Minister of Finance's overview of the economy; South African Revenue Service & National Treasury 2011 Strategic Plans; Resolution on International Monetary Fund managing director appointment

This premium content has been made freely available

Finance Standing Committee

30 May 2011
Chairperson: Mr T Mufamadi (ANC)
Share this page:

Meeting Summary

The Minister reported that South Africa would still hopefully achieve 3.4% growth. Employment had been growing and over 200 000 jobs had been created in the first quarter of this year compared with the last quarter of last year, although this pace of employment creation was certainly inadequate in the face of the challenge of creating five million jobs by 2020. Globally prospects were very uncertain. Thus we should be appreciative that South Africa’s economy was on a reasonably steady footing. However, there was concern at the sovereign risk in Europe and the stability of its banking systems, the slower growth in the United States of America, and the increasing potential for inflation impacting negatively in countries such as China and India, which were important trading partners for South Africa. However, Africa was reflecting some of the fastest growing economies in the world, although from a very low base. The global growth of around 6% or 5.5% was pulled through largely now by developing and emerging economies, and not the developed economies, and as we moved into the next five or 10 years that would become a more permanent feature of global growth too. It was important to build greater confidence amongst our economic players so they saw it as a worthwhile business exercise to invest more of their surplus cash in the South African economy. It was investment that created new jobs; it was investment that either grew existing businesses or created new businesses. It was investment, ultimately, that would grow economies as well. The elections demonstrated that local government needed to be strengthened and those delivery systems required to be upgraded to enable better and more effective service delivery to our people with better support to municipalities. There would be a greater emphasis on reprioritising expenditure. The Accountant-General would release a circular on new rules for procurement. Details of all tenders worth more than R500 000 must be submitted to the provincial treasuries or to the National Treasury. Names of all companies submitting tenders would be published on the relevant department’s website. Bidders would be required to disclose the names of all directors and senior officials. The first list of just over 100 individuals or entities that the state should not be dealing with in future had also recently been published on the National Treasury website. The Minister said that it was important for us, just as much as we had democratised South Africa, to ensure also that we were active players in democratising international institutions such as the International Monetary Fund.

National Treasury told Members that in the last financial year part of the improvement in the fiscal position from a deficit of 5.3% to 5% had been as a result of the positive contribution made by the SARS by realising a higher than targeted revenue collection in the order of R2 billion. There were some risks. Although inflation remained moderate, currently at 4.2%, it was likely to rise a little and the average for the full calendar year would be about 5.1%, but still within the target and it was likely to touch the higher band of the inflation target range by 2012. Rising fuel prices and the impact of food prices were beginning to bite. Debt servicing costs would tend to rise. Unemployment remained stubbornly high. South Africa experienced, like many other parts of the emerging world, some capital inflows, which tended to lead to the strengthening or deterioration of the currency. There were other global risks as well. Growth in Europe was somewhat weak and that could hurt our exports. An announcement of the R9 billion jobs fund was made at the time of the budget and this was intended to support the expansion of existing programmes and also to pilot some innovative approaches to employment creation with a special focus on employment opportunities for young people. National Treasury had introduced a savings and expenditure reprioritisation programme which enabled recouping some R20 billion in this year’s budget which had been taken away from programmes or areas that were of lesser priority and channelled towards key priority areas. Major reforms in the social security system and health financing were the subject of investigation in the period ahead. A paper was published in February on the youth employment subsidy and was currently under review in the context of the National Economic Development and Labour Council. National Treasury had allocated substantial resources to infrastructure and development over the next three years.

Members requested the Minister to take the matter of appointing a new managing director for the International Monetary Fund to Cabinet and ensure that Africa was promoted. There was need for some sort of effort from Government as a whole and maybe Parliament must take up the matter. Perhaps the Chairperson could introduce in the National Assembly discussion on action on South Africa’s candidate. Members asked if the increased wage bill was not a threat to South Africa’s inflation target, hoped that savings were not the result of under expenditure, welcomed the review of the equitable share formula, asked about the impact of the events in North Africa on the price of fuel and inflation pressures, and asked about supply chain management corruption and the measures to address it and to what degree Members would be able to access information arising from this. The Protection of Information Bill might have an impact on Members in their access to that information which might be declared classified. If so, Members needed to know because that Bill was vastly different from the Bill that the Cabinet had considered. Members asked how many new jobs were created by the private sector, if the National Treasury still supported Public Private Partnerships in relation to prisons, and asked about the National Treasury’s outcomes and training. National Treasury needed economists and financial expertise, but there was nothing about the training programme of those personnel. For the economy to grow, skilled persons were needed. Members asked what the benefits of membership of the BRICS group - Brazil, Russia, India, China and South Africa - were, and if the Department was satisfied with the implementation of the Public finance Management Act. Members were also concerned about gender representation in the National Treasury.

The Minister introduced the presentation from the SARS. He had just received news that the first quarter gross domestic product had been calculated at 4.8%. This was excellent. What was extremely encouraging was the strong growth in manufacturing. He asked the Standing Committee to take account of the growth prospects and therefore the revenue prospects. The target for this year was R741 billion, and over the next three years it was hoped to collect well over R2 trillion in contributions to the fiscus. It was equally necessary to be mindful of the global risks previously mentioned, any of which could have a negative effect on South Africa’s growth prospects and therefore revenue prospects. The key was to grow the economy by creating more businesses and employing more people and thus collecting more taxes. However, recessions increased tax avoidance and evasion. The Minister gave the example of United States based companies which were holding over $1 trillion offshore, and would not bring that money back into the United States, not withstanding all the difficulties with debt that the country had, unless they paid a lower rate of tax than 35%. This was an example of corporate citizenship going wrong. Recession further meant that developed countries were facing fiscal pressures themselves, so they were putting pressure on developing countries under the heading of domestic resource mobilisation. South Africa was, fortunately, not dependent on aid, and, in the SARS, had an excellent example of the mobilisation of domestic resources. The focus for the SARS this year would be continuation of improvement in the service that the SARS provided to South Africans, and the extension of the modernisation programme to value added tax and to customs. Moreover, the point had been reached where the products developed in the SARS could be used elsewhere in Government. The Department of Home Affairs was one example. Thus one could save a good deal of money by avoiding re-inventing the wheel. The Minister spoke about customs modernisation. This would facilitate trade in the South African Customs Union and also across the African continent. It would also avoid arguments in the Union about trade data.

The SARS had identified four enduring core outcomes: increased customs compliance, increased tax compliance, increased ease and fairness of doing business with the Service, and increase cost effectiveness, internal efficiency and institutional respectability. These would be achieved through the SARS compliance philosophy which linked its actions to the degree of tax payer or trader compliance. To this end, the SARS sought to nurture willing participation and building fiscal citizenship. The SARS Commissioner commented on the importance of the SARS monitoring programme. It had achieved a record of four million taxpayers filing their submissions. R674 billion had been collected in the past fiscal year. This was a 13% growth. The SARS emphasised the need to ensure accountability and register those who had the potential to become tax payers. The Service was expanding the use of third party data, and expanding the Voluntary Disclosure Programme to include overseas entities. The Service was developing greater collaboration with other Government departments and agencies, in particular the Department of Home Affairs. The SARS sought to strengthen its leadership to make the organisation more agile.

Members commended the SARS for exceeding its target the previous year. This was commendable and might assist with debt levels and the deficit on the budget. Members asked what further steps the Service intended to take to deal with internal corruption. Members also commended the good work the excellent work of the Service’s parliamentary liaison office, which was most helpful and fair to Members. Members asked how realistic the Service’s protections were, what the role of the World Cup was in the increased collection of revenue, and observed that the strategic plan had moved from11 strategic priorities to seven over the past three years. What benefits would this actually yield to the Service’s approach? Members asked why there were delays in obtaining tax certificates. The Chairperson asked to what extent these compliance measures assisted the Service. The Committee would monitor with keen interest the implementation of the plan and offered to interact dynamically. He thought that small, medium and micro enterprises needed special attention, since almost 50% of jobs were created in that sector.

The Standing Committee adopted a resolution that the South African Government should continue to give the matter of the appointment of the next International Monitoring Fund managing director the serious attention that it deserved and reaffirmed the Group of 20 resolutions that the appointment be made through an open, transparent and merit based process. The Committee believe that developing countries had the ability to put forward candidates who had the appropriate merit and experience

Meeting report

Introduction
The Chairperson welcomed the Minister of Finance and the many delegates from the National Treasury and the SARS Commissioner and his team. The Chairperson congratulated Mr Lungisa Fuzile on his appointment as Director-General, National Treasury, and noted that in the past Mr Fuzile had been strict in handling the provincial fiscal system.

Minister of Finance introduction
The Minister of Finance, Pravin Gordhan, reported that notwithstanding the rather gloomy economic environment in which we lived globally we tended to forget the good things that were happening in South Africa. Whilst much of the developed world had growth of less than 3%, in South Africa we were moving in the right direction unless something untoward happened and we would still hopefully achieve the 3.4% growth that we were talking about; employment had been growing and, as would be seen from the slides, over 200 000 jobs had been created in the first quarter of this year compared with the last quarter of last year. Although we would also see that this pace of employment creation was certainly inadequate in the face of the challenge of creating five million jobs by 2020.

