-Natal during 2019 damaged infrastructure and resulted in the deaths of 50 people. According to the World Economic Forum, extreme weather, natural disasters and climate action failure are three of the top five global risks in 2020. Since 2016, government has allocated R6.3 billion for drought relief projects and R660 million for flood relief. Yet reactive responses to disasters are inefficient and costly. The National Treasury is exploring ways to improve the immediate fiscal response to disasters and the fiscal management of government’s response to the long-term effects of climate change. Government provides funding for disaster response and recovery mainly through conditional grants. Funds are available for emergency housing and temporary infrastructure repairs, while social development departments provide assistance such as food parcels. Ring-fenced allocations in conditional grants then fund rebuilding of damaged infrastructure, including subsidised houses. However, the release of funds is often slow, and these are not always spent as planned. The National Treasury and the National Disaster Management Centre will review the funding system during 2020. Infrastructure design and construction can become more resilient to extreme weather. Submission guidelines for funding requests from the Budget Facility for Infrastructure will be adjusted to incorporate climate resilience. Government is also considering making ecological infrastructure, such as wetlands that can reduce flood damage, eligible for infrastructure grant funding. Projects with positive climate impacts are eligible for grant and concessional loan financing through international green financing initiatives. The energy efficiency demand side management grant is already using this funding to roll out renewable-energy projects in municipal buildings. South Africa has joined the Network of Central Banks and Supervisors for Greening the Financial System, which focuses on initiatives in sustainable finance. During 2020, the National Treasury will publish a paper on financing a sustainable economy, and the process to establish minimum practice and standards for emerging environmental risks. The National Treasury is also exploring tools to assess and anticipate the effects of climate change across budget-related areas.

2020 BUDGET REVIEW Investigation to appoint additional investigators, primarily to address the backlog of corruption cases. Table 5.13 Peace and security expenditure Source: National Treasury To safeguard the country’s borders, R831 million is reprioritised from the police to the departments of Defence and Home Affairs. These allocations will pay for equipment and technology to enable the military to broaden coverage of the borders, and the Department of Home Affairs to profile passengers before they reach ports of entry and minimise security risks. In addition, R255 million is reprioritised to the Independent Electoral Commission in 2020/21 to procure 38 000 voter registration devices. R831 million reprioritised for border security General public services This function aims to build a capable, ethical and developmental state. This requires professional and responsive public servants, as well as engaged citizens. Public administration and fiscal affairs grows fastest over the medium term as R3.1 billion was reprioritised to Statistics South Africa over the MTEF period to conduct the population census in 2021/22. In addition, R1 billion is allocated to the South African Revenue Service to improve its information communications technology capacity and operations. To fund critical priorities over the medium term, R74.5 million is reprioritised within the function. The Auditor-General of South Africa receives R374 million as a direct charge against the National Revenue Fund to support audits in financially distressed municipalities and entities. Funds reprioritised for census and allocated to South African Revenue Service 62 2019/20 Revised estimate R million 2020/212021/222022/23 Medium-term estimates Percentage of total MTEF allocation Average annual MTEF growth Defence and state security50 766 Police services105 163 Law courts and prisons48 448 Home affairs9 988 51 37848 93250 439 106 127110 758114 186 49 60451 99253 641 9 8919 60910 538 22.6% 49.6% 23.3% 13.8% -0.2% 2.8% 3.5% 1.8% Total214 365 217 001221 291228 804 100.0% 2.2% of which: Compensation of employees146 536 Goods and services47 742 Transfers and subsidies13 013 Buildings and other fixed structures2 674 Machinery and equipment4 135 147 850154 231158 667 47 11849 78251 002 13 8399 95110 269 3 1613 2853 411 4 9143 9755 382 69.1% 22.2% 5.1% 1.5% 2.1% 2.7% 2.2% -7.6% 8.4% 9.2%

6 Division of revenue and spending provinces and municipalities by Overview Pdeliver on its developmental mandate therefore requires provinces rovinces and municipalities account for the majority of public A capable state requires provinces and municipalities that can spend efficiently spending in South Africa. Building a capable state that is able to and municipalities to have the capacity to spend efficiently. It is also important to ensure problems are addressed timeously. Over the past few years, a number of programmes have been implemented to strengthen provincial and municipal capacity. Government investment can stimulate demand in the economy and create a foundation for future growth, provided that it is well spent. But wasteful spending and corruption undermine the ability of governments to translate budgeted resources into delivery of services. The resulting collapse of basic functions like water reticulation, sewage treatment and safe roads in some parts of the country imposes hardships on communities and increases the 65 In brief •Over the next three years, after providing for debt-service costs, the contingency reserve and provisional allocations, 48.2 per cent of nationally raised funds are allocated to national government, 43 per cent to provincial government and 8.8 per cent to local government. •The division of revenue redistributes revenue based on need, with taxes raised mainly in wealthier areas funding poorer provinces and municipalities. •The budget supports the development of a more capable state at sub-national level. Incentive programmes reward good performance and a range of capacity-building measures are in place. To improve infrastructure delivery, a new approach to project preparation in cities is introduced. •Where provinces and municipalities fail to meet basic standards, national government is prepared to impose consequences, including by intervening and withholding transfers. These measures have led to a significant increase in the number of municipalities with funded budgets in 2020/21.

2020 BUDGET REVIEW cost of doing business. For public spending to achieve value for money, the fundamentals of governance need to be fixed at all levels. The 2020 Budget protects the transfers that deliver the greatest value, while reducing those spent less effectively. Improving spending efficiency requires greater accountability from provinces and municipalities – especially to the residents who are entitled to these services. Over the period ahead, national government will continue to fund provinces and municipalities, work with them to build capacity, and ensure that underperforming sub-national governments face consequences. Provinces and municipalities need to become more accountable to residents for how they spend public money Division of revenue Over the medium-term expenditure framework (MTEF) period, after budgeting for debt-service costs, the contingency reserve and provisional allocations, 48.2 per cent of nationally raised funds are allocated to national government, 43 per cent to provinces and 8.8 per cent to local government. Table 6.1 Division of nationally raised revenue 1. Includes proposed compensation reductions, support to Eskom, amounts for Budget Facility for Infrastructure projects and other provisional allocations Source: National Treasury 66 2016/172017/182018/19 Outcome R billion 2019/20 Revised estimate 2020/212021/222022/23 Medium-term estimates Average annual MTEF growth Division of available funds National departments555.6592.6634.3 of which: Indirect transfers to3.63.83.9 provinces Indirect transfers to8.17.87.8 local government Provinces500.4538.6572.0 Equitable share410.7441.3470.3 Conditional grants89.797.2101.7 Local government102.9111.1118.5 Equitable share50.755.660.8 Conditional grants40.943.745.3 General fuel levy11.211.812.5 sharing with metros 739.5 3.9 7.0 612.8 505.6 107.3 125.0 67.0 44.9 13.2 757.7768.9797.8 4.14.85.1 7.67.28.2 649.3692.0730.7 538.5574.0607.6 110.8118.0123.1 132.5142.4151.4 74.781.187.2 43.846.248.1 14.015.216.1 2.6% 8.8% 5.1% 6.0% 6.3% 4.7% 6.6% 9.2% 2.4% 6.9% Provisional allocation––– not assigned to votes1 – -7.8-16.1-34.9 Non-interest allocations1 158.91 242.31 324.8 Percentage increase3.9%7.2%6.6% 1 477.3 11.5% 1 531.71 587.21 645.1 3.7%3.6%3.6% 3.7% Debt-service costs146.5162.6181.8 Contingency reserve––– 205.0 – 229.3258.5290.1 5.05.05.0 12.3% Main budget expenditure1 305.41 404.91 506.6 Percentage increase4.9%7.6%7.2% 1 682.3 11.7% 1 766.01 850.71 940.2 5.0%4.8%4.8% 4.9% Percentage shares National departments 47.9% 47.7% 47.9% Provinces 43.2% 43.4% 43.2% Local government 8.9% 8.9% 8.9% 50.1% 41.5% 8.5% 49.2%48.0%47.5% 42.2%43.2%43.5% 8.6%8.9%9.0%

CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES The proposed changes to the wage bill discussed in Chapters 3 and 5 are not yet reflected in the allocations to national and provincial departments shown in Table 6.1, or in the equitable share allocations in the Division of Revenue Bill. Once these changes are agreed in the Public Service Co-ordinating Bargaining Council, they will be implemented in the 2020/21 adjustment budget. This will reduce the national and provincial shares of the division of revenue and increase that of local government in relative terms. Shares in the division of revenue are also sensitive to increased support to public entities, which is provided at national level. This explains national government’s somewhat larger share in 2019/20. The division of revenue is redistributive, based on need. Most tax revenues come from urban centres: for example, per capita revenues from personal income tax are three times higher in Gauteng than in the Eastern Cape. However, the allocations made through the division of revenue are based on the demand for public services in each province and municipality, not its contribution to national revenues. Allocations also consider poverty rates. As a result, transfers per capita to the Eastern Cape are about 40 per cent higher than to Gauteng. Proposed adjustments to wage bill, when effected, will change shares in division of revenue 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 formulas, and explains how the division incorporates the recommendations of the Financial and Fiscal Commission. 67 R thousand 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 Percentage change Keeping the equitable share stable in line with population growth and demand for services South Africa’s population grew by just over 1 million people between 2018 and 2019, while the number of households grew by nearly 500 000. Equitable share transfers to provinces and municipalities need to keep pace with population growth and demand for services. After accounting for inflation, the division of revenue has maintained stable allocations over the decade between 2013/14 and 2022/23. This is true on a per person basis through the provincial equitable share (PES), and on a per household basis through the local government equitable share (LGES). Figure 6.1 Transfers increase in line with population growth 12 1 Source: National Treasury While annual growth rates fluctuate and there have been several rounds of fiscal consolidation over this period, the allocations per person and per household for the provision of basic services are remarkably consistent. Over the 2020 MTEF period, the provincial equitable share grows by an average of 6.3 per cent a year, while the local government equitable share grows at an average of 9.2 per cent a year. By contrast, transfers to national departments grow at 2.6 per cent a year. Debt-service costs are growing at a much faster rate, averaging 12.3 per cent a year. LGES per household PES per person PES growth rate (RHS) LGES growth rate (RHS) 10 14 9 8 7 10 6 8 5 4 6 3 4 2 2 0 0

2020 BUDGET REVIEW Reductions to transfers As outlined in the 2019 Medium Term Budget Policy Statement (MTBPS), most conditional grants have been reduced as part of efforts to limit growth in government expenditure and ensure public debt is sustainable. To manage the effect on services, these reductions take into account: Most conditional grants have been reduced, taking into account past performance • • • Past spending and performance Whether the grant funds salaries, medicines and food Whether there has been significant real growth in allocations in recent years. Where possible, the National Treasury has reduced transfers that are more likely to go unspent or to be spent less effectively. Accordingly, grants that have persistently underperformed have been reduced by larger amounts. The largest proportional reduction to local government grants in 2020/21 has been made in the public transport network grant, because only six of the 13 cities receiving the grant have successfully launched public transport systems. The three cities that have shown the least progress – Buffalo City, Msunduzi and Mbombela – have been suspended from the grant and will not receive allocations in the 2020 MTEF period. Larger reductions are also made to grants to urban municipalities, which have more capacity to offset cuts by increasing their own-revenue investments. Proposed changes to the wage bill, once effected, will result in reductions to the provincial equitable share in the 2020/21 adjustment budget. These reductions will be fully offset by the lower compensation spending by provinces as a result of the revised wage agreement. Building capability for infrastructure delivery The National Treasury continues to expand the tools available for provinces and municipalities to improve spending. Weaknesses in preparing and authorising projects and programmes are one of the main causes of poor performance on infrastructure transfers. The Infrastructure Delivery Management System has helped provinces build infrastructure units with qualified staff and institutionalise best practices. In the 2020 Budget, cities will receive grant funding through the integrated city development grant to institutionalise an effective system for preparing programmes and projects. Metros will only be eligible for this funding if they: Conditions attached to integrated city development grant funding • Have not had an adverse or disclaimed audit opinion in the last two financial years Have formally adopted the Cities’ Infrastructure Delivery and Management System guidelines Establish a programme and project approval committee to authorise work Commit to co-financing contributions and budget management arrangements. • • • National government provides a broad range of capacity-support grants and programmes for local government. This system is under review; 68

CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES reforms to improve its effectiveness are likely to be implemented from 2021/22. Past performance Underspending has stabilised across national and provincial government. In 2018/19, national expenditure, excluding direct charges to the National Revenue Fund, amounted to R820.9 billion out of a total adjusted appropriation of R831.6 billion. This amounted to underspending of 1.3 per cent. Provincial government underspent its adjusted budget of R598.6 billion for 2018/19 by R7.7 billion (1.3 per cent), compared with Underspending has stabilised at just above 1 per cent across national and provincial government R5.8 billion (1 per cent) in conditional grants declined 96.6 per cent in 2018/19. the prior year. Spending on provincial slightly, from 97.7 per cent in 2017/18 to About 38 per cent (R1.2 billion) of the R3.2 billion in unspent grant funds was returned to the National Revenue Fund because the funds were not committed to identifiable projects. Spending outcomes for 2018/19 varied across the 257 municipalities. Many local governments adopted unrealistic spending plans. As a result, Spending outcomes varied considerably in local government, with significant underspending 211 municipalitiesunderspent their operating budgetsand 214 municipalities underspent their capital budgets. This was a slight improvement from the previous year. Of the R33.6 billion in specific purpose conditional grants transferred to municipalities in 2018/19, R27.2 billion (80.1 per cent) was spent – down from the 93 per cent spent in 2017/18. This decline was partly due to underspending on drought relief funds allocated in the middle of the financial year. Spending outcomes also varied across grants. The spending rate among infrastructure grants was highest in the municipal infrastructure grant, which spent 92.7 per cent of transferred funds. This was achieved by closely monitoring municipal spending, and stopping transfers and reallocating funds in-year when the Department of Cooperative Governance identified that a municipality was not performing. Municipalities applied to roll over R4.4 billion of the unspent grant funds to 2019/20, but only R1.9 billion was found to meet the requirements. Provincial revenue and spending Provinces are responsible for providing social services. This includes public basic education for 12.5 million learners and healthcare for 49.1 million South Africans who do not have private insurance. Most recipients access these services free of charge or for low fees. Provinces do not have significant taxation powers, so the division of revenue compensates them for the cost of the services they provide through transfers. These account for an average of 95 per cent of provincial revenues. More than 80 per cent of transfers to provinces are allocated through the equitable share, which is based on a formula incorporating the demographic factors that affect demand for services, such as the school-age population and the population without medical aid. These factors are updated annually. Further improvements to the formula are expected to be announced in the 2020 MTBPS. Provinces are responsible for drawing Transfers to cover the cost of providing social services account for 95 per cent of provincial revenues 69

2020 BUDGET REVIEW up their own budgets and prioritising the use of these funds to meet their mandates. Table 6.2 Provincial equitable share Source: National Treasury Although wages account for a growing share of provincial budgets, provinces generally manage to remain within their planned spending for compensation. Over the past three financial years, provinces have on aggregate spent less than they budgeted to on wages, and in 2018/19 only one province exceeded its compensation budget. Without changes to the provincial wage bill, however, slower growth in transfers implies that spending on compensation of employees is likely to rise from 60 per cent of provincial budgets in 2019/20 to 63 per cent by the end of the 2020 MTEF period. To limit the effect of this compositional change on services, provinces are finding ways to reduce costs. These include merging provincial public entities, improving integrated planning to avoid duplication of services, enhancing contract management to avoid overpricing of projects, centralising the approval process for appointing new employees, curbing overtime and exploring new revenue sources. The guidelines for the budget process this year included a call for all departments to identify savings of between 5 and 7 per cent of their budgets in each year of the MTEF period. Some provinces struggled to achieve these savings. Others used the opportunity to make reductions and reprioritise savings for other priorities. Some provinces set aside unallocated amounts to reduce pressure in functions like health, roads and scholar transport; to settle unpaid bills and medico-legal claims; and to respond to disasters. Despite the constrained fiscal environment, government continues to increase funding for early education. An additional R1.4 billion is allocated to the early childhood development grant over the medium term. Provinces have also prioritised early-grade reading. Their budgets for the 2020 MTEF period are expected to provide funds for upskilling teachers and subject advisors, assessing students’ reading ability and providing additional reading material. Some provinces have found ways to achieve cost savings and reduce pressure in core social functions 70 2019/20 R million 2020/212021/222022/23 Medium-term estimates Average annual MTEF growth Eastern Cape68 824 Free State28 187 Gauteng102 448 KwaZulu-Natal106 014 Limpopo58 965 Mpumalanga41 428 Northern Cape13 424 North West34 973 Western Cape51 291 71 41575 30678 841 30 01731 89733 657 112 118121 121129 908 111 442117 755123 544 62 32966 25669 935 44 10546 99649 724 14 29015 20716 068 37 54840 17442 682 55 20859 27663 194 4.6% 6.1% 8.2% 5.2% 5.9% 6.3% 6.2% 6.9% 7.2% Total505 554 538 472573 990607 554 6.3%

CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Changes in conditional grants Changes are made to the structure of conditional grants to better align them with government’s evolving policy objectives. In 2020, the National Treasury will work with the Department of Health to develop a strategy to align changes to health conditional grants with national health insurance reforms. These changes include accelerating the delivery of improved infrastructure for hospitals and clinics. In 2020/21 a development component will be reintroduced in the national tertiary services grant. This component will fund the development of specialised services in historically underserved provinces. Grants funding the training and development of health professionals have also been merged to form a new statutory human resources, training and development grant. Government has shifted the emphasis of housing policy from building costly subsidised units to providing serviced sites where residents can invest in improvements. Funding for this purpose is ring-fenced in the informal settlements upgrading components of the human settlements development grant and the urban settlements development grant. Other changes aim to improve the effectiveness of conditional grant spending. The 2020 Division of Revenue Bill will enhance requirements for information sharing where provincial conditional grants are transferred to public entities or municipalities to implement projects. These measures will improve coordination between different parts of government working on projects in the same area, in line with the district development model being led by the Department of Cooperative Governance. If a municipality or province does not adhere to grant conditions or is not spending its allocated funds, then further transfers can be withheld or reallocated to another recipient. The bill will require grant recipients to report the reasons why funds were withheld or reallocated in their annual Grant to be expanded to develop specialist health services in underserviced areas A shift from building costly subsidised housing to providing serviced sites where people can build and invest 71 Progress in turning around financial management in North West province In April 2018, following extensive protests by residents over the poor quality of public services in North West, national government placed the provincial government under intervention, as authorised by the Constitution. National departments are responsible for managing the interventions in their provincial counterparts. Five national departments took responsibility for delivering the mandates of their North West counterparts. Another five departments, including the National Treasury, issued directives to their provincial counterparts, which outlined the provincial department’s failure to meet its obligations and the corrective steps required. The National Treasury’s intervention in the provincial treasury involves three phases. The first phase, to stabilise provincial finances, has been completed, with 72 per cent of the National Treasury’s directives implemented. These included a financial and governance review of the North West Development Corporation, which revealed serious maladministration after oversight of this entity was shifted to the Office of the Premier. To improve governance, oversight responsibility has been returned to the Department of Economic Development, Environment, Conservation and Tourism. Irregular contracts across a wide range of activities, from project management offices to scholar transport, have been identified and terminated. The provincial treasury has initiated a project to develop contract registers and identify irregular expenditure in municipalities. The North West treasury was tasked with ensuring that all the province’s departments are appropriately funded for the services they have to deliver. Health has been a particular focus. As a result, the budget of the provincial health department was increased by 10.5 per cent between 2018/19 and 2019/20. Between March 2016 and December 2019, the province filled 235 critical positions for medical practitioners and specialists, and 1 064 nursing posts. The second phase of the intervention, from September 2019 to August 2020, aims to strengthen supply chain management. It will focus on improving audit outcomes, investigating irregular and wasteful expenditure, and intensifying forensic investigations. The third phase, beginning in September 2020, will monitor ongoing implementation.

2020 BUDGET REVIEW financial statements, occurring in future. and the measures they are taking to avoid this Table 6.3 Conditional grants to provinces Source: National Treasury Municipal revenue and spending Unlike provinces, municipalities have significant revenue-raising powers. Municipal property rate collections, for example, amount to more than 1 per cent of GDP, roughly equivalent to national customs duties. Most municipal revenue is generated from the sale of services such as water and electricity, so collecting fees owed for these services is foundational to sustainable municipal services. Yet South Africa’s 257 municipalities are also diverse, ranging from cities with large revenue-raising potential from property rates and the sale of services, to rural municipalities where most residents are very poor and the municipal budget is primarily funded from transfers. While own revenues account for the majority of municipal resources, transfers through the division of revenue make up about 30 per cent of aggregate municipal budgets and can account for more than 80 per cent of budgets in rural municipalities. The largest of these transfers is the local government equitable share, which is allocated through a formula that incorporates the number of poor households in each municipality and the cost of free basic services. The formula provides additional support to municipalitieswith lower revenue-raising capacity and includes R5.4 billion for maintenance. Diverse range of municipalities includes cities that can raise substantial revenue and poor rural municipalities 72 2019/20 Adjusted R millionbudget 2020/212021/222022/23 Medium-term estimates MTEF total Direct conditional grants Comprehensive agricultural support programme1 538 Ilima/Letsema projects538 Community library services1 501 Education infrastructure10 514 National school nutrition programme7 186 HIV, TB, malaria and community outreach22 039 Health facility revitalisation6 007 Statutory human resources, training and development3 846 National tertiary services13 186 Human settlements development18 780 Informal settlements upgrading partnership– Provincial roads maintenance11 442 Public transport operations6 326 Other direct grants4 360 1 5221 6201 672 549614632 1 4791 5841 667 11 00811 71012 255 7 6668 1258 516 24 38727 93129 405 6 3686 6587 034 4 1554 3334 494 14 06914 69415 294 16 62113 41413 871 –3 8904 121 11 59311 93812 507 6 7507 1217 090 4 6194 3304 580 4 814 1 795 4 730 34 973 24 308 81 723 20 060 12 982 44 057 43 905 8 011 36 037 20 961 13 529 Total direct conditional grants107 263 110 785117 962123 137 351 883 Indirect transfers3 941 School infrastructure backlogs1 987 National health insurance indirect1 909 Ilima/Letsema projects45 4 0604 8245 076 1 7362 2952 424 2 2882 5292 652 36–– 13 961 6 456 7 469 36

CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Municipalities also earn revenue from levying charges on developers to connect new developments to municipal services. The draft Municipal Fiscal Powers and Functions Amendment Bill proposes new, uniform regulations for these development charges, strengthening the revenue-raising framework for municipalities. This bill, which was published for public comment in January 2020, can be found on the National Treasury website. The 2020 Budget includes funding to support pilot initiatives to improve municipal revenue collection. The National Treasury will work with selected municipalities that have large outstanding debts to bulk suppliers, including Eskom, as a result of customer non-payment. Smart meters will be retrofitted in these municipalities to test whether revenue collections increase sufficiently to pay for the meters and recover associated costs. If so, further rollout of smart meters may be funded by borrowing against future revenue increases. The Department of Cooperative Governance has also been funded to run a payment culture campaign. Improving regulation of development charges will increase municipal revenue Table 6.4 Transfers to local government Source: National Treasury Government continues to reform the system of conditional grant transfers to local government based on the principles set out in the 2019 Budget Review. In 2020, the scope of the municipal infrastructure grant will be expanded to allow the purchase of specialised waste management vehicles and broaden waste collection services to more poor households. The structure of the fiscal framework for local government is refined in each budget. In 2020, the Minister of Finance will host a special lekgotla of the Budget Forum – the intergovernmental structure established to facilitate formal consultation on local government finances – to review the Minister of Finance to host special Budget Forum in 2020 to review municipal funding model 73 2019/20 Adjusted R millionbudget 2020/212021/222022/23 Medium-term estimates MTEF total Equitable share and related68 973 General fuel levy sharing with metros13 167 Direct conditional grants45 068 Municipal infrastructure14 816 Integrated urban development857 Urban settlements development12 045 Informal settlements– upgrading partnership Integrated national electrification1 863 programme (municipal) Public transport network6 468 Water services infrastructure3 669 Regional bulk infrastructure2 066 Other direct grants3 283 74 68381 06287 213 14 02715 18216 085 43 81946 19848 147 14 67115 93716 852 9481 0151 075 11 2827 4057 352 –3 9454 181 1 8592 0032 119 6 4466 7977 119 3 4453 6203 701 2 0062 1562 281 3 1623 3203 467 242 958 45 294 138 163 47 460 3 038 26 039 8 126 5 981 20 362 10 767 6 442 9 949 Total direct transfers127 209 132 529142 442151 445 426 416 Indirect transfers7 024 Integrated national electrification3 124 programme (Eskom) Regional bulk infrastructure3 094 Other indirect grants806 7 6287 2298 161 3 0012 9943 688 3 8573 2753 455 7709591 017 23 017 9 684 10 587 2 747

2020 BUDGET REVIEW municipal funding model broadly. The National Treasury is working with the Department of Cooperative Governance, the South African Local Government Association, the Financial provinces to prepare for this lekgotla. and Fiscal Commission and Progress in addressing unfunded budgets Over the past several years, a growing number of municipal councils have adopted unfunded budgets, in which realistically anticipated revenue is insufficient to meet planned spending sustainably. The National Treasury engages with these municipalities and is implementing more serious consequences for councils that continue to adopt unfunded budgets. At the time of the 2019 MTBPS, the National Treasury had written to 127 municipalities that had adopted unfunded budgets for 2019/20 and advised them to table adjusted budgets to balance planned expenditure with credible revenue projections. Sixty-one municipalities were able to do this. As a result, nearly three-quarters of all municipalities now have funded budgets – the highest proportion since the National Treasury began assessing the sustainability of all municipal budgets in 2013/14. After National Treasury intervention, nearly three-quarters of municipalities now have funded budgets 74 R billion Trends in municipal revenues Municipal revenues from service charges and property rates continue to grow rapidly, averaging about 8 per cent per year in nominal terms over the period 2013/14 to 2017/18. Cost increases for services such as electricity, water, sanitation and refuse collection are largely driven by growth in bulk costs, which municipalities must pass on to their consumers. Growth in property rates has been slightly faster, averaging about 9 per cent a year over this period. Figure 6.2 Municipal operating revenue 350 Source: National Treasury There is a noticeable difference between budgeted revenue and actual cash collected by municipalities. Over the five-year period shown in Figure 6.2, cash collections average about 11 per cent less than the expected revenue in municipalities’ adjusted budgets. Most of this difference is because of write-offs – in 2017/18, for example, municipalities wrote off R24.9 billion in unrecoverable debts. Municipalities use accrual accounting, which recognises revenues, taxes, fees and charges when bills are issued, not when payments are received. If revenues are billed but not paid, this will lead to cash-flow problems, and the municipality may be unable to meet its obligations. To avoid this, municipalities should budget for expected revenues as the amount that will likely be collected, taking into account historical experience with revenue and write-offs. This is part of the test that is applied when the National Treasury determines whether a municipality’s budget is funded or not. Adjusted budgetActual cash collectedDebt impairment 300 250 200 150 100 50 0 2013/142014/152015/162016/172017/18

CHAPTER 6: DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES Figure 6.3 Funded and unfunded municipal budgets Source: National Treasury The remaining 66 municipalities were unable to revise their budgets despite support from national and provincial treasuries, mainly due to their large arrear obligations to creditors such as Eskom and water boards. These municipalities were then asked to revise their budgets to ensure adequate cash flows to cover their commitments in this financial year. When 36 municipalities did not comply with this and other requirements, the National Treasury withheld their equitable share payments. Funds were released as municipalities met the revised conditions. The National Treasury and provincial treasuries will closely monitor these municipalities, which are expected to continue improving their budget management and move towards fully funded budgets in future. Equitable shares withheld from municipalities until they fulfil budgetary responsibilities Promoting local accountability While national and provincial treasuries can monitor the financial health of local government, only local residents can hold municipalities accountable for their full range of functions. Frustration with the decline in services has led community organisations in several towns to approach the courts to require municipalities to be placed under intervention by the provincial government and for municipal councils to be dissolved – a measure of last resort included in the Constitution. Municipal administrations are the sphere of government closest to communities, and should be the most responsive to their day-to-day needs. The use of courts to compel municipalities to meet their mandates reflects a profound breakdown in this relationship and in governance. Rebuilding trust in these municipalities will require greater accountability among councillors and officials. In addition to supporting capacity building in sub-national government, the National Treasury publishes extensive municipal financial data that can assist residents to engage with their local council. Recent efforts have focused on making this data more user-friendly to members of the public by improving the portal, www.municipalmoney.gov.za. Residents need to hold municipalities accountable for their full range of functions 75 Number of municipalities 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 Revised 2019/20 Funded Unfunded Undetermined Funded with risk 280 240 200 160 120 80 40 0 103 84 82 123 113 66 81 69 188 189 174 153 145 130 134 191

2020 BUDGET REVIEW Conclusion National government continues to support provinces and municipalities to deliver their mandates, but will impose governments violate public finance laws. consequences where local 76 Collaborations to promote local economic development Although local economic development projects often focus on small areas, they usually require collaboration among stakeholders across government, the private sector and community organisations to succeed. Several examples of recent collaborative initiatives are highlighted below. •Purpose-built coalitions that serve to build partnerships can bring different stakeholders together to drive local projects. In Nelson Mandela Bay, the Real Baakens Group was formed in 2017 by social activists, business people, municipal officials and spatial development experts to restore a river valley running through the city. The group engaged with the municipality to unblock stalled projects and mobilise resources to clean sewage spills and stormwater litter traps, and fix water leaks. The renewed Baakens Valley has the potential to be a well-used park, event space and tourist attraction. •The Department of Trade, Industry and Competition is implementing the Industrial Park Revitalisation Programme, which aims to attract investment by improving infrastructure in existing industrial parks, many of which are located in low-income areas. The department is working with municipalities that are responsible for many of the services needed. The National Treasury’s Cities Support Programme is also supporting Ekurhuleni, eThekwini, Tshwane and Mangaung to revitalise targeted parks, some of which are not operating optimally because of erratic electricity supply or protests by local residents. Cities will be supported to resolve these constraints. •Although township economic development initiatives have helped to improve quality of life through investment in public infrastructure and privately owned shopping centres, they have been insufficient to address the broader legacy of dislocation. The Cities Support Programme is promoting an approach to township economic development that recognises that many factors affect township economies, and that more participatory and collaborative approaches are required. Taking lessons from Gauteng’s Tshepo 1 Million Programme, a three-year programme to pilot this approach was launched in five metros in December 2019.

7 Government debt and contingent liabilities Overview O21.4 per cent to R407.3 billion. Borrowing is expected to reach ver the past year, government’s gross borrowing requirement – the Government’s gross borrowing requirement grew by 21.4 per cent over the past year budget balance plus maturing loans – has increased by R497.5 billion in 2022/23. The steep increase is the result of weak economic growth, the deteriorating fiscal position, an increase in domestic bond redemptions and large-scale support to distressed state-owned companies. About 90 per cent of government debt is rand-denominated, shielding government from some volatility in debt costs due to fluctuations in the exchange rate. However, higher yields, especially on longer-dated domestic bonds, have increased borrowing costs. Debt and debt-service costs will continue to rise over the medium term. Gross loan debt is estimated to increase from R3.18 trillion (61.6 per cent of GDP) in 2019/20 to R4.38 trillion (71.6 per cent of GDP) in 2022/23. Net loan debt is estimated to increase from R2.94 trillion (57 per cent of GDP) 77 In brief •Over the past year, government’s gross borrowing requirement has risen by R71.9 billion to R407.3 billion. •Government has financed this steep increase in a responsible manner, despite a deteriorating fiscal position resulting from weak economic growth and the precarious finances of state-owned companies. •Deep and liquid domestic capital markets remain the primary source of financing over the next three years. •Gross loan debt is expected to increase to R4.38 trillion, or 71.6 per cent of GDP, by 2022/23, with foreign debt averaging 9.6 per cent of gross debt over the medium term. Net loan debt is expected to reach R4.15 trillion, or 67.8 per cent of GDP, by 2022/23. •Contingent liabilities are expected to increase from R979.9 billion in 2019/20 to R1.16 trillion by 2022/23. •The risk to South Africa’s credit ratings became more pronounced in 2019. Only Moody’s and Ratings and Investment Information (R&I) rate the country’s debt at investment grade.

2020 BUDGET REVIEW in 2019/20 to R4.15 trillion (67.8 per cent of GDP) in 2022/23. Contingent liabilities – mainly guarantees to state-owned companies – are projected to reach R979.9 billion on 31 March 2020. Government’s long record of prudent debt management has enabled the National Treasury to consistently match higher borrowing requirements without dramatically increasing the cost of debt. Nonetheless, prudent debt management cannot substitute for sustainable public finances, or for a growing economy. Debt is not expected to stabilise over the medium term. The risk to South Africa’s remaining investment-grade credit ratings has become more pronounced. As discussed in Chapter 3, urgent interventions are required to stabilise the public finances. Prudent debt management strategies allow government to finance higher borrowing requirements Financing strategy Despite the challenging economic environment, government has continued to implement an efficient and cost-effective financing strategy. Global and domestic economic trends are considered when establishing the mix of funding instruments and maturities, as well as risk and debt management plans. The strategy prioritises funding liquidity – that is, the ability to make agreed-upon payments in a timely manner – while minimising refinancing and currency risk, without compromising the efficient functioning of the domestic bond market. In 2020/21, the borrowing requirement will be R432.7 billion. To ensure a diversified debt portfolio that spreads risk, the requirement will be met from short-and long-term borrowing in the domestic market, and from 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 will be in the form of foreign bonds. Government is preparing to issue a domestic Islamic bond in 2020/21. In addition, government is considering borrowing from multilateral institutions to finance infrastructure projects, with the benefit of additional technical expertise. Government’s strategic portfolio risk benchmarks help to ensure that the debt structure is configured to minimise risk. The debt portfolio is expected to remain within the current benchmarks during 2020/21. Government’s financing strategy remains efficient and cost-effective, and minimises risk Table 7.1 Performance against strategic portfolio risk benchmarks 1. Excludes borrowing from the Corporation for Public Deposits and retail savings bonds Source: National Treasury 78 Benchmark Descriptionrange or limit 2019/202020/21 Estimates Treasury bills as % of domestic debt115 Long-term debt maturing in 5 years as % of bonds25 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) Term-to-maturity of total debt (years) Term-to-maturity of foreign debt (years) 11.812.0 11.314.6 22.923.3 10.19.5 12.811.8 13.812.6 13.011.8 13.111.5

CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Risks to the financing strategy The main risks to the financing strategy are: Budget deficit, inflation and exchange-rate fluctuations, and credit rating downgrades are risks to financing strategy • A widening budget deficit. If GDP growth contracts or spending increases – for example, through additional support to state-owned companies – debt and borrowing costs would increase. Inflation and exchange-rate risks. Unanticipated increases in inflation or depreciation in the rand exchange rate would increase the cost of outstanding inflation-linked or foreign-currency debt. Sovereign credit ratings. Further downgrades of South Africa’s credit ratings could lead to higher costs of borrowing. • • Borrowing performance and projections 2019/20, the budget deficit increased by R82.3 billion In relative to Borrowing requirement set to reach R497.5 billion in 2022/23 as result of higher budget deficit, redemptions projections in the 2019 Budget, partially offset by lower domestic bond redemptions of R11.1 billion. As a result, the gross borrowing requirement rose from a projected R335.3 billion to R407.3 billion for 2019/20, or from 6.2 to 7.9 per cent of GDP. Over the medium term, the gross borrowing requirement will increase from R407.3 billion to R497.5 billion as a result 79 Sovereign credit ratings and the borrowing requirement South Africa’s credit ratings from Moody’s, Standard & Poor’s and Fitch carry a negative outlook. Moody’s and R&I maintain an investment-grade rating. A downgrade by Moody’s would trigger exclusion from indices such as the FTSE World Government Bond Index, and would prevent some institutions from holding the country’s debt. Such an event could lead to short-term volatility in financial markets, including an increase in borrowing costs and exchange-rate depreciation. Given the country’s highly developed and liquid financial markets, however, it would be unlikely to affect government’s ability to finance its medium-term borrowing requirements. Figure 7.1 illustrates the sensitivity of debt and debt-service costs to changes in selected macroeconomic variables, such as interest, inflation and exchange rates. A further deterioration in sovereign credit ratings, for example, would result in adverse movements in exchange and interest rates, resulting in higher debt and borrowing costs. Figure 7.1 Sensitivity of debt and debt-service costs* *Assuming all other variables remain unchanged Source: National Treasury Rating agencies are concerned about the country’s low economic growth, rising fiscal deficit, growing debt and high contingent liabilities. Nonetheless, South Africa is supported by strong core institutions such as the judiciary and Reserve Bank, deep domestic financial markets and a well-capitalised financial sector. Change in debt-service costs Change in gross loan debt 1 percentage point change in headline inflation R1 change in the rand/US dollar exchange rate 1 percentage point change in short-and long-term interest rates 0 10 20 R billion 0.2 6 2 24 6.6 18

CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES 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 Domestic short-term borrowing Short-term loans are made up of a highly liquid Corporation for Public Deposits borrowing facility and Treasury bills. During 2019/20, government issued an additional R11 billion in Treasury bills (relative to 2019 Budget projections) to partly finance the higher gross borrowing requirement. Loans from the Corporation for Public Deposits increased from R17.3 billion to R27.3 billion. Over the medium term, Treasury bill issuance will amount to 12.4 per cent of total domestic borrowing. In 2020/21, net Treasury bill issuance will amount to R48 billion, while borrowing from the Corporation for Public Deposits will remain unchanged at R27.3 billion. Treasury bill issuance will amount to 12.4 per cent of total domestic borrowing over medium term Table 7.3 Domestic short-term borrowing Source: National Treasury 81 2019/20 2020/21 2019/202020/21 OpeningNetClosing R millionbalancechangebalance Net Closing changebalance Weekly auction estimates Corporation for17 27810 00027 278 Public Deposits Treasury bills307 36026 000333 360 91-days17 000-4 72912 271 182-days59 818-2 60457 214 273-days98 5049 840108 344 364-days132 03823 493155 531 –27 278 48 000381 360 3 32915 600 11 55668 770 16 066124 410 17 049172 580 7 93010 375 1 0001 200 2 0552 645 2 3703 190 2 5053 340 Total324 63836 000360 638 48 000408 638 2018/19 R millionOutcome 2019/20 BudgetRevised 2020/212021/222022/23 Medium-term estimates Main budget balance-231 342 Redemptions-15 570 Domestic long-term loans-13 529 Foreign loans-2 041 -255 243-337 508 -80 088-69 743 -30 596-19 535 -49 492-50 208 -367 999-366 374-359 348 -64 699-63 531-138 137 -52 465-59 239-122 937 -12 234-4 292-15 200 Total-246 912 -335 331-407 251 -432 698-429 905-497 485 Financing Domestic short-term loans14 061 Treasury bills (net)14 039 Corporation for Public Deposits22 Domestic long-term loans183 003 Market loans183 503 Loans issued for switches-500 Foreign loans25 258 Market loans25 258 Loans issued for switches– Change in cash and other balances224 590 Cash balances-2 274 Other balances326 864 25 00036 000 15 00026 000 10 00010 000 216 000298 900 216 000299 189 –-289 28 52076 052 28 52076 052 –– 65 811-3 701 71 644-724 -5 833-2 977 48 00048 00055 000 48 00048 00055 000 ––– 337 700337 400385 800 337 700337 400385 800 ––– 29 26044 79053 200 29 26044 79053 200 ––– 17 738-2853 485 12 596-5 321-1 647 5 1425 0365 132 Total246 912 Percentage of GDP5.0% 335 331407 251 6.2%7.9% 432 698429 905497 485 8.0%7.5%8.1%

2020 BUDGET REVIEW Domestic long-term borrowing Domestic long-term borrowing consists of fixed-rate, inflation-linked and retail savings bonds. Between April 2019 and January 2020, government raised R250.6 billion by issuing domestic long-term debt. Fixed-rate bonds accounted for 82.6 per cent of bond issuances, with inflation-linked instruments making up the remainder. Fixed-rate bonds were issued across a range of maturities. About half were issued for between four and 15 years, as the bond exchange programme created space to issue more bonds in the short-to-medium term. In 2019/20, interest rates on long-term bonds increased compared with the previous year. Government was able to issue more bonds in the short-to-medium term, lowering its average borrowing costs. For instance, in 2018/19, fixed-rate bonds were funded at an average interest rate of 9.3 per cent, while in 2019/20, they were funded at an average interest rate of 9.1 per cent. Over the medium term, domestic long-term borrowing will increase from R298.9 billion in 2019/20 to R385.8 billion in 2022/23. Average cost of borrowing of 9.1 per cent for fixed-rate bonds Non-resident holdings As a category, international investors remain the largest holders of domestic government bonds, with 37.1 per cent of the portfolio. Moreover, foreign holdings increased by R95 billion in 2019, relative to an increase of R8 billion in 2018, showing global investors remain positive about South African assets despite concern about sovereign credit risk. Foreign holdings of government bonds increased by R95 billion in 2019 International borrowing Government’s foreign-currency bonds – mainly denominated in dollars and euros – are issued to meet foreign-currency commitments. In 2019/20, favourable pricing and continued investor interest allowed government to raise US$5 billion in 10-year and 30-year bonds, compared with the US$4 billion required for the year. Over the medium term, an additional US$8.5 billion will be raised in global capital markets. 82 R billion Dec 2014 Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Figure 7.3 Ownership of domestic bondsFigure 7.4 Domestic bonds held by foreign investors 800 700 600 500 400 300 200 100 0 Source: Share Transactions Totally Electronic 808 705 713 558 449 451

CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Table 7.4 Foreign-currency commitments and financing Source: National Treasury Cash balances Government’s total cash holdings consist of deposits held at the commercial banks and the Reserve Bank. At the end of 2019/20, these balances stood at R238.8 billion. About 74.2 per cent, or R177.2 billion, of these holdings constitutes official foreign exchange reserve deposits made with the central bank, which is available as bridging finance. Over the medium term, foreign-currency deposits will remain slightly below US$7.5 billion, in line with government’s commitment to the Reserve Bank. Government’s total cash balances stand at R238.8 billion Table 7.5 Change in cash balances 1. A positive value indicates that cash is used to finance part of borrowing requirement 2. Rand values at which foreign currency was purchased or borrowed 3. Deposits in rands and US dollars to meet government’s commitments 4. Deposits in rands and US dollars made with Reserve Bank to increase official foreign exchange reserves Source: National Treasury 83 2018/19 R millionOutcome 2019/20 BudgetRevised 2020/212021/222022/23 Medium-term estimates Rand currency Opening balance123 241 Closing balance120 575 of which: Tax and loan accounts63 418 Change in rand cash balance12 666 (opening less closing balance) 138 657120 575 117 157117 157 50 00050 000 21 5003 418 117 157117 157117 157 117 157117 157117 157 50 00050 00050 000 ––– Foreign currency2 Opening balance112 546 Closing balance117 486 US$ equivalent8 722 Change in foreign currency-4 940 cash balance1 (opening less closing balance) 144 628117 486 94 484121 628 6 7868 285 50 144-4 142 121 628109 032114 353 109 032114 353116 000 7 1427 3257 435 12 596-5 321-1 647 Total change in cash balances1-2 274 71 644-724 12 596-5 321-1 647 Total closing cash balance238 061 of which: Operational cash 379 878 Official reserves 4158 183 211 641238 785 40 05961 537 171 582177 248 226 189231 510233 157 44 55147 28449 002 181 638184 226184 155 2018/19 US$ millionOutcome 2019/20 Estimate 2020/212021/222022/23 Medium-term estimates Opening balance8 942 Commitments-2 479 Redemptions-154 Interest-1 025 Departments-1 300 Financing2 259 Loans2 000 Purchases– Interest259 Closing balance8 722 8 722 -5 717 -3 456 -1 147 -1 114 5 280 5 000 – 280 8 285 8 2857 1427 325 -3 382-3 051-3 620 -836-287-1 000 -1 296-1 454-1 600 -1 250-1 310-1 020 2 2393 2343 730 2 0003 0003 500 ––– 239234230 7 1427 3257 435

2020 BUDGET REVIEW Government debt and debt-service costs National government debt Table 7.6 summarises the distribution and stock of national government debt. 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 Debt is not expected to stabilise over the medium term. Gross loan debt is expected to increase to R4.38 trillion, or 71.6 per cent of GDP, by 2022/23, with net debt reaching 67.8 per cent of GDP over the same period. Government debt levels are affected by changes in inflation and exchange rates. For example, rand appreciation decreases the value of outstanding Debt is not expected to stabilise over the medium term foreign debt.Foreign-currency-denominated debtwill average R381 billion, or 9.6 per cent, of gross debt over the medium term. Government’s foreign-currency exposure is partly offset by foreign-currency investments, which in 2019/20 amount to US$8.3 billion. In 2019/20, the stock of debt increased by R388 billion. The main budget deficit accounted for 87 per cent of this increase, while interest and inflation rate changes explain much of the rest. 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 84 2018/19 R millionOutcome 2019/20 Estimate 2020/212021/222022/23 Medium-term estimates Budget deficit231 342 Discount on loan transactions18 165 Revaluation of inflation-linked bonds123 440 Revaluation of foreign-currency debt150 225 Change in cash and other balances2-24 590 337 508 22 473 24 531 -450 3 701 367 999366 374359 348 5 9468 1706 443 28 67734 42736 248 7157 1836 930 -17 738285-3 485 Total298 582 387 763 385 600416 439405 484 End of period2018/19 R billionOutcome 2019/20 Estimate 2020/212021/222022/23 Medium-term estimates Domestic loans22 497 Short-term325 Long-term2 173 Fixed-rate1 605 Inflation-linked568 Foreign loans2291 2 859 361 2 498 1 851 647 317 3 2283 5973 957 409457512 2 8193 1403 445 2 0752 3502 542 744790903 334382427 Gross loan debt2 788 Less: National Revenue Fund-243 bank balances2 3 176 -238 3 5623 9794 384 -222-227-230 Net loan debt2 545 2 938 3 3403 7524 154 As percentage of GDP: Gross loan debt56.7 Net loan debt51.7 61.6 57.0 65.669.171.6 61.565.167.8

CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES National government debt-service costs Government debt-service costs are determined by debt stock, new borrowing and macroeconomic variables such as interest, inflation and exchange rates. In 2019/20, debt-service costs were revised upwards by R2.8 billion due to the higher borrowing requirement. In addition, increased Treasury bill issuance and greater bridging finance increased short-term borrowing costs. As a share of GDP, debt-service costs are projected to average 4.5 per cent over the medium term. Table 7.8 National government debt-service costs Source: National Treasury Contingent liabilities Contingent liabilities are state obligations that will only result in expenditure if a specific event occurs. Government closely monitors the status of its contingent liabilities and other fiscal obligations. These include guarantees to state-owned companies, independent power producers, public-private partnerships and provisions for multilateral institutions. The financial position of state-owned companies is discussed in Chapter 8. Details of contingent liabilities and other obligations are shown in Table 11 of the statistical annexure. Government guarantees and other liabilities Government is committed to reducing guarantees as part of its efforts to maintain prudent levels of debt and contingent liabilities. Guarantees to state-owned companies In 2019/20, government issued guarantee reporting guidelines for national departments and state-owned companies. The guidelines state that exposure from a guarantee consists of the sum of the outstanding value of a loan, accrued interest and adjustments to inflation-linked bonds as a result of changes in the inflation rate. The approved guarantee amount, however, reflects only the capital value of the loan. As a result, the exposure amount may exceed the approved guarantee amount. The total amount for approved guarantees is expected to decrease by R3.3 billion to R484.4 billion by the end of March 2020, with associated exposure estimated to increase by R17.2 billion to R385.3 billion. Eskom constitutes the largest exposure, at 77.2 per cent of guarantees. Guidelines issued to improve guarantee reporting 85 2018/19 R millionOutcome 2019/20 BudgetRevised 2020/212021/222022/23 Medium-term estimates Domestic loans167 438 Short-term29 601 Long-term137 837 Foreign loans14 411 184 240188 202 25 34528 039 158 895160 163 17 96816 803 211 144237 614266 238 25 44128 26031 255 185 703209 354234 983 18 12620 86823 907 Total181 849 202 208205 005 229 270258 482290 145 As percentage of: GDP3.7 Expenditure12.1 Revenue14.3 3.74.0 12.212.2 14.415.2 4.24.54.7 13.014.015.0 16.417.418.4

2020 BUDGET REVIEW 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, adjustments to inflation-linked bonds as a result of inflation rate changes and accrued interest 3. The exposure in 2017/18 excludes adjustments to inflation-linked bonds as a result of inflation rate changes 4. These amounts only include national and provincial PPP agreements Source: National Treasury In 2019/20, there were four significant changes to the guarantee profile: • • • Eskom used an additional R12 billion of its guarantee. Denel was granted guarantees of R3.5 billion. Government recapitalised the South African Post Office and South African Express to allow the airline to settle guaranteed debt. The Development Bank of Southern Africa and the South African National Roads Agency Limited repaid some of their guaranteed debt. • Other guarantees Contingent liability risks for independent power producers (IPPs) are very low. Government has committed to procure up to R200 billion in renewable energy from IPPs. The value of signed projects, which represents government’s exposure, is expected to amount to R161.4 billion by March 2020. This exposure is expected to decrease to R141.9 billion in 2022/23. During 2019/20, government’s exposure to public-private partnerships decreased by about R1.8 billion to R8.7 billion, as a number of projects reached maturity. Total exposure is expected to reach R7 billion in 2022/23. Contingent liability risks for IPPs are very low Exposure to PPPs declined by R1.8 billion as a number of projects reached maturity 86 2017/18 R billionGuaranteeExposure2 2018/19 GuaranteeExposure2 2019/20 GuaranteeExposure2 Public institutions469.8327.3 of which: Eskom350.0250.6 SANRAL 338.930.4 Trans-Caledon Tunnel Authority25.718.9 South African Airways19.111.1 Land and Agricultural Bank of9.63.8 South Africa Development Bank of Southern12.24.1 Africa South African Post Office4.20.4 Transnet3.53.8 Denel2.42.4 South African Express1.10.9 Industrial Development0.40.1 Corporation South African Reserve Bank–– Independent power producers200.2122.2 Public-private partnerships49.69.6 487.7368.1 350.0285.6 38.939.5 43.014.3 19.115.3 9.61.0 11.44.3 2.9– 3.53.8 3.43.4 2.80.2 0.50.1 0.3– 200.2146.9 10.510.5 484.4385.3 350.0297.4 37.939.9 43.013.5 19.117.3 9.60.9 10.04.6 –– 3.53.8 6.96.9 1.90.2 0.50.1 –– 200.2161.4 8.78.7

CHAPTER 7: GOVERNMENT DEBT AND CONTINGENT LIABILITIES Other contingent liabilities Table 7.10 shows government’s exposure to multilateral institutions and other implicit contingent liabilities. South Africa subscribes to shares in these institutions but does not pay the full amount. Government’s commitments represent the unpaid portion of the share subscribed to in the unlikely event these institutions run into financial difficulty. Table 7.10 Provision for multilateral institutions and other contingent liabilities Source: National Treasury 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 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 appreciation of the rand, unrealised gains are expected to amount to R278.1 billion by end-March 2020, a decrease of R7.6 billion compared with 2018/19. In 2019/20, government settled a realised loss of R131.7 million. Losses of R97.9 million are projected for 2020/21. Conclusion A prudent debt management strategy, alongside deep and liquid domestic capital markets, has enabled government to finance the higher borrowing requirement. The current debt trajectory is not sustainable, however, and will have to be addressed by reducing expenditure, improving the financial positions of state-owned companies and increasing revenue collection through higher economic growth. Debt management strategy has enabled government to finance borrowing, but debt trajectory is not sustainable 87 R billion2017/18 2018/19 2019/20 Multilateral institutions211.5 of which: New Development Bank33.2 African Development Bank44.1 International Monetary Fund76.4 Other contingent liabilities277.4 of which: Export Credit Insurance Corporation of South Africa18.2 Post-retirement medical assistance69.9 Road Accident Fund139.2 260.7 57.9 53.9 85.9 326.2 20.5 69.9 173.6 280.0 76.0 54.4 86.2 424.6 18.2 69.9 273.1

8 Financial position of public-sector institutions Overview Tfunds. Their mandates include building and operating infrastructure, his chapter discusses the financial position of state-owned Public-sector institutions need to be well governed, operationally sound and financially sustainable companies, development finance institutions and social security financing social and 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. The 2019 Budget Review outlined a set of urgent reforms for Eskom, acknowledging that it was the largest state-owned company in need of significant restructuring – but not the only one. Since then, there has been some progress. The Department of Public Enterprises has published a roadmap for Eskom’s reform, outlining the utility’s role as part of a 89 In brief •The financial performance of several large state-owned companies continued to deteriorate sharply over the past year, leading to an increasing drain on public resources. •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. Few are meeting these requirements: liabilities are growing faster than assets, with a consequent decline in aggregate net asset value of 5.6 per cent in 2018/19. •The combined net asset value of the three large development finance institutions – the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC) and the Land Bank – increased to R139.4 billion in 2018/19. •The social security funds will pay out R211 billion in benefits and collect R238 billion in contributions over the medium term. Large surpluses in the Unemployment Insurance Fund and the Compensation Fund, however, are more than offset by Road Accident Fund liabilities, which are expected to reach R605 billion by 2022/23. •In 2018/19, the Government Employees Pension Fund paid out R102.5 billion in benefits funded by investment income of R84.2 billion and contributions of R75.6 billion.

