Southern African Customs Union Revenue Sharing Formula: briefing by National Treasury

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Finance Standing Committee

13 September 2010
Chairperson: Ms N Sibhidla (ANC)
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Meeting Summary

The Chief Director, National Treasury and representatives from the South African Revenue Services briefed the Committee on the review of the revenue sharing formula applied by the Southern African Customs Union (SACU). 

The briefing covered an overview of the context of the revenue sharing agreement, an economic perspective of the five countries in the Union, the revenue sharing regimes applicable since 1910, the application and outcome of the formula agreed in 2002, the extent of economic dependence on customs revenue by the countries in the Union, the proposed new revenue sharing formula and other changes to the agreement, other tentative ideas being explored and the proposed way forward.  The National Treasury would like to see that a new agreement and formula was in place for the 2011/12 fiscal year.

Members asked questions about the free circulation of people and goods between the SACU and SADC countries; the utilisation of the funds in the common revenue fund; the consideration of other models in the development of the new formula; the accuracy of the data collected at border posts; the inclusion of Zimbabwe in SACU; the reduction of the dependence of SACU countries on customs revenue; the impact of the free trade agreements; if SACU had any loans from the World Bank; the consultation process underway in the SACU countries; the risk of destabilising the economies of SACU countries by the implementation of new agreements; the impact of the agreements between certain SACU countries and the European Union; the congestion experienced at border posts; the various systems used at border posts; the introduction of one-stop border posts and the policy on the disposal of confiscated goods.


Meeting report

Briefing by the National Treasury
Mr Neil Cole, Chief Director, National Treasury, introduced the delegates from the Treasury and from the South African Revenue Services (SARS) to the Committee.  SARS was represented by Mr Mvuselelo Mgeyane, Executive: Stakeholder Management, Mr Randall Carolissen, Group Executive: Revenue Analysis and Ms Mamiky Leolo, Executive Manager: Revenue Analysis.

The detailed briefing on the revenue sharing formula applicable to the Southern African Customs Union (SACU) was made in response to a request from the Committee during an earlier meeting held with the National Treasury and SARS (see attached document).

SACU comprised the countries of South Africa, Botswana, Lesotho, Swaziland and Namibia.  The current revenue sharing agreement between the countries was under review and had been discussed at a recent summit with the five Heads of State concerned.  The new arrangements have not been finalised and the briefing represented an opportunity to engage with the Committee on the matter.  The amended agreement would have to be ratified by Parliament in accordance with the requirements for international agreements.

The presentation included an overview of the context and historical background of the SACU revenue sharing agreement.  The highest decision-making body was the Council of Ministers, representing the Heads of State and the Ministers of Finance of the five member countries.  The current revenue sharing formula was not sustainable but there were issues beyond the issue of revenue that had to be taken into consideration.  The current agreement prevented other countries in Southern Africa from joining the Union (for example, Mozambique, Zimbabwe, Zambia and Angola).

Pie charts and graphs illustrated the relevant position of the five countries.  South Africa contributed approximately 85% to 90% of the nominal gross domestic product (GDP and the real domestic demand.  An overview of the historical revenue sharing regimes in 1910, 1969 and 2002 was given.  A common external tariff was applied to imported goods and services.  In recent years, the common revenue pool amounted to approximately R40 to R45 billion.  South Africa was the overseer and manager of the common revenue pool as the country was responsible for the most collections.  The 2002 agreement allowed for the revenue share of each country to be paid out in accordance with a forecast while the actual amount of revenue collected was only reconciled in the following fiscal year.  The global economic downturn resulted in the amounts paid out in 2008/09 and 2009/10 exceeding the actual revenue collections made during the same period.

A detailed explanation of the applicable revenue sharing formulae was provided.  The revenue paid to SACU countries was based on the extent of trade with each other.  In 2008/09, South Africa contributed R45.4 billion (98.4%) to the common revenue pool.  The result of the 2002 revenue sharing formula was that South Africa received R21.4 billion (46.5%) from the common revenue pool.  Most of the imports destined for the other countries entered the region through South African ports.  In 2006/07, South Africa collected R5.2 million in import duties payable on R1.75 billion of bonded goods destined for the other countries.

A major concern was the extent of the dependency of Swaziland, Lesotho, Namibia and Botswana on customs revenue.  In the case of Swaziland, customs revenue represented 70% of the country’s total annual revenue budget.  This dependence exposed the countries concerned to economic volatility.  The presentation included graphs to illustrate the negative effects of the global economic downturn.