Globally, as the DG would explain, it was very uncertain. This is why we should be appreciative of the fact that our own economy was on a reasonably steady footing and nothing was happening in our economy of an extraordinary nature that we needed to be concerned about. However, for many months now, indeed for almost a year, we had been concerned at the sovereign risk in Europe and the stability of its banking systems, and the slower growth in the United States of America (USA) and the data that had emerged, and more recently the increasing potential for inflation impacting negatively in countries such as China and India, which were important trading partners for South Africa, and those uncertainties gave rise to a certain amount of gloom globally. The longer these uncertainties lasted, the more uncertainty they created. However, it would appear that political problems in those environments made it impossible for governments in those geographical areas to resolve their problems sooner rather than later.

On the positive side though, Africa was reflecting some of the fastest growing economies in the world, although from a very low base. Africa had become recognised, although slowly in some fora as a new pole of growth and demand and within the context of multi polarity there was a situation in which we looked at many more countries or regions which we looked at as sources of growth and demand, and as locomotives for joining the world economy Africa would become more and more prominent. It was a fact of life that the world itself was going though an important transition in which the global growth of around 6% or 5.5% was pulled through largely now by developing and emerging economies, and not the developed economies, and as we moved into the next five or 10 years that would become a more permanent feature of global growth as well..

If we were to give real emphasis to the New Growth Path, if we are to create 5 million jobs, there were a number of things that we as South Africans would have to approach with a greater sense of urgency and determination. Amongst these we need to ask how we give greater impetus to growth itself.

Secondly, it had to be asked how we could change the quality of growth so that it became more inclusive.

This meant that all of our people should be beneficiaries of that growth.

Thirdly it was necessary to undertake with a greater sense of urgency some of the microeconomic reforms of the bottlenecks in our economy that we were well aware of. There are still too many people in the mining industry, for example, who complained that their products cannot be exported quickly enough or in the quantities that they desired because of delays in getting to or through the ports, or that they could not be beneficiated before they exported.

An important challenge in the present circumstances was how to build greater confidence amongst our economic players so they saw it as a worthwhile business exercise to invest more of their surplus cash in the South African economy. Like companies elsewhere in the world, South African companies have a fair amount of surplus cash which they were not investing and one of the tasks that all of us had was to break this confidence barrier and to ensure that there was in fact this bolder approach to investment. It was investment that created new jobs; it was investment that either grew existing businesses or created new businesses. It was investment, ultimately, that would grow economies as well.

Secondly the elections had demonstrated that local government needed to be strengthened in more ways than one and that delivery systems required to be upgraded to enable better and more effective service delivery to our people with better support to municipalities. The Ministry was still running a sound fiscal shift and the kind of fiscal consolidation that South Africa was approaching in a fairly balanced way was still the most responsible and correct way of doing things. However, it was necessary to be aware that, given the crises elsewhere there must be a sterner look at how we managed our own expenditure. We needed to be much more mindful about taking a balanced, but careful approach to how we spent money and the extent to which we borrowed to spend money, and, more importantly, borrowing should be for investment purposes and not for consumption. Linked to that, there would be a greater emphasis on reprioritising expenditure in order to ensure that it was the priorities that received the money and not projects and programmes that did not fit into the priorities.

In respect of procurement, the issues of supply chain mismanagement and allegations of corruption had been fairly severe from all quarters in South Africa. Over the past two years a number of measures had been taken to address this particular question. The Accountant-General in the next 24 hours would release a circular that would give expression to some of the things that we said that we would do in the budget. Because procurement was such an important part of the expenditure of the state, and therefore of the tax payers’ money that the Commissioner and his 15 000 colleagues collected dutifully, it was necessary to ensure that supply chain processes were as watertight and as accountable as they could be. The key issue under these regulations was that national and provincial governments, constitutional institutions, and Schedule 3 A and 3C entities, would have to give advance notice of their intention to put out work to tender and they should file an annual tender plan. Details of all tenders worth more than R500 000 must be submitted to the provincial treasuries or to the National Treasury, and a monitoring mechanism would be developed by the National Treasury. In the interest of transparency Names of all companies submitting tenders would be published on the relevant department’s website. Bidders would be required to disclose the names of all directors and senior officials. This would enable governmental departments to verify whether any directors or senior officials were in the service of the state, and whether they had been previously restricted from doing business with the state or were linked to previously restricted suppliers. The first list of just over 100 individuals or entities that the state should not be dealing with in future had also recently been published on the National Treasury website. Specific information of successful bids must be published so that members of the public could have access to it. Information would include contract numbers and descriptions, names of successful bidders, preferences claimed, contract prices, and other relevant information. There would be limits on variations to existing contracts or aspects thereof. This was an important control mechanism that needed to be put in place. The Minister noted that this was one example of delivering on the undertakings previously given.

We were all aware that Mr Strauss-Kahn, the former managing director of the International Monetary Fund (IMF), had resigned on account of certain allegations against him which had to be tested in court. That opened up a vacancy for the position of managing director. For the past 40 years the traditional understanding was that the head of IMF was to be appointed from a European country while the head of World Bank would be appointed from the United States of America (USA) and that any time there was a vacancy, the vacancy would be filled on that basis. However, for some years now, developing countries in particular have been demanding that these institutions should democratise themselves and that they meet the requirements of the 21st century in terms of transparency and other issues. This came to a head, and there had been any number of studies in the World Bank and in the IMF of what these governance transformations were that needed to occur in the two institutions. In September 2009, when leaders of the Group of 20 (G20), including President Zuma and others, issued a communiqué which for the first time agreed on the following:

‘Modernising the IMF’s governance is a core element of our efforts to improve the IMF’s credibility, legitimacy and effectiveness.’ (Paragraph 21)

‘The IMF should remain a quota based organisation.’ (Paragraph 21)

The quota basis was another contested area. But who was allocated what share of the quota determined what kind of vote. There were some interesting dynamics that were emerging, as a result of which one was now finding in the developing countries that there was a distinction between dynamic emerging markets and developing countries.

(Paragraph 21) went on to say:

‘Amongst the changes that need to be made will be the size of any increase in the IMF quota which will have a bearing on the ability to facilitate changes in quota shares, the size and composition of the executive board, ways of enhancing the board’s effectiveness, and the fund governor’s involvement in the strategic oversight of the IMF. Staff diversity should be enhanced, in other words, there should be more people from other parts of the world and with diverse mindsets and philosophical backgrounds.’(Paragraph 21)

The following was the key part:

‘As part of the comprehensive reform package we agree that the heads and senior leadership of all international institutions should be appointed with an open, transparent and merit-based process.’ (Paragraph 21)

In other words it was longer part of the 20th century deal about what the US does and about what Europe does. It was necessary urgently to implement the package of the IMF quota and reforms that the G20 had agreed in April 2008.

There was thus a commitment from the G20 that the heads of these institutions and the senior leadership should happen through an open, transparent and merit-based process. The Standing Committee would be very aware that even before the managing director resigned some individuals in the European context were saying that the next head of the IMF should be a European. Many developing countries were disappointed and dismayed by what we heard because we thought that this was the commitment that we had reached within the G20.

As a result, Brazil, Russia, India, China, and South Africa – the BRICS countries, issued a statement last week asking that these principles be implemented in the choice of the managing director. That process was still ongoing. However, it was important for us, just as much as we had democratised South Africa, to ensure also that we were active players in democratising international institution, so that the voices of developing countries were heard in those important processes as well.

National Treasury on its 2011 Annual Strategic Plan: Director-General’s Briefing
Mr Lungisa Fuzile, Director-General: National Treasury, said that National Treasury’s mandate was derived from Chapter 13 of the South African Constitution, and was also reinforced by certain provisions in the Public Finance Management Act (PFMA) and other pieces of legislation such as the Municipal Finance Management Act (MFMA) and the Banks Act. The aims of the National Treasury Department in broad terms included the fiscal policy framework and coordinating macroeconomic policy, preparing a sound and sustainable national budget, equitable division of resources, which happened annually, equitably and efficiently fiscal revenue while enhancing efficiency and competitiveness of the South African economy. Also it was about managing sustainable and making effective use of Government assets and liabilities and promoting improved public accountability and enforcing effective financial management. It would become clearer how we attained these objectives. (Slides 2-3, on Treasury aims and objectives).