2020 BUDGET REVIEW reformed electricity supply industry, and will report on progress at key milestones. South African Airways (SAA) has been placed in voluntary business rescue. The business rescue practitioners are expected to publish their plan within a matter of weeks. With the exception of the Road Accident Fund, the financial positions of the social security funds are sound. They are able to meet their long-term obligations, as is the Government Employees Pension Fund. Over the past year, government has taken steps to strengthen governance and transparency at the Public Investment Corporation. Apart from Road Accident Fund, financial position of social security funds remains sound State-owned companies Unlike their private counterparts, most state-owned companies hold developmental rather than profit-driven mandates. Nonetheless, these entities need to be financially self-sustaining. In recent years, a pattern of mismanagement and poor governance at major state-owned companies has led to operational failures, financial distress and increased demands for taxpayer support through the national budget. This problem is compounded by broad, sometimes unfunded mandates and, in some cases, outdated business models. The financial performance of state-owned companies continues to deteriorate. Liability growth has outpaced that of assets, with a consequent decline in net asset value, eroding the ability of these entities to meet their financial obligations and deliver on their mandates. Average return on equity, a measure of how effectively net assets are used to create value, fell sharply in 2018/19 – the most recent year for which data is available. This decline is largely the result of weak revenue growth, high compensation costs and rapidly growing debt-service costs. Average return on equity at state-owned companies has fallen sharply Table 8.1 Combined balance sheets of state-owned companies1 2016/172 2017/182 R billion/per cent growth 2014/15 2015/16 2018/19 Total assets 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% 1 224.3 3.9% 870.3 6.4% 354.0 -1.8% 0.7% 1 263.2 3.2% 901.1 3.5% 362.1 2.3% -0.8% 1 269.0 0.5% 927.0 2.9% 342.0 -5.6% -8.2% Total liabilities Net asset value Return on equity (average) 1. State-owned companies listed in schedule 2 of the PFMA, excluding development finance institutions 2. Numbers may differ from earlier publications due to restatement or error Source: National Treasury As the scale of financial challenges in state-owned companies has become apparent, many have struggled to access capital markets. In combination with weak cash flows (Figure 8.1), this has reduced their capital spending, resulting in delayed delivery of much-needed social and economic infrastructure. It has also affected their ability to meet debt commitments. The Public Finance Management Act requires state-owned companies listed in schedule 2 to generate sufficient financial resources from their operations to meet obligations to employees, the public, creditors and debt holders. Increasingly, however, these entities rely on external funding, government-guaranteed debt and bailouts to sustain operations. 90

CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS Figure 8.1 Negative cash flows at state-owned companies* *Companies listed in schedule 2 of the PFMA, excluding development finance institutions **Numbers may differ from earlier publications due to restatement or error Source: National Treasury Over the past 12 years, government has allocated R162 billion to the financially distressed state-owned companies shown in Table 8.2. These allocations generally provide short-term support, but cannot substitute for the far-reaching structural reforms needed to return them to operational and financial stability. Of the total allocations, Eskom accounts for 82 per cent. In 2019/20, government allocated R49 billion to Eskom and committed R112 billion in medium-term funding. Eskom accounts for 82 per cent of fiscal support to state-owned companies over past 12 years Table 8.2 Summary of recapitalisations and bailouts of state-owned companies Source: National Treasury 91 R billion EskomSouth AfricanDenelSouth African South African AirwaysExpressBroadcasting R billionCorporation Total 2008/0910.0––0.4– 2009/1030.01.5––– 2010/1120.0–––– 2011/12––––– 2012/130.7–0.4–– 2013/14––––– 2014/15––––– 2015/1623.0–––– 2016/17––––– 2017/18–10.0––– 2018/19–5.0–1.2– 2019/2049.05.51.80.33.2 10.4 31.5 20.0 – 1.1 – – 23.0 – 10.0 6.2 59.8 2008/09-2019/20 (history)132.722.02.21.93.2 162.0 2020/2156.010.30.60.2– 2021/2233.04.3––– 2022/2323.01.8––– 67.1 37.3 24.8 2020/21-2022/23 (MTEF)112.016.40.60.2– 129.2 Total244.738.42.82.13.2 291.2 100 50 0 -50 -100 -150 -200 Debt principal repayments Interest payments Capital expenditure Net cash from operations Net cash flow after interest, debt service and capital expenditure 85 89 80 67 64 -103 -98 -86 -79 -57 -51 -47 -43 -34 -49 -28 -69 -35 -38 -44 2014/152015/162016/17**2017/18**2018/19

2020 BUDGET REVIEW Debt obligations Figure 8.2 shows the long-term debt maturity profile for the seven largest borrowers. Total debt amounts to R759.9 billion, of which 62 per cent is guaranteed by government. Over the next three years, debt repayments total R178.1 billion, of which R103.5 billion is held by Eskom. Debt repayments over next three years total R178.1 billion, of which Eskom holds R103.5 billion Figure 8.2 Debt maturity profile of major state-owned companies* *Airports Company South Africa, Denel, Eskom, South African National Roads Agency Limited, SAA, Transnet and Trans-Caledon Tunnel Authority Source: National Treasury Rising interest costs reflect market doubts about state-owned companies’ ability to repay debt In recent years, the ability of state-owned companies to access funding and generate sufficient cash flows to repay maturing debt has declined. Rising interest costs reflect market doubts about their ability to repay debt. Increasingly, these entities require state guarantees to borrow. Furthermore, much of the debt that has been raised is in short-term instruments, and is used for refinancing and operations rather than capital investment. Figure 8.3 Borrowing costs for state-owned companies and development finance institutions, 2018/19 *Effective cost of debt for the 10 largest borrowers Source: National Treasury 92 R billion 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28 2028/29 2029/30 2030/31 2031/32 2032/33 2033/34 2034/35 2035/36 2036/37 2037/38 2038/39 2039/40 2040/41 2041/42 2042/43 2043/44 Effective government borrowing cost Minimum* Maximum* Unguaranteed Guaranteed 7.7 13.5 0 4 8 12 16 Per cent 11.4 6.9 7. 6 6.9 Domestic capital repayments 60 50 40 30 20 10 0 Foreign capital repayments Government-guaranteed capital portion

CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS Figure 8.3 shows the difference between borrowing costs for government and state-owned companies, indicating the level of risk that the market attaches to the latter. Government’s average effective borrowing cost is 6.9 per cent. State-owned companies are paying substantially more to borrow – and the highest cost is for guaranteed debt. SAA’s borrowing incurs nearly twice the interest rate of government. Table 8.3 shows that in 2018/19, as in the previous year, state-owned companies could only raise 75.4 per cent of planned borrowing. The decline in borrowing plans has reduced or delayed capital expenditure. In 2018/19, in contrast to previous years, about 70 per cent of state-owned companies’ domestic borrowing was in long-term instruments. Nonetheless, this debt continued to be used for refinancing maturing debt. State-owned companies borrow at higher rates than government Table 8.3 Borrowing requirement of selected state-owned companies1 1. Airports Company South Africa, Eskom, SANRAL, SAA, Transnet and Trans-Caledon Tunnel Authority 2. ACSA and TCTA not included, as no forecast was provided Source: National Treasury Overall, these trends reflect the deteriorating financial state of major state-owned companies. Without effective structural reforms, this cycle of lower funding access and higher reliance on government is set to continue. Eskom Eskom relies on state support to operate. The utility reported a net profit of R1.3 billion at 30 September 2019, but it is not generating enough cash to cover debt and finance costs. This is partly a result of non-payment by municipalities and other consumers. Government is working with municipalities to strengthen governance and financial management. Eskom’s immediate priority is to stabilise its operational and financial position, as discussed in Annexure C of the 2019 Medium Term Budget Policy Statement. Government has provided significant financial support to Eskom since 2008. This includes R105 billion in 2019/20 and 2020/21, which is conditional, to improve accountability and address inefficiencies. The conditions include reducing primary energy costs, containing other costs and making progress on restructuring. Eskom provides regular updates on these conditions, and government reviews its cash flows on a daily basis. Eskom has begun the process of separating its three operating activities – generation, transmission and distribution – each of which will soon have its own board and management structure. Eskom, which does not generate sufficient cash to cover debt and finance costs, is reliant on state support 93 2017/18 R billionBudgetOutcome 2018/19 BudgetOutcome 2019/20 Revised 2020/212021/22 2022/232 Medium-term estimates Domestic loans (gross)70.154.4 Short-term17.929.4 Long-term52.225.0 Foreign loans (gross)65.048.8 Long-term65.048.8 61.846.1 20.113.9 41.732.2 52.039.7 52.039.7 46.6 13.2 33.4 37.7 37.7 51.232.327.1 14.210.67.0 37.021.720.1 37.438.639.9 37.438.639.9 Total135.1103.2 113.885.8 84.3 88.670.967.0 Percentage of total: Domestic loans51.9%52.7% Foreign loans48.1%47.3% 54.3%53.7% 45.7%46.3% 55.3% 44.7% 57.8%45.6%40.4% 42.2%54.4%59.6%

2020 BUDGET REVIEW Transnet Transnet operates South Africa’s port, freight rail and pipeline infrastructure. The group’s net profit increased from R4.9 billion in 2017/18 to R6 billion in 2018/19, supported by fair-value adjustments on leased investment properties. Transnet, which borrows on the strength of its own balance sheet, raised R6.7 billion through commercial paper, bank loans and development finance institutions in 2018/19. It invested R14.7 billion to maintain rail and port capacity, and R3.2 billion to expand infrastructure and equipment. Rating agencies downgraded Transnet’s credit rating, citing increased liquidity risk as a result of loan covenants triggered by an audit qualification on the 2018/19 annual financial statements. Transnet borrows on the strength of its own balance sheet South African Airways SAA’s board placed the airline into voluntary business rescue in December 2019 as a result of its inability to meet financial obligations. Since 2008/09, SAA has incurred net losses of over R32 billion. Government has set aside R16.4 billion over the medium term for SAA to repay its guaranteed debt, and cover debt-service costs. Government anticipates that additional funding will be required to cover restructuring costs in line with the business rescue plan. R16.4 billion set aside over medium term for SAA to repay guaranteed debt and cover debt-service costs South African Express SA Express, illiquid and insolvent, is unable to settle either short-or long-term obligations as they become due. Cumulative losses amount to R1.2 billion over the past 10 years. The airline was recently placed under involuntary business rescue, which it intends to appeal. Government will need to assess its appetite for continued ownership of the carrier, given that it has a limited role in the local aviation market. Government needs to assess its appetite for continued ownership of SA Express Denel Denel, the state-owned military and aerospace equipment manufacturer, faces serious liquidity problems. In response, government provided Denel with R1.8 billion in 2019/20. State guarantees granted to the entity amount to R6.9 billion. Additional funding of R576 million is allocated for 2020/21. This support is allocated with conditions that emphasise the need for Denel to speedily implement its turnaround plan. The plan includes exploring private-sector participation, optimising its property and plant, and developing an appropriate funding model. It is critical for government to define Denel’s role in a modern defence industry. South African Broadcasting Corporation Government allocated R3.2 billion to the SABC in 2019/20, of which R2.1 billion has been transferred, to enable the broadcaster to pay its bills. The conditions included reviewing broadcasting sector policies to respond to advances in technology, costing the developmental mandate and evaluating opportunities for private-sector participation. The remaining R1.1 billion is expected to be transferred to the SABC by 31 March 2020. Denel’s role in a modern defence industry needs to be defined Government allocated R3.2 billion to SABC in 2019/20 to enable it to pay its bills 94

CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS Development finance institutions To support government in achieving inclusive growth and the objectives of the National Development Plan, development finance institutions require supportive governance structures, financial sustainability and developmental impact. They also require strong capacity. The net asset value of the three largest development finance institutions – the DBSA, IDC and Land Bank – increased by 4.7 per cent in 2018/19 to R139.4 billion. The institutions transitioned to the International Financial Reporting Standard 9 during the period, which resulted in higher impairments, causing a slight decrease in net loan books. Combined net asset value of DBSA, IDC and Land Bank increased by 4.7 per cent in 2018/19 Table 8.4 Financial position of selected development finance institutions 2016/17 2017/18 2018/19 R billion IDC Total assets Loan book Equity and other investments Total liabilities Net asset value 129.8 26.7 103.1 41.5 88.3 137.0 30.7 106.3 44.9 92.1 144.6 25.9 118.7 49.3 95.3 DBSA Total assets Loan book Equity and other investments Total liabilities Net asset value 83.7 76.6 7.1 51.6 32.1 89.2 75.0 14.2 54.9 34.3 89.5 75.8 13.7 52.3 37.2 Land Bank Total assets Loan book Equity and other investments Total liabilities Net asset value 45.4 41.0 4.4 39.0 6.4 49.5 43.4 6.1 42.8 6.7 52.4 44.5 7.9 45.5 6.9 Source: National Treasury Land Bank The Land Bank supports development and transformation of the agricultural sector. In 2018/19, it disbursed R5.1 billion of developmental and transformational loans, significantly up from R1.6 billion in 2017/18. The bank is refocusing on the development of smallholder farmers and aims to adopt financially and economically sustainable practices. During 2018/19, the Land Bank used R377.4 million of the R400 million joint Land Bank/IDC drought relief fund to provide low-interest loans to affected areas. In addition, it agreed with the Jobs Fund to provide concessional credit and support to small-and medium-scale emerging farmers. Industrial Development Corporation The IDC finances industrial development across Africa. Over the medium term, it will focus on financing and facilitating the adoption of emerging technologies and creating new industries. In 2018/19, the IDC approved funds totalling R13.1 billion, compared with R16.7 billion in 2017/18, and disbursed funds of R11.8 billion, compared with R15.4 billion in 2017/18. The corporation’s profits decreased by 78 per cent from R3.2 billion in IDC approved R13.1 billion in financing in 2018/19, down from R16.7 billion a year earlier 95

2020 BUDGET REVIEW 2017/18 to R720 million in 2018/19, mainly due to higher once-off capital gains recorded in 2017/18. In 2015/16, the IDC set a five-year target to approve R23 billion for black industrialists; by 2018/19, it had approved R21.4 billion for such projects. This programme is expected to create about 22 600 jobs. Development Bank of Southern Africa The DBSA finances infrastructure projects in water, sanitation, communication, energy and school infrastructure across southern Africa. It also assists with project preparation and implementation. The DBSA’s profit increased from R2.3 billion in 2017/18 to R3.1 billion in 2018/19, mainly due to interest income, and gains from foreign exchange and financial instruments. During the year, its developmental loan book rose marginally from R75 billion to R75.8 billion. DBSA’s developmental loan book rose marginally to R75.8 billion Development finance borrowing requirement In 2018/19, the three development finance institutions borrowed R56.3 billion, significantly more than the budgeted R45.4 billion. The difference is attributable to a steep increase in borrowing by the Land Bank, which was used to support its lending activities. The Land Bank and the DBSA account for 82.4 per cent of development finance borrowing. Over the medium term, borrowing plans total R90.7 billion. In 2018/19, nearly 90 per cent of borrowing was in domestic debt. Development finance borrowing rose significantly in 2018/19, largely as result of Land Bank lending Table 8.5 Borrowing requirement for development finance institutions1 1. Land Bank, DBSA and IDC 2. Land Bank and DBSA not included, as no forecast was provided Source: National Treasury Social security funds Social security funds, financed through levies and taxes, provide insurance for unemployed workers and those injured in road or workplace accidents. Over the medium term, these funds expect to collect R238 billion in contributions and pay R211 billion in benefits. The scale of Road Accident Fund (RAF) liabilities, however, means that the combined financial position of the social security funds is deeply negative. In 2018/19, the funds had a combined cash surplus of R6.8 billion. Over the medium term, however, the funds will have an average combined cash deficit of R3.3 billion, as benefits paid out by the Unemployment Insurance Fund (UIF) increase following legislative amendments. Combined R3.3 billion cash deficit over medium term is a result of RAF liabilities 96 2017/18 R billionBudget Outcome 2018/19 BudgetOutcome 2019/20 Revised 2020/212021/22 2022/232 Medium-term estimates Domestic loans (gross)51.154.0 Short-term36.239.0 Long-term14.915.0 Foreign loans (gross)9.35.6 Long-term9.35.6 36.250.6 23.923.1 12.327.5 9.25.7 9.25.7 39.8 20.3 19.5 18.0 18.0 26.831.16.0 20.920.81.0 5.910.35.0 14.49.62.8 14.49.62.8 Total60.459.6 45.456.3 57.8 41.240.78.8 Percentage of total: Domestic loans84.6%90.6% Foreign loans15.4%9.4% 79.7%89.9% 20.3%10.1% 68.9% 31.1% 65.0%76.4%68.2% 35.0%23.6%31.8%

CHAPTER 8: FINANCIAL POSITION OF PUBLIC-SECTOR INSTITUTIONS Table 8.6 Financial position of social security funds 1. Compensation Commissioner for Occupational Diseases in Mines and Works Source: National Treasury Unemployment Insurance Fund The UIF pays benefits to those who are out of work due to retrenchment, illness or maternity leave. Benefit payments are expected to grow from R11 billion in 2018/19 to R22 billion in 2022/23. Over this period, the fund will run an average surplus of R3.6 billion on an accrual basis and a cash deficit. The latter is the result of retrospective payments to claimants who were assessed and paid at a rate based on the old legislation, when they were meant to be paid based on higher rates in the amended act. The additional benefits are expected to cost R12.7 billion. The fund plans to finalise these claims by 2020/21. The UIF’s net asset value is set to increase from R144.3 billion in 2018/19 to R175 billion in 2022/23. UIF maintains surplus, but higher benefits will see it run cash deficit over medium term Road Accident Fund The RAF provides compensation for the loss of earnings, along with general damages, and medical and funeral costs to victims of road accidents. Claims against the fund are expected to increase from R96.4 billion in 2018/19 to R145.6 billion in 2022/23. The RAF’s revenues are insufficient to meet its liabilities. Consequently, the accumulated deficit is forecast to increase from R262.1 billion in 2018/19 to R593 billion in 2022/23. Over the past 20 years, increases in the RAF levy have typically exceeded 97 Figure 8.4 RAF liabilitiesFigure 8.5 RAF annual deficit Source: National Treasury 2016/172017/182018/19 R billionOutcome 2019/20 Estimate 2020/212021/222022/23 Medium-term estimates Unemployment Insurance Fund Total assets139.5159.3165.5 Total liabilities6.413.421.2 Net asset value133.1145.9144.3 174.1 22.3 151.8 182.8191.5200.7 23.424.525.7 159.4167.0175.0 Compensation Fund1 Total assets66.472.075.4 Total liabilities18.538.547.8 Net asset value47.933.527.6 79.1 49.8 29.3 82.887.091.1 51.854.256.6 31.032.834.5 Road Accident Fund Total assets9.29.811.2 Total liabilities189.2216.1273.3 Net asset value-180.0-206.3-262.1 11.5 341.1 -329.6 11.711.811.9 413.1500.4604.9 -401.4-488.6-593.0

2020 BUDGET REVIEW inflation, yet the liabilities of the fund have grown at a faster pace. The RAF fuel levy increases by 9c/litre on 1 April 2020. Compensation Fund The Compensation Fund provides compensation for disability, illness and death resulting from occupational injuries and diseases. In 2018/19, the fund paid out R3.9 billion in benefits and ran a surplus of R1.7 billion. Over the medium term, the surplus is expected to average R2.5 billion due to higher returns on investments. This will increase the fund’s net asset value. Government Employees Pension Fund In 2018/19, the GEPF provided retirement security to about 1.3 million employees and 460 000 beneficiaries. Active membership has declined slightly, reflecting government’s efforts to stabilise headcounts, while the number of pensioners has remained relatively constant. The fund paid out benefits totalling R103 billion in 2018/19. Contributions received increased from R70.4 billion in 2017/18 to R75.6 billion in 2018/19, largely due to members’ annual salary increases. The cash revenue that the fund received from its investments grew by 17 per cent in 2018/19 to R84.2 billion. Table 8.7 Selected income and expenditure of GEPF 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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 48.7 26.9 84.2 43.2 57.9 85.8 83.1 88.3 94.9 102.5 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 The Public Investment Corporation invests the excess funds accumulated by the GEPF and the social security funds. At end-March 2019, it had R2.13 trillion in assets under management. A commission of inquiry was appointed to investigate allegations of impropriety in 2018. The commission has submitted its final report to the President. In the interim, the Minister of Finance has reconstituted the corporation’s board. Table 8.8 Breakdown of assets under management by PIC, 2018/19 Compensation Unemployment Employees Pension Fund R billion 1. Includes the Compensation Pension Fund Source: Public Investment Corporation and National Treasury 98 Government Insurance FundFund1Other Total Asset class Equity1 032.440.016.2– Bonds 574.989.541.513.1 Money market75.118.48.534.0 Property95.44.80.11.4 Unlisted investments70.913.61.9– 1 088.7 719.1 136.0 101.6 86.4 Total1 848.7166.368.248.5 2 131.7

A Report of the Minister of Finance to Parliament Introduction This annexure fulfils the requirement of section 7(4) of the Money Bills Amendment Procedure and Related Matters Act (2009), which prescribes that the Minister of Finance 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 the procedure that the National Assembly committees must follow when assessing the performance of each national department before the budget is introduced. This procedure provides for committees to prepare budgetary review and recommendation reports, which: • Must provide an assessment of the department’s service delivery performance given available resources. Must provide an assessment of the effectiveness and efficiency of the department’s use of available resources. May include recommendations on the future use of resources. • • 101

2020 BUDGET REVIEW This annexure provides responses to the portfolio committees’ recommendations where they relate to the National Treasury. A number of committees recommended making additional budget allocations available for certain programmes, sub-programmes or other budget items. Due to the constrained fiscal outlook, there is limited scope to do so. Departments, public entities and constitutional institutions are required to reprioritise existing funds for emerging priorities. Should the fiscal outlook improve, recommendations for additional funding may be considered in future budget processes. 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 committee made a similar recommendation in the 2019 Budget. The National Treasury is part of the task team on this issue. Funds can only be ring-fenced after government decides whether the function lies with the Department of Basic Education or the Department of Transport. Consideration should be made to increase the budget of Umalusi due to its expanded mandate. As noted at the beginning of this section, there is little scope to provide additional funding at this time. Portfolio Committee on Employment and Labour The committee recommends that the Minister of Finance take steps to ensure that the budget allocation of the Department of Employment and Labour is adjusted to accommodate its expanded mandate, thus enabling the capacitation of its inspectorate. The National Treasury recognises the Department of Employment and Labour’s contribution to creating jobs. The department has a budget allocation of R3.6 billion in 2020/21, R3.9 billion in 2021/22 and R4 billion in 2022/23. As noted at the beginning of this section, there is little scope to provide additional funding at this time. Portfolio Committee on Higher Education, Science and Technology The committee recommends that the Minister of Higher Education, Science and Technology and the Minister of Finance consider the following: The Ministry should expedite the process of filling the three Deputy Director-General positions in the Planning, Policy and Strategy; Technical and Vocational Education and Training (TVET); and Community Education and Training (CET) programmes as the process started in November 2017 for the Deputy Director-General of CET and June 2018 for both the Deputy Director-General of Planning, Policy and Strategy and TVET. The National Treasury has previously raised the issue of filling these posts with the department. The committee notes that notwithstanding the significant progress made by the department in securing additional funding to expand student accommodation in higher education, the private sector should be pursued to invest more resources towards the expansion of student housing in higher education. Since 2018, the Student Housing Infrastructure Programme has received additional funding through the Budget Facility on Infrastructure. The programme is estimated to cost R96 billion over the next 10 years 102

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT to build about 300 000 beds. Construction of residences is under way at Fort Hare and Nelson Mandela University, funded by government, development finance institutions and private finance. The Development Bank of Southern Africa, together with the Department of Higher Education and Training, is facilitating the programme. Moreover, the current public-private partnership (PPP) regulations are being reviewed to address the shortcomings of the current framework and increase the PPP pipeline. Most universities continue to establish partnerships and elicit sponsorships to fund infrastructure projects. The committee notes that notwithstanding the current fiscal constraints, the National Treasury should increase the baseline funding for the CET sector so that the mandate of the sector and its policy priorities can be realised. The Department of Higher Education and Training should investigate whether funds from its baseline can be redirected to this sector. In the 2019 Adjusted Estimates of National Expenditure, the department declared underspending of R129.6 million for compensation of employees due to vacant posts. The ability to spend additional allocations is relevant in determining whether to provide more funding. The committee recommends that the filling of vacant funded posts by the Quality Council for Trades and Occupations (QCTO) should be prioritised as a matter of urgency to improve the overall performance of the entity, which was at 59 per cent during the year under review. The National Treasury agrees with the recommendation. The QCTO has underspent on the compensation of employees budget by an average of R16.5 million over the past three financial years, indicating that it has funds to fill critical posts. The entity is in the process of filling the posts. The committee recommends that the QCTO expedite the process of purchasing its own premises given the high rental fee amounting to R8 million per annum. The National Treasury agrees with the committee’s recommendation that the QCTO should expedite the purchase of its own premises. It should be noted that R12 million from the reserve fund was approved and earmarked to procure the QCTO’s premises in 2018/19. The committee recommends that mechanisms to increase the budget allocation to the Department of Science and Innovation be explored and pursued by the Minister of Higher Education, Science and Technology. The committee will support all efforts to secure additional funding for the science and innovation portfolio. There is little scope to provide additional funding at this time. The National Treasury will continue to work closely with the Department of Science and Innovation on developing and strengthening existing mechanisms to better account for public-led research and development spending to support the policy priorities outlined in the 2019 White Paper, and the draft Science and Innovation Decadal Plan. Portfolio Committee on Health The National Treasury and the Department of Health should allocate part of the 2018/19 Medium Term Expenditure Framework (MTEF) health infrastructure allocations to gradually offset expenditure accruals that have arisen from unavoidable demands for which allocated budgets were depleted. The National Treasury should ensure that the framework for health infrastructure conditional grants accommodates flexibility during periods of protracted fiscal constraint so that provinces can be allowed to re-orientate their package of available capital allocations towards maintenance. Accruals incurred by provincial health departments have increased significantly in recent years, exceeding R13.3 billion as at 31 March 2019. Of this, R6.7 billion is older than 30 days. This partly reflects financial 103

2020 BUDGET REVIEW pressures in provinces, but it also reflects weak financial management. Provincial departments require a more systematic and sustainable way of addressing rising accruals. The National Treasury, together with the national Department of Health, has developed a Health Action Plan that includes developing accruals intervention strategies and aligning procurement and cash-flow plans. Infrastructure is partly funded through the provincial equitable share, which provinces use at their discretion. The conditional grant framework does not limit redirecting capital allocations to maintenance. Provinces will, however, need to resubmit annual implementation plans showing changes to the infrastructure project list for approval by the national Department of Health. When redirecting funds to maintenance, it is important to consider the stages and cash flows of currently funded projects to ensure there are funds for contractually committed infrastructure projects. The national Department of Health and the National Treasury should provide adequate funding to the Office of the Health Ombud in line with the recently approved structure for better reporting and functionality. The National Treasury will support reprioritisation requests from areas that will not negatively affect service delivery. Portfolio Committee on Women, Youth and Persons with Disabilities The Commission for Gender Equality’s funding model 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 commission’s funding model 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, Youth and Persons with Disabilities and the Department of Justice and Constitutional Development, respectively. The Commission for Gender Equality 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. Departments, public entities and constitutional institutions are encouraged to reprioritise existing funds for emerging priorities. The National Treasury will continue to engage the Commission for Gender Equality as part of the budget process, specifically in relation to the issues highlighted by the committee. Portfolio Committee on Agriculture, Land Reform and Rural Development Agriculture has been highlighted by the President in his economic stimulus package, including the National Treasury’s discussion paper entitled “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa”, as one of the sectors with massive job creation potential. However, the sector is constrained by challenges which include climate change in the form of frequent and prolonged droughts, floods and veld fires; disease outbreaks; technological advances; and international trade standards and regulations. To give effect to the department’s mandate and some of the proposals in the Treasury discussion document, including the plans to reprioritise funding towards investments in agriculture, a significant increase in the budget allocation to the Department of Agriculture, Land Reform and Rural Development for the medium term is proposed. The National Treasury agrees with the committee’s recommendation. Over the 2020 MTEF period, an allocation of R495.1 million has been reprioritised within the existing budget baseline to boost agriculture production; improve health and food safety programmes; develop capacity to respond to biosecurity 104

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT threats; revitalise laboratories; revitalise quarantine stations and strengthen inspection services at ports of entry; and strengthen animal and plant health, inspection and laboratory services. Over the medium term, a further R500 million will be allocated to the sector to fast-track the process of restoring land rights, supporting inclusive economic transformation as envisaged in the National Treasury’s discussion paper. Onderstepoort Biological Products (OBP) plays a vital role in the prevention and management of livestock diseases and, therefore, food and human safety. Notwithstanding the once-off allocation of R492 million that was made to OBP in 2012/13 for the refurbishment and modernisation of the vaccine manufacturing facility, and that over the years, the entity managed to raise additional funding to continue with the refurbishment project, which cost an estimated R1.2 billion, an additional funding allocation for operational activities is proposed from 2020/21 onwards. The funds will be used to establish a vaccine reserve to ensure that vaccines are available in sufficient quantities to address animal disease outbreaks (e.g. Anthrax, African Horse Sickness, Rift Valley Fever, Brucellosis, etc.), and to manufacture public good vaccines (orphan vaccines), which are unprofitable for OBP to produce but are of national importance in animal disease prevention and management. While the modernisation project is in progress, the aging infrastructure that does not meet good manufacturing practice standards is limiting OBP’s production efficiency and competitiveness. The National Treasury agrees with the committee’s recommendation. Over the medium term, the reprioritised allocation of R495.1 million to the Department of Agriculture, Land Reform and Rural Development for the Agricultural Production, Health, Food Safety, Natural Resources and Disaster Management Programme will indirectly reduce OBP’s burden of producing and distributing vaccines. The budget allocated to the department includes a component for preventing and managing animal and livestock disease. There is little scope for additional allocations. The department will have to collaborate with OBP to prevent and manage livestock diseases. The National Treasury will continue to engage with the department and OBP to ensure that funding is available. Portfolio Committee on Mineral Resources and Energy The National Treasury should restore MTEF funding of the Council for Geoscience in the short term, while securing R300 million baseline funding for the medium to long term in order to ensure that the entity is able to meet its mandate, which is long term in nature and scope, including the funding model that accommodates the National Key Point designation of the entity, in order to ensure compliance. The National Treasury agrees with the committee’s recommendation. Over the 2020 MTEF period, an additional allocation of R345.8 million has been reprioritised within the existing budget baselines for geological mapping to assess on-shore and off-shore mineral, agricultural, energy and groundwater resources to catalyse their exploration. Portfolio Committee on Small Business Development The committee should be updated on the Small Business Innovation Fund after commitments by the National Treasury have been formalised. The Department of Small Business Development has already begun to operationalise the fund through the Small Enterprise Agency. Over the 2020 MTEF period, the fund has been allocated R2.8 billion. 105

2020 BUDGET REVIEW Portfolio Committee on Tourism The committee recommends that the Minister of Finance work with the Department of Tourism to reprioritise budget for the Tourism vote in line with the committee’s new oversight approach with a focus on villages, townships and small towns. The National Treasury and the Department of Tourism will hold further discussions to realign budget and spending priorities over the medium term. The committee recommends that the Minister of Finance, notwithstanding the constrained national fiscus, consider the contribution of the tourism sector to the gross domestic product (GDP) of the country and the labour-intensive nature of the tourism sector and find innovative ways of increasing the budget appropriated for the Tourism vote. The National Treasury recognises tourism’s important contribution to GDP growth, but there is little scope to provide additional funding at this time. The National Treasury discussion paper, Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa, identifies the tourism sector as one of the labour-intensive sectors that could create jobs for semi-skilled and unskilled workers in the short to long term. The National Treasury supports the implementation of microeconomic reforms in the paper that could stimulate growth, investment and job creation in tourism. Portfolio Committee on Defence and Military Veterans The committee recommends that the National Treasury should not lower the Department of Defence’s baseline budget allocation in nominal terms over the MTEF period. This relates to all outlying years of the MTEF and specifically to 2021/22 where the budget is set to decrease from R52.5 billion in 2020/21 to R50.9 billion in 2021/22. The Department of Defence has an allocation of R52.4 billion in 2020/21, R50.8 billion in 2021/22 and R53 billion in 2022/23. In nominal terms, the 2020 MTEF allocations of the department are comparable to the 2019 MTEF allocations. The committee urges the National Treasury to provide additional funds specifically for the purpose of border safeguarding. The committee recommends that the number of sub-units be increased incrementally over the MTEF period with the aim of having 22 sub-units deployed for landward borderline duties by the end of the MTEF period. Additional funds should also include an allocation for the use of technology as a force multiplier for border safeguarding purposes. Border security remains a priority for government. The National Treasury has allocated an additional R225 million to the Department of Defence over the medium term to procure equipment and technology to support military units deployed to safeguard our borders. The committee urges immediate engagement between the Minister of Defence, the Minister of Finance and the Commander in Chief of the South African National Defence Force, to finalise a funding plan that will arrest the current decline of the military. This recommendation is derived from the dire financial and resource situation shared with the committee by especially the South African Army, the South African Air Force and the South African Navy during its recent oversight engagements. The finalised plan should be presented to the committee no later than the end of the first quarter of 2020/21. The National Treasury agrees that the funding challenges of the Department of Defence should be discussed. The department is arranging a meeting with the President, the Minister of Finance, the Minister of Public Service and Administration, and the Minister of Defence and Military Veterans to address the funding challenges. 106

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT The committee noted comments by the Department of Defence that savings to compensation of employees can be made through a process of force rejuvenation. The committee therefore recommends a joint approach to force rejuvenation that would see the Department of Defence develop and roll out a rejuvenation plan and the National Treasury provide funding for an exit mechanism to speed up rejuvenation. The National Treasury should, as soon as possible, release funds to facilitate an interim exit mechanism for the remainder of 2019/20. The Department of Defence should finalise rejuvenation plans for full implementation from 2020/21. The National Treasury agrees that the Department of Defence should develop a rejuvenation strategy. At a ministerial meeting, it was resolved that the department would develop and submit a rejuvenation strategy to the National Treasury by May 2019. The department has not yet submitted the strategy, but is engaging with the National Treasury on a draft. The Department of Defence has yet to implement early retirement without penalties, which was introduced in the 2019 Budget Review as one of the measures to reduce spending on compensation of employees. Portfolio Committee on Justice and Correctional Services In addition to recommending that zero budget reductions be applied in the case of the South African Human Rights Commission and the Public Protector of South Africa, the committee recommends that additional funding be provided to: • The National Prosecuting Authority to address the shortfall in its compensation of employees budget; fill critical post vacancies; create capacity in the asset forfeiture, specialised commercial crimes, and witness protection units; and resume its aspirant prosecutor programme. Legal Aid South Africa 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 and assist in land claims matters. The South African Human Rights Commission to fulfil its coordinating role in respect of the National Preventative Mechanism established in terms of the Optional Protocol to the Convention Against Torture and Other Cruel, Inhumane or Degrading Treatment or Punishment. The Public Protector of South Africa to fill vacancies, employ professional services, and improve security. • • • The 2020 Budget provides additional funding of R1.2 billion to the National Prosecuting Authority to improve prosecutorial capacity, rejuvenate the aspirant prosecutor programme and operationalise the new Investigative Directorate. Over the medium term, Legal Aid South Africa will receive additional funding of R75 million for increased capacity. The National Treasury has not reduced the baselines of the South African Human Rights Commission or the Public Protector of South Africa over the medium term. Portfolio Committee on International Relations and Cooperation The committee recommends to the Minister of Finance that investigations be undertaken, and a report submitted, around the role played by the National Treasury in the procurement processes of the New York Pilot project. Consequence management should be undertaken where wrongdoing has been established. The National Treasury is assisting the Department of International Relations and Cooperation with its investigation into the New York Pilot project, which aims to develop a multi-use area of offices and residential accommodation for diplomats and foreign-service staff in New York. It has given the department information pertaining to the procurement of a building through the PPP process, and will continue to provide any assistance required for the department to complete its investigation. 107

2020 BUDGET REVIEW Portfolio Committee on Public Service and Administration The Minister in the Presidency for Planning, Monitoring and Evaluation and the Minister of Finance should urgently resolve the budget shortfall on compensation of employees and critical surveys at Statistics South Africa (Stats SA) so that crucial and quality statistics get generated to the country and government’s benefit; if an ideal resolution cannot be found, the Minister for Planning, Monitoring and Evaluation is requested to escalate the matter to the Presidency. The department has been allocated R154.4 million over the MTEF period to address funding shortfalls in employee compensation and R150 million in 2020/21 to conduct the Income and Expenditure Survey. There is little scope for additional funding. The National Treasury will continue to engage with Statistics South Africa to find solutions for the funding shortfall on compensation of employees, and has asked the department to present the following information to justify its budget programme structure: • Explain the structure of its provincial and regional offices, considering the staff complement and budget allocation of these offices as a proportion of the department’s total staff complement and budget. • Calculate how much the department will save by transitioning from paper-assisted personal interviewing to computer-assisted personal interviewing. The savings could be reprioritised or used to reskill staff for other critical areas in the department. Recommendations of the Standing Committee on Appropriations on the 2019 MTBPS The National Treasury and the Department of Employment and Labour should conduct a comprehensive study on the public-sector wage bill at all levels of government, including state-owned companies and municipalities, in order to determine the exact impact of aggregate wages in government. This assessment should also consider the wider implication of reducing the public service on tax revenue, unemployment, service delivery and skills leakages within the public sector. The National Treasury should report to the committee before the tabling of the 2020 MTBPS. The National Treasury welcomes the committee’s recommendation. The National Treasury and the Department of Public Service and Administration have undertaken an extensive review of remuneration trends in the public sector over the past decade. Some of this work is reflected in Annexure B of the 2019 MTBPS. This collaboration will be extended to include the Department of Employment and Labour and the increased scope recommended by the committee will be factored into future work. Findings will be reported in the 2020 MTBPS. The National Treasury, in consultation with relevant stakeholders, should develop more effective supply chain management and procurement mechanisms to ensure value for money is obtained, especially regarding the overpricing of goods and services. The National Treasury has finalised a revised supply chain management regulatory framework. Compliance monitoring has been strengthened to maximise value for money, eliminate waste and prevent abuse of the procurement system. Other steps to improve procurement capacity and service delivery include reducing fragmentation and strengthening the national procurement architecture; strengthening the tax clearance system to ensure that those who have defrauded the state cannot do business with it; and introducing measures to improve institutions’ ability to set up bid committee structures for the invitation, evaluation and adjudication of tenders. 108

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT To intensify compliance monitoring and expenditure containment, institutions are required to submit tender programmes to relevant treasuries. Demand-management procurement plans are scrutinised against the tender programmes. In addition to the focus on reducing the public-sector wage bill, the National Treasury should focus on other measures that will boost the performance of the South African economy. The National Treasury supports this recommendation. It has released a discussion paper, Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa. In it, government has outlined short-and medium-term reforms that can boost economic growth, many of which do not require significant state resources. Interventions to improve the quality of infrastructure planning, including the Budget Facility for Infrastructure, are beginning to show results. Government continues to work with the private sector through the Infrastructure Fund and other initiatives. Report of the Standing and Select Committees on Finance on the 2019 Revised Fiscal Framework The committee appreciates the global and domestic economic and political uncertainties and volatilities that make it difficult to accurately forecast GDP growth figures but recommends that the National Treasury draw in more independent expertise in its forecasting process to improve the credibility of the fiscal framework and better manage the economic and fiscal risks associated with its forecasts. The National Treasury uses various models to generate economic forecasts, including inflation, terms of trade, sector and business cycle models. They supplement the main macroeconomic forecast model, which is a large semi-structural econometric model similar to those used by the Reserve Bank and the Bureau for Economic Research. The assumptions that are used in the main model are sourced from global institutions or determined internally through a rigorous assumptions process. The model is regularly updated to capture changes in the South African and global economy. The Economic Policy division is engaging with the Bureau for Economic Research to assess and improve the model. Other models that are used for policy analysis and research are also maintained and updated. These are less appropriate for forecasting, but are still used to analyse trade-offs of policy and other shocks to the economy to better inform the forecast process. Since 2014, forecast errors from the National Treasury and market analysts have been decreasing. Independent studies show that National Treasury forecasts are on par with, or better than, market projections. It should also be noted that no institution has had consistently accurate forecasts over time.1 The Minister of Finance agreed that high debt now will burden future generations if it is not managed properly and the situation is unsustainable. We therefore require the National Treasury to report quarterly on the effectiveness of its debt management strategies, that would ensure that the level of debt stabilises over the medium term as the current situation is not sustainable. Rising fiscal deficits over the past decade have increased government’s borrowing requirements and debt-to-GDP ratio. Accordingly, the only way to lower the debt-to-GDP ratio is through consistently higher economic growth or lower spending. Government’s prudent debt management strategy enables it to manage the risks associated with elevated borrowing. Debt management is guided by strategic risk benchmarks for refinancing, interest, inflation and currency risks. 1 See for example: Bhoola, F., Rossouw, J. and Giannaros, M. 2018. Comparing Macroeconomic Forecasts for South Africa from 2001 to 2017: Do We Need Official Forecasts? Studies in Economics and Econometrics, 42(3): 35-69. 109

2020 BUDGET REVIEW The committee supports the new approach to project planning, budgeting, preparation and implementation and welcomes the progress of the Budget Facility for Infrastructure technical team. It believes that government needs to do much more to reduce corruption and wasteful and unnecessary expenditure and significantly improve the efficiency and quality of spending also in light of the Auditor-General’s announcement of continued increases in wasteful, fruitless and irregular expenditure, which stood at a total of R63.4 billion in 2018/19. Irregular expenditure increased from R52.7 billion in 2017/18 to R61.4 billion in 2018/19. The National Treasury should report progress made to the Committees on Appropriations in both the Houses of Parliament. Reducing corruption and wasteful, fruitless and irregular expenditure is the responsibility of every government department and entity, all of which have their own accounting officers. The National Treasury provides support to departments and entities in line with its mandate. Under the Public Finance Management Act (1999), the accounting officer and authorities of departments and public entities must: • Report irregular expenditure and fruitless and wasteful expenditure to the relevant treasury. • Take disciplinary steps against officials who make or permit irregular expenditure and fruitless and wasteful expenditure. In 2018, the National Treasury issued an irregular expenditure framework as an instruction, which was revised in May 2019. It sets out procedures for disciplining officials accused of financial misconduct and, where applicable, recovering funds and laying criminal charges. These disciplinary steps are required before such expenditure may be condoned. Amendments to the Public Audit Act (2004), which took effect on 1 April 2019, empower the Auditor-General to refer any suspected material irregularities for investigation. They also empower the Auditor-General to take appropriate remedial action and to issue a certificate of debt where an accounting officer or accounting authority has failed to comply with remedial action. The South African Revenue Service (SARS) needs to develop its policies and capacity to tax the digital economy more effectively and is required to report on this to the committee at the first quarterly briefing of 2020. The National Treasury agrees with the recommendation and will report as requested. Officials from both the National Treasury and SARS have been engaging with other countries to find global consensus on how to ensure that profit from digitised business models is taxed appropriately. The aim of the Organisation for Economic Co-operation and Development committee responsible for making recommendations in this area is to reach consensus on a new international tax architecture in 2020. South Africa is represented on the committee. SARS needs to work together with the relevant stakeholders to address the root causes of fiscal leakages emanating from, but not limited to, Road Accident Fund claims, medico legal claims and police litigations, particularly those resulting mainly from negligence. SARS will continue to engage with stakeholders on limiting the fiscal leakages cited by the committee. For example, SARS participates in an inter-agency working group with the Department of Trade and Industry and the National Treasury that focuses on tackling illicit trade, particularly in the clothing and textile industry. The committee notes with concern the direct impacts of incorrect economic growth forecasts on tax revenue collection by SARS. We are concerned that the revenue shortfall increases from a projected R14.5 billion in 2018/19 to R52.5 billion in 2019/20 and R84 billion in 2020/21 and that the scope for further tax increases has also narrowed. The National Treasury should support SARS more actively, 110

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT including financially and in rebuilding the organisation without interfering in its operational matters. SARS, the National Treasury and law enforcement agencies need to work far more effectively in processing cases against any staff members legitimately accused of financial misconduct and corruption. The final revenue shortfall for 2018/19 was R57.3 billion compared to 2018 Budget estimates, and based on the audited revenue outcomes for 2018/19. The significant downward revisions to the economic and revenue outlook since the 2019 Budget are mainly the result of weaker economic performance. Tax revenue collection estimates published in the Budget Review and MTBPS are projections, rather than targets. If assumptions are not realised or economic performance is different than projected, these revenue estimates are subsequently revised. In the 2019 MTBPS, the National Treasury proposed additional allocations of R1 billion over three years for SARS to rebuild capacity, improve operations, and implement critical projects and recommendations from the Nugent Commission. Investigations into financial misconduct and corruption are ongoing. The National Treasury and SARS presented a progress report to the Standing Committee on Finance about implementing the recommendations of the Commission of Inquiry into Tax Administration and Governance by SARS. The committee is concerned about a constantly increasing gross debt-to-GDP ratio, a projected increase from R3.2 trillion in 2019/20 reaching R4.5 trillion in 2022/23 (71 per cent by 2023) as this is likely to burden future generations if concerted efforts are not made to sustainably reduce it. The persistently widening budget deficit, expected to peak at 6.5 per cent in 2019/20, a level last experienced during the 2009 recession, is a cause for concern, since there does not appear to be a point of stabilisation over the medium term. The committee also notes that debt service costs have become the fastest-growing expenditure item, costing the national fiscus R203.7 billion per annum (13.7 per cent) in 2019/20 and are expected to reach almost R300 billion in 2022/23. These funds could be utilised for other competing economic and social needs. The committee recommends that the National Treasury do far more to incrementally reduce the debt-to-GDP ratio and report on progress on this at its quarterly briefings. In the 2019 MTBPS, government proposed achieving a main budget primary balance by 2022/23. Achieving the fiscal target requires making large additional adjustments to the fiscal framework exceeding R150 billion in total over the medium term. These adjustments would need to address growth in the public-service wage bill and include a sustainable plan for state-owned companies in order to reduce future transfers. Given the size of the required adjustment, additional tax measures were considered. These measures require making difficult decisions that will affect the economy and the distribution of public resources. The committee notes that the 2019 MTBPS budgeted contingency reserves amount to R18 billion over the medium term, or R6 billion each year. These amounts are not adequate and are likely to leave South Africa susceptible to external and internal shocks in an event of unforeseen circumstances such as imminent dangers of food insecurity and water scarcity, including through potential floods and drought. The committee urges the National Treasury to quantify and factor in these potential risks in the economic growth forecasts and the overall fiscal framework. The National Treasury assesses fiscal risks to identify and plan for unexpected and uncertain events. This process informs the formulation of the fiscal framework and culminates in the publication of an annual fiscal risk statement. The contingency reserve is part of the expenditure ceiling and is determined within this overall limit. Its size depends on available resources and the level of uncertainty and is revised during the budget process. Analysis in the 2013 Budget Review showed that unforeseen and unavoidable expenditure adjustments, for which the contingency reserve was budgeted, averaged R4 billion per year over five years. This was much lower than the contingency reserve amounts, which were then lowered. In addition to the contingency reserve, there are disaster relief grants for local and provincial government. In the past, the combination of the contingency reserve, the disaster relief grants and other 111

2020 BUDGET REVIEW ring-fenced funds within infrastructure grants has proven sufficient to meet the costs associated with natural disasters. Recommendations of the Standing Committee on Appropriations on the Adjustments Appropriation Bill The Minister of Finance should ensure that the National Treasury carefully scrutinises government departments’ ability to spend allocated funds before submitting budget proposals to Parliament in order to prevent continued underspending on allocated funds as it has implications for government debt and the interest payments. Over the past 25 years the National Treasury has developed a rigorous budget process that imposes the highest level of scrutiny to ensure that departments have the ability to spend allocated funds. The Constitution mandates the National Treasury to manage public finances, and the Public Finance Management Act makes the National Treasury responsible for managing the budget preparation process. To support this, the National Treasury provides an overall fiscal framework based on the macroeconomic forecast. It also proposes the division of revenue between the three spheres of government and provides technical guidelines for budget submissions to ensure that they reflect the priorities set out by the President. These processes are subject to a lengthy period of consultation and modification throughout government, including the Ministers’ Committee on the Budget, before they are considered by Cabinet and ultimately Parliament. The National Treasury recognises that ultimate authority for the nation’s finances rests with Parliament, which debates and votes on the Budget in a range of public forums. The Money Bills Amendment Procedure and Related Matters Act also gives Parliament the opportunity to amend the Budget. The National Treasury conducts a wide range of stakeholder engagements, and encourages all South Africans to comment on the allocation of public funds. The Minister of Finance should, within 60 days after the adoption of this report by the House, submit to Parliament a report on all outstanding conditions attached to the bailouts of state-owned entities; while conditions for the 2020/21 Budget allocation to Eskom should be included in the primary legislation, to improve oversight and accountability. Eskom met conditions for the initial transfer of funds in December 2019 and continues to meet conditions for the remaining tranches of the Special Appropriation in 2019/20. Denel, South African Airways, South African Express and the South African Broadcasting Corporation have partially complied with the conditions attached for drawdowns in 2019/20 from the contingency reserve. These entities are being monitored to ensure compliance is achieved by the end of 2019/20. The National Treasury will separately provide a comprehensive analysis of the status of the conditions for all five entities to the committee. All departments that requested virements from compensation of employees to other economic classifications due to unfilled vacancies should, together with the National Treasury, and within 60 days after the adoption of this report by the House, provide a report detailing why budgeted vacancies were not filled on time, particularly the critical ones and those on the frontline service delivery points. The National Treasury will investigate the causes of these vacancies with the Department of Public Service and Administration, and provide a detailed report to Parliament within the 60 days. With regards to the R157 million declared unspent allocation for the Jobs Fund by the National Treasury, the committee recommends that the Minister of Finance should, within 60 days after the adoption of this report by the House, submit to Parliament a report on the reasons for this underspending and how it will be avoided in future. The National Treasury should also brief the committee on how the Jobs Fund is being administered in order to broaden its understanding. 112

