Briefing on MTBPS & adoption of Adjustments Appropriation Bill [B76-2008], Revenue Laws A/B, Revenue Laws Second A/B, Finance Bill [B78-2008], Eskom Subordinated Loan Special Appropriations Bill [B77-2008]&Government Employees Pension Fund Bill [B79-2008]

Meeting report

Medium Term Budget Policy Statement (MTBPS): National Treasury (NT) briefing
Mr Kuben Naidoo, Deputy Director General: Budget Office, National Treasury, briefed the Committee on the Medium Term Budget Policy Statement (MTBPS). He reported that the global economic context had changed considerably. The early decisions the National Treasury had taken on fiscal policy, inflation targeting, gradual approach to exchange controls, banking regulation and public spending choices would allow South Africa to weather the storm. Economic growth was likely to slow but the budget framework provided for continuing spending on infrastructure and public services and programmes aimed at cushioning  the poor against slower growth.

He examined the position of South Africa in the current global economic crisis, the macro economic forecast for South Africa and noted how the global landscape had significantly changed. Gross Domestic Product (GDP) growth would be affected by slowing domestic expenditure, and investment remained a key driver of growth over the MTEF. Inflation was set to decline as pressures from high food and oil prices subsided. There would be sustaining of economic growth through revenue trends and tax policies.

Mr Naidoo then elaborated on the key spending trends, the components of in-year adjustments for 2008/9 and the adjustments to provincial and local government appropriations  (see attached presentation document).

Adjustment Estimates of National Expenditure (ENE): National Treasury Presentation
Mr Naidoo presented the Adjustment Estimates of the National Expenditure (ENE), noting the components of the Adjustment Budget, the revised National Budget, inflation-related adjustments, and criteria for the assessment of unforeseeable and unavoidable expenditure. The section on actual unforeseeable and unavoidable expenditure was particularly lengthy. Supplementary amounts in the budget for 2008,  as well as the proposed roll-overs were reported, as well as the Self Financing Expenditure. The declared savings for 2007/8 were R4.3 billion, and projected underspending for 2008/9 was R1.2 billion. In total therefore the  savings totalled R5.5 billion. The in-year adjustments resulted in the expenditure level increasing from R611.1 billion to R635.5 billion.

Discussion
Mr Moloto (ANC) asked if there was any work being done on external vulnerability in the short term.

Mr Lesetja Kganyago, Director-General, National Treasury, responded that the external vulnerability was dealt with by means of the fiscal stance taken in the past two years. The focus was on increasing savings so as to offset the current account deficit. Government had to drive these savings. The budget surplus was used to accumulate additional reserves and increase the Treasury’s ability to re-finance external short term debt. They had engaged in switched auctions, where they offered investors longer dated debt options (higher maturity) in order to get them to sell their short term debt to the National Treasury. This was to promote a move to longer term debt in general. NT had also engaged in debt exchanges where they asked investors to switch to longer term debt and in particular to switch to 15 Treasury Bonds. These measures were aimed at taking short term debt out of the international capital markets.

Mr Moloto asked if there were any lessons to be learnt from what was a global banking crisis, and what weaknesses needed to be addressed, particularly with reference to the off-balance sheet developments.

Hon Trevor Manuel, Minister of Finance, responded that it was notable that the Glass-Steagall Act in the United States had fallen into disuse, and for this reason some institutions had leant more toward deposit taking than others. To all intents and purposes, the restrictions of the Glass-Steagall had gone. In the context of that, the emphasis had been placed on the financial sector as a key growth sector over the past fifteen years, and that had been a major concern. One of the features that the Department had touched on in the MTBPS speech was the credit default swops (CDS), which by the end of 2000 had accounted for $100 billion and by the end of 2007 had increased to $64 trillion. Growth at such an exponential rate could not be supported by anything in reality. Opposing views had been expressed at the time on this growth. The President of France, Nicholas Sarkozy, had recently expressed views on hedge funds and the exuberance of the financial sector. The views emanating from Germany had described these private hedge funds as “locusts”, meaning that they would swallow up everything in sight and then move on.