Within the context of the Government’s outcomes approach, we now pursued these objectives of the National Treasury. Whilst the work of the National Treasury was in many ways cross cutting, there were three of the 12 outcomes to which the National Treasury contributed directly. The first of these was decent employment to improve economic growth. The second was responsible local government. The last one was an efficient and effective development-orientated public service and an empowered, fair and inclusive citizenship. (Slide 4)

The Minister had already indicated that there were a number of positives that needed to be acknowledged, while highlighting the risks. Among the positives was the fact that the South African economy had been growing since turning the corner after the global financial crisis. Whilst in the budget it was projected that the economy would grow at 3.4% in this calendar year, already some analysts including the South African Reserve Bank had started to talk about the possibility that growth might exceed what National Treasury had projected in February 2011. The South African Reserve Bank (SARB) was envisaging 3.7% growth for this year, and this was supported by the stable macroeconomic conditions currently prevailing. Inflation remained moderate. At the last reading it was at 4.2%. That created a basis of course for low interest rates, which were at 23 year lows at the moment. Employment was projected to grow annually at 1.8%, and Statistics South Africa (Stats SA) had already indicated that just over 200 000 people were engaged in employment between the last quarter last year and the first quarter of this year. South Africa was now a member of the BRICS. This presented a platform for South Africa to contribute towards facing economic reform and taking advantage of a whole number of opportunities that would arise from that special relationship. It was known that in the last financial year part of the improvement in the fiscal position that National Treasury had published in February from a deficit of 5.3% to 5% had been as a result of the positive contribution made by SARS by realising a higher than targeted revenue collection in the order of R2 billion. (Slide 5)

Having noted those positives there were some risks. Although inflation remained moderate, currently at 4.2%, it was likely to rise a little and the average for the full calendar year would be about 5.1%, but still within the target and it was likely to touch the higher band of the inflation target range by 2012. We were all aware that rising fuel prices and the impact of food prices were beginning to bite. Because we were coming out of the global financial crisis, our fiscal position had deteriorated though it was set to improve going forward. However, we would continue to accumulate debts in the period ahead and accordingly debt servicing costs would tend to rise. Unemployment remained stubbornly high. South Africa experienced, like many other parts of the emerging world, some capital inflows, which tended to lead to the strengthening or deterioration of the currency. There were other global risks as well. Growth in Europe was somewhat weak, while Europe was still a significant trading partner of South Africa and therefore that could hurt our exports. Europe was yet to emerge from and even deal decisively with the sovereign debt problems that arose from Southern Europe, in particular Greece and Ireland, and of course there were a range of banking risks on the horizon in Europe. Some emerging market economies had started to experience inflation pressures, which if they necessitated some tightening, would dampen the prospects for growth there and could affect us too. (Slide 6)

There were certain strategic programmes of Government that had been announced over a period of time in the President’s State of the Nation Address (SONA) through to the Budget. National Treasury contributed to some of these through the business that it was involved in. Chief among these was employment creation. An announcement of the R9 billion jobs fund was made at the time of the budget and this was intended to support the expansion of existing programmes and also to pilot some innovative approaches to employment creation with a special focus on employment opportunities for young people. National Treasury had introduced a savings and expenditure reprioritisation programme which saw us being able to recoup in the order of R20 billion in this year’s budget which had been taken away from programmes or areas that were of lesser priority and channel them towards key priority areas. This would continue in the period ahead and the focus was to ensure that within the existing envelop it was possible to do more of the things that the Government had identified as priorities. The Minister had already touched on the need to reform the supply chain and enforce compliance in this regard. The idea was to combat corruption and fraud in the public sector. Major reforms in the social security system and health financing are the subject of investigation in the period ahead. Sustainable funding models were being explored for these initiatives and of course the first stage of implementing the National Health Insurance was announced in February 2011. This included strengthening the health care system through building of hospitals and other initiatives. Of course, again, the issue of employment but now addressed in a more focused way in terms of the paper that was published in February on the youth employment subsidy. Comments in this regard have been received and the document was currently under review in the context of the National Economic Development and Labour Council (NEDLAC). Of course, the National Treasury had allocated substantial resources to infrastructure and development over the next three years. (Slide 7)

Mr Fuzile gave a quick overview of the structure and composition of programmes that fell within the Treasury Vote. Some of the programmes had not changed, but if Members looked at the numbers they would see some changes because of reconfiguration of some of the programmes.

The structure had been modified as follows:
•Programme 1 – Administration (no changes)
•Programme 2 – Economic Analysis and Forecasting, Taxation, Financial Regulation & Research
(2 divisions – Economic Policy and Taxation, and Financial Security Policy, was programme 6)
•Programme 3 – Public Finance and Budget Management
(no changes in composition, was programme 2 previously)
•Programme 4 – Asset and Liability Management
(no changes in composition, was programme 3 previously)
•Programme 5 – Financial Accounting and Reporting
(2 divisions – no changes in composition, old programmes 4 & 5 previously)
•Programme 6 – International Financial Relations
(International & Regional Economics, was part of programme 6)
•Programme 7 – Civil & Military Pensions, Contributions to Funds & Other Benefits
(no change on the composition, was programme 8)
•Programme 8 – Technical & Management Support & Development Finance
(was part of programme 2)
•Programme 9 – Revenue Administration
(was part of the fiscal transfers programme)
•Programme 10 – Financial Intelligence and State Security
(was part of the fiscal transfers programme)
(Slides 8-9)

Programme 1 - Administration
• Corporate Services responsible for the overall strategic management and support for the department.
Plans over the next three years:
•Enhance the talent management programme to ensure relevance to the needs of the department
•Continue leadership development to create a pool of senior management cadres (from Deputy Director level)
•Implement in-year monitoring tool to improve financial management and reporting from six to two days
•Develop ICT systems and services in support of organisational objectives
•Implement an automated registry where departmental information could be stored, managed and accessed electronically

Administration would emphasise talent management which could be drawn upon when vacancies at senior level occurred and developing ICT systems and an automated registry with a view to the paperless office. (Slide 10)

Programme 2: Economic Analysis, Tax, Financial Regulation and Research
•Provide specialist policy research, analysis and advisory services in the areas of macroeconomics, microeconomics, taxation, the financial sector, and regulatory reform. Comprised 2 divisions: Economic Analysis and Forecasting, and Tax and Financial Sector Policy
Plans over the next 3 years:
•Develop and maintain economic forecasting models that facilitated sound policy making through in-depth economic analysis, including macroeconomic forecasts
•Monitor the exchange rate and explore policy measures to ensure competitiveness
•Formulating and implementing annual tax proposals
•Produce policy paper on carbon tax proposal for Cabinet approval and submit proposal for the 2012 Budget
•Explore policy measures to increase private savings
•Conduct consultations and implement proposals related to strengthening the financial regulatory system (“A safer financial sector to serve SA better”)
•Publish a policy document with proposals on modernising the framework for inward and outward investment
•Explore models for financing the National Health Insurance (NHI), with the first steps towards its launch announced in the 2011 budget. (Slides 11-12).


 Programme 3: Public Finance and Budget Management
•Provide analysis and advice on fiscal policy and public finances, intergovernmental financial relations, and expenditure planning and priorities. Manage the annual budget process and provide public finance management support. Comprised three divisions: Public Finance, Budget Office, and Intergovernmental Relations.
Plans over the next 3 years:
•Establish a Capital Projects Unit to evaluate options for investment in liquid fuels supply capacity, review solar park proposals and conduct pre-feasibility review of major projects in water and transport sectors
•Work with programme 2 to develop a policy framework for social security reform
•Introduce longer-term expenditure estimates for selected programmes and entities
•Monitor expenditure on a monthly and quarterly basis and provide analysis of expenditure trends
•Improve the budget process and provide information by government function
•Refine the new disaster funding grant mechanism and other aspects of managing disaster response
•Extend the coverage of the consolidated account to include information on the consolidated accounts and borrowing of government
•Broaden focus of ODA funding to include economic and rural development, employment creation and public service delivery improvement
•Review the provincial and local government fiscal framework in line with national budget framework and policy objectives
•Review the equitable share formula for local government and provinces to improve targeting of resources in favour of the poorer geographical areas and pro-poor programmes
•Implement key local budget reforms to improve budget implementation and reporting (slides 13-14).

