Carbon Tax Bill: finalisation & voting; Financial Matters Amendment Draft Bill: briefing

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Finance Standing Committee

05 February 2019
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with the National Treasury for finalisation and adoption of the Carbon Tax Bill. The Committee also received a briefing and discussed the Financial Matters Bill.

National Treasury highlighted that the Carbon Tax Bill was formally tabled in November 2018. It reflects some of the input received during last year’s parliamentary hearings – summarised in a National Treasury response document presented to the committee on 4 December. The entire drafting process was informed by stakeholder consultations which begun nearly 10 years ago. Its overarching objective was to incentivise medium-to-long term behaviour change on the part of producers and consumers alike. On subsequent amendments, Schedule 1 had been changed to reflect a default calorific value of 0.0243 per tonne of ‘other bituminous coal’. Schedule 2 had been changed to reflect new figures in respect of: industrial processes and product use involving carbonates, ceramics, soda ash and non-metallurgical magnesia; and the metals industry.

The Chairperson pointed out that apart from the formal parliamentary meetings, on the recommendation of the Committee, Treasury and the Department of Environmental Affairs (DEA) met with stakeholders several times to process aspects of the Carbon Tax Bill. This came on the top of continual exchanges between Treasury and DEA since 2011. He took the Committee through the B-version of the Bill page by page. He noted there were no reservations to the amendments from Members, and put the Carbon Tax Bill up for adoption. The Carbon Tax Bill was adopted. The DA reserved its position on the Bill. 

National Treasury indicated that the Financial Matters Bill was published for comments on 24 August 2018 with closing date of 14 September 2018. It was subsequently introduced in Parliament on 31 January 2019. The Financial Matters Bill was published for comments on 24 August 2018 with closing date of 14 September 2018. It was subsequently introduced in Parliament on 31 January 2019. The Bill seeks to amend: Insolvency Act, by ensuring that government’s international objectives for enabling over-the counter (OTC) derivatives transactions with international counterparties; Military Pensions Act, by introducing gender neutrality and recognising various forms of legal marriages for purposes of benefits for all military staff; Banks Act, to enable qualifying state-owned companies to apply for banking licences subject to executive approval; Government Employees Pension Law, by introducing principle of “service reduction approach” to ensure that member’s pension pay-outs to former spouses upon divorce are not converted to debt obligation as is case under current approach; and Auditing Profession Act. On proposed amendment to the Banks Act, Treasury highlighted governance conflicts presented by state banks. International experience, and South Africa’s own experience suggests that state ownership of banks has potential to undermine prompt corrective action by prudential regulators. Prudential regulators sometimes forbear (i.e. they do not apply full regulatory measures) when faced with failing state banks due to the reluctance to frustrate what could be viewed as government policy or programs. This is undesirable as the prudential regulators are duty-bound to level the playing field. Prudential regulators must maintain an environment in which all entities operating in the banking sector adhere to the same principles in order to be supervised effectively.

A DA Member felt there had been a massive walk-back on the part of Treasury from its initial positions on the rationale of establishing a state-owned bank. She could not recall Treasury being this circumspect about the risks of establishing state-owned banks and emphasising the need for tighter rules as was now the case. The actual rationale of allowing state-owned banks to apply for banking licenses was not presented- the presentation read like an argument against the establishment of such banks. She wanted to be provided with a lot more evidence and arguments for the amendment of the Banks Act. The Committee was getting on with contradictory positions. An ANC Member said the Committee majority had strong views about the need for the establishment of a state-owned bank. Anything that spoke against the view of the ruling party in this regard would not be supported. The ruling party policy on the issue was that money contributed by the state should be controlled by it. Such funds would include basic social services such as pensions and grants. This notwithstanding, financial sector transformation was at the heart of the matter. Financial inclusion is as much about the ownership of banks as it is about access to retail banking services – and progress towards establishing black-owned banks should not undermined by the recent VBS scandal or the financial crisis facing some state-owned entities.

The Chairperson said proposed amendments to the Insolvency Act were too technical and complex such that most Members could not have understood them. He asked Treasury to outline the amendments in narrative format and furnish a one pager to the Committee by the end of the week. Regardless of the pressures associated with processing post-Budget draft legislation, the ruling party caucus was determined that the necessary amendments to the Banks Act should be in place before the end of the fifth Parliament. Amendments to the Auditing Profession Act included in the Bill would also be prioritised. To that end, the proposed new piece of legislation may need to be pared down – leaving amendments to the Insolvency Act, the Government Employees Pension Law and the Military Pensions Act to a later stage if there was not enough time.

Meeting report

Deliberations on Carbon Tax Bill

The Chairperson welcomed everyone to the first Committee meeting of 2019. He announced that Mr D Maynier (DA) was no longer a full Member of the Committee. He would therefore not be attending meetings in general but would only appear when major issues of interest to him or his party were under discussion. On the Carbon Tax Bill, the Committee would not be opening up further debates. Members would merely check whether amendments being agreed upon were in line with December 2018 deliberations. The Committee majority agreed with most of Treasury’s proposals on the Carbon Tax Bill but felt a phased approach should be taken upon its implementation.

Ms T Tobias (ANC) commented on the alignment of the carbon budget and carbon tax. There was need for more clarity on how the carbon budget would be dealt with by the Department of Environmental Affairs (DEA), and what the Bill in its entirety sought to achieve. The carbon tax should be evaluated together with carbon emissions reduction measures already in place.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, highlighted the Carbon Tax Bill was formally tabled in November 2018. It reflects some of the input received during last year’s parliamentary hearings – summarised in a National Treasury response document presented to the committee on 4 December. The entire drafting process was informed by stakeholder consultations which begun nearly 10 years ago. Its overarching objective was to incentivise medium-to-long term behaviour change on the part of producers and consumers alike. On subsequent amendments, Schedule 1 had been changed to reflect a default calorific value of 0.0243 per tonne of ‘other bituminous coal’. Schedule 2 had been changed to reflect new figures in respect of: industrial processes and product use involving carbonates, ceramics, soda ash and non-metallurgical magnesia; and the metals industry.

The Chairperson said the Committee would consider the Report on the Carbon Tax Bill before voting on the Bill itself. The report had been sent out to Members prior to the meeting for perusal. He pointed out that apart from the formal parliamentary meetings, on the recommendation of the Committee, Treasury and DEA met with stakeholders several times to process aspects of the Bill. This came on the top of continual exchanges between Treasury and DEA since 2011.

Ms G Ngwenya (DA) felt the report on the Bill was not an accurate reflection of all Committee deliberations and made no mention of key issues raised during public submissions as well as subsequent consultation processes. Key concerns raised by multiple stakeholders should have found expression in the report but had been left out. Largely contested viewpoints such as those around ring-fencing of the tax should have found their way into the report. Also, minority views should be included in the report.

The Chairperson said there was nothing in the report that was inaccurate; not comprehensive enough, maybe. After consulting with powers that be in Parliament, he was advised opposition parties were entitled to a brief minority opinion in Committee reports. Therefore the DA should deliver a minority view of six to10 lines which would be inserted into the report. The Committee would vote on the report the next day. He took the Committee through the B-version of the Bill page by page. He noted there were no reservations to the amendments from Members, and put the Carbon Tax Bill up for adoption.

Ms P Nkonyeni (ANC) moved for the adoption of the Bill.

Ms Tobias seconded.

Mr A Lees (DA) said the DA reserved its position on the Bill.  

The Chairperson asked when the Customs and Excise Bill was going to be tabled formally. What was the procedure to attend to that?  

Adv Frank Jenkins, Parliamentary Legal Advisor, said the Committee needed to finalise the Customs and Excise Bill and get it to the President to sign as the two Bills should come into operation simultaneously. It must be processed in time to be tabled with the Carbon Tax Bill since it is pivotal to the collections and payments process.

Ms Empie van Schoor, Chief Director: Legal Services, National Treasury, said the Customs and Excise Bill did not have to be tabled formally to the House as it was the case with other Tax Bills. It would be ATC’d and then subsequently referred to the Committee. An explanatory summary of the Bill was gazetted the previous day in anticipation of its imminent introduction.

The Chairperson directed Treasury to table the aforesaid Bill in time for consideration by the Committee within the next two weeks. Once again, Treasury wanted to clobber the Committee with Bills whilst they themselves had no capacity to process them timeously. Treasury had failed to sort this out in the two months that Parliament was in recess. The Bill would have to be delivered before the Committee processes the Budget and would be considered by the House after State of the Nation Address debates. He invited the presentation on the Financial Matters Bill.

Financial Matters Amendment Bill presentation

Ms van Schoor stated that the Financial Matters Bill was published for comments on 24 August 2018 with closing date of 14 September 2018. It was subsequently introduced in Parliament on 31 January 2019. The

Bill seeks to amend: Insolvency Act, by ensuring that government’s international objectives for enabling over-the counter (OTC) derivatives transactions with international counterparties; Military Pensions Act, by introducing gender neutrality and recognising various forms of legal marriages for purposes of benefits for all military staff; Banks Act, to enable qualifying state-owned companies to apply for banking licences subject to executive approval; Government Employees Pension Law, by introducing principle of “service reduction approach” to ensure that member’s pension pay-outs to former spouses upon divorce are not converted to debt obligation as is case under current approach; and Auditing Profession Act. Amendments following public comments were as follows:

Insolvency Act

Mr Langelihle Nkabinde, Senior Economist, National Treasury, said the proposed amendments would ensure that government’s international objectives for enabling over-the-counter (OTC) derivatives transactions with international counter parties (South Africa’s compliance with its G-20 commitments) are met. Amendments also seek to alleviate the conflict of laws and align the Insolvency Act with the Draft Margin Notice (to be published in 2019). Amendments further provide for a process to be followed when a master agreement creditor realises his/her security in terms of the master agreement and for the Office of the Master to deal with disputes of preference under those agreements.

Clauses 83(5), 83(10), (10A) (a)

  • reference to collateral security held in terms of a Master Agreement in S35B(2) in conflict with pledged assets provided in 83(10), the former spoke to outright transfer of ownership whilst the latter spoke to pledging for security purposes.

Clause 10

  • Proof of claim alignment with s44 (4) of Insolvency Act.
  • Alignment with S83 (12) of Insolvency Act.
  • Deletion of “creditors interested in the estate” in (10B) (a)

Clause (10B) (f)

  • Alignment with S89 (2) of secured creditor liability for costs of sequestration.

The Chairperson said proposed amendments to the Insolvency Act were too technical and complex such that most Members could not have understood them. He asked Treasury to outline the amendments in narrative format and furnish a one pager to the Committee by the end of the week. Regardless of the pressures associated with processing post-Budget draft legislation, the ruling party caucus was determined that the necessary amendments to the Banks Act should be in place before the end of the fifth Parliament. Amendments to the Auditing Profession Act included in the Bill would also be prioritised. To that end, the proposed new piece of legislation may need to be pared down – leaving amendments to the Insolvency Act, the Government Employees Pension Law and the Military Pensions Act to a later stage if there was not enough time. The amendments to the Insolvency Act were too complex to be processed within two weeks.

Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, indicated most of the technical aspects of the Financial Matters Bill had been extensively consulted on. Treasury would submit the one pager as requested by the Chairperson.

Military Pensions Act

Adv Ailwei Mulaudzi, Director: Legal Services, National Treasury, highlighted proposed amendments to the Military Pensions Act following public comments. The Act provides for, among others, pensions and gratuities for certain persons in respect of disability caused or aggravated by military service. It recognises certain marriages and male gender for purposes of benefits in manner contrary to section 9 of Constitution. For example, section 1 defines "dependant" in relation to member, to be his wife or child. This definition assumes that members are only husbands in heterosexual relationships and furthermore perpetuates discriminatory stereotypes that only heterosexual relationships are acceptable. Therefore an amendment of section 11 by substituting “marital status” for “spousal status” to ensure gender neutrality was proposed.

The Chairperson said the amendment to this aspect of the Bill was straightforward and the Committee would agree unless something spectacularly original emerges later on.

Banks Act

Mr Havemann took the Committee through amendments to the Banks Act. The Bill proposes that state-owned company must first obtain approval of Minister of Finance, acting with concurrence of Minister responsible for state-owned company to apply for authorisation to establish bank. Assets of company, its holding company and, if applicable, holding company of its holding company, must exceed its liabilities. Further, the Bill limits definition of “public company” in section 1 of Companies Act by excluding enterprise owned by municipality from qualifying to register as bank. Proposed amendments to the Banks Act were as follows:

Clause 10 (amendment of section 1)

  • definition of “public company” amended for clarity purposes by making reference to ‘state-owned company’  as defined in paragraph (a) of the definition of “state-owned company” in section 1 of the Companies Act. This is to ensure that enterprise owned by municipality may not be registered as bank.

Clause 11 (amendment of section 12)

  • subsection 4 (a) inserted to state that subsection only applies to a state-owned company as defined in paragraph (a) of definition of “state-owned company” in section 1 of Companies Act. Under the Companies Act, state-owned companies are no longer classified as public companies. Currently, Banks Act only allows for public companies to establish a bank. As a result, state-owned companies meeting prudential and other requirements of Banks Act, are unable to apply for authorisation to establish bank. To limit fiscal risks of state-owned banks which may, in terms of its founding legislation, be able continue to operate despite being not a going concern, it is proposed that only qualifying state-owned companies that are financially sound may apply for authorisation to establish bank

Mr Havemann highlighted governance conflicts presented by state banks. International experience, and South Africa’s own experience suggests that state ownership of banks has potential to undermine prompt corrective action by prudential regulators. Prudential regulators sometimes forbear (i.e. they do not apply full regulatory measures) when faced with failing state banks due to the reluctance to frustrate what could be viewed as government policy or programs. This is undesirable as the prudential regulators are duty-bound to level the playing field. Prudential regulators must maintain an environment in which all entities operating in the banking sector adhere to the same principles in order to be supervised effectively. When Meeg Bank experienced difficulties, government felt at the time that state ownership (national, provincial or local) of banks was undesirable as it could create governance conflicts and undermine effective and uniform regulation and supervision by the prudential regulator.  

On establishment of state banks and market failure, the traditional rationale for introducing a state bank relates to addressing market failures, i.e. the state supplying services that privately-owned banks may be unable or unwilling to supply. However, in a market where failures do not exist, introducing state banks is harder to justify. The ownership of banks by the state represents a huge contingent liability on the shareholder (in this case ultimately the fiscus). Currently the contingent liability is circa R7 billion. Financial inclusion is often cited as the key reason for the establishment of state-owned retail banks. However, South Africa has made progress in improving retail financial inclusion, with 90% of South African adults using some form of financial service and of which less than 1% is attributable to the Postbank. State banks pose significant fiscal risk. The root of the problems currently faced by many advanced economies is caused by the close interrelationship between banks and the sovereign. This risk is particularly acute for a state bank.

Discussion

Ms Ngwenya felt there had been a massive walk-back on the part of Treasury from its initial positions on the rationale of establishing a state-owned bank. She could not recall Treasury being this circumspect about the risks of establishing state-owned banks and emphasising the need for tighter rules as was now the case. The actual rationale of allowing state-owned banks to apply for banking licenses was not presented- the presentation read like an argument against the establishment of such banks. She wanted to be provided with a lot more evidence and arguments for the amendment of the Banks Act. The presentation read like a case for not supporting the amendment. Further, having a state-owned company applying for a banking license would mean extending its mandate and thus the need for approval from Parliament.

The Chairperson said he might allow some latitude for further discussions, but would not expect a repeat of debates that emerged when the Committee deliberated on Mr F Shivambu’s (EFF) Banks Bill. There was no time for ideological debates at this stage.

Ms Tobias said the Committee majority had strong views about the need for the establishment of a state-owned bank. Anything that spoke against the view of the ruling party in this regard would not be supported. The ruling party policy on the issue was that money contributed by the state should be controlled by it. Such funds would include basic social services such as pensions and grants. This notwithstanding, financial sector transformation was at the heart of the matter. Financial inclusion is as much about the ownership of banks as it is about access to retail banking services – and progress towards establishing black-owned banks should not undermined by the recent VBS scandal or the financial crisis facing some state-owned entities.

Ms Ngwenya felt the Committee was getting on with contradictory positions. That a sizeable segment of the market goes on without bank accounts needed to be proven as a market failure. She identified the need for a comprehensive market study to determine why the private sector was failing to serve this market and thus the need for state intervention.

The Chairperson said he was equally struck by Treasury’s meagre arguments for a state-owned bank as opposed to its initial positions. It was almost as if there was some sort of retreat. There were many reasons and overwhelming arguments for the establishment of a state-owned bank. The arguments being brought forth by Ms Ngwenya were pretty banal as they had been exhausted already. However, there may be a case for having Parliament play some role in the approval of banking licenses for state-owned enterprises. There can be no economic transformation without financial sector transformation. State-owned banks should be seen in that context – and as a fundamental requirement of the developmental state. The majority was not going to budge on this. That said, there appears to be general agreement about drawing the line at municipal banks at this stage.

Mr Momoniat said Treasury saw the Banks Bill amendment as an enabling legislation which would allow for more diversity. State-owned entities applying for banking licenses must still have good business models to ensure viability. Regulations and tougher conditions should apply to guard against systemic failures. Treasury had not shifted from its initial position but was merely pointing out aspects which needed to be explored further. Inclusion is multi-faceted, and these issues were included in the presentation to emphasise the importance of any entity (private or public) passing certain tests and having a good business model to qualify for a banking licence. The Bill provides for this. There had been no change in Treasury’s position on the rationale for establishing a state-owned bank – which is that, where privately-owned banks are unable or unwilling to supply a service, a state-owned bank should do so.

Auditing Profession Act

Adv Mulaudzi took the Committee through further amendments to the Auditing Profession Act following public comments. The Act provides for establishment of Independent Regulatory Board for Auditors (“IRBA”) and regulation of conduct of registered auditors and candidate auditors. To address challenges faced by IRBA during investigations into improper conduct by registered auditors, the Bill allowed IRBA to establish subcommittees, including an enforcement committee to deal with certain categories of disciplinary matters. It also provided for powers for investigating committees to authorise officials of IRBA to enter and search premises or subpoena any person with information required to complete an investigation. Proposed amendments also empower IRBA to, if considered appropriate, refer matter against registered auditor to an accredited professional body for investigation. The Bill requires IRBA to take appropriate measures in respect of personal information in its possession or under its control.

 The amendments were as follows:  

Clause 15 (amendment of section 11) - Appointment of members of Regulatory Board

  • Minister to appoint persons who are independent of the auditing profession
  • Two persons appointed to the Board to include a person who is a registered auditor with at least 10years’ experience in auditing and an advocate or attorney with at least 10 years’ experience in practicing law.

Clause17- (Subcommittees of Regulatory Board)

  • Provides for Board to establish enforcement committee to deal with disciplinary matters, another power for Board to establish other subcommittees to assist with performance of its functions.
  • Members of subcommittees to be appointed from among members of Board.

Clause 18- amendment of section 20

  • words “as and when it is required” substituted to provide for committees of Board to meet at least twice a year.

Clause 19 (amendment of section 24- Investigating committee)

  • amended to only provide for matters dealing with investigating committee. Matters relating to disciplinary procedures moved to another clause.

Clause 20-insertion of sections 24A to 24C

  • 24A provides for powers for investigating committee to enter and search premises
  • 24B regulates use of warrant during search
  • 4C provides for establishment of disciplinary committee to conduct disciplinary hearings

Clause 21-insertion of section 37(1A)

  • to provide for registration with Board if individual is member of accredited professional body.

Clause 22-section 45(7)

  • rephrased to provide more clarity on removal of auditor after reporting irregularity to Board

Clause 23-insertion of section 48(1A)

  • replacing regulatory Board with enforcement committee and giving committee power to refer non-audit matter brought against auditor to accredited professional body for investigation and disciplinary proceedings.

Clause 26

  • amendment of section 51B by providing for sanctions in disciplinary hearing process

Clause 27

  • substitution of section 53 to provide for offences relating to investigation and disciplinary process

Closing remarks

The Chairperson expressed support for the amendments to the Audit Profession Act. This was the signal the Committee wished to give before public hearings, unless something dramatic happens. He thanked everyone for their inputs.

The meeting was adjourned. 

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