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT The National Treasury has briefed the committee. As outlined in the report, the funds have already been committed to projects and have not been declared unspent. Approved projects are funded through the budget processes, with the Jobs Fund’s allocations being ring-fenced or earmarked. Projects are required to provide budgets over three years even though their expenditure is projected to go beyond the MTEF period. This usually results in benchmarking rather than bottom-up budgeting or rescheduling. External factors affecting projects include the following: • The Jobs Fund only releases grant funding when projects reach contracted milestones, and the weak economy has negatively affected these plans. Before the Jobs Fund releases grant funding, project partners are required to contribute funding. Where project funds have not been provided timeously, grant funding has been delayed. A significant portion of the Jobs Fund portfolio consists of projects in the agricultural sector. Severe drought has delayed planned activities such as planting, with consequences for the release of grant funding. • • These factors have resulted in revised project implementation plans and related annual budgets. The Jobs Fund requested that the R157 million be released at a later stage when funds are required by implementing projects in order to roll out project activities and achieve the planned job creation targets. The Jobs Fund will continue to implement prudent fiscal discipline. Although funds have been committed to projects, grant funding will not be released unless performance and matched funding targets have been met. Recommendations of the Standing Committee on Appropriations on the Division of Revenue Amendment Bill (2019) The Minister of Finance should ensure that the 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 (2019): Corrections to Conditional Grant Frameworks: • • • • • • • • Ilima/Letsema grant framework School infrastructure backlogs grant National health insurance direct grant Human papillomavirus vaccine grant Human resources capacitation grant National health insurance indirect grant: Health facility revitalisation component Provincial roads maintenance grant Integrated urban development grant. The corrected frameworks have been gazetted together with the details of the revised allocations, which were provided through the Division of Revenue Amendment Act (2019). The Minister of Finance should ensure that there is a consequence management framework and that actions are taken against government institutions that continuously underspend on their appropriated budgets. The National Treasury agrees that there should be consequences for institutions that underspend or underperform. 113

2020 BUDGET REVIEW Provinces and municipalities that underspend face consequences set out in the Division of Revenue Act. In terms of sections 18 to 20, if a recipient is anticipated to underspend, further transfers can be withheld, stopped or reallocated to another institution. If transferred funds are not spent by the end of the financial year, and no rollover is approved, provinces and municipalities must transfer the remaining funds back to the National Revenue Fund, or the funds owed will be offset against future transfers. Additional discussion is provided in Chapter 6 of the Budget Review. Recommendations of the Select Committee on Appropriations on the Division of Revenue Amendment Bill (2019) The Minister of Finance must ensure that the National Treasury gazettes the 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 (2019) as soon as possible. The following are the affected grants: • • • • • • • • • • Ilima/Letsema grant School infrastructure backlogs grant National health insurance direct grant Human papillomavirus vaccine grant Human resources capacitation grant National health insurance indirect grant: Health facility revitalisation component Provincial roads maintenance grant Integrated urban development grant Municipal disaster recovery grant Municipal infrastructure grant. The corrected frameworks have been gazetted together with the details of the revised allocations, which were provided through the Division of Revenue Amendment Act. While the committee notes the technical issues behind the school infrastructure backlogs grant adjustment and adjustments to infrastructure grants as a whole, the committee recommends that all procedural and technical issues be swiftly and effectively dealt with to ensure that the financial support for the removal of these backlogs is given, and that government does everything in its power to ensure the speedy completion of these projects. The National Treasury agrees that all procedural and technical issues need to be dealt with swiftly and effectively and has engaged the Department of Basic Education on these issues. The National Treasury can also confirm that provinces that had their allocations reduced in the 2019 adjustment budget due to technical challenges have received their full allocation in the 2020 Budget. In order to prevent fiscal dumping and fruitless and wasteful expenditure, the Minister of Finance, together with the Ministers of Agriculture, Health and Basic Education and the affected provincial treasuries, should ensure that concrete steps are taken to build and demonstrate capacity to spend, including developing clear plans to monitor expenditure for proposed additional allocations. Further, the ministers need to ensure that the proposed additional allocations are effectively and efficiently spent according to the approved plans before the end of this financial year, and provide a progress report to the committee in the first quarter of the 2020/21 financial year. The proposed additional allocations include the following conditional grants: • The ring-fenced R60.7 million, which was shifted to the Eastern Cape Provincial Department of Transport for roads damaged by floods. • The new indirect component of the Ilima/Letsema grant, amounting to R45.3 million, to fund the National Food and Nutrition Survey. 114

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT • The human resources capacitation grant, amounting to R300 million, which is allocated to cater for the shortage of funding towards the carry-through costs of filling vacancies in the health sector. The direct component of the national health insurance grant, which will allow provinces to make payments directly to contracted health professionals. Additional funding of R700 million to the school infrastructure backlogs grant, which was added to the 2019/20 allocation. The municipal disaster recovery grant amount of R133.2 million, earmarked for eThekwini Metropolitan Municipality and Ugu District Municipality. • • • The National Treasury agrees with this recommendation and will monitor the spending of all transferred funds and provide the progress report as requested. The Minister of Finance should ensure that the National Treasury timeously approves the roll-overs contained in the bill for all projects near completion for the receiving municipalities (for regional bulk infrastructure to be used for emergency Vaal River pollution remediation) and provinces (for medical equipment in Limpopo hospital), and provides a progress report to the committee in the first quarter of 2020/21. The roll-overs have been approved and the funds are available to be spent. The National Treasury will provide the progress report as requested. The committee appeals to the National Treasury, the Department of Cooperative Governance and Traditional Affairs and the South African Local Government Association (SALGA) to continue to support municipalities until the Eskom and water boards’ debt issues are resolved; and to ensure that the issues around provincial and national departments owing municipalities are also expeditiously addressed to bolster municipal finances. They must further ensure that municipalities create credible credit control measures, debt management policies and effective revenue collection strategies; and provide a progress report in this regard to the committee in the first quarter of 2020/21. The National Treasury agrees with this recommendation and continues to work with the Department of Cooperative Governance and SALGA to support municipalities. The revised municipal budgets, described in Chapter 6 of the Budget Review, take account of the need to make payments to Eskom and water boards. The smart meter pilot, also described in Chapter 6, could make revenue collection and payments more sustainable. The National Treasury will provide the progress report as requested. The committee requests that the National Treasury consider allocating a budget for the development of the Moloto Rail Corridor even if it is spread over a period of five years. The argument that a feasibility study found the project to be too expensive was not accepted by the committee, which argued that high cost of a project cannot be elevated above the lives of voters who had been promised a better service. The Minister of Finance agrees that the loss of life on this road, and all roads in the country, is unacceptable. Improving safety on this route is a priority and work is already under way to improve road capacity and safety through infrastructure upgrades. This will be complemented by improving the safety of government-subsidised buses operating along the Moloto Corridor and running road safety campaigns. The option of building a new railway line along the Moloto Corridor was explored in a feasibility study undertaken by the Department of Transport in 2015. The National Treasury’s evaluation of this study concluded that it did not justify investment in a new railway link through the Moloto Corridor route, but that it does provide good grounds for improvements to the road infrastructure and transport services along the route. These upgrades will be carried out by the South African National Roads Agency Limited (SANRAL). 115

2020 BUDGET REVIEW SANRAL is upgrading roads across five municipalities in three provinces to accommodate the large volumes of daily traffic along this route. SANRAL is allocated R4.2 billion to upgrade these roads between 2019/20 and 2022/23. The buses that operate along the Moloto Corridor are subsidised by the Gauteng Provincial Government, including through funds transferred to the province in the public transport operations grant. The grant rules provide for the possibility that the national Department of Transport could take over responsibility for managing the contract for this route. This would allow the national department to issue a new contract for the route to improve the service. The bus operator on this route has recently implemented additional safety measures, including providing advanced driving courses for bus drivers and introducing new buses with cameras and GPS systems. Human settlement and economic development options for this region also need to be considered. A large number of residents in this region commute long distances daily to work in Tshwane – a legacy of apartheid spatial development policies. The National Development Plan calls for reducing the commuting burden and developing in ways that account for the unique needs and potential of different urban and rural areas. Future economic development in the Moloto region could alter commuting patterns, as would the decision by some households to take advantage of new housing opportunities closer to their places of work. All of these options must be kept open. A bus transport system will be much more flexible than a rail-based system to meet future changes in commuting patterns. The Minister of Finance and the Minister of Transport should report progress to Parliament, within three months after the adoption of this report, on what has been done since the pronouncement by President Jacob Zuma – in September 2017 – that the Moloto Rail Development Corridor was a government priority and one of the infrastructure development initiatives. An update is provided in the response to the previous recommendation. Recommendations of the Select Committee on Appropriations on the proposed division of revenue and the conditional grant allocations to provincial and local spheres of government Given the current state of the country’s fiscus presented in the 2019 MTPBS, including proposed budget reductions at provincial and local governments levels, which are at the coalface of service delivery, the committee recommends that the National Treasury, together with the Department of Cooperative Governance and Traditional Affairs, alongside provincial treasuries and provincial cooperative governance departments, ensure that provinces and municipalities use all the available resources in line with the public financial management prescripts in a manner that reduces waste, eradicates opportunities for corruption, and promotes quality service delivery as envisaged in the National Development Plan. The Minister of Finance agrees with this recommendation and appreciates the call to action for all parts of government to redouble their efforts to ensure sound management of public funds. Given the levels of under-investment in infrastructure projects by larger urban municipalities, the committee recommends that the National Treasury and the Department of Cooperative Governance fast-track the following initiatives and provide a progress report to the committee in the first quarter of the 2020/21 financial year: • Table the Municipal Fiscal Powers and Functions Amendment Bill to standardise the regulation of development charges in order for municipalities to recover their capital costs of connecting new developments to infrastructure. 116

ANNEXURE A: REPORT OF THE MINISTER OF FINANCE TO PARLIAMENT •Introduce the dedicated grant funding for large urban municipalities, whereby eligible municipalities will receive co-financing on a declining basis over three years. • Ensure that capacity-building and improvement of municipal systems allocations, such as the local government financial management grant and the municipal systems improvement grant, are effectively and efficiently utilised for their intended purposes. The National Treasury agrees with the recommendations and can report the following updates on each item: • The draft Municipal Fiscal Powers and Functions Amendment Bill was published for public comment in January 2020. Comments are invited until the end of March, after which they will be processed before the revised draft will go to Cabinet before being tabled in Parliament. The grant funding for project preparation recommended by the committee is being provided through the integrated city development grant, which forms part of the Division of Revenue Bill (2020). Grants like the financial management grant and the municipal systems improvement grant must be used for their intended purpose, as required by the Division of Revenue Act. The effectiveness of the capacity-building system for local government is also being reviewed by the National Treasury, with initial results likely to influence improvements to the system from 2021. • • While the committee understands the need to restructure certain conditional grants, it is of the view that grant restructuring, termination or merging must not affect service delivery objectives and proper assessment or analysis of grant performance ought to be conducted before any restructuring can happen. These include the following affected conditional grants: the human papillomavirus vaccination grant, which will be merged with the HIV, TB, malaria and community outreach grant; and the fact that from 2021/22, two new components, mental health and oncology, will be added to the HIV, TB, malaria and community outreach grant. The National Treasury agrees that grant restructuring should not harm but improve service delivery. Only small changes are being made to the structure of conditional grants in 2020/21. The Department of Health and the National Treasury will work together to develop a broader strategy that will inform future changes to health grants and ensure their alignment to national health insurance reforms. With regards to the Moloto Corridor, the committee believes that the loss of many lives in that area must come to an end. The committee recommends that the National Treasury consider allocating resources for the development of a Moloto Corridor Rail Project over the 2020/21 MTEF period and make use of all revenue-sourcing avenues at its disposal. The argument that a feasibility study found the project to be too expensive is not acceptable given the high levels of road fatalities there, affecting not only the Department of Transport, but also the Department of Health, due to the overcrowding in the hospital near the high accident zone. The National Treasury should provide a progress report on this during the tabling of the 2020 Budget. This issue has been responded to under an earlier recommendation of the Select Committee on Appropriations, recommendations on the Division of Revenue Amendment Bill. With regards to the municipalities adopting unfunded budgets, the committee recommends that the National Treasury, together with the Department of Cooperative Governance and Traditional Affairs, as well as the affected provincial treasuries, expedite the implementation of the revised strategy to address municipal financial performance failures, which has been endorsed by the Budget Council and Budget Forum, the respective intergovernmental forums for provincial and local government finances. A progress report hereon should be submitted to the committee in the first quarter of the 2020/21 financial year. The National Treasury agrees with this recommendation and is already implementing the strategy. Chapter 6 of the Budget Review reports on the results of efforts to get municipalities with unfunded 117

2020 BUDGET REVIEW budgets to revise their spending plans in line with credible revenue expectations. The National Treasury will provide further reports to the committee as requested. The committee recommends that the National Treasury, together with the Department of Cooperative Governance and Traditional Affairs and affected treasuries, expedite the pilot project of the district models, which will be implemented in Oliver Reginald Tambo District Municipality and eThekwini Metropolitan Municipality, and ensure that resources allocated to this project are effectively and efficiently utilised and value for money is achieved. On completion of the pilot project, the committee expects a report identifying lessons learnt during the pilot phase, how resources allocated have been utilised and clear recommendations to improve the programme before it is implemented. The National Treasury agrees with this recommendation. The national Department of Cooperative Governance is coordinating the implementation of the pilots of the district development model. The National Treasury will support the department in identifying lessons learnt for the report requested. The National Treasury should review the vertical division of nationally raised revenue, in order to ascertain whether the 9 per cent allocation to local government is sufficient for the sector to perform its mandate. The Minister of Finance has proposed holding a special local government Budget Forum lekgotla to discuss the structure of the local government fiscal framework, including the size and structure of transfers. The National Treasury should engage more extensively with the Financial and Fiscal Commission (FFC) and respond more comprehensively to its recommendations, as a constitutional body. Government, and specifically the Department of Planning, Monitoring and Evaluation, should provide detailed implementation plans, including deadlines, for the recommendations that it does agree with. Section 214 of the Constitution requires that the FFC’s recommendations be considered before tabling the division of revenue. Government’s responses to the FFC’s recommendations related to the division of revenue are provided in part 3 of Annexure W1 of the Budget Review. Other FFC recommendations have been referred to the relevant ministers, who will respond directly to the FFC. The Minister of Finance and the Chairperson of the FFC have corresponded to clarify how interactions between the staff of the commission and the National Treasury should be structured to facilitate a productive working relationship. In order to have more effective consultation on budgetary matters, the National Treasury and SALGA should engage more extensively during the budget planning cycle and not only at the Budget Forum meetings. The National Treasury agrees that ongoing engagements with stakeholders, including SALGA, are important to resolving problems in the intergovernmental system. SALGA officials are invited to participate in a range of meetings and processes with the National Treasury and others, such as the local government equitable share working group and conditional grant framework meetings. The National Treasury has proposed collaborating with SALGA and the Department of Cooperative Governance to produce papers and presentations for the local government Budget Forum lekgotla in 2020. 118

B Tax expenditure statement Introduction The primary aim of the tax system is to raise sufficient revenue for government spending. It can also promote socioeconomic objectives through targeted tax exemptions, deductions or credits. Tax expenditures are estimates of the total 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. In 2017/18 – the latest year for which data is available – tax expenditures were estimated at R210 billion or 4.5 per cent of GDP. For that year, 35 tax expenditures were calculated compared to 34 in 2014/15, 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, value-added tax (VAT) relief for basic food items and medical tax credits on contributions to medical schemes. The effectiveness of tax incentives in meeting their stated objectives is questionable, particularly in developing countries. For example, incentives to promote investment may not materially affect decisions on whether to invest or not. Tax expenditures can also undermine the tax principles of equity and simplicity, with unintended negative consequences for the efficiency of the tax system and the broader economy. Government will continue to monitor and evaluate tax expenditures, and repeal incentives that are redundant, inefficient or inequitable. Tax expenditure estimates The estimates presented in Table B.2 are calculated using the “revenue foregone” method. This entails comparing actual revenue collections with revenue that would have been collected without the incentive 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), which allows expenditure estimates to be accounted for on an accrual basis. Changes to estimation methods since the 2019 Budget The most significant change to the tax expenditure methodology since the 2019 Budget relates to the calculation of expenditure estimates for VAT zero-rated municipal property rates. Previously, the reported municipal property rates estimates were based on data in vendors’ VAT returns submitted to SARS. In addition to zero-rated property rates, these returns include other zero-rated supplies to municipalities, as the design of the VAT return form does not distinguish between each category. This resulted in overstated tax expenditure estimates. Going forward, the tax expenditure on these property rates will be based on the audited financial statements of municipalities published on the National Treasury website. The tax expenditure estimates on VAT zero-rated municipal property rates have been recalculated for the reporting period and are now more accurately reflected in Table B.2. 119

2020 BUDGET REVIEW The diesel refund tax expenditure estimates were understated in the 2019 Budget because they did not include the diesel refund previously offset against domestic VAT. This has been updated and estimates in the 2020 Budget are correctly reflected over the reporting period. More accurate data and estimation methodologies have prompted revisions to the historical tax expenditure estimates in Table B.2. For the first time, tax expenditure estimates are published for the participation exemption for foreign dividends and the sale of equity shares, which has been effective since March 2012 through section 10B of the Income Tax Act (1962). Medical tax credit expenditures now distinguish between credits on contributions to medical schemes and for out-of-pocket expenditure. Participation exemption in terms of foreign dividends and share sales In line with the move from a source-based to a residence-based tax system, foreign dividends became taxable in South Africa in 2000. This shift aimed to bring South Africa closer to internationally accepted tax principles and to neutralise tax avoidance schemes. In 2012, with the move from secondary tax on companies to dividends tax, the participation exemption was introduced. To qualify for the exemption, a resident company (or group of companies) must hold at least 10 per cent of the total equity shares and voting rights of the company declaring the foreign dividend. The exemption is intended to encourage the repatriation of dividends and prevent economic double taxation – for example, if dividend withholding tax is due in the foreign country. Qualifying companies are also exempt from capital gains tax on the sale of shares. Foreign dividends are taxable as ordinary revenue unless they qualify for the participation exemption. In 2012, a ratio was introduced to bring the effective tax rate on foreign dividends in line with taxation of local dividends. Companies that do not qualify for the participation exemption will have their foreign dividend income effectively taxed at 20 per cent (15 per cent prior to 1 March 2017), in line with local dividends. Figure B.1 Foreign dividend participation exemption tax expenditures 200 6 160 Source: National Treasury Administrative data from SARS reveals the number of companies using this exemption for foreign dividends and the rand value of the exemption (Figure B.1). Multiplying the dividend withholding tax rate by the aggregate value of the exemption provides an estimate of the revenue foregone. It is difficult to estimate the revenue that could be generated from removing the participation exemption as behaviour might change in response. Companies may be less inclined to repatriate foreign dividends without the exemption. Moreover, if the dividend was taxed at source, South Africa might not receive the full amount of dividend tax and would have to provide a credit for the amount already paid. To avoid an overestimate, the tax expenditure estimates have been adjusted downwards by one quarter over the reporting period. 120 R billion Companies Estimated tax r evenue foregone 5180 4 3 140 2 1120 0100 2012/1 32013/1 42014/1 52015/1 62016/1 72017/1 8 Number of companies (RHS)

ANNEXURE B: TAX EXPENDITURE STATEMENT The National Treasury is not yet able to calculate the capital gains tax forgone as a result of the participation exemption. Trends in tax expenditure: 2014/15 – 2017/18 This section uses historical data to analyse trends in tax expenditure between 2014/15 and 2017/18. Including the new estimates for the participation exemption, 35 tax expenditures were estimated for 2017/18. Figure B.2 Share of total tax expenditure per tax type Source: National Treasury The share of personal income tax expenditures increased to more than half of the total in 2017/18. This was the result of the significant downward adjustment to the expenditure estimates for VAT zero-rated municipal property rates, which was partially offset by the inclusion of the participation exemption expenditures for corporates. Relative to the 2019 Budget estimates, corporate income tax expenditures increased significantly between 2014/15 and 2017/18 due to the inclusion of estimates for the participation exemption. In addition, over the same period, about 20 per cent of medical tax credit expenditures were the result of eligible out-of-pocket expenditures by individuals (R4.8 billion in 2017/18). Evaluation of tax expenditures Government views the monitoring and evaluation of tax expenditures as an important component of ensuring transparency and accountability. As recommended by the Davis Tax Committee, government will systematically review all business tax incentives with the aim of repealing those that are redundant, inefficient or inequitable. Furthermore, government will enhance the transparency of tax expenditure reporting by investigating whether to publish a greater number of the corporate beneficiaries of incentives and the related amounts. The 2020 Budget proposes the review of several tax incentives in 2020/21, as shown in Table B.1, to determine whether to amend or repeal them. These incentives will initially be amended by inserting sunset clauses, where none exist, indicating that they will lapse within two years. This will allow the review of these incentives to be completed before making a final decision on their future. The repeal of ineffective or distortionary incentives will expand the corporate tax base and enhance equity and efficiency in the tax system. Besides those listed in Table B.1, other incentives without sunset clauses have been identified for future review. These incentives will be amended by inserting sunset clauses to allow for a second phase of reviews to be completed after the initial phase targeted to begin in 2020/21. This process will continue 121 Value-added taxCorpo rat e income taxPersonal income taxCu stoms an d excise d uties 2017/1 8 2014/1 5 0102030405060708090100 Per cent 26 6 52 16 28 7 47 18

2020 BUDGET REVIEW beyond the 2020 medium-term expenditure framework period until all business tax incentives have been reviewed. Table B.1 Tax expenditures proposed for review Source: National Treasury The broad criteria used to assess whether a particular incentive is justified include: • • • • • • Has it ever been reviewed? Does it have a sunset clause? Is it in line with current government objectives? Does it support job creation? How many taxpayers are claiming the incentive? Does its provision create unintended consequences or distortions? It is unclear whether section 12F, which provides for a deduction for airport and port assets, is meeting its objectives. It was introduced in 2001 to promote private investment in public infrastructure. Uptake has been slow with only a few taxpayers claiming the incentive. About R600 million is claimed each year. Slow uptake may indicate that industry dynamics, beyond the scope of tax incentives, are deterring new entrants. To date, the incentive has not been reviewed and has no sunset clause. Section 12DA provides for a deduction for rolling stock and was introduced to correct the imbalance between the capacity of the transportation network and the infrastructure demands of the growing economy. One dominant taxpayer claimed almost R10 billion in each of the 2017 and 2018 tax years, raising concerns about the equity of the corporate tax system. Section 13sept provides for a deduction for the sale of low-cost residential units by an employer to its employee through an interest-free loan. It was introduced to address challenges in providing low-cost residential houses to employees by means of lease agreements. Between 2013/14 and 2017/18, few taxpayers claimed the incentive. The low tax expenditure values and number of beneficiaries implies that this incentive may not be an appropriate mechanism to achieve its objective. Section 12O was introduced to encourage a profit-driven rather than expenses-driven approach in the filmmaking industry, after the accelerated write-off (section 24F of the Income Tax Act) was exploited. The film industry receives separate on-budget support to promote its growth and development, calling into question the need for the tax incentive, which has few claimants and is subject to lobbying for increased benefits. 122 Income Tax Act Effective date Current deduction Number of beneficiaries and tax expenditure (R million) 2013/142014/152015/162016/172017/18 Sunset clause Se cti on 12F 01/01/01 5% for 20 ye a rs < 10< 10< 10< 10< 10 179.3146.4157.3172.5209.9 Non e Se cti on 12DA 01/01/08 20% for 5 ye a rs < 5< 10< 5< 5< 10 1.09.60.12 726.12 756.1 Non e Se cti on 13sept 21/10/08 10% fo r 10 ye a rs < 10< 10< 10< 5< 10 1.00.80.60.41.3 Non e Se cti on 12O 01/01/12 Exe mpti o n < 10< 10< 10< 10< 10 26.413.913.216.23.1 01/01/22

ANNEXURE B: TAX EXPENDITURE STATEMENT Table B.2 Tax expenditure estimates R million 2014/15 2015/16 2016/17 2017/18 Personal income tax Re ti re me nt fund contri bu ti on s 1 Pension contributions – employees Pension contributions – employers Provident contributions – employees Provident contributions – employers Retirement annuity Me di ca l Medical tax credits on contributions 2 Medical tax credits on out-of-pocket expenditure I nte re s t e xe mpti o ns Se co nd a ry re ba te (65 ye a rs a nd o l de r) Te rtia ry re bate (75 ye a rs and o l de r) Dona ti on s Ca pi ta l ga i ns ta x (a nn ua l e xcl us i o n) 53 707 13 019 23 882 – 10 087 6 718 22 004 17 852 4 152 2 478 1 868 160 951 482 58 980 14 363 26 348 – 11 129 7 141 22 595 18 477 4 118 2 814 1 922 179 707 529 73 547 15 014 29 064 3 285 12 303 13 881 25 381 20 289 5 092 3 173 2 173 190 807 679 77 375 17 008 31 987 3 947 13 249 11 184 24 111 19 297 4 814 3 257 1 941 170 809 601 Ve nture ca p i ta l co mpa ni e s 26 207 213 201 Total personal income tax 81 676 87 934 106 163 108 465 Corporate income tax Sma l l b usi n e ss co rpo ra ti o n ta x sa vi n gs Reduced headline rate Section 12E depreciation allowance Re s e a rch a n d de ve l op me n t Le a rne rs hi p a l l owa n ce s Stra te gi c i n du s tri a l pro je cts (12I ) Film i nce n ti ve 3 Urba n d e ve l o pme nt zo ne s Empl oyme n t ta x i nce n ti ve Energy-e ffi ci en cy s a vi n gs 2 641 2 607 33 207 952 423 15 232 2 420 135 2 839 2 795 44 277 1 068 479 13 257 4 063 1 057 2 880 2 838 42 232 1 070 690 16 273 4 656 1 192 2 549 2 510 39 150 568 418 3 295 4 317 456 Pa rticipation e xe mp tion 4 4 907 4 122 6 294 3 421 Total corporate income tax 11 932 14 175 17 304 12 176 123

2020 BUDGET REVIEW Table B.2 Tax expenditure estimates (continued) R million 2014/15 2015/16 2016/17 2017/18 Value-added tax Ze ro-ra te d s u pp l i e s 19 basic food items 5 Petrol 6 Diesel 6 Paraffin 6 Municipal property rates Reduced inclusion rate for commercial accommodation 47 002 21 503 16 065 2 146 659 6 402 228 47 941 22 793 15 901 1 911 536 6 567 233 50 521 24 411 16 150 1 842 569 7 285 263 54 254 26 023 17 080 2 049 665 8 130 307 Exe mpt s uppli e s (publ i c tra ns port a nd e duca ti on) 1 256 1 332 1 426 1 520 Total value-added tax 48 259 49 273 51 947 55 774 Customs duties and excise Motor ve hi cl e s (MI DP/APDP, i ncl ud i ng I RCCs )7 Te xtile a nd cloth ing (du ty cre dits – DCCs )7 Furni ture a n d fi xture s Othe r cu s toms 8 23 467 539 180 911 26 936 788 217 1 040 28 362 725 181 963 28 754 712 198 875 Di esel refu nd 9 6 900 9 283 5 037 3 025 Total customs and excise 31 997 38 264 35 268 33 564 Total tax expenditure 173 863 189 646 210 682 209 979 Tax expenditure as % of total gross tax revenue 17.6% 17.7% 18.4% 17.3% Total gross tax revenue 986 295 1 069 983 1 144 081 1 216 464 Tax expenditure as % of GDP 4.5% 4.6% 4.8% 4.5% 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) was included for the first time in the 2019 Budget 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. Tax expenditure only attributable to foreign dividends. Capital gains tax on share sales not included 5. VAT relief in respect of basic food items based on 2010/11 Income and Expenditure Survey data 6. Based on fuel volumes and average retail selling prices 7. Motor Industry Development Programme (MIDP), replaced in 2013 by the Automotive Production Development Programme (APDP); import rebate credit certificate (IRCC); duty credit certificates (DCC) 8. Goods manufactured exclusively for exports, television monitors and agricultural goods exempted 9. Diesel refund previously offset against domestic VAT has been added Source: National Treasury 124

2020 BUDGET REVIEW Table C.2 Annual income tax payable and average tax rates, 2020/21 (taxpayers aged 65 to 74) Source: National Treasury Table C.3 Annual income tax payable and average tax rates, 2020/21 (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 26 February 2020 to the extent shown in Table C.4. 126 Taxable income (R) 2019/20 rates (R) Proposed 2020/21 rates (R) 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 2 385 11 717 24 717 37 717 68 424 103 259 199 925 302 425 507 425 732 425 1 107 10 107 22 635 35 635 65 555 99 300 194 378 296 878 501 878 723 786 -1 278 -1 610 -2 082 -2 082 -2 870 -3 960 -5 547 -5 547 -5 547 -8 639 -53.6% -13.7% -8.4% -5.5% -4.2% -3.8% -2.8% -1.8% -1.1% -1.2% 1.6% 0.7% 5.9% 5.1% 9.9% 9.1% 12.6% 11.9% 17.1% 16.4% 20.7% 19.9% 26.7% 25.9% 30.2% 29.7% 33.8% 33.5% 36.6% 36.2% Taxable income (R) 2019/20 rates (R) Proposed 2020/21 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 – 4 986 14 318 27 318 40 318 71 025 105 860 202 526 305 026 510 026 735 026 – 3 843 12 843 25 371 38 371 68 291 102 036 197 114 299 614 504 614 726 522 – -1 143 -1 475 -1 947 -1 947 -2 735 -3 825 -5 412 -5 412 -5 412 -8 504 – -22.9% -10.3% -7.1% -4.8% -3.9% -3.6% -2.7% -1.8% -1.1% -1.2% 0.0%0.0% 3.3%2.6% 7.2%6.4% 10.9%10.1% 13.4%12.8% 17.8%17.1% 21.2%20.4% 27.0%26.3% 30.5%30.0% 34.0%33.6% 36.8%36.3%

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Table C.4 Specific excise duties, 2019/20 – 2020/211 127 Tariff item Tariff subheading Article description 2019/20 Rate of excise duty 2020/21 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 R102.07/l i a a 7,82c/l i R106.56/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 R13.55/l i R14.36/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 R4.20/l i R204.15/l i a a R4.39/l i R213.13/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 R7.03/l i R204.15/l i a a R7.34/l i R213.13/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 R4.20/l i R204.15/l i a a R4.39/l i R213.13/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 R7.03/l i R204.15/l i a a R7.34/l i R213.13/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 R4.20/l i R204.15/l i a a R4.39/l i R213.13/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 R7.03/l i R204.15/l i a a R7.34/l i R213.13/l i a a 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 R13.55/l i R14.36/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 R4.20/l i R204.15/l i a a R4.39/l i R213.13/l i a a

2020 BUDGET REVIEW Table C.4 Specific excise duties, 2019/20 – 2020/21 (continued) 128 Tariff item Tariff subheading Article description 2019/20 Rate of excise duty 2020/21 Rate of excise duty 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 o l i c s tre n gth o f a t l e a s t 15 pe r ce n t b y vo l u me b ut n o t e xce e d i n g 22 p e r ce n t b y vol . Oth e r R7.03/l i R204.15/l i a a R7.34/l i R213.13/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 o l i c s tre n gth o f a t l e a s t 4.5 per cen t b y vo l u me b ut n o t e xce e d i n g 15 p e r ce n t b y vol . Oth e r R4.20/l i R204.15/l i a a R4.39/l i R213.13/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 o l i c s tre n gth o f a t l e a s t 15 pe r ce n t b y vo l u me b ut n o t e xce e d i n g 22 p e r ce n t b y vol . Oth e r R7.03/l i R204.15/l i a a R7.34/l i R213.13/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: 104.17.03 104.17.05 104.17.07 104.17.09 104.17.11 104.17.15 104.17.16 104.17.17 104.17.21 104.17.22 2206.00.05 2206.00.15 2206.00.17 2206.00.19 2206.00.21 2206.00.81 2206.00.82 2206.00.83 2206.00.84 2206.00.85 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 ng fe rme n te d be ve ra ge s de ri ve d from the fe rme n ta ti o n o f fru i t o r h o n 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 co hol 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 o na l Note 1 to Cha pte r 22 Oth e r fe rme n te d b e ve ra ge s , u nfo rti fi e d , wi th a n a l co h o l i c s tre n gth o f l e s s th a n 2.5 p e r ce nt b y vo l u me Oth e r fe rme n te d b e ve ra ge s o f no n -ma l te d ce re al gra in 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 not e xce e d i ng 9 pe r ce nt b y vo l . Oth e 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 co hol 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 b ut n o t e xce e d i n g 9 p e r ce n t b y vol . Oth e r fe rme n te d a p pl 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 b ut n o t e xce e d i n g 15 p e r ce n t b y vol . Oth e r fe rme n te d fru i t b e ve ra ge s a n d me a d b e vera ge s , i n cl u d i n g mi xtu re s o f ferme n ted b e vera ge s d eri ved fro m th e fe rme nta ti o n o f fru i t o r h o ne y, u n fo rti 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 by vo l u me but not e xce e di n g 15 pe r ce nt b y vo l . Oth e r fe rme n te d a p pl e o r p e a r b e ve ra ge s , fo rti fi e d , wi th a n a l co h o l i c s tre n gth o f a t l e a s t 15 p e r ce nt b y vo l u me b u t n o t e xce e d i n g 23 p e r ce n t by vo l . Oth e r fe rme n te d fru i t b e ve ra ge s a n d me a d b e vera ge s i n cl u d i n g mi xtu re s o f ferme n ted b e vera ge s d eri ved fro m th e fe rme nta ti o n o f fru i t o r h o ne y, fo rti fi e d , wi th a n a l co h o l i c s tre n gth o f a t l e a s t 15 p e r ce n t by vo l u me bu t not e xce e di n g 23 pe r ce nt b y vo l . Oth e r mi xtu re s o f fe rme n te d frui t o r me a d b e ve ra ge s a nd non-a l co hol i c b e ve ra ge s , un fo rti 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 by vo l u me but not e xce e di n g 15 pe r ce nt b y vo l . 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 R102.07/l i a a R81.71/l i a a R81.71/l i a a R102.07/l i a a R14.36/l i 7,82c/l i R106.56/l i a a R106.56/l i a a R106.56/l i a a R106.56/l i a a R106.56/l i a a R85.25/l i a a R85.25/l i a a R106.56/l i a a

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Table C.4 Specific excise duties, 2019/20 – 2020/21 (continued) 129 Tariff item Tariff subheading Article description 2019/20 Rate of excise duty 2020/21 Rate of excise duty 104.17.25 104.17.90 2206.00.87 2206.00.90 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 R81.71/l i a a R204.15/l i a a R85.25/l i a a R213.13/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 R204.15/l i a a R204.15/l i a a R213.13/l i a a R213.13/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 R183.73/l i a a R204.15/l i a a R191.82/l i a a R213.13/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 R183.73/l i a a R204.15/l i a a R191.82/l i a a R213.13/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 R204.15/l i a a R204.15/l i a a R213.13/l i a a R213.13/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 R204.15/l i a a R204.15/l i a a R213.13/l i a a R213.13/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 R204.15/l i a a R204.15/l i a a R213.13/l i a a R213.13/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 R204.15/l i a a R204.15/l i a a R213.13/l i a a R213.13/l i a a 104.23 2208.70 Liqueurs and cordials: 104.23 2208.70.2 In containers holding 2 li or less: 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 R81.71/l i a a R204.15/l i a a R85.25/l i a a R213.13/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 R81.71/l i a a R204.15/l i a a R85.25/l i a a R213.13/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 R81.71/l i a a R204.15/l i a a R85.25/l i a a R213.13/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 R81.71/l i a a R204.15/l i a a R85.25/l i a a R213.13/l i a a

2020 BUDGET REVIEW Table C.4 Specific excise duties, 2019/20 – 2020/21 (continued) 1. The chapter references in this table refer to chapters of the schedule to the Customs and Excise Act (1964) Source: National Treasury In terms of section 48 of the Customs and Excise Act, part 2A of schedule 1 is amended to the extent set out overleaf. 130 Tariff item Tariff subheading Article description 2019/20 Rate of excise duty 2020/21 Rate of excise duty 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 R3901.04/kg ne t R3901.04/kg ne t R4193.62/kg ne t R4193.62/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 R8.33/10 ci ga re tte s R8.33/10 ci ga re tte s R8.70/10 ci ga re tte s R8.70/10 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 R3901.04/kg ne t R3901.04/kg ne t R4193.62/kg ne t R4193.62/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 R8.33/10 ci ga re tte s R8.33/10 ci ga re tte s R8.70/10 ci ga re tte s R8.70/10 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 R215.52/kg ne t R231.69/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 R215.52/kg ne t R215.52/kg ne t R374.58/kg R231.69/kg ne t R231.69/kg ne t R391.06/kg 104.35 2403.91 "Homogenised" or "reconstituted" tobacco: 104.35.11 104.35.13 2403.91.10 2403.91.90 I mp o rte d fro m Swi tze rl a n d Othe r - - R815.63/kg R815.63/kg 104.35 2403.99 Other: 104.35.15 104.35.17 104.35.19 2403.99.30 2403.99.40 2403.99.90 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 Othe r R374.58/kg R215.52/kg ne t - R391.06/kg R231.69/kg ne t R815.63/kg

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Table C.5 Amendments to part 2A of Schedule No. 1 By deletion of the following: By the insertion of the following: Source: SARS In terms of section 75 of the Customs and Excise Act, schedule 6 is amended to the extent set out below. Table C.6 Amendments to Schedule No. 6 By deletion of the following: By insertion of the following: By insertion of the following: Source: SARS Additional tax amendments Additional tax amendments proposed for the upcoming legislative cycle are set out below. Individuals, employment and savings Reimbursing employees for business travel If an employee spends a night away from home for business purposes, an employer may reimburse the employee for meals and incidental costs. This reimbursement is not taxed, provided the amount does not exceed the amount published by the Commissioner of the South African Revenue Service (SARS) in the notice. If an employee is away from the office on a day trip, advances or reimbursements are not 131 Rebate item Tariff item Rebate code CD Description Extent of rebate Extent of refund 622.22 622.22 104.35.17 104.35.19 08.01 09.01 73 89 Oth e r p i p e to ba cco s u bs ti tu te s Oth e r As p ro vi d e d i n No te 4 to th i s Se cti o n As p ro vi d e d i n No te 4 to th i s Se cti o n Rebate item Tariff item Rebate code CD Description Extent of rebate Extent of refund 622.07 622.07 622.07 622.07 622.07 622.12 622.12 622.12 622.12 622.12 622.22 622.22 622.22 104.35.11 104.35.13 104.35.15 104.35.17 104.35.19 104.35.11 104.35.13 104.35.15 104.35.17 104.35.19 104.35.11 104.35.13 104.35.15 05.01 06.01 07.01 08.01 09.01 05.01 06.01 07.01 08.01 09.01 05.01 06.01 07.01 71 76 78 76 74 70 79 77 75 73 79 77 75 I mporte d fro m Swi tze rl a n d Othe r Othe r ci ga re tte toba cco s ub s ti tute s Othe r pi pe toba cco s ubs ti tute s Othe r I mporte d fro m Swi tze rl a n d Othe r Othe r ci ga re tte toba cco s ub s ti tute s Othe r pi pe toba cco s ubs ti tute s Othe r I mporte d fro m Swi tze rl a n d Othe r Othe r ci ga re tte toba cco s ub s ti tute s Ful l duty Ful l duty Fu l l duty Fu l l duty Ful l duty Ful l duty Ful l duty Fu l l duty Fu l l duty Ful l duty As provi d e d i n No te 4 to th i s Se cti o n As provi d e d i n No te 4 to th i s Se cti on As p ro vi de d i n Note 4 to thi s Se cti o n Rebate item Tariff item Rebate code CD Description Extent of rebate Extent of refund 622.07 622.07 622.12 622.12 622.22 622.22 104.35.07 104.35.09 104.35.07 104.35.09 104.35.07 104.35.09 05.01 06.01 05.01 06.01 05.01 06.01 74 72 73 71 71 75 Othe r ci ga re tte toba cco s ub s ti tute s Othe r pi pe toba cco s ubs ti tute s Othe r ci ga re tte toba cco s ub s ti tute s Othe r pi pe toba cco s ubs ti tute s Othe r ci ga re tte toba cco s ub s ti tute s Othe r pi pe toba cco s ubs ti tute s Fu l l duty Fu l l duty Fu l l duty Fu l l duty As p ro vi de d i n Note 4 to thi s Se cti o n As p ro vi de d i n Note 4 to thi s Se cti o n Tariff item Tariff subheading Article description Rate of excise duty 104.35 2403.91 "Homogenised" or "reconstituted" tobacco: 104.35.11 104.35.13 104.35.15 104.35.17 104.35.19 2403.91.10 2403.91.90 2403.99.30 2403.99.40 2403.99.90 I mpo rte d fro m Swi tze rl a n d Othe r Othe r ci ga re tte tob a cco s u bs ti tu te s Othe r p i pe to ba cco s ub s ti tute s Othe r R815.63/kg R815.63/kg R391.06/kg R231.69/kg ne t R815.63/kg Tariff item Tariff subheading Article description Rate of excise duty 104.35.07 104.35.09 2403.99.30 2403.99.40 Othe r ci ga re tte tob a cco s u bs ti tu te s Othe r p i pe to ba cco s ub s ti tute s R374.58/kg R215.52/kg ne t

2020 BUDGET REVIEW taxed if the employee can prove that they incurred these expenses on the instruction of the employer, in the furtherance of the employer’s trade. An anomaly arises when an employee purchases meals and incurs incidental costs during a day trip for work, but the employer has not explicitly instructed the employee to do so. To address this anomaly, it is proposed that the legislation be amended to exclude reimbursement expenses incurred by an employee for meals and incidental costs during a business day trip, provided the employer’s policy allows for such reimbursement. Clarifying deductions in respect of contributions to retirement funds Paragraphs 5(1)(a) and 6(1)(a) of the second schedule to the Income Tax Act (1962) make provision for a deduction of retirement fund contributions that did not qualify for a deduction in terms of section 11F of the act. These paragraphs refer to “own contributions”, which inadvertently prevents employer retirement fund contributions on behalf of employees (made on or after 1 March 2016) from qualifying for a deduction under either paragraph. It is proposed that the legislation be amended to remove this anomaly. Addressing the circumvention of anti-avoidance rules for trusts In 2016, anti-avoidance measures were introduced to curb the transfer of growth assets to trusts using low interest or interest-free loans, which was done to avoid estate duty on the asset’s subsequent growth in value. In 2017, these rules were strengthened to prevent the transfer of growth assets through low interest or interest-free loans made to companies owned by trusts. Certain taxpayers are undermining the adjusted rules by subscribing for preference shares in companies owned by trusts that are connected to the individuals. To curb this new form of abuse, it is proposed that the rules preventing tax avoidance through the use of trusts be amended. Addressing an anomaly in the rollover of amounts claimable under the employment tax incentive If the amount available to be claimed by a compliant employer in respect of the monthly employment tax incentive (ETI) is not claimed in that respective month, it can be claimed in the following month. Any unclaimed monthly ETI must be claimed by August or February, whichever is the last month of each reconciliation period. If the monthly ETI is not claimed by that time, the compliant employer forfeits that amount. However, if a non-compliant employer did not claim any ETI for an employee they were entitled to claim for, the employer is able to claim the ETI in any subsequent month when it becomes compliant. This creates an anomaly because non-compliant employers benefit more than compliant employers. It is proposed that the legislation be amended to address this anomaly. Addressing an anomaly in the tax exemption of employer-provided bursaries A number of employer bursary schemes seek to reclassify ordinary remuneration as a tax-exempt bursary granted to the dependants of an employee. Government proposes to close this loophole. These amendments will take effect on 1 March 2020. Business (general) Addressing anomalies on the acquisition of assets in exchange for debt issued The Income Tax Act sets out rules for the tax treatment of “share for share” and “asset for share” transactions, and for curbing value-shifting arrangements under these transactions. The act contains a rule to determine the base cost of assets acquired by a company in exchange for the issue of debt by that company. The interaction between the specific base cost rule for debt issued on the acquisition of assets and the act’s general provisions for determining the base cost creates unintended consequences. Some taxpayers are of the view that the specific rule overrides other anti-avoidance measures dealing with disposals between connected individuals. To address these concerns, it is proposed that the legislation be amended. 132

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Refining the corporate reorganisation rules Refining the interaction between the anti-avoidance provisions for intra-group transactions: Current corporate reorganisation rules allow for the tax-neutral transfer of assets between companies that are part of the same group. These provisions contain anti-avoidance measures to limit the abuse of these rules through: • • • • Early disinvestment in transferred assets External distribution of intra-group sale proceeds Transfers of assets and assumption of related debt De-grouping the group of companies that entered into an intra-group sale. In 2019, the legislation was amended to clarify the interaction between the anti-avoidance rules for de-grouping a group of companies and the anti-avoidance rules for the early disinvestment in transferred assets. However, the interaction between the anti-avoidance rules for de-grouping, and rules for the transfer of assets and the assumption of related debt may result in double taxation. It is proposed that the legislation be amended to address this anomaly. Clarifying rollover relief for unbundling transactions: The Income Tax Act makes provision for rollover relief where shares of a resident company (referred to as an unbundled company) that are held by another resident company (referred to as an unbundling company) are distributed to the shareholders of that unbundling company in accordance with the effective interest of those shareholders. However, these unbundling transactions are subject to an anti-avoidance rule that excludes the shareholders and the unbundling company from benefitting from the rollover relief if 20 per cent or more of the shares in the unbundled company are held by non-residents – either alone or together with individuals connected to those non-residents – after the transaction. This rule aims to limit the extent to which taxpayers can distribute tax-free shares in resident companies to non-residents. The current rule creates a loophole. To close this loophole, it is proposed that the legislation be amended to make provision for the 20 per cent rule to apply irrespective of whether non-resident shareholders are connected to each other. Business (financial sector) Taxation of insurance Tax treatment of deposit insurance scheme: Government is establishing a deposit insurance scheme to protect depositors in the event of a bank failure, which in turn will contribute to the stability of the South African financial system. It is envisaged that each bank will make stipulated contributions to the scheme. It is proposed that tax implications relating to the deposit insurance scheme be considered. Clarifying the meaning of “asset” for the taxation of long-term insurers: The rules in the Income Tax Act dealing with the taxation of long-term insurers make provision for assets to be allocated to the relevant fund and the profit to be taxed when annual transfers are made to the corporate fund. The transfer amounts are calculated by deducting the adjusted International Financial Reporting Standards (IFRS) value of liabilities from the market value of assets in the policyholder and risk policy funds. A problem arises with the treatment of assets that do not have an open market value, for example, prepayments. Prepayments are treated as assets for financial reporting purposes and they cannot be separately disposed of in the open market. To address these concerns, it is proposed that the legislation be amended to make provision for those assets that do not have a market value. Reviewing the interaction between rules for the taxation of benefits received by short-term insurance policyholders and the tax treatment of related expenses: 133

2020 BUDGET REVIEW The Income Tax Act allows short-term insurance premiums to be deductible provided they are disclosed as expenses for the purposes of financial reporting in line with IFRS 9. The act also makes provision for including short-term insurance policy benefits received or accrued during a year of assessment in gross income. However, another rule prohibits the deduction of any loss or expense, to the extent that it is recoverable under any contract of insurance, guarantee, security or indemnity. It is proposed that the interaction between the different rules for the taxation of benefits received by short-term insurance policyholders and the tax treatment of related expenses be reviewed. Refining the tax treatment of doubtful debt Clarifying the tax treatment of doubtful debt for non-bank taxpayers with security: The Income Tax Act sets out specific criteria for determining a doubtful debt allowance deduction for non-bank taxpayers that are not applying IFRS 9 to debt for financial reporting purposes. In this case, an age analysis of debt is used to determine a 25 per cent and 40 per cent deduction allowance for the doubtful debt. However, these deductions do not account for the taxpayer’s debt security. It is proposed that the determination of deductions in respect of secured debt arrears owed to non-bank taxpayers not applying IFRS 9 should be reviewed. Clarifying the tax treatment of doubtful debt in respect of certain impairments for banking regulated taxpayers: The Income Tax Act makes provision for the specific tax treatment of doubtful debt owed to taxpayers subject to prudential banking regulations. However, unlike the rules relating to non-banks, bank rules do not only restrict the allowance to be granted to a debt that would have been deductible if it had become a bad debt. As a result, certain impairments such as financial guarantee contracts that would otherwise not be deductible in terms of the act’s bad debt deduction provisions are deductible in terms of IFRS 9. This creates unintended consequences. To address these concerns, it is proposed that the determination of deductions in respect of impairments under IFRS 9 should be reviewed. Clarifying the tax treatment of doubtful debt in respect of taxpayers operating a leasing business: Taxpayers conducting a leasing business (lessors) and applying IFRS 9 for financial reporting purposes cannot claim a doubtful debt allowance because lease receivables are specifically excluded. This creates unintended consequences. To address these concerns, it is proposed that changes be made in the tax treatment of doubtful debts for both banking regulated and other taxpayers to exclude lease receivables that have not been received or accrued. Curbing potential tax avoidance caused by dividend deductions A bank or other “covered person” must, subject to exclusions, include in or deduct from their statement of comprehensive income all amounts from qualifying financial assets and financial liabilities that are recognised as profits or losses. One of the exclusions is a dividend or foreign dividend received by or accrued to a “covered person”. Some covered individuals are providing investment opportunities to investors by inserting a special purpose vehicle in a banking group between an investor and a “covered person”. This vehicle issues shares (a financial liability) to the investors that yield dividends while it receives interest or other income on its financial assets. The special purpose vehicle effectively converts income to dividends for the benefit of investors. To close this loophole, it is proposed that the exclusions from the rules for the taxation of covered individuals be extended to dividends declared. Refining the taxation of real estate investment trusts Clarifying the definition of real estate investment trusts (REITs): The current definition of REIT in the Income Tax Act refers to the approval of listing requirements by the appropriate authority under the Financial Markets Act (2012) in consultation with the Minister of Finance. This definition needs to be updated to be in line with the Financial Sector Regulation Act (2017). In 134