Programme 4: Asset and Liability Management
•Prudent management of Government’s financial assets and liabilities. Comprises one division: Asset and Liability Management
Plans over the next 3 years
•Finance government’s gross borrowing requirements of about R575 billion
•Maintain sound investor relations through road shows and enhanced dissemination of information
•Actively manage Government’s debt portfolio through buy-back and switch/exchange programmes – debt set to rise to R1.4 trillion or 39.4% of gross domestic product (GDP)
•Maintain debt service cost as percentage of GDP at sustainable levels – between 2.6 and 2.9 % of GDP
•Optimise the use of public sector cash through broadening the coordination thereby reducing borrowing cost
•Strengthen financial oversight and monitor economic performance of Development Finance Institutions (Development Bank of Southern Africa (DBSA) and Land Bank in particular)

In terms of the new configuration the above would assure prudent asset and liability management. Debt was expected to rise and this unit would manage debt to ensure it was sustainable and would strengthen oversight and emphasise infrastructure investment. (Slide 15)

Programme 5: Financial Accounting and Reporting
•Facilitated accountability, governance and oversight by promoting transparent, economic, efficient and effective management in respect of revenue, expenditure, assets and liabilities in the public sector.
Comprised two divisions: Specialist Functions and Office of the Accountant General
Plans over the next 3 years
•Roll-out strategic sourcing principles to 42 medium capacity municipalities and introduce the strategic sourcing principles to 30 low capacity municipalities
•Promulgate and implement revised preferential procurement regulations, and monitor implementation of the revised preferential procurement regulations
•Review of procurement legislation in consultation with relevant stakeholders
•Apply strategic sourcing methodologies to improve value for money in 32 transversal term contracts.
•Implement completed Integrated Financial Management System (IFMS) modules in identified departments
•Issue Treasury Instructions as a step to enforce supply chain compliance and to counter fraud and corruption
•Develop guidelines to strengthen the monitoring and oversight function of Parliamentarians
•Monitor improvements in financial management in national and provincial institutions and report to the Standing Committee on Public Accounts (SCOPA) and the Standing Committee on Finance (SCOF) by August 2011
•Implement Financial Management (FM ) Capability Maturity Assessment in selected municipalities and entities
•Manage an academic support programme for chartered accountants (CAs) and other accountants in Government (17 participants in 2011)
•Provide targeted support to priority departments and municipalities to improve financial management.
(Slides 16-17)

Programme 6: International Financial Relations
•Advance South Africa’s economic interests through regular strategic analysis, engagement and negotiation at financial and economic forums. Increase Africa’s voice and improve South Africa’s participation in international institutions. Promote regional economic integration in the Southern African Development Community (SADC) and strengthen economic links within Africa. Comprised one division: International and Regional Economic Policy
Plans over the next 3 years:
•Finalise agreement on a new revenue-sharing formula in the Southern African Customs Union (SACU)
•Formulate proposals and establish a regional infrastructure fund
•Increase shareholding in the African Development Bank to 6% - part of the process to increase South Africa’s voice and shareholding
•Promote and support the development of African countries
•Facilitate engagements between regional and international institutions and the Ministry of Finance
– Group of 20 (G20), International Monetary Fund (IMF), World Bank …
(Slide 18).

Programme 8: Technical and Management Support & Development Finance
•Promote public and private investment in infrastructure and public services by providing technical support for capital expenditure planning and Public Private Partnerships (PPPs), advice on financing alternatives for municipal development, and financial assistance for neighbourhood development projects
•This programme had six sub-programmes including the new jobs fund which supports the creation of self-sustaining employment, and the post-disaster recovery and reconstruction transfer which deals with post-disaster recovery activities.
Plans over the next 3 years
•Build project management capacity in government
•Ensure improved infrastructure delivery, through the implementation of the Infrastructure Delivery Improvement Programme (36 Technical Assistants, four in each province)
•Support municipalities in planning and implementing integrated neighbourhood development programmes in townships
•Develop project appraisal methodology for capital and infrastructure projects.
(Slide 19)

Programmes 7, 9 and 10 reported directly to Parliament. (Slide 20)

National Treasury presented its resource plan for 2011 with figures for 2010/11 budget, 2010/11 preliminary outcome, and 2011/12 for administration, economic policy, tax, financial regulation and research, public finance and budget management, asset and liability management (operational budget, Eskom, Land Bank), financial systems and accounting (operational budget, transfers), international financial relations (operational budget, transfers), subtotal, operational budget, transfer budget, percentage of operational to transfer budget, civil and military pensions, contributions to funds and other benefits,
technical support and development finance, operational budget, transfers, revenue administration, financial intelligence and state security, and grand total (slide 21).

Discussion
Mr D van Rooyen (ANC) welcomed the presentation and complimented the Minister and the new DG. He observed that in the way Europe was approaching the matter of appointing a new managing director of the IMF there were one or two things that one needed to learn as emerging markets or developing countries. Europe was not leaving the lobbying for its candidate to individuals; the lobbying was done by the governments of the concerned countries. This was not the way it was being done here in Africa. There has only been a suggestion from the ministry, and this was not enough. It was necessary to take the matter up collectively. From his perspective, it was quite a strategic move and would obviously affect how we built the confidence of the investors into our continent. The Minister of Finance of France was now in Brazil to lobby specifically and Africa was targeted. We were not taking these developments seriously enough. The Minister must take this to Cabinet and ensure that Africa was promoted.

Mr Van Rooyen asked the DG if the increasing wage bill was not a risk if we had to speak about all these risk factors that might have a negative effect on South Africa’s inflation rate. With an increasing wage bill it was obvious that more income would boost demand and thus add to inflation, even though wage increases were inflation-indexed. . Was this not a threat to South Africa’s inflation target?

The Minister responded on the risk of the increased wage bill to inflation. This was something that he had constantly sought to communicate. Ultimately what was required in South Africa was an understanding that, certainly in the public sector, it was necessary to balance the considerations of the needs of those who required wage increases in relation to the pressures of increases in the cost of living and increased inflation as against increasing employment within the public sector, in particular with regard to front line service delivery people as distinct from administrative staff.

On behalf of Government, it was the Hon Richard Baloyi, Minister of Public Administration, and his team who dealt with this question. Each year when we budgeted we tried to create an envelope that catered both for the cost of living increases on the one hand but also to the additional employment in Government on the other hand. Over the past few years that had virtually been wiped entirely by salary increases, and the occupational specific dispensations (OSDs) had certainly put immense pressure particularly on provincial budgets as a result of which there too there had been compromising of certain lines of expenditure. There had also been dialogue between Government and the labour sector to result in a better understanding of this phenomenon but also of the tighter fiscal environment in which we were operating. Prior to the recession the tax to gross domestic product (GDP) ration was just over 28% and we were unlikely to return to 28% for a long time to come. We were just over 25% now. The Minister had already described the risks that South Africa faced in the global environment and the slower growth in the South African environment. The only way in which we could push up some of these things was to widen the tax base, by having more businesses paying tax or more individuals paying tax, or creating more businesses that would ultimately pay tax. This was not happening at a rate that would sustain what we wanted to do. This was the understanding that he asked for on this particular question.

Mr Van Rooyen hoped that savings were not the result of under expenditure. That would be very unfortunate.

The Minister asked Mr Andrew Donaldson, Deputy Director-General: Public Finance, National Treasury, to respond to the question on the savings and expenditure, and whether this was under expenditure.

The DG began his responses with the distinction between savings and under spending. The figure referred to in the slide was at the beginning of the year. Cabinet, advised by the Minister, looked at specific areas in which cuts could be made since certain programmes were no longer top priority in relation to others, and therefore the resources were allocated. This was distinct from what one would have at the end of the year, where a department spent less than was allocated and this was badly disguised as savings. Some of it could be, where maybe one found a cheaper way to procure something that had previously been estimated at a higher cost. However, this figure was real savings from departments.

Mr Andrew Donaldson, Deputy Director-General: Public Finance, National Treasury, responded on what National Treasury looked for when it was trying to achieve savings in governmental departments. It looked for delivering services at lower costs and rationalising on the institutional capacity of Government. So if one looked at the Stats SA chapter in the Estimates of National Expenditure (ENE) Stats SA had indicated four specific things that were done to achieve savings. Stats SA had centralised their processing of surveys and had therefore been able to cut down on the costs of questionnaires. Stats SA had established a set of norms and standards for office space requirements and this had rationalised on office buildings. Stats SA had invested in a fleet of vehicles and so had cut back on the cost of hiring cars. In many departments there had been efforts to cut back on travel and accommodation costs and on communication costs by instituting better management of telephone costs and least cost routing of telephone calls, and in Stats SA’s case there was investment in video conferencing. This was the kind of thing that National Treasury looked for in saving.

Mr Donaldson said that in some cases there was also a rationalisation of institutions. In the area of Human Settlements the Social Housing Foundation had been closed and its functions transferred to other institutions. There were savings associated with such moves. However, National Treasury was very conscious that there was under spending and under delivery in some areas, sometimes because of unrealistic plans. The attempt to establish a rural household infrastructure spending programme managed by Human Settlements was just not realistic and that programme had been shifted to another department because of the impracticality of what had been planned and the savings in numbers were as a consequence of greater realism in spending commitments.

Mr Van Rooyen welcomed the review of the equitable share formula – this review was a valuable exercise and was long overdue. He wanted to check his observation from National Treasury’s strategic plan that it was only in the 2013/14 financial year that one would start to use data from the census that would be conducted this year. This delay would obviously affect the issues of the review of the equitable share. He raised this point because currently local government was burning. In the main this was because of the funding model. Was there any way to expedite this long overdue process to bring it forward in order to start realising the benefit of this intervention earlier than envisaged in the National Treasury’s Stategic Plan?

The DG responded on the equitable share revision. He hoped that Statistics South Africa (Stats SA) could provide earlier than planned information from the October census, but it took time to process the volume of the information. Mr Brown and he had discussed this the previous day. The interval between censuses would provide challenges for the revision of the equitable share formulae especially at local government level. The survey that was done in between did not produce good enough data to be used at local government level for planning and resource allocation purposes. If information could be made available early, National Treasury would use it.