All SACU countries agreed that the revenue sharing formula had to be changed to achieve a sustainable arrangement, to support regional infrastructure development, to increase the level of transparency and Parliamentary oversight, to expand the Union and to contribute to a reduction in non-tariff barriers, harmonised customs systems and procedures and fiscal and tax administration reform.  An outline of the proposed changes and other tentative ideas was provided.

The briefing was concluded with proposals for the way forward.  The National Treasury hoped that negotiations would be concluded and the new agreement finalised before the end of the current fiscal year, for implementation by 2011/12.

Discussion
Mr M Oriani-Ambrosini (IFP) observed that opportunities were created during times of crisis.  The current agreements were not sustainable and arose from a historical situation.  The economic downturn provided the reason to change the agreements in place.  He said that South Africa considered the protocol on the free circulation of people between the SADC countries as too problematic.  Within SACU, the free circulation of goods, capital and labour was not a problem.  The funds in the common revenue fund could be utilised to implement a process of integration and he asked if the free circulation of people within SADC would be considered.

Mr D Van Rooyen (ANC) welcomed the presentation and agreed with Mr Oriani-Ambrosini’s view that the revenue generated should be applied for the purpose of integrating the countries in the Southern African region.  He asked to what extent the Union was empowered to realise the objectives of SACU and if any monitoring took place.  He asked if any other models of customs unions had been investigated.

Ms Z Dlamini-Dubazana (ANC) thanked the National Treasury for the presentation and noted the acknowledgement that further research was necessary.  She asked how accurate the data was that would be used in the new revenue sharing formula.  She asked if the status of the individual SACU countries could be determined with any accuracy.  She pointed out that South Africa incurred most of the overhead costs associated with the infrastructure and should be adequately compensated.  She noted that there were many trucks traveling through South Africa to deliver goods to Zimbabwe.  She asked if the process of including Zimbabwe into SACU could be expedited to prevent the continued loss of revenue by South Africa.

Mr M Motimele (ANC) said that any strategy developed needed to address two critical issues, namely the reduction of the extent by which SACU countries depended on customs revenue and the utilisation of such revenue to grow the South African economy.  Customs revenue agreements should not result in the creation of parasite or charity states.  He asked that the strategy developed was presented to the Committee for consideration.

Dr Z Luyenge (ANC) agreed with the comments of the other Members of the Committee concerning the role of South Africa in SACU.  He wanted to know what the impact was of the free trade agreements on South Africa and on the other SACU member countries.  He asked if there was any link between SACU and the World Bank for the purpose of realising the agenda for the development of infrastructure and if SACU or the member countries had any loans from the World Bank for this purpose.  He asked for a more detailed explanation of the ‘parallel consultations’ that were taking place in the other SACU countries.

Mr N Koornhof (COPE) asked if there was a possibility that the new formula could financially destabilise the economies of the SACU countries.  He noted that SACU countries were signing agreements with the European Union (EU) and asked if these agreements had resulted in disagreements between the members of SACU and what the impact of the agreements would be on the Union.

Mr E Mthethwa (ANC) noted that different systems were used at border posts and how the accuracy of the data collected on duties was verified.  He remarked that major delays at border posts were caused by the large number of trucks passing through borders and wanted to know what steps were being taken to synchronise the procedures followed at border posts.  He asked how the matter of the other trade agreements entered into by SACU member countries was dealt with.

Mr Cole replied that the issue of the free movement of people and goods between countries had a political and an economic aspect.  His response would be limited to the economic perspective.  The SACU agreements did not address the issue of free border crossing.  SADC had produced a document on the strategy for the development of regional integration, which included the promotion of free trade, free markets and the free movement of goods and services between SADC countries.  Analysts assessing the land-locked countries in the Southern African region have agreed that the free movement of capital, people, goods and services was desirable.  He thought that such agreements would assist in solving the current problems experienced with migration and immigration.  The SADC document was a statement rather than an agreement and was based on the arrangement between EU countries.

Mr Cole agreed that appropriate models had to be considered to develop a framework whereby the common revenue fund could be used to support regional integration and the development of infrastructure.  The Development Bank of Southern Africa could be approached for assistance as the bank had undertaken several projects in the region and had developed expertise and an understanding of the technical aspects of the terrain.  The African Development Bank had recently opened a regional office in South Africa and worked closely with the Development Bank of Southern Africa.  Parts of other models could be used, for example the Common Market of Eastern and Southern African states (COMESA) was making progress towards developing a customs union.  Other examples could be found in East Africa, the EU, the Gulf States and the Caribbean.  He felt that the Southern African environment had to be considered and the impact of undoing agreements that had been in place over the previous 100 years on the countries involved had to be taken into account.