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS addition, it is proposed that the consultation requirements regarding listing criteria in an approved exchange should be reviewed. Clarifying the meaning of a share in the definition of REITs: To qualify as a REIT for tax purposes, the entity must be a resident and the trust’s shares must be a listed on an exchange as defined in section 1 of the Financial Markets Act and licensed under section 9 of that act. However, it has come to government’s attention that some REITs wish to issue and list preference shares. It was never envisaged that holders of preference shares should benefit from the REIT tax dispensation because preference shares are mainly used for financing, and not to provide full equity exposure to investors. It is proposed that the legislation be clarified to exclude preference shares and non-equity shares from the shares that must be listed on an exchange to qualify as a REIT. Amending the anti-avoidance provision regarding taxation of foreign dividends received by REITs: A REIT holding shares in a non-resident property company qualifies for a participation exemption in terms of the Income Tax Act in respect of foreign dividends from that non-resident company. The REIT also gets a full deduction when it distributes profits from those foreign dividends. To address this mismatch, it is proposed that the legislation be amended so that the full dividend is subject to tax if the recipient company is a REIT. Refining the tax treatment of transfer of collateral in securities lending arrangements The Income Tax Act contains rules to address dividend tax avoidance transactions whereby listed shares are lent or transferred as collateral from a person that would be liable for the tax to a tax-exempt person. The borrower or recipient of the collateral receives the exempt dividend and pays a manufactured dividend to the lender or provider of the collateral. It is proposed that the anti-avoidance rules be extended to also cover situations where additional exempt parties are involved to facilitate the avoidance transactions. Business (incentives) Reviewing the special economic zone tax incentive regime The special economic zone (SEZ) tax incentive regime rules are contained in two separate provisions of the Income Tax Act. The first deals with the criteria for determining what constitutes a company, under the SEZ tax regime, that qualifies to be taxed at a rate of 15 per cent instead of 28 per cent. In addition, this provision includes a sunset clause. The clause originally stated that the provision will no longer apply for years of assessment starting on or after 1 January 2024. Following the late enactment of the Special Economic Zones Act (2014), the clause was amended to add that the provision will no longer apply for years of assessment after a 10-year period determined from the date when a qualifying company started trading in an SEZ. The second provision provides for an accelerated capital allowance for a building owned and used by a qualifying company in the production of its income within an SEZ. This provision has a sunset clause of the year of assessment starting on or after 1 January 2024. Government proposes to amend the sunset clauses for sections 12R and 12S to clearly stipulate an end date for these incentives. No company would be eligible for approval beyond these dates. The end date would also provide government with a natural point for reviewing these incentives to determine whether they should be continued. Reviewing the venture capital company tax incentive regime The venture capital company tax incentive regime has a sunset clause of 30 June 2021. Government will review the effectiveness, impact and role of this regime to ascertain whether the incentive should be discontinued. 135

2020 BUDGET REVIEW Clarifying anomalous provisions Over the past two years, changes were made in the venture capital company incentive tax regime to curb abuse and limit the regime’s revenue costs. There are potential unintended consequences within the current legislation that may affect the successful closure of legitimate venture capital companies. It is proposed that the legislation be amended to address these unintended consequences. Mining capital expenditure Addressing the tax treatment of allowable mining capital expenditure: The Income Tax Act makes provision for any taxpayer that derives income from mining operations to be allowed an accelerated capital expenditure deduction. At issue are the definitions of mining and mining operations for purposes of claiming the capital expenditure deductions, and whether a contract miner – who excavates for a fee – and the mineral rights holder – as principal – should both qualify for accelerated capital expenditure deductions. To address these concerns, it is proposed that the provisions dealing with allowable mining capital expenditure be reviewed. Removing the Minister of Finance’s discretion in ring-fencing capital expenditure per mine: The tax-deductible capital expenditure incurred on a mine may not be used to reduce the taxable income of another mine, unless the Minister of Finance, in consultation with the Minister of Mineral Resources and Energy and having considered the relevant fiscal, financial and technical implications, decides otherwise. The application of this discretion has proven problematic, so it is proposed that the discretion be reviewed with the aim of its removal or restructuring. Aligning immunity from taxation of international organisations South Africa is a member of many internationally recognised organisations. The international agreements underpinning these memberships make provision for these international organisations to be immune from taxation in South Africa. The Income Tax Act makes provision for such exemptions, but it is proposed that amendments be made to all tax acts to make provision for these exemptions and ensure South African legislation aligns with international agreements. Refining tax treatment of foreign donor-funded projects In 2006, changes were made to the Income Tax Act to make provision for the tax treatment of foreign donor-funded projects in terms of the Official Development Assistance Agreement. Given that some of these projects were entered into long ago, it has come to government’s attention that the interaction between the provisions of the act and the provisions of the Official Development Assistance Agreement creates unintended consequences. It is proposed that amendments be made to the legislation to address these concerns. Reviewing expenditure deductions incurred related to the National Key Points Act The National Key Points Act (1980) makes provision for deduction of expenditure incurred by taxpayers in respect of any national key point. The act will be repealed when the Critical Infrastructure Protection Act (2019) comes into effect. It is proposed that the current expenditure deduction for national key points be reviewed to ascertain whether this deduction should be discontinued or aligned with the Critical Infrastructure Protection Act, but with certain limitations. 136

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS International Amending the anti-avoidance provision regarding change of residence Capital gains tax is levied when a person ceases to be a South African tax resident. When a company ceases to be a resident, there is a deemed disposal of its assets that triggers capital gains tax. Despite these rules, residents that hold shares in the company could subsequently dispose of the shares and qualify for a participation exemption for the sale of company shares. It is proposed that amendments be made to the legislation to close this loophole. Changing the anti-avoidance provision regarding taxation of foreign dividends received by residents The participation exemption rules for foreign dividends do not contain a similar limitation for general foreign dividends exemption rules (in the Income Tax Act). This limitation denies tax exemption for foreign dividends if there is a deductible expense or reduction that is determined directly or indirectly with reference to a dividend. For example, where a resident owns 20 per cent of the shares in an unlisted foreign company, no tax is imposed on the foreign dividends, even though these dividends arose from amounts that previously qualified for a tax deduction. To address this concern, it is proposed that changes be made to the legislation. Refining the definition of an “affected transaction” in the transfer pricing rules Transfer pricing rules apply if a taxpayer or a controlled foreign company enters into a transaction with a non-resident “connected person”, on terms and conditions that are not at arm’s length, and derives a tax benefit from that transaction. In the case of a transaction between a controlled foreign company and a non-resident “connected person”, a tax benefit may not be derived by the foreign company, but may be derived by a South African resident shareholder as a result of a lower inclusion of controlled foreign company net income for the resident. To address this situation, it is proposed that the legislation be amended to refer to a tax benefit that may be derived by a person, in relation to a controlled foreign company, that is a resident. Refining the tax treatment of capital flows Restricting the artificial reduction of dividends and capital gains tax: The current exchange control provisions restrict the use of loop structures, in part to protect the tax base. Tax legislation is a more appropriate tool to combat tax avoidance. For example, if a resident individual or trust holds at least 10 per cent of the total equity shares and voting rights in a foreign company, they qualify for a participation exemption and all foreign dividends received are exempt from tax. If the resident shareholding is more than 50 per cent, the foreign company is a controlled foreign company and all of the controlled foreign company’s dividend income is exempt from tax. If loop structures are no longer restricted, it would be possible to set up a structure where the controlled foreign company owns a South African company, and any dividends flowing from the resident company to the resident individual or trust through the controlled foreign company are exempt for the individual or trust. This would enable the resident individual or trust to reduce their dividend tax liability in respect of dividends declared by a resident company from 20 per cent to, in some instances, zero. A further loop structure risk exists if a resident disposes of shares in a controlled foreign company that owns South African assets. The unrealised gains attributable to the South African assets may not be taxed if the resident qualifies for the participation exemption for capital gains. Government proposes that the controlled foreign company legislation be amended to limit the dividend exemption available to a resident individual or trust relating to the accrual or receipt of dividends from a resident company to a controlled foreign company. As a result, such dividends would be taxed at an effective rate of 20 per cent, in line with cases where resident individuals receive dividends from resident companies. 137

2020 BUDGET REVIEW In addition, it is proposed that the participation exemption for capital gains on the disposal of shares in controlled foreign companies by residents should not apply to the extent that the value of those shares is derived from South African assets. Withdrawing retirement funds upon emigration: Individuals are currently able to withdraw funds from their pension preservation fund, provident preservation fund and retirement annuity fund upon emigrating for exchange control purposes through the Reserve Bank. As a result of the exchange control announcements in Annexure E, the concept of emigration as recognised by the Reserve Bank will be phased out. It is proposed that the trigger for individuals to withdraw these funds be reviewed. Any resulting amendments will come into effect on 1 March 2021. Transferring dual-listed shares abroad: A resident individual or company that owns a listed domestic security is not permitted to export that security without approval. This approval requirement is one of the exchange control provisions that will be phased out. As a result, government proposes that these events be deemed a disposal that would attract capital gains tax or normal tax. If the person or company remains a tax resident, they would be liable for tax on further gains when the security is sold in future. Value-added tax Revising the definition of “telecommunication services” for electronic services regulations With effect from April 2019, the regulations prescribing electronic services were changed to broaden the scope of electronic services that are subject to South African value-added tax (VAT). However, the definition of "telecommunication services" in the regulations currently contains an incorrect reference that creates unintended consequences. It is proposed that further changes be made to the regulations to address these consequences. Reviewing the VAT accounting basis option available for an intermediary In terms of section 54(2B) of the VAT Act (1991), certain supplies made by an underlying foreign electronic services supplier are deemed to be made by the intermediary, who is then required to levy and account for South African VAT on these supplies. Section 15(2)(a)(vii) of the VAT Act allows a vendor that is a foreign electronic services supplier to apply to the SARS Commissioner to account for VAT on a payment basis. However, it does not allow a vendor that is an intermediary to account for VAT on this basis. It is proposed that an intermediary vendor be allowed to account for VAT on a payment basis. Changing the VAT treatment of transactions under the corporate reorganisation rules Section 8(25) of the VAT Act ensures that transactions entered into between a group of companies have no VAT consequences. This is achieved by treating the supplier and the recipient of goods or services as the same person, provided the relevant rollover relief provisions of the Income Tax Act are met. The income tax relief provisions may not apply to the transfer of certain assets, which means that their transfer will also not qualify for the VAT relief, even though the assets form part of the entire transaction. This limitation of relief creates unintended consequences for VAT. The entire transaction could qualify for VAT relief under the going-concern provisions, but are excluded because the transaction falls within the ambit of the corporate reorganisation rules, which automatically require the provisions of section 8(25) of the VAT Act to apply. It is proposed that changes be made in the relief provisions in section 8(25) of the VAT Act to address these limitations. Reviewing section 72 arrangements and decisions In 2019, changes were made in section 72 of the VAT Act, which deals with the SARS Commissioner's discretion to make arrangements or decisions regarding the application of the VAT Act to specific 138

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS situations where the manner in which a vendor or class of vendors conducts their business leads to difficulties, anomalies or incongruities. These changes have an impact on the arrangements and decisions made before 21 July 2019. To address these concerns, government will review the impact and the role of these arrangements and decisions to ascertain whether they should be discontinued or extended in accordance with the new provisions of section 72. Clarifying the VAT treatment of irrecoverable debts Where a vendor, who is required to account for VAT on an invoice basis, has made an input tax deduction for the VAT they were charged on a taxable supply and that vendor has not paid the full consideration within a 12-month period, that vendor will be required to account for output tax on the unpaid amount. The VAT Act provides clarity on the time of supply within which such output tax is to be declared. However, there is uncertainty regarding the value of supply rule that applies in certain circumstances. It is proposed that clarity be provided in the legislation to address the uncertainty. Introducing measures to address undue VAT refunds on gold Schemes and malpractice to claim undue VAT refunds have been detected in the value chain relating to gold exports. The schemes and malpractice generally involve the import of coins, purchase of Krugerrands and illicit gold. It is proposed that appropriate regulations be considered or legislation be amended to address this. Carbon tax Update on the Trade Exposure and Performance Allowance Regulations The Carbon Tax Act came into effect on 1 June 2019. Following an extensive five-year stakeholder consultation process on the design, scope and methodology, the National Treasury published draft regulations for trade exposure and performance allowances for public comment in December 2019. After taking into account the public comments received, the draft regulations will be revised and gazetted in March 2020. In that month, the National Treasury will also publish a notice for the renewable energy premium credit and, in April 2020, the Department of Environment, Forestry and Fisheries will publish the methodology and accounting framework for greenhouse gas emissions sequestration. Aligning the carbon fuel levy adjustment with Carbon Tax Act Non-stationary greenhouse gas emissions from petrol and diesel used for road transport are incorporated in the current fuel levy in terms of the Customs and Excise Act. Under section 5 of the Carbon Tax Act, the rate of the carbon tax must be increased annually based on the consumer price index inflation rate for the preceding tax period plus two percentage points for the first phase of the carbon tax up to December 2022. To provide clarity on the quantum of the annual carbon fuel levy rate adjustment, it is proposed that changes to the carbon fuel levy should be aligned with adjustments to the principal carbon tax rate under the Carbon Tax Act and become effective on the first Wednesday in January for a particular tax period. The rates of 7 cents and 8 cents per litre for petrol and diesel respectively will remain unchanged for the 2020 tax period. Government will also publish a technical note outlining the methodological approach and administrative process for future carbon fuel levy rate adjustments by June 2020. Allowing a carbon tax “pass-through” for the regulated liquid fuels sector Currently, stationary sources of greenhouse gas emissions from crude oil and synthetic coal-to-liquid and gas-to-liquid refining processes are covered by the carbon tax and qualify for tax-free allowances up to a maximum of 90 per cent and 95 per cent respectively. Due to the regulated nature of petrol and diesel fuel prices, refineries are unable to recover these carbon tax costs. The 2013 Carbon Tax Policy Paper recommended a limited, transparent and equitable “pass-through” mechanism for carbon tax costs. Taking into account the maximum tax-free allowances for fuel combustion and fugitive emissions, 139

2020 BUDGET REVIEW amendments are proposed to allow a limited recovery of the carbon tax costs for regulated fuels. It is proposed that the cost recovery mechanism applies as a deduction against the carbon tax liability of petroleum refineries and government will publish the applicable rates for specific regulated fuels in a notice in the gazette. Tax administration Income Tax Act Failure by public benefit organisations approved to receive tax-deductible donations to submit audit certificates If a public benefit organisation fails to comply with specific requirements for receiving tax-deductible donations, SARS may regard these donations as taxable income for the organisation. If the failure is not addressed within a reasonable period, the receipts issued by the organisation will no longer be valid for claiming tax deductions. The sanctions do not apply to the requirement that an organisation conducting mixed activities, some of which qualify for the issue of receipts and some of which do not, obtain an audit certificate for the use of the funds for which receipts have been issued. It is proposed that this be corrected. Refunds of withholding tax on royalties where the royalty becomes irrecoverable: The interest-withholding tax provisions provide for a refund of tax withheld when interest became due and payable if the interest subsequently becomes irrecoverable. It is proposed that the same principle should apply in cases where royalty-withholding tax was paid and the royalty becomes irrecoverable. Customs and Excise Act Exchanging information with the Department of International Relations and Cooperation: A review aimed at minimising abuse and risks associated with duty-free shops was announced in the 2019 Budget Review. The abuse of duty-free purchases by certain diplomats has become an increasing problem and disclosure of relevant information to the Department of International Relations and Cooperation will enable a response at a diplomatic level. It is proposed that SARS be permitted to disclose information regarding duty-free purchases by diplomats to the Director-General of the Department of International Relations and Cooperation. Providing for the publication of tariff determinations: The World Customs Organisation advocates capacity building, skills development and knowledge sharing by customs authorities to enhance compliance with customs and excise legislation. Publishing tariff classifications will be useful in this regard and will contribute to consistency and transparency in the classification of goods. It is proposed that the Customs and Excise Act be amended to provide for the publication of tariff determinations and rules prescribing the circumstances in which such publication may take place, the kind of information that may be published and the manner of publication. Liability for duty in respect of imported goods: The liability for import duties rests with the master, pilot or carrier and only ceases when the goods are lawfully delivered, after due entry, to the importer or agent of the importer. Complaints by stakeholders have highlighted certain difficulties relating to the cessation of liability of the master, pilot or carrier at that stage. These difficulties include high shipping line charges for landside operations and the transport of goods for scanning, the favouring of shipping line transport, and the removal of containers to certain container depots with which shipping lines have private agreements. It is proposed that the Customs and Excise Act be amended to address these challenges by providing for licensed removers of goods in bond to move containerised goods from container terminals before they are released. The liability of the master, pilot or carrier will cease on delivery of the goods to a licensed remover. Provision will also be made for the assumption of liability by the licensed remover on receipt of the goods until their delivery. 140

ANNEXURE C: ADDITIONAL TAX POLICY AND ADMINISTRATIVE ADJUSTMENTS Progress with the review of the diesel refund administration: SARS recently published draft diesel refund rules and notes to the Customs and Excise Act for public comment. The draft is the result of National Treasury and SARS consultations with affected industries, including the 2017 discussion paper, Review of the Diesel Fuel Tax Refund System, industry-specific workshops conducted in 2018 and further technical inputs received from stakeholders during 2019. The draft presents a provisional outline for the review of the diesel refund administration to facilitate further industry engagements during 2020. The reform proposals and legislative framework will be refined further based on the outcome of the engagements. Tax Administration Act Aligning the Mineral and Petroleum Resources Royalty (Administration) and the Tax Administration acts: Chapter 12 of the Tax Administration Act (2011) created a framework to support the modernisation of the SARS accounting system for interest. Due to the similarities in the interaction between provisional and income tax on the one hand and the estimation and final payment of royalties for mineral and petroleum resources on the other, it is proposed that the Mineral and Petroleum Resource Royalty (Administration) Act (2008) and Chapter 12 of the Tax Administration Act be amended to ensure they align. This includes aligning interest payable for royalties, for the first and second payment, with provisional tax interest under Chapter 12. Estimated assessments for non-compliance: SARS may issue an estimated assessment to a taxpayer who does not file a return. The assessment may only be disputed where the relevant return is filed and SARS has failed to revise the assessment in light of the return. This ensures that all the facts are available when the assessment is revisited and that the dispute resolution timelines that would otherwise apply may be relaxed in appropriate circumstances. It is proposed that this approach be extended to cases where specific relevant material was requested from a taxpayer on more than one occasion, without an adequate response. Withholding PAYE refunds where returns are outstanding: In terms of the Income Tax Act, SARS may refuse to authorise a refund until a taxpayer furnishes any outstanding returns. A similar but broader provision exists in the Employment Tax Incentive Act (2013). Given the tight integration between the PAYE, skills development levy, unemployment insurance contributions and employment tax incentive systems, it is proposed that this power also apply to the Skills Development Levies Act (1999) and the Unemployment Insurance Contributions Act (2002). It is also proposed that the similar provisions across tax legislation be reviewed to determine if they can be consolidated into a single provision applicable to all tax types under the Tax Administration Act. Withholding refunds where a matter is under criminal investigation: The Tax Administration Act provides that SARS may withhold a refund until such time that the refund is verified, inspected or audited. It is proposed that this provision be extended to include criminal investigations. Technical corrections In addition to the amendments described above, the 2020 tax legislation will make 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. 141

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 government priorities and the medium-term strategic framework, the 2020 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. The budgeting provisions are complemented by reforms to improve the effectiveness of infrastructure spending. Trends in public infrastructure spending Between 1998/99 and 2018/19, the public sector spent R3.2 trillion on infrastructure (Figure D.1). Expenditure increased from R48.8 billion in 1998/99 to R216.2 billion in 2018/19. The average real growth in expenditure for the period 1998/99 to 2006/07 was 8 per cent. Spending then escalated on construction projects related to the 2010 FIFA World Cup, resulting in an average real growth of 50 per cent over 2007/08 and 2008/09. Since then, expenditure growth has been declining with an average real growth of 2 per cent. This declining trend is largely due to municipalities and state-owned companies substantially reducing their spending over the past few years. Several major state-owned companies have struggled to access capital markets to finance infrastructure programmes. Most municipalities have underspent on conditional grants and are not collecting sufficient revenue to finance their capital budgets. In addition, national government has reduced infrastructure conditional grants to provinces and municipalities as the budget deficit and debt have risen. The same trend is visible in infrastructure spending as a percentage of GDP. 143 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 2020 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.

2020 BUDGET REVIEW Figure D.1 Public-sector infrastructure spending Source: National Treasury Public-sector infrastructure spending highlights Table D.1 summarises government’s infrastructure spending 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 and bulk infrastructure amounting to R43.9 billion over the MTEF period 2. Administration services include infrastructure spending by the departments of International Relations and Cooperation, Home Affairs, and Public Works and Infrastructure, 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 144 2016/17 2017/18 2018/19 Outcomes R billion 2019/20 Revised estimate 2020/21 2021/22 2022/23 Medium-term estimates MTEF total Ene rgy67.055.139.9 Wa te r a nd s a ni ta ti on30.826.827.1 Trans p ort an d logi s tics70.975.474.4 Othe r e con omi c s e rvi ce s14.317.113.5 He a l th10.49.711.3 Educa ti o n17.817.617.2 Huma n s e ttl e me nts 118.314.315.0 Othe r s oci a l s e rvi ce s10.311.210.1 Ad mi n i s tra ti o n s e rvi ce s 210.19.17.7 49.7 33.5 90.5 13.1 12.0 19.5 18.8 10.5 9.4 52.452.445.3 37.039.640.6 97.8105.4105.1 11.812.212.5 12.312.312.6 18.719.720.7 16.613.413.9 10.29.810.2 10.311.011.2 150.0 117.1 308.3 36.5 37.3 59.1 43.9 30.2 32.5 Total249.9236.3216.2 257.0 267.1275.9272.0 815.0 Na ti on a l de pa rtme n ts15.814.913.6 Provi n ci a l d e p a rtme nts62.662.359.5 Lo ca l gove rn me n t54.458.861.0 Public e ntitie s 317.113.29.6 Public-pri va te p a rtn e rs h ips4.84.84.9 Sta te -owne d comp a n i e s 395.282.267.5 15.8 60.8 61.7 18.7 5.6 94.2 16.116.917.3 59.957.159.9 62.365.768.7 19.019.620.6 5.76.15.9 104.0110.599.5 50.4 177.0 196.8 59.2 17.8 314.0 Total249.9236.2216.2 257.0 267.1275.9272.0 815.0

ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Public-sector infrastructure spending over the medium-term expenditure framework (MTEF) period is estimated at R815 billion. State-owned companies continue to be the largest contributor to capital investment, spending a projected R314 billion over the next three years. Provinces are expected to spend R177 billion on infrastructure over the same period, while municipalities are forecast to spend R196.8 billion. Public housing and bulk infrastructure built through the human settlements development grant in provinces is expected to total R43.9 billion. Although these assets are transferred to homeowners, this spending is a substantial government contribution to the built environment. Spending on economic infrastructure, mainly by state-owned companies, accounts for 75.1 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 20.9 per cent of the total, of which health and education account for 4.6 per cent and 7.2 per cent respectively. In 2019/20, the public sector is estimated to spend R257 billion on infrastructure, an increase of 19 per cent relative to 2018/19. This is mainly because of higher estimated spending by state-owned companies including the Passenger Rail Agency of South Africa, Eskom, Transnet and Rand Water, which are expected to resume or begin infrastructure projects that were deferred in previous years. The value of infrastructure budgets, however, is eroded by insufficient capacity and skills to build a sustainable pipeline of projects, as shown by infrastructure backlogs and the lack of business confidence. Government is therefore adopting a multi-faceted approach by resourcing project preparation facilities, reviewing regulations and policies, and introducing reforms. This approach is expected to improve the effectiveness of infrastructure spending and develop a project pipeline for funding by government and the private sector. Sectoral updates Energy Energy expenditure is expected to total R150 billion over the next three years, accounting for 18.4 per cent of total infrastructure spending. Eskom accounts for R128 billion, or 85.3 per cent, of this amount. The Department of Mineral Resources and Energy will focus on increasing household access to electricity over the medium term. A total of R16.4 billion has been allocated to support the Integrated National Electrification Programme. The programme will fund an estimated 560 000 new connections to the power grid over the MTEF period. An additional 15 000 households will be provided with non-grid (stand-alone power system) connections per year. Over the medium term, government will transfer R6 billion to municipalities and R9.7 billion to Eskom to fund this programme. To help municipalities replace and upgrade municipal infrastructure with more energy-efficient technology, R691.3 million has been allocated to the energy efficiency and demand-side management grant over the medium term. The Department of Mineral Resources and 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 2010 to 2030. Up to 2019, 6 422 MW has been procured from 112 renewable energy independent power producer projects over seven bid windows, and 3 976 MW of electricity generation capacity from 64 projects has been added to the national grid. Private-sector investment in the programme amounts to R209.7 billion to date, of which R41.8 billion is from international investors and funders. 145

2020 BUDGET REVIEW Water and sanitation Government will spend R117.1 billion on water and sanitation over the next three years, accounting for 14.4 per cent of public-sector infrastructure expenditure. The Water Infrastructure Development Programme is allocated R41.6 billion over the medium term. The majority of this allocation, R24.5 billion, will be transferred to the Water Trading Entity, the regional bulk infrastructure grant and the water services infrastructure grant. The Water Trading Entity will receive transfers amounting to R6.6 billion over the medium term for new and existing projects such as the acid mine drainage operations in Gauteng, phase 2D of the Olifants River water resources development project, the Mokolo-Crocodile River water augmentation project, the raising of Tzaneen Dam, the Mdloti River development project, and the raising of Hazelmere Dam. Disbursements through the regional bulk infrastructure grant and the water services infrastructure grant will amount to R17.2 billion over the medium term. The funding will be used to implement regional bulk and water services infrastructure projects. Transport and logistics Public-sector infrastructure investment plans for transport and logistics total R308.3 billion over the medium term. This accounts for 37.8 per cent of total infrastructure expenditure during this period. These investments will improve the transport network, enhance the mobility of people and service provision, 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. Over the MTEF period, major investments in roads and rail include the following: • The South African National Roads Agency Limited has been allocated R64.6 billion over the medium term. Of this amount, R35.4 billion will be used to improve and construct non-toll roads, R3.4 billion to construct the N2 Wild Coast highway, R2.5 billion to upgrade the R573 (Moloto Road) and R1.9 billion to compensate for reduced tariffs in the Gauteng Freeway Improvement Project. The provincial roads maintenance grant has been allocated R36 billion to maintain the provincial road network by resealing a targeted 16 226 lane kilometres, rehabilitating 6 199 lane kilometres, and patching 3.7 million square kilometres of potholes. The Passenger Rail Agency of South Africa has been allocated R32.4 billion in capital transfers to modernise the rail network. In addition, R20.4 billion has been allocated to the public transport network grant to fund the integrated public transport networks in 10 cities across the country. • • Human settlements The Department of Human Settlements has been allocated R95.9 billion over the medium term, which will support delivery of 226 906 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. The human settlements development grant has been allocated R43.9 billion over the medium term to fund housing and human settlements programmes at a provincial level. Over the same period, the urban settlements development grant has been allocated R26 billion to fund infrastructure provision for broader urban development in metropolitan municipalities. The National Housing Finance Corporation will increase access to affordable housing finance for low-to middle-income households by facilitating private-sector lending for housing. Over the medium term, the 146

ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE corporation will focus on incremental housing finance; developer and emerging contractor finance; affordable rental housing finance; and finance-linked individual subsidies for qualifying households. Over the medium term, the corporation will receive an additional allocation of R1.3 billion for its finance-linked individual subsidy programme. Health Over the medium term, the Department of Health plans to accelerate the delivery of infrastructure in the health sector for the implementation of national health insurance. The direct health facility revitalisation grant, which is transferred to provincial health departments, will receive R19.9 billion over the next three years. Over the same period, R4.6 billion will be allocated to the health facility revitalisation component of the national health insurance indirect grant. A portion of this allocation will fund the planning and building of the Limpopo Central Hospital in Polokwane, which is expected to be completed in 2025/26. Education Government plans to spend R59.1 billion on infrastructure for the education sector over the MTEF period. The Department of Basic Education plans to spend R41.4 billion on school infrastructure over the medium term. The education infrastructure grant has been allocated R35 billion over this period to accelerate the construction, maintenance, upgrading and rehabilitation of new and existing school infrastructure. The school infrastructure backlogs grant will receive R6.5 billion to provide water, sanitation and electricity to schools, and replace schools constructed with inappropriate materials. In 2020/21, R1.7 billion will be used to build 31 new schools and to provide water and sanitation facilities to 125 and 691 schools respectively. The Department of Higher Education and Training will focus on increasing student access and improving staff development in the university system by increasing allocations to universities with a high proportion of students and staff from historically disadvantaged population groups. In 2020/21, the University Capacity Development Programme will receive R1.1 billion, the Historically Disadvantaged Institutions Development Programme will receive R536.3 million and the Infrastructure and Efficiency Programme will receive R2.8 billion. Infrastructure reforms Infrastructure investments facilitate economic activities and thus enable economic growth, job creation and poverty alleviation. The National Development Plan targets infrastructure investment of 30 per cent as a percentage of GDP by 2030. Figure D.2 Public and private capital investment as a share of GDP, 1960–2018 30 Source: Reserve Bank 147 Per cent of GDP 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 35 Public-sector investment 25 20 15 10 5 0 Private-sector investment NDP target

2020 BUDGET REVIEW Bridging the infrastructure investment gap requires developing innovative approaches to leverage private-sector finance, making the necessary regulatory changes and improving infrastructure planning across government to build a pipeline of projects. To unlock this potential, government has initiated broad reforms in infrastructure provision. The reforms will ensure that infrastructure is built faster and that costs are controlled, with appropriate sharing of risks between the private and public sector. In addition, government is integrating climate-change considerations into existing tools to strengthen the climate resilience of infrastructure. The components of these reforms are summarised below. The Budget Facility for Infrastructure The Budget Facility for Infrastructure (BFI) was launched in 2016 to support the planning and execution of priority infrastructure projects and programmes. The facility evaluates proposals before committing fiscal resources to avoid funding poorly planned and inadequately prepared large-scale projects. The BFI creates a window for annual submissions for budgets of large infrastructure projects and programmes, assesses the submissions, and makes recommendations to budget authorities and political decision makers. Since 2017, there have been three annual BFI windows. In total, submissions were received for 169 projects worth R374.5 billion, and 26 projects worth R37.1 billion were recommended for funding. Most proposals submitted through the BFI are poorly planned and packaged, mainly because of insufficient technical expertise and institutional capacity to develop good projects. Appraisal and evaluation guideline With funding from the World Bank, the National Treasury is developing a government-wide project appraisal and evaluation guideline. The guideline will provide simple, uniform methodologies and criteria that will apply to all new proposals. It will guide practitioners on how to package projects and enable decision makers to select projects that offer value for money and maximise economic benefits for government. The guideline is expected to be drafted within the next six months. Infrastructure Fund Government has committed R100 billion to the Infrastructure Fund, including R10 billion over the next three years. This includes new funding, new guarantees and repackaging of existing projects. The fund focuses on blended-finance projects, most of which will be funded primarily by the private sector. The Infrastructure Fund will increase private-sector investment in public infrastructure and contribute to higher economic growth, productivity and employment creation. The fund’s implementation unit, housed within the Development Bank of Southern Africa (DBSA), aims to facilitate and speed up the development of projects and programmes. The unit aims to build a pipeline of potential projects worth over 700 billion over the next 10 years. Stringent criteria are applied when deciding which projects should be included in the Infrastructure Fund pipeline. To be accepted, projects must: • Be large, as the preparation costs for blended-finance projects are prohibitive for small projects and large-scale investment is being targeted. Be suitable for blended financing, with clear and predictable cash flows, sufficiently attractive risk profiles for investors, and the need for some financial support from government. Mobilise private-sector skills and resources. Align with government’s infrastructure priorities. Be scalable and replicable. • • • • Over the next three years, the DBSA will identify, plan and package at least five blended-finance mega projects (valued at over R200 billion), using the funds committed by government to close funding gaps and reduce risks for the private sector. Results from the first set of projects will be used to adapt and 148

ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE strengthen the final design of the Infrastructure Fund. The DBSA is collaborating with private-sector investment associations, the Banking Association South Africa, the Association for Savings and Investment South Africa, and the Public Private Growth Initiative to build partnerships and attract private-sector funding. Project proposals will be evaluated through the BFI. Public-private partnership review In 2019, the National Treasury began reviewing the public-private partnership (PPP) regulations and guidelines. The review aims to identify and address challenges that have negatively affected PPP project readiness and private-sector participation. Improvements stemming from the review are also expected to enhance the Infrastructure Fund work on blended-finance projects. The review of the PPP framework is a key reform as most of the blended projects will be partnerships between the public and private sector. Key stakeholders in government and the private sector are providing input to the review. The recommendations are expected in September 2020. Feasible recommendations will be incrementally introduced to scale up the pipeline of PPP projects. Municipal Investment Programme Project Preparation Facility The Neighbourhood Development Programme helps municipalities improve the development and management of their built environment. To expedite spatial transformation in cities, the focus has been on planning well-located, mixed-use and mixed-income development programmes and projects as required by built environment performance plans. Metropolitan municipalities have growing infrastructure investment needs, established institutional capacity, autonomous borrowing authority and generally healthy balance sheets that can be used to leverage private finance. A dedicated grant will be created to support them to establish effective and efficient programme management and project preparation facilities for their capital investment programmes. They will be financed by reprioritising funds from the integrated city development grant and neighbourhood development partnership grant. From 2020/21, the Cities Preparation Support Fund will provide co-financing, which declines as these municipalities increase their capacity. Cities Support Programme’s work on climate change and infrastructure For many cities, strengthening the resilience of infrastructure and supporting low-carbon development of capital projects is a large-scale undertaking that requires strong partnerships and new sources of capital. Some cities lack technical expertise or access to the capital required. The National Treasury’s Cities Support Programme helps cities increase their capital investments in climate resilience and low-carbon development through targeted technical assistance to strengthen project design, packaging and preparation. The programme will also strengthen cities’ capability to manage climate-resilient assets by integrating climate-change considerations into their planning tools, including the Infrastructure Delivery Management System, guidelines for catalytic land development programmes and the BFI’s project appraisal and evaluation guideline. Support on applying these tools will be provided at the national and city level. Major infrastructure projects Table D.2 provides a pipeline of projects that are at various stages of development. Some projects are still in the early stages of project preparation while others are at advanced stages. These projects are not yet approved for funding. Large projects have to go through a number of approval gates involving successively more detailed planning before being considered for funding through the budgeting process. Most of the proposed projects and programmes will be financed in partnership with government, the private sector and development finance institutions. Health sector projects, however, are fully funded by government. 149

2020 BUDGET REVIEW Table D.2 Major infrastructure projects per sector Project name Implementing agent Project cost (R billion) Project description Current status Health Limpopo Central Hospital Limpopo Department of Health 4 Construction of a new 488-bed central hospital on a greenfield site donated by the Polokwane Local Municipality Procurement Tygerberg Hospital Western Cape Department of Health 4.3 Construction of a 550-bed regional hospital Feasibility completed Klipfontein Hospital Western Cape Department of Health 4.2 Construction of a 1 238-bed hospital to replace the GF Jooste Hospital Feasibility completed Education Student Housing Infrastructure Programme (SHIP) pilot phase Department of Higher Education and Training 96 Construction of student residences Various stages Gauteng Schools Programme Gauteng Provincial Government 4.7 Construction, expansion, refurbishment and facilities management of 64 schools in Gauteng Feasibility Housing Social Housing Programme Phase 1 Social Housing Regulatory Authority 10.3 Construction of social housing in well-located areas for low-to middle-income families Implementation Social Housing Programme Phase 2 Social Housing Regulatory Authority 18.5 Social Housing Programme Phase 2 Pre-feasibility Office accommodation Kopanong Precinct Gauteng Department of Infrastructure Development 16 Construction of Gauteng Provincial Government office to consolidate administration function of 19 buildings in the Johannesburg CBD Procurement Rural Development and Land Reform head office accommodation Department of Rural Development and Land Reform 4 Construction of the head office Procurement accommodation Bhisho Office Precinct Eastern Cape Department of Roads and Public Infrastructure 5 Construction of offices for seven Eastern Cape departments in a single location in Bhisho Procurement Telecommunications Broadband rollout (SA Connect) Department of Telecommunications and Postal Services 80 Broadband infrastructure in areas where pure private provision thereof is not commercially viable Feasibility 150

ANNEXURE D: PUBLIC-SECTOR INFRASTRUCTURE UPDATE Table D.2 Major infrastructure projects per sector (continued) Project name Implementing agent Project cost (R billion) Project description Current status Transport Gauteng Rapid Rail Network Extension Phase 1 and 2 Gauteng Department of Roads and Transport 112 A two-phase extension of the existing Gautrain rail system Feasibility Gautrain: Acquisition of additional rolling stock Gauteng Department of Roads and Transport 2 Procurement of 48 additional coaches and expansion of depot facility to accommodate increased demand Feasibility National Roads Programme – upgrades to existing non-concession national toll roads South African National Roads Agency 22 Major upgrades to various sections of the N1, N2 and N3 roads Pre-feasibility Provincial roads concessions Provincial roads and transport departments 45 Provincial roads infrastructure projects Pre-feasibility Expansion of the MyCiTi Bus Rapid Transport System in Cape Town City of Cape Town 7.5 Expansion of the current MyCiTi Procurement Bus Rapid Transport System network Small Harbours Programme Department of Public Works and Infrastructure 8.2 Upgrading and refurbishment Feasibility of 12 proclaimed fishing harbours in the Western Cape, and nodal-based refurbishment and development of new harbours in the Northern Cape, Eastern Cape and KwaZulu-Natal Transnet natural gas networks project Transnet 10 Develop, design, finance, construct and operate liquefied natural gas midstream infrastructure to enable gas import Pre-feasibility One-stop border posts Department of Home Affairs 11 Upgrade, refurbishments and Procurement facilities management for the six busiest border posts Energy Approach to Distribution Asset Management Department of Mineral Resources and Energy, Cooperative Governance and Municipal Infrastructure Support Agent 30 Maintenance, refurbishment Pre-feasibility and strengthening of municipal electricity distribution networks Research SA Isotope Facility National Research Foundation 1.4 Construction of the South African Isotope Facility Procurement Solid waste Mossel Bay regional landfill facility Garden Route District Municipality 0.8 Development of solid waste and landfill Procurement KwaDukuza waste services KwaDukuza Local Municipality 0.3 Collection and disposal of solid waste from households Procurement 151

2020 BUDGET REVIEW Table D.2 Major infrastructure projects per sector (continued) Project name Implementing agent Project cost (R billion) Project description Current status Water and sanitation Water reuse Cooperative Governance and Municipal Infrastructure Support Agent 50-75 Increasing bulk water supply, through wastewater reuse or putting in place new sources of supply such as desalination Pre-feasibility Water and sanitation private-sector participation Cooperative Governance and Municipal Infrastructure Support Agent 100 Increasing private-sector participation in the provision of municipal water and sanitation services Pre-feasibility Non-revenue water (water conservation and water demand management) Cooperative Governance and Municipal Infrastructure Support Agent 35-50 Improving water infrastructure Pre-feasibility to reduce losses, and improving metering, billing and collection from non-indigent customers Olifants River Water Resources Development Project Trans-Caledon Tunnel Authority 20 Bulk water infrastructure development Pre-feasibility Bulk infrastructure Industrial Development Corporation (IDC) infrastructure for industrial projects programme Industrial Development Corporation 15 Industrial Development Corporation infrastructure for industrial projects Feasibility Vumela - municipal bulk infrastructure financing Cooperative Governance and Municipal Infrastructure Support Agent 50-60 Development of municipal bulk infrastructure Pre-feasibility Coega Special Economic Zone Return Effluent Scheme Coega Development Corporation 0.9 Construction of critical bulk infrastructure (water, return effluent and sanitation) around the development of a bulk return effluent scheme Feasibility completed The establishment of basic economic infrastructure in Zone 3, 5, 6 and 7 of the Coega Special Economic Zone to unlock gas-to-power, aquaculture development and bulk water demand Coega Development Corporation 0.5 The provision of bulk services, including water, sanitation, electrical and energy Feasibility completed Source: National Treasury 152

E Financial sector update This annexure provides an update on regulatory changes in the financial sector, including changes announced in the 2019 Medium Term Budget Policy Statement to promote investment and reduce burdensome regulation. Fighting financial crime and corruption South Africa’s financial intelligence system is undergoing a mutual evaluation by an assessment team from the Financial Action Task Force (FATF). This review, which takes place regularly in all FATF member countries, evaluates national systems to prevent money laundering, terror financing and financing of the proliferation of weapons of mass destruction. The review will conclude in September 2020, at which time the review team will provide an evaluation and recommendations to the South African authorities. Concurrently, government is preparing legislative and regulatory proposals to combat sophisticated financial crimes, unexplained wealth and suspicious financial flows. These may include expanding the scope of suspicious transaction reporting, facilitating greater cooperation and information sharing between relevant authorities, and expanding capacity in the areas of analysis, enforcement and investigation. These proposals will complement the recommendations emerging from the FATF review. Simplifying cross-border trade and financial flows In 2019, South Africa was one of 54 countries that signed up to an African free-trade area encompassing 1.2 billion people and more than US$3 trillion in output. African countries have agreed to cut tariffs to zero on 90 per cent of goods, which, alongside other trade-facilitating measures, is expected to increase intra-continental commerce by more than 50 per cent over four years, according to the United Nations Economic Commission for Africa. The free-trade area presents an opportunity to speed up development on the continent, and represents a potentially large market for South African goods and services. In this context, the National Treasury proposes modernising the foreign-exchange system. Since 1933, South Africa has operated a “negative list” system. By default, foreign-currency transactions are prohibited, except for those listed in the Currency and Exchanges Manual. As a result, even small individual transactions – such as for travel – require onerous approval processes. This regime constrains trade and cross-border flows, particularly in relation to fast-growing African economies. Over the next 12 months, a new capital flow management system will be put in place. All foreign-currency transactions will be allowed, except for a risk-based list of capital flow measures summarised in the box overleaf. This change will increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty. The capital flow measures take account of the Organisation for Economic Co-operation and Development best-practice Code of Liberalisation of Capital Movements1 and 1 Available online at http://www.oecd.org/daf/inv/investment-policy/Code-capital-movements-EN.pdf 153

2020 BUDGET REVIEW are aligned with similar approaches in other developing countries. The detailed list of remaining capital flow measures will be published on the Reserve Bank website. Tax and exchange control treatment of individuals Following reforms to the income tax treatment of South African tax residents who receive remuneration outside the country, government proposes to remove the exchange control treatment for individuals, while strengthening the tax treatment. The intention is to allow individuals who work abroad more flexibility, provided funds are legitimately sourced and the individual is in good standing with the South African Revenue Service. Individuals who transfer more than R10 million offshore will be subjected to a more stringent verification process. Such transfers will also trigger a risk management test that will include certification of tax status and the source of funds, and assurance that the individual complies with anti-money laundering and countering terror financing requirements prescribed in the Financial Intelligence Centre Act (2001). This will be phased in by 1 March 2021. Under the new system, natural person emigrants and natural person residents will be treated identically. Additional restrictions on emigrants – such as the restrictions on emigrants being allowed to invest, and the requirement to only operate blocked accounts, have bank accounts and borrow in South Africa – have been repealed. The concept of emigration as recognised by the Reserve Bank will be phased out, to be replaced by a verification process based on the requirements above. Tax residency for individuals will continue to be determined by the ordinarily resident and physically present tests as set out in the Income Tax Act (1962). Under existing international standards, South Africa participates in the automatic sharing of information between tax authorities on individuals’ financial accounts and investments. These cooperative practices will remain in place to ensure that South African tax residents who have offshore income and investments pay the appropriate level of tax. Other reforms State bank In 2019, Parliament passed legislation to allow state-owned companies to apply for banking licences. Postbank is in the process of applying for such a licence. The decision to grant a licence is ultimately the 154 Remaining capital flow and macroprudential measures To ensure financial stability, some macroprudential and capital management measures will remain. These include: •South African corporates will not be allowed to shift their primary domicile, except under exceptional circumstances approved by the Minister of Finance. •Approval conditions granted by the Minister of Finance for corporates with a primary listing offshore, including dual-listed structures, will be aligned to the current foreign direct investment criteria and/or conditions to level the playing field. •Cross-border foreign-exchange activities will continue to be conducted through dealers authorised and regulated by the Reserve Bank. •Prudential limits on South African banks and institutional investors will remain, but the limits will be reviewed regularly. •Banks’ unhedged foreign-currency exposures will remain limited to 10 per cent of liabilities (known as the net open foreign exchange position) and will remain regulated by the Prudential Authority of the Reserve Bank. •The domestic treasury management company policy, which allows South African companies to establish one subsidiary as a holding company for African and offshore operations without being subject to exchange control restrictions, will remain in place, as will the international headquarter company regime. •The export of intellectual property for fair value to non-related parties will not be subject to approval. •The current policy of certain loop structures, which relates to the acquisition by private individuals of equity and/or voting rights in a foreign company, will remain until tax amendments are implemented to address the risks. The foreign-exchange treatment of individuals will be aligned to the tax treatment, which is discussed below and in Annexure C.