The Minister responded to Mr V Rooyen on the funding model for local government by saying that money was not always the problem, as Mr Sogoni had pointed out. There were a number of human problems. Politicians made the wrong choices. There was lack of planning, as Mr Sogoni had pointed out. Also there was the appointment of people in the wrong positions, poor procurement controls, and not undertaking the basic responsibility to do things right, like making sure that there was provision for cleanliness and ensuring that roads were graded correctly. In a few of the marginal rural municipalities the funding issue needed to be looked at. However, if overall there was a message to allocate more funding in the equitable share to local government, then national departments must be prepared to take less. In other words, the envelope was not going to change.

Mr S Swart (ACDP) congratulated the new DG and wished him well in his appointment. Members would support him as much as possible.

Mr Swart asked about the fiscal implications of the increase in the wage bill.

Mr Swart asked about the Minister’s reference in the budget to fiscal principles dealing with the deficit and state debt levels. Mr Swart asked about the progress in that regard.

The Minister asked the DG and Mr Matthew Simmonds, Acting Director-General: Budget Office, National Treasury, to respond to Mr Swart on the fiscal guidelines. However, the Minister wanted to add to the response to this particular question that this was work in progress. A fair amount of research had been done and would land on Member’s tables as a proposal to consider.

The DG said that the Minister had already covered the subject of the fiscal guidelines. The principles were set out in the budget review. The aim was to draw lessons from other countries, and, more importantly, find something that would work for South Africa.

The DG responded on the debt service costs arising. What the global financial crisis had done was to force South Africa into a situation in which it ran deficits. We spent more than the revenue that we collected in any one year. This meant that South Africa’s total stock of debt had to be increased every year. Thus the chances were that the interest that one would pay on one’s debt would be higher. This explained the slight increase in debt costs. However, without sowing seeds of complacency, while both debt and debt service costs were rising, South Africa compared much more favourably, relative to countries that were considered developed at one stage. South Africa’s debt to GDP ratio would probably peak around 40% before starting to level off and fall but there were countries whose debt was well in excess of 100% or even 200% of the their GDP. So South Africa was still in a satisfactory situation.

Mr Swart said that the Minister also referred to international events, and asked about the impact of the events in North Africa with regard, for example, to the price of fuel and inflation pressures.

The Minister responded to Mr Swart on the North African events. Libya was responsible for about 2% of the fuel supplies, so that would explain the kind of increase that we had seen. There was strong suspicion that speculation was playing a role here. There was tremendous concern about that. On the other hand, the North African events had a very positive effect, because by democratising societies one was opening up new possibilities. Those countries would grow and give competition to South Africa, and we must try to outpace them, but we must support the democratisation processes, and there were more pluses than negatives to the developments.

Mr Swart asked about the issue of corruption to which the Minister had referred and the measures to address it. The Minister had referred to a number of regulations that would be passed to deal with supply chain management corruption. Mr Swart asked to what degree Members would be able to access information arising from this. For example, the Minister had stated that the regulations would state that departments would have to submit advanced tender programmes to provincial and national treasuries. There would be a monitoring mechanism. The names of bidders would be published. The bidders would disclose the names of all directors and others concerned. Mr Swart acknowledged that the Chairperson might rule him out of order but he understood that NIA played a process from the Protection of Information Bill deliberations. This Bill might have an impact on Members in their access to that information which might be declared classified. If so, Members needed to know because that Bill was vastly different from the Bill that the Cabinet had considered.

The Minister said that he would work with the Accountant General on the corruption measures, but the latter could give the first answer to that question.

Mr Freeman Nomvalo, Deputy Director-General: Office of the Accountant General, responded on the issues of transparency. The DG had answered in regard to the Protection of Information Bill. With regard to capacity building, National Treasury would report on its work in national and provincial departments in cooperation with the Department of Public Service and Administration later in the year. National Treasury would finalise a strategy for capacity building in the public sector. There were thus initiatives that supported the training.

The DG replied that the information on supply chain about publishing in advance it would be available and accessible to everyone on the National Treasury’s website. It would not be subject to any classification contemplated in the Bill that Mr Swart was referring to.

Mr N Koornhof (COPE) welcomed the new DG and said that if he achieved 80% of this strategic plan South Africa would be a better place to live in a year from now. He complimented him and said that it was a very practical strategic plan session this morning.

Mr Koornhof echoed what Mr Van Rooyen had said about the IMF. There was need for some sort of effort from Government as a whole and maybe Parliament must take up the matter. Perhaps the Chairperson could introduce in the National Assembly discussion on action on South Africa’s candidate.

Mr Koornhof observed that there were about 213 000 new jobs in the last quarter of 2010 and the first quarter of 2011. He asked how many of those new jobs were created by the private sector.

The Minister said that he was sure that someone from the delegation could tell Members how many of the newly created jobs were from the private sector. He would wait for the support team to do that.

The DG said that most of the jobs were created in the private sector. The two biggest sectors were finance and manufacturing.

Mr Koornhof asked about where South Africa stood regarding the Southern African Customs Union (SACU). Would the final agreement be concluded?

Mr Koornhof asked whether the National Treasury was satisfied that South Africa was not going to destabilise its neighbouring countries and SACU members for the wrong reasons.

Mr Koornhof wanted a democracy in Swaziland, but if South Africa destabilised its neighbours from a fiscal point of view it was not good for South Africa.

The Minister responded to Mr Koornhof with regard to SACU that it certainly was not the intention of South Africa to contribute negatively to the fiscal sustainability of its neighbours, since South Africa sought to play a hugely supportive role in this regard, but what he had pointed out was that the current formula and way of doing things was not sustainable. Two of the SACU countries received over 60% of their current expenditure from the SACU revenue. We now had the experience of the great recession in which we lost substantial amounts of revenue, which meant that the other countries lost a substantial amount in terms of the SACU pool contribution to their countries. The sooner that we could have a more stable approach which provided a buffer against such phenomena as the recession, the better. Whether we would achieve that soon enough was part of the challenge. There were some other countries that were already severely challenged in this regard and were not in very good shape. Ultimately South Africa was the country to which everyone turned, and we had our own limitations and challenges. South African tax payers would also ask the question as to where their money was being spent and how that kind of expenditure was justified. One was mindful of this area, and the Minister thanked Mr Koornhof for raising it.

Mr Koornhof had seen some negative media reports on the Public Private Partnerships (PPPs) in relation to prisons and asked if the National Treasury still supported PPPs in relation to prisons.

The Minister said that Mr Andrew Donaldson, Deputy Director-General: Public Finance, National Treasury, would be the right person to answer on PPP prisons.

The DG responded that the National Treasury remain committed to PPPs even in prisons. One could still find properly structured PPPs, where the sharing of risks between Government and the private sector was appropriate, the design of the facilities was not excessively expensive, and delivered what was wanted at a good price, even in this area.

Mr Donaldson said that if one looked at Correctional Services in the ENE, there were at least eight prison improvement programmes done through conventional procurement approaches. The PPP approach, though modified, was thought appropriate for at least two of the prisons. The changes were driven by the need to ensure that these PPPs were efficient.

Ms Z Dlamini-Dubazana (ANC) thanked the Treasury family for its visit and apologised that Members came at 09h30 while the Minister had already arrived at 09h00.

Ms Dlamini-Dubazana asked about the Minister’s submission in which he had referred to means to create the five million jobs and the logistic aspect of it. This caused her some concern, because what he had said was critical but the bottom line was what was to be done about it. This was not apparent in the submission. One found that the products of our mines were subject to delay. In KwaZulu-Natal the Black Economic Empowerment (BEE) mines especially lacked the means to load those products on the ships. They lacked access to the ports. She was talking in particular about the serious problem of Richards Bay and making sure that their products got delivered at the right time and at the right place to their customers. She asked if that problem had been resolved. If the problem with those logistics was not corrected, it would not help us to create new jobs.

The Minister asked the DG to respond to Ms Dlamini-Dubazana on the logistics network.

The DG responded to Ms Dlamini-Dubazana that the logistics and transport issue was a challenge. In some areas there were additional challenges such as the licensing for water, access to energy, and so on. However, a positive development was that there was now awareness of the problem, and to a certain degree some of the investments that were made in the R800 billion that one referred to were intended to cover these areas by the way. Included in the investment programme of Government and state owned entities were investments by the two biggest state owned entities - Eskom and Transnet. Eskom made up 36% of the R800 billion. Whether this was fast enough was a debate for another day. Similarly Transnet was making certain investments. At times, however, sometimes one found that where investments were made, and where the private structure needed the infrastructure, there was sometimes a mismatch. This was something that Government was working upon.

Ms Dlamini-Dubazana welcomed the new DG and wanted him to feel at home with the Standing Committee.

Ms Dlamini-Dubazana asked about the National Treasury’s outcomes. The DG had not mentioned anything about the training to be done as one of its outcomes. National Treasury needed economists and financial expertise, but there was nothing about the training programme of those personnel. For the economy to grow, skilled persons were needed. What was National Treasury going to do about that? When would it begin the programme to train the people who would assist us when the economy grew.