Mr Cornelissen explained that the revenue and growth forecasts were substantially reduced in the previous year.  Customs revenue was adversely affected by the global economic downturn.  South Africa had weathered the downturn relatively well, compared to other developed countries but was nonetheless severely affected.  The forecasted customs revenue was determined a year in advance and the countries were locked into the agreement.  The amount of revenue could not be revised until the actual revenue generated was established.  The economy reflected a slow recovery rate and currently stood at the levels achieved in 2005/06.  He acknowledged that the forecast made during the previous two years had been incorrect but it was difficult to make accurate predictions in recessionary periods, when demand patterns were driven by psychological as well as economic factors.  More detailed statistical data was available to the Committee, if required.

Mr Cole explained that South Africa had the largest economy on the African continent and would play the most significant role in any regional arrangement.  Lesotho, Botswana and Swaziland were land-locked and shared borders with South Africa.  South Africa had strong historical ties with Namibia.  Given the manufacturing capacity of South Africa, he expected that most of the trade with the SADC and SACU countries would continue to be transported through South Africa.  South Africa was the major provider of manufactured goods in the region, which raised questions over the fact that the other countries were virtually forced to trade with South Africa even if cheaper imports from other countries were available.  The question was being asked if the other countries should be compensated for the unequal balance in trade.  A similar situation existed in the EU, where Germany and France paid proportionally more into the structural development fund than the smaller EU member countries but had a greater say over the fund.

Mr Cole said that there were 12 million Zimbabwean citizens and prior to 2000, the country was South Africa’s largest trading partner.  The current figures were still impressive and an economic arrangement with South Africa made sense.  He thought that the SACU membership of Zimbabwe would be beneficial and the currency situation of Zimbabwe would improve if that country was associated with a common monetary area.  SACU membership of Angola should be considered as well.  The two critical issues raised by Mr Motimele would be borne in mind when proposals were developed and should form the pillars of the new arrangements.  It was essential that the new agreements were sustainable.

Ms Leolo advised that the impact of the free trade agreement between SACU countries was limited.  Most imported goods were destined for sale in South Africa and very little were subsequently re-directed for sale in the other countries.

Mr Cole said that an example of infrastructure development was the large project to build a bridge over the Zambezi River between Botswana and Zambia.  He expected that the completed bridge would result in an increase in goods moving between South Africa and Zambia.  The World Bank had undertaken studies in the region that would have a bearing on SACU.  SACU did not have a loan from the World Bank but certain SACU states had loans from the World Bank and the Development Bank of Southern Africa to provide budgetary support and for certain infrastructure projects.  There was a consultation process underway in the other SACU countries, which was similar to the informal consultations held in South Africa between Government Departments and other stakeholders.

Mr Cole agreed that the economic destabilisation of the SACU countries must be avoided.  The dependency of these countries on customs revenue had increased since the agreements made in 1969.  Any new agreements have to be implemented over a period of time and required complementary tax and fiscal policy reform.  A new revenue authority had been established in Swaziland and that country had acknowledged that its dependency on customs revenue was not sustainable.  It was well known that the economic partnership agreements between certain SACU countries and the EU had caused major disagreements in the Union.  The Department of Trade and Industry had advised that agreement on the EU arrangements would be reached by December 2010 but certain unresolved issues remained.

Mr Cornelissen conceded that the accuracy of the data collected at border posts was a cause of concern.  The discrepancies formed a major part of the discussions during trade reconciliation meetings.  SARS was currently engaged in modernising the customs systems and in building the capacity to use the new systems.  He expected the new system to be implemented within one to two years.  He expected that the other SACU countries would resist the establishment of one-stop border posts as customs revenue formed such a large proportion of total revenue.  The new trade agreements and systems would ease the congestion experienced at border posts.

Mr Cole advised that the concept of one-stop border posts was desirable.  The Minister of Finance had issued a directive for the development of a policy framework, based on the experience gained at the Lebombo/Mozambique border post.  He was confident that the support of the SADC and SACU countries would be gained.

Ms Dlamini-Dubazana suggested that the policy applicable to the disposal of the goods confiscated at border posts was reviewed and taken into consideration in the revenue sharing formula.

The Chairperson thanked the delegates for the briefing.  She said that ongoing engagement with the Committee was necessary and advised that the Members would be involved in discussions to formulate the Committee’s approach on the matter.

The meeting was adjourned.


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