ANNEXURE E: FINANCIAL SECTOR UPDATE prerogative of the Prudential Authority, which will assess each applicant on its merits. The design of any state bank will protect the fiscus in the event of poor governance, non-performing loans or shortages in capital funding. Sovereign wealth fund The National Treasury is conducting a feasibility study for a sovereign wealth fund, possibly from the proceeds from the allocation of spectrum and the sale of non-core assets to capitalise such a fund. In addition, a fiscal rule that saves fiscal surpluses in the fund could help to manage volatile revenues. Alignment with Basel Committee on Banking Supervision principles In line with the Basel Committee on Banking Supervision’s core principles on corporate governance, South Africa has strengthened the regulatory framework by enforcing stricter independence requirements for directors on bank boards. In 2019, government updated banking regulations relating to a securitisation framework, total loss-absorbing capacity holdings, capital requirements for equity investments in funds, capital requirements for bank exposures to central counterparties and the standardised approach for measuring counterparty credit-risk exposures. In addition, consultation with the banking industry has started on the Fundamental Review of the Trading Book, a comprehensive set of capital rules applied to a bank’s wholesale trading activities. The economic effects of implementing these rules will be comprehensively assessed. Third-party cell captive insurance In December 2019, the Financial Sector Conduct Authority published a position paper2 to address concerns about third-party cell captive insurance, in which insurance is provided through cells, rather than directly to a client. Improving its regulation and supervision will protect consumers by ensuring that a financial advisor can no longer earn commission and share in the profits of the cell captive arrangement. Deposit insurance for financial institutions Following extensive consultation, the Minister of Finance has submitted final legislation to introduce a comprehensive deposit insurance scheme that protects depositors when banks fail. This safety net will also support the growth of smaller banks. In addition, systemically significant payment systems, as defined in the National Payment System Act (1998), will be considered. The Corporation for Deposit Insurance, which will be located at the Reserve Bank, is being created to manage and administer the deposit insurance fund. Further details of the tax treatment of this fund are contained in Annexure C. The Conduct of Financial Institutions Bill and retail distribution review In 2018, the Conduct of Financial Institutions Bill was published for public consultation. Public workshops were held during 2019. Over 800 pages of comments were received, including feedback on governance requirements, retirement funds, payment services, financial markets and wholesale banking. A revised draft of the bill will be published for public comment and tabled in Parliament in 2020. The Financial Sector Conduct Authority published an update of its retail distribution review in December 2019.3 The report indicates significant progress in implementation, which establishes requirements for product sales and ongoing support to the consumer, and ends “sign-on” bonuses. Financial markets legislation In the context of rapidly evolving financial markets, South Africa needs to update its legislative and regulatory framework. An extensive review of the Financial Markets Act (2012) highlighted gaps in the 2 Available at https://www.fsca.co.za/Regulatory%20Frameworks/Pages/Position%20Policy%20Papers.aspx 3 Available at https://www.fsca.co.za/Regulatory%20Frameworks/Temp/RDR%20General%20Status%20Update%20December%202019.pdf 155

2020 BUDGET REVIEW current framework and proposed changes. The National Treasury has consulted with market participants, the Prudential Authority and the Financial Sector Conduct Authority. A consultation paper will be published on the National Treasury website, and legislation will be drafted for public comment and tabled in Parliament by 2021. The framework for regulating over-the-counter derivative markets has been finalised, in line with South Africa’s commitment to the Group of Twenty. The final joint standard on margin requirements will take effect on 1 October 2020. Levies The Financial Sector Levies Bill, to be submitted to Parliament during 2020, will propose the collection of levies to ensure that the Prudential Authority, the Financial Sector Conduct Authority and ombuds are sufficiently resourced to carry out their duties and functions. Transformation and financial inclusion The Financial Sector Transformation Council has established eight subcommittees to review the targets in the Financial Sector Code to strengthen transformation of the financial sector. To date, the committees have developed targets for management control, skills development, socioeconomic development, consumer education and retirement funds. A paper to establish a policy framework for financial inclusion in South Africa will be published for public comment in 2020. Innovation hub The Intergovernmental Fintech Working Group is introducing an online fintech portal with an innovation hub, which will clarify the applicability of financial services regulation and support the testing of new products and services. Unclaimed benefits Retirement funds and the Guardian’s Fund are sometimes unable to trace beneficiaries, resulting in the money remaining unclaimed. The money is invested in government bonds and other instruments. These investments are being considered in the mobilisation of funding for infrastructure. Government will introduce legislation later this year to centralise such funds and establish a central registry of all members of retirement funds. Retirement fund reform Government and the National Economic Development and Labour Council have agreed to proceed with retirement reform related to the harmonisation of all retirement benefits, including provident funds. Government will take steps to ensure the development of annuity products more suitable for the low-income market. Further reforms will include improving oversight and governance of commercial umbrella funds, fund consolidation and auto-enrolment. 156

2020 BUDGET REVIEW Summary of the national budget 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. Source: National Treasury 158 R million 2019/20 2020/21 2021/22 2022/23 Budget Revised estimate estimate Budget estimate Medium-term estimates REVENUE Estimate of revenue before tax proposals Budget 2020/21 proposals: Direct taxes Taxes on individuals and companies Personal income tax Increasing brackets by more than inflation Revenue if no adjustment is made Higher-than-inflation increase in brackets and rebates Indirect taxes Carbon tax Plastic bag levy 1 425 418 - -2 000 -2 000 -2 000 12 000 -14 000 2 000 1 750 250 Estimate of revenue after tax proposals Percentage change from previous year 1 403 464 1 344 796 1 397 996 4.0% 1 484 294 1 580 877 6.2% 6.5% 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 votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees adjustment 743 900 746 713 202 208 205 005 505 554 505 554 13 167 13 167 18 759 18 576 4 213 4 411 900 249 935 591 248 057 246 686 614 373 611 782 15 460 13 573 22 360 63 549 1 558 - 10 - 1 000 - 5 348 - -4 800 - 805 666 229 270 538 472 14 027 19 413 4 485 963 114 261 333 644 025 15 303 42 454 -7 786 7 021 - 23 000 -37 807 872 909 940 599 258 482 290 145 573 990 607 554 15 182 16 085 20 585 21 970 4 670 4 846 988 836 1 029 513 279 252 288 690 684 282 721 889 15 809 16 510 9 493 2 424 -16 077 -34 887 1 853 3 573 4 000 6 000 33 000 23 000 -54 929 -67 460 Total 1 645 707 1 682 304 1 760 994 1 845 668 1 935 225 Plus: Contingency reserve 13 000 - 5 000 5 000 5 000 Estimate of national expenditure Percentage change from previous year 1 658 707 1 682 304 1 765 994 5.0% 1 850 668 1 940 225 4.8% 4.8% 2019 Budget estimate of expenditure Increase / decrease (-) 1 658 707 23 597 1 769 566 -3 572 1 900 485 -49 817 Gross domestic product 5 413 825 5 157 347 5 428 212 5 758 993 6 126 302

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 buy shares or assets. 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. Taxes levied on commodities as a certain percentage of their value. Manufacturing activities that transform raw materials and intermediary goods derived from agriculture into intermediate or final goods. 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. The repayment of a loan by instalments over its duration. 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. 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. 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. Accrual Acquisition debt Adjustments estimate Administered prices Ad valorem duties Agro-processing Allocated expenditure Amortisation Annuity Anti-avoidance rule Appropriation Asset price bubble Balance of payments Base erosion and profit shifting Basel III Baseline Basis point Beneficiation Bond Bond premium Bond spread Bond-switch programme 161

2020 BUDGET REVIEW Bracket creep Increased real tax liability that arises when the personal income tax tables 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. A reform to the budget process that establishes specialised structures, procedures and criteria for committing fiscal resources to public infrastructure spending. Property of any kind, including assets that are movable or immovable, tangible or intangible, fixed or circulating, but excluding trading stock held to realise 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 to produce 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. The process of allocating a greenhouse gas emissions allowance to a company for a specific period of time. 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. Budget balance Budget Facility for Infrastructure Capital asset Capital expenditure Capital flow Capital formation Capital gains tax Capital goods Capitalised interest Capital market Carbon budgeting 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. 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 that are used within a short period of time, usually a year. Connected person debt/credit Consolidated general government Consolidated government expenditure Consumer price index Consumption expenditure 162

GLOSSARY Contingency reserve 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. Stock brokers that do not trade as a treasury operation; the Reserve Bank; banks and their controlling companies; and companies or trusts that form part of a banking group, excluding short-and long-term insurers, and these insurers’ subsidiaries and companies in which they hold a controlling share. An indicator of the risk of default by a borrower or the riskiness of a financial instrument. The probability of financial loss resulting from failure to repay a loan or meet a contractual obligation. 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. A tax levied on imported goods. An unsecured debt instrument backed by general creditworthiness of the issuer rather than by specific assets. 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. Contingent liability Controlled foreign company Corporatisation Cost-push inflation Countercyclical fiscal policy Coupon (bond) Covered person Credit rating Credit risk Crowding-in Crowding-out Cryptocurrency Currency risk Current account (of the balance of payments) Current balance Current expenditure Customs duties Debenture Debt redemption profile 163

2020 BUDGET REVIEW Debt-service costs 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 total value of debt owed to all lenders. The removal or dismantling of a facility from service. Retirement funds’ trustee boards must offer a default in-fund preservation arrangement to members who leave the services of their employer before retirement, and a default investment portfolio to contributing members who do not or cannot choose how their savings should be invested. 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. See unemployment. 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. A public offering auction where the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold. The development of children from birth until the year they enter formal schooling. Debt-service coverage ratio Debt stock Decommissioning Default regulations Deflation Deleveraging Depreciation (capital) Depreciation (exchange rate) Derivative financial instrument Designated countries Development finance institutions Digital economy Direct taxes Discouraged work seekers Discretionary trust Disposable income Dissaving Dividend Dividend withholding tax Division of revenue Domestic demand Double tax agreement Dutch auction pricing Early childhood development 164

GLOSSARY Economically active population 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. 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) that 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. The maximum allowable level of expenditure to which government has committed itself. Public entities not directly funded from the fiscus. 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. Economic cost Economic growth Economic rent Effective tax rate Embedded derivative Emerging economies Employment coefficient Equitable share Equity finance Exchange control Exchange item Exchange-traded funds Excise duties Expenditure ceiling Extra-budgetary institutions Fair-value adjustment Fee-free higher education and training Financial account Financial and Fiscal Commission 165

2020 BUDGET REVIEW Financial Sector Conduct Authority 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. 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”, which refers 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 arrangements, procedures, rules and institutions underlying the conduct of government’s budgetary policies. 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 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. Spending on buildings, machinery and equipment contributing to production capacity in the economy. See also gross fixed-capital formation. A bond that pays a specific interest rate over a specified period of time. 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 bought or sold at a future date. A geographical region in which a group of countries has signed an agreement and maintain few or no barriers to trade in the form of tariffs or quotas between them. 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. Financial Services Board Financial Stability Board Financial year Fintech Fiscal consolidation Fiscal framework Fiscal incidence Fiscal leakage Fiscal marking Fiscal policy Fiscal space Fiscal year Fixed investment/capital formation Fixed-rate bond Floating rate notes Foreign currency swaps Foreign direct investment Forward book Forward cover Free-trade area Fringe benefit Fuel levy 166

GLOSSARY Fugitive emissions Emissions that are unintentionally released into the atmosphere through, for example, leaks from industrial plants and pipelines. 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. The ratio of company debt to equity capital. Reserves held by the Reserve Bank to meet foreign-exchange obligations and to maintain liquidity in the presence of external shocks. The total amount of money owed by 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, or 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. See government debt. Function shift Funded pension arrangements Gearing ratio Gold and foreign exchange reserves Government debt Government guarantee Green paper Gross borrowing requirement Gross domestic product Gross domestic product inflation Gross fixed-capital formation Gross loan debt Gross value added The value of output less intermediate consumption. It is also a measure of the contribution an industry or sector makes to the economy. 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. Group of Twenty (G20) Hedging Horizontal equity Impaired advances Impairment Import parity pricing Inclusion rate 167

2020 BUDGET REVIEW Independent power producer Industrial development zone A private-sector business that generates energy for the national grid. 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. A fund that will provide government support for the co-financing of programmes and projects that blend public and private resources. The Department of Energy’s long-term plan for the country’s energy mix and generation expansion in order to meet electricity demand. 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. Goods produced to be used as inputs in the production of final goods. Money that different organs of state owe to each other. Stocks of goods held by firms. An increase in inventories reflects an excess of output relative to spending over a period of time. A credit rating indicating minimal risk to investors. A financial certificate that complies with Islamic religious law. It represents partial ownership of an asset. The issuer buys back the bond at a future date at par value. 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 means of managing electricity supply when the power system is constrained by limiting the electricity supply to areas. A commitment, in a loan agreement, to certain activities. If violated, the covenant can trigger a default or penalties. Structures that arise when private individuals are permitted by the Reserve Bank to acquire up to 40 per cent equity or voting rights in a foreign company, which may in turn hold investments and/or make loans in a Common Monetary Area country (South Africa, eSwatini, Lesotho and Namibia). 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. Inflation Inflation targeting Infrastructure Fund Integrated Resource Plan Intergenerational equity Intermediate goods Intra-state debt Inventories Investment grade Islamic bond Labour intensity Levelised cost of electricity Liquidity Liquidity requirements Liquidity risk Load-shedding Loan covenant Loop structures Lump-sum benefit M3 Macroeconomics Macroprudential regulation 168

GLOSSARY Marginal income tax rate Marginal lending rate 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. A civil claim of alleged wrongful medical treatment against a health provider. 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. The authority that regulates electricity, piped-gas and petroleum pipelines industries in South Africa. 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. Gross loan debt less government’s cash balances. Marketable securities Means test Medico-legal claims Medium Term Expenditure Committee Medium-term expenditure framework Microeconomics Ministers’ Committee on the Budget Monetary policy Money supply National budget National Development Plan National Energy Regulator of South Africa National Revenue Fund Negotiable certificate of deposit Net borrowing requirement Net exports Net loan debt Gold and foreign exchange reserves minus the oversold forward book. The figure is expressed in dollars. The difference between the value of exports and 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. Net open foreign currency position Net trade New Development Bank Nominal exchange rates Nominal wage 169

2020 BUDGET REVIEW Non-competitive bid auction 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 35 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. An environmental tax on certain types of plastic carrier and flat bags that is earmarked to establish recycling facilities. 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. 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 consumers’ 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. 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 Plastic bag levy Policy reserve Portfolio investment Potential growth Presidential Infrastructure Coordinating Commission Price discovery Price sensitivity Primary bond auctions Primary deficit/surplus Primary market Primary sector Principal purpose test Private-sector credit extension 170

GLOSSARY Privatisation 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 engage in social activities to meet the needs of the general public. They are mainly funded by donations from the public and other institutions. 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 in which 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. A composite index measuring the change in manufacturing activity. 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. Producer price index Productivity Profit shifting Prudential Authority Public-benefit organisations Public entities Public Finance Management Act Public goods Public Investment Corporation Public-private partnerships Public sector Public-sector borrowing requirement Purchasing managers’ index Quarterly Employment Statistics Quarterly Labour Force Survey Rating agency Real effective exchange rate Real expenditure 171

2020 BUDGET REVIEW Real interest rate Real wage Recapitalisation 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. 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. The removal of seasonal volatility (monthly or quarterly) from a time series dataset. This provides a measure of the underlying trend in the data. A market where securities are bought and sold by 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. Recession Redemption Refinancing Refinancing risk Regional integration Remuneration Repurchase agreements Repurchase (repo) rate Reserves (foreign exchange) Residence-based income tax system Revaluation gain/loss Risk premium Saving Seasonally adjusted Secondary market Secondary market pricing Secondary rebate Secondary sector Secondary tax on companies Section 21 company Sector education and training authorities Secured debt instruments Securitisation 172

GLOSSARY Service and transfer payments 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. 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, Namibia, Lesotho and eSwatini 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 guarantees and international agreements. Amounts appropriated to be spent in terms of statutes and not requiring appropriation by vote. 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. Measures put in place to substantially change the economy, or the institutional and regulatory framework in which people and businesses operate. A clause in a public policy that allows for a law to cease being in effect after a specified date. 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. Social infrastructure Social wage Source-based income tax system Southern African Customs Union agreement Southern African Development Community Sovereign debt Sovereign debt rating Spatial planning Special economic zones Specific excise duty Standing appropriations Statutory appropriations Sterilisation Structural budget balance Structural constraints Structural reforms Sunset clause Switch auction Syndicated loan Tax amnesty Tax avoidance 173

2020 BUDGET REVIEW Tax base 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. 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. 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. The setting of the price at which connected persons transfer goods or services between themselves. 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. 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 Trade balance Trade regime Trade-weighted rand Transfer pricing Treasury bills Treaty shopping Trend GDP growth 174

GLOSSARY Unallocated reserves 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). 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. 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. The amount of value-added tax (VAT) repayable by the South African Revenue Service 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 principle 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 right to ownership of an asset that cannot be arbitrarily taken away by a third party. The transfer of resources from one programme to another within the same department during a financial year. 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. 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. Consumable goods that are exempt from the 15 per cent VAT rate. Unemployment (broad definition) Unemployment (official definition) Unitary payment Unit labour cost Unqualified audit Unsecured debt instruments Unsecured lending VAT refund Venture capital company Vertical equity Vested right Virement Vote Water trading account Weighted average cost of capital Withholding tax White paper Yield Yield curve Zero-rated tax items 175

STATISTICAL ANNEXURE Statistical annexure Explanatory notes The statistical tables present details of the main budget; consolidated national, provincial and social security funds expenditure; consolidated government revenue and expenditure; consolidated government revenue, expenditure and financing; total debt of government; and net loan debt, 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. 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. 179 1 Main budget: revenue, expenditure, budget balance and financing, 2013/14 to 2022/23 2 Main budget: estimates of national revenue – summary of revenue, 2002/03 to 2022/23 3 Main budget: estimates of national revenue – detailed classification of revenue, 2016/17 to 2020/21 4 Main budget: expenditure defrayed from the National Revenue Fund by vote, 2016/17 to 2022/23 5 Consolidated national, provincial and social security funds expenditure: economic classification, 2016/17 to 2022/23 6 Consolidated national, provincial and social security funds expenditure: functional classification, 2016/17 to 2022/23 7 Consolidated government revenue and expenditure: economic classification, 2016/17 to 2022/23 8 Consolidated government expenditure: functional classification, 2016/17 to 2022/23 9 Consolidated government revenue, expenditure and financing, 2016/17 to 2022/23 10 Total debt of government, 1995/96 to 2022/23 11 Net loan debt, provisions and contingent liabilities, 2009/10 to 2022/23

2020 BUDGET REVIEW Since more than 50 per cent of total national expenditure on the 2020/21 main budget consists of transfer payments to other levels of general government, economic and functional classifications of national budget expenditure are not comprehensive. For the purposes of analysis, it would be preferable to present economic and 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 account has 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 2013/14 and medium-term estimates to 2022/23. In line with the economic reporting format introduced in 2009, the revenue classification shows departmental sales of capital assets separately. 180

STATISTICAL ANNEXURE Repayments of loans and advances, which were previously shown as negative expenditure, have been reclassified as revenue. The national budget deficit (negative budget balance) is due to a higher increase in expenditure relative to the revenue collected over the same period. 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 2016/17 to 2022/23. In 2019/20, 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 Fund. 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: 181

2020 BUDGET REVIEW • 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. 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: 182

STATISTICAL ANNEXURE • 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). • 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 162 national and provincial departments and 186 entities are included in the 2020 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, any related revaluation adjustments on inflation-linked bonds and 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. 183

2020 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 2013/14. 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. Source: National Treasury 184 R million 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 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 Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees 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) 12) Change in cash and other balances (-increase) Total financing (net) 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 1 119 530.3 1 144 081.0 -39 448.3 14 897.7 18 224.9 149.2 1 176 623.8 1 216 463.9 -55 950.9 16 110.8 19 541.0 197.5 1 260 705.5 1 287 690.2 -48 288.6 21 303.9 14 452.9 111.9 887 366.2 462 603.0 101 184.7 336 495.3 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 – – – – 1 137 904.4 588 731.7 146 496.7 410 698.6 11 223.8 15 233.0 5 079.5 716 658.5 210 088.3 486 109.1 15 598.5 4 862.5 – – – – 1 196 362.3 636 337.0 162 644.6 441 331.1 11 785.0 16 293.6 4 282.7 768 602.9 218 947.5 516 020.0 15 232.9 18 402.5 – – – – 1 275 270.3 685 914.8 181 849.1 470 286.5 12 468.6 17 479.9 3 830.7 820 697.8 228 766.3 563 097.9 14 469.2 14 364.4 – – – – 1 047 758.6 1 131 900.1 1 244 622.9 1 305 390.1 1 404 939.9 1 506 612.5 – – – – – – 1 047 758.6 1 131 900.1 1 244 622.9 1 305 390.1 1 404 939.9 1 506 612.5 -160 392.4 -4.4% -166 443.2 -4.3% -168 386.4 -4.1% -167 485.7 -3.8% -208 577.7 -4.4% -231 342.2 -4.7% 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 -26 086.4 33 407.0 174 438.0 200 200.0 -1 508.0 -24 254.0 29 774.0 33 895.0 – – -4 121.0 -29 041.3 14 061.0 169 474.0 183 503.0 -500.0 -13 529.0 23 217.0 25 258.0 – – -2 041.0 24 590.2 160 392.4 166 443.2 168 386.4 167 485.7 208 577.7 231 342.2 GDP 3 614 459 3 865 119 4 124 704 4 419 437 4 698 724 4 921 494 National Revenue Fund transactions 13) National Revenue Fund receipts National Revenue Fund payments 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 11 999.4 -161.6 Net 11 193.0 11 121.5 13 695.8 12 462.6 16 013.2 11 837.8

STATISTICAL ANNEXURE Table 1 Main budget: revenue, expenditure, budget balance and financing 1) 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. 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) Revaluation estimates are based on National Treasury's projection of exchange rates. 13) 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. 185 2019/20 2020/21 2021/22 2022/23 R million Budget Revised Deviation estimate estimate Medium-term estimates 1 389 607.8 1 332 098.9 -57 508.8 1 422 208.0 1 358 934.6 -63 273.4 -50 280.3 -50 280.3 – 17 680.1 23 444.7 5 764.6 13 727.0 12 583.8 -1 143.3 129.6 113.6 -16.0 1 385 864.0 1 425 417.6 -63 395.2 23 841.6 12 002.3 129.3 1 478 538.9 1 512 193.8 -60 563.0 26 908.1 5 622.8 132.4 1 574 534.5 1 609 656.6 -63 365.7 28 243.6 6 208.0 134.7 Main budget revenue Current revenue 2) Tax revenue (gross) 3) 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 Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Com pensation of em ployees 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 12) Redemptions (including revaluation of loans) Change in cash and other balances (-increase) Total financing (net) 1 403 464.4 1 344 796.3 -58 668.1 743 900.1 746 713.2 2 813.2 202 207.8 205 005.0 2 797.1 505 553.8 505 553.8 – 13 166.8 13 166.8 – 18 758.5 18 576.3 -182.2 4 213.2 4 411.4 198.3 900 249.4 935 590.9 35 341.5 248 056.6 246 686.4 -1 370.2 614 372.7 611 782.0 -2 590.7 15 460.1 13 573.2 -1 886.9 22 359.9 63 549.3 41 189.4 10.0 – -10.0 1 000.0 – -1 000.0 5 348.0 – -5 348.0 -4 800.0 – 4 800.0 1 397 995.6 805 666.3 229 270.0 538 471.5 14 026.9 19 412.9 4 485.1 963 114.2 261 332.9 644 024.8 15 302.8 42 453.7 7 020.6 – 23 000.0 -37 806.7 1 484 294.1 872 909.4 258 482.1 573 989.5 15 182.5 20 585.0 4 670.3 988 835.6 279 252.0 684 281.7 15 809.0 9 493.0 1 852.6 4 000.0 33 000.0 -54 929.1 1 580 877.1 940 599.1 290 145.1 607 553.5 16 085.0 21 969.8 4 845.7 1 029 512.7 288 689.8 721 889.4 16 509.7 2 423.9 3 573.5 6 000.0 23 000.0 -67 460.4 1 645 707.4 1 682 304.1 36 596.7 1 760 994.4 1 845 668.5 1 935 224.9 13 000.0 – -13 000.0 5 000.0 5 000.0 5 000.0 1 658 707.4 1 682 304.1 23 596.7 1 765 994.4 1 850 668.5 1 940 224.9 -255 243.0 -337 507.8 -82 264.8 -4.7% -6.5% -1.8% -367 998.9 -6.8% -366 374.3 -6.4% -359 347.8 -5.9% 25 000.0 36 000.0 11 000.0 185 404.0 279 365.0 93 961.0 216 000.0 299 189.0 83 189.0 – -289.0 -289.0 -30 596.0 -19 535.0 11 061.0 -20 972.0 25 844.0 46 816.0 28 520.0 76 052.0 47 532.0 – – – – – – -49 492.0 -50 208.0 -716.0 65 811.0 -3 701.2 -69 512.2 48 000.0 285 235.0 337 700.0 – -52 465.0 17 026.0 29 260.0 – – -12 234.0 17 737.9 48 000.0 278 161.0 337 400.0 – -59 239.0 40 498.0 44 790.0 – – -4 292.0 -284.7 55 000.0 262 863.0 385 800.0 – -122 937.0 38 000.0 53 200.0 – – -15 200.0 3 484.8 255 243.0 337 507.8 82 264.8 367 998.9 366 374.3 359 347.8 5 413 825 5 157 347 -256 477 5 428 212 5 758 993 6 126 302 GDP 4 488.0 10 020.1 5 532.1 -135.3 -468.2 -332.8 6 005.0 -97.9 4 762.0 – 5 306.0 – 13) National Revenue Fund transactions National Revenue Fund receipts National Revenue Fund payments 4 352.7 9 551.9 5 199.3 5 907.1 4 762.0 5 306.0 Net

2020 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 186 R million 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividends tax and interest withholding tax Tax on retirem ent funds Other 1) 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 Other 5) Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges Other 6) Stamp duties and fees State miscellaneous revenue 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 – – 612.0 557.1 212.2 383 482.7 195 145.7 165 539.0 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 TOTAL TAX REVENUE (gross) Non-tax revenue 8) Less: SACU payments 9) Other adjustment 10) 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 – 625 100.2 20 819.6 -28 920.6 – TOTAL MAIN BUDGET REVENUE 286 675.6 301 029.4 350 346.5 418 653.1 484 635.1 562 644.4 616 999.2 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 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 -24 712.6 230.2 616 868.0 391 691.9 233 435.6 -27.4 20 688.4 -28 920.6 131.2 National Revenue Fund receipts 12) 8 167.9 1 598.2 2 492.0 6 905.2 3 438.1 1 849.8 8 203.4

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. 187 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 R million Actual collections 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 -14.6 606 820.5 388 102.4 191 151.6 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 Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividends tax 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 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 – 1 069 982.6 57 275.7 -51 021.9 – TOTAL TAX REVENUE (gross) 8) Non-tax revenue 9) Less: SACU payments 10) Other adjustment 586 113.1 672 751.5 745 291.3 800 142.2 887 366.2 965 456.9 1 076 236.4 TOTAL MAIN BUDGET REVENUE 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 1 076 115.3 624 157.7 445 825.7 -0.8 57 154.6 -51 021.9 121.1 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 6 428.6 3 013.9 5 209.2 12 302.8 11 709.3 12 647.0 14 377.5 12) National Revenue Fund receipts

2020 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 188 R million 2016/17 2017/18 2018/19 2019/20 2020/21 Actual collections % change Revised on actual estimates 2018/19 Budget estimates BeforeAfter tax proposals Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividends tax and interest w ithholding tax Tax on retirem ent funds Other 1) 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 Other 5) Taxes on international trade and transactions Custom s duties Health prom otion levy on im ports Im port surcharges Other 6) Stamp duties and fees State miscellaneous revenue 7) 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 -23.5 738 740.6 492 082.9 212 046.1 30 523.1 – 4 088.6 17 439.0 17 439.0 15 251.8 604.4 2 069.3 5 334.8 7 243.2 460 544.6 324 766.0 40 829.7 3 195.1 4 191.9 75 372.2 1 082.9 8 404.0 2 702.9 55 722.9 54 968.1 53.1 – 701.8 0.0 -8.7 778 280.1 5.4% 527 584.2 7.2% 216 718.1 2.2% 29 741.7 -2.6% – – 4 236.0 3.6% 18 576.3 6.5% 18 576.3 6.5% 16 037.8 5.2% 563.3 -6.8% 2 071.1 0.1% 6 163.0 15.5% 7 240.4 -0.0% 488 710.6 6.1% 344 201.9 6.0% 46 764.6 14.5% 2 590.0 -18.9% 4 112.5 -1.9% 79 277.5 5.2% 1 030.9 -4.8% 8 025.0 -4.5% 2 708.3 0.2% 57 329.7 2.9% 56 325.2 2.5% 54.3 2.4% – – 950.2 35.4% 0.1 46.7% – – 815 588.2 813 588.2 548 771.5 546 771.5 230 225.6 230 225.6 31 807.8 31 807.8 – – 4 783.3 4 783.3 19 412.9 19 412.9 19 412.9 19 412.9 17 509.8 17 509.8 702.7 702.7 2 320.5 2 320.5 6 865.9 6 865.9 7 620.7 7 620.7 512 266.8 514 266.8 360 554.6 360 554.6 48 836.1 48 836.1 2 860.4 2 860.4 4 328.5 4 328.5 83 441.2 83 441.2 1 150.5 1 150.5 8 100.3 8 100.3 2 995.3 4 995.3 60 639.8 60 639.8 59 500.2 59 500.2 74.6 74.6 – – 1 065.0 1 065.0 0.1 0.1 – – TOTAL TAX REVENUE (gross) Non-tax revenue 8) Less: SACU payments 9) Other adjustment 10) 1 144 081.0 33 271.8 -39 448.3 – 1 216 463.9 35 849.3 -55 950.9 – 1 287 690.2 35 868.7 -48 288.6 – 1 358 934.6 5.5% 36 142.0 0.8% -50 280.3 4.1% – – 1 425 417.6 1 425 417.6 35 973.2 35 973.2 -63 395.2 -63 395.2 – – TOTAL MAIN BUDGET REVENUE 1 137 904.4 1 196 362.3 1 275 270.3 1 344 796.3 5.5% 1 397 995.6 1 397 995.6 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 1 137 755.2 681 741.0 462 327.8 12.2 33 122.6 -39 448.3 149.2 1 196 164.8 730 739.5 485 747.9 -23.5 35 651.8 -55 950.9 197.5 1 275 158.4 758 853.4 528 845.5 -8.7 35 756.8 -48 288.6 111.9 1 344 682.7 5.5% 799 490.8 5.4% 559 443.8 5.8% – – 36 028.4 0.8% -50 280.3 4.1% 113.6 1.5% 1 397 866.3 1 397 866.3 838 024.3 836 024.3 587 393.3 589 393.3 – – 35 843.9 35 843.9 -63 395.2 -63 395.2 129.3 129.3 National Revenue Fund receipts 12) 14 240.7 16 600.3 11 999.4 10 020.1 -16.5% 6 005.0 6 005.0

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. Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement. Excludes sales of capital assets. 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. 9) 10) 11) 12) 189 2020/21 2021/22 2022/23 R million % change % of on revised total budget 2019/20 revenue % change after tax proposals Estimates 2020/21 % change on Estimates 2021/22 4.5% 58.2% 3.6% 39.1% 6.2% 16.5% 6.9% 2.3% – – 12.9% 0.3% 4.5% 1.4% 4.5% 1.4% 9.2% 1.3% 24.7% 0.1% 12.0% 0.2% 11.4% 0.5% 5.3% 0.5% 5.2% 36.8% 4.8% 25.8% 4.4% 3.5% 10.4% 0.2% 5.3% 0.3% 5.3% 6.0% 11.6% 0.1% 0.9% 0.6% 84.4% 0.4% 5.8% 4.3% 5.6% 4.3% 37.4% 0.0% – – 12.1% 0.1% – 0.0% – – 863 888.2 6.2% 581 145.9 6.3% 243 685.7 5.8% 33 769.1 6.2% – – 5 287.5 10.5% 20 585.0 6.0% 20 585.0 6.0% 18 955.8 8.3% 778.3 10.8% 2 546.0 9.7% 7 546.4 9.9% 8 085.1 6.1% 543 916.1 5.8% 381 858.9 5.9% 51 097.3 4.6% 3 109.7 8.7% 4 592.2 6.1% 88 525.8 6.1% 1 247.1 8.4% 8 213.2 1.4% 5 271.9 5.5% 64 848.8 6.9% 63 606.6 6.9% 90.1 20.7% – – 1 152.1 8.2% 0.1 1.4% – – 921 375.1 6.7% 621 602.2 7.0% 258 356.8 6.0% 35 802.2 6.0% – – 5 614.0 6.2% 21 969.8 6.7% 21 969.8 6.7% 20 164.8 6.4% 827.9 6.4% 2 708.4 6.4% 8 027.7 6.4% 8 600.7 6.4% 576 525.0 6.0% 405 598.3 6.2% 53 440.7 4.6% 3 308.3 6.4% 4 885.1 6.4% 94 172.0 6.4% 1 304.3 4.6% 8 352.4 1.7% 5 463.9 3.6% 69 621.8 7.4% 68 347.0 7.5% 96.8 7.5% – – 1 178.0 2.2% 0.1 1.7% – – Taxes on income and profits Personal incom e tax Corporate incom e tax Secondary tax on com panies/dividends tax 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 4.9% 102.0% -0.5% 2.6% 26.1% -4.5% – – 1 512 193.8 6.1% 32 663.3 -9.2% -60 563.0 -4.5% – – 1 609 656.6 6.4% 34 586.3 5.9% -63 365.7 4.6% – – TOTAL TAX REVENUE (gross) 8) Non-tax revenue 9) Less: SACU payments 10) Other adjustment 4.0% 100.0% 1 484 294.1 6.2% 1 580 877.1 6.5% TOTAL MAIN BUDGET REVENUE 4.0% 100.0% 4.6% 59.8% 5.4% 42.2% – – -0.5% 2.6% 26.1% -4.5% 13.8% 0.0% 1 484 161.7 6.2% 887 797.5 6.2% 624 396.4 5.9% – – 32 530.9 -9.2% -60 563.0 -4.5% 132.4 2.4% 1 580 742.5 6.5% 946 881.3 6.7% 662 775.3 6.1% – – 34 451.6 5.9% -63 365.7 4.6% 134.7 1.7% 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 -40.1% 0.4% 4 762.0 -20.7% 5 306.0 11.4% 12) National Revenue Fund receipts

2020 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. 190 Source: National Treasury R thousands 2016/17 2017/18 2018/19 Actual collections BeforeAfterRevisedActual tax proposalstax proposalsestimatecollection Taxes on income and profits Personal income tax Tax on corporate income Corporate income tax Secondary tax on companies/dividends tax Interest withholding tax Other Interest on overdue income tax Small business tax amnesty Taxes on payroll and workforce Skills development levy Taxes on property Estate, inheritance and gift taxes Donations tax Estate duty Taxes on financial and capital transactions Securities transfer tax1) Transfer duties Domestic taxes on goods and services Value-added tax Domestic VAT Import VAT Refunds Specific excise duties Beer Sorghum beer and sorghum flour Wine and other fermented beverages Spirits Cigarettes and cigarette tobacco Pipe tobacco and cigars Petroleum products2) Revenue from neighbouring countries3) Health promotion levy Ad valorem excise duties Fuel levy Taxes on use of goods or permission to use goods or to perform activities Air departure tax Plastic bag levy Electricity levy Incandescent light bulb levy CO2 tax - motor vehicle emissions Tyre levy International Oil Pollution Compensation Fund Carbon tax Turnover tax for micro businesses Other Universal Service Fund Taxes on international trade and transactions Import duties Customs duties Health promotion levy on imports Other Miscellaneous customs and excise receipts Diamond export levy Other taxes Stamp duties and fees State miscellaneous revenue4) 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 12 212 711 703 019 460 952 841 217 412 046 27 894 315 665 250 4 776 801 1 766 16 012 406 16 012 406 16 584 607 732 086 2 292 015 5 837 511 7 722 996 422 248 282 336 279 470 152 788 760 -191 070 644 13 172 996 3 918 3 771 583 6 442 619 11 067 422 429 271 829 790 1 638 277 – 3 780 887 70 948 576 1 086 040 241 295 8 500 970 55 359 1 336 818 715 997 3 019 – 33 504 192 357 49 939 408 49 151 743 700 809 86 856 -337 -337 -23 511 765 831 359772 991 359751 845 673738 740 597 498 334 638505 844 638497 451 304492 082 904 231 568 699231 218 699218 435 812212 046 052 30 828 96830 828 96830 340 67429 898 035 640 367640 367668 192625 055 4 413 8424 413 8424 949 2364 088 202 44 84444 844455349 16 929 38316 929 38317 312 16117 438 989 16 929 38316 929 38317 312 16117 438 989 17 160 66517 310 66516 034 76515 251 778 415 821415 821539 007604 447 2 573 4852 723 4851 895 8312 069 332 5 824 6445 824 6446 060 2715 334 752 8 346 7148 346 7147 539 6567 243 247 457 283 221484 825 979460 287 253460 544 575 363 016 755378 635 762379 887 172378 732 651 162 191 630169 472 624174 030 292175 184 585 -199 998 727-199 998 727-228 000 000-229 151 259 13 986 41314 576 41313 450 01013 781 537 4 3564 3564 4754 130 3 976 3754 086 3754 218 8464 452 995 6 828 1437 038 1437 466 9537 759 815 11 505 29811 915 29811 974 08112 090 765 484 930494 930423 477412 910 872 433872 433858 724838 362 1 664 2451 664 2451 879 8621 489 176 –1 684 7582 395 7583 195 110 4 059 7864 187 7864 162 6664 191 871 76 288 55077 508 55075 373 56775 372 226 1 154 2901 154 2901 102 3541 082 862 253 419363 419310 362300 395 8 621 0868 621 0868 434 4788 403 962 60 58590 58540 74040 719 1 435 2071 575 2071 236 0291 390 472 601 302601 302751 804730 204 3 0633 0635 9395 481 –––– 44 84444 84417 98012 938 229 236229 236261 682222 666 52 902 83054 050 07356 721 80555 722 906 51 698 81952 600 81955 638 27954 968 076 –245 24278 24253 052 1 103 3771 103 377918 427623 781 100 634100 63486 85677 997 -443-443-33948 -443-443-33948 -1 142 473-1 142 473–-8 651 TOTAL TAX REVENUE (gross) 1 144 080 987 1 216 463 874 1 308 964 5421 344 964 5421 302 201 3181 287 690 241 Less: SACU payments5) Payments in terms of Customs Union agreements (sec. 51(2) of Act 91 of 1964) -39 448 348 -39 448 348 -55 950 873 -55 950 873 -48 288 636-48 288 636-48 288 636-48 288 636 -48 288 636-48 288 636-48 288 636-48 288 636 TOTAL TAX REVENUE (net of SACU payments) 1 104 632 639 1 160 513 001 1 260 675 9051 296 675 9051 253 912 6821 239 401 605

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 Swatini. Revenue received by SARS in respect of taxation that could not be allocated to specific revenue types. Payments in terms of SACU agreements. 191 2019/20 2020/21 R thousands Budget estimates% change on BeforeAfterRevised2018/19 tax proposalsestimate actual BeforeAfter tax proposals 806 541 612820 341 612778 280 1055.4% 539 076 912552 876 912527 584 2167.2% 229 608 192229 608 192216 718 0972.2% 31 892 51531 892 51529 144 409-2.5% 702 368702 368597 334-4.4% 5 261 1405 261 1404 235 9003.6% 485485149-57.3% 18 758 51018 758 51018 576 3056.5% 18 758 51018 758 51018 576 3056.5% 17 158 87217 158 87216 037 7715.2% 576 793576 793563 283-6.8% 2 028 7372 028 7372 071 0760.1% 6 485 1226 485 1226 162 99015.5% 8 068 2198 068 2197 240 421-0.0% 503 448 985504 648 985488 710 6466.1% 406 966 584406 210 232399 432 7005.5% 187 765 494187 421 846182 666 0474.3% -233 160 795-233 160 795-237 896 8323.8% 14 582 85214 969 26915 420 22211.9% 4 3374 3374 2242.3% 4 175 2414 210 8804 452 108-0.0% 7 132 1487 310 0928 927 71315.1% 12 251 92612 627 46914 406 84319.2% 475 214499 671475 38215.1% 918 599918 599870 0383.8% 1 813 6151 813 6152 208 03648.3% 1 986 0671 986 0672 590 033-18.9% 4 454 4874 454 4874 112 466-1.9% 81 657 58382 957 58379 277 4915.2% 1 159 2151 159 2151 030 853-4.8% 326 371326 371325 9868.5% 8 562 4858 562 4858 025 000-4.5% 41 35941 35932 529-20.1% 1 254 7881 254 7881 300 225-6.5% 790 583790 583817 54212.0% 6 0306 0303 170-42.2% –––– 19 14919 14919 26748.9% 265 654265 654209 604-5.9% 61 300 36361 300 36357 329 6682.9% 60 029 48660 029 48656 325 2082.5% 245 242245 24254 3082.4% 932 366932 366859 74137.8% 93 26993 26990 41215.9% -344-3447146.7% -344-3447146.7% –––-100.0% 815 588 183 548 771 494 230 225 625 31 169 089 638 701 4 783 092 182 19 412 896 19 412 896 17 509 810 702 682 2 320 507 6 865 932 7 620 689 512 266 829 421 650 757 192 962 798 -254 058 947 16 484 000 4 939 5 326 196 9 281 460 14 461 679 493 879 1 002 759 1 781 193 2 860 369 4 328 453 83 441 153 1 150 545 360 782 8 100 339 37 477 1 394 995 951 353 3 548 – 26 263 220 839 60 639 807 59 500 218 74 619 963 645 101 324 71 71 – 813 588 183 546 771 494 230 225 625 31 169 089 638 701 4 783 092 182 19 412 896 19 412 896 17 509 810 702 682 2 320 507 6 865 932 7 620 689 514 266 829 421 650 757 192 962 798 -254 058 947 16 484 000 4 939 5 326 196 9 281 460 14 461 679 493 879 1 002 759 1 781 193 2 860 369 4 328 453 83 441 153 1 150 545 610 782 8 100 339 37 477 1 394 995 951 353 3 548 1 750 000 26 263 220 839 60 639 807 59 500 218 74 619 963 645 101 324 71 71 – Taxes on income and profits Personal income tax Tax on corporate income Corporate income tax Secondary tax on companies/dividends tax Interest withholding tax Other Interest on overdue income tax Small business tax amnesty Taxes on payroll and workforce Skills development 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 Domestic VAT Import VAT Refunds Specific excise duties Beer Sorghum beer and sorghum flour Wine and other fermented beverages Spirits Cigarettes and cigarette tobacco Pipe tobacco and cigars 2)Petroleum products 3)Revenue from neighbouring countries Health promotion levy Ad valorem excise duties Fuel levy Taxes on use of goods or permission to use goods or to perform activities Air departure tax Plastic bag levy Electricity levy Incandescent light bulb levy CO2 tax - motor vehicle emissions Tyre levy International Oil Pollution Compensation Fund Carbon tax Turnover tax for micro businesses Other Universal Service Fund Taxes on international trade and transactions Import duties Customs duties Health promotion levy on imports Other Miscellaneous customs and excise receipts Diamond export levy Other taxes Stamp duties and fees 4) State miscellaneous revenue 1 407 207 9981 422 207 9981 358 934 5665.5% 1 425 417 596 1 425 417 596 TOTAL TAX REVENUE (gross) -50 280 313-50 280 313-50 280 3134.1% -50 280 313-50 280 313-50 280 3134.1% -63 395 241 -63 395 241 -63 395 241 -63 395 241 5) Less: SACU payments Payments in terms of Customs Union agreements (sec. 51(2) of Act 91 of 1964) 1 356 927 6851 371 927 6851 308 654 2545.6% 1 362 022 355 1 362 022 355 TOTAL TAX REVENUE (net of SACU payments)

2020 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. 11) Includes National Revenue Fund receipts previously accounted for separately. Source: National Treasury 192 R thousands 2016/17 2017/18 2018/19 Actual collections BeforeAfterRevisedActual tax proposalstax proposals estimatecollection TOTAL TAX REVENUE (net of SACU payments) 1 104 632 639 1 160 513 001 1 260 675 9051 296 675 9051 253 912 6821 239 401 605 Sales of goods and services other than capital assets Sales of goods and services produced by departments Sales by market establishments6) Administrative fees Other sales Sales of scrap, waste, arms and other used current goods Transfers received Fines, penalties and forfeits Interest, dividends and rent on land Interest Cash and cash equivalents Dividends Airports Company South Africa South African Special Risks Insurance Association Vodacom Industrial Development Corporation Reserve Bank (National Treasury) Telkom Other Rent on land Mineral and petroleum royalties 7) Mining leases and ownership 8) Royalties, prospecting fees and surface rental 9) Land rent Sales of capital assets Financial transactions in assets and liabilities10) 2 546 176 56 205 1 342 255 1 098 748 48 968 495 915 666 963 11 188 619 3 981 450 255 671 151 200 – 20 000 – 830 813 1 218 5 801 670 111 696 23 616 11 285 149 200 18 224 915 2 588 718 55 913 1 438 136 1 082 556 12 113 330 504 466 043 12 725 550 3 484 812 266 854 242 979 – 50 000 – 846 603 – 7 617 251 179 777 23 387 13 887 197 491 19 540 965 2 298 7472 298 7472 381 5462 320 696 69 23469 23463 29759 164 1 368 3701 368 3701 352 6681 344 910 850 725850 725954 741902 116 10 41810 41810 84014 506 571 161571 161599 722386 234 610 725610 7251 161 5551 751 945 12 778 77012 778 77013 365 53816 845 028 3 490 3163 490 3163 575 1146 833 549 281 434281 434280 000109 989 160 261160 261160 26180 000 ––3232 20 00020 00050 00050 000 –––– 600 000600 000490 645722 859 1 0001 00046– 7 985 9957 985 9958 339 6278 611 781 193 905193 905440 537413 477 26 95626 95624 06319 000 18 90318 9035 2134 342 130 682130 682119 638111 917 8 080 1268 080 12613 845 40114 452 907 TOTAL NON-TAX REVENUE11) 33 271 788 35 849 271 24 470 21124 470 21131 473 40035 868 727 TOTAL MAIN BUDGET REVENUE 1 137 904 427 1 196 362 272 1 285 146 1171 321 146 1171 285 386 0821 275 270 332 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 14 240 651 10 710 440 2 594 049 – – 936 162 16 600 255 13 115 597 1 132 995 – – 2 351 663 6 185 0006 185 00011 685 23611 999 374 6 185 0006 185 00010 238 13810 390 835 ––1 000 0001 161 388 ––444 598– –––– ––2 500447 151

STATISTICAL ANNEXURE Table 3 Main budget: estimates of national revenue Detailed classification of revenue 193 2019/20 2020/21 R thousands Budget estimates% change on BeforeAfterRevised2018/19 tax proposalsestimate actual BeforeAfter tax proposals 1 356 927 6851 371 927 6851 308 654 2545.6% 1 362 022 355 1 362 022 355 TOTAL TAX REVENUE (net of SACU payments) 2 377 4052 377 4052 397 1013.3% 72 14672 14663 6787.6% 1 411 3711 411 3711 399 5324.1% 882 933882 933923 5442.4% 10 95510 95510 347-28.7% 602 202602 202660 34571.0% 788 825788 825711 989-59.4% 13 911 64413 911 64419 675 22616.8% 3 771 8363 771 8366 789 432-0.6% 297 194297 194100 000-9.1% 171 305171 305171 305114.1% 3232–-100.0% 50 00050 00050 000– –––– 600 000600 000600 000-17.0% 1 0461 0463 500– 8 766 1758 766 17511 951 92638.8% 217 547217 547-20 244-104.9% 24 67724 67724 67729.9% 11 83211 8324 6296.6% 129 597129 597113 5991.5% 13 727 01813 727 01812 583 757-12.9% 2 415 121 71 051 1 473 117 860 207 10 746 667 716 874 175 19 884 602 6 065 515 90 000 187 901 32 50 000 – 664 446 1 200 12 696 862 90 200 26 034 12 412 129 305 12 002 286 2 415 121 71 051 1 473 117 860 207 10 746 667 716 874 175 19 884 602 6 065 515 90 000 187 901 32 50 000 – 664 446 1 200 12 696 862 90 200 26 034 12 412 129 305 12 002 286 Sales of goods and services other than capital assets Sales of goods and services produced by departments 6)Sales by market establishments Administrative fees Other sales Sales of scrap, waste, arms and other used current goods Transfers received Fines, penalties and forfeits Interest, dividends and rent on land Interest Cash and cash equivalents Dividends Airports Company South Africa South African Special Risks Insurance Association Vodacom Industrial Development Corporation Reserve Bank (National Treasury) Telkom Other Rent on land 7)Mineral and petroleum royalties 8)Mining leases and ownership 9)Royalties, prospecting fees and surface rental Land rent Sales of capital assets 10) Financial transactions in assets and liabilities 31 536 69131 536 69136 142 0170.8% 35 973 205 35 973 205 11) TOTAL NON-TAX REVENUE 1 388 464 3761 403 464 3761 344 796 2705.5% 1 397 995 560 1 397 995 560 TOTAL MAIN BUDGET REVENUE 4 488 0004 488 00010 020 079-16.5% 4 488 0004 488 0007 156 956-31.1% ––2 483 353113.8% ––378 078– –––– ––1 692-99.6% 6 005 000 6 005 000 – – – – 6 005 000 6 005 000 – – – – 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

2020 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. 194 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 R million 2016/17 2017/18 Expenditure of which on budget transfers transfers vote to to local outcome provinces 1) government 2) Expenditure of which on budget transfers vote to outcome provinces 1) 1 The Presidency 2 Parliament 3 Cooperative Governance of which: local government equitable share 4 Government Communication and Information System 5 Home Affairs 6 International Relations and Cooperation 7 National School of Government 8 National Treasury 9 Planning, Monitoring and Evaluation 10 Public Enterprises 11 Public Service and Administration 12 Public Service Commission 13 Public Works and Infrastructure 14 Statistics South Africa 15 Traditional Affairs 16 Basic Education 17 Higher Education and Training 18 Health 19 Social Development 20 Women, Youth and Persons with Disabilities 21 Civilian Secretariat for the Police Service 22 Correctional Services 23 Defence 24 Independent Police Investigative Directorate 25 Justice and Constitutional Development 26 Military Veterans 27 Office of the Chief Justice 28 Police 29 Agriculture, Land Reform and Rural Development 30 Communications and Digital Technologies 31 Employment and Labour 32 Environment, Forestry and Fisheries 33 Human Settlements 34 Mineral Resources and Energy 35 Science and Innovation 36 Small Business Development 37 Sports, Arts and Culture 38 Tourism 39 Trade, Industry and Competition 40 Transport 478.1 – – 1 738.9 – – 69 718.2 – 66 178.5 – – 50 709.0 585.1 – – 8 143.5 – – 6 844.9 – – 87.7 – – 28 120.7 – 1 454.4 367.4 – – 253.8 – – 463.0 – – 229.1 – – 6 403.4 761.7 664.0 2 461.2 – – 130.7 – – 21 476.1 16 579.6 – 49 098.0 – – 38 496.2 33 981.0 – 147 325.0 85.5 – 623.5 – – 99.4 – – 21 542.2 – – 46 599.5 – – 241.7 – – 16 039.0 – – 504.6 – – 855.6 – – 80 874.2 – – 15 357.2 2 202.5 – 2 821.2 – – 2 761.6 – – 7 581.6 – – 30 587.2 18 284.0 10 839.5 9 173.9 – 2 131.9 7 423.2 – – 1 197.0 – – 4 981.6 1 912.5 – 1 919.6 – – 11 014.5 – – 56 403.7 15 878.5 5 694.2 485.2 – 1 711.9 – 76 209.5 82.3 – – 619.3 – 8 401.7 – 5 996.9 – 153.7 – 39 595.8 – 425.6 – 250.4 – 454.9 – 247.4 – 6 942.3 781.2 2 195.5 – 139.6 – 22 932.0 17 570.1 52 256.8 – 42 424.7 37 570.2 159 379.0 524.4 659.8 – 118.3 – 22 757.3 – 48 355.1 – 255.3 – 16 607.2 – 601.5 – 997.5 – 86 480.4 – 15 175.8 2 241.7 5 684.1 – 2 844.0 – 7 906.3 – 33 370.5 19 969.3 9 721.3 – 7 528.6 – 1 459.5 – 5 201.9 2 005.8 2 134.0 – 10 145.3 – 54 670.7 16 476.5 Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and deputy president salaries (The Presidency) Members' remuneration (Parliament) Debt-service costs (National Treasury) Provincial equitable share (National Treasury) 4) General fuel levy sharing with metropolitan municipalities (National Treasury) National Revenue Fund payments (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 Òther Auditor-General of South Africa (National Treasury) Skills levy and sector education and training authorities (Higher Education and Training) Magistrates' salaries (Justice and Constitutional Development) Judges' salaries (Office of the Chief Justice and Judicial Administration) International Oil Pollution Compensation Fund (Transport) 716 658.5 89 685.2 91 643.2 5.7 – – 436.5 – – 146 496.7 – – 410 698.6 410 698.6 – 11 223.8 – 11 223.8 1 778.0 – – 187.2 – – 525.6 – – 1 065.2 – – 0.0 – – 79.1 – – 15 233.0 – – 1 845.7 – – 930.7 – – 3.8 – – 768 602.9 97 221.5 5.7 – 556.3 – 162 644.6 – 441 331.1 441 331.1 11 785.0 – 587.1 – 225.4 – – – 361.8 – -0.1 – 196.3 – 16 293.6 – 1 933.5 – 998.4 – 5.6 – Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees adjustment 588 731.7 410 698.6 11 223.8 – – – – – – – – – – – – 636 337.0 441 331.1 – – – – – – – – Total 1 305 390.1 500 383.8 102 867.1 1 404 939.9 538 552.6 Contingency reserve National government projected underspending Local government repayment to the National Revenue Fund – – – – – – – – – – – – – – – Main budget expenditure 1 305 390.1 500 383.8 102 867.1 1 404 939.9 538 552.6

STATISTICAL ANNEXURE Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 4) Provincial equitable share excluding conditional grants to provinces. 195 2017/18 2018/19 2019/20 R million of which transfers to local government 2) Expenditure of which on budget transfers transfers vote to to local outcome provinces 1) government 2) Adjusted Budget appro-estimate 3) priation – – 72 012.2 55 613.7 – – – – 1 592.7 – – – – 691.4 – – – – – – – – – – – – – – – – – – – 11 382.2 2 290.3 – – – – – 6 214.4 465.2 – – 1 872.7 – – 81 755.1 139.0 77 220.2 – – 60 757.9 643.7 – – 9 047.2 – – 6 370.2 – – 166.8 – – 28 554.6 – 1 508.8 384.6 – – 6 474.8 – – 492.7 – – 263.9 – – 7 463.5 824.0 692.9 2 311.1 – – 154.3 – – 23 414.8 17 690.2 – 72 866.3 – – 46 594.6 41 364.1 – 172 562.6 776.9 – 723.9 – – 123.9 – – 23 776.9 – – 47 865.0 – – 314.8 – – 17 182.1 – – 542.0 – – 1 092.0 – – 90 297.5 – – 16 600.2 2 845.9 – 4 826.6 – – 3 086.7 – – 7 992.0 – – 32 195.4 18 990.0 11 343.9 8 970.4 – 2 119.5 7 949.3 – – 1 419.5 – – 5 314.0 2 011.1 – 2 234.8 – – 10 519.3 – – 59 193.5 17 026.0 6 394.2 699.1 699.3 1 993.5 1 993.5 90 554.4 90 178.2 – – 688.7 683.6 8 339.7 9 527.7 6 508.5 6 508.5 187.9 187.9 30 720.7 30 628.9 478.4 479.5 17 945.0 56 883.0 536.0 527.2 278.2 278.2 7 869.0 7 967.0 2 514.4 2 514.4 163.4 168.4 24 504.5 24 464.5 89 454.5 89 013.6 51 460.7 51 195.2 184 767.8 184 697.8 739.3 738.0 146.7 143.1 25 407.6 25 316.9 49 850.4 50 235.6 336.7 336.7 18 717.1 18 781.5 662.6 652.6 1 197.7 1 197.7 97 448.6 96 684.2 17 398.7 17 228.9 2 572.0 5 774.1 3 435.1 3 433.2 8 742.1 8 695.7 33 879.2 33 861.9 9 445.2 9 185.8 8 194.6 8 172.3 2 568.6 2 268.6 5 771.1 5 723.1 2 392.7 2 392.7 11 044.4 11 014.4 64 194.2 64 205.1 1 The Presidency 2 Parliament 3 Cooperative Governance of which: local government equitable share 4 Government Communication and Information System 5 Home Affairs 6 International Relations and Cooperation 7 National School of Government 8 National Treasury 9 Planning, Monitoring and Evaluation 10 Public Enterprises 11 Public Service and Administration 12 Public Service Commission 13 Public Works and Infrastructure 14 Statistics South Africa 15 Traditional Affairs 16 Basic Education 17 Higher Education and Training 18 Health 19 Social Development 20 Women, Youth and Persons with Disabilities 21 Civilian Secretariat for the Police Service 22 Correctional Services 23 Defence 24 Independent Police Investigative Directorate 25 Justice and Constitutional Development 26 Military Veterans 27 Office of the Chief Justice 28 Police 29 Agriculture, Land Reform and Rural Development 30 Communications and Digital Technologies 31 Employment and Labour 32 Environment, Forestry and Fisheries 33 Human Settlements 34 Mineral Resources and Energy 35 Science and Innovation 36 Small Business Development 37 Sports, Arts and Culture 38 Tourism 39 Trade, Industry and Competition 40 Transport 99 317.5 – – – – 11 785.0 – – – – – – – – – – 820 697.8 101 667.1 106 019.7 5.7 – – 493.2 – – 181 849.1 – – 470 286.5 470 286.5 – 12 468.6 – 12 468.6 161.6 – – 142.0 – – – – – 18.8 – – 0.9 – – 97.7 – – 17 479.9 – – 2 047.4 – – 1 022.2 – – 3.0 – – 900 249.4 941 105.7 7.3 7.3 527.5 600.5 202 207.8 203 730.8 505 553.8 505 553.8 13 166.8 13 166.8 135.3 359.5 135.3 131.7 – 143.4 – 83.9 – 0.5 50.4 62.8 18 758.5 18 576.3 2 383.7 2 263.7 1 098.5 1 098.5 10.4 10.4 Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and deputy president salaries (The Presidency) Members' remuneration (Parliament) Debt-service costs (National Treasury) 4) Provincial equitable share (National Treasury) General fuel levy sharing with metropolitan municipalities (National Treasury) National Revenue Fund payments (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 Òther Auditor-General of South Africa (National Treasury) Skills levy and sector education and training authorities (Higher Education and Training) Magistrates' salaries (Justice and Constitutional Development) Judges' salaries (Office of the Chief Justice and Judicial Administration) International Oil Pollution Compensation Fund (Transport) 11 785.0 – – – – 685 914.8 470 286.5 12 468.6 – – – – – – – – – – – – 743 900.1 745 430.4 10.0 - 1 000.0 - 5 348.0 - -4 800.0 - Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees adjustment 111 102.6 1 506 612.5 571 953.6 118 488.3 1 645 707.4 1 686 536.1 Total – – – – – – – – – – – – 13 000.0 – - -1 183.8 - -2 000.0 Contingency reserve National government projected underspending Local government repayment to the National Revenue Fund 111 102.6 1 506 612.5 571 953.6 118 488.3 1 658 707.4 1 683 352.3 Main budget expenditure