The Minister noted that the idea that one could grow an economy based solely on what happened in the financial sector had to be fundamentally wrong. The other issue was that financial markets were closely tracked for minute-to minute fluctuation. This contributed to the problem of market volatility. Dumping was also a problem, as was the resultant price manipulation. The question was really what role hedge funds played. They must take stock of all the factors, and institutionally they must ask what role the International Monetary Fund (IMF) should play. There was now a great emphasis on the role of the G20 countries and the prevailing view that the G7 group had outlived its usefulness. This pointed to a more central role for the G20 and a more systematic approach.

Mr Moloto stated that the risk spread had increased recently. He added that the Eskom appropriation represented a major capital investment. He asked what portion was sourced was sourced internationally, and what part was sourced domestically.

Mr Kganyago agreed that the risk spread was widening and this hinged on two factors. The first was the counterintuitive tendency in the global market. This was called the “flight to quality “ and meant that investors were pulling money out of the emerging markets and redirecting those funds to the advanced economies, particularly the USA. This was irrational because the USA was where the crisis originated, and was due to fear. The second factor was a global trend of risk aversion. There was a distrust of banks and people were using these funds to buy short dated US Treasury bills. The upshot of this activity was that it posed a challenge for South Africa’s State Owned Enterprises, who were having difficulty accessing international capital markets and were now negotiating export credit

Mr Moloto referred to the deficit/surplus situation and the budget deficit of 4%. He asked what risks were posed in this regard, and what was the possibility of obtaining financing offshore.

Mr S Marais (DA) quoted that over the short term a growing interest rate differential between South Africa and the developed economies would be another factor supporting capital inflows. He asked to what extent this was a factor in considering the repurchase rate (repo rate) as the interest rate had to be higher to attract investment.

Mr Kganyago responded that the interest rate differential did underpin investment flows but as to the repo rate decision, he thought it preferable for the National Treasury to stay out of monetary policy decisions.

Mr Marais asked about the employment creation incentive and asked for clarity on how this would apply to non-government employers.

Mr Manuel responded that this statement referred to the Expanded Public Works Programme (EPWP) and the creation of short duration job opportunities. The macro-economic reforms were aimed at smoothing the transition for young people from school to work.

Mr Naidoo added that the EPWP was a ground-based programme and the policy had wanted it to be labour intensive. This had worked well for short term employment. The programme was now moving into the second phase to create longer term jobs by incentivising municipalities to use more labour-intensive operation methods.

Mr Marais referred to the comments on the higher efficiency of government, and stated that the policy was good but the implementation was not always keeping pace. He referred specifically to the roll-overs and asked what specific measures National Treasury  recommended must be taken in respect of departments that were underspending.

Mr Manuel responded that it was Parliament’s role to assess the efficiency of spending of government. It was within that oversight role to ask if the money allocated by the National Treasury was spent as planned. These were the checks and balances provided for in the Public Finance Management Act (PFMA).

Mr Naidoo added that the mid-year performance reviews had provided Parliament with the information to hold government departments to account.

Dr D George (DA) referred to the unchanged expectations on the tax revenue. Corporate tax was likely due to the global economic crisis and he asked if inflation would offset this.

Mr Manuel referred to the Budget Review of the MTBPS and noted that the percentage of GDP had fallen, while the nominal amount had increased. The latter made up the shortfall that had been queried

Mr B Johnson (ANC) remarked that a broader debate was needed on the developmental state and the accompanying review of the developmental financial institutions. There was an issue of their inefficiency in comparison with commercial financial institutions.

Mr Manuel responded that a full discussion was needed on the development finance institutions. Access was an important dimension in this kind of financing. The behaviour of the individuals in an economy, coupled with inflation, determined the rates in that economy. The   development finance institutions reported to different ministries and more co-ordination was needed here. This could be seen as work in progress.

