Minister of Finance on Medium Term Budget Policy Statement 2011, Adjustments Appropriation & Division of Revenue

Meeting report

Medium Term Budget Policy Statement (MTBPS): Minister's overview
The Minister of Finance, Pravin Gordhan, assumed that Members had read his speech already. There was a recovery in progress following the 2008/09 recession, but that recovery was endangered by events with their epicentre in Europe. If the meeting had been held in the afternoon one might have learned whether the European leaders had emerged with some kind of solution to the challenges that they faced.

Secondly the crisis within the recovery was having ripple effects throughout the world. In South Africa's case the first quarter had been very good with growth of 4.5%. In the second quarter it had decreased to 1.3%. The third quarter's figure, of course, was not yet known. The estimate for this year was growth of 3.1%. In these circumstances, there had also been a reduction in revenue. At this stage it was estimated that some R13 billion would be under-collected. This, of course, would have an impact on the fiscal framework. It was proposed to increase the fiscal deficit from 5.3% to 5.5%, and that extra borrowing would help sustain the economy in this period.

In terms of economic strategy it was necessary to focus on an investment-led approach. This meant investing in the economy and in infrastructure, by investing on the capital side, in terms of maintenance and new infrastructure. That investment would help to keep the economy going.

At the same time South Africa's debt trajectory was managed so that, although a debt to gross domestic product (GDP) ratio (expressed as a percentage) of 40% was expected by 2014/15, or slightly beyond that, it was envisaged that this would taper off, with further tapering off in the following years as well.

It was aimed to sustain growth, because government, not only in South Africa but elsewhere in the world – had been playing a very important part in sustaining growth while the private sector had retreated in the face of recession; and at the same time ensure that there was a credible fiscal consolidation path as one moved forward, because there would be another crisis sometime in the future. It was necessary to create what could be called the fiscal space to be able to react in the way South Africa had reacted in 2008. Members would remember that South Africa was then in 1% surplus. South Africa was then able to borrow and work its way out of that part of the crisis, and work its way into the future.

In order for the investment-led approach to succeed, from a Government point of view, it was necessary to take a serious look at the composition of expenditure. The composition of expenditure meant that if one was spending money on interest payments, which was the fastest growing item on Government's books at the moment, and if that increased further, as it would, over the next two or three years, it would crowd out other forms of expenditure. There were thus interest payments, compensation, goods and services, and investment in capital projects themselves. By composition, one was saying that it was necessary to examine the percentages that were being spent on each of these areas, and how one could reallocate money to the focus on investment in infrastructure, which would have a stimulatory effect on the economy.

To reach that point, it was also necessary to create what was created last year, as Members and colleagues would remember, namely, a policy reserve. This meant creating a little pot somewhere and then asking who would contribute to filing that pot. There were a number of ideas and suggestions that would be worked upon in the course of the next month. Amongst these would be cash surpluses within the state, and how to use these cash surpluses. Some entities were already quick to say that they had projects coming on. Such entities should be given a message that this would not be very helpful, in trying to protect the money that we had. There was a very simple message to everybody within the broader state, that one could not have cash surpluses sitting in one part of the state, and another part of the state borrowing. This was not good cash management. Nor was it a good way to manage the fiscus. There was a concept of the 'haircut', which the European situation had popularised as well, and last year Members would remember a 0.3% 'haircut', which yielded R6 billion over three years, which was allocated to higher education and training.

In summary, there was a difficult environment with reduced revenue, but opportunities to focus on investment, and to rally resources, both from within the state and from within the private sector to get this investment process going.

The Minister anticipated that Members would say that there was already under-expenditure on the investment side and infrastructure. This was true, and Government was now making extraordinary efforts to ensure better planning processes in Government, a pipeline of projects in Government, assistance to various levels and entities within Government, and development of the capacity to deliver better. Clearly what was required was a more effective partnership, as existed in during the Soccer World Cup 2010, between the public and private sectors to move these infrastructure projects onwards much faster.

More would emerge from the Presidential Commission on Infrastructure as well, which would help us to move faster in respect of some of these matters.

Members already knew the allocations, the rollovers, what the adjustment budget said in respect of allocations to various areas.

The R25 billion of six years at this point in time for the competitiveness / economic support package was an area into which if Government could find more money it would put more. The idea was, for example, to increase the competitiveness of South Africa's manufacturing sector, and ensure that it was able to compete in a world which was especially competitive at this time. However, it was important not only to support existing businesses but also to change them so that they could have a fair chance of competing with other players on the African continent and on other continents too. Equally, however, if the situation in which South Africa found itself became any worse, then it would be necessary to use both these resources and other resources to set aside around 2009 to defend jobs and ensure that workers were not retrenched, and to make sure that enterprises continued in some form or other, let alone finding additional ways to grow business and social enterprises.

Discussion
Mr D van Rooyen (ANC) asked firstly about the gap, acknowledged by the Minister, on underspending on infrastructure investments. This problem had persisted for some time. Every year there were undertakings to tackle this problem. If serious efforts were not made to deal with this aspect, we would continue to be limping, more especially as to economic infrastructure.

One of the key things that had emerged was the shortage of required skills – hence high under-expenditure. It had to be asked if there was any concerted effort or focus in dealing with this problem. The current approach appeared to be very sluggish, in particular towards challenges of skills development. As a result, South Africa continued to incur major costs, especially in hiring experts from abroad.

Secondly there had been discussion on moderation of the growth in the unit labour cost – in other words, moderation of wages. What progress had been achieved? Last year there was an undertaking that there would be a collective platform for lobbying for such moderation. However, it seemed that we were not getting anywhere. One trade union recently produced a very progressive attempt to deal with wage moderation. However, one wondered if this problem was being addressed at national level. It seemed to be left to the discretion of individual trade unions. One sought an update on efforts being made to ensure 'that we arrest' this particular situation.

Members had been given the impression in their last engagement that Overseas Development Assistance (ODA) was quite insignificant for South Africa. However, insignificant as they might look, ODA could assist in addressing some of our challenges. Definitely it was important for parliamentarians to be taken on board on the ODA flows that were coming into South Africa, on what they were used for, and on how they were assisting South Africa to address some of the challenges faced. Obviously the old trend of not including them as part of South Africa's revenue continued.

Mr Van Rooyen pointed out that Members believed that ODA must be part and parcel of South Africa's revenue to be used for addressing some of the developmental challenges that the country was faced with.

Ms Z Dlamini-Dubazana (ANC) sought clarity on the fiscal guidelines, which indicated fiscal policies. The Minister had indicated during his speech that efficiency was one crucial factor to ensure sustaining South Africa's debt sustainability. She asked how other Government departments could be assisted, since Government spending, if not properly managed, would prevent attaining that sustainability.

Secondly, if one shifted to the bulk infrastructure, one might achieve something. She asked if there could be less emphasis on investing in the Euro zone countries, and instead a focus on intra-regional investments, because this was where bulk infrastructure could assist in generating revenue for South Africa. Because of what was happening with the Euro zone crisis, and because of South Africa's exports that had been affected, it had to be asked, having said that, if the Minister and his colleagues together with the Department of Trade and Industry, review the industrial policy and consider taking some other measures to make the shift as to whom South Africa traded with and what percentages or rating South Africa was receiving thereof. Could there be some improvement in those trading rates or percentages?
 
Ms Dlamini-Dubazana assured the Minister that Members also were very concerned about the figures – the 5.5% fiscal deficit, the 3.1% GDP growth which was less than projected. There was indeed a serious problem. 'Who is going to bring in that port?' She hoped that the South African Revenue Service (SARS) was still ensuring good compliance, since that might help, but Members were indeed worried.

Mr N Koornhof (COPE) asked about the stabilisation of state debt. Previously it was expected to stabilise around 2014.Yesterday and this morning the Minister had hinted that it might be a little bit later. In a reply on the Minister's behalf, the National Treasury had indicated, two weeks previously, that it would be in 2015/16. 'When do you expect the state debt to stabilise?'

Secondly, in the Minister's statement the previous day, he had said that he believed that South Africa's bond market was highly liquid and deep. It was correct to say that up to the end of August, since about R50 billion worth of bonds had been sold. However, in September it turned 'just like that'. Since the rand had sold off 15% at its lowest point, effectively wiping out the carry yield pick-up by the foreign investors in that particular month, and foreign investors had sold R14 billion in the latter part of September, South Africa was now struggling to find foreign investors to take up the R1.5 billion that South Africa offered them every month. Was that a concern?

All agreed that the state wage bill was a concern. The unions were already coming out fighting about the 5%, and were demanding an increase of nothing less than the rate of inflation. Was it not time to say to South Africans that the higher paid categories would receive less and the lower paid categories more – subject to a limit [overall] of 5%? So the directors-general might see no increases for the next three years, while the lower levels in the civil service might receive 6%. In this way one might reduce the gap between the rich and the poor.

Adv S Swart (ACDP) commended the Minister for his prudent medium term budget statement, and asked if it was not important to take the negotiations with unions and labour to a higher level than the National Economic Development and Labour Council (NEDLAC) almost to a mini Convention for a Democratic South Africa (CODESA) around the issue of economics where one really wanted to reach some agreement particularly on the wage bill – the 5% - and the dual wage settlement in the textile industry between the one union here in the Cape other union. What was the possibility of extending such negotiated discussions and agreements to other industries?

The Special Investigating Unit (SIU) and the Asset Forfeiture Unit had submitted extensively to the Portfolio Committee on Justice and Constitutional Development and seemed to be doing an incredibly good job. Indications were that comparable countries had almost 10 times the personnel that these units had. Would it not be value for money to increase the resources of such law enforcement authorities as the Hawks, the SIU, and the Asset Forfeiture Unit, to recover very quickly money that had been spent irregularly as a result of corruption? The estimate was that R25 to 30 billion of procurement was going to corrupt and irregular expenditure.

SARS was doing an incredibly good job as indicated in SARS Annual Report 2010/11.It was encouraging that the net had been increased by around 47%. However, there was still a reduction in revenue; up to August, the reduction was around R8 billion. Despite the increase in the net, the economy was not responding accordingly.

Dr D George (DA) acknowledged that the Minister had highlighted the problem of the growing public sector wage bill and that Government was the main creator of jobs in the economy. The Minister had said that there should also be more investment spending and less current consumption spending. How exactly was the Minister going to do that? Was there a plan to achieve that objective? Dr George had noted that Mr Koornhof had asked if the 5% [wage increase] proposal was achievable.

The Minister had not given much further detail on the National Health Insurance (NHI) scheme in his speech the previous day. If the financial model for the NHI was not properly designed, it would place enormous pressure on the public finances. Had any modelling been done on the NHI, and if so, please could the Minister provide details? Dr George was currently struggling to put some numbers to it.

The Minister had also spoken several times previously about wasteful spending. There was a leakage of R30 billion from the procurement system. There was also an increase in irregular and wasteful spending and it seemed to be a systemic problem in the public financial system. This was very worrying. What was the Treasury going to do to stop this rot and ensure that the people responsible for this irregular and wasteful expenditure were held to account and removed from the system?

Dr George emphasised that he was not alarmed about the deficit or about the reduction in GDP growth at present. However, he wondered how realistic the Minister's projections were for 2012, 2013 and 2014, bearing in mind the economic circumstances in the global economy. If these projections were incorrect, it would be extremely difficult to manage the reduction of the deficit.

Mr A Lees (DA, KwaZulu-Natal) referred to reforms to improve the quality of regulation. He asked the Minister to explain further exactly what that meant. Did it mean a reduction in regulation? What did it mean to those who had to deal with regulation?

The Minister had talked about strengthening the labour market institutions to support faster growth. Would that be the kind of agreement reached between the Southern African Clothing Textile Workers Union (SACTWU) and the local textile workers?

That agreement had been touted as a breakthrough, and probably was, but the reality was that in Newcastle, KwaZulu-Natal, over the last three weeks, 7 000 jobs had been lost in the textile industry, primarily because of wage issues. This was a huge loss for the economy generally, but for the economy of Newcastle it was devastating. Would this kind of thing be addressed in the R25 billion? Mr Lees noted that the Minister had said that he wanted to avoid the retrenchment of employees. More detail was required on how this R25 billion would be spent, for example, on direct or indirect subsidies for first time work-seekers.

SARS had indeed done a very good job. However, the fact was that revenue was down. He referred to an instance where it had taken three months to pay a substantial amount of money, in advance, to SARS. The system had simply not allowed payment. The taxpayer had been told repeatedly that the matter was being dealt with. The e-filing system was 'a marvellous improvement' for which SARS deserved to be congratulated, but it needed to be refined, since there might be revenue losses there.

The Minister had quite rightly talked about industrial development being central to sustainable growth. However, there was a lack of detail on how this would be stimulated. Was it part of the R25 billion? How would it be done? Would there be concentration on the existing industrial development zones (IDZs)? Would industrial development be broadened? Had the Minister any detail?

The Minister observed that Members had done their homework. Mr Van Rooyen's comments on under-expenditure were fair. However, it had to be remembered that National Treasury allocated funds, which others spent. The changes to be seen would be the following:

 ▪ In the next six months or so one would see this pipeline of projects beginning to develop, so that one would not wait for money and then develop a project. That approach was more likely to bring about changes and results could be expected in that regard.

 ▪ One would see a better sense of how the private and public sector could work together as effectively as they had done in some instances in the past in relation to the projects that were ahead. It was already happening now. If a dam was being built, it was built by the private sector. Government merely provided the money and the specifications. It was similar with Transnet and Eskom, for example. It had to be asked how this could be accelerated, and that investment could be focused to achieve a multiplier effect on the economy.

▪ More efforts were being made to move the IDA programme to its next phase. Some provinces had not done too well in welcoming this process. However, there were still efforts to build up provincial capacity.

▪ Through the Development Bank of Southern Africa (DBSA) and the Siyenza Manje programme and other efforts, there were intentions and programmes at the moment to see how municipal processes could be speeded up.

▪ There was more work to see that skills were directed to the places where they were required, if not at a local municipality level, at a district municipality level, so that a number of district municipalities could share those skills. This was the support work. The Minister of Higher Education and Training was working on the skills development side in terms of the skills development accord signed between business and labour to examine how to speed up the development of artisans and upgrade the further education and training (FET) colleges.

A number of colleagues had asked about wages and wage moderation, and the example of the clothing and textile workers. Clearly when confronted with difficult situations which threatened jobs and enterprises and when there was a difficult climate externally and internally, then labour and business needed to put their heads together with the prime objective of trying to keep people at work and stop enterprises from closing. The Minister imagined that there were many of these initiatives happening at the moment, not just those that one was hearing about. Such initiatives must be encouraged. These were the agreements in the work environment that could be best reaped in that environment rather than be prescribed from elsewhere. Each sector and each firm would be different.

There must be a spirit of working together to develop formulae to help us to survive this crisis and go beyond it, as Germany did successfully after 2008, until the European crisis began to worsen, when Germany's export market began to decline, as a result of which Germany was facing a slow-down as well.

As to ODA, the Minister replied that he would ask the ODA people give Members a full list of what had happened over the past few years. National Treasury acted only as a conduit in many ways and as a liaison. It was not a significant amount in the overall scheme of things - less than 1%.

The Minister replied to Ms Dlamini-Dubazana that 'We cannot really assist Government departments'. A cultural change was required – leadership from politicians, leadership from directors-general, leadership from senior public servants, and recognition that one could do better with one's own money if one did the right thing. Parliament needed to put a lot more pressure on senior civil servants and accounting officers to account a lot more for what they did and did not do. There was need for extensive conversation on what modesty and moderation meant, particularly given the difficult circumstances in which South Africa found itself. The challenges and options had been pointed out, but, there had to be a serious culture shift, with possible reductions in the size of overseas delegations, the numbers of nights spent away in hotels, the specifications of cars hired – these were all choices that one could make; it was not possible to prescribe all these choices, but one must listen to one's conscience as well in approaching these issues.

The Minister of Trade and Industry was reviewing the area of shifting trade. There was no doubt that if we carried on with our existing trading patterns and relied on trade with countries whose economies would be in trouble for the next couple of years and growing no more than 2%, then South Africa would not have a demand factor that was being created in respect of its economy. Clearly, diversifying trade was a huge responsibility. All Members needed to become ambassadors for trade to enable South Africa to expand its range of options. It was also important to trade in goods that people wanted and at a price that they could afford.

It had to be asked how many businesses were alive to the possibilities around South Africa and were willing to innovate and take risks.

Members should not worry about the deficit. If it became a cause for anxiety, he would inform them.

Mr Lungisa Fuzile, Director-General, National Treasury, would address some of Mr Koornhof's questions on numbers. However, Mr Koornhof need not be as anxious as he appeared to be.

Mr Koornhof had made an interesting point on the state wage bill, again in saying that here was a new reality that one was faced with. Some of the ideas that he had put forward were extremely useful and, hopefully, would be taken into account. It was necessary to be constructively imaginative about how we crossed this bridge for the next two or three years.

The Minister replied to Adv Swart that there were ongoing discussions between the labour community and Government. These had produced two or three accords, as indicated earlier on. It was hoped that through that process, which included NEDLAC processes as well, some of the issues that had been referred to could be tackled. If these issues were not tackled, then we would be selling ourselves short.

Whether the resources of the SIU and the Asset Forfeiture Unit be increased, was part of a budgeting process.

Mr Oupa Magashula, SARS Commissioner, would handle revenue questions.

In a restrictive environment, the Minister said, it was necessary to look at compositional spending. Secondly, the economy now needed an investment-led approach. Thirdly, in terms of changing composition, re-prioritisation was necessary. It had to be asked, perhaps in the context of the work of the Standing Committee on Appropriations, whether there were resources in area X which could be redirected to area Y. It had to be asked if projects for the next year were absolutely necessary, or if they could be deferred for a two-year period, so that more could go into investment. Thirdly it had to be asked if this consumption expenditure was really necessary or could rather be directed into more capital expenditure. Parliament could play a very big role if aligned around this approach. He sought help from the Committees present to begin the process of achieving that alignment. The plan was to obtain a wider conversation and understanding, and to get into the details over the next month in preparation for the budget and beyond. As mentioned the previous day, Government would also look for the cash resources and non-core assets and other areas from which resources could be mobilised. So there was a plan, and it was now necessary to execute that plan.

A number of opposition parties had raised the NHI question. The Minister did not understand why. There was no immediate risk of a fiscally unsustainable process emerging. The Minister of Health had said very clearly that this was a 14-year process. The first five years would be about rehabilitating, reconstructing and enabling the public health care sector to completely change the quality of health care that it offered. Secondly, the Minister of Health, from April 2012, would be implementing 10 pilot projects in 10 areas where these activities would be undertaken, so that one could understand what it meant to upgrade public health care facilities. Thirdly, there was work happening at the moment. As soon as there was certainty as to what the options might be, the Minister of Finance would make that information available. There was no secret process. It was work that required a fair amount of diligence. It needed to take into account different views and models that people were using. It was intended to develop a longer-term fiscal framework, so that one could think in five or 10-year terms. The NHI and social security reform, or even infrastructure, were long, 10-year projects. Government was absolutely committed to working within a sustainable framework. It was Parliament which was best placed to hold people to account. National Treasury was considering amendments to the Public Finance Management Act (PFMA) to lay greater accountability at the door of officials, and politicians who might make some of these decisions. Greater sanctions might be needed than existed at present. There was no way of predicting, with absolute certainty, deficits for 2013. All that could be indicated was the trajectory that one wanted to follow if the conditions expected to unfold did indeed unfold. Within that an element of adaptability was required together with agility. A sustainable framework was what would carry South Africa through this difficult period. South Africa was still first in transparency in terms of budget documentation. Dr George should not lose sleep.

The Minister replied to Mr Lees that it was important to ensure that the decisions made by regulatory authorities were economically sound, and took into account all the factors that needed to be taken into account.

The Minister acknowledged that, in South Africa, accessing jobs was difficult for many people. There were labour market institutions, but they did not reach everyone. There was also information in the labour market but this did not reach everyone either. So there were gaps between those who might be seeking work and those who might be offering work. So there was potential to increase access and information, and increase the reach of these institutions.

Mr Z Luyenge (ANC) asked about the feedback that National Treasury should receive from the industries and companies that were beneficiaries from the Industrial Development Corporation (IDC) support. Were any reports received? He asked if there was any agreed mechanism to enable the National Treasury to sustain the Unemployment Insurance Fund by a pre-exit strategy or capacity-building of those people who might leave their employment, because, when they got out there, they became too young to obtain social grants and too old to obtain further employment. Was the National Treasury not considering ring fencing the component meant for sports facility development, because it was not a priority for the municipalities. The Department of Sport and Recreation had no funding and was looking at this need.

Mr Mashile (ANC, Mpumalanga) asked about the politics of rollovers and fiscal dumping by national departments and their 'perceived naughtiness', inclusive of the virements. He asked about the actual practical steps with regard to compensation. How would it be done practically? He also asked about the money stashed by municipalities into the banks while lending other people the money that the municipalities were supposed to spend on service delivery. Such municipalities then borrowed money. What could be done about it? How would the moratorium on the toll roads affect spending? What was the percentage of revenue derived from penalties? If there was any trend, what was its direction, and what was its impact on revenue collection?

Dr P Rabie (DA) thought that this was a very cautious mini-budget, but laudable and something to be proud of. 15.2 million South Africans were dependent on social grants. This was almost 11% of the total budget. Also 2.8% of South Africans had given up hope of finding a job. Was it not possible to offer incentives to the unemployed to try harder to find work? It was dangerous to have almost 3 million people who had given up trying to find work.

Mr S Marais (DA) noted that the growth of 3.1% in the GDP was very moderate. SARS could have an optimal recovery of revenue but if economy did not produce money then that optimal recovery would not be enough. One could have fantastic management of expenses, but if the economy did not generate the revenue needed to pay for everything, then one could have the best plans in the world but not be able to fund them. The Minister had cautioned, in his policy statement, that the priorities for the funding of the new growth path might be under pressure. The funding of the land reform process was enormously under pressure, and it seemed that there was not enough money for that. This linked to his colleague's question about the NHI. It was a long-term project, but one knew that a 7% growth in GDP was needed to achieve five million jobs in 2020. Currently we knew that there were seven million people who were looking for jobs. How on earth could the NHI be funded with a growth of only just over 4%? Such was far from a growth in GDP from which one could fund everything. It was necessary to look at all the variables. These were the things that brought Members to ask these questions.

The Chairperson said that Mr Marais had made his point.

Mr Marais said that the Minister had mentioned nothing about the wage subsidy. Was that going to be implemented? It had the potential to assist young people to be employed.

The Minister had clearly indicated that emerging markets were suffering from portfolio investments. Mr Koornhof had indicated that South Africa was running a huge risk at the moment.

Angola had last year received $10 billion whereas South Africa received about $1 billion. How could that be changed to bring certainty to investors? Currently, it seemed that foreign investors were becoming more reluctant to invest in South Africa.

Mr Neels van Rooyen, Chairperson of the Public Accounts Committee, Free State Legislature, asked about the optimal collection of revenue in the provinces. It was high time that the provinces and local government optimised and assisted in their own revenue collection. That National Treasury Regulations were not addressing this was worrying. It was encouraging to look at the local government expenditure review, but the lack of Treasury Regulations was a concern.

The second issue was on the changing of the composition of spending. The Minister was correct to say that we should finance investment. He had also referred to maintenance and refurbishment, which was the right way to go, since this was the perfect entry level for emerging contractors. However, one did not know if the Department of Trade and Industry (DTI) was ready to assist emerging contractors and the small, medium and micro enterprises (SMMEs) to take up these opportunities.
 
Mr G Snell (ANC) requested the Minister, when he reviewed the Public Finance Management Act (PFMA) to do an analysis of the consequence of creating autonomy of accounting officers and the impact of this on governance, and the negative consequence this had on the manner in which one could control the funds and the manner in which national policy was implemented at provincial level.

The Minister asked Mr Snell to please write a page on the autonomy of accounting officers to explain exactly what he had in mind. Mr Neels van Rooyen's point about revenue collection in provinces was absolutely crucial in areas where more help was needed or where there was limited capacity. The Committees should ask the DTI to address them on its capacity to help emerging contractors.

The Minister replied that National Treasury funded whatever it wanted to fund to the limits of what was available according to the fiscal framework. It was a simple principle. There were no unsustainability issues that entered this equation. The wage subsidy was still work in progress. The MTBPS was precisely that: it was a budget policy statement; it was not a statement that was meant to cover every area. There was indeed a need to attract more investment. South African businesses were sitting with R300 billion surpluses as well. However, in climates such as the present, people tended to be more averse to taking risks.

The Minister agreed with the spirit of Dr Rabie's proposal to give incentives to the unemployed to seek work, rather than depend on welfare. The question was how to get the mechanics going.

Mr Mashile had raised some very useful questions. Colleagues present would answer some of them. The Minister appreciated Mr Mashile's phrase 'the naughtiness of receiving departments'. He acknowledged that fiscal dumping was happening. National Treasury had tried to limit rollovers as much as possible.

On compensation it was necessary to go through negotiations of two types – annual negotiations and political discussions. Colleagues would address questions on municipalities and the moratorium question. Toll roads had inspired much emotion, but roads and infrastructure would have to be built, and that momentum would have to be maintained.

Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, National Treasury, would respond to Dr Luyenge on sports facilities, a question that he had raised before. The UIF question needed to be thought about, as the Chairperson had said. National Treasury did not receive information about IDC support. The Director-General would respond.

The Deputy Minister of Finance, Nhlanhla Nene, said that until such time as efficiencies in expenditure were dealt with it was not a matter of resources that would address our problems. More resources would help, but until such time as one could secure the efficiency in expenditure one would not be doing justice to what one was supposed to do. He hoped that Members would really scrutinise rollovers in due course, because even if National Treasury had approved them in terms of the legislation, it was ultimately Parliament that passed the rollovers, on the basis that the rollovers were legitimate because funds had been committed to projects that had not got under-way. Rollovers should not be confused with under-spending. The Committees must be alert for signs of fiscal dumping. Also the virements that National Treasury had approved in terms of the law were tabled to Parliament, since Parliament had the final say. Unless Parliament ratified them they could not be authorised.

Mr Lungisa Fuzile, Director-General, National Treasury, replied to Mr Koornhof that there was still overall for the year to date positive net purchases of bonds by foreigners. Up to September the total sum purchased, less what the foreigners had sold was a positive figure of about R37 billion. In October alone, National Treasury had seen net purchases of about R5 or 6 billion. Thus, notwithstanding the risk aversion associated with the problems in Europe, questions that had arisen in relation to sovereign debt instruments as a safe instrument into which to put money people even foreigners still had confidence in South Africa and its fiscal sustainability, and its ability to pursue policies that would ensure that the debt that was issued today would be serviced tomorrow, and repaid on time. National Treasury raised money in debt instruments to the extent of about R10 billion a week. The bulk of it was in short term instruments. None of these had demonstrated any serious difficulties. For some of the inflation-linked bonds there had been one or two options that had not been well-subscribed. On average days when National Treasury held auctions it still received bids that were far higher than the amount of money that National Treasury wanted to raise on any given day. In the context in which the capital flows were quite volatile as the result of uncertainty, it should be expected that with the effect that that had on the currency, it did become a problem for foreigners, because if they bought rand-denominated bonds today and tomorrow the rand weakened then they would lose money. National Treasury anticipated that this trend would continue for a while, and some of them might pull out. However, it had tended to be a short term phenomenon, and, for as long as interest rates elsewhere remained very low, and South Africa's interest rates remained at their present levels, the likelihood that foreigners would walk away from National Treasury's bonds was minimal. Also if South Africa's growth story was believed, which was the case, because it was a sound one, if fiscal sustainability was embedded in South Africa's policy, then the likelihood that people would run away was limited. The Minister had dealt with improved regulation satisfactorily.

Mr Oupa Magashula, SARS Commissioner, replied to Adv Swart that revenue grew up to the end of September grew by 7.1% year on year. Thus there was revenue growth. Against the February budget estimate it was weaker or slower. At the end of September revenue collection was behind by about R13 billion. The main source for that was, as Adv Swart had pointed out, was value added tax (VAT). The Minister had mentioned one source of the leakage in VAT as rampant fraud, which SARS had detected and had brought down. Also VAT refunds had been higher than expected. Also there had been slower or lower VAT returns from small and medium size businesses (SMEs).

Mr Magashula replied to Mr Lees that even if SARS was 99% efficient, at any point in the year, SARS interacted with over 12 million tax payers. So 1% of these was 120 000 who would be dissatisfied. SARS tried to learn from each and every interaction, and actually encouraged people to come forward to report any unfortunate experiences with SARS. On the basis of such feedback SARS tried to improve, but SARS could never claim that it would be 100% perfect.

Mr Magashula replied to Mr Mashile that penalties on interest constituted about R2 billion of SARS' revenue in the last year. It was in the Annual Report and was about 0.4%.

Mr Andrew Donaldson, Deputy Director-General (DDG): Budget Office, National Treasury, replied on industrial development zones and the UIF and its assistance to potential work-seekers. The legislation, which was more than 10 years old now, provided for industrial development zones. National Treasury had been in discussion with the Department of Trade and Industry on what might need to be done to give greater impetus to investment in IDZs. The basic idea behind concentrated industrial development areas was the need to take advantage of economies of agglomeration. Businesses located next to each other were able to benefit from their proximity, technology and skills development associated with industrial development, and, of course, take advantage of modern transport, logistics and communication systems. So much of the investment in the infrastructure had been done. There had been investment in a new port and in industrial estate in East London. However, these investments had not gained anything like the kind of impetus that was needed. Under consideration was whether there was a need to supplement, with other incentives, the state's financing of the infrastructure, which was the main investment that Government was making in these facilities. So there was a need to look at international experience. In other countries there was a range of other kinds of incentives for business investment, for training, for wages, sometimes in the form of preferential tax arrangements and other adjustments to the regulatory environment. In many countries, IDZs had a strong export focus. What would emerge out of the DTI's review of its IDZs would be that there would be some areas in which export potential required new incentives and so the funds that had been set aside in this MTBPS for competitiveness support to industry would at least in part go to providing additional incentives to IDZs or economic development or export processing areas. National Treasury had been advised that it was unwise to adopt a one-size-fits-all approach to the development of concentrated industrial areas. This was very much an area of cooperation between departments in which National Treasury would be taking the lead from the Department of Trade and Industry in this work. The Minister of Labour and the board of the Unemployment Insurance Fund had given consideration in the last year to the possibility of extending unemployment insurance relief probably at a flat rate in a continuation or lengthening of the period in which unemployment benefits could be claimed. Moreover, it was required of unemployment insurance claimants that they must register with the Employment Services of the Department of Labour. Those Services had a lot of potential over time to channel people into employment opportunities. However, there was much work to be done in delivering the kind of information that was needed about job opportunities for those Employment Services to function effectively together with improvement in the coordination of the Government's Employment Services and the private sector employment and job information agencies.

Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, National Treasury, replied to Mr Mashile that municipalities were part of cash management. Municipalities needed three or four months cash reserves to meet their obligations. Some municipalities had possibly eight to 10 months’ reserves, which accounted for some of the investments. The key question would be what would be the right balance of having enough kind of cash to sustain the municipalities over a period of time. National Treasury was looking into that.

Mr Brown responded to Dr Luyenge on sports facilities. In the metropolitan municipalities, secondary cities and some of the towns, the provision for sports facilities had been there, and in some cases, it had even grown. The key question for National Treasury would possibly be the logistics to manage the existing sports facilities or to roll-out at the end of the day. The other important thing that National Treasury would have to address would be the broader issue around land management. Putting in money by itself would not necessarily achieve the desired integration. There was a broader implementation issue that needed to be dealt with. Then there was the issue of the smaller, rural municipalities - where communities were dispersed. Where one put sports facilities in such municipalities became an important issue. There was also the issue of the partnership between the municipalities and the Department of Basic Education. National Treasury had included in the Municipal Infrastructure Grant (MIG) a component that needed to be ring-fenced, but if the 15% was taken as part of the allocation for municipalities it became a small amount and one did not achieve the reach that was desired.

Mr Freeman Nomvalo, Accountant-General, National Treasury, replied on the question of reviewing the PFMA. The existing provisions did provide a substantial accountability framework that must be enforced. The Minister had talked of the issues of culture change. A number of questions which arose on the perceived inadequacy of the PFMA tended to arise from people who did not really know what the PFMA said. A specific example was Section 38 (1)(c)(i) which provided that the accounting officer must take effective and appropriate steps to collect all money due to the department. Failure to do so was financial misconduct. So there was already provision, not in the Treasury Regulations but in the primary legislation.

What the Minister was talking about was taking a close look at the existing framework and seeing how it related to other legislation that might contribute effectively towards the effectiveness of the PFMA, and considering how one created that alignment and ensured that there were no gaps and that it was possible to enforce this legislation from all fronts. An important element that would ensure that any set of rules that one brought to the occasion became effective was in the matter in which one also rolled out that legislation to a point where all the stakeholders, parliamentarians, executive authorities, and accounting officers had a full appreciation and understanding of the legislation so that they could assist Government in ensuring that the legislation was complied with and were not taken for a ride by those who had unscrupulous intentions. So the issue was about making those alignments clearer and ensuring that the roles and responsibilities, particularly between the executive authorities and accounting officers were clearly separated. Executive authorities should not perform operational functions.

Adjusted Estimates of National Expenditure 2011: National Treasury briefing
Chairperson Mufamadi asked Co-Chairpersons Sogoni and Chaane to lead the next portion of the meeting.
 
Mr Fuzile referred to page 34 of the MTBPS and to this year's Adjusted Estimates of National Expenditure, and summarised the Estimates. When all the estimates that he was going to refer to globally were effected, the total expenditure projected for this year would be about R900 million below what was tabled in the budget in February.

The first broad areas of adjustments was roll-overs. These related, as the Minister had indicated earlier, to instances where a department underspent last year. On the programme on which it underspent, it might have made commitments and continued with the work but was likely to run out of funds to finance those programmes this year with the result that these programmes or projects, if infrastructure, were likely to be stranded. Therefore consideration was usually given to recommending that funding be made available to those departments for the purpose of continuation of those programmes. About R3.7 billion was rolled over from the previous year to this year.

The second category of adjustments was unforeseeable and unavoidable expenditures. The bulk of that would relate to things such as infrastructure damaged by floods or the outbreak of animal diseases. In that regard R1.031 billion had been recommended. An issue covered in the earlier discussion was the issue of personnel costs or adjustments to conditions of service, which came out at a figure higher than was budgeted for in February. In this regard an amount of R4.45 billion was recommended. The bulk of this went to provinces, because they ran the most personnel-intensive services in the form of education and health. Most national and provincial departments had been advised that they must accommodate the higher-than-budgeted-for increases by re-prioritising their expenditure.

The third category of items related to self-financing expenditures. These were activities that usually generated income. The activities that fell under National Treasury were those that fell under the South African Reserve Bank (SARB) as delegated functions from National Treasury, such as the voluntary disclosure programmes for people who had fallen foul of the exchange controls and had to pay penalties. The SARB incurred some costs in enforcing these penalties but then the National Treasury had to reimburse the SARB. These amounted to some R38 million, which was provided for here.

Also there were debt service costs higher than budgeted for to the tune of about R285 million.

Once all these adjustments were effected, the amount projected to be spent would be, subject to Parliament's approval, about R1 billion lower than the budget approved in the earlier appropriation that was approved earlier in the year.

Division of Revenue Amendment Bill [B 17-2011]: National Treasury briefing
Mr Brown said that National Treasury hereby tabled the Division of Revenue Amendment Bill [B 17-2011]. All of these amendments had changed Schedule 1 - the equitable division of revenue raised nationally among the three spheres of Government.

Mr Brown referred to Schedule 4 - Allocations to provinces to supplement the funding of programmes or functions funded from provincial budgets (page 16).

He then referred to page 18 on which there was a further addition for agricultural disasters. The breakdown for the affected provinces was shown. Page 21 showed the human settlements part of the disaster – R180 million and how it was divided across provinces. Page 23 showed the transport part of the disaster allocation. Members would recall that National Treasury had introduced a R8.2 billion Schedule 4 conditional grant. At that time amounts had not been allocated. Schedule 7 on page 25 now showed the breakdown for the R700 million was going to be spent across the different provinces. These were some of the changes that had been put together on the schedules to really reflect that.

In addition to that, the Bill, on page 33, provided a breakdown of the entire conditional grants for all of the provinces.

The memorandum on the objects of the Division of Revenue provided an explanation of all the analyses.

The change that had been made in respect of local government had to do with the gratuities for the councillors who were not returned at the elections. These gratuities would be managed by the national Department of Cooperative Governance.

The above were the adjustments made in respect of provinces and municipalities.

Discussion
Mr Mashile asked Mr Brown about paragraph 3.8 of the Memorandum of the Objects of the Division of Revenue Amendment Bill – Table 3: Conditional Grants to Provinces: approved national roll-overs to 2011/12, on page 33 of the Bill. He asked if they were correct and justified. What did National Treasury detect about the character and nature of applications for roll-overs? Were some applications not genuine and therefore discarded? Did some applications appear to be 'really naughty'?

Mr N van Rooyen referred to page 65 of the Division of Revenue Amendment Bill – allocation in kind to municipalities for designated special programmes. In the Free State there were three small, rural, and struggling municipalities which were reducing their budgets. What was the rationale for taking money away from them? He also referred to page 61, 63 and 64: the Free State had been forgotten again. Why?

Mr Snell asked, with reference to what he had heard in the Portfolio Committee on Health, if budgeting for provinces would be on a norms and standards basis with regard to hospitals. Alternatively, would one 'tweak' the conditional grants to ensure that norms and standards were budgeted for?

Chairperson De Beer said that the Select Committee on Finance's experience in visiting five provinces had brought out the question of requesting roll-overs from National Treasury. In North West a few weeks ago his Committee had encountered 13 municipalities requesting a roll-over. How would this be treated? He gave examples. The reality was that if some municipalities, especially the small, rural ones with a small revenue base, did not get the roll-overs, they would have to close their doors.

Mr M Swart (DA) asked about the R116.3 million which had to be provided for contractual penalties incurred by Denel. Were there any future commitments in this regard? If so, approximately how much?

A Member asked, with reference to the allocations in kind detailed in the Division of Revenue Amendment Bill, whether it had been checked if most of the provinces that were receiving the money were not necessarily affected by infrastructural under-expenditure, so that one did not overburden those provinces but gave them more money when needed.

A Member asked about disaster relief grants for farmers. What was the amount paid by provinces to agencies given to provinces? Secondly, was there a certain amount voted for farm workers?

A Member referred to page 34 of the MTBPS, and to the last bullet – the R11 million declared as savings from the local government financial management grant. What did a declaration that there was a saving mean? What were the circumstances around it?

The Deputy Minister replied that the general response was that a municipality would suffer if funds were withheld. However, the fact was that the municipality was suffering despite the availability of funds. So if National Treasury continued to reward that municipality with the carrot instead of the stick, it would in fact be killing that municipality. Giving them the funds still did not solve the problems of service delivery. Therefore it was written into law in the Division of Revenue that if there was low or poor spending on those grants, the only stick available was to withhold the funds. This was why Members had heard that there was a portion of the funds that had been rolled-over because having dealt with the issues that were constraining expenditure, the funds could be rolled-over to be used in the following financial year.

Normally what was approved was what had passed the test of the roll-overs and the adjustments appropriations. When National Treasury brought these roll-overs to Parliament it was because National Treasury was satisfied that the roll-overs had passed the test of unforeseen and unavoidable with regards to the adjustments appropriations. The purpose of bringing such roll-overs, and virements also, was to enable the Committees to satisfy themselves that these roll-overs and virements did indeed pass the test.

Mr Fuzile replied that National Treasury received far more applications or requests for additional expenditure than the amounts seen here. A number of requests were not recommended on a number of grounds. Two of them were very important and Members had referred to them. These did not fall in the category of unforeseen and unavoidable. It was taken into account that a department might have a budget for infrastructure or for a particular programme, if it asked for a roll-over at this particular time, having spent only 20% of its allocation, it would most likely be denied a roll-over. The balance was a delicate one. Treasury had to be extra careful about what it recommended to the Treasury Committee for fear that it might leave a project stranded with no money to pay the contractors.

Denel had obtained its work packages under the A400M Airbus carrier aircraft agreement; Denel was assigned to produce seven components of this aircraft. The entities concerned were required to have an indemnity. Government was required to give Denel an indemnity to the maximum of R1.6 billion. Against that, already just over R800 million had been drawn down. Now there had been a request for this R100 million approximately, or rather a call on that indemnity. There were triggers for the call on that indemnity.

Mr Brown replied to Mr Mashile that National Treasury had added R50 million to the financial management grant. Part of that R50 million was to find a way of using the water boards to engage interns in a training programme. It was intended to scale it up.

The provinces had been required to provide detailed motivations for roll-overs. The process for approving them was rigorous. The infrastructure grant for provinces: National Treasury withheld R2.4 billion last year, and this year was approving only R1.1 billion. It was confident that the provinces would be able to spend the money.

Mr Brown replied to the Mr N van Rooyen. He referred to 'page 66' and the footnote at the bottom of that page. It was the Department of Water Affairs which administered the grant. It would take part of the grant to do detailed feasibility studies for future projects. It was not as if the money was taken away from municipalities. The Free State was provided for.

Mr Brown replied to Mr Snell that National Treasury did not use norms and standards when allocating resources, but many of the provinces had done much detailed work on the costing of schools.

Mr Brown replied to Mr De Beer that he was helping him to motivate for allocations.

Mr Brown replied to a Member who had referred to the education grant and asked if National Treasury took underspending into account. This grant was administered by the national Department of Basic Education, which used the DBSA to roll-out that infrastructure.

Mr N van Rooyen gave the example of a municipality in the Free State from which R22 million had been withheld. He understood Mr Brown's explanation on the water boards but was not satisfied as to the money taken away from the municipalities.

Co-Chairperson De Beer proposed that there should be great efforts to address the vacuum at community level left by the end of the Siyenza Manje programme in March 2011. The Member of the Executive Council (MEC) for Cooperative Governance and Traditional Affairs (COGTA), North West, had admitted that there was not enough funding for the implementation of the turnaround strategy. Mr De Beer wanted National Treasury to note this.

Mr Ramatlakane asked further about the penalty for Denel. He wanted to be sure if the indemnity amounted to R1.6 billion. Was a gradual growth anticipated in that amount as a result of the non-delivery of contractual agreements on time? Was National Treasury worried?

Mr Ramatlakane asked further about the progress on under-expenditure on the Siyenza Manje programme and the capacity to spend. Surely holding the purse was part of National Treasury's concern.

Mr Fuzile replied that the contract for Denel set the upper limit at R1.6 billion. Ideally this was an amount that ought not to have been drawn on. Government had given the indemnity because it believed that Denel could deliver the components that it had agreed to deliver on time. Now Denel appeared to be consistently failing.

National Treasury did care about capacity and had undertaken several initiatives to deal with the issue of financial management, which was its primary domain. It also had a technical assistance unit, and had actively rendered help to municipalities, and continued to run the infrastructure delivery improvement programme. The problem was massive. National Treasury acknowledged its involvement in infrastructure, however, there was a need to find other ways of dealing with the capacity problem.

As required by law, National Treasury made available from time to time reports on progress on expenditure which was the first indicator of whether things were going right or not happening. However, National Treasury could not be everywhere, or risk failing in its main duty.

Mr Brown replied that National Treasury had deployed people in provincial treasuries. However, as to the Municipal Finance Management Act (MFMA) aspect there were still some provinces that were lagging behind. It was unfortunate that National Treasury had moved a little slowly in the establishment of the municipal infrastructure agency that it had mooted. However the Department of Cooperative Governance (DoCG) had signed an agreement with the DBSA.

Mr Brown replied that the R25 million was a grant in kind. The Department of Water Affairs would be doing the project itself. The project was under-way.

The Deputy Minister was not convinced that to implement a turnaround strategy there was a need for separate and additional funding.

Mr Snell asked if there was a sub-section in the PFMA on which to hold the accounting officer of Denel responsible for a loss of R116 million from the budget.

Ms R Mashigo (ANC) asked about the amount attached to the roll-overs. How did they go through? Libraries had been an item under Arts and Culture for so long yet it was still being rolled-over. It needed to be taken into account when considering these adjustments. She referred also to infrastructure grants. These roll-overs said a lot. Something needed to be done about these departments.

Mr L Ramatlakane (COPE) acknowledged that there had been interventions, for example the Siyenza Manje programme in terms of financial capacity. There must be success stories as well as failures. He asked for a list, together with the solutions applied. National Treasury should not feel that it was interfering. It had much constitutional power in dealing with issues of resources.

Mr Mashile recalled that earlier that year Members had engaged DBSA on the Siyenza Manje programme . One of the questions asked was if DBSA removed its deployees, would the municipality be able to continue its activities. The chief executive officer (CEO) of DBSA had replied in the negative. The Minister in his responses had also referred to this project as the one plan to deal with the issue of skills. However, up to April this year, there had been nothing to ensure improvement, other than the unblocking of projects. Had National Treasury a different understanding? Generally skills had not been transferred.

Co-Chairperson Chaane said that this subject required a whole day's engagement, with DoCG too. Small and rural municipalities had serious challenges of capacity. People with skills preferred not to work in those municipalities because of lower salary levels. However, it was big cities with capacity that tended to abuse the system by applying for roll-overs. There was need for caution. He asked what mechanism National Treasury was putting in place to prevent provincial departments dumping money to municipalities and abusing the systems, for example as with the community libraries conditional grant, which was intended for building libraries but in many cases was actually used by municipalities for other purposes. This distorted reporting. There was still a huge backlog of libraries. This had been seen in North West, where R30 million was transferred to municipalities over a period of two years but not a single library had been built. The other example was the hospital revitalisation grant. North West was again an example. National Treasury needed to establish some kind of verification mechanism.

The Deputy Minister noted the comments, but some of them should be dealt with at the level of provincial legislatures, as provinces had their own provincial treasuries. He referred to page 33. National Treasury was satisfied from the technical aspects of the roll-overs, and it was up to the Committees to interrogate them.

A few weeks ago, the DBSA Annual Report 2010/11 had been tabled. Some of the new information that appeared in it did not confirm some of Members' observations. He agreed that a discussion with DoCG was appropriate.

Co-Chairperson Chaane pointed out that much as some of these matters pertained to provincial legislatures, National Treasury was the main transferor of funds, and these matters should not only be noted but also acted upon. The DBSA had contracted an independent service provider to conduct an assessment study; this was a thick report which, he did not think, was contained in the DBSA's Annual Report 2010/11, so perhaps a special meeting was needed on that subject with DoCG and National Treasury.

Co-Chairperson Sogoni said that the Committees would take more time to analyse the morning's submissions and would subsequently engage on some of the issues that had been raised. Parliament should support the approach taken by National Treasury to support job creation through building infrastructure. Also it was necessary to examine how the departments responded to roll-overs. Ms Mashigo and Mr Mashile had raised the matter of virements, and engaged substantially with the Accountant-General but there should be further engagement around these issues. Members of Parliament agreed with the provisions of the PFMA but wanted to see credible budgeting. Perhaps North West should be invited to respond. Members agreed around the withholding of funds, but it should be approached from the viewpoint of beneficiaries, who would not be able to receive services because officials did not spend allocated funds. He thanked the Deputy Minister and colleagues.

Co-Chairperson Sogoni adjourned the meeting.