2020 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. 196 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 R million 2019/20 2020/21 of which transfers transfers Revised to to local estimate provinces 1) government 2) of which transfers transfers Budget to to local estimate provinces 1) government 2) 1 The Presidency 2 Parliament 3 Cooperative Governance of which: local government equitable share 4 Government Communication and Information System 5 Home Affairs 6 International Relations and Cooperation 7 National School of Government 8 National Treasury 9 Planning, Monitoring and Evaluation 10 Public Enterprises 11 Public Service and Administration 12 Public Service Commission 13 Public Works and Infrastructure 14 Statistics South Africa 15 Traditional Affairs 16 Basic Education 17 Higher Education and Training 18 Health 19 Social Development 20 Women, Youth and Persons with Disabilities 21 Civilian Secretariat for the Police Service 22 Correctional Services 23 Defence 24 Independent Police Investigative Directorate 25 Justice and Constitutional Development 26 Military Veterans 27 Office of the Chief Justice 28 Police 29 Agriculture, Land Reform and Rural Development 30 Communications and Digital Technologies 31 Employment and Labour 32 Environment, Forestry and Fisheries 33 Human Settlements 34 Mineral Resources and Energy 35 Science and Innovation 36 Small Business Development 37 Sports, Arts and Culture 38 Tourism 39 Trade, Industry and Competition 40 Transport 699.3 – – 1 993.5 – – 88 168.2 130.9 83 115.2 – – 66 973.5 683.6 – – 9 527.7 – – 6 508.5 – – 187.9 – – 30 432.0 – 1 594.0 464.0 – – 56 883.0 – – 527.2 – – 278.2 – – 7 927.0 868.2 730.0 2 514.4 – – 166.2 – – 24 064.7 18 569.2 – 88 859.3 – – 50 695.0 45 524.1 – 184 697.8 518.2 – 738.0 – – 143.1 – – 25 316.9 – – 50 235.6 – – 336.7 – – 18 581.5 – – 652.6 – – 1 197.7 – – 96 684.2 – – 17 228.9 2 158.7 – 4 648.9 – – 3 381.7 – – 8 695.7 – – 33 861.9 19 604.4 12 194.5 9 036.7 – 2 090.4 8 172.3 – – 2 268.6 – – 5 687.1 2 121.2 – 2 392.7 – – 11 014.4 – – 63 976.1 17 768.2 6 393.1 611.6 – – 2 180.5 – – 96 234.0 138.5 90 656.4 – – 74 683.3 720.5 – – 9 029.6 – – 6 850.2 – – 206.6 – – 33 123.2 – 1 575.0 500.0 – – 37 849.4 – – 565.7 – – 297.6 – – 8 070.8 834.3 748.0 3 452.2 – – 173.4 – – 25 328.2 19 564.3 – 97 444.0 – – 55 516.0 49 267.2 – 197 718.3 915.1 – 778.5 – – 156.3 – – 26 800.0 – – 52 438.6 – – 355.7 – – 19 860.6 – – 683.1 – – 1 259.8 – – 101 711.0 – – 16 810.1 2 153.4 – 3 394.5 – – 3 637.7 – – 8 954.7 – – 31 324.9 17 493.5 11 440.7 9 337.0 – 2 076.7 8 797.4 – – 2 406.8 – – 5 720.2 2 075.7 – 2 481.0 – – 11 082.1 – – 62 036.3 18 342.8 6 554.3 Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and deputy president salaries (The Presidency) Members' remuneration (Parliament) Debt-service costs (National Treasury) Provincial equitable share (National Treasury) 4) General fuel levy sharing with metropolitan municipalities (National Treasury) National Revenue Fund payments (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 Òther Auditor-General of South Africa (National Treasury) Skills levy and sector education and training authorities (Higher Education and Training) Magistrates' salaries (Justice and Constitutional Development) Judges' salaries (Office of the Chief Justice and Judicial Administration) International Oil Pollution Compensation Fund (Transport) 935 590.9 107 263.1 111 852.9 7.3 – – 600.5 – – 205 005.0 – – 505 553.8 505 553.8 – 13 166.8 – 13 166.8 468.1 – – 131.7 – – 252.3 – – 83.9 – – 0.2 – – 62.8 – – 18 576.3 – – 2 163.7 – – 1 098.5 – – 10.4 – – 963 114.2 110 784.8 118 501.9 7.8 – – 507.2 – – 229 270.0 – – 538 471.5 538 471.5 – 14 026.9 – 14 026.9 97.9 – – 97.9 – – – – – – – – – – – 120.0 – – 19 412.9 – – 2 550.2 – – 1 190.9 – – 11.0 – – Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees adjustment 746 713.2 505 553.8 13 166.8 - – – - – – - – – - – – 805 666.3 538 471.5 14 026.9 7 020.6 – – - – – 23 000.0 – – -37 806.7 – – Total 1 682 304.1 612 816.8 125 019.7 1 760 994.4 649 256.3 132 528.8 Contingency reserve National government projected underspending Local government repayment to the National Revenue Fund – – – – – – – – – 5 000.0 – – - – – - – – Main budget expenditure 1 682 304.1 612 816.8 125 019.7 1 765 994.4 649 256.3 132 528.8

STATISTICAL ANNEXURE Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote 4) Provincial equitable share excluding conditional grants to provinces. 197 2021/22 2022/23 R million of which transfers transfers Budget to to local estimate provinces 1) government 2) of which transfers transfers Budget to to local estimate provinces 1) government 2) 648.8 – – 2 331.5 – – 104 262.1 146.1 98 387.0 – – 81 061.8 763.2 – – 9 659.9 – – 7 038.5 – – 227.3 – – 35 822.5 – 1 644.4 524.3 – – 4 637.4 – – 606.6 – – 316.3 – – 8 757.3 871.4 790.0 4 843.9 – – 184.7 – – 27 333.0 20 773.3 – 102 753.0 – – 60 638.3 53 916.6 – 211 810.9 1 056.7 – 821.5 – – 166.3 – – 28 565.6 – – 50 852.5 – – 377.7 – – 21 168.8 – – 711.0 – – 1 335.9 – – 108 208.8 – – 17 946.9 2 319.7 – 3 918.6 – – 3 857.2 – – 9 287.8 – – 31 788.6 17 614.4 11 517.7 9 570.0 – 2 233.1 9 377.8 – – 2 696.1 – – 6 035.5 2 204.9 – 2 586.2 – – 10 098.3 – – 69 034.6 19 058.3 6 911.0 676.0 – – 2 429.4 – – 111 656.6 153.0 105 531.1 – – 87 212.7 794.0 – – 10 041.5 – – 7 328.9 – – 236.3 – – 32 911.9 – 1 717.5 547.9 – – 2 119.1 – – 627.5 – – 328.2 – – 9 089.7 902.8 819.1 2 862.6 – – 192.3 – – 28 592.4 21 737.9 – 107 373.4 – – 63 491.0 56 537.0 – 226 890.8 1 191.9 – 853.0 – – 173.3 – – 29 779.2 – – 52 993.6 – – 393.4 – – 22 083.9 – – 735.0 – – 1 398.3 – – 112 683.6 – – 18 520.9 2 392.0 – 2 643.0 – – 4 009.8 – – 9 640.5 – – 32 790.8 18 317.4 11 708.2 10 583.4 – 2 362.0 9 681.5 – – 2 760.7 – – 6 269.6 2 307.5 – 2 687.7 – – 10 489.1 – – 72 228.0 19 597.2 7 240.2 1 The Presidency 2 Parliament 3 Cooperative Governance of which: local government equitable share 4 Government Communication and Information System 5 Home Affairs 6 International Relations and Cooperation 7 National School of Government 8 National Treasury 9 Planning, Monitoring and Evaluation 10 Public Enterprises 11 Public Service and Administration 12 Public Service Commission 13 Public Works and Infrastructure 14 Statistics South Africa 15 Traditional Affairs 16 Basic Education 17 Higher Education and Training 18 Health 19 Social Development 20 Women, Youth and Persons with Disabilities 21 Civilian Secretariat for the Police Service 22 Correctional Services 23 Defence 24 Independent Police Investigative Directorate 25 Justice and Constitutional Development 26 Military Veterans 27 Office of the Chief Justice 28 Police 29 Agriculture, Land Reform and Rural Development 30 Communications and Digital Technologies 31 Employment and Labour 32 Environment, Forestry and Fisheries 33 Human Settlements 34 Mineral Resources and Energy 35 Science and Innovation 36 Small Business Development 37 Sports, Arts and Culture 38 Tourism 39 Trade, Industry and Competition 40 Transport 988 835.6 117 961.5 127 259.5 8.3 – – 541.0 – – 258 482.1 – – 573 989.5 573 989.5 – 15 182.5 – 15 182.5 – – – – – – – – – – – – – – – 125.0 – – 20 585.0 – – 2 715.6 – – 1 268.7 – – 11.6 – – 1 029 512.7 123 136.7 135 359.8 8.6 – – 561.2 – – 290 145.1 – – 607 553.5 607 553.5 – 16 085.0 – 16 085.0 – – – – – – – – – – – – – – – 129.0 – – 21 969.8 – – 2 816.0 – – 1 318.9 – – 12.0 – – Total appropriation by vote Plus: Direct charges against the National Revenue Fund President and deputy president salaries (The Presidency) Members' remuneration (Parliament) Debt-service costs (National Treasury) 4) Provincial equitable share (National Treasury) General fuel levy sharing with metropolitan municipalities (National Treasury) National Revenue Fund payments (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 Òther Auditor-General of South Africa (National Treasury) Skills levy and sector education and training authorities (Higher Education and Training) Magistrates' salaries (Justice and Constitutional Development) Judges' salaries (Office of the Chief Justice and Judicial Administration) International Oil Pollution Compensation Fund (Transport) 872 909.4 573 989.5 15 182.5 1 852.6 – – 4 000.0 – – 33 000.0 – – -54 929.1 – – 940 599.1 607 553.5 16 085.0 3 573.5 – – 6 000.0 – – 23 000.0 – – -67 460.4 – – Total direct charges against the National Revenue Fund Provisional allocation not assigned to votes Infrastructure fund not assigned to votes Provisional allocation for Eskom restructuring Compensation of employees adjustment 1 845 668.5 691 951.1 142 442.0 1 935 224.9 730 690.2 151 444.8 Total 5 000.0 – – - – – - – – 5 000.0 – – - – – - – – Contingency reserve National government projected underspending Local government repayment to the National Revenue Fund 1 850 668.5 691 951.1 142 442.0 1 940 224.9 730 690.2 151 444.8 Main budget expenditure

2020 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 198 R million 2016/17 2017/18 2018/19 2019/20 % 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 779 534.456.5% 462 478.033.5% 170 193.112.3% 146 863.410.6% 543 121.539.4% 109 375.67.9% 4 680.80.3% 108 821.97.9% 28 262.92.0% 2 205.80.2% 45 635.83.3% 34 049.22.5% 26 741.61.9% 7 307.60.5% 11 586.60.8% 4 917.50.4% 6 669.10.5% 28 415.12.1% 220 404.416.0% 191 339.713.9% 29 064.72.1% 49 930.83.6% 39 199.32.8% 22 377.61.6% 16 821.71.2% 9 241.70.7% 3 622.00.3% 5 619.70.4% 139.70.0% 1 202.30.1% 147.70.0% 7 183.70.5% 838 697.956.7% 494 713.533.4% 180 857.512.2% 163 126.911.0% 570 707.038.6% 118 344.88.0% 5 134.20.3% 113 777.87.7% 32 021.02.2% 1 971.90.1% 41 115.22.8% 32 544.52.2% 22 605.71.5% 9 938.80.7% 8 570.70.6% 3 351.80.2% 5 218.90.4% 28 900.92.0% 234 575.315.9% 205 748.013.9% 28 827.31.9% 50 690.13.4% 39 388.62.7% 23 489.61.6% 15 899.01.1% 10 364.30.7% 4 446.40.3% 5 917.90.4% 180.10.0% 676.20.0% 80.90.0% 19 309.11.3% 902 037.056.7% 527 932.833.2% 191 667.512.0% 182 436.811.5% 625 823.839.3% 126 302.47.9% 6 740.30.4% 128 765.68.1% 37 530.32.4% 2 346.40.1% 42 047.22.6% 33 422.12.1% 23 641.01.5% 9 781.00.6% 8 625.20.5% 3 631.00.2% 4 994.10.3% 33 875.02.1% 254 956.816.0% 226 215.214.2% 28 741.61.8% 48 732.43.1% 37 908.12.4% 23 142.71.5% 14 765.40.9% 9 968.50.6% 4 145.10.3% 5 823.40.4% 102.50.0% 648.60.0% 104.80.0% 14 764.90.9% 983 613.8 567 426.3 210 660.5 205 527.0 684 098.2 133 286.0 5 735.7 146 329.9 42 614.4 2 542.0 44 822.9 34 760.9 24 077.6 10 683.4 10 062.0 4 218.4 5 843.6 35 631.2 278 871.8 248 953.7 29 918.1 49 499.9 36 651.7 21 075.9 15 575.7 11 983.1 4 238.4 7 744.7 106.1 532.8 226.3 64 036.1 1 379 770.4100.0% –– 1 479 404.1100.0% –– 1 591 358.1100.0% –– 1 781 248.0 – 1 379 770.4100.0% 1 479 404.1100.0% 1 591 358.1100.0% 1 781 248.0

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. 199 2020/21 2021/22 2022/23 R million % of total Budget % of estimatetotal Budget % of estimatetotal Budget % of estimatetotal 55.2% 31.9% 11.8% 11.5% 38.4% 7.5% 0.3% 8.2% 2.4% 0.1% 2.5% 2.0% 1.4% 0.6% 0.6% 0.2% 0.3% 2.0% 15.7% 14.0% 1.7% 2.8% 2.1% 1.2% 0.9% 0.7% 0.2% 0.4% 0.0% 0.0% 0.0% 3.6% 1 026 763.854.7% 576 814.830.7% 220 152.411.7% 229 796.612.2% 723 406.838.5% 140 767.77.5% 5 450.80.3% 153 808.88.2% 45 043.72.4% 2 829.70.2% 41 368.72.2% 30 806.61.6% 19 967.71.1% 10 839.00.6% 10 562.10.6% 4 248.10.2% 6 314.00.3% 39 438.62.1% 300 149.616.0% 271 079.614.4% 29 070.01.5% 51 470.62.7% 39 198.72.1% 22 347.11.2% 16 851.50.9% 11 500.90.6% 3 982.70.2% 7 518.20.4% 180.60.0% 336.90.0% 253.60.0% 72 060.73.8% 1 093 709.155.9% 603 481.330.8% 231 178.411.8% 259 049.413.2% 761 888.338.9% 150 650.57.7% 5 776.40.3% 156 353.88.0% 47 426.02.4% 2 785.20.1% 50 527.52.6% 41 125.72.1% 25 792.11.3% 15 333.60.8% 9 401.90.5% 2 901.10.1% 6 500.80.3% 42 268.22.2% 311 877.015.9% 281 587.714.4% 30 289.21.5% 53 857.32.8% 41 651.92.1% 24 744.51.3% 16 907.50.9% 11 649.80.6% 4 317.30.2% 7 332.50.4% 18.30.0% 277.90.0% 259.40.0% 42 500.62.2% 1 159 258.356.5% 630 065.930.7% 238 432.111.6% 290 760.314.2% 807 494.339.3% 160 267.27.8% 5 981.80.3% 160 859.97.8% 49 671.72.4% 2 974.60.1% 56 207.42.7% 46 363.72.3% 28 865.31.4% 17 498.40.9% 9 843.70.5% 3 012.40.1% 6 831.30.3% 44 322.62.2% 333 190.916.2% 301 377.314.7% 31 813.61.6% 55 278.82.7% 42 542.02.1% 25 820.11.3% 16 722.00.8% 12 194.70.6% 4 509.00.2% 7 685.70.4% 19.40.0% 273.50.0% 249.10.0% 25 431.91.2% 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% – 1 873 701.999.7% 5 000.00.3% 1 951 955.299.7% 5 000.00.3% 2 047 463.499.76% 5 000.00.2% 100.0% 1 878 701.9100.0% 1 956 955.2100.0% 2 052 463.4100.0%

2020 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 200 R million 2016/17 2017/18 2018/19 2019/20 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 236 570.4 17.1% 146 496.7 10.6% 47 211.5 3.4% 129 918.3 9.4% 88 044.7 6.4% 20 331.4 1.5% 21 542.2 1.6% 146 504.6 10.6% 23 763.1 1.7% 21 589.5 1.6% 7 816.6 0.6% 1 473.5 0.1% 77 320.3 5.6% 2 537.1 0.2% 3 507.6 0.3% 8 497.0 0.6% 9 054.2 0.7% 119 773.7 8.7% 34 248.1 2.5% 69 929.0 5.1% 15 596.6 1.1% 172 738.5 12.5% 11 777.8 0.9% 286 829.3 20.8% 219 392.2 15.9% 262 157.0 17.7% 162 644.6 11.0% 48 939.0 3.3% 137 532.8 9.3% 93 532.3 6.3% 21 243.2 1.4% 22 757.3 1.5% 152 781.1 10.3% 25 308.5 1.7% 21 787.8 1.5% 8 243.2 0.6% 1 511.6 0.1% 78 006.0 5.3% 5 713.5 0.4% 3 667.4 0.2% 8 543.1 0.6% 9 371.4 0.6% 128 312.3 8.7% 36 347.4 2.5% 76 896.3 5.2% 15 068.5 1.0% 188 158.1 12.7% 12 090.1 0.8% 304 786.7 20.6% 235 275.5 15.9% 272 644.4 17.1% 181 849.1 11.4% 47 796.7 3.0% 144 337.5 9.1% 98 458.0 6.2% 22 102.6 1.4% 23 776.9 1.5% 165 523.5 10.4% 25 627.9 1.6% 23 415.6 1.5% 7 259.5 0.5% 1 562.6 0.1% 89 491.2 5.6% 5 202.9 0.3% 3 894.6 0.2% 9 069.2 0.6% 9 669.0 0.6% 134 788.2 8.5% 35 671.6 2.2% 82 535.0 5.2% 16 581.7 1.0% 203 598.4 12.8% 12 219.8 0.8% 341 468.6 21.5% 259 312.2 16.3% 300 628.3 205 005.0 50 163.4 154 773.7 105 640.3 23 816.6 25 316.9 225 881.0 28 162.0 24 610.9 56 180.4 1 676.7 96 649.0 5 024.1 4 143.8 9 434.1 10 565.9 144 505.6 37 414.2 91 087.8 16 003.5 217 368.7 13 261.5 375 669.2 288 430.5 1 379 770.4 100.0% – – 1 479 404.1 100.0% – – 1 591 358.1 100.0% – – 1 781 248.0 – 1 379 770.4 100.0% 1 479 404.1 100.0% 1 591 358.1 100.0% 1 781 248.0

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. 201 2020/21 2021/22 2022/23 R million % of total Budget % of estimate total Budget % of estimate total Budget % of estimate total 16.9% 11.5% 2.8% 8.7% 5.9% 1.3% 1.4% 12.7% 1.6% 1.4% 3.2% 0.1% 5.4% 0.3% 0.2% 0.5% 0.6% 8.1% 2.1% 5.1% 0.9% 12.2% 0.7% 21.1% 16.2% 326 094.8 17.4% 229 270.0 12.2% 50 628.1 2.7% 157 631.4 8.4% 107 264.0 5.7% 24 628.9 1.3% 25 738.5 1.4% 236 399.6 12.6% 28 848.4 1.5% 24 224.3 1.3% 69 722.0 3.7% 1 774.5 0.1% 93 994.7 5.0% 3 110.9 0.2% 4 741.6 0.3% 9 983.2 0.5% 10 573.1 0.6% 152 549.2 8.1% 35 649.1 1.9% 100 010.4 5.3% 16 889.8 0.9% 224 661.8 12.0% 14 361.0 0.8% 388 113.1 20.7% 312 689.8 16.7% 360 245.6 18.5% 258 482.1 13.2% 48 237.8 2.5% 165 067.7 8.5% 112 232.4 5.7% 25 821.6 1.3% 27 013.7 1.4% 216 421.8 11.1% 30 458.6 1.6% 25 539.3 1.3% 40 432.6 2.1% 1 737.0 0.1% 99 683.5 5.1% 3 182.0 0.2% 4 823.0 0.2% 10 565.7 0.5% 10 798.9 0.6% 162 553.1 8.3% 37 678.6 1.9% 108 051.4 5.5% 16 823.0 0.9% 238 048.7 12.2% 15 303.1 0.8% 410 482.7 21.0% 324 795.9 16.6% 388 963.3 19.0% 290 145.1 14.2% 49 718.9 2.4% 170 343.1 8.3% 115 832.8 5.7% 26 628.2 1.3% 27 882.1 1.4% 215 383.4 10.5% 33 203.8 1.6% 26 590.4 1.3% 31 306.1 1.5% 1 812.6 0.1% 103 784.5 5.1% 3 199.6 0.2% 4 613.5 0.2% 10 872.9 0.5% 11 186.2 0.5% 171 431.2 8.4% 38 674.7 1.9% 115 382.7 5.6% 17 373.8 0.8% 250 886.3 12.3% 14 548.4 0.7% 428 459.4 20.9% 346 543.1 16.9% 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% – 1 873 701.9 99.7% 5 000.0 0.3% 1 951 955.2 99.7% 5 000.0 0.3% 2 047 463.4 99.8% 5 000.0 0.2% 100.0% 1 878 701.9 100.0% 1 956 955.2 100.0% 2 052 463.4 100.0%

2020 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 202 R million 2016/17 2017/18 2018/19 2019/20 % 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 1 285 061.0 100.0% 1 174 525.2 91.4% 110 535.8 8.6% 543.9 0.0% 1 350 837.5 100.0% 1 235 356.4 91.4% 115 481.1 8.5% 540.2 0.0% 1 445 027.5 100.0% 1 321 569.1 91.4% 123 458.4 8.5% 396.8 0.0% 1 516 681.6 1 395 383.0 121 298.7 306.7 1 285 604.9 100.0% 885 826.0 61.4% 511 665.9 35.5% 217 628.3 15.1% 156 531.7 10.9% 469 152.1 32.5% 112 738.1 7.8% 23 936.1 1.7% 31 981.2 2.2% 2 290.0 0.2% 32 172.2 2.2% 30 526.7 2.1% 235 507.8 16.3% 79 065.0 5.5% 58 900.6 4.1% 16 615.4 1.2% 790.2 0.1% 2 594.5 0.2% 164.3 0.0% 8 534.2 0.6% 1 351 377.7 100.0% 942 300.4 61.1% 548 057.6 35.5% 221 324.3 14.4% 172 918.5 11.2% 501 834.4 32.5% 121 803.8 7.9% 27 041.3 1.8% 36 790.6 2.4% 2 123.3 0.1% 31 886.7 2.1% 31 014.3 2.0% 251 174.4 16.3% 77 397.8 5.0% 58 384.7 3.8% 16 592.7 1.1% 847.8 0.1% 1 421.5 0.1% 151.1 0.0% 20 322.7 1.3% 1 445 424.3 100.0% 1 011 975.7 61.6% 584 841.1 35.6% 234 976.5 14.3% 192 158.1 11.7% 545 229.2 33.2% 129 455.6 7.9% 25 609.4 1.6% 38 898.3 2.4% 2 386.1 0.1% 31 389.7 1.9% 35 496.5 2.2% 281 993.6 17.2% 69 865.4 4.3% 52 717.3 3.2% 14 666.4 0.9% 738.6 0.0% 1 539.8 0.1% 203.4 0.0% 15 706.1 1.0% 1 516 988.3 1 095 868.3 629 200.4 251 656.1 215 011.8 599 650.1 137 653.6 26 590.8 46 555.4 2 589.5 35 361.4 37 089.3 313 810.1 82 804.1 60 807.8 19 077.0 605.4 1 831.9 481.9 65 223.1 1 442 577.2 100% – 1 541 855.3 100.0% – 1 642 776.4 100.0% – 1 843 545.6 – 1 442 577.2 1 541 855.3 1 642 776.4 1 843 545.6 -156 972.3 -3.6% -190 477.6 -4.1% -197 352.1 -4.0% -326 557.2 -6.3% 157 334.7 36 432.7 -36 795.0 156 972.3 4 419 437.0 204 163.7 29 811.0 -43 497.1 190 477.6 4 698 724.0 183 826.2 26 187.9 -12 662.0 197 352.1 4 921 494.0 312 736.0 27 546.9 -13 725.7 326 557.2 5 157 347.4

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. 203 2019/20 2020/21 2021/22 2022/23 R million % of total Budget % of estimate total Budget % of estimate total Budget % of estimate total 100.0% 92.0% 8.0% 0.0% 1 583 599.2 100.0% 1 455 526.9 91.9% 128 072.3 8.1% 305.9 0.0% 1 682 503.8 100.0% 1 549 544.6 92.1% 132 959.2 7.9% 334.9 0.0% 1 791 044.2 100.0% 1 648 613.2 92.0% 142 430.9 8.0% 274.5 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% 59.4% 34.1% 13.7% 11.7% 32.5% 7.5% 1.4% 2.5% 0.1% 1.9% 2.0% 17.0% 4.5% 3.3% 1.0% 0.0% 0.1% 0.0% 3.5% 1 583 905.1 100.0% 1 143 426.9 58.7% 638 864.8 32.8% 265 078.4 13.6% 239 483.7 12.3% 640 225.2 32.8% 145 339.0 7.5% 28 638.7 1.5% 48 277.7 2.5% 2 879.8 0.1% 35 539.6 1.8% 41 022.7 2.1% 338 527.7 17.4% 92 146.8 4.7% 68 383.5 3.5% 20 620.2 1.1% 439.5 0.0% 1 903.6 0.1% 800.1 0.0% 73 645.7 3.8% 1 682 838.7 100.0% 1 218 007.8 59.8% 667 815.5 32.8% 281 464.7 13.8% 268 727.5 13.2% 671 805.1 33.0% 155 518.4 7.6% 27 012.1 1.3% 50 341.5 2.5% 2 838.2 0.1% 39 864.8 2.0% 43 696.4 2.1% 352 533.8 17.3% 101 410.6 5.0% 76 880.6 3.8% 21 798.9 1.1% 422.9 0.0% 1 656.8 0.1% 651.4 0.0% 44 115.6 2.2% 1 791 318.7 100.0% 1 286 330.7 60.2% 697 113.3 32.6% 288 524.8 13.5% 300 692.6 14.1% 713 435.9 33.4% 165 463.8 7.7% 28 492.1 1.3% 51 872.7 2.4% 3 029.5 0.1% 43 226.6 2.0% 45 848.8 2.1% 375 502.5 17.6% 108 975.3 5.1% 82 745.4 3.9% 23 283.7 1.1% 768.3 0.0% 1 647.3 0.1% 530.6 0.0% 27 297.9 1.3% 100.0% 1 949 444.6 100.0% 5 000.0 2 035 339.1 100.0% 5 000.0 2 136 039.9 100.0% 5 000.0 1 954 444.6 2 040 339.1 2 141 039.9 -370 539.5 -6.8% -357 500.4 -6.2% -349 721.2 -5.7% 332 285.9 18 815.4 19 438.3 370 539.5 5 428 211.8 325 912.6 41 763.4 -10 175.6 357 500.4 5 758 993.4 317 484.1 40 760.4 -8 523.3 349 721.2 6 126 301.9

2020 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 204 R million 2016/17 2017/18 2018/19 2019/20 % 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 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 elsew here classified Health Recreation and culture Education Social protection Subtotal: functional classification Plus: Contingency reserve Total consolidated expenditure 246 038.217.1% 146 496.710.2% 47 402.43.3% 131 470.59.1% 89 155.76.2% 20 570.01.4% 21 542.21.5% 202.6 167 088.611.6% 30 629.52.1% 22 114.21.5% 9 465.40.7% 2 411.70.2% 84 977.45.9% 4 487.60.3% 3 670.20.3% 9 332.60.6% 10 618.40.7% 144 913.910.0% 36 077.52.5% 70 867.04.9% 37 969.42.6% –– 173 789.812.0% 12 236.40.8% 288 368.420.0% 220 650.615.3% 269 752.517.5% 162 644.610.5% 49 158.93.2% 138 828.49.0% 94 617.66.1% 21 225.81.4% 22 757.31.5% 227.7 175 362.311.4% 31 964.62.1% 22 069.31.4% 9 462.60.6% 2 478.90.2% 87 228.35.7% 9 251.40.6% 3 878.70.3% 9 028.40.6% 11 449.10.7% 150 248.39.7% 37 828.32.5% 77 825.65.0% 34 594.42.2% –– 188 374.312.2% 12 449.30.8% 310 066.020.1% 236 166.315.3% 281 015.717.1% 181 849.111.1% 47 715.32.9% 146 001.78.9% 99 786.16.1% 22 196.71.4% 23 776.91.4% 242.0 179 583.010.9% 32 349.02.0% 23 855.21.5% 10 192.80.6% 2 425.70.1% 89 490.15.4% 8 564.90.5% 4 095.90.2% 8 609.40.5% 12 079.40.7% 158 880.29.7% 37 330.32.3% 83 596.15.1% 37 953.82.3% –– 203 665.112.4% 12 687.00.8% 342 634.020.9% 258 515.015.7% 308 574.5 205 005.0 50 408.9 156 969.7 107 086.9 24 275.0 25 316.9 290.9 240 959.9 35 629.5 26 458.3 58 568.8 2 597.1 97 622.5 6 452.6 4 379.1 9 251.9 13 458.7 171 342.5 39 814.0 92 274.3 39 254.3 – 217 664.5 13 736.5 380 341.9 290 088.5 1 442 577.2100% – 1 541 855.3100% – 1 642 776.4100% – 1 843 545.6 – 1 442 577.2 1 541 855.3 1 642 776.4 1 843 545.6

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. 205 2019/20 2020/21 2021/22 2022/23 R million % of total Budget% of estimate total Budget% of estimate total Budget% of estimate total 16.7% 11.1% 2.7% 8.5% 5.8% 1.3% 1.4% 13.1% 1.9% 1.4% 3.2% 0.1% 5.3% 0.4% 0.2% 0.5% 0.7% 9.3% 2.2% 5.0% 2.1% – 11.8% 0.7% 20.6% 15.7% 335 903.617.2% 229 270.011.8% 50 965.02.6% 160 119.38.2% 109 041.85.6% 25 014.81.3% 25 738.51.3% 324.1 259 383.013.3% 36 702.21.9% 25 462.41.3% 72 283.33.7% 2 792.00.1% 103 055.85.3% 4 551.70.2% 4 988.20.3% 9 547.40.5% 13 330.90.7% 183 950.49.4% 38 646.52.0% 101 109.65.2% 44 194.32.3% –– 225 240.111.6% 14 811.30.8% 390 864.520.1% 314 876.416.2% 373 586.118.4% 258 482.112.7% 48 484.32.4% 167 662.38.2% 114 116.65.6% 26 190.31.3% 27 013.71.3% 341.6 238 933.511.7% 38 451.91.9% 26 607.61.3% 43 225.42.1% 2 583.00.1% 108 756.15.3% 4 242.30.2% 5 083.20.2% 9 983.90.5% 13 712.40.7% 199 037.09.8% 40 885.32.0% 109 221.25.4% 48 930.62.4% –– 238 841.911.7% 15 819.30.8% 412 485.720.3% 326 776.516.1% 403 011.118.9% 290 145.113.6% 49 975.52.3% 173 189.88.1% 117 945.45.5% 26 990.81.3% 27 882.11.3% 371.50.0% 240 395.711.3% 41 227.71.9% 27 663.71.3% 34 252.61.6% 2 672.80.1% 114 565.25.4% 4 596.20.2% 4 883.80.2% 10 533.60.5% 13 871.30.6% 211 157.59.9% 42 168.72.0% 116 608.15.5% 52 380.82.5% –– 252 079.111.8% 15 095.10.7% 428 906.420.1% 348 358.416.3% 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 elsew here classified Health Recreation and culture Education Social protection Subtotal: functional classification Plus: Contingency reserve Total consolidated expenditure 100% 1 949 444.6100% 5 000.0 2 035 339.1100% 5 000.0 2 136 039.9100% 5 000.0 1 954 444.6 2 040 339.1 2 141 039.9

2020 BUDGET REVIEW Table 9 Consolidated government revenue, expenditure and financing Source: National Treasury 206 R million 2016/17 2017/18 2018/19 2019/20 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 1 266 853.1 1 174 525.2 85 313.5 7 014.4 1 285 199.3 511 665.9 217 628.3 156 531.7 399 373.3 -18 346.1 -0.4% 543.9 69 778.8 79 065.0 -148 299.9 -3.4% 9 673.7 – -156 972.3 -3.6% -440.6 0.0% 157 334.7 36 432.7 -36 795.0 156 972.3 4 419 437.0 1 331 662.4 1 235 356.4 89 525.6 6 780.5 1 371 811.4 548 057.6 221 324.3 172 918.5 429 511.0 -40 149.0 -0.9% 540.2 72 323.4 77 397.8 -149 181.0 -3.2% -1 147.6 – -190 477.6 -4.1% -17 559.1 -0.4% 204 163.7 29 811.0 -43 497.1 190 477.6 4 698 724.0 1 429 845.5 1 321 569.1 101 560.3 6 716.1 1 483 839.8 584 841.1 234 976.5 192 158.1 471 864.1 -53 994.4 -1.1% 396.8 73 365.0 69 865.4 -142 833.6 -2.9% -524.1 – -197 352.1 -4.0% -5 194.0 -0.1% 183 826.2 26 187.9 -12 662.0 197 352.1 4 921 494.0 1 503 562.5 1 395 383.0 103 021.2 5 158.3 1 622 015.8 629 200.4 251 656.1 215 011.8 526 147.4 -118 453.2 -2.3% 306.7 73 502.6 82 804.1 -156 000.1 -3.0% -52 103.9 – -326 557.2 -6.3% -111 545.4 -2.2% 312 736.0 27 546.9 -13 725.7 326 557.2 5 157 347.4

STATISTICAL ANNEXURE Table 9 Consolidated government revenue, expenditure and financing 207 2020/21 2021/22 2022/23 Budget estimate Budget estimate Budget estimate R million 1 570 968.4 1 455 526.9 110 264.5 5 177.0 1 712 133.5 638 864.8 265 078.4 239 483.7 568 706.6 -141 165.1 -2.6% 305.9 71 518.6 92 146.8 -163 359.5 -3.0% -61 014.9 5 000.0 -370 539.5 -6.8% -131 055.8 -2.4% 332 285.9 18 815.4 19 438.3 370 539.5 5 428 211.8 1 674 353.4 1 549 544.6 119 359.7 5 449.1 1 811 111.9 667 815.5 281 464.7 268 727.5 593 104.1 -136 758.5 -2.4% 334.9 78 701.0 101 410.6 -179 776.8 -3.1% -35 965.2 5 000.0 -357 500.4 -6.2% -88 772.8 -1.5% 325 912.6 41 763.4 -10 175.6 357 500.4 5 758 993.4 1 782 018.9 1 648 613.2 127 793.4 5 612.3 1 915 038.7 697 113.3 288 524.8 300 692.6 628 707.9 -133 019.8 -2.2% 274.5 84 728.0 108 975.3 -193 428.8 -3.2% -18 272.6 5 000.0 -349 721.2 -5.7% -49 028.6 -0.8% 317 484.1 40 760.4 -8 523.3 349 721.2 6 126 301.9 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

2020 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 2020. 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 208 R million 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 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) 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 -2 650 364 963 349 415 331 505 17 910 – 2 030 351 445 -6 549 344 896 10 944 – 10 944 11 394 – 11 394 14 560 – 14 560 16 276 – 16 276 25 799 – 25 799 31 938 – 31 938 82 009 – 82 009 279 488 270 858 308 239 305 482 336 111 331 313 363 227 358 061 381 503 374 218 399 551 396 901 433 454 426 905 – 2 169 73 14 431 9 200 18 170 28 024 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) 94.4% 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% 80.6% 76.5% 4.1% 0.0% 0.5% 96.1% 3.9% 96.3% 3.7% 95.7% 4.3% 95.5% 4.5% 93.2% 6.8% 92.0% 8.0% 81.1% 18.9% 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 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% 32.6% 31.9% 7.6% 7.6% 40.1% 39.5%

STATISTICAL ANNEXURE Table 10 Total debt of government 1) 5) Valued at appropriate foreign exchange rates up to 31 March 2019 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2020, projected to depreciate in line with inflation differentials. 6) The balance on the Gold and Foreign Exchange Contingency Reserve Account on 31 March 2020 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. 209 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 R million 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 -93 809 387 012 527 751 462 751 65 000 – 1 956 529 707 -101 349 428 358 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 74 286 – 74 286 64 670 – 64 670 69 405 – 69 405 66 846 – 66 846 82 581 – 82 581 96 218 – 96 218 97 268 – 97 268 427 066 417 336 454 969 442 300 501 496 470 626 528 325 470 138 553 683 478 368 577 039 483 230 626 975 525 626 36 577 18 036 5 292 -1 751 -28 514 -72 189 -101 585 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% 84.2% 73.8% 10.4% 0.0% 0.3% 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 82.6% 17.4% 85.8% 14.2% 86.2% 13.8% 87.3% 12.7% 85.1% 14.9% 83.3% 16.7% 84.5% 15.5% 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% 22.0% 17.8% 4.0% 4.0% 26.0% 21.8% 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

2020 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 2020. 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 210 R million 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 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) 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 1 782 042 1 572 574 209 468 – 37 322 1 819 364 -112 250 1 707 114 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 72 426 199 607 -102 083 97 524 804 929 673 040 990 572 820 409 1 187 790 989 731 1 365 689 1 181 607 1 584 758 1 379 454 1 798 915 1 584 207 2 018 971 1 804 638 -35 618 -28 283 -67 655 -125 552 -177 913 -203 396 -304 653 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) 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% 88.3% 77.9% 10.4% 0.0% 1.8% 87.6% 12.4% 90.1% 9.9% 90.2% 9.8% 90.9% 9.1% 90.9% 9.1% 90.7% 9.3% 90.1% 9.9% 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 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% 44.1% 41.4% 4.8% 2.4% 48.9% 43.8%

STATISTICAL ANNEXURE Table 10 Total debt of government 1) 5) Valued at appropriate foreign exchange rates up to 31 March 2019 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2020, projected to depreciate in line with inflation differentials. 6) The balance on the Gold and Foreign Exchange Contingency Reserve Account on 31 March 2020 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. 211 2016/17 2017/18 2018/19 2) 2019/20 2020/21 2021/22 2022/23 R million 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 2 467 758 2 160 398 307 360 – 29 228 2 496 986 -120 575 2 376 411 2 820 128 2 486 768 333 360 – 39 228 2 859 356 -117 157 2 742 199 3 187 987 2 806 627 381 360 – 39 228 3 227 215 -117 157 3 110 058 3 556 745 3 127 385 429 360 – 39 228 3 595 973 -117 157 3 478 816 3 917 299 3 432 939 484 360 – 39 228 3 956 527 -117 157 3 839 370 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 212 754 -114 353 98 401 217 811 -106 110 111 701 291 314 -122 542 168 772 316 708 -121 141 195 567 334 449 -104 502 229 947 382 130 -109 377 272 753 427 060 -113 027 314 033 2 232 889 2 008 274 2 489 718 2 260 367 2 788 300 2 545 183 3 176 064 2 937 766 3 561 664 3 340 005 3 978 103 3 751 569 4 383 587 4 153 403 -231 158 -193 917 -285 829 -278 078 -278 078 -278 078 -278 078 88.7% 77.6% 11.2% 0.0% 1.7% 90.1% 78.3% 11.8% 0.0% 1.2% 88.5% 77.5% 11.0% 0.0% 1.0% 88.8% 78.3% 10.5% 0.0% 1.2% 89.5% 78.8% 10.7% 0.0% 1.1% 89.4% 78.6% 10.8% 0.0% 1.0% 89.4% 78.3% 11.0% 0.0% 0.9% 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 90.5% 9.5% 91.3% 8.7% 89.6% 10.4% 90.0% 10.0% 90.6% 9.4% 90.4% 9.6% 90.3% 9.7% 45.7% 43.2% 4.8% 2.2% 50.5% 45.4% 48.4% 45.7% 4.6% 2.4% 53.0% 48.1% 50.7% 48.3% 5.9% 3.4% 56.7% 51.7% 55.4% 53.2% 6.1% 3.8% 61.6% 57.0% 59.5% 57.3% 6.2% 4.2% 65.6% 61.5% 62.4% 60.4% 6.6% 4.7% 69.1% 65.1% 64.6% 62.7% 7.0% 5.1% 71.6% 67.8% 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

2020 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 212 R million 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Net loan debt2) Provisions3) African Development Bank Development Bank of Southern Africa Government employee leave credits International Bank for Reconstruction and Development International Monetary Fund Multilateral Investment Guarantee Agency New Development Bank Contingent liabilities Guarantees4) Agricultural cooperatives Central Energy Fund Denel Development Bank of Southern Africa Eskom5) 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 Reserve Bank Telkom South Africa Trans-Caledon Tunnel Authority Transnet Universities and technikons Other contingent liabilities6) 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 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 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

STATISTICAL ANNEXURE Table 11 Net loan debt, provisions and contingent liabilities 1) 4) Amounts drawn against financial guarantees, inclusive of revaluation adjustments on inflation-linked bonds and accrued interest. Numbers prior to 2018/19 exclude revaluation adjustment on inflation-linked bonds. 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. 5) 6) 213 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 R million 2 008 274 210 974 49 344 20 000 14 137 26 527 79 535 193 21 238 670 147 426 234 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 – 243 913 29 481 14 015 – 69 938 119 830 5 950 4 699 2 260 367 211 480 44 119 20 000 13 606 23 993 76 358 173 33 231 736 518 459 107 93 – 2 430 3 975 250 648 – 84 6 – 137 122 188 37 – 619 3 813 3 20 – 9 580 11 059 – 867 30 368 400 – 111 18 912 3 757 – 277 411 31 807 18 192 – 69 938 139 204 13 118 5 152 2 545 183 260 704 53 855 20 000 13 496 29 287 85 908 211 57 947 851 792 525 568 93 – 3 430 4 256 285 587 – 77 6 – 147 146 892 36 – 518 965 – 20 – 10 464 15 269 – 163 39 462 – – 124 14 302 3 757 – 326 224 36 001 20 454 – 69 938 173 559 20 656 5 616 2 937 766 279 962 54 350 20 000 14 373 28 807 86 195 213 76 024 979 988 555 430 93 – 6 930 4 481 297 432 – 56 6 – 144 161 427 36 – 427 873 – 20 – 8 654 17 328 – 163 39 919 – – 123 13 514 3 804 – 424 558 36 001 18 209 – 69 938 273 105 21 689 5 616 3 340 005 301 460 54 387 20 000 15 221 28 827 86 254 213 96 558 1 041 915 550 383 93 – 6 930 4 572 296 482 – 51 6 – 144 163 485 34 – 362 873 – 20 – 8 047 8 028 – 163 44 177 – – 128 12 984 3 804 – 491 532 36 001 14 088 – 69 938 343 116 22 773 5 616 3 751 569 328 749 55 502 20 000 16 149 29 418 88 022 218 119 440 1 097 499 535 820 93 – 5 930 4 663 295 142 – 46 6 – 146 155 574 32 – 297 873 – 20 – 7 494 4 228 – 163 45 922 – – 135 11 252 3 804 – 561 679 36 001 11 060 – 69 938 415 198 23 866 5 616 4 153 403 334 993 56 506 20 000 17 102 29 950 89 614 221 121 600 1 164 075 516 840 93 – 5 930 4 734 291 711 – 41 6 – 145 141 937 30 – 232 873 – 20 – 7 001 2 608 – 163 43 120 – – 138 14 254 3 804 – 647 235 36 001 8 168 – 69 938 502 500 25 012 5 616 2) Net loan debt 3) Provisions African Development Bank Development Bank of Southern Africa Government employee leave credits International Bank for Reconstruction and Development International Monetary Fund Multilateral Investment Guarantee Agency New Development 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 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

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. This 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 2020 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 2020 division of revenue. Part 3 sets out how the FFC’s recommendations on the 2020 division of revenue have been taken into account. Part 4 explains the formula and criteria for dividing the provincial equitable share and conditional grants among provinces. Part 5 sets out the formula and criteria for dividing 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. 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 1

2020 BUDGET REVIEW Association (SALGA), culminating in meetings of the Budget Forum (made up of the Budget Council and SALGA). The division of revenue, and the government priorities that underpin it, was agreed for the next three years at a Cabinet meeting in October 2019. 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) 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. The National Development Plan sets out a long-term vision for the country’s development, including for economic development, environmental sustainability and building a capable and developmental state. It also sets goals for specific provincial and local government functions, including basic education, health, agriculture, human settlements, electricity, water and sanitation. In the June 2019 State of the Nation Address, the President set out the following seven priorities for this administration: 1. 2. 3. 4. 5. 6. 7. Economic transformation and job creation Education, skills and health Consolidating the social wage through reliable and quality basic services Spatial integration, human settlements and local government Social cohesion and safe communities Building a capable, ethical and developmental state A better Africa and world. These priorities have informed deliberations in the budget process on how resources will be allocated between the different spheres of government. They will also form the basis of the next five-year implementation plan for the National Development Plan, which is expected to be published by the Department of Planning, Monitoring and Evaluation in 2020. In the 2019 Medium Term Budget Policy Statement (MTBPS), the Minister of Finance outlined how the resources available to government over the 2020 medium-term expenditure framework (MTEF) period would be allocated to help achieve government’s goals in a difficult economic environment. Chapter 4 of the 2019 MTBPS and Chapters 5 and 6 of the 2020 Budget Review discuss how funds have been allocated across the three spheres of government based on these priorities. The framework for each conditional grant also notes how the grant is linked to the seven priorities. 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. Chapter 7 of the 2020 Budget Review provides a more detailed discussion. National government’s needs and interests The Constitution assigns exclusive and concurrent powers and functions to each sphere of government. National government is solely 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 2

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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 objectives. The division of revenue provides equitable shares to provinces and local government to enable them to meet their basic service obligations. In addition, conditional grants are provided to enable them to improve and expand services. Over half of non-interest spending is allocated to provinces and local government. These allocations also grow at a faster rate than those to national departments over the 2020 MTEF period, reflecting the priority placed on health, education and basic services, as well as the rising costs of these services as a result of population growth and higher bulk electricity and water costs. Fiscal capacity and efficiency National government has primary revenue-raising powers, with it collecting most of the largest taxes such as income taxes, value-added tax, fuel levies and customs and excise duties. The difference between the assignment of revenue-raising powers and spending responsibilities between the spheres of government is compensated for through the transfer of nationally raised revenue to provinces and local government. Provinces have limited tax-raising powers. Licences for vehicles and gambling are their largest sources of own tax revenue. Provincial functions such as basic education, public healthcare and social welfare do not lend themselves to self-funding or cost recovery. Due to their limited revenue-raising ability, and their responsibility to implement costly services at no or low fees to most recipients, provinces receive a larger share of nationally raised revenue than local government. Municipalities are assigned significant own revenue-raising powers, including the collection of property rates, which is a tax equivalent to more than 1 per cent of gross domestic product (GDP) and is worth slightly more than nationally collected revenue from customs duties. Municipalities also provide services such as electricity and water, the costs of which can be recovered through tariffs. As a result, local government finances most of its expenditure through property rates, user charges and fees. However, the ability of individual municipalities to raise revenue varies greatly – rural municipalities raise significantly less revenue than large urban and metropolitan municipalities. The design of the local government fiscal framework acknowledges that, as a result of their lower own revenue capacity, many rural municipalities will depend on transfers for most of their funding. The local government equitable share formula incorporates a revenue adjustment factor that considers the fiscal capacity of each recipient municipality (full details of the formula are provided in Part 5 of this annexure). The equitable share also provides funding to enable all municipalities to provide free basic water, electricity, sanitation and waste management services to poor households. To support the expansion of these services, local government’s share of nationally raised revenue has increased from 3 per cent in 2000/01 to 8.8 per cent over the 2020 MTEF period. The mechanisms for allocating funds to provinces and municipalities are regularly reviewed to improve their efficiency. To maximise the impact of allocations, many provincial and local government conditional grants consider the recipient’s efficiency in using previous allocations. The reductions in planned transfers over the 2020 MTEF period also took account of past performance of conditional grants, both in terms of their spending levels and their efficiency in meeting their objectives with the funds that were spent. 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 3

2020 BUDGET REVIEW included 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 redistribute funds towards poorer provinces and municipalities (parts 4 and 5 of this annexure provide statistics illustrating this). 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. The 2020 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 reduced. 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 government to swiftly allocate and transfer funds to affected provinces and municipalities in the immediate aftermath of a disaster. Sections 16 and 25 of the Public Finance Management Act (1999) provide 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 2020 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 2020 Budget Review). However, the most important public spending programmes that help poor South Africans, contribute to growth and create jobs have been protected from major reductions. The 2020 division of revenue reprioritises existing funds to ensure these objectives are met. Excluding debt-service costs and the contingency reserve, allocated expenditure shared across government amounts to R1.53 trillion in 2020/21, R1.59 trillion in 2021/22 and R1.65 trillion in 2022/23. The division of these funds between the three spheres takes into account government’s spending priorities, each sphere’s revenue-raising capacity and responsibilities, and input from various intergovernmental forums and the FFC. 4