Mr Johnson asked the delegation for their views on the macroeconomic challenges, specifically related to the expected social spending. At an inflation rate of approximately 13%,  an increase of R20 was a real increase of only 2%

Mr Manuel responded that, according to the PFMA, the instances where appropriations could be made excluded inflationary adjustments. This was about fiscal targets and what was regarded as unforeseeable and unavoidable expenditure. In his tenure as Minister of Finance, this was the first time there had been an in-year adjustment to a grant. It had to be noted that the Committee could vote against it.

Mr Johnson asked for understanding of what the rationale was behind the R20 increase.

Mr Naidoo responded that there had been a R60 increase in April and this was a further R20 increase, totalling an R80 increase in-year on the pensioners grant. The increase in the child support grant was over 15% (paid by R10 in April and a further R20 now). It was a specific choice to increase the child support grant by more than inflation, because it reached more households.

Ms J Fubbs (ANC) stated these were turbulent times, and the de-leveraging in the USA required more funding. She referred to the falling oil and food prices that could bring inflation back into the target band. She asked for comments on how the depreciating rand could dilute the oil price decline.

Ms Fubbs referred to the effect of the global economic crisis on the current account deficit and the report that it seemed as if the risk was in decline, and asked what measures were envisaged to address the current account situation.

Ms Fubbs pointed out that the comparisons of nominal and real exchange rates dates did not tally, and asked what would happen if the figures were made comparable.

Mr Manuel that the nominal rate or differential for July was available from the National Treasury.

Mr M Swart (DA) referred to the section in the MTBPS related to local governments, and noted that by 2011 there would be many more municipalities. He asked if district municipalities would still be required.

Mr Kenneth Brown, Acting Deputy Director-General: Intergovernmental Relations, National Treasury, responded that the district municipalities would be folded into their respective local municipalities. Their future would furthermore be determined by the review to be conducted by the Department of Provincial and Local Government. 

Mr Swart asked what other sources of income were being considered, with reference to local authorities.

Mr Brown responded that the gains made on the VAT zero rating and the fuel levy would be sufficient to cover some costs of replacement. The South African Local Government Association (SALGA) was also exploring other sources of income, most notably a local business tax. The issues of fluctuation and stability of this income were being considered.

Mr B Mnguni (ANC) queried donor funding to the development finance institutions, and the conditions attached to it.

Mr Manuel responded that there was a procedure in place to bring together the different ministries on the donor funding to the development finance institutions.

Mr Mnguni queried the progress of the proposals on the Development Finance Institutions.

Mr Mnguni asked for the delegates’ views on what would constitute a competitive exchange rate.

Mr Manuel jokingly responded that this was like asking how long is piece of string.  More seriously, he responded that there was indeed the desire to have a stable exchange rate, but felt that the Governor of the South African Reserve Bank was the correct person to answer that question.

Mr Mnguni referred to the view of the IMF on current account deficits and the risk these posed to external investment. Additionally, he recounted the comments of Mr Tito Mboweni, Governor of the Reserve Bank, on the use of theory, that this was no longer practical to deal with the real situation. He asked what measures of stabilisation or intervention were being taken to deal with the current account deficit.

Mr Manuel responded that the theories in the textbooks were written for a more centrally State-controlled environment. This was no longer the case  in a market-oriented system, where the system was dependent on its supply and demand platforms. In a globalised environment, the issue was the ability of institutions to deal with balance of payments support. He would echo the Reserve Bank’s views and said that there was a need to put the textbooks aside. It should be noted that the authorities could not show their hands at all times as there was a lot of profit riding on the information released. On the whole, the National Treasury remained optimistic but would not be unrealistic or reckless.

Mr Manuel commented that it was also necessary to have a better quality press, which would help to inform. At the moment this was not happening as the media tended to give editor’s comments on everything that had happened and at times, it seemed that journalists were spokespersons for certain individual interests. The result of this was that the public was left largely uninformed, and the coverage choices were disrespectful to all South Africans. South Africa needed an information flow that helped people understand the real situation.