The Minister referred Ms Dlamini-Dubazana to slide 10 with reference to training in the National Treasury, which had talent management programmes. Ms Marion Mbina-Mthembu, Deputy Director-General: Corporate Services, National Treasury, could provide further information.

The DG responded to the question on outcomes not reflecting training. The 12 outcomes were just 12 high level outcomes, but within the National Treasury’s own programmes, it ran a series of training activities. There were chartered accountants who had qualified after being trained in the National Treasury, which was something very innovative. This had been led by the Accountant General with support from the DG’s predecessor. Currently the National Treasury had people under the same programmes. However, National Treasury also valued training in leadership. Economists and financial specialists had been trained in the private sector. Beyond the National Treasury, that new programme which combines all the new tech support programmes was about helping spread the reach of such training to provinces but there was an issue of how far the National Treasury must go in that respect as it was not the National Treasury’s core business.

The DG referred to the increase in spending of 14%. At least some of that money was going to supporting economic research in universities which fed into National Treasury’s economic advice.

Ms Dlamini-Dubazana asked what the benefits of membership of BRICS were. How would we benefit?

The Minister responded to Ms Dlamini-Dubazana on the benefits of South Africa’s membership of BRICS. The first benefit of course was that South Africa, Africa’s biggest economy, was now part of BRICS, although it was not of the size of population or GDP of the other members. Secondly, the agreement signed by President Zuma and the other heads of state and government provided for a number of areas of cooperation, on trade, investment, on development finance institutions working with each other, and on think tanks sharing research and ideas. Once that concept got off the ground there would be an immense boost and synergy to those countries. However, it was necessary to be mindful that this was competitive cooperation.

Ms Dlamini-Dubazana noted that the Minister had said that when one borrowed it was necessary to ensure that borrowing was for the purpose of investment rather than for consumption. Therefore it had to be asked why we were experiencing rising debt costs. What were we servicing? Were we servicing the loan? Was it not taken for the investment rather than the consumption?

The Minister said that the DG and his colleagues could respond to a question on debt costs.

Ms Dlamini-Dubazana added to what two Members had said previously with regard to the IMF. With reference to how South Africa had handled the 2010 Fifa World Cup, she asked the Minister together with the Chairperson to take this message from the Standing Committee that it requested the Government to take the matter of the appointment of the new IMF managing director further to make sure that we took seriously the consideration of South Africa’s candidate. Africa as a whole was looking to South Africa. If South Africa did not take the lead then we were letting down the whole of SADC and the whole of Africa.

Ms N Sibhidla (ANC) congratulated the new DG.

Ms Sibhidla agreed with Members’ views on the IMF. The decision of the G20 of 2008 must be implemented. Also South Africa was raising its hand to say that its Government must mobilise the continent and the other regions in regard to this appointment.

The Minister thanked Members for their understanding in regard to the IMF. He asked Members to keep a vigilant eye on developments in the month of June 2011.The Minister urged that South Africa make its contribution to the democratisation of key institutions.

The Chairperson would interact by the end of the day with other Chairpersons in the economic cluster on seeking a resolution to ask Government to take up the matter of the appointment of the new managing director for the IMF. We need to encourage our Government to take this matter to intergovernmental levels in the continent and encourage the Pan African Parliament and the Commonwealth to take a common position, basically reflecting what Ms Sibhidla had proposed to the effect that South Africa was an interested party.

Members agreed.

Ms Sibhidla asked about the BRICS. Ms Dlamini-Dubazana had partly covered the issue; however, it had to be asked if South Africa had a plan to mobilise the business community to seize the opportunities that were created by South Africa’s participation in that group and how to mobilise the other countries in the continent under one vision of what South Africa wanted to achieve out of its participation in the BRICS.

The Minister responded to Ms Sibhidla on mobilising the business community. This was important, since one could take advantage of such opportunities only if businesses were entrepreneurial enough and energetic enough and creative enough. The doors were partly open to begin to seize the opportunities that came with membership in BRICS.

Ms Sibhidla asked how performance would be assessed in Programme 1. This question was important for the Standing Committee’s oversight role.
 
Ms Sibhidla asked about the projection on expenditure, referred to in Programme 2, on consultants of about 14 %. What informed that projection?

The Minister referred Ms Sibhidla’s question on Programme 2 to the DG, who might wish to refer it to one of his colleagues.

Ms Sibhidla observed that, with reference to Programme 6, one of the milestones of the financial year was to increase shareholding in the African Development Bank to 6%. What was the situation currently? What was our share currently?

The Minister said that Mr Neil Cole, Chief Director: International Economics, National Treasury, could handle the question on Programme 6 on the increase in share holding.

Mr E Sogoni (ANC), Chairperson, Standing Committee on Appropriations, joined colleagues on congratulating the new DG on his appointment.

Mr Sogoni said that it was unfortunate that some Members had not received all the documents, in particular the Strategic Plan, and had had to rely only on the presentation. As the DG was saying, some of the legislation that guided the Department of National Treasury was the PFMA and MFMA. He asked if the Department was satisfied with the implementation of the PFMA up to now. In some of the issues raised there were gaps, and in other areas, for instance with ‘the functions of Treasury towards the Department’, as indicated in the PFMA, he was not sure that this Strategic Plan was strong enough in saying this was what was to be done in terms of strengthening the departments let alone the provinces. If one looked at some of the reasons for under spending, one had to reiterate Mr Van Rooyen’s statement that he hoped that savings were not the result of under expenditure. On the other hand, were there savings from having people do things better?

The Minister said that the Accountant General would look at the PFMA. [Mr Freeman Nomvalo, Deputy Director-General: Office of the Accountant General, would answer on the Accountant General’s behalf]

Mr Nomvalo responded on the implementation of the PFMA. It was an interesting question. It presupposed that there could be challenges that arose from the inherent weaknesses in the PFMA. He did not think that was where the challenges lay. He had made the statement several times that if there was leadership that cared to ask questions, one would find that matters began to improve. There were examples of that, such as the improvements in the Department of Home Affairs. Hopefully, improvements could be sustained in the Eastern Cape. There had been many positives in the implementation of the PFMA, although there had been weaknesses identified, but one could not blame the challenges necessarily on weaknesses in the legislation, but those challenges needed to be examined and addressed. Also since last year National Treasury had prioritised departments that had serious financial management challenges, and put together a team comprising different disciplines within the National Treasury; there was agreement on what National Treasury would deliver; these things were signed off and implemented. There was reasonable hope of improvement in these departments in the near future.

Mr Sogoni acknowledged the Strategic Plan’s reference to planning but did not think that it emphasised planning enough. Many issues of under spending, in particular in the provinces, related to the planning process. He was not sure if it was raised enough.

Mr Nomvalo responded to Mr Sogoni on the capacity building strategy. When National Treasury addressed capacity building across the state it would also be dealing with planning; it was one piece of the puzzle. It was also essential to ensure that there were people who were available to be trained and who were trainable. It was expected that oversight in those departments would ensure the availability of such personnel and suitable equipment.

Mr Sogoni asked if the DG was satisfied with the level of transformation in the National Treasury.

The Minister said that the DG would look at the issue of gender.

The DG responded on transformation. There were 10 deputy directors-general (DDGs) who were responsible for running divisions in the National Treasury, three of whom were women – one of whom was appointed in an acting capacity. National Treasury was moving in the right direction.

Mr Sogoni asked about roll out (slide16). Why were only 42 medium capacity municipalities and 30 low capacity municipalities chosen? What about the rest of the 283 municipalities?

The Minister said that Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, National Treasury, would look at the 42 municipalities.

The DG responded on the 42 municipalities selected for National Treasury to help. The Accountant General could answer further. Some of the municipalities were delegated to provinces, so provincial treasuries were supposed to do the same thing that National Treasury was doing, even if they did it with some assistance from National Treasury. But because they were closer to the larger number of municipalities, the provincial treasuries should have their own support programmes in financial management.

Mr Nomvalo thought that the DG had answered the question of the municipalities properly. There were delegated municipalities and other municipalities for which the National Treasury was responsible. Also National Treasury worked with provinces on trying to provide help to municipalities in National Treasury’s capacity building initiatives.

Mr Sogoni asked about reporting to the Standing Committee on Public Accounts (Scopa) and to the Standing Committee on Finance (slide 17). Why not the Standing Committee on Appropriations?

The Minister awaited Mr Songoni’s invitation to visit the Standing Committee on Appropriations. He would be more careful about including that committee in references.

Mr Neil Cole, Chief Director: International Economics, National Treasury, replied to a question on the shareholding in the African Development Bank. South Africa held 4.6% of the total shares in the Bank. This was just over 200 000 shares held by South Africa. South Africa was the third largest African shareholder after Nigeria and Egypt. This was largely because South Africa had joined many years after the others. In terms of South Africa’s shareholding, South Africa was about 50% undersubscribed, so there was considerable room for South Africa to increase its shareholding in the African Development Bank to approximately 9% which would be equivalent to the subscription in terms of South Africa’s economic size.

The Chairperson felt that the Standing Committee needed a different approach to these important cross-cutting presentations to avoid bundling them with related institutions unless the Committee had set aside the whole day.