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE The provincial and local equitable share formulas are designed to ensure fair, stable and predictable revenue shares, and to address economic and fiscal disparities. Reductions to transfers The fiscal objectives that determined the spending envelope are set out in Chapter 3 of the 2020 Budget Review. Reductions to previously announced spending levels were made across all three spheres of government to fit within the revised expenditure ceiling. The 2019 MTBPS announced that provincial transfers have been reduced by R20.3 billion over the MTEF period and transfers to local government have been reduced by R20.5 billion. Following the 2019 MTBPS, further changes were made. In total, the provincial equitable share has been reduced by R7.3 billion through a 2 per cent reduction in all non-compensation spending per year and a R5.2 billion reduction in compensation of employees. Direct conditional grants to provinces have been reduced by a net R13.3 billion, as the reduction of R16.2 billion is partly offset by reprioritisations of R2.9 billion. The local government reductions comprise R3.2 billion from the local government equitable share and R16.8 billion in reductions to direct conditional grants. All direct conditional grants have been lowered, except for the early childhood development grant and the learners with profound intellectual disabilities grant. To manage the impact on services, the amount reduced from each grant considers: Past spending and performance. Whether it funds salaries, medicines and food. Whether there has been significant real growth in allocations in recent years. Larger reductions are also made to grants to urban municipalities, which have more capacity to offset the effect of cuts by increasing their own revenue investments. Parts 4 and 5 of this annexure set out in more detail how the changes to the baseline affect provincial and local government transfers. The proposed changes to the wage bill discussed in Chapter 3 of the Budget Review are not yet reflected in the allocations to national and provincial departments shown in the Division of Revenue Bill. Once these changes are agreed in the Public Service Co-ordinating Bargaining Council, they will be implemented in the 2020/21 adjustment budget and 2020 MTBPS. This will reduce the national and provincial shares, and increase the local government share, of the division of revenue in relative terms. Reprioritisations To meet policy objectives while remaining within the revised expenditure ceiling, existing budgets need to be reprioritised to meet government’s policy goals. Priorities over the 2020 MTEF period that are funded through reprioritisations in the division of revenue include: Increasing the per-child subsidy for early childhood development services from R15 per day to R17 per day in 2020/21, rising to R18.57 per day by 2022/23. Addressing shortfalls in the funding of community outreach services in the health sector. Supporting the continued rollout of free sanitary products to learners from low-income households. Repairing wastewater treatment infrastructure in the Vaal River System. These reprioritisations complement baselines that provide R2.07 trillion to provinces and R426.4 billion to local government in transfers over the 2020 MTEF period. These transfers fund many core policy priorities, including basic education, health, social development, roads, housing and municipal services. The fiscal framework Table W1.1 presents the medium-term macroeconomic forecasts for the 2020 Budget. It sets out the growth assumptions and fiscal policy targets on which the fiscal framework is based. 5

2020 BUDGET REVIEW Table W1.1 Medium-term macroeconomic assumptions 1. A positive number reflects a surplus and a negative number a deficit Source: National Treasury Table W1.2 sets out the division of revenue for the 2020 MTEF period after accounting for new policy priorities. Table W1.2 Division of nationally raised revenue 1. Includes proposed compensation reductions, support to Eskom, amounts for Budget Facility for Infrastructure projects and other provisional allocations Source: National Treasury 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 to priorities. 6 2016/17 2017/18 2018/19 Outcome R million 2019/20 Revised estimate 2020/21 2021/22 2022/23 Medium-term estimates Division of available funds National departments 555 643 592 640 634 322 of which: Indirect transfers to provinces 3 636 3 813 3 909 Indirect transfers to local 8 112 7 803 7 770 government Provinces 500 384 538 553 571 954 Equitable share 410 699 441 331 470 287 Conditional grants 89 685 97 222 101 667 Local government 102 867 111 103 118 488 Equitable share 50 709 55 614 60 758 Conditional grants 40 934 43 704 45 262 General fuel levy sharing with 11 224 11 785 12 469 metros 739 463 3 941 7 024 612 817 505 554 107 263 125 020 66 973 44 879 13 167 757 725 768 870 797 832 4 060 4 824 5 076 7 628 7 229 8 161 649 256 691 951 730 690 538 472 573 990 607 554 110 785 117 962 123 137 132 529 142 442 151 445 74 683 81 062 87 213 43 819 46 198 48 147 14 027 15 182 16 085 Provisional allocation – – – not assigned to votes1 – -7 786 -16 077 -34 887 Non-interest allocations 1 158 893 1 242 295 1 324 763 Percentage increase 3.9% 7.2% 6.6% 1 477 299 11.5% 1 531 724 1 587 186 1 645 080 3.7% 3.6% 3.6% Debt-service costs 146 497 162 645 181 849 Contingency reserves – – – 205 005 – 229 270 258 482 290 145 5 000 5 000 5 000 Main budget expenditure 1 305 390 1 404 940 1 506 613 Percentage increase 4.9% 7.6% 7.2% 1 682 304 11.7% 1 765 994 1 850 668 1 940 225 5.0% 4.8% 4.8% Percentage shares National departments 47.9% 47.7% 47.9% Provinces 43.2% 43.4% 43.2% Local government 8.9% 8.9% 8.9% 50.1% 41.5% 8.5% 49.2% 48.0% 47.5% 42.2% 43.2% 43.5% 8.6% 8.9% 9.0% 2019/20 20192020 R billion/percentage of GDPBudgetBudget 2020/21 20192020 BudgetBudget 2021/22 20192020 BudgetBudget 2022/23 2020 Budget Gross domestic product5 413.85 157.3 Real GDP growth1.5%0.6% GDP inflation5.4%4.2% 5 812.45 428.2 1.9%0.9% 5.4%4.3% 6 249.15 759.0 2.1%1.4% 5.3%4.6% 6 126.3 1.7% 4.6% National budget framework Revenue1 403.51 344.8 Percentage of GDP25.9%26.1% Expenditure1 658.71 682.3 Percentage of GDP30.6%32.6% Main budget balance1-255.2-337.5 Percentage of GDP-4.7%-6.5% 1 505.11 398.0 25.9%25.8% 1 769.61 766.0 30.4%32.5% -264.4-368.0 -4.5%-6.8% 1 632.91 484.3 26.1%25.8% 1 900.51 850.7 30.4%32.1% -267.6-366.4 -4.3%-6.4% 1 580.9 25.8% 1 940.2 31.7% -359.3 -5.9%

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.3 Changes over baseline 2020/21 2021/22 R million 24 597 -7 858 -5 352 -8 804 -9 049 -7 056 National departments Provinces Local government Allocated expenditure 11 387 -24 910 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, debt-service costs, the contingency reserve and provisional allocations Source: National Treasury The 2020 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 2020/21 to Parliament in May 2019. This year’s theme is “reprioritising local government finances”. The 2020/21 recommendations cover the following areas: local government financing framework, municipal government capacity building, local government sustainability, infrastructure management and efficiency, investment and developmental challenges in the local government sector. 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 7 2020/21 R millionAllocation 2021/222022/23 Forward estimates National11 152 840 Provincial538 472 Local74 683 1 195 6171 245 459 573 990607 554 81 06287 213 Total1 765 994 1 850 6681 940 225

2020 BUDGET REVIEW 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. Recommendations that do not relate to the division of revenue have been referred to the officials to whom they were addressed – the Minister of Cooperative Governance and Traditional Affairs and the President of SALGA – and they will respond directly to the FFC. All the FFC recommendations can be accessed at www.ffc.co.za. Recommendations that apply directly and indirectly to the division of revenue Chapter 2: Reviewing the Local Government Fiscal Framework Supplementary revenue sources for local government The FFC recommends the following: “The Minister of Finance should take steps (including piloting) to add the following supplementary revenue sources to the list of allowable taxes for different types of municipalities in a differentiated manner that could include the development charges, tourism levies, land value capture mechanisms, tourism levies and fire levies. Fire service levies in particular should be considered for the municipalities that are to be authorised for this function. The greater potential for expansion of own revenue sources in urban areas should be compensated for by changes to the division of revenue to increase transfers to rural areas.” Government response Government supports this recommendation. Additional revenue sources to municipalities should be fully explored. Government has prioritised various reforms to supplement the revenue sources of municipalities. These include: Amending the Municipal Fiscal Powers and Functions Act (2007) to ensure development charges are uniformly regulated. Government acknowledges that, despite their potential scope to generate substantial revenue and support the provision of infrastructure to unlock growth, development charges have not been fully explored due to lack of clarity on how they should be levied. The legislative amendments contained in the draft Municipal Fiscal Powers and Functions Amendment Bill, published for comment in January 2020, address this challenge. Updating the municipal borrowing policy framework to clarify the funding instruments that municipalities are allowed to use to leverage their borrowing. These include, among others, land value capture mechanisms, tax increment financing, project finance and the use of public-private partnerships. Furthermore, the Municipal Fiscal Powers and Functions Act already allows municipalities to apply to the Minister of Finance to levy additional taxes such as the tourism levies and fire levies recommended by the FFC. The act also allows the Minister of Finance to introduce new municipal taxes on his own initiative. Applications from municipalities to implement new revenue sources provide a good mechanism for piloting new revenue sources like these as it ensures that the pilot municipalities are ready and willing to implement the new taxes. To be considered by the Minister of Finance, an application to introduce additional taxes must include the following: What the revenue from the proposed new municipal tax will be used for. 8

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Its compliance with section 229(2)(a) of the Constitution, which requires that municipal taxes not prejudice national economic policy. The tax base, the desired tax rate, people liable for the tax and tax relief measures. The tax collecting authority. Particulars of any consultations conducted, including consultations with, where applicable, a provincial government, organised local government and municipalities, and the outcomes of the consultations. Government also agrees that future increases in own revenue collection in urban areas will create scope for government to reduce transfers to these municipalities and use those funds to increase transfers to rural municipalities that have less potential to increase their own revenues. This stance is reflected in the way reductions to transfers have been implemented in the 2020 MTEF, with larger reductions made to urban grants. Land value capture The FFC recommends that, “The Minister of Finance should proactively inform municipalities on various land value capture mechanisms that municipalities can take advantage of in order to supplement their current own revenue sources.” Government response Government views land value capture mechanisms as strategic funding tools for local government. These mechanisms should be used to augment municipal revenues to fund investment in infrastructure needed to support development. The National Treasury has called on municipalities to use all available options to increase their own revenues for several years in the Budget Review and the MTBPS. Municipalities, including the City of Johannesburg and the City of Cape Town, are already implementing land value capture mechanisms such as tax incremental financing and development rights. Government agrees that further information can enable more municipalities to take advantage of these mechanisms. It continues to research and analyse various land value capture mechanisms to better advise municipalities on their implementation. Chapter 3: Municipal Government Capacity Building Municipal functionality The FFC recommends that, “The Minister of COGTA, the Minister of Finance and the President of SALGA jointly lead the development of a government-wide accepted definition of ‘municipal functionality’. The definition should be based on the six factors put forward by the Commission: maintenance and performance of systems, processes and practices in governance, service delivery, financial management, leadership, political management, and human resources. Further, they should ensure that the accepted indices for measuring dysfunctionality should be explicit. Indicators of dysfunctionality should be chosen carefully and should exclude factors that are outside the current control of municipality. This definition can be used across government, including in targeting capacity support grants and further differentiating conditional grants.” Government response Government supports the proposal of a collaborative process to better understand and define municipal functionality. The Minister of Finance has proposed that a special local government Budget Forum lekgotla be held in May or June 2020 to discuss issues affecting the structure of the local government fiscal framework. The proposed agenda for this lekgotla includes a discussion on municipal functionality, and officials from the Department of Cooperative Governance, SALGA, the National Treasury and the FFC will work together to prepare options on how municipal viability should be understood and measured. 9

2020 BUDGET REVIEW Capacity building The FFC recommends that, “Based on an assessment of the specific needs of a municipality, the Minister of Finance and Minister of COGTA jointly, and in consultation with provincial governments, should prioritise technical support for new systems, innovative business process redesign and change management.” Government response Government agrees with the recommendation. When new systems, innovative business process redesign and change management are introduced, technical support to local government is necessary. The new municipal Standard Chart of Accounts (mSCOA) is an example of prioritising technical support in implementing new systems. mSCOA significantly changed municipal financial management as it introduced a standard chart of accounts for the first time. This required changes to the way municipalities recorded transactions, so that transactions would be comparable across all municipalities. To facilitate this change, government provided mSCOA training and training manuals, guidelines and an interactive multimedia learning webpage, which is on the National Treasury Municipal Financial Management Act website (mfma.treasury.gov.za). Government also invests more than R3 billion each year in capacity building and support to local government. In 2019/20, a review of the capacity building and support system of local government was announced. This review will identify overlaps, gaps and duplications and propose systematic measures to rectify them. The main work of the review is expected to be concluded during 2020. Minimum competency The FFC recommends that, “The Minister of Finance should conduct regular assessments of the minimum competency regulations to determine their impact and whether there are tangible improvements as a result of complying.” Government response Government agrees on the need to review the impact of its programmes and policies. Reviews should take place after an initiative has had sufficient time to have a measurable impact. The Municipal Regulations on Minimum Competency Levels were amended by the Minister of Finance, acting with the agreement of the Minister of Cooperative Governance and Traditional Affairs (COGTA), through a gazette published on 26 October 2018. As such, it is too soon to review the impact of the minimum competency regulations. Their impact will be reviewed in due course. Chapter 4: Local Government Infrastructure Management and Efficiency Local government infrastructure management and efficiency The FFC recommends that, “The Minister of COGTA and the Minister of Finance jointly should, as part of the ongoing local government infrastructure grant reforms, strengthen the linkage between technical project planning processes and budgeting and foster smooth intergovernmental infrastructure coordination, including the following: (i) Time-bound plans for consolidating all municipal infrastructure grants into the respective existing sector-specific grants and thereby provide the key sector department with the authority to carry out their infrastructure support mandate; (ii) Clarification of roles and responsibilities especially in the delivery of water and electricity services between local municipalities and district municipalities on the one hand, and public entities, including the water authorities and Eskom respectively. With respect to specific local geographic areas, these roles and responsibilities must receive further expression in a Memorandum of Understanding. This will enable more direct targeting of funding for services in the Division of Revenue Act.” 10

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Government response Government acknowledges the need to consolidate municipal infrastructure grants and to strengthen the linkages between the technical project planning process and the budgeting. The review of local government infrastructure grants has identified consolidation and rationalisation in the number of grants received by each municipality as a key area for reforming the grant system. A number of reforms have been made to the infrastructure grant system in this regard. As early as 2015, two separate public transport grants to cities – one for capital and one for operational expenditures – were merged into a consolidated public transport network grant. This began the process of reducing duplication in the grant system. It also enhanced the link between capital investment and the sustainability of ongoing operational costs. This was followed by the rationalisation of four overlapping water and sanitation grants into two grants, each with direct and indirect components. The regional bulk infrastructure grant remains a stand-alone grant to fund large bulk-water and sanitation projects. The municipal water infrastructure grant, the water services operating subsidy grant and the rural households infrastructure grant were merged into one grant – the water services infrastructure grant – to fund construction and refurbishment of reticulation schemes and on-site services in rural municipalities. This responded to the concerns over duplication and fragmentation in water and sanitation grants. Most recently, the electrification funds for metropolitan municipalities from the Integrated National Electrification Programme (municipal) grant were shifted into the urban settlements development grant. This responds to several challenges noted by the Department of Mineral Resources and Energy with the grant, including problems in coordinating the timing of projects with the provision of other services and will help reduce the reporting burden for cities. As the various grants in the system serve different purposes, the consolidation and rationalisation process requires extensive consultation before grants can be merged. Grant consolidation must not adversely affect projects already being implemented through one of the affected grants (for example, as a result of changed conditions in the merged grant). It is therefore not appropriate to set definitive timelines on when grants will be consolidated, but government is committed to achieving the vision of a differentiated grant system that recognises the varying contexts faced by different types of municipalities while reducing the number of separate grants each municipality receives. Government also agrees that sector departments must carry out their infrastructure support and oversight mandates, whether this is for a sector-specific grant or as part of a consolidated grant that more holistically funds municipal infrastructure investment plans. The Division of Revenue Act (2019) includes new requirements that sector departments must be consulted on their responsibilities with respect to consolidated conditional grants before the draft frameworks are submitted to the National Treasury. This new requirement, which came into effect in preparing the 2020/21 conditional grant frameworks, should strengthen coordination between national departments. Government agrees that greater clarity on roles and responsibilities in the delivery of water and electricity is needed. Sections 29(2) and (3) of the Division of Revenue Act make provision for district and local municipalities to agree on their respective roles and responsibilities in providing services. Section 29(2) requires that district municipalities providing a service must, before implementing any capital project for water, electricity, roads or other municipal service, consult the local municipalities within whose area of jurisdiction the project will be implemented. Section 29(3) requires that district municipalities ensure they do not duplicate any function provided by a local municipality and must transfer funds for the provision of services to the relevant local municipality providing the service. Section 29(5) requires that district and local municipalities must agree to a payment schedule for funds that must be transferred from the district municipality to the local municipality for functions they perform on behalf of the district municipality. However, the Division of Revenue Act can only allocate transfers to the municipality formally assigned the responsibility for a function. The conclusion of an agreement between the district and local municipalities allows for smoother transfers between them, but would not allow national government to transfer funds directly to a municipality that is not assigned the relevant function. The Department of Mineral Resources and Energy is developing an electrification master plan, which will provide guidance on which areas should be electrified by Eskom and which by municipalities. However, the 11

2020 BUDGET REVIEW final decision on whether electricity distribution licences are granted to municipalities or Eskom is determined by the National Energy Regulator of South Africa. Infrastructure inspectorate The FFC recommends that, “The Minister of COGTA should establish an infrastructure inspectorate through the Municipal Infrastructure Support Agency (MISA) to assess management performance processes and capacity within municipalities to implement grant-funded and non-grant-funded infrastructure projects on a continuous basis.” The FFC also recommends that, “The MISA inspectorate should undertake infrastructure delivery management capability assessments, quality inspections of new and existing built infrastructure, project management and delivery audits and advise on alternative approaches, materials or technologies for infrastructure delivery through the development of infrastructure blueprints for various types of municipal facilities.” Finally, the FFC recommends that, “The Minister of COGTA should align inspectorate assessments to the Division of Revenue Bill conditions for allocation, reporting and the disbursement of grants. This must be in line with the recently established Budget Facility for Infrastructure Programme criteria for appraising and budgeting for infrastructure projects.” Government response Government acknowledges the need for improved oversight of the implementation of municipal infrastructure projects. The infrastructure inspectorate proposed by the FFC would require significant institutional capacity to implement successfully. As a result, the decision of whether an inspectorate is the best mechanism through which to improve oversight, and whether this capacity should be located in MISA or another institution, needs to be considered carefully. The National Treasury has recommended to MISA that it ask the Department of Planning, Monitoring and Evaluation to conduct a formal review of MISA’s operational efficiency. This independent assessment will identify which activities are improving municipal infrastructure delivery and which are not. This will help us to identify where there is scope to reprioritise resources within MISA to fund new activities such as the work of the proposed inspectorate. Developments in late 2019 are likely to affect MISA’s ability to implement significant new programmes in the short term. However, this recommendation will be considered further within government during 2020. In the meantime, government will continue to implement measures to review and strengthen municipal capacity building and to improve coordination and project management capacity, as described in the responses to other recommendations. Shared project management capacity in district municipalities The FFC recommends that, “The Minister of Finance, jointly with the Minister of COGTA, MECs for Finance and other provincial government departments, should within a district municipality area pull together the various project management resources present from GTAC, MISA, MIG administration and the respective municipal PMUs, to create a shared project management facility to improve the oversight capacity in respect of projects and to protect the financial interest of local government against contractor misconduct.” Government response Government agrees on the importance of improving the coordination of infrastructure delivery. President Ramaphosa launched pilots of the district development model in O.R. Tambo District Municipality, eThekwini Metropolitan Municipality and Waterberg District Municipality. The model aims to develop and implement One Plan for each district or metropolitan area that coordinates the efforts of different stakeholders within the respective municipality. This includes better coordination of project management capacity, as recommended by the FFC. 12

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE To complement efforts to improve project implementation, government is also investing in improved capacity to prepare projects. Sound project preparation will make implementation much smoother. Additional support and funding for project preparation is being made available through a new facility at the Development Bank of Southern Africa, established in support of the Infrastructure Fund. Government has also introduced dedicated grant funding for project preparation in metropolitan municipalities (this may be extended to other municipalities in future). From 2020/21, metropolitan municipalities will be funded for infrastructure project and programme preparation costs through the integrated city development grant, on condition that they meet certain requirements with respect to their project and programme preparation and authorisation processes and that they contribute funds from their own resources. Part 4: Provincial allocations Provincial government receives two forms of allocations from nationally raised revenue, the equitable share and conditional grants. Sections 214 and 227 of the Constitution require that an equitable share of nationally raised revenue be allocated to provincial government to provide basic services and perform its allocated functions. The equitable share is an unconditional transfer to provinces and constitutes their main source of revenue. Due to their limited revenue-raising abilities, provinces receive 43 per cent of nationally raised revenue. In addition, they receive conditional grants to help them fulfil their mandates. Transfers to provinces account for over 90 per cent of provincial revenue. This section outlines national transfers to provinces for the 2020 MTEF period, including the fiscal consolidation measures announced in the 2019 MTBPS, as well as other changes that were effected after it was tabled, both to the equitable share and conditional grants. Having taken the revisions to the provincial fiscal framework into account, national transfers to provinces increase from R612.2 billion in 2019/20 to R649.3 billion in 2020/21. Over the MTEF period, provincial transfers will grow at an average annual rate of 6 per cent to R730.7 billion in 2022/23. Table W1.5 sets out the transfers to provinces for 2020/21. A total of R538.5 billion is allocated to the provincial equitable share and R110.8 billion to conditional grants. Table W1.5 Total transfers to provinces, 2020/21 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. 13 EquitableConditional R millionsharegrants Total transfers Eastern Cape71 41512 488 Free State30 0178 239 Gauteng112 11823 935 KwaZulu-Natal111 44222 011 Limpopo62 3299 890 Mpumalanga44 1058 312 Northern Cape14 2904 542 North West37 5487 743 Western Cape55 20813 191 Unallocated–433 83 903 38 256 136 053 133 453 72 219 52 417 18 832 45 291 68 398 433 Total538 472110 785 649 256

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.6 Revisions to direct and indirect transfers to provincial government Source: National Treasury 15 2020/212021/222022/23 R million MTEF total revision Technical adjustments-2 503-2 669– Direct transfers-1 930-1 997666 Provincial equitable share: 121 145 123 grant reprioritisations Provincial equitable share: -2 503 -2 669 – CPI inflation adjustment Ilima/Letsema projects -36 – – Health facility revitalisation grant 199 6 – HIV, TB, malaria and community outreach 223 456 475 Human papillomavirus vaccine -223 -235 -244 National health insurance grant: health 289 300 311 professionals Human settlements development3 015– – Informal settlements upgrading partnership-3 015 –– Indirect transfers -573-672-666 Ilima/Letsema indirect 36 – – National health insurance indirect -609 -672 -666 -5 172 -3 261 390 -5 172 -36 205 1 154 -702 900 3 015 -3 015 -1 911 36 -1 947 Additions to baselines656794944 Direct transfers656794944 Provinicial equitable share293320362 Early childhood development362473582 2 393 2 393 976 1 418 Reductions to baselines-6 930-8 025-9 295 Direct transfers-6 584-7 846-9 087 Provinicial equitable share-2 349-2 452-2 524 Comprehensive agricultural support programme-154-194-233 Ilima/Letsema projects-31-39-48 Land care programme: poverty relief and-4-5-7 infrastructure development Community library services-105-95-83 Education infrastructure-459-616-775 HIV and AIDS (life skills education)-24-27-34 Maths, science and technology-12-13-14 National school nutrition programme-30-40-53 HIV, TB, malaria and community outreach-244-278-291 Health facility revitalisation-191-206-216 Statutory human resources, training and development-11-67-70 National tertiary services–-148-156 Human settlements development-2 331-1 984-2 402 Informal settlements upgrading partnership–-432-453 Expanded public works programme integrated-42-49-51 grants for provinces Social sector expanded public works programme incentive for provinces-41-48-50 Mass participation and sport development-57-69-75 Provinicial roads maintenance-500-1 084-1 258 Public transport operations––-295 Indirect transfers-346-179-208 School infrastructure backlogs-33-44-46 National health insurance indirect-314-135-162 -24 251 -23 517 -7 325 -581 -118 -17 -283 -1 850 -85 -39 -123 -812 -612 -147 -304 -6 717 -885 -142 -139 -201 -2 841 -295 -734 -123 -611 Total change to provincial government allocations Change to direct transfers-7 858-9 049-7 477 Change to indirect transfers-920-851-874 -24 385 -2 644 Net change to provincial government allocations-8 778-9 900-8 351 -27 029

2020 BUDGET REVIEW Transfers to provincial governments are reduced by R27 billion over the 2020 MTEF period, of which direct transfers are reduced by R24.4 billion and indirect transfers are reduced by R2.6 billion. The 2019 MTBPS announced a reduction of R7.3 billion in the provincial equitable share over the MTEF period, which is equivalent to 2 per cent of non-compensation expenditure funded by the equitable share. More recently, the effect of lower estimates of consumer price index inflation on projected compensation spending have allowed a further reduction of R2.5 billion in 2020/21 and R2.7 billion in 2021/22 from the provincial equitable share. For the 2020 MTEF period, there are several increases to the provincial equitable share as a result of reprioritisations. To continue rolling out the Sanitary Dignity Programme, which was introduced in the 2019 MTEF period, R652 million has been added. A total of R398 million has been reprioritised from national government to provinces to continue to employ social workers in areas with high levels of gender-based violence, substance abuse and social problems affecting children, and an additional R315 million has been reprioritised to continue supporting non-profit organisations in implementing social behaviour change programmes to address social and structural drivers of HIV, TB and sexually transmitted infections. Further details of these allocations are contained in the provincial equitable share section, under the description of allocations made outside the formula. Where funds have been reprioritised from provincial conditional grants, these changes are reflected as technical adjustments in Table W1.6, while funds reprioritised from allocations to other spheres are shown as additions to the provincial fiscal framework. Several technical adjustments to conditional grants are shown in Table W1.6. In the 2019/20 adjustment budget, an indirect Ilima/Letsema grant was created to fund the National Food and Nutrition Survey, conducted by the Human Sciences Research Council, which will benefit provinces and national government. This survey will establish a baseline for poverty and food security that can be used to improve the targeting of poverty-relief programmes. This indirect grant will continue in 2020/21 and R36 million has been shifted from the direct Ilima/Letsema projects grant to the newly created indirect component to complete the survey. The 2019/20 adjustment budget announced that the contracting of health professionals to implement national health insurance would shift from being funded through the national health insurance indirect grant to being funded through the direct national health insurance grant. This shift continues over the 2020 MTEF period, and R900 million is allocated to this grant over the three years. Funds for the completion of a project in Limpopo have been shifted from the national health insurance indirect grant to the direct health facility revitalisation grant. The introduction of a separate informal settlements upgrading partnership grant has been delayed until 2021/22, so the indicative baseline for this grant in 2020/21 has been shifted back to the human settlements development grant. Over the 2020 MTEF period, R1.4 billion has been added to the early childhood development grant to increase the subsidy paid for children receiving early childhood development services and to provide for additional children to access these services. Several reprioritisations and technical changes to conditional grants that were announced in the 2019 MTBPS will be implemented over the 2020 MTEF period. These include a reprioritisation of R255 million over the MTEF period from the comprehensive agricultural support grant to the Department of Agriculture, Land Reform and Rural Development to support animal and plant health to sustain exports. The funds will be used to improve laboratory capacity, border control and inspections by the national department. Funds are also reprioritised out of the human settlements development grant to support efforts to address pollution in the Vaal River system. Reductions to provincial conditional grants, made as part of the fiscal consolidation announced in the 2019 MTBPS, were determined taking account of the factors described in Part 2 of this annexure. The details are discussed under individual grants. The provincial roads maintenance grant has been reduced by R500 million in 2020/21 and this amount has been set aside as a provisional allocation to fund disaster recovery projects. Including all of the additions, reductions and technical changes, the provincial equitable share grows at an average annual rate of 6.3 per cent over the MTEF period, while direct conditional grant allocations grow at an average annual rate of 4.7 per cent. 16

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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 2020 MTEF period, the following amounts are allocated to the provincial equitable share respectively: R538.5 billion, R574 billion and R607.6 billion. The equitable share formula The equitable share formula consists of six components that account for the relative demand of services and take into consideration the change of demographics in each of the provinces. The structure of the two largest components, education and health, is based on the demand and the need for education and health services. The other four components enable provinces to perform their other functions, taking into consideration population size of each province, the proportion of poor residents in each province, the level of economic activity and the costs associated with running a provincial administration. For the 2020 MTEF, the formula has been updated with data from Statistics South Africa’s 2019 mid-year population estimates on population and age cohorts and the 2019 preliminary data published by the Department of Basic Education on school enrolment from the Learner Unit Record Information and Tracking System (LURITS) database. Data from the health sector, the 2018 General Household Survey for medical aid coverage and the Risk Equalisation Fund for the risk-adjusted capitation index is also used to update the formula. 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 (2020/21 – 2022/23). The provincial equitable share formula continues to be reviewed. Further details of this review are discussed in Part 6. Summary of the formula’s structure The formula’s six components, shown in Table W1.7, capture the relative demand for services across provinces and take into account specific provincial circumstances. The 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 2020 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 five 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). 17

2020 BUDGET REVIEW Table W1.7 Distributing the equitable shares by province, 2020 MTEF Source: National Treasury Education component (48 per cent) The education component has two sub-components, accounting for school-age population (five to 17 years) and enrolment data. Each element is assigned a weight of 50 per cent. In 2018/19, the data source for enrolment numbers was changed as part of the review of the provincial equitable share, from the SNAP survey to the Department of Basic Education’s data collection system, LURITS. The LURITS 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. When the changes were implemented in the 2018 MTEF, the data was phased in over three years, with the 2018 MTEF and the 2019 MTEF enrolment numbers including data from the old SNAP survey. This phased approach is now complete, and from 2020/21 only the LURITS data is used to update learner enrolment numbers. As a result of the review of the formula, the data used for the school-age population sub-component has also changed. From 2019/20, the use of Statistics South Africa’s annual mid-year population estimates for the five-year-old to 17-year-old age cohort is being phased in. This data is updated yearly, unlike the 2011 Census data, which was used to update the school-age population previously. This will help limit the shocks of updating the sub-component after a lag between Census updates. This change is being phased in over three years, ending in 2021/22. In 2020/21, the data used to update the age cohort sub-component takes two thirds of its data from the mid-year population estimates and one third from the 2011 Census. From 2021/22, the data used comes only from the mid-year population estimates. Table W1.8 shows how this phase-in is calculated and the age cohort numbers used in the formula. 18 EducationHealthBasic sharePovertyEconomicInstitu-activity tional 48.0%27.0%16.0%3.0%1.0%5.0% Weighted average 100.0% Eastern Cape 14.0% 12.3% 11.4% 14.9% 7.7% 11.1% Free State 5.3% 5.3% 4.9% 5.1% 5.0% 11.1% Gauteng 19.4% 24.0% 25.8% 18.7% 34.3% 11.1% KwaZulu-Natal 21.6% 20.5% 19.2% 21.8% 16.0% 11.1% Limpopo 12.7% 10.2% 10.2% 13.5% 7.3% 11.1% Mpumalanga 8.4% 7.5% 7.8% 9.3% 7.5% 11.1% Northern Cape 2.3% 2.1% 2.2% 2.2% 2.1% 11.1% North West 6.8% 6.7% 6.9% 8.2% 6.5% 11.1% Western Cape 9.5% 11.4% 11.6% 6.4% 13.6% 11.1% 13.0% 5.5% 21.4% 20.3% 11.5% 8.2% 2.6% 7.0% 10.4% Total100.0%100.0%100.0%100.0%100.0%100.0% 100.0%

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.8 Age-cohort sub-component, data phase-in, 2020 MTEF Source: National Treasury Table W1.9 shows the combined effect of updating the education component with new enrolment and age cohort data on the education component shares. Table W1.9 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 W1.10 shows the shares of the risk-adjusted component, which accounts for 75 per cent of the health component. 19 Age 5-17 Thousand School enrolmentChanges in 20182019enrolment (phased-in)LURITSdata Weighted average 2019 MTEF2020 MTEF Difference in weighted average Eastern Cape1 873 Free State695 Gauteng2 704 KwaZulu-Natal2 869 Limpopo1 608 Mpumalanga1 117 Northern Cape300 North West935 Western Cape1 341 1 8821 841-40 69671418 2 3602 44080 2 8522 841-11 1 7531 753-0 1 0691 09526 2932985 83285221 1 1251 18660 14.5% 5.3% 18.7% 22.0% 12.9% 8.4% 2.3% 6.6% 9.2% 14.0% 5.3% 19.4% 21.6% 12.7% 8.4% 2.3% 6.8% 9.5% -0.48% -0.01% 0.74% -0.46% -0.18% -0.01% -0.02% 0.11% 0.33% Total13 443 12 86213 021159 100.0% 100.0% – 2011 Census Ages 5-17 Thousand Mid-year population estimates (MPYE): Ages 5-17 Blended data used in provincial equitable share formula 2018 2019 Change 2020/21 2021/22 (1/3 Census, (MYPE data 2/3 MYPE) only) Eastern Cape 1 856 Free State 657 Gauteng 2 232 KwaZulu-Natal 2 759 Limpopo 1 536 Mpumalanga 1 054 Northern Cape 289 North West 825 Western Cape 1 175 1 865 1 881 16 725 714 -11 2 913 2 941 28 2 959 2 924 -35 1 626 1 644 18 1 156 1 149 -7 305 305 1 993 990 -2 1 405 1 425 20 1 873 695 2 704 2 869 1 608 1 117 300 935 1 341 1 881 714 2 941 2 924 1 644 1 149 305 990 1 425 Total 12 383 13 945 13 974 28 13 443 13 974

2020 BUDGET REVIEW Table W1.10 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 2018 General Household Survey, is deducted from the 2019 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 W1.10 shows the change in this sub-component between 2019 and 2020. Table W1.11 Output sub-component shares Source: National Treasury The output sub-component (shown in Table W1.11) uses patient load data from the District Health Information Services. The average number of visits to primary healthcare clinics in 2017/18 and 2018/19 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 at public hospitals in 2017/18 and 2018/19 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 W1.12 shows the updated health component shares for the 2020 MTEF period. 20 Primary healthcare visits Thousand 2017/18 2018/19 Average Share Hospital workload patient-day equivalents 2017/18 2018/19 Average Share Eastern Cape 16 418 16 606 16 512 13.8% Free State 5 462 5 299 5 381 4.5% Gauteng 21 132 20 905 21 019 17.6% KwaZulu-Natal 28 403 28 525 28 464 23.8% Limpopo 14 858 14 336 14 597 12.2% Mpumalanga 9 160 9 253 9 207 7.7% Northern Cape 2 689 2 719 2 704 2.3% North West 7 455 7 446 7 450 6.2% Western Cape 14 140 14 083 14 111 11.8% 4 328 4 388 4 358 13.5% 1 976 2 126 2 051 6.3% 7 315 7 467 7 391 22.9% 7 055 7 143 7 099 22.0% 3 014 3 010 3 012 9.3% 1 992 1 898 1 945 6.0% 563 573 568 1.8% 1 573 1 610 1 592 4.9% 4 344 4 297 4 321 13.4% Total 119 717 119 173 119 445 100.0% 32 161 32 512 32 336 100.0% Mid-year Insured Risk-Weighted population population adjusted population estimates index Thousand 2019 2018 Risk-adjusted shares 2019 2020 Change Eastern Cape 6 712 10.0% 96.9% 5 851 Free State 2 887 16.2% 103.3% 2 498 Gauteng 15 176 23.9% 105.4% 12 175 KwaZulu-Natal 11 289 12.4% 98.9% 9 781 Limpopo 5 983 8.2% 91.6% 5 033 Mpumalanga 4 592 12.6% 95.7% 3 841 Northern Cape 1 264 16.1% 100.7% 1 068 North West 4 027 13.5% 102.2% 3 561 Western Cape 6 844 25.1% 104.0% 5 333 11.9% 11.9% 5.4% 5.1% 24.2% 24.8% 20.5% 19.9% 10.1% 10.2% 7.8% 7.8% 2.2% 2.2% 7.2% 7.2% 10.8% 10.9% 0.05% -0.32% 0.54% -0.59% 0.10% 0.05% 0.02% 0.09% 0.06% Total 58 775 – – 49 141 100.0% 100.0% –

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.12 Health component weighted shares Source: National Treasury Basic component (16 per cent) The basic component derives from each province’s share of the national population. This component constitutes 16 per cent of the total equitable share. For the 2020 MTEF, population data is drawn from the 2019 mid-year population estimates produced by Statistics South Africa. Table W1.13 shows how population changes have affected the basic component’s revised weighted shares. Table W1.13 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. For this component, the poor population is defined as people who fall into 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 who fall 21 Mid-year population estimates Thousand20182019 Population% changepopulation change Basic component shares 2019 MTEF2020 MTEF Change Eastern Cape6 523 Free State2 954 Gauteng14 717 KwaZulu-Natal11 385 Limpopo5 797 Mpumalanga4 524 Northern Cape1 226 North West3 979 Western Cape6 621 6 712 2 887 15 176 11 289 5 983 4 592 1 264 4 027 6 844 1902.9% -67-2.3% 4593.1% -96-0.8% 1853.2% 681.5% 383.1% 481.2% 2233.4% 11.3%11.4% 5.1%4.9% 25.5%25.8% 19.7%19.2% 10.0%10.2% 7.8%7.8% 2.1%2.2% 6.9%6.9% 11.5%11.6% 0.12% -0.21% 0.33% -0.51% 0.14% -0.02% 0.03% -0.04% 0.17% Total57 726 58 775 1 049– 100.0%100.0% – Risk-adjustedPrimaryHospital healthcare compo-nent Weight75.0%5.0%20.0% Weighted shares 20192020 Change Eastern Cape 11.9% 13.8% 13.5% Free State 5.1% 4.5% 6.3% Gauteng 24.8% 17.6% 22.9% KwaZulu-Natal 19.9% 23.8% 22.0% Limpopo 10.2% 12.2% 9.3% Mpumalanga 7.8% 7.7% 6.0% Northern Cape 2.2% 2.3% 1.8% North West 7.2% 6.2% 4.9% Western Cape 10.9% 11.8% 13.4% 12.3%12.3% 5.4%5.3% 23.6%24.0% 21.0%20.5% 10.1%10.2% 7.4%7.5% 2.1%2.1% 6.7%6.7% 11.4%11.4% -0.02% -0.07% 0.47% -0.53% 0.08% 0.00% -0.00% 0.05% 0.02% Total100.0%100.0%100.0% 100.0%100.0% –

2020 BUDGET REVIEW into the poorest 40 per cent of South African households by the province’s population figure from the 2019 mid-year population estimates. Table W1.14 shows the proportion of the poor in each province from the Income and Expenditure Survey, the 2019 mid-year population estimates and the weighted share of the poverty component per province. Table W1.14 Comparison of current and new poverty component weighted shares in shares Source: National Treasury 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 2020 MTEF, 2017 GDP-R data is used. Table W1.15 shows the weighted shares of the economic activity component. Table W1.15 Current and new economic activity component weighted shares Source: National Treasury Full impact of data updates on the provincial equitable share Table W1.16 shows the full impact of the data updates on the provincial equitable share per province, after the six updated components have been added together. It compares the target shares for the 2019 and 2020 MTEF periods. The size of each province’s share reflects the relative demand for provincial public services in that province, and the changes in shares from 2019 to 2020 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 above. 22 Current (2019 MTEF) GDP-R, 2016Weighted (R million) shares New (2020 MTEF) GDP-R, 2017Weighted (R million)shares Difference in weighted shares Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 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% 358 6277.7% 234 5055.0% 1 593 87434.3% 746 36016.0% 340 2737.3% 348 9877.5% 96 4872.1% 301 4776.5% 632 99013.6% 0.1% 0.0% -0.4% 0.1% 0.1% 0.1% -0.0% 0.0% -0.1% Total 4 350 314100.0% 4 653 579100.0% 0.0% Income and Expendi-ture Survey Thousand2010/11 Current (2019 MTEF) Mid-yearPoorWeighted populationpopula-shares estimatestion 2018 New (2020 MTEF) Mid-yearPoorWeighted populationpopula-shares estimatestion 2019 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 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% 6 7123 49214.9% 2 8871 1955.1% 15 1764 38118.7% 11 2895 11521.8% 5 9833 16213.5% 4 5922 1709.3% 1 2645152.2% 4 0271 9298.2% 6 8441 4966.4% 0.2% -0.2% 0.3% -0.5% 0.2% -0.0% 0.0% -0.0% 0.1% Total 57 72623 079100.0% 58 77523 457100.0% –

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.16 Full impact of data updates on the equitable share Source: National Treasury Phasing in the formula The annual updates to the official data used to calculate the provincial equitable share formula result in changes to each province’s share of the available funds. These changes reflect the changing balance of service delivery demands among the provinces, and the annual data updates are vital to ensuring that allocations can respond to these changes. However, provinces need stable and predictable revenue streams to allow for sound planning. As such, the new shares calculated using the most 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 W1.17. The phase-in mechanism provides a smooth path to achieving the 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 2020/21 published in the 2019 MTEF, and closes the gap between these shares by a third in each year of the 2020 MTEF period. As a result, one third of the impact of the data updates is implemented in 2020/21 and two thirds in the indicative allocations for 2021/22. The updates are thus fully implemented in the indicative allocations for 2022/23. Table W1.17 Implementation of the equitable share weights Source: National Treasury Allocations calculated outside the equitable share formula In addition to allocations made through the formula, the provincial equitable share includes allocations that have been determined using other methodologies. These allocations are typically introduced when a new function or additional funding is transferred to provinces and national government indicates separately how 23 2020/21 Indicative weighted shares from Percentage 2019 MTEF 2020/21 2021/22 2022/23 2020 MTEF weighted shares 3-year phasing Eastern Cape 13.4% Free State 5.6% Gauteng 20.6% KwaZulu-Natal 20.9% Limpopo 11.6% Mpumalanga 8.2% Northern Cape 2.7% North West 6.9% Western Cape 10.2% 13.3% 5.6% 20.8% 20.7% 11.6% 8.2% 2.7% 7.0% 10.3% 13.1% 5.6% 21.1% 20.5% 11.5% 8.2% 2.6% 7.0% 10.3% 13.0% 5.5% 21.4% 20.3% 11.5% 8.2% 2.6% 7.0% 10.4% Total 100.0% 100.0% 100.0% 100.0% 2019 MTEF2020 MTEF weightedweighted averageaverage Difference Eastern Cape 13.2% 13.0% Free State 5.6% 5.5% Gauteng 20.9% 21.4% KwaZulu-Natal 20.8% 20.3% Limpopo 11.5% 11.5% Mpumalanga 8.2% 8.2% Northern Cape 2.6% 2.6% North West 7.0% 7.0% Western Cape 10.2% 10.4% -0.2% -0.1% 0.5% -0.5% -0.0% -0.0% -0.0% 0.1% 0.2% Total100.0%100.0% 0.0%

2020 BUDGET REVIEW much funding has been allocated to each province for this specific purpose. Funds are also added through this approach when a priority has been identified through the national budget process and provincial government performs the function or when a conditional grant is absorbed into the equitable share. For the 2020 MTEF, three new adjustments are allocated outside the provincial equitable share formula. In the social development sector, R398 million has been reprioritised from national government to continue to employ social workers in areas with a high prevalence of gender-based violence, substance abuse and issues affecting children. The allocations to the provinces are based on the prevalence of these problems, population and geographic size, and the number of sites offering social work services. In addition, R315 million has been reprioritised from the Department of Social Development for provinces to continue to help non-profit organisations implement Social Behaviour Change Programmes to address social and structural drivers of HIV, TB and sexually transmitted infections. To scale up the Sanitary Dignity Programme, which provides sanitary products to indigent girl learners, funds were added to the equitable share in 2019/20. To continue rolling out this programme, R652 million has been added to the provincial equitable share over the 2020 MTEF period. These funds are proportionally allocated to the provinces based on the number of girl learners in Grades 4 to 12 in the poorest schools (quintiles 1–3) in each province. Table W1.18 provides a summary of the allocations made outside the provincial equitable share in the 2020 MTEF period and a short description of how these amounts are allocated among provinces. Table W1.18 Allocations outside provincial equitable share formula Source: National Treasury Final provincial equitable share allocations The final equitable share allocations per province for the 2020 MTEF period are detailed in Table W1.19. These allocations include the full impact of the data updates, phased in over three years, and the allocations that are made separately from the formula. 24 2019/20 2020/212021/222022/23 Allocation criteria R million Adjusted Budget Medium-term estimates Food relief shift – 677175 Allocated equally among the provinces Social worker employment grant shift 213 227239251 Allocated in terms of what provinces would have received had the grant continued Substance abuse treatment grant shift 75 798387 Allocated in terms of what provinces would have received had the grant continued Municipal intervention support 87 899397 Allocated equally among the provinces Gender-based violence and sexually transmitted infections support shift – 93109114 Allocated based on the non-profit organisations located in the 27 priority districts Social worker additional support shift – 113139146 Allocated according to areas of high prevalence of gender-based violence, substance abuse and issues affecting children Sanitary Dignity Programme 157 209217226 Allocated proportionately based on the number of girl learners per province in quintiles 1 to 3 schools Infrastructure delivery improvement programme shift 45 454547 Allocated equally among the provinces Total 576 9219971 042

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.19 Provincial equitable share 2020/21 2021/22 2022/23 R million Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 71 415 30 017 112 118 111 442 62 329 44 105 14 290 37 548 55 208 75 306 31 897 121 121 117 755 66 256 46 996 15 207 40 174 59 276 78 841 33 657 129 908 123 544 69 935 49 724 16 068 42 682 63 194 Total 538 472 573 990 607 554 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 4.7 per cent over the medium term. Direct conditional grant baselines total R111 billion in 2020/21, R118 billion in 2021/22 and R123 billion in 2022/23. Indirect conditional grants amount to R4.1 billion, R4.8 billion and R5.1 billion respectively for each year of the same period. Table W1.20 provides a summary of conditional grants by sector for the 2020 MTEF period. More detailed information, including the framework and allocation criteria for each grant, is provided in the 2020 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 2018/19. 25

2020 BUDGET REVIEW Table W1.20 Conditional grants to provinces Source: National Treasury Agriculture, land reform and rural development 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 26 2019/20 Adjusted R million budget 2020/21 2021/22 2022/23 MTEF total Agriculture, land reform and rural development 2 159 Comprehensive agricultural support programme 1 538 Ilima/Letsema projects 538 Land care programme: poverty relief 82 and infrastructure development Basic Education 18 569 Education infrastructure 10 514 HIV and AIDS (life skills education) 257 Learners with profound intellectual disabilities 221 Maths, science and technology 391 National school nutrition programme 7 186 Cooperative Governance 131 Provincial disaster relief 131 Health 45 524 HIV, TB, malaria and community outreach 22 039 Health facility revitalisation 6 007 Human papillomavirus vaccine 157 National tertiary services 13 186 National health insurance grant: health professionals 289 Statutory human resources, training and development 3 846 Human Settlements 19 604 Human settlements development 18 780 Title deeds restoration 548 Provincial emergency housing 277 Informal settlements upgrading partnership – Public Works and Infrastructure 868 Expanded public works programme 437 integrated grant for provinces Social sector expanded public works 431 programme incentive for provinces Social Development 518 Early childhood development 518 Sports arts and culture 2 121 Community library services 1 501 Mass participation and sport development 620 Transport 17 768 Provincial roads maintenance 11 442 Public transport operations 6 326 2 153 2 320 2 392 1 522 1 620 1 672 549 614 632 82 86 88 19 564 20 773 21 738 11 008 11 710 12 255 247 259 262 243 256 266 401 423 438 7 666 8 125 8 516 138 146 153 138 146 153 49 267 53 917 56 537 24 387 27 931 29 405 6 368 6 658 7 034 – – – 14 069 14 694 15 294 289 300 311 4 155 4 333 4 494 17 493 17 614 18 317 16 621 13 414 13 871 578 – – 295 311 326 – 3 890 4 121 834 871 903 421 440 456 414 432 447 915 1 057 1 192 915 1 057 1 192 2 076 2 205 2 307 1 479 1 584 1 667 597 621 640 18 343 19 058 19 597 11 593 11 938 12 507 6 750 7 121 7 090 6 865 4 814 1 795 257 62 076 34 973 767 765 1 262 24 308 438 438 159 721 81 723 20 060 – 44 057 900 12 982 53 425 43 905 578 932 8 011 2 609 1 316 1 292 3 164 3 164 6 588 4 730 1 858 56 998 36 037 20 961 Total direct conditional allocations 107 263 110 785 117 962 123 137 351 883 Indirect transfers 3 941 Agriculture, land reform and rural development 45 Ilima/Letsema indirect 45 Basic Education 1 987 School infrastructure backlogs 1 987 Health 1 909 National health insurance indirect 1 909 4 060 4 824 5 076 36 – – 36 – – 1 736 2 295 2 424 1 736 2 295 2 424 2 288 2 529 2 652 2 288 2 529 2 652 13 961 36 36 6 456 6 456 7 469 7 469

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE targeted farmers. Over the 2020 MTEF period, R255.1 million is reprioritised from the grant to the Department of Agriculture, Land Reform and Rural Development to fund improved laboratory capacity, border control and inspections. Although funds have been reprioritised from this grant, over the 2020 MTEF period R4.8 billion is allocated to this grant, and the baseline grows from R1.5 billion in 2020/21 to R1.7 billion in 2022/23. The fiscal consolidation reductions for this grant are equivalent to 5 per cent of the grant’s baseline in 2020/21, 6 per cent in 2022/23 and 7 per cent in 2022/23. 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 Expanded Public Works Programme. Over the medium term, R257 million is allocated to this grant. The fiscal consolidation reductions for this grant are equivalent to 5 per cent of the grant’s baseline in 2020/21, 6 per cent in 2022/23 and 7 per cent in 2022/23. The Ilima/Letsema projects grant aims to boost food production by helping previously disadvantaged farming communities. The grant’s baseline is R1.8 billion over the 2020 MTEF period. This includes R36 million in 2020/21, which is allocated through the Ilima/Letsema indirect grant to complete the National Food and Nutrition Survey. These funds were previously ring-fenced in the direct Ilima/Letsema projects grant, and this shift will allow the national Department of Agriculture, Land Reform and Rural Development to pay the Human Sciences Research Council directly for the survey. The fiscal consolidation reductions for this grant are equivalent to 5 per cent of the grant’s baseline in 2020/21, 6 per cent in 2021/22 and 7 per cent in 2022/23. Basic education grants The education infrastructure grant provides supplementary funding for ongoing infrastructure programmes in provinces. This includes maintaining existing infrastructure and building new infrastructure to ensure school buildings meet the required norms and standards. The grant’s total allocation for this period is R35 billion: R11 billion in 2020/21, R11.7 billion in 2021/22 and R12.3 billion in 2022/23. The fiscal consolidation reductions for this grant are equivalent to 4 per cent of the grant’s baseline in 2020/21, 5 per cent in 2022/23 and 5.9 per cent in 2022/23. 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 2020/21 incentive, the departments had to meet certain prerequisites in 2018/19 and have their infrastructure plans approved in 2019/20. 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 W1.21 shows the final score and incentive allocation for each province. Table W1.21 Education infrastructure grant allocations Source: National Treasury 27 R thousand Planning assessment results from 2019 2020/21 Final allocation for 2020/21 Basic Incentive componentcomponent Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 77% 70% 90% 93% 75% 84% 80% 65% 91% 1 470 72873 386 767 04373 386 1 424 37173 386 1 922 79673 386 1 182 97873 386 1 021 29573 386 523 88273 386 1 016 62473 386 1 017 77673 386 1 544 114 840 429 1 497 757 1 996 182 1 256 364 1 094 681 597 268 1 090 010 1 091 162 Total 10 347 489660 478 11 007 967

2020 BUDGET REVIEW 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 services and electricity on behalf of provinces. This grant is allocated R6.5 billion over the medium term in the Planning, Information and Assessment Programme. An allocation of R1.7 billion in 2020/21 will be used to replace 40 inappropriate and unsafe schools with newly built ones, provide clean water to 432 schools and provide appropriate sanitation services to 1 033 schools. The national school nutrition programme grant aims 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 5.8 per cent, with a total allocation of R24.3 billion. The fiscal consolidation reductions to this grant are equivalent to 0.4 per cent of the grant’s baseline in 2020/21, 0.5 per cent in 2021/22 and 0.6 per cent in 2022/23. The maths, science and technology grant provides for ICT, workshop equipment and machinery to schools, which should lead to better outcomes in maths and science in the long term. The grant’s total allocation is R1.3 billion over the medium term. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. 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. The programme 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 R767 million over the medium term. The fiscal consolidation reductions to this grant are equivalent to 8.8 per cent of the grant’s baseline in 2020/21, 9.5 per cent in 2021/22 and 11.5 per cent in 2022/23. The learners with profound intellectual disabilities grant aims to expand access to education for these learners. Over the MTEF period, the grant will provide access to quality, publicly funded education to such learners by recruiting outreach teams. This grant has been allocated R765 million over the 2020 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. Strategies to mitigate the effects of the ongoing drought have, in part, been funded by this grant. 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 2020 MTEF period, R438 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 and continues to fund medical specialists, equipment, and advanced medical investigation and treatment according to approved service specifications. Patient referral pathways often cross provincial borders and, as a result, many patients receive care in neighbouring provinces if the required services are unavailable in their home province. For the 2020 MTEF period, the national Department of Health has reprioritised R176 million within this conditional grant to develop and expand tertiary services in the Eastern Cape, Limpopo, Mpumalanga and the North West. The funds have 28

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE been ring-fenced in the 2020/21 allocations for these provinces and left unallocated for 2021/22 and 2022/23. These developmental allocations will allow the provinces to develop their capacity in offering tertiary services within their facilities. A similar approach to allocating developmental funds is taken in the statutory human resources component of the statutory human resources, training and development grant and further details on the amounts ring-fenced are discussed under this grant. The urban areas of Gauteng and the Western Cape continue to receive the largest share of the grant because they provide the largest proportion of high-level, sophisticated services. The national Department of Health has reviewed the allocation criteria under this grant and is working with provinces to develop a new allocation model to ensure continued fairness in allocations. The grant is allocated R44.1 billion over the medium term: R14.1 billion in 2020/21, R14.7 billion in 2021/22 and R15.3 billion in 2022/23. The fiscal consolidation reductions to this grant are equivalent to 1 per cent of the grant’s baseline in 2021/22 and 1 per cent in 2022/23. 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. A total of R199 million in 2020/21 and R5.7 million in 2021/22 has been shifted from the national health insurance indirect grant: health facility revitalisation component to this grant for upgrades to Pietersburg Hospital in Limpopo. These funds were initially part of the Limpopo allocations in the national health insurance indirect grant. The province will now undertake the upgrades, so the funds will be transferred directly to the province. Over the 2020 MTEF period, R20 billion has been allocated to this grant. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. Like the education infrastructure grant discussed previously, a two-year planning process is also required for provinces to access this grant’s incentive component. The national Department of Health and the National Treasury assessed the provinces’ infrastructure plans. This was 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 W1.22 sets out the final score and the incentive allocation per province. Table W1.22 Health facility revitalisation grant allocations Source: National Treasury The human resources capacitation grant and the health professions training and development grant have been merged to create a new statutory human resources, training and development grant from 2020/21. The conditional grant has two components and has been allocated R4.2 billion in 2020/21, R4.3 billion in 2021/22 and R4.5 billion in 2022/23. The health professions training and development component funds the training of health sciences professionals, including specialists, registrars and their supervisors (who were previously funded from the health professions training and development grant). The statutory human resources 29 R thousand Planning assessment results from 2019 2020/21 Final allocation for 2020/21 BasicIncentive componentcomponent Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape 73% 62% 70% 80% 60% 69% 50% 73% 86% 610 773 527 985 909 450 1 212 654 683 713 365 162 409 404 538 398 640 033 58 760 58 760 58 760 58 760 58 760 58 760 – 58 760 58 760 669 533 586 745 968 210 1 271 414 742 473 423 922 409 404 597 158 698 793 Total 5 897 570 470 082 6 367 652

2020 BUDGET REVIEW component will fund intern and community service posts (which were previously funded from the human resources capacitation grant), as well as some posts previously funded from the equitable share. When the human resources capacitation grant was introduced, it was primarily meant to fund the shortfall in funding for interns and community service posts, but its scope expanded to include other vacant posts in the health sector. These non-statutory posts will now be funded through the provincial equitable share. Therefore, the grant will be able to fund some additional internship and community service posts that were previously funded from the equitable share. Over the 2020 MTEF period, similar to the national tertiary services grant, R65 million has been ring-fenced in the health professions training and development component of this grant for the development and expansion of tertiary services in the Eastern Cape, Limpopo, Mpumalanga, the Northern Cape and the North West. The funds have been allocated to these provinces for 2020/21, and are left unallocated for the outer two years of the MTEF period. 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 could be explicitly earmarked. This will help ensure that these workers are better integrated into national health services. In 2020/21, R800 million has been reprioritised to the community outreach services component from the HIV and AIDS component of the grant to cover a shortfall in the salaries of community health workers in that year. In 2019/20, two new components were added to the grant, to strengthen the continued fight against malaria in three provinces and to monitor the activities and outcomes of the TB portion of the grant. In the 2020 MTEF, the human papillomavirus vaccine grant has been merged into the HIV, TB, malaria, community outreach grant and a separate component will be created within the grant to continue funding human papillomavirus vaccinations. Two new components for mental health and oncology will be introduced in 2021/22, with funds of R452 million reprioritised from the national health insurance: personal services component for the two outer years of the 2020 MTEF period. The grant’s total baseline amounts to R82 billion over the medium term. The fiscal consolidation reductions to this grant are equivalent to 1 per cent of the grant’s baseline in 2020/21, 1 per cent in 2021/22 and 1 per cent in 2022/23. The national health insurance indirect grant continues to fund all preparatory work for universal health coverage, as announced in 2017/18. Over the 2020 MTEF period, this will be done through three components: health facility 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. 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. In 2020/21, this component will also pilot new initiatives to improve the quality of health in preparation for accreditation to deliver national health insurance services. The non-personal services component is allocated R2.2 billion over the medium term to continue funding initiatives to strengthen health information systems, clinics, and the dispensing and distribution of centralised chronic medicines. This indirect grant is allocated a total of R7.5 billion over the 2020 MTEF period. The fiscal consolidation reductions to this grant are equivalent to 9.8 per cent of the grant’s baseline in 2020/21, 4 per cent in 2021/22 and 4.7 per cent in 2022/23. In the 2019/20 adjustment budget, funds for contracting health professionals were shifted from the personal services component of the indirect grant to create a new direct national health insurance grant. The contracting of health professionals in former national health insurance pilot sites was previously administered at national level, but the contracting was being carried out at provincial level with the 30

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE requirement that provinces submit claims for the costs they incurred. Transferring these funds to provinces allows them to pay contractors directly. The contracting of health professionals will continue to be funded in the direct national health insurance grant over the MTEF period through an allocation of R900 million. 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. Over the 2020 MTEF period, a total of R44 billion has been allocated to this grant. The fiscal consolidation reductions to this grant are equivalent to 13.1 per cent of the grant’s baseline in 2020/21, 12.9 per cent in 2021/22 and 14.8 per cent in 2022/23. 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 from the 2010 General Household Survey on the proportion of traditional dwellings with damaged roofs and walls per province is used to adjust these totals so that only dwellings providing 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 W1.23 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 provinces to 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. 31

2020 BUDGET REVIEW Table W1.23 Human settlements development grant formula calculation Source: 2011 Census and General Household Survey In 2019/20, the structure of the human settlements development grant was changed to intensify efforts to upgrade informal settlements in partnership with communities. To promote this objective, a new component was introduced with specific conditions relating to such upgrades. The new component amounts to 15 per cent of the formula-based grant allocation to each province. The funds ring-fenced for each province are a minimum expenditure requirement, allowing them to invest more if necessary. The component requires the use of a partnership approach that promotes community ownership and participation in the upgrades. Provinces are required to work with municipalities to identify and prioritise informal settlements for upgrading and to submit a plan for each settlement to be upgraded, prepared in terms of the National Upgrading Support Programme’s methodology. This component will remain in place in 2020/21, serving as a planning and preparatory platform for the introduction of a new informal settlements upgrading grant in 2021/22. The new grant will be created by reprioritising funds from the human settlements development grant. A similar approach is being taken in the urban settlements development grant, discussed in Part 5, with an informal settlements upgrading component and the intention to introduce a separate grant for metropolitan municipalities in the outer years of the MTEF period. A total of R544 million is ring-fenced within the human settlements development grant in 2020/21 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. 32 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 100.0% 100.0% 100.0% 100.0%

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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 on the functioning of the property market, the title deeds restoration grant was introduced to accelerate the backlog eradication process. The grant was introduced in 2018/19 and comes to an end in 2020/21. It has an allocation of R578 million in 2021/22, which has been indicatively incorporated back into the human settlements development grant baseline in that year. 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 programme. In 2019/20, the grant’s purpose was expanded to fund the repair of houses damaged in disasters, if those repairs are cheaper than the grant’s funding of relocating households to temporary shelter. Over the 2020 MTEF period, a total of R932 million has been allocated to this grant. Public works and infrastructure grants The expanded public works programme (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 R1.3 billion over the MTEF period. The fiscal consolidation reductions to this grant are equivalent to 9 per cent of the grant’s baseline in 2020/21, 10 per cent in 2021/22 and 10.1 per cent in 2022/23. 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 R1.3 billion over the MTEF period. The fiscal consolidation reductions to this grant are equivalent to 9 per cent of the grant’s baseline in 2020/21, 10 per cent in 2021/22 and 10.1 per cent in 2022/23. Social development grants The early childhood development grant supports government’s prioritisation of early childhood development, as envisioned in the National Development Plan. The grant aims to improve poor children’s access to early childhood programmes and ensure that early childhood centres have adequate infrastructure. The grant baseline totals R3.2 billion over the 2020 MTEF period, which includes an additional R1.4 billion. For 2020/21, the additional allocations have been used to increase the per-child subsidy from R15 per day to R17 per day in 2020/21. The subsidy is then projected to increase in line with inflation to R17.77 in 2021/22 and R18.57 in 2022/23. The grant additions cover the cost of increasing the per-child subsidies funded from the provincial equitable share in 2020/21 as well as those funded directly from the grant. The additions also fund a small expansion in access to early childhood development services, which can be implemented by increasing the number of subsidies for centre-based early childhood development services or by providing subsidies for non-centre-based early childhood development services. The allocation of funds in the maintenance component of the grant, for the two outer years of the 2020 MTEF period, will be informed by the outcomes of the infrastructure assessments that need to be conducted in each province. As a result, 80 per cent of the allocations in this component remain unallocated in these two outer years. Sports, arts and culture grants The community library services grant, administered by the Department of Sports, 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 33

2020 BUDGET REVIEW 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 R4.7 billion over the next three years. The fiscal consolidation reductions to this grant are equivalent to 6.6 per cent of the grant’s baseline in 2020/21, 5.7 per cent in 2021/22 and 4.7 per cent in 2022/23. 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. Over the MTEF period, an amount of R90 million has been reprioritised within this grant to support the Netball World Cup, which will be hosted in the Western Cape in 2023. The grant is allocated R1.9 billion over the medium term. The fiscal consolidation reductions to this grant are equivalent to 8.8 per cent of the grant’s baseline in 2020/21, 10 per cent in 2021/22 and 10.5 per cent in 2022/23. Transport grants The public transport operations grant subsidises commuter bus services. It helps ensure that provinces meet their contractual obligations and provide services. Most of the contracts subsidised through this grant continue to operate on long-standing routes that link dormitory towns and suburbs established under apartheid to places of work. The grant allows provinces to renegotiate contracts and routes, and/or to devolve the function and funding to municipalities. This provides an opportunity for routes to be restructured in line with new settlement patterns and to promote more integrated urban development patterns in future. The grant is allocated R21 billion over the MTEF period. The fiscal consolidation reductions to this grant are equivalent to 4 per cent of the grant’s baseline in 2022/23. The provincial roads maintenance grant is a supplementary grant that supports the cost of maintaining provincial roads. Provinces are expected to fund the construction of new roads from their own budgets and supplement the cost of maintaining and upgrading existing roads. Grant allocations are determined using a formula based on provincial road networks, road traffic and weather conditions. These factors reflect the varying 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 incentive portion of the grant is meant to be based on performance indicators relating to traffic loads, safety engineering and visual condition indicators. However, the Department of Transport was unable to provide updated data on the incentive calculation in time to determine incentive allocations for 2020/21. As a result, the full grant is allocated through the formula described above. The Department of Transport and the National Treasury agree that the grant should be used to incentivise improved performance in provincial roads departments and will work together in 2020 to revise the incentive component in time to determine allocations from the R1.6 billion unallocated incentive pool in 2021/22. The total allocation for the MTEF period is R36 billion. The fiscal consolidation reductions to this grant are equivalent to 8.3 per cent of the grant’s baseline in 2021/22 and 9.1 per cent in 2022/23. This grant has been reduced by R500 million in 2020/21 and this amount has been set aside as a provisional allocation to fund disaster recovery projects during the same year. 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 2020/21 budgets, and to promote better accountability and transparency by ensuring that all national allocations are included in municipal budgets. Over the 2020 MTEF period, R426.4 billion will be transferred directly to local government and a further R23.4 billion has been allocated to indirect grants. Direct transfers to local government over the medium term account for 8.8 per cent of national government’s non-interest expenditure. When indirect transfers are 34

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE added to this, total spending on local government expenditure. increases to 9.3 per cent of national non-interest Table W1.24 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, each municipality varies dramatically, with poor rural municipalities receiving most of their revenue from transfers, while urban municipalities raise the majority of their own 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, 2020/21* *Reflects funds allocated through Division of Revenue Bill. Allocations to district municipalities are reassigned to local municipalities where possible Source: National Treasury 35 R thousands Aver age equitable share per h ouseho ld Aver age cond ition al grant per hou seh old 10 8 6 4 2 0 Me tros (8) Secondary cities (19) Large towns (26) Small towns (99) Mostly r ural municipalities (61) 4.2 3.8 7.2 2.5 5.9 2.3 2.3 4.5 3.5 2.6 2016/172017/182018/19 Outcome R million 2019/20 Adjusted budget 2020/212021/222022/23 Medium-term estimates Direct transfers102 867111 103118 488 Equitable share and related50 70955 61460 758 Equitable share formula145 25949 92855 072 RSC levy replacement4 5674 7954 795 Support for councillor883891891 remuneration and ward committees General fuel levy sharing11 22411 78512 469 with metros Conditional grants40 93443 70445 262 Infrastructure39 25941 88843 862 Capacity building and other1 6751 8151 400 Indirect transfers8 1127 8037 770 Infrastructure8 0937 6997 699 Capacity building and other1910371 127 209 68 973 62 648 5 357 969 13 167 45 068 43 172 1 897 7 024 6 913 111 132 529142 442151 445 74 68381 06287 213 68 06374 09079 913 5 6525 9636 249 9691 0091 051 14 02715 18216 085 43 81946 19848 147 41 86044 13045 998 1 9592 0672 149 7 6287 2298 161 7 5007 0938 020 128135140 Total110 979118 905126 258 134 233 140 157149 671159 605

2020 BUDGET REVIEW Changes to local government allocations Over the next three years, above-inflation growth in allocations to the local government equitable share continues, while growth in conditional grants is slower as a result of reductions announced in the 2019 MTBPS. As a result, total direct allocations to local government grow at an annual average rate of 6.6 per cent over the MTEF period. The changes to each local government allocation are summarised in Table W1.25. Table W1.25 Revisions to direct and indirect transfers to local government Source: National Treasury 36 2020/212021/222022/23 R million 2020 MTEF Total revisions Technical adjustments––– Direct transfers-330-60-70 Municipal infrastructure-206-52-57 Urban settlements development2 835–– Integrated urban development565257 Neighbourhood development partnership-30-60-70 Informal settlements upgrading partnership-2 985–– Indirect transfers3306070 Neighbourhood development partnership306070 Regional bulk infrastructure400–– Water services infrastructure-100–– – -460 -316 2 835 166 -160 -2 985 460 160 400 -100 Additions to baselines250–– Indirect transfers250–– Regional bulk infrastructure250–– 250 250 250 Reductions to baselines-5 083-7 823-8 262 Direct transfers-5 022-6 996-7 982 Local government equitable share-1 000-1 100-1 100 Local government equitable share-1 000-1 100-1 100 Conditional grants-4 022-5 896-6 882 Municipal infrastructure-783-842-882 Water services infrastructure-426-541-698 Urban settlements development-1 270-1 968-2 554 Integrated national electrification programme-119-128-134 Integrated urban development-47-51-53 Public transport network-1 049-1 570-1 727 Neighbourhood development partnership-65-77-81 Integrated city development-10-11-11 Rural roads asset management systems-12-13-13 Informal settlements upgrading partnership–-438-459 Regional bulk infrastructure-174-187-196 Energy efficiency and demand-side management-22-23-24 Local government financial management-17-18-19 Expanded public works programme-23-24-26 Infrastructure skills development-5-5-5 Indirect transfers-61-826-279 Integrated national electrification programme-61-826-279 -21 168 -20 001 -3 200 -3 200 -16 801 -2 506 -1 665 -5 793 -380 -151 -4 347 -224 -31 -38 -898 -558 -68 -53 -73 -15 -1 167 -1 167 Total change to local government allocations Change to direct transfers-5 352-7 056-8 052 Change to indirect transfers519-766-209 -20 461 -457 Net change to local government allocations-4 833-7 823-8 262 -20 918

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Technical adjustments in Table W1.25 summarise the shifting of funds between different local government allocations, but do not change the total amount allocated to local government. These changes to the grants include the shifting of: R400 million in 2020/21 from the municipal infrastructure grant, the water services infrastructure grant and the urban settlements development grant to the indirect regional bulk infrastructure grant to assist in funding the rehabilitation of wastewater treatment infrastructure in the Vaal River System. R160 million from the direct neighbourhood development partnership grant to the indirect component of the grant over the MTEF period. R3 billion that had been indicatively allocated to the new informal settlement upgrading partnership grant in 2020/21. This amount is shifted back to the urban settlements development grant following the decision to extend the informal settlements window within this grant for another year. R166 million over the 2020 MTEF period from the municipal infrastructure grant to the integrated urban development grant for the entry of one additional municipality into the grant. In addition to funds shifted from other local government grants, R250 million has been added to the indirect regional bulk infrastructure grant in 2020/21 to assist with addressing pollution in the Vaal River System. These funds were reprioritised from allocations in other spheres of government. The local government equitable share is reduced by R3.2 billion over the 2020 MTEF period as part of the fiscal consolidation measures announced in the 2019 MTBPS. The reductions in 2020/21 and 2021/22 eliminate the unallocated funds set aside in the equitable share to provide for possible higher increases in bulk costs. As a result, these reductions will not affect the indicative allocations for individual municipalities. Reductions to local government conditional grants, due to fiscal consolidation measures announced in the 2019 MTBPS, were determined taking account of the factors described in Part 2 of this annexure. These reductions to direct conditional grants to local government total R16.8 billion over the 2020 MTEF period. Indirect grants to local government have been reduced by R1.2 billion over the medium term, through a reduction to the indirect integrated national electrification programme grant. The details are discussed later under individual grants. 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 with the least potential to cover these costs from their own revenues. In the process of determining the baseline for the outer year (2022/23) of the 2020 MTEF period, the local government equitable share allocation has grown by 7.6 per cent, well above the standard 4.8 per cent baseline increase. The difference is equivalent to an amount of R2.2 billion in that year. This should cover the anticipated increase in the costs of providing free basic services to a growing number of households, and accounts for likely above-inflation increases in the costs of bulk water and electricity. It will also allow for above-inflation increases in allocations to poorer and rural municipalities through the redistributive components of the equitable share formula. Over the 2020 MTEF period, the local government equitable share, including the Regional Service Council/Joint Service Board (RSC/JSB) levies replacement grant and special support for councillor remuneration and ward committees grant, amounts to R243 billion (R74.7 billion in 2020/21, R81.1 billion in 2021/22 and R87.2 billion in 2022/23). Due to previous increases, as well as the revised baseline for 2022/23, the local government equitable share grows at an average annual rate of 8.1 per cent over the MTEF period. 37

2020 BUDGET REVIEW 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 to ensure objectivity (the horizontal division). The principles and objectives of the formula are 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. In 2020 terms, this monthly income is equivalent to about R3 700 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 38 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

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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. The number of households per municipality used to calculate indicative allocations for the outer years of the MTEF period 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 2018 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 income. The total number of households in each municipality is adjusted every year to account for growth. Although the share of households subsidised for free basic services through the formula remains constant, the number of households subsidised increases annually in line with estimated household growth. The basic services subsidy is typically allocated to 100 per cent of households that fall below the poverty threshold. This is the case in 2020/21 and 2021/22. In 2022/23, the subsidy is allocated to 99.4 per cent of households below the poverty threshold to ensure that the effect of the reduction in that year is spread across all the components of the formula. The number of households that receive free basic services should not be affected because municipalities have not yet extended the provision of free basic services to reach all poor households. The basic services subsidy will fund: 10.4 million households in 2020/21. 10.6 million households in 2021/22. 10.8 million households in 2022/23. The basic services component provides a subsidy of R435.04 per month in 2020/21 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 W1.26 and includes an allocation of 10 per cent for service maintenance costs. Table W1.26 Amounts per basic service allocated through the local government equitable share, 2020/21 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 W1.26 is updated annually based on the following factors. 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. In March 2019, the 39 Allocation per household below affordability threshold (R per month) Total allocation per service (R million) Energy Water Sanitation Refuse removal Operations Maintenance Total 84.30 130.38 96.21 80.65 9.37 14.49 10.69 8.96 93.66 144.86 106.90 89.61 11 645 18 011 13 290 11 141 Total basic services 391.53 43.50 435.04 54 087

2020 BUDGET REVIEW regulator approved tariff increases of 9.4 per cent in 2019/20, 8.1 per cent in 2020/21 and 5.2 per cent in 2021/22. However, Eskom submitted an application to the court to increase the bulk tariffs. While the court has found merit in Eskom’s case, it has ruled that the matter is not urgent. The court will only rule on the merits of the case after the 2020 Budget has been tabled. Due to uncertainty about the exact tariffs for the municipal financial years (which are different to those for national financial years) and the pending court decision, the equitable share formula continues to use the 8 per cent bulk tariff increase in 2020/21 and 2021/22 that was used when the baselines for these years were calculated in the 2018 and 2019 MTEF periods. The electricity cost estimate for 2022/23 is calculated using an electricity price bulk increase of 8.9 per cent, which is the average annual tariff increase for the National Energy Regulator of South Africa’s multi-year price determination period of 1 April 2019 to 31 March 2022. Other (non-bulk) electricity costs are updated based on the National Treasury’s inflation projections in the 2019 MTBPS. 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 average tariff increases for bulk water from water boards in 2019/20 was 10.4 per cent. Other costs are updated based on the National Treasury’s inflation projections in the 2019 MTBPS. The costs for sanitation and refuse removal are updated based on the National Treasury’s inflation projections in the 2019 MTBPS. 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 R54.1 billion in 2020/21 and accounts for 79.5 per cent of the value of the local government equitable share formula allocation. 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. In 2020/21, this component consists of a base allocation of R7.4 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. 40 The basic services component BS = basic services subsidy x number of poor households

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE The institutional component accounts for 8.2 per cent of the equitable share formula and is worth R5.6 billion in 2020/21. 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, 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 2020/21, the allocation to district and metropolitan municipalities for municipal health and other services is R10.39 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 12.3 per cent of the equitable share formula and is worth R8.4 billion in 2020/21. 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 the 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. 41 The community services component CS = [municipal health and related services allocation x number of households] + [other services allocation x number of households] The institutional component I = base allocation + [allocation per councillor x number of council seats]

2020 BUDGET REVIEW 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 revenue to receive a higher equitable share. Because district municipalities do not collect revenue 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 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 2020/21, the grant increases by 7.2 per cent for district municipalities authorised for water and sanitation and 2.4 per cent for unauthorised district municipalities. The different rates recognise the various service-delivery responsibilities of these district municipalities. Special support for councillor remuneration and ward committees Councillors’ salaries are subsidised in poor municipalities. The total value of the support provided in 2020/21 is R969 million, calculated separately to the local government equitable share and in addition to the funding 42

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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, 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). The Minister of Cooperative Governance and Traditional Affairs last gazetted a notice on the determination of upper limits of salaries in December 2018. This is due to an ongoing review of wages which has resulted in a wage freeze for 2020/21. Using this last notice for maximum remuneration for part-time councillors, cost savings of R46 million are realised in 2020/21, with savings of R55 million carried through in 2021/22 and R63 million in 2022/23. A total of R164 million over the 2020 MTEF period is therefore shifted from support for councillor remuneration and ward committees to the local government equitable share formula. 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. 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 R43.8 billion in 2020/21 to R46.2 billion in 2021/22 and R48.1 billion in 2022/23. 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 R155 billion over the 2020 MTEF period. 43

2020 BUDGET REVIEW Table W1.27 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. The grant’s baseline is reduced by R783 million in 2020/21, R842 million in 2021/22 and R882 million in 2022/23. The fiscal consolidation reductions to this grant are equivalent to 5 per cent of the grant’s baseline in 2020/21, 5 per cent in 2021/22 and 5 per cent in 2022/23. These reductions do not include an amount of R166 million shifted to the integrated urban development grant over the 2020 MTEF period, following approval for Steve Tshwete Local Municipality to participate in the programme from 2020/21. In 2020/21, R150 million is reprioritised from this grant to the indirect regional bulk infrastructure grant for the Vaal River system intervention. The total allocations for this grant amount to R47.5 billion over the 2020 MTEF period and grow at an average annual rate of 4.3 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. 44 2016/172017/182018/19 Outcome R million 2019/20 Adjusted budget 2020/212021/222022/23 Medium-term estimates Direct transfers39 25941 88843 862 Municipal infrastructure14 91415 89115 288 Integrated urban development––– Urban settlements development10 83911 38211 306 Informal settlements upgrading––– partnership Integrated city development267292294 Public transport network5 5936 1076 287 Neighbourhood development592658569 partnership Integrated national electrification1 9462 0871 904 programme Rural roads asset management102107108 systems Regional bulk infrastructure1 8501 8291 963 Water services infrastructure2 8313 3054 777 Municipal disaster recovery140261 151 Energy efficiency and demand-side186203215 management 43 172 14 816 857 12 045 – 310 6 468 602 1 863 114 2 066 3 669 133 227 41 86044 13045 998 14 67115 93716 852 9481 0151 075 11 2827 4057 352 –3 9454 181 317341361 6 4466 7977 119 559567593 1 8592 0032 119 108114121 2 0062 1562 281 3 4453 6203 701 ––– 218230243 Indirect transfers8 0937 6997 699 6 913 7 5007 0938 020 Integrated national electrification3 5263 8463 846 programme Neighbourhood development152828 partnership Water services infrastructure298852852 Regional bulk infrastructure3 4222 9742 974 Bucket eradication831–– 3 124 50 644 3 094 – 3 0012 9943 688 6395106 579730771 3 8573 2753 455 ––– Total47 35249 58851 561 50 085 49 36051 22454 018

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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 W1.28 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. 45 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 metres of their dwelling) Number of 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 Number of poor households Number of poor households E Number of poor 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

2020 BUDGET REVIEW Table W1.28 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 the Department of Sports, Arts and Culture. These earmarked funds amount to R759 million over the MTEF period (R253 million in each year of the 2020 MTEF period). 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 The integrated urban development grant is allocated to selected urban local municipalities in place of the municipal infrastructure grant. The grant recognises that municipalities differ in terms of their context and introduces a differentiated approach to encourage integrated development in cities. It is intended to: Support spatially aligned public infrastructure investment that will lead to functional and efficient urban spaces. Enable and incentivise municipalities to invest more non-grant funding in infrastructure projects in intermediate cities. The grant extends some of the fiscal reforms already implemented in metropolitan municipalities to non-metropolitan cities and is administered by the Department of Cooperative Governance. Municipalities must meet certain criteria and apply to receive the integrated urban development grant instead of the municipal infrastructure 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. 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 shift 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 46 Municipal infrastructureComponent grant (formula) weights Value of component 2020/21 (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% 9 966 7 176 2 292 498 1 993 658 664 664 67.9% 48.9% 15.6% 3.4% 13.6% 4.5% 4.5% 4.5% Constant 1 130 7.7% Ring-fenced funding for sport infrastructure 253 1.7% Total 14 671 100.0%

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE 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 2020/21 The allocations for the integrated urban development grant are R948 million in 2020/21, R1 billion in 2021/22 and R1.1 billion in 2022/23. These allocations include additions of R56 million in 2020/21, R52 million in 2021/22 and R57 million in 2022/23, following the addition of Steve Tshwete Local Municipality to the pool of municipalities participating in the grant. The allocations for 2020/21 include R15 million in funds ring-fenced for sports infrastructure projects. These funds were shifted from the municipal infrastructure grant. The fiscal consolidation reductions to this grant are equivalent to 5 per cent of the grant’s baseline in 2020/21, 5 per cent in 2021/22 and 5 per cent in 2022/23. 47 Performance-based component weighted indicators for integrated urban development grant Indicator Purpose 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-use applications in 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

2020 BUDGET REVIEW Table W1.29 Formula for integrated urban development grant incentive component 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. Since 2019/20, cities have been 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 report on one agreed set of indicators 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 component was introduced in 2019/20 for the upgrading of informal settlements. It sets a minimum amount each city must spend on informal settlement upgrades and requires cities to work in partnership with communities. The component has been extended for one more year, to 2020/21, and amounts to 20 per cent of the urban settlements development grant. The extension of this component serves as a planning and preparatory platform for a new informal settlements upgrading partnership grant, planned for 2021/22. Provided the component is a success, the new grant will be created through the reprioritisation of funds from the urban settlements development grant. Initial amounts of R3.9 billion in 2021/22 and R4.2 billion in 2022/23 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. The urban settlements development grant, including allocations for the new informal settlements upgrading partnership grant, is allocated R34.2 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 Department of Human Settlements’ capacity-building guideline. Because this grant has been previously reduced by a smaller proportion than the municipal infrastructure grant, the urban settlements development grant is reduced by R1.3 billion in 2020/21, R2 billion in 2021/22 and R2.7 billion in 2022/23 in order to fund other government priorities. The fiscal consolidation reductions to the urban settlements development grant are equivalent to 13.1 per cent of the grant’s baseline in 2020/21, 21 per cent in 2021/22 and 25.8 per cent in 2022/23. Reductions to the informal 48 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 Polokwane Ray Nkonyeni Sol Plaatje Stellenbosch Steve Tshwete 3 183 1 048 3 488 10 222 1 834 1 484 1 067 1 782 80% 7% No 76% 5% Yes 14% 2% No 21% 2% No 22% 3% No 15% 2% No 79% 1% No 74% 1% Yes – – – – – – – – 65% 85% 0% 0% 5% 0% 40% 70% 52 680 22 678 – – 2 335 – 10 865 31 761 55 863 23 725 3 488 10 222 4 170 1 484 11 932 33 543 Total 24 108 120 319 144 428

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE settlement upgrading partnership grant are equivalent to 10 per cent of the grant’s baseline in 2021/22, and 9.9 per cent in 2022/23. In 2020/21 R150 million is reprioritised from the urban settlements development grant to the indirect regional bulk infrastructure grant for the Vaal River system intervention. Integrated city development grant The 2019 MTBPS announced that, subject to certain conditions, programme and project preparation funding would be provided to metros through the grant system. Following consultations with cities, including through the City Budget Forum and a workshop, it has been agreed that cities will be able to use at least half of their integrated city development grant allocations for programme and project preparation activities in 2020/21. The remaining allocations from this grant can be used to complete planned investments funded from the grant, so that the full grant amount can be allocated to programme and project preparation activities from 2021/22. In order to be eligible to use these funds for project preparation costs, metros will need to: Submit a letter to the National Treasury indicating their commitment to establishing and institutionalising an effective system of programme and project preparation. Prove they have not had an adverse or disclaimed audit opinion in the last two financial years. Have formally adopted council resolutions on adopting the Cities Infrastructure Delivery and Management Systems guidelines, establishing a programme and project approval committee, and committing to co-financing contributions and budget management arrangements. Total allocations over the 2020 MTEF period amount to R1 billion and grow at an average annual rate of 5.2 per cent. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. 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. It is allocated R20.4 billion over the medium term. The grant has been reduced by R1 billion in 2020/21, R1.6 billion in 2021/22 and R1.7 billion in 2022/23. These fiscal consolidation reductions to this grant are equivalent to 14 per cent of the grant’s baseline in 2020/21, 18.8 per cent in 2021/22 and 19.5 per cent in 2022/23. Of the 13 cities that have been receiving the grant, three have been in the planning phase since the introduction of the grant in the 2006 MTEF period. These three cities have been suspended from the grant for the 2020 MTEF period, but this should have a minimal impact on service delivery because the cities were not transporting any passengers through this grant. The suspended cities are Buffalo City, Mbombela and Msunduzi. Despite support provided by the national Department of Transport, the cities of Cape Town, Johannesburg and eThekwini have not been able to scale up rollout to levels that justify their baseline allocations. As a result, the department proposed reductions to their allocations, based on performance and the ability of the cities to cover the shortfall from own revenue. The allocations for this grant are determined through a formula, which determines 95 per cent of the allocations, and a performance-based incentive component introduced in 2019/20, which accounts for the remaining 5 per cent. The formula 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. 49

2020 BUDGET REVIEW 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 it must have spent more than 80 per cent of its 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 2020/21 is set out in Table W1.30 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. Table W1.30 Public transport network grant incentive Source: National Treasury In the formula for the grant, 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. Table W1.31 sets out how the final allocation for each municipality is determined, taking account of both the formula and incentive components. 50 Oper-Grant Eligible ational spent in for public 2018/19 incentive transport system Coverage AverageCity's of direct weekday contri-costspassenger bution from trips (% of (% of farebox population) property rates) Raw scores for incentive Incentive allocation for 2020/21 (R 000) Minimum threshold Yes 80% 35.0% 1.00% 2% Buffalo City City of Cape Town City of Johannesburg City of Tshwane Ekurhuleni eThekwini George Mangaung Mbombela Msunduzi Nelson Mandela Bay Polokwane Rustenburg No 99% No Yes 89% Yes Yes 86% Yes Yes 100% Yes Yes 76% No No 63% No Yes 99% Yes No 75% No No 100% No No 100% No Yes 94% Yes No 69% No No 79% No 0.0% 0.00% 0.0% 41.6% 1.61% 6.3% 35.2% 1.13% 3.9% 29.9% 0.15% 1.6% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% 34.3% 6.20% 8.9% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% 27.5% 0.80% 2.4% 0.0% 0.00% 0.0% 0.0% 0.00% 0.0% – 0.466 0.063 – – – 0.461 – – – 0.010 – – – 201 785 37 062 – – – 29 513 – – – 1 683 – – Total 1.000 270 043

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Table W1.31 Formula for the public transport network grant allocations 1. Excludes additional funds for Cape Town allocated through the Budget Facility for Infrastructure 2. These three cities are suspended from the grant Source: National Treasury In addition to the formula and performance incentive, R4 billion is allocated through the public transport network grant over the medium term for the City of Cape Town’s MyCiti public transport network, approved through the Budget Facility for Infrastructure. The facility seeks to support 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 in order to stimulate third-party public and private investment. In metropolitan municipalities, the focus is on upgrading urban hubs in townships. The National Treasury, in collaboration with other stakeholders, including the Department of Agriculture, Rural Development and Land Reform and the Department of Cooperative Governance, has identified 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 2020 MTEF period amount to R2 billion, made up of R1.7 billion for the direct capital component and R263 million for the indirect technical assistance component. An amount of R160 million, consisting of R30 million in 2020/21, R60 million in 2021/22 and R70 million in 2022/23, has been shifted from the direct component to the indirect component. The fiscal consolidation reductions to this grant are equivalent to 10 per cent of the grant’s baseline in 2020/21, 11 per cent in 2021/22 and 10.9 per cent in 2022/23. 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 51 Base 20% Demand-driven factors 75% Subtotal: base and demand driven factors Perfomance 5% Fiscal consolidation reductions 100% Equally shared Population Regional Public compo-gross transport nent shares value users addedcompo-compo-nent nent shares shares Incentive compo-nent (R 000) Grant 1 (R 000) Buffalo City2 City of Cape Town City of Johannesburg City of Tshwane Ekurhuleni eThekwini George Mangaung Mbombela2 Msunduzi2 Nelson Mandela Bay Polokwane Rustenburg Unallocated incentive 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% – 201 785 37 062 – – – 29 513 – – – 1 683 – – – -247 346 -97 766 -133 451 – – -103 087 – – -209 848 -205 360 – – – -52 466 – 944 974 1 051 518 771 954 716 466 783 643 153 645 242 210 – – 316 207 189 292 230 939 – Total 100.0% 100.0% 100.0% 100.0% 95.0% 270 043 -1 049 324 5 400 848

2020 BUDGET REVIEW 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. The direct component of this grant is reduced by R426 million in 2020/21, R541 million in 2021/22 and R698 million in 2022/23. Although these reductions mean that the implementation of some projects will be delayed, they will not negatively impact water augmentation projects in drought-affected municipalities. This component of the grant has a total allocation of R10.8 billion over the 2020 MTEF period. The fiscal consolidation reductions to this grant are equivalent to 11 per cent of the grant’s baseline in 2020/21, 13 per cent in 2021/22 and 15.9 per cent in 2022/23. The indirect component of this grant is reduced by R100 million in 2020/21, with a total allocation of R2.1 billion over the medium term. Of this amount, R106 million is allocated to municipalities in the Free State and Northern Cape to complete outstanding bucket eradication projects and R181 million is allocated for drought relief projects. 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 direct component of this grant is reduced by R174 million in 2020/21, R187 million in 2021/22 and R196 million in 2022/23. An amount of R650 million is added to the indirect component of this grant to accelerate the implementation of repairs to the sewerage system in Emfuleni Local Municipality, which is currently spilling raw sewage into the Vaal River, and a further R100 million is reprioritised within the grant for the Vaal River intervention. This component also includes R241 million for the completion of bucket eradication projects. The fiscal consolidation reductions for this grant are equivalent to 8 per cent of the grant’s baseline in 2020/21, 8 per cent in 2021/22 and 7.9 per cent in 2022/23. The grant has a total allocation of R17 billion over the medium term, consisting of R6.4 billion and R10.6 billion for the direct and indirect components respectively. Integrated national electrification programme grants These grants aim to provide capital subsidies to municipalities to provide electricity to poor households and fund bulk infrastructure to ensure a constant supply of electricity. Allocations are based on the backlog of households without electricity and administered by the Department of Mineral Resources and 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 R15.7 billion on the programme over the next three years. The integrated national electrification programme (municipal) grant is reduced by R119 million in 2020/21, R128 million in 2021/22 and R134 million in 2022/23. It has a total allocation of R6 billion over the medium 52

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE term and grows at an average annual rate of 4.4 per cent. The fiscal consolidation reductions to this grant are equivalent to 6 per cent of the grant’s baseline in 2020/21, 6 per cent in 2021/22 and 5.9 per cent in 2022/23. The integrated national electrification programme (Eskom) grant is allocated R9.7 billion over the medium term and grows at an average annual rate of 5.7 per cent. It is reduced by R61 million in 2020/21, R826 million in 2021/22 and R279 million in 2022/23 to fund other government priorities. The reductions to this grant are equivalent to 2 per cent of the grant’s baseline in 2020/21, 21.6 per cent in 2021/22 and 7 per cent in 2022/23. Energy efficiency and demand-side management grant The energy efficiency and demand-side management grant funds selected municipalities to implement projects with a focus on public lighting and energy-efficient municipal infrastructure. The grant continues to make provision 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. The 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 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. This 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 R691 million over the medium term. The fiscal consolidation reductions to this grant are equivalent to 9 per cent of the grant’s baseline in 2020/21, 9 per cent in 2021/22 and 8.9 per cent in 2022/23. 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. 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. This grant is reduced by R12 million in 2020/21, R13 million in 2021/22 and R13 million in 2022/23 to fund other government priorities. The grant is allocated R108 million in 2020/21, R114 million in 2021/22 and R121 million in 2022/23. The fiscal consolidation reductions to this grant are equivalent to 10 per cent of the grant’s baseline in 2020/21, 10 per cent in 2021/22 and 9.9 per cent in 2022/23. 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, 53

2020 BUDGET REVIEW which promotes increased labour intensity in municipalities, and the municipal disaster relief grant. A total of R6.6 billion is allocated to capacity-building grants and other current transfers to local government over the medium term. Table W1.32 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. This grant is reduced by R17 million in 2020/21, R18 million in 2021/22 and R19 million in 2022/23 to fund other government priorities. Total allocations amount to R1.7 billion over the MTEF period and grow at an average annual rate of 3.8 per cent. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. Infrastructure skills development grant The infrastructure skills development grant develops capacity within municipalities by creating a sustainable pool of young professionals with technical skills in areas 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. This grant is reduced by R5 million in each year of the 2020 MTEF period. The grant’s total allocations amount to R482 million over the 2020 MTEF period and grow at an average annual rate of 3.9 per cent. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. 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 and the implementation of the municipal standard chart of accounts. The Department of 54 2016/17 2017/18 2018/19 Outcome R million 2019/20 Adjusted budget 2020/21 2021/22 2022/23 Medium-term estimates Direct transfers 1 675 1 815 1 400 Municipal disaster relief 118 341 – Municipal demarcation transition 297 140 – Municipal systems improvement – – 23 Municipal emergency housing – – 38 Infrastructure skills development 130 141 141 Local government financial 465 502 505 management Expanded public works programme 664 691 693 integrated grant for municipalities 1 897 335 – – 149 149 533 730 1 959 2 067 2 149 354 373 391 – – – – – – 159 168 175 153 162 168 545 575 596 748 790 819 Indirect transfers 19 103 71 111 128 135 140 Municipal systems improvement 19 103 71 111 128 135 140 Total 1 695 1 919 1 470 2 008 2 087 2 203 2 289

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE Cooperative Governance implements the indirect grant. The grant’s total allocations amount to R404 million over the 2020 MTEF period and grow at an average annual rate of 8.1 per cent. 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 R23 million in 2020/21, R24 million in 2021/22 and R26 million in 2022/23. The impact of these reductions will be spread across municipalities in line with the grant’s formula. The grant is allocated R2.4 billion over the MTEF period and grows at an average annual rate of 3.9 per cent. The fiscal consolidation reductions to this grant are equivalent to 3 per cent of the grant’s baseline in 2020/21, 3 per cent in 2021/22 and 3 per cent in 2022/23. 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, R1.1 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 The municipal emergency housing grant is intended to enable the Department of Human Settlements to rapidly respond to emergencies by providing temporary housing and repairs in line with the Emergency Housing Programme. The grant is limited to funding emergency housing and repairs following the immediate aftermath of a disaster, and not the other emergency situations listed in the programme. Over the MTEF period, R502 million is available for disbursement through this grant. 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 2020/21 as part of the ongoing review and refinement of the intergovernmental fiscal framework. Provinces and municipalities will be consulted on all proposed changes. 55

2020 BUDGET REVIEW 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 2020. During the year, the review will focus on: Refining options for a revised poverty component in the formula. Developing options for how the formula can account for costs associated with being in a rural location. Working with the Department of Health to revise and update the risk-adjusted factor as part of a broader overhaul of the health component. Working with the Department of Basic Education to develop options for how to account for the different funding needs of different types of schools and learners. The formula is being reviewed by a provincial equitable share task team made up of representatives from the National Treasury and provincial treasuries. The task team partners with sector departments, Statistics South Africa and the FFC on different components of the review. The task team reports to the Technical Committee on Finance, and the Budget Council considers and approves any proposed changes to the formula. Preparing for national health insurance implementation South Africa aims to make significant strides towards universal health coverage through the progressive implementation of national health insurance, as outlined in the National Health Insurance White Paper, which government adopted in 2017, and the National Health Insurance Bill, which was tabled in 2019 and is currently being considered in Parliament. Establishing the National Health Insurance Fund is likely to have significant implications for provincial finances, which are being discussed through consultative structures like the Technical Committee on Finance. In parallel, efforts to strengthen the health system in preparation for national health insurance will continue, including developing and piloting provider payment mechanisms, expanding the national insurance beneficiary registry, and purchasing and providing a prioritised set of health services. Government is also piloting a new quality improvement activity within the non-personal services component of the NHI indirect grant that will help facilities meet the envisaged standards required for NHI accreditation. The experience gained from this pilot will inform future efforts to improve quality. Two grants related to capacity development in the health sector have been merged in 2020/21, and the National Treasury and the Department of Health will work together during 2020 to develop a strategy for further reforms to the structure of all the health conditional grants to ensure that they are aligned to support NHI implementation. Shift of nursing and agricultural colleges to national government For nursing colleges and agricultural colleges to be accredited as higher education colleges in terms of the Higher Education Act (1997), the function for administering these colleges needs to move from provinces to national government. The Department of Higher Education and Training is coordinating with the departments of Health and Agriculture, Land Reform and Rural Development, as well as their provincial counterparts to prepare for this proposed function shift. The National Treasury will work with provincial treasuries and the FFC to assess the financial impacts of the proposed shift. The role of provinces in promoting economic development 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. An Economic Development Coordination Forum has been established to improve the coordination of economic development initiatives between provincial and national governments. This forum is chaired jointly by the National Treasury and the Department of Trade, Industry and Competition, and includes participants from provincial treasuries and 56

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE sector departments, as well as the Department of Small Business Development, the Department of Cooperative Governance and SALGA. This year, the forum will establish work streams to examine data for economic development, policy and alignment issues, and township economic development (including industrial parks). 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. Progress has been made in holding joint planning sessions between provinces and municipalities, and support in this area will continue in 2020. National departments will also be supported to participate in intergovernmental planning and to review sector policies and funding strategies to promote better alignment with spatial development frameworks. The National Treasury will review provincial infrastructure sector funding policies and propose how grants, incentives and other funding sources can best be structured to strengthen funding coordination to achieve spatial development objectives. Disaster funding The National Treasury will work with the National Disaster Management Centre to review the funding of disaster response and recovery activities. Climate change will make extreme weather events more common, and the disaster funding system needs to adapt to this new reality. The current system is designed to allow for the rapid release of funds immediately following the declaration of a disaster, and to fund the repair or reconstruction of infrastructure after an event. While there are problems and inefficiencies within the existing system that need to be addressed through this review, it must also consider how to place greater emphasis on being prepared before disasters occur. The system also needs to be adapted to respond better to long-running disasters such as drought conditions that may last for several years. New informal settlements upgrading grants for provinces and municipalities Informal settlement upgrades are a priority 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 settlements. Following the introduction of dedicated components 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, which will be introduced in the 2021 MTEF period. These separate grants were intended to be introduced in 2020/21, but additional time is needed for provinces and municipalities to complete their informal settlements upgrading strategies. These strategies will guide how spending on the new grant will be prioritised. Having an additional year will allow the design of the new grants to draw on the lessons learnt from a full year of implementing the components within the existing grants. The design of the new grants will include consultations with provinces, municipalities, community organisations and other interested stakeholders. These consultations will also address the respective roles of provinces and municipalities in upgrading informal settlements. 57

2020 BUDGET REVIEW Review of the local government fiscal framework Budget Forum lekgotla The local government fiscal framework refers to all of the revenue sources that are available to local government and all the expenditure responsibilities that they have. A well-designed fiscal framework allows each municipality to balance its revenue sources against its expenditure responsibilities. Many stakeholders have expressed concern that elements of the current local government fiscal framework make it difficult for municipalities to balance their revenues with their expenditure responsibilities. The Minister of Finance has therefore proposed that the Budget Forum hold a special lekgotla in 2020 to review the structure of the framework and to agree on which issues in local government are attributable to the structure of the fiscal framework and which are related to other factors such as problems in governance, intergovernmental relations and the assignment of functions between spheres. This will help to resolve contentious issues and build consensus. The Budget Forum is chaired by the Minister of Finance and includes Members of the Executive Council (MEC) responsible for finance in each province and SALGA. In order to facilitate improved cooperation across sectors, the Minister and MECs responsible for cooperative governance are also invited to participate in meetings of the Budget Forum. The Chairs of Parliament’s Standing and Select Committee on Appropriations and Finance and as well as representatives of the FFC are invited to attend. Items for the lekgotla will be prepared in a collaborative process that includes inputs from officials from all of the participating organisations. The outcomes are expected to inform a reform agenda for the local government fiscal framework over the next five years that will complement the ongoing reforms discussed below. 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: 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. Reviewing and updating how the special support for councillor remuneration is calculated. This support is calculated separately from the rest of the equitable share formula, but transferred with equitable share allocations. Support is only provided to small and poor municipalities and the data used for determining eligibility needs to be updated. Working with Statistics South Africa to explore how new population estimates at municipal level can be incorporated into the formula updates. 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, Department of Planning, Monitoring and Evaluation, 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 departments. Further consolidating conditional grants. Increasing differentiation in the grant system, so that grants are well aligned to the different circumstances found across the country’s 257 municipalities. Reviewing grant formulas to ensure that allocations are equitable across the different types of municipalities that receive allocations from differentiated grants, such as the urban settlements 58

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE development grant (for metros), the integrated urban development grant (for intermediate cities) and the municipal infrastructure grant. Identifying ways to incorporate incentives for improved asset management into the grant system. Review of the municipal capacity support system Government is reviewing the system of capacity support provided to municipalities. It invests public funds of more than R3 billion in capacity support for municipalities every year through a broad range of grants and programmes. These various forms of capacity development and support tend to be planned and managed separately from one another. The National Treasury is managing the review, with the aim of identifying ways to improve the impact of this spending. Preliminary results may inform initial changes to the capacity-building system in the 2021 Budget. 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. These once-off charges are imposed by a municipality on a land owner applying for land development approval. The charges are based on the concept that urban growth and expanded land use creates the need for additional infrastructure services, so 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 to incorporate the regulation of development charges. The draft amendment bill has been submitted to Cabinet and was published for public comment in January 2020. The due date for submitting comments is 31 March 2020. Parallel to the public participation process, the National Treasury intends to undertake provincial and national workshops to provide clarity on the technical provisions of the draft bill. The draft legislation can be accessed on the National Treasury website: http://www.treasury.gov.za/legislation/draft_bills. Municipal borrowing The 2017 update to the Policy Framework for Municipal Borrowing and Financial Emergencies will be submitted to Cabinet shortly. The updates aim to address the limitations of the original policy framework of 2000 and to respond to the changing needs and conditions in the municipal borrowing market by permitting the use of innovative infrastructure financing mechanisms. The updated policy framework makes specific recommendations on the role of development finance institutions in financing creditworthy municipalities. It proposes that these institutions should play a developmental, complementary and supportive role to transactions rather than competing directly with private financiers. It also suggests that development finance institutions should establish clear and measurable development impact indicators for their municipal operations in general, and for specific transactions. Each institution must, well in advance of any proposed lending to a municipality, obtain written agreement from the National Treasury that specifically outlines the development objectives and indicators of the loan, before entering into any transaction. The National Treasury continues to publish the Municipal Borrowing Bulletin on a quarterly basis. Copies can be obtained from www.mfma.treasury.gov.za. 59