Mr Mnguni noted that economic growth had been revised down to 3.7%, and asked if the original estimate of 4% was not a bit optimistic.

Mr S Asiya (ANC) suggested that it would be of paramount importance for Members to receive an in-depth briefing on the global economic crisis.

Mr Manuel agreed that such a discussion was desirable and suggested that the NT prepare a paper to summarise the issues surrounding the global economic crisis, for the perusal of the Members before that discussion.

Mr Asiya referred to the Millennium  Development Goals for 2015 and the 2010 planning. He asked what would happen in planning after the World Cup was over, and what the next milestone would be. He expressed the view that it would probably be global warming.

Ms R Mashigo (ANC) referred to the allocations to No Fee schools and queried the implementation challenges and whether the tools used to make these allocations to schools were inappropriate. There were cases where these allocations actually disadvantaged children and she was curious as to the standards used.

Mr Manuel responded that the criteria on which a No Fee school was selected did not fall within the functions of National Treasury.

Mr E Sogoni (ANC) referred to government’s priorities of reducing poverty in rural areas. He pointed out that government had not succeeded in achieving access to land and asked if the approach was being reviewed from a policy point of view.

Mr Sogoni referred to the new measure of inflation, and queried its advantages, as also whether the re-weighting of the Consumer Price Index (CPI) basket of goods would be a true reflection of the CPI.

Mr Moloto referred to the comments in the MTBPS speech regarding equity in banking and noted that some partners in Black Economic Empowerment (BEE) deals were highly leveraged. He asked how this could be balanced in response to the crisis, specifically interventions to offset that debt, and cushion against losses.

Mr Manuel responded that he held the view that banking could not be leveraged. The ownership of a bank required capital. The emphasis should be on balance. There were issues of access and investment in areas that were off the beaten track. BEE could also be approached from the perspective of the training and development of personnel so as to address race and gender imbalances. National Treasury had not departed from the view that the ownership of a bank could not be capitalised.

Mr Asiya remarked that certain State Owned Enterprises could, using the Minister’s own analogy, be regarded as “locusts” and he referred specifically to Denel in this regard.

Mr Naidoo responded that the total guarantee to Denel was R 1.6 billion

Mr Asiya referred to  the roll-overs to the Health and Education Department and asked if there was any link between the two departments.

Mr Naidoo replied that the HIV/AIDS money had been spent well. There had been some under spending on the life skills programme, which was a joint programme of the Department of Health and the Department of Education, and as such the funds had been split.

Mr Asiya asked when the Kimberley prison would be completed.

Mr Naidoo responded that the National Treasury was hopeful that the Kimberley prison would be completed by the end of 2008.

Mr G Schneemann (ANC) referred to the present and past allocations to the Road Accident Fund and asked how National Treasury could address the sustainability of the Road Accident Fund.

Mr Naidoo responded that the Road Accident Fund was divided into two parts, of Direct payments and Limited liability payments. There had already been successes in improving the efficiency of the direct payments but there would still be problems with the capping of limited liability payments.

Mr Sogoni asked if there was a relationship between the roll-overs and the high vacancy rate in the public services.

Mr Sogoni noted that there were cases where departments asked for adjustments when it was clear that they did not have the capacity to deliver.
 
Mr Naidoo responded that there were several reasons for under spending, and one was certainly poor planning capacity. The aggregate roll-over amount was R2.4 billion and this was a relatively small share of the total budget (being approximately 0.5% of the total budget). The NT could only recommend the funds for roll-over if the funds were already allocated.

Mr Mnguni referred to securitisation and off-balance sheet items and asked how that posed a risk to the economic picture.