The Chairperson said that central procurement was overdue. National Treasury needed to be capacitated, and become more assertive. He recalled his visit to China with the Speaker when they had seen a great hall that had been put into use in no more than eight months after the concept had been approved. There had probably been no tender involved. It was not just a question of skills. The Standing Committee needed to support the Minister fully.

The Chairperson recalled his conversation with the Minister of Economic Development the previous day. AS one moved by day in Pretoria, Durban and Johannesburg one saw that the people inside, at work, was less than the number of people idling in the streets yet the latter were people with energy. You had a ready made corps of people who could do anything you want.

The Chairperson noted that the Minister had said that borrowing should be for investment rather than consumption, but we needed to know where this money was going.

The Chairperson asked about the R30 billion rands savings and asked what plans existed for the renewal of the inner cities which were disintegrating, for example, Pretoria.

South African Revenue Service (SARS) 2011 Strategic Plan: Minister’s Overview
The Minister said that he had just received news that the first quarter GDP had been calculated at 4.8%. This was excellent. What was extremely encouraging was the strong growth in manufacturing. This was a sector impacted upon by the strong rand. Clearly the manufacturing community was demonstrating its resilience and its capacity to survive some of the global conditions. Apart from agriculture most of the sectors had shown very positive growth, and this was a good sign for the rest of the year.
He asked the Standing Committee to take account of the growth prospects and therefore the revenue prospects. The target for this year was R741 billion, and over the next three years it was hoped to collect well over R2 trillion in contributions to the fiscus.

It was equally necessary to be mindful of the global risks previously mentioned, any of which could have a negative effect on South Africa’s growth prospects and therefore revenue prospects.

The key was to grow the economy by creating more businesses and employing more people and thus collecting more taxes.

The Minister said that recessions unfortunately led to more unacceptable tax practices. This was seen globally and in South Africa, whereby well-connected individuals were finding better ways of avoiding paying their share of taxes.

Recession further meant that developed countries were facing fiscal pressures themselves, so they were not putting pressure on developing countries under the heading of domestic resource mobilisation – in other words, do more in your own countries to mobilise your own taxes rather than depend upon aid.

The Minister said that South Africa was, fortunately, not dependent on aid, and, in SARS, had an excellent example of the mobilisation of domestic resources.

The Minister said that, on the African continent, there was an initiative whereby companies and countries to indicate transparently what amount of tax was paid when, and by whom. This would enable us to understand where the resources were in individual countries, whether companies were paying their fair share of taxes, and whether countries were using them effectively.

Another initiative internationally was country by country reporting. That also would improve domestic resource mobilisation.

The Minister gave the example of United States based companies which were holding over $1 trillion offshore, and were saying that they would not bring that money back into the United States, not withstanding all the difficulties with debt that the country had, unless they paid a lower rate of tax than 35%. They got a deal like this in 2004, and this was an example of corporate citizenship going wrong.

The focus for SARS this year would be continuation of improvement in the service that SARS provided to South Africans, the extension of the modernisation programme to value added tax (VAT) and personal and company income tax (PIT and CIT), and to customs. Moreover, the point had been reached where the products developed in SARS could be used elsewhere in Government. The Department of Home Affairs was one example. In this way, from the viewpoint of National Treasury, we could save a good deal of money by avoiding re-inventing the wheel.

The Minister spoke about customs modernisation. This would facilitate trade in SACU and also across the African continent. It would also avoid arguments in the SACU about trade data.

SARS Commissioner’s Briefing on South African Revenue Service 2011 Strategic Plan
Mr Oupa Magashula, SARS Commissioner, said that women and men both moaned about taxes.

Mr Magashula said that , in the 10 February 2011 State of the Nation Address (SONA), President Jacob Zuma had noted that we had achieved much as a nation in 17 years of democracy but he had exhorted South Africans to achieve more. Each and every South African had a role to play. Our goal was clear. It was necessary to achieve decent employment opportunities, and a vibrant economy.

SARS had identified four enduring core outcomes that were manifest along the entire trader/taxpayer value chain.

These outcomes were: increased customs compliance, increased tax compliance, increased ease and fairness of doing business with SARS, and increase cost effectiveness, internal efficiency and institutional respectability (slide 1).

To this end SARS placed emphasised the importance of registration, identification and licensing, filing and submission, declaration, and payment and performance (slide 1).

The above would be achieved through SARS compliance philosophy which linked its actions to the degree of tax payer or trader compliance. To this end, SARS sought to nurture willing participation and building fiscal citizenship (slide 2).

This would be achieved by increasing efficiency resulting from SARS’s modernisation programme, with particular reference to human resources (slide 5)

This was aligned to SARS strategic priorities which it had articulated over the past two years. Three year strategic priorities in relation to the four core outcomes given in slide 1 were indicated (slide 4).

SARS’s three year deliverables for Strategic Priority 1 – Drive revenue realisation to deliver now and ensure sustainability were growing the taxpayer register through inclusion of individuals and businesses that were eligible to pay tax as well as the inclusion of individuals and businesses that were likely to become eligible to pay tax in the future; streamlining the audit and customs inspection processes and strengthening audit capability to deal with complex cases and serious taxpayer and trader non-compliance; re-engineering the debt collection processes; expanding the administration of penalties for non-compliance; expanding the use of third party data, time-series tax payer history and statistical scoring methodologies to enhance SARS compliance risk detection and rating capabilities for PIT, Pay as You Earn (PAYE), Company Income Tax (CIT), Value Added Tax (VAT) and Customs; and concluding the voluntary disclosure programme to encourage proactive disclosure of non-payment by non-compliant taxpayers (slide 5).

SARS three year deliverables for Strategic Priority 2 – Drive productivity, service quality and cost efficiency were to improve the ease and speed of registration and other interactions for businesses supported by a single view of each tax payer and trader; improve turnaround times and reduce paperwork for transactions and queries via automation for priority taxpayer and trader segments; and implement a revised service philosophy, service charter and channel strategy that meets taxpayer/trader needs (slide 6).

Three year deliverables for Strategic Priority 3 – Fully deliver on SARS’s custom’s mandate were a seamless transition to an integrated border management model, developed with other Government Departments; an enhanced service offering reduced paper work, quicker processing times to preferred traders comprising 80% of all legal trade entering the country; improved ease and speed of declaration processing and inspections through modernising processes and systems; a system to prioritise and expedite Customs inspections through use of additional data sources and the continued rollout of non-intrusive inspection capability vastly to improve SARS’s ability to inspect the goods crossing South Africa’s ports of entry; enhanced border control detection capability through the Customs Border Control Unit (CBCU) and Dog Detection Unit (DDU), thereby improving security at ports of entry; and enhancement of the traveller experience when entering and leaving the country (slide 7).

Three year deliverables for Strategic Priority 4 – to improve SARS operating model, streamline governance and strengthen leadership were fully implementing SARS’s new operating model with an integrated workforce plan that made SARS’s workforce more empowered, agile and responsive to meet the needs of our taxpayers/traders; streamlining SARS’s governance framework to reduce unnecessary levels of bureaucracy while still maintaining appropriate levels of oversight; and further embed the SARS value-based leadership model with appropriate resourcing and capabilities (slide 8).

Three year deliverables for Strategic Priority 5 – Implement segmentation to strengthen SARS’s business model were delivering tailored services to meet the needs of our five priority segments namely large business, medium-sized businesses, practitioners, traders and individual taxpayers; and accelerate the development of a small business segment in support of entrepreneurship, economic growth, and job creation, including the enhancement of the Turnover Tax system (slide 9).

For Strategic Priority 6 – Enable SARS’s people to perform at their peak, three year deliverables were embedding a workforce planning methodology to inform employee development, redeployment and recruitment; enhancing employee value proposition, to attract and retain the skills that SARS needed; improving performance management processes to empower managers effectively to manage employee performance; improving SARS’ organisational culture and employee engagement; and building of an external skills pipeline to enable sustainability and employment creation (slide 10).

SARS’s three year deliverables for Strategic Priority 7 – Deepen key external relationships to manage the whole value system were enhance outreach, education, service and enforcement by building collaborative partnerships with private, public and international sector partners and utilising their feedback to improve compliance; make a broader societal contribution through targeted, high-impact initiatives; and build institutional respectability and service delivery excellence for SARS and its Government partners (slide 11).

SARS would now be focused on the achievements of these outcomes in line with Government’s outcomes approach (slide 12) through developing and tracking outcomes measures that SARS would use to track its progress (table of measures and targets for increased customs compliance – slide 13; table of measures and targets for increased tax compliance – slide 14; table of measures and targets for increased ease and fairness in doing business with SARS – slide 15); and table of measures and targets for increased cost effectiveness and internal efficiency (slide 16).

SARS’s expenditure estimates over the medium term were provided together with information on total funds available from the National Treasury Grant, interest income, and other income, and information on the allocation of funding for modernisation and initiatives, enforcement, service, and support for the years 2011/12, 2012/13, and 2013/14 (table - slide 17).