Mr Kganyago responded that this was exactly the reason why there had been a problem. The global economic crisis happened because people took balance sheet items such as loans,  and sold them into special purpose vehicles (SPVs), which carried a rating of its own. They then used the cash or capital to generate more loans and create more SPVs, all of which did not appear on the balance sheet. For this reason, the balance sheets still looked good. This system created constant pressure to create more loans and led to irresponsible lending. There was a breakdown of control due to the lack of supervision. The National Credit Act put South Africa a few steps ahead as it required lenders to check the ability of a person to repay the credit granted. The Registrar of Bank and the Banks Act also regulated the South African system. The real question that had arisen was how governments would fund the resultant losses. He quoted the example of Ireland, which had a surplus for 8 years running prior to the fallout on global market. The government had to bail out Irish banks and were now left with a deficit of 6%.

Ms Fubbs asked if the NT had issued Denel with a note if they continued to hedge against derivatives, or how it was cautioning departments on that route.

Mr Manuel responded that the issue was the operation of State Owned Enterprises (SOEs) and their accumulation of liabilities. That situation needed to be strengthened. Departments generally resisted that caution and attempted to bypass the NT. The Treasury was then seen as an ogre for enforcing matters. SOE liabilities were a risk to all of us because the enterprises were effectively owned by everyone.

The Chairperson stated that the Committee needed to take a decision on the Adjustments Appropriation Bill.
 
The Adjustments Appropriation Bill was adopted.

The Chairperson read the report of the Committee, which was also adopted.

Eskom-subordinated Loan Special Appropriation Bill [B77-2008] (The Bill): National Treasury briefing
Mr Lungisa Fuzile, Acting Deputy Director-General:Assets and Liability Unit, National Treasury, reported that the Bill was dealing with the amount announced by the Minister of Finance in the MTBPS speech. It was to the effect that R60 billion be made available to Eskom,  over three years, in increments of R10 billion, R30 billion and R 20 billion. The necessity for the payments arose from the situation in which Eskom had found itself, and the appropriation was aimed at preventing further downgrading in ratings,  thereby ensuring that Eskom would continue to be able to access capital markets. The details of the loan were that Eskom was not required to repay the interest over the first ten years of the loan. After the first 10 years it would repay the interest, pending a review of their credit matrix. The amount would be fully redeemed within 30 years. The full amount and schedule of appropriation provided certainty for Eskom to build capacity over the next three years.

Discussion
The Chairperson queried the extent of the guarantee.

Mr Fuzile responded that this was contained in the schedule and amounted to R10 billion in the first year, R30 billion in the second year and R20 billion in the third. The three amounts would total R60 billion over 3 years.

Mr Kganyago said that National Treasury considered guarantees on the basis of an assessment made by the Guarantee Certification Committee of the National Treasury. The guarantee was published on page 9 of the Budget document, as an additional oversight for the members to check the guarantees. They charged a fee for the guarantee, which was meant to discourage institutions from constantly seeking guarantees. Eskom was very strong and the only reason they were pushing forward with the loan was because there was a cash mismatch.

Ms Fubbs noted that Eskom needed an estimated R343 billion. She noted that the Fiscal Framework was limiting cash support to SOEs, and asked if the Fiscal Framework cap would apply to the next two to three years.

Mr Fuzile replied that Eskom needed to finance the R343 billion over the next 3 years. Of that, government was committing R60 billion. This R60 billion became law as soon as it was passed as an appropriation for the next three years. This was an acknowledgement that Eskom needed more cash sooner than they had thought.

Eskom had already been awarded a 27.5% increase in price for the current year, and another increase was planned for next year. A substantial part of that would fund part of the R343 billion. In addition Eskom was going to borrow. It was in negotiations with the African Development Bank, and the World Bank, and was also looking into sourcing funding from the export credit agencies (for the export of the capital components needed to expand capacity)

Dr George asked if Eskom would only have to repay the interest if it was in a sound financial position. He asked when it would need to repay the non-interest portion, and how large was the guarantee on additional funds.

Mr Fuzile replied that these responses could change, depending on the market. Certain conditions were placed on the capital sum. The R60 billion was payable by year 30 but there were no other conditions. The interest conditions did not apply to the capital sum. By year 30, the new power stations would be generating profit and Eskom would be able to lend.

Ms Mashigo asked how much of the loan would go towards personnel.

Mr Fuzile replied that the money was meant for the procurement of inputs like capital equipment and was not meant to fund operation costs such as personnel.

Mr Moloto asked if the Eskom allocation had been adjusted for inflation.

Mr Fuzile replied that the amount had not been adjusted for inflation. The amount had been announced in the Budget and this session was meant to approve it to be brought forward.

Mr Manuel added that Eskom had been a self funding entity and they had not had the kind of relationship where the National Treasury was constantly transferring funds to it. It was now in an extraordinary situation because the NT did not run a loan account according to the PFMA. Parliament had to approve the special appropriation. The R60 billion was meant to lower the cost of borrowing for Eskom, which was important for the price of electricity in the future.

The Chairperson read through the Bill clause by clause.

The Committee adopted the Bill.

The Chairperson read the report of the Committee, which was also adopted by Members.
 
Government Employees Pension Fund (condonation of interrupted service) Bill [B79-2008]: National Treasury presentation and adoption
Mr Naidoo took the Committee through the background to this Bill. The Bill originated because of a petition made by Mrs Kellermann requesting that there be a condonation of the break in her husband’s service with the Department of Justice, and a re-assessment of the pension benefits payable to her, as his widow, on the basis of his twenty years of pensionable service. On 2 June 2006 the National Assembly had granted the petition. There had been a delay in tabling the Bill due to an attempt by the Executive to address concerns relating to the petition. The legislative framework and summary of the Bill was also presented (see attached document)

Mr Moloto noted that this Bill had serious implications and that there should generally be wider consultation by Members before approving the Bill.

The Chairperson noted Mr Moloto’s comment, but it did not receive support from other Members.

The Chairperson read through the Bill clause by clause and the Members adopted the Bill.

The Chairperson read the report of the Committee, which was adopted.

At the end of the meeting, Ms N Mokoto (ANC) raised an objection to the adoption of the Bill, stating that she believed that this Bill should be taken back as she was not sure that the proper procedure had been followed.

The Chairperson responded that as a matter of procedure, it was impossible to do this, as the Bill had  already been adopted by the Committee.

Ms Mokoto responded that she did not raise the objection earlier because she needed to consult with the Chief Whip.

The Chairperson responded that this made no difference and that the majority of Members had agreed to pass the Bill.

Finance Bill [B78-2008]
Mr Naidoo briefed the Committee on the Finance Bill, noting that this Bill originated on recommendation of the Standing Committee on Public Accounts (SCOPA). It related to the need to approve unauthorised expenditure referred to in the Schedule, incurred by various Departments in respect of the financial years also set out in the Schedule, and as described in the SCOPA reports. It was noted that this Act did not detract from any rights or obligation to take appropriate steps for recovery of the unauthorised expenditure from a responsible former or current official.

The Chairperson replied that SCOPA had presented these reports to Parliament

The Chairperson read through the Bill clause by clause, and Members agreed to the adoption of the Bill.

The Chairperson read the report of the Committee, which was also adopted by Members.

Mr Marais indicated that he wished to acquaint himself with the detail of the Bill and would liase with SCOPA to this end.

Mr Manuel added that the National Treasury was essentially merely conveying this Bill to the Committee at the instance of SCOPA.

Revenue Laws Amendment Bill [B80-2008]
Revenue Laws Second Amendment Bill [B81-2008]
The Chairperson commented that the Committee had basically agreed to the Bills at the previous session  held on 20 October 2008.
In respect of each of the Revenue Laws Amendment Bill, and the Revenue Laws Second Amendment Bill, The Chairperson read through the Bill clause by clause, and Members adopted each of the Bills.

The Chairperson then read through the report of the Committee on each of the Bills. The Committee approved and adopted each of the reports.
 
Mr Marais suggested that the Revenue Laws Amendment Bills’ debate time be shortened, as the time could better be used on the other Bills.

The meeting was adjourned.