SARS’s projected human resource capacity was provided with information on the number of permanent employees and temporary employees, on the percentage net growth excluding temporary employees, and on the total for the years 2011/12, 2012/13, and 2013/14 (table - slide 18).

Mr Magashula commented on the importance of SARS’s monitoring programme. It had achieved a record of four million taxpayers filing their submissions. R674 billion had been collected in the past fiscal year. This was a 13% growth. The aim was to cascade this growth throughout SARS as an organisation, and modernise customs, freeing the movement of legitimate goods to compliant traders. These were just a few of the priority programmes.

Mr Magashula commented on the need to ensure accountability and register those who had the potential to become tax payers. Measures would be taken against serial non-compliers, and there was provision for administrative penalties. SARS’s regime was very effective. For every month the penalty accumulated with interest. It was a money making machine. SARS was expanding the use of third party data, and expanding the Voluntary Disclosure Programme to include overseas entities.

Mr Magashula commented on its internal priority to make registering easier registering. It planned to reduce paper work for priority tax payers, revise the service charter and achieve a quicker processing time. Importance was placed on modernising customs; the CBCU and dog detection unit, and SARS’s collaboration with the Department of Home Affairs was highlighted. SARS sought to strengthen its leadership to make the organisation more agile. There was focus on appropriate levels of oversight, with value based leadership and appropriate resourcing. SARS sought to meet the needs of different tax payers and identify pockets of non-compliance including offshore. To this end, SARS conducted joint audits with other jurisdictions. SARS sought the development of a small business turnover tax system. SARS aimed to attract and retain staff and improve its organisational culture.

SARS would also make a broader societal contribution by targeted high impact initiatives like a registration of foreigners and businesses that existed in this country. It would build service delivery excellence for SARS and its Government partners.

Mr Magashula referred to an OECD publication which reported that even countries which had used an outcomes based approach for 15 years still struggled with issues of measurement and target setting. This was especially the case for outcomes. The key challenge for all countries was obtaining good quality reliable and timely information. Outcome measures were technically more difficult to measure.
 
Mr Magashula commented on the increase in electronic submissions and improvement in turnaround times.

Discussion
The Chairperson asked if Honourable Members had all paid their taxes.

Mr Swart observed that SARS’s target this year was R741 billion. The first GDP figure was 4.8%. One presumed that SARS’s target was based on the 3.4%. If South Africa’s growth rate continued to rise, SARS might exceed its target. SARS had exceeded its target the previous year. This was commendable and might assist with debt levels and the deficit on the budget.

The Minister said that if GDP was higher then revenue collections should be higher.

Mr Swart asked what further steps SARS intended to take to deal with corruption within SARS.

Mr Magashula replied to that SARS had arrested quite recently about 20 people within SARS who had collaborated with vendors to defraud the VAT system. Part of the modernisation made sure that, in respect of the sale that a vendor claimed, the person who received the services had an equal and same kind of invoice that he could produce for those services.

Mr Barry Hore, Chief Operations Officer, SARS, replied to Mr Swart on corruption within SARS. This required systemic measures. Over the past two months SARS had begun the modernisation of the VAT system by means of an electronic case and work flow system with blind case selection and heavy enforcement of audit processes, including recording of telephone calls with staff members. This helped to detect collusion.

Ms Swart commended the good work that SARS did and wanted this passed on to the SARS staff.

Mr Swart also commended the excellent work of SARS’s parliamentary office, which was most helpful and fair to Members.

Ms Dlamini-Dubazana thought that the Commissioner had today come from the University of Oxford with his presentation. She understood SARS’s seven objectives. The tracking system for the outcomes was, however, confusing. She wanted to align the outcomes with the seven objectives. What measure did SARS use to evaluate the rest of its objectives?

Mr Magashula replied to Ms Dlamini-Dubazana that SARS had started modernisation as a priority. Pay as You Earn (PAYE) modernisation was still outstanding. There were still some third party links that remained to be connected. SARS was working currently on linking up credit bureaus since they had a far better picture of the debts and assets of individuals. SARS had dropped the modernisation of offices as one of its priorities. Next year one of the priorities would be the full modernisation of the company income tax. The four key outcomes endured.

Ms Dlamini-Dubazana asked about the figure of R30 000 000 for interest income (slide 17).

Ms Trix Coetzer, Chief Financial Officer, explained that the R30 million was merely interest on a mismatch between the money received from National Treasury and SARS expenditure patterns.

Mr Sogoni observed that the Commissioner might be scaring Members rather than educating them.

Mr Sogoni asked how realistic SARS projections were.

The Minister replied that it was difficult to achieve accurate projections. There was a level of uncertainty that one had to allow for, but, generally speaking, higher growth did result in higher revenue. However, we were still talking about numbers that were well below our peak in 2008.

Mr Sogoni asked what the role of the World Cup was in the increased collection of revenue.

The Minister was sure that, from the viewpoint of VAT, the World Cup did help, but generally the World Cup cost us a lot of money, not necessarily for SARS, but in setting up some Department of Home Affairs systems.

The Chairperson observed that the strategic plan had moved from11 strategic priorities to seven over the past three years. What benefits would this actually yield to SARS’s approach?

The Chairperson noted that SARS had been emphasising its modernisation programme. What was the cost?

The Chairperson asked what the return on the investment programme was, and for how long did SARS intend to run with this modernisation programme.

The Minister replied on modernisation that one was changing this institution fundamentally, firstly from the perspective of its overall design, and secondly in terms of its products. SARS was making itself more efficient internally but also easier for the tax payer. It was similar on the customs side. There had been a huge sea change and now almost everything happened electronically. Very few income tax submissions were made on paper now. Instead they were made electronically or through assistance at SARS offices.

The Chairperson asked, in terms achieving this target, to what extent these compliance measures assisted SARS.

Mr Magashula replied to the Chairperson on how much compliance contributed. Last year SARS recovered around R13.8 billion. R761 million had been collected though administrative penalties imposed on 86 000 people who had paid such penalties. There was thus a big contribution from compliance.


Mr Sogoni said that the more SARS was modernising the harder and longer it took to obtain tax clearance certificates. Why was this so?

Mr Hore replied that SARS had become more stringent on issuing tax clearance certificates.

Ms Sibhidla asked if there was a reliable data base of tax payers.

Mr Magashula replied that SARS had an individual tax register of over 10 million persons. The four million referred to by the Chairperson were those who had not the obligation to file, because they were below the tax threshold, and who had now been registered, since they had the potential to become tax payers. SARS also had other campaigns, in cooperation with the Department of Home Affairs and other Government departments and agencies, to register people in the streets, and would use third party information, including with biometric details obtained from border entry points. Once data bases existed that could be manipulated, SARS would be better able to register people and to check them. SARS had started with the ‘low hanging fruits’ and was ensuring that at least if anyone earned a salary and had an IRP5 form, he or she would be on SARS’s register. The same would happen to vendors.

The Chairperson noted that through these additional measures SARS was able to achieve a record number of tax payers who submitted their returns on time, and through employer assistance SARS had now added over four million additional salary earners to the tax register. Were these people outside the tax bracket?

The Chairperson said that the Committee would monitor with keen interest the implementation of the plan and offered to interact dynamically. He thought that small, medium and micro enterprises (SMMEs) needed special attention, since almost 50% of jobs were created in that sector.

The Chairperson thanked the Minister and the Commissioner.

Standing Committee’s Draft Resolution of the choice of IMF managing director
The Chairperson read the Standing Committee’s draft resolution on the choice of IMF managing director:

The Standing Committee on Finance met on 31 May 2011 to receive a presentation on the strategic plans of the National Treasury and the SARS. Amongst the issues raised by the National Treasury through the Minister of Finance, the Hon Pravin Gordhan, was the much publicised resignation of the IMF managing director (MD) and the pending appointment of the new MD. [After] robust engagement [the Committee] decided to call upon all relevant stakeholders to ensure the implementation of the G20 resolution regarding the transformation and modernisation of the IMF and the World Bank with specific reference to the appointment of the MD. We reaffirm the decision that the appointment be made through an open, transparent and merit-based process. We therefore resolved that the South African Government give this matter the serious attention that it deserved. We believe that developing countries have the ability to put forward candidates who have the appropriate merit and experience. [We therefore reaffirm that the appointment be made through an open, transparent and merit-based process].] We further resolve that Government timeously inform Parliament on progress regarding this matter.

Mr Swart agreed with the broad ambit but suggested ‘that the South African Government continue to give this matter the serious attention that it deserved’, and ‘the Government pronounce its interest on the matter and start lobbying all relevant [parties] to support the candidate nominated by South Africa’.

The Chairperson thought this a good suggestion.

Members agreed on the draft resolution, subject to corrections of the language.

The meeting was adjourned.

[Apologies were received from Dr D George (DA), Dr Z Luyenge (ANC) and Mr E Mthethwa (ANC). The Minister of Finance, tendered the apologies of the Hon N Nene, Deputy Minister of Finance, on account of bereavement in his family]

Share this page: