Minister of Finance on National Treasury Annual Report 2011/12

Meeting report

National Treasury Annual Report 2011/12: Minister's briefing
The Hon. Pravin Gordhan, Minister of Finance, clarified that the South African Reserve Bank (SARB) was, in terms of the Constitution, an independent institution, but it worked with National Treasury and within a policy framework provided by the Ministry. He had just returned from the International Monetary Fund (IMF)-World Bank meetings in Tokyo. The IMF had once again downgraded global growth, and was still somewhat pessimistic about growth prospects in the bigger emerging market economies, India, China, and Brazil, in particular. There was a slight lowering of the growth prospects for Africa, although the continent remained, by and large, a very positive story in the overall picture. At the moment, there were no magical answers emerging. There were the forthcoming elections in the United States, and the prospect of jumping over a fiscal cliff, as everyone described it, towards the end of the year, together with the debt ceiling that had to be negotiated in the new year. It would be largely the result of the elections that would determine where the US stood, and what that would mean for South Africa. It was an area of serious concern.

Secondly in the European situation, there was now a better understanding that whilst important initiatives had been taken, to work towards a banking union, a fiscal union, the establishment of the European Stability Mechanism (ESM), the pool of reserves to help with the bail-outs of European economies that found themselves in trouble, and the European Central Bank (ECD) had given an undertaking that it would act if certain conditions were met by offering assistance to certain countries, in the short term all these institutions and ideas still needed to be put in place. One envisaged an 18 month period in which the effects of these institutions still might not be felt in any serious way. The problems in Spain still remained areas of uncertainty. On Thursday this week there was to be a summit of EU leaders, from which one hoped to see greater clarity on the position of Greece. Italy seemed to be more stable in the current environment. However, in the foreseeable future, one did not see any bright spark emerging that would indicate a reversal of growth trends in Europe.

The IMF in its work had reinforced an important point that South Africa had been practising. Firstly, one needed to maintain a balance between fiscal consolidation and support for growth. Secondly, that front-loading – fiscal consolidation, meaning in the near term to reduce debt, spending and deficits – actually had a costly effect. Thirdly, calculations indicated that the fiscal multipliers of front-loading or fiscal consolidation were much greater than originally thought. If one tried to cut deficits too fast, it actually dampened the prospects of growth and raising revenue to sort out the debt problem. 'Austerity now' was becoming less credible. On the other hand, South Africa had been using an approach of fiscal consolidation, but on a sustainable basis.

The most important question that everybody had been asking was whether there was a growth story emerging across the globe and in the developed economies. Regrettably there was no story of growth. He noted the presence of some colleagues from the Russian consulate, and that Russia would take over the chair of the G20 later this year. Russia, as Chair, would face the challenge of how to inspire the world to agree on a growth path that began to create better prospects for young people, for creating jobs, and solving the debt problems confronting countries at the moment.

Thus 2011/12 was very much the same story. The test for National Treasury and for Government as a whole was whether one steered the ship fiscally in a proper way in this period. Did one ensure maintaining a sustainable path, in terms of managing spending, revenue, and debt situation? And did one do enough to ensure that the country lived within its means? The Director-General (DG) would present to Members was that the recommendations made to the Ministers' Committee on the Budget and the Cabinet finally, and their deliberations on the matter, demonstrated that Government as a whole had been extremely balanced and responsible in terms of the way in which it had managed the fiscus in the year under review, and continued to do so now, and that the fiscal guidelines talked about for the last two years – countercyclicality, inter-generational equity and debt sustainability were guidelines that still had an important influence in the manner in which one designed the fiscal pathway moving forward.

Important work had been done in the area of expenditure management. What had started in 2009/10 had continued. That was to ensure careful management of expenditure in Government to ensure value for money, and reach the point of saving more money. This included reprioritising within departments and reprioritising between departments, and having the courage to cut those programmes which had no place in a constrained fiscal environment.

National Treasury would also report on new institutions that it had set up, its progress on financial regulations, the manner in which tax policy had been developed over this period, and progress towards creating a new culture of public expenditure and its management. Some people had the misconception that South Africa was a rich country, and could spend as it liked. Parliament had a role in changing this misconception.

There was the prospect of a ten year period of very low growth in the developed parts of the world economy. The one saving grace was that the bigger emerging markets were all undertaking very important initiatives to either stimulate their economies or reform their economies. India, China, and Brazil were doing some very interesting work to refloat their economies and recover their old growth trajectories. However, many thought that these countries would not recover the high rates of growth that they had before. For South Africa and the world more broadly, the key challenge was to reduce inequality.

National Treasury would emphasise the need to focus on the performance of provinces and municipalities, and would report on the work that had been done.

In summary, 2011/12 was a tough period globally and continued to be so. Global uncertainty continued. South Africa's domestic situation was better than many made it look. South Africa still had more than 2% growth, and sometimes 3% in this period. South Africans needed to show much more courage and cohesion in order to push those figures higher, not for the sake of the figures themselves, but to alleviate the plight of the poor of South Africa, to create jobs, and ensure the fiscal space to enable South Africa to respond to its challenges.                 

National Treasury Annual Report 2011/12: National Treasury briefing
Introduction
Mr Lugisa Fuzile, National Treasury Director-General (DG), reported that National Treasury continued to respond to the 2008 recession with appropriate fiscal and other measures to promote sustainable growth. A framework was also developed which provided for a shift in expenditure planning so that budgeting occurred by function rather than by department. Promoting greater accountability and transparency in Government remains one of National Treasury's key focus areas, and it developed fraud detection guidelines and issued instruction notes strengthening supply chain management practices.

Overview
February macroeconomic forecasts projected GDP growth of 2.7% in 2012 set to rise to around 4% by 2014. IMF latest growth forecast was 2.6% this year and 3.0% next year. Inflation had moderated during the course of the year and was expected to remain within the target band. Investment had been supported largely by Government and public corporations. Two credit rating agencies had downgraded South Africa’s sovereign rating. They had cited concerns relating to the sustainability of the growth trajectory due to the slow pace of policy implementation and growing income inequality. They had kept South Africa (SA) on negative outlook. Debt stock rose in line with wider budget deficit. Fiscal policy was anchored on the principles of countercyclicality, sustainability and intergenerational fairness. There was a bigger focus on value for money and the shifting of resources from consumption towards infrastructure investment, and support for economic competitiveness. There was a need to strengthen efficiency in public spending, eliminate wastage, improve the alignment between allocations and policy priorities, and root out corruption.

Major achievements
Among the highlights for the year was the training of 10 055 councillors across the country. Improved budget support and oversight of local government remained a significant feature of the work of the Treasury. The revised gross borrowing requirement of R173 billion was successfully financed. US$1.5 billion was raised in the international capital market, R149 billion in the domestic capital market, and R5 billion from retail bond investors. The Treasury continued to play its part in Government’s multilateral engagements. The past year was marked by efforts to ensure the implementation of key recommendations agreed to by G20 heads of state and intended to reform global economic governance principles. The public service remuneration analysis and forecasting unit was established to monitor the impact of Government’s compensation policy on the fiscus. Public service remuneration was the single largest component of the budget and in order to achieve fiscal sustainability an increased focus on public-sector remuneration was required. The National Treasury had begun implementing proposals to strengthen the financial regulatory system. This was being undertaken to ensure suitable oversight of international and national financial architecture, banking systems, equity and bond markets, and related institutions. The National Capital Projects (NCP) unit carried out substantive work on feasibility studies for major national infrastructure projects in support of greater infrastructure investment and economic growth. The legal establishment of the Government Technical Advisory Centre (GTAC) was completed to support the roll-out of various programmes in Government. This was in support the effort to improve the overall performance of Government. Further work would continue to prepare for the launch of the GTAC on 1 April 2013.

Sovereign rating developments
Moody’s revised SA’s credit outlook in November 2011 from stable to negative. This was followed by Fitch in early January 2012 and Standard and Poor (S&P) in March 2012, both revising SA’s credit outlook from stable to negative stable. R&I affirmed SA’s stable outlook.
See table, slide 7).

Constraints assigned by major credit rating agencies
Debt targets could be undermined by popular pressures ahead of the 2014 national and provincial elections. There were expectations that growth would be slower than previously expected, and insufficient to prevent already high unemployment rates from increasing further, thereby exacerbating social tensions. South Africa's external finances were also deteriorating. Slow progress on several long-standing structural issues had over time caused South Africa's economic performance to fall behind that of its peers.

Treasury's view
South Africa's fiscal path remained realistic, achievable and sustainable. It was framed within a context of tough global economic challenges: global growth was slow; Europe, South Arica's major trading partner, was in crisis.

South Africa should stay the course; strike the balance between supporting the economy in ST; and [pursue] fiscal consolidation. South Africa's fiscal path was underpinned by fiscal guidelines of countercyclicality, debt sustainability and fairness across generations.

Programme 2: Economic Policy, Tax, Financial Regulation & Research (Division 1 Tax & Financial Sector Policy)
A discussion paper on Medical Tax Credits was published on 17 June 2011. The Financial Markets Bill and Credit Ratings Services Bill were published in August 2011 and submitted to Parliament in February 2012. The policy paper on retirement savings was completed for Budget Day 2012, but only released in the new financial year. The Rates and Monetary Amounts and Amendment of Revenue Laws Bill was published on 13 March 2012. The Secondary Tax on Companies (STC) was phased out on 31 March 2012. The Division assisted the Department of Trade and Industry with the design of the manufacturing competitiveness enhancement programme; and continued with improvements to economic models to enhance assessment of impacts of energy and tax policies.

Programme 3: Public Finance & Budget Management (Division 1 Budget Office)
The Division ensured that the budget frameworks for MTBPS and the Budget Review were tabled on time and included an estimate of the structural budget balance; provided comprehensive analysis of performance measurements and reporting by departments and entities in line with improved guidelines emphasising cost effectiveness and enhanced performance management; and extended the scope of the draft regulations to encompass procurement that was particular to the construction environment, to cover the whole project life cycle of infrastructure projects, from planning to procurement. The 2012 Budget process was characterised by decisions following a functional budgeting approach, which allowed for enhanced value-for-money assessments during the budget allocation process. This approach grouped together national, provincial and local government, and government agencies, in terms of the function they performed.
(Slide 11)

Programme 3: Public Finance and Budget Management (Division 2 Public Finance)
The Public Finance division was responsible for liaison with national departments on budgeting and expenditure monitoring issues, and supported the Minister of Finance in policy advice and inter-departmental correspondence and consultation. The broad functional groups established for the 2011/12 budget process had contributed to improved planning and coordination, which has provided a sound foundation for the 2012 Medium Term Expenditure Committee (MTEC) process and preparation of next year’s budget. Improvements to the Estimates of National Expenditure (see www.treasury.gov.za) included revised programme structures and performance indicators, more comprehensive information on public entities in the detailed vote chapters (on website) and improved inter-departmental consultation. This document assisted analysts, and Parliament in particular in holding Government departments accountable. A new quarterly expenditure reporting system was developed for national departments, and implemented with effect from the 1st Quarter 2012/13 report to the Standing Committee on Appropriations.

Programme 3: Public Finance and Budget Management (Division 3 Intergovernmental Relations)
The Division introduced reforms to the provincial and local government fiscal system to improve its functioning; strengthen the conditions in the 2012 DoRA aiming to improve infrastructure delivery outcomes, and direct more resources towards poor resourced municipalities. The Division implemented the comprehensive City Support Programme, which was intended to pay particular attention to the big cities and make sure that as they received larger numbers of people they were able to build sufficient infrastructure and take a long term view of planning. The Division extended the energy efficiency conditional grant and introduced a new grant to fund internship for technical skills in municipalities. The Division strengthened technical and leadership capacity in municipalities by providing induction for new councillors, mayors and municipal managers and, in partnership with the University of Cape Town, World Bank Institute and the South African Local Government Association (SALGA) delivered Leadership in Local Government for Mayors and Municipal Managers as one element of the City Support Programme.
(Slide 13)

Programme 4: Asset & Liability Management
The Programme financed gross issuance of R185.4 billion. Debt service costs were 2.6% of GDP as projected. Funding was below risk allocations by 2 percentage points, while the composition of Government debt still deviated from long-term risk guidelines. The switch auction strategy on selected Government bonds reduced the refinancing risk. The Programme achieved a saving of up to 3.5% on borrowing costs due to intergovernmental cash coordination, and monitored state-owned companies (SOCs) and development finance institutions on progress made in line with their strategic and borrowing and capital expenditure plans to ensure that they complied with all statutory requirements.

Programme 5: Financial Accounting & Reporting (Division 1 – Office of the Accountant-General)
The Departmental reporting framework for 2012/13 was finalised by 31 March 2012 and the draft framework for 2013/14 was finalised and published for comment; sixteen generic financial management policies were developed; the Consolidated Annual Financial Statements for departments and public entities for the 2011/12 financial year were compiled and in process of being audited with a view to be tabled by 31st of October 2012; strategic support plans were developed and implemented for all prioritised entities; financial management capacity building strategy was updated to include local government; 22 financial management learning programmes were developed; 1 419 officials were trained in financial management disciplines; the Division conducted internal audit/state of readiness reviews in 13 institutions; assessed financial management capabilities of national and provincial departments through the Financial Management Capability Maturity Model; developed 30 new indicators to enhance monitoring and reporting of the implementation of the Municipal Finance Management Act (MFMA); financial management implementation (technical) support was availed to 69 small and rural municipalities; the Division conducted performance audits on major public procurement in 14 departments and municipalities; conducted 11 forensic investigations that resulted in reports for further criminal investigation; and investigated contraventions of policies and regulations, the outcomes of which were 26 criminal charges being laid with the South African Police Service (SAPS) and 32 disciplinary cases laid with the SAPS as part of the national government team that intervened in Limpopo in terms of section 100 of the Constitution.

Programme 5: Financial Accounting & Reporting Division 2: Specialist Function: Supply Chain Management
Steady progress was made towards development of the procurement catalogue – all corporate contracts were completed plus four transversal contracts. Tenders for payroll were advertised by the State Information Technology Agency (SITA) and tender adjudication processes were in progress. It was acknowledged that the Integrated Financial Management System (IFMS) was lagging behind schedule, but some progress had been made. A number of modules, as listed, had been completed. Some were under development.
(See slides 17-18 for further details)

Programme 6: International Financial Relations
The division made significant strides in advancing the interests of SA in bilateral and multilateral engagements, with a strong focus on economic development of the African continent. Some of the highlights in 2011/12, included strengthening the operations of the SA, Nigeria, Angola constituency in the World Bank, and of the African constituency in the IMF; strengthening cooperation with other departments to enhance advancement of SA policy imperatives in Brazil, Russia, India, China and South Africa group (BRICS) and Group of 20 (G20); and participating in the development of regional economic integration strategies and infrastructure financing mechanisms. (See slide 19 for further details)

Programme 8: Technical & Management Support and Development Finance
The Technical Support and Management and Development Finance programme provided specialised infrastructure development planning and implementation support and technical assistance to aid capacity building in the public-sector. Highlights included: the Technical Assistance Unit (TAU) supported 86 projects, focusing mainly on the areas of organisational development, strategic planning and performance budgeting. The Public Private Partnership (PPP) unit focused on concluding partnership agreements, increasing oversight capacity and promoting capital investment, especially in the social sector. The neighbourhood development programme provided technical assistance to 60 municipalities and contributed R50.1 million towards long-term township regeneration, planning and coordination in local government. Expenditure against the direct grant amounted to R783.3 million (98% of the budget amount). The Infrastructure Delivery Improvement Programme (IDIP) delivered draft construction procurement standards for use by provincial treasuries to assess and improve compliance by implementing departments, and concluded an agreement with the University of Pretoria as a pilot site for the development and management of an Infrastructure Delivery Management Toolkit training course. The Municipal Finance Improvement Programme (MFIP) was a new multi-year programme that was established to render technical assistance and support in implementing financial management reforms in local government. The Jobs Fund, which was allocated R2 billion for the 2011/12 financial year, was established. To date R1.8 billion had been allocated to 34 projects and 21 000 jobs were created.

Programmes 7, 9 and 10
These programmes were primarily relate to fiscal transfers. Programme 7 (Civil and Military Pensions) dealt with the payment and administration of special pensions, military pensions, other statutory pensions, and post-retirement medical subsidies. More information was available on page 94 of the Annual Report. Programme 9 (Revenue Administration) referred to transfers made to the South African Revenue Service during the 2011/12 year. (See page 97 for transfers made in the 2010/11 financial year). Programme 10 (Financial Intelligence and State Security) referred to transfers made to the Financial Intelligence Centre and Secret Services to combat financial crime including money laundering and terror financing activities, and to gather intelligence for purposes of national security, defence and combating crime.

Programme 1: Administration
This programme provided leadership, strategic management and administrative support to the Department. Highlights included: increased awareness on risk management and corruption; National Treasury was the first national department to close its financial books for the year; strategic sourcing and its economies of scale was yielding desired cost reduction; and a secured environment ensured no leakage of economic or financial policy matters.

Human Capital
National Treasury's total staff complement was 1150: 55% female, 80% black. At senior management level, 57% black and 43% female. The National Treasury had a vacancy rate of 9.5% (121 posts) at the end of the 2011/12 financial year. Of the 239 offers made, 223 accepted while 16 declined; reasons advanced for declining offers related to salaries, counter offers, and other developmental career choices. A total of 125 critical skills positions were filled during the financial year. In partnership with Disabled People South Africa, National Treasury was increasing attraction of candidates with disabilities. National Treasury achieved 1.04% of the 2% target. The employee lifestyle management programme was utilised by 87.3% of employees; 68% of directors and 85% of chief directors participated in the leadership development programme.

Outcome: Expenditure 2011/12: programmes
Figures were provided (See table, slide 25)

Outcome: per Economic Classification
Figures were provided (See table, slide 26)

Outcome of the Auditor-General audit report
It was an unqualified audit report but with emphasis of matters. Material impairment of R17.2 million relates to Programme 7, specifically Special Pensions, due to the Board misinterpreting the Special Pensions Act (No. 69 of 1996) as 752 beneficiaries had committed schedule 1 offences. The spending due to difficulty of recovery needed to be considered as a write off/loss. There was material underspending of R2.477 billion. Details of spending deviation were shown on following slides.

Main Reasons for Spending Deviations
Lags in Spending: the Jobs Fund was established in 2011 with administration based at DBSA – actual spending lagged behind commitment of funds. As to the Integrated Financial Management System (IFMS): there were project implementation delays. As to the Neighbourhood Development Partnership Grant (NDPG): although deviation percentage was small, the actual amount was relatively large. Further reasons were post-retirement medical benefits, special pensions and the Political Office Bearers Pension Fund. Another reason was personnel vacancies: although the departmental vacancy rate reduced from 14% in 2010/11 to 9.5% in 2011/12, there was a spending deviation observed. A further reason was capital spending and building refurbishment: the delay in finalising the refurbishment of the 38 Church Square building resulted in the delay in procurement of the security system, information technology and furniture and fittings. This was not shown in the table on the next slide, as the deviation amount was less than R20 million.

Deviations in Spending 2011 / 12
Figures were provided.
(See table, slide 29)

Appropriate remedial actions
752 cases deemed to be incorrectly interpreted in terms of the Act: the Special Investigating Unit (SIU) and National Treasury legal department advised that High Court determination needed to be obtained but raised concerns that it would be difficult to rescind the payments as expectations had already been created. The matter would be dealt through accounting treatment. The Jobs Fund allocation had been reviewed in line with the revised disbursement schedules which had been diligently assessed. Spending for 2012/13 for the Jobs Fund was aligned with the planned milestone achievements.

Jobs Fund overview
The Jobs Fund (JF) was established to encourage innovation and support public and private sector initiatives with sustainable employment potential.

The aim of the JF was to utilise public money to catalyse innovative and partnership based approaches to job creation and promote opportunities that led to the long term improvement of employment prospects of the unemployed, especially young people and women. JF Target – the creation of about 150,000 sustainable jobs. The JF was a programme to be implemented over a five year period. 2011/12 was the establishment year of the Fund. 2012/13 (year 1) to 2016/17 (year 5) was the project implementation period. 2017/18 was a close-out year wherein final programme evaluations, audits and learning would be consolidated and disseminated

Jobs Fund: Main Reasons for Spending Deviation
The reasons were : detail design and embedding the implementation of a new funding instrument; establishing administrative capacity; finalising the governance framework; manual assessment of 2600 applications; and contracting with grantees (ensuring conditions precedent were met).

Jobs Fund: Progress 2012/13
Second call for proposals was issued, successful implementation of on-line application process, applications currently being assessed to be completed by end November. National Treasury anticipated that another billion rand would be allocated by the Investment Committee to fund a new tranche of projects; this would result in a change to the projected disbursement profile over the Medium Term Expenditure Framework (MTEF). The initial budget for the Jobs Fund was an indicative budget, the results of the first and second call for proposals had informed a review of the MTEF allocations. The budget had been rescheduled. The estimated grant transfer to the Development Bank of Southern Africa (DBSA) for 2012/13 was R438 531 million. The adjustments to the Jobs Fund Budget would be reviewed on an on-going basis – since the open architecture of the Fund implied that one did not know how much grant funding future applicants would request, neither the applications that would be approved by the Investment Committee. To date 19 grantees from the first call for proposals had been contracted. The first grant disbursement to grantees was made in April 2012. Training sessions were hosted for Grantees.

Other Areas of Spending Deviation
Personnel Vacancies: progress had been made in reducing the departmental vacancy rate from 14% in 2010/11 to 9.5% in 2011/12. There were challenges faced in attracting the right skills for the identified positions. 5% of offers made had been turned down for various reasons including salaries, counter offers, and other developmental career choices.

IFMS: delays experienced in awarding procurement for development of inventory management, finance and payroll modules. Finance module development was awarded in May 2012 and spending had begun. Inventory Management procurement was cancelled – SITA was to develop in-house and spending was expected to begin during 2012/13 financial year. Procurement module development was yet to be awarded – this might continue to affect
spending.

NDPG: the Neighbourhood Development Partnership (NDP) recorded a R41.6 million (4.9%) underspend out of a total allocation of R850 million. This amount was withheld in terms of the conditional grant requirements. Non-compliance by municipalities related to low value for money. Challenges included low-quality or no project planning submissions, project delays due to high staff attrition and variances between budgeted project approval amounts and actual contractor spend.
(Slide 34)

Discussion
Ms P Adams (ANC) referred to the training of councillors, one of National Treasury's major achievements (slide 5). If there was follow-up training, was it sufficient? Also, was there an assessment tool? There were service delivery protests all over the country.

Ms Adams asked about the partnership development grant programmes. National Treasury had targeted 100 programmes, but had met only 95. What had happened to the other five programmes?

National Treasury had interventions in three provinces. How far had they worked? When did National Treasury intend to withdraw?

Ms Z Dlamini-Dubazana (ANC) thanked the Minister and National Treasury for the informative briefings. The information was of critical importance to the Committee.

National Treasury had a focus on value for money and shifting of resources from construction to infrastructure (slide 4). How far had National Treasury progressed on this focus?

National Treasury was trying to increase the efficiency of public spending. What programme was in place to achieve this?

The Committee had heard some months ago that National Treasury was establishing its procurement office. Had this office now been established? If not, why not?

National Treasury wanted to roll out the strategic sourcing principle to 42 medium capacity municipalities (slide 13). What was the report back?

With reference to the establishment of the Government Technical Advisory Centre (Annual Report, page 97). How was this centre different from the technical and management support and development finance that was already in place in the National Treasury? This was within Programme 8. This was a Programme that cut across. The Auditor-General had commented that this very same programme did not have a measurable objective, did not have the expected outcomes, and did not have the problem output. This was worrying. She could believe that National Treasury received an unqualified audit opinion, but the Auditor-General examined the numbers and the receipts but did not measure the commitments. This was a concern.

The debt service costs of 2.6% of the GDP were a worry (slide 14), because the growth in GDP was about 3.2%. How much of this 2.6% was used to service the 'borrowed loan'?

With reference to the deviations and virements on the payment for capital assets of R21 million (Annual Report, page 137), which were under Programme 8, a programme that raised some concern, and Programme 1 Administration, why were those virements made to the capital assets?

She thought that a follow-up session might be needed, as there were so many questions that she could ask.

Mr T Harris (DA) noted that the Minister had been to an IMF-World Bank meeting in Tokyo. Mr Harris assumed that the narrative of those meetings had shifted in the last few months. One had been very concerned over global growth, in particular, the situation in Europe. He was sure that high on the agenda now was the concern that South Africa was declining faster than the rest of the world, especially as to the sustainability of the state finances as reflected by the credit ratings downgrade [by Moody's]. The Minister had said that South Africa was doing better than people made it appear, but, especially when it came to ratings, perception was reality. The credit ratings downgrades would, Mr Harris assumed, have a very big material effect on the cost of borrowing. As the DG had shown, all three major credit rating agencies had removed South Africa's A grade status and now South Africa was down to the level of 'junk status'. Mr Harris was interested in the duality of National Treasury's approach to the credit ratings. When South Africa was upgraded, National Treasury would say that it was an endorsement of Government's performance, but when South Africa was downgraded, National Treasury attacked the methodology and approach of the credit rating agencies. Surely it was necessary to recognise on both sides that the credit rating agencies had a particular methodology. When South Africa was upgraded, one should accept that methodology, and when South Africa was downgraded, one should accept that methodology again. He asked the Minister to explain that duality.

The Minister had spoken at length on the bail-out structures for the European Union. Now there was a question mark over South Africa's national finances, as raised by the credit rating agencies, what bail-out mechanisms existed for South Africa? Mr Harris assumed that there was the bail-out fund to which South Africa had contributed a few months ago. He had heard talk of another structure between the members of BRICS. He asked the Minister to describe South Africa's options for bailing out its economy if necessary. Obviously, the DA, like all parties, hoped that this situation would not arise. However, what structures existed to assist South Africa?

Then the Minister had spoken about fiscal consolidation and support for growth. Mr Harris could see the plan for fiscal consolidation in the budget, but he could not see the support for growth. That was obvious. It showed in the numbers. Malaysia was growing at 5.4%. Chile was growing at 5.5%. Peru was growing at 6.1%. Vietnam and the Philippines were both growing at 5.9%. These were all economies that were very much like South Africa's. However, South Africa was growing at only 2%. The budget did not deal with the support for growth, and this showed in the numbers. He asked for more clarity.

The Chairperson asked Mr Harris to be clear as to which budget he referred.

Mr Harris replied that he was referring to the national budget. The Minister had spoken on how budgets needed to tread the line between fiscal consolidation and support for growth. Mr Harris would argue that South Africa's national budget so far had not done that and this showed up in the growth numbers. 

The DG had spoken of the hold-up of the youth wage subsidy at NEDLAC. Why did this particular proposal need consensus? Other proposals emerged from NEDLAC without consensus. Business had not signed off on the labour laws, yet these laws were now before Parliament. Why did the youth wage subsidy have a special status? What was National Treasury's reading of that situation? How come laws came to Parliament every day without consensus from NEDLAC, but it was totally unacceptable for the youth wage subsidy not to have consensus from NEDLAC.

There was much detail on the under spending on the jobs fund. On average, one was giving projects R 53 million. If the total was R18 billion to create 21 000 jobs, that was R85 000 per job. He understood that the original forecast was R60 000. The cost per job was slightly higher, but it was still relatively good value. The major factor, however, was that National Treasury was in error by R2.5 billion in its forecast. This was quite significant a number. He understood that one might get it slightly wrong, but as an example to other departments it was very serious.

In the same regard, the Auditor-General's report was 'a litany of poor examples to the other departments'. In terms of the framework for managing programme performance, 42% of targets were not time-bound. Employees performed work outside without written permission. There was insufficient evidence that bids were used for tenders of over half a million. There was no human resource plan in place. There was non-compliance with the Public Finance Management Act (No. 1 of 1999) and National Treasury's own regulations. The Annual Financial Statements had material misstatements that could have been avoided if there had been an effective review mechanism in place. This was an unqualified report, but an unqualified opinion was the bare minimum that could be accepted from National Treasury. These things that the Auditor-General had indicated were seriously alarming when they came from a department like National Treasury. How could one expect colleagues in other committees to hold those departments to account when National Treasury was not even getting these issues right.

In the Annexures, Mr Harris was interested in three big numbers. The first was the R15 billion guarantee for the Development Bank of Southern Africa (DBSA). For how long was this in place? Was this the recapitalisation that Members had been told about? The fact that the DBSA had now shifted its financing focus to a more risky approach to financing low capacity municipalities was of concern since that approach might increase the risk that this R15 billion guarantee might be called upon from National Treasury.

The second big number was the R60 billion loan to Eskom, of which R20 billion was added last year. Did National Treasury feel that this amount was recoverable? Eskom was raising funds on the capital market. So one would imagine that the bond holders would be repaid before National Treasury. A similar thing applied to the Gautrain loan of R4.2 billion. The Gautrain was funded by bank finance and a grant from the provincial government. So again National Treasury would be quite low on the list of creditors. Was this amount actually recoverable?

As to the Alexkor contingent liability of R1.19 million, would National Treasury give guarantees to private mining companies that competed with Alexkor? Surely one had the state playing in a space in which one might argue that the state should not be involved, yet National Treasury had to stand surety for amounts such as this to back up Alexkor. He had serious reservations.

There was a promissory note about R1 billion with no justification or explanation as to its purpose (Annual Report, page 211). Clarity was required. 

Investment by Government and by public corporations was propping up the infrastructure investment side of the economy, but from Parliament's side it was impossible to work out how much money was being spent. Every year one was given huge numbers for infrastructure, but then it was impossible to do oversight on how that money was spent because there was no reporting on the investment by the Government and public corporations. He would appreciate figures from National Treasury.

There was significant under spending from the Economic Policy division of 32%. The Technical Support division was under spent by 38%. Broadly the payment for capital assets was under spent by 56%. Mr Harris found this astonishing in the context of a budget in which the state was supposed to be investing in capital to ensure South Africa's long term growth prospects. If National Treasury under spent by 56% on its payment for capital assets, it set a very poor example.

Mr Ross thanked the Chairperson for noting his hand in absentia. This was unique. He asked for information on the material under spending in terms of the R2.4 billion. He asked about the stronger intervention by National Treasury in local government. There had been interventions lately in terms of Section 216(2) of the Constitution, whereby the funds of municipalities could be withheld in terms of the Division of Revenue Act (DoRA) allocation. This was also a unique step. He supported these interventions in order to stop the theft, the corruption, and the maladministration. The strong interventions by National Treasury were a step in the right direction, but they would be strengthened even further by the establishment of the procurement office. What were the plans for implementation of that procurement office?

With regard to the R60 billion to Eskom, and the R20 billion added, it seemed that the guarantees to Eskom were much needed because one wanted an alternative funding model as opposed to administrative prices, and one agreed that loans in the longer term were a step in the right direction. However, was this guarantee to Eskom a soft loan, and was Eskom not becoming a bottomless pit in terms of the delays in the construction of Medupi Power Station, the new dry-cooled coal fired power station being built by Eskom near Lephalale in Limpopo province?

The DBSA had indicated in earlier presentations that it would require R110 billion for infrastructure backlogs in the country, which was a significant amount. R15 billion had already been allocated, also in terms of a guarantee. Did one envisage that this amount would become much higher in view of the challenges that DBSA would face as an institution in being at the forefront of implementation of infrastructure development?

Ms J Tshabalala (ANC) asked about Programme 3, the first bullet, on the introduction of reforms in provincial and local government fiscal systems, to direct more resources to poorly resourced municipalities. What informed the determination of that? Was it service delivery or population?

There was a draft construction procurement standard (Programme 8) for use by provincial treasuries to improve compliance by implementing departments. This was long overdue and was highly welcome. However, what was the time frame?

Under human capital (Programme 1 Administration) there was a need to account for youth employment in those percentages, as well as the number of women and the number of blacks employed.

The inability to meet the target of 2% of people with disabilities was becoming a matter of rhetoric in all departments. One must be determined to achieve it at some point. It was not good enough to keep on reporting that one was unable to achieve this target. Moreover, why was it so difficult to employ people with disabilities?

The Auditor-General's report showed deviations that had been observed. What were these deviations? Were they around the number of posts that had been advertised? There was much money involved when one saw such deviations.

On outcome and expenditure, it was reported on the budget allocated that one was able to spend 89% of the budget. What was the cause of the under spending? What happened to that money? She hoped that National Treasury would not say that it represented a saving.

National Treasury should inform the Committee on how it dealt with matters of emphasis in the previous reporting period.

National Treasury should be serious when reporting (Annual Report, page 128) particularly when the employment creation facilitation fund was very key and important to the youth. There was a lack of substantive reporting on this fund.

On page 97 it did not say much on the last bullet.

Why should one shift funds amounting to R21 000 from capital assets (Annual Report, page 137)?

She quoted a piece of investment wisdom from Warren Buffett who said 'Rule No.1: Never lose money. Rule No.2: Never forget rule. Were we able to deliberate money from where we were sitting? How was it that the inflation rate was affecting our savings?

She welcomed the RNI (Japan) credit rating agency affirmation of South Africa's outlook.

The mining industry production had been quite stagnant. In the cause of balancing interests, where was South Africa? What did this mean for South Africa's fiscus?

She would not comment on the youth wage subsidy as it was at NEDLAC.

Minister's responses
The Minister thanked the Members for the questions which made for an exciting debate.

The Minister responded to Ms Adams on the intervention in the three provinces. He clarified that there were two provinces with interventions. In the case of the third province, 'a polite message had been sent'.

The Limpopo intervention had worked from a financial point of view. When he had briefed the Committee previously, he had said so, but memories were short, and he was grateful to Ms Adams for asking the question. National Treasury had intervened in Limpopo because that provincial government had written to National Treasury and asked if it could borrow just over R1 billion and obtain an overdraft from a bank. National Treasury had asked why Limpopo wanted an overdraft. When National Treasury checked, it found that at the rate of spending at that time, by the end of the financial year Limpopo would have a deficit of R2 billion. National Treasury informed Limpopo that this was not a sustainable financial situation. Other challenges were noted, and Government decided to intervene in terms of the Constitution. Nine or ten months later, the provincial treasury now had a new head of department. There were some new staff appointed. Some staff still needed to be appointed, to ensure proper cash management and budgeting.

Secondly National Treasury had worked with the provincial officials to prepare the budget with which one was now operating the 2012/13 Limpopo provincial budget. This budget was prepared on a surplus basis, so that Limpopo could recover from some of its problems, such as unauthorised expenditure.

In the other Limpopo provincial departments there had been varied levels of success. The Department of Health was doing extremely well. It had brought the service delivery situation largely under control. To be perfectly frank, there was some propaganda at the moment to undermine the intervention. This was regrettable, as people should speak on the basis of facts. Clearly people who had been benefiting from inappropriate access to public funds were obviously going to squeal.

Similarly Members would have heard about the challenges in education, some of which had been met, and some of which the Minister of Basic Education was still dealing. The Minister of Transport had just appointed a new administrator. The Minister of Public Works had a team in place and had met with it ten days ago.

The Minister offered to give the Committee, together perhaps with colleagues from the National Council of Provinces (NCOP), a more comprehensive report in due course.

National Treasury would not yet withdraw from Limpopo, because current situation was not sustainable. There were about 30 cases with the South African Police Service (SAPS), where charges had been laid. The enforcement authorities had to pursue those. There were another 30 odd cases where disciplinary action needed to be taken. Some action had begun. This was still work in progress. National Treasury was obtaining legal clarity on some disjuncture between national and provincial authority.

There was a fair amount of corrective action in the Free State that had been undertaken in the roads department. Mr Kenneth Brown could give more details.

After six months of hard work in Gauteng, there was now some understanding with the Department of Health, both national and provincial, on how to bring the finances of the provincial health department into the right range. National Treasury and the Minister of Health had worked hard to ensure that public services were not compromised by some of the financial challenges. National Treasury had met about three weeks ago with all the parties concerned and so had been directly involved.

One of the challenges, as Members would know, in many of the provinces, was that money intended for health and education was sometimes used for other things. This compromised basic services. As one worked towards the next budget, one sought to ensure that an allocation for health remained such. Otherwise one would keep looking for 'haircuts' of one kind or another to correct something that should not have happened.

The Minister responded to Ms Dlamini-Dubazana on the value for money consumption for infrastructure. 'We are at the early stages of that.' Setting an objective was one thing, but putting it into practice required time, but National Treasury was persuading people who managed and developed budgets of the direction required. He thought that one needed to make many more people aware of why this was important. In the overall budget there was a great deal of money going into economic and social infrastructure. All was not lost in that regard. The process had begun. There was now a greater recognition, for example, in terms of the personnel bill. 'We've got the wage deals that we have.' However, together with the Minister of Public Service and Administration, National Treasury was considering the global amount of R300 odd billion rand, and how one could obtain savings on any number of things. There was some work going on that one was not yet ready to report on yet - for example, were there still ghosts in the public service? Were there still people taking too much sick leave in the public service? It had to be asked if there were there still categories of surplus workers who refused to transfer to where they required but for whom one then substituted in one way or another?

The Minister responded on efficiency in public spending. Mr Donaldson might want to comment on that. Over the past three years National Treasury had gone quite far in introducing the concept of savings, of reprioritisation within departments, and of contributing to a pool from which other programmes could actually be serviced. One was at the edge of a piece of work done by the National Treasury and the Presidency: Department of Performance Monitoring and Evaluation, which was beginning to indicate which programmes in Government could be slowed down, which programmes could be cut, and which programmes could be deferred. There was still some way to go, but at  least the conversation had started, so that one worked within the kind of fiscal envelope that one had at the moment. There was still room for progress in this particular area. It was not quite the case that South Africa was a rich country in which one could spend as much money as one wished in different levels of government. This was not the case. Parliament had an important role in bringing this new consciousness about.

The Minister referred to the debt service cost of 2.6% of GDP. This was the interest that one paid on debt. The DG would give a more elaborate explanation. This was what it cost to borrow money. If one did not reduce that amount of money, it meant that there was less money available to deliver services. Prior to the global recession, South Africa was doing very well in this area. South Africa's debt servicing costs were very low, so more money was available for delivering services. Basically, fiscal consolidation meant that it was necessary to lower the level of borrowing. However, it was necessary to understand that if one borrowed, credit ratings became important, the cost of borrowing became important, and the fact that people were willing to lend one money became important was becoming important as well. So there were many in South Africa who thought that one could borrow on the one hand and say and do what one wanted. This relationship did not work, particularly if it was the National Treasury DG who was expected to go and smile in New York and Boston and say that he was there to borrow money. Those were challenges.

National Treasury's responses
The DG answered the question on the central procurement office (CPO). National Treasury had done an internal reorganisation. It was not creating the central procurement office from the very beginning, but it was required to serve a very different purpose from that of the institution that National Treasury had had for some time. Under specialist functions, National Treasury had two sections. One of them dealt with matters of supply chain. He had reported on some of the changes to regulations that had been effected to align the Preferential Procurement Policy Framework Act and the triple B legislation. The work on supply chain procurement already happened there, but there was some scaling up which one wanted to do, which the CPO would do. Part of the process for creating the CPO was to split the fifteenth part of specialist functions, and leave as a standalone the supply chain management. There would be someone to head that unit once all the due processes had been followed at a senior level to drive procurement and monitoring of the supply chain. However, the processes could take long, so an application had been sent with all the details, and a job description and evaluation had been done. All these were necessary steps. In the interim, because National Treasury understood the urgency, it had decided to advertise the position as additional to the establishment. This avoided the need to obtain all the approvals and enable a highly qualified person to be appointed on a contract basis. Interviewing at this level, that of Deputy Director-General (DDG), required a panel that included membership at a political level. By the end of this year, an interim appointment would definitely be made.

On the National Development Plan (NDP), some of the municipalities fell off there which accounted for the under spending of R41 million on that grant. Municipalities applied for this grant and some of them realised up front that the grant had two windows – technical support and the grant which funded bricks and mortar. The technical support window which was small was usually used to assist municipalities that wished to tap the bricks and mortar part but might not have the technical capacity to prepare applications that met the criteria and conditions prescribed under the grant, which were approved by Parliament with the framework and so forth. There was a change in some of the municipalities in the year in question in so far as there were instances – most of the five - in which the previous political office bearers had applied and were granted for one purpose. Then when the new people came in, they were not sure if that was what they wanted to do. This explained that deviation.

The DG responded to Ms Dlamini-Dubazana that the Infrastructure Delivery Improvement Programme was part of the Public Private Partnership (PPP) that provided support, but not the regulatory bid, and some of the financial management support programmes were going to comprise this, but were now done under statute. There was now a minute that established it as a component of Government, with a head equivalent to a director-general, with reporting arrangements that would be clarified. Some of the targets set for that year would include, for example: 80 technical assistance projects supported; 36 long term technical assistants – four per province – deployed across all nine provinces. He referred to the Strategic Plan. There would be some instances where the nature of what National Treasury wanted to achieve did not easily lend itself to quantification and attaching a time frame to it per se. In other words, if one was going to assist people, and one wanted them to ask for help, as was the case on a programme like this, one could not determine in advance that ten of them would ask for help, and out of that ten one would help six of them, and that they would have asked by the end of April. This was not how real life worked. If one expected people to apply for help, one just signalled that with the resources available one thought that one could help people in this area, because this was the conception of the Programme. But one could say in advance that one would expect to receive applications at a specific time, but in so far as there was a continuation, from previous years, of commitments and arrangements with provinces, like the example given, then one certainly could say that one would deploy so many technical assistants to these places to achieve these objectives. This was why there were those differences. He referred again to the Strategic Plan. Notwithstanding that most of them had those indicators, there were some that did not have them – 'correctly so, in our view', as he had just explained.

Mr Dalu Majeke, National Treasury Chief Financial Officer, said that National Treasury had not literally taken money from capital assets. It was just a shift. He referred to the Annual Report, page 137. Money had been taken from Programme 1 – Administration and moved to Programme 8. It was purely a matter of reprioritisation within the National Treasury.

Mr Kenneth Brown, DDG: Intergovernmental Relations, replied to Ms Adams, that, after an election, National Treasury would give councillors a file on the Municipal Finance Management Act (MFMA), and a guide on what to do and what not to do. This time, specifically, National Treasury had recognised the need for an intense programme of training and induction. In terms of follow-up, the National Treasury had a MFMA Coordinators Forum, which was placed in each of the treasuries. Also, in each of the treasuries, there were MFMA units, and these had the responsibility to ensure that the budget process in a municipality was strengthened from preparation right up to execution. Where there were better treasuries, there was better performance. Four of the treasuries, in terms of the MFMA units, were fairly strong. There had been a decline in negative audits. 'So we are doing follow ups in terms of that in different other ways, than to call people out of their job to train them as it related to that.'   

Mr Freeman Nomvalo, DDG: Office of the Accountant-General, thought that Mr Brown had answered adequately. He assisted the DG with Mr Harris' question on 'the litany' of issues raised by the Auditor-General. National Treasury took very seriously any issue that the Auditor-General raised. National Treasury had responded to each of the issues raised, in terms of ensuring that they were addressed going forward. However, the Committee would appreciate that this was not a widespread occurrence in the National Treasury. For example, paragraph 4. The issues relating to material misstatements persisted because those numbers remained in the financial statements. There was a process that had to be followed to deal with that. Once that process was completed, that item would fall away. 

As to the issue of performing remunerative work, the framework governing this in Government had a weakness. Until that weakness was addressed it was necessary to come up with a compensating control in the National Treasury. This had been suggested, and was being implemented as one spoke. All of the above items were isolated matters. 
[
The DG replied to Mr Harris who had raised the question of not seeing the capital expenditure that would lift the productive capacity of this economy. National Treasury published the numbers in the budget in the first instance, and National Treasury usually showed the expenditure for the past three years. Those actual expenditure figures were real. This was the overall broad response. He referred Mr Harris to the quarterly bulletins of the South African Reserve Bank, which summarised the figures – the figures for spending of corporations and of Government, and the aggregates. One could easily find them in the annual reports of the state-owned entities (SOEs).

The capital under spending in the National Treasury needed careful explanation. The Treasury was not a big capital-spending department. The bulk would be transfers. Secondly, the greater part of the under spending related to what in reality was a small project. Here was an example where percentages could be misleading, as the actual amount of money was relatively small. It concerned the contract, managed by the Department of Public Works (DPW), for the refurbishing of a building. He explained that there were unanticipated stuctural problems that had resulted in delays.

Ms Avril Halstead, Chief Director, representing the DDG: Asset and Liability Management, on SOEs and debt. She continued what the DG was saying about the capital expenditure (CAPEX) of the SOEs. In the budget review, National Treasury published its annual updates on what expenditure actually took place. Data was collected on a quarterly basis. If specific targets were not met, National Treasury considered what specific interventions to put in place, and, in the case of Eskom in particular, had sought to ensure that there were no delays with projects such as Medupi. The first units of Medupi would be commissioned early next year.

The local government unit also produced quarterly reports on the capital spending in municipalities.

She gave more information about Eskom: in terms of the R60 billion loan, the R20 billion allocated last year was part of the R60 billion allocation. The loan had been drawn down in three tranches of R10 billion, and a further R30 billion in 2010/11; and then the final R20 billion in 2011/12. She described it as a R60 billion subordinated loan, which meant that it would rank behind Eskom's other debt that it had issued; so, in the event that Eskom were liquidated, which one hoped would not happen, the other bond issuers would be paid out first, and only thereafter the subordinated loan. The intention behind providing the loan was to provide a type of equity-like support to Eskom to strengthen its balance sheet. The interest rate which National Treasury charged on this loan was based on the R206 yield rate, but that interest rate was payable only if Eskom's credit metrics were sufficiently sound. The point was not to be charging Eskom interest while it was struggling to service other loans and to put additional pressure on its cash flows. As one moved to the cost-reflective tariffs, one was already beginning to see in Eskom's financial statements that there were significant improvements. It was expected that in due course Eskom would be able to sustain itself, borrow without guarantees, and eventually repay that loan, which was for 30 years.

The R15 billion in respect of the DBSA referred to an increase in the callable capital. In order to increase that callable capital, which was like equity, except that it was not actually equity that National had paid across to the DBSA. Possible examples were the African Development Bank and the International Monetary Fund (IMF). In the event that the IMF started to bail out European countries, then it might make calls on its callable capital from various countries to put that money in. Obviously the DBSA would not be bailing out European countries. In effect, it served the same purpose as equity. National Treasury wanted to increase the DBSA's equity to R20 billion. To effect that actually required an amendment to the DBSA's founding Act, which specified a number in the region of R4.8 billion. At the moment, National Treasury had provided a guarantee to DBSA with the intention of amending the legislation so that the amount would become what was called 'callable capital'.

The reason for providing this was to improve the DBSA's capacity to lend. Obviously the DBSA had to lend to municipalities or SOEs. It was also undertaking some lending to renewable Independent Power Producers (IPPs) and industrial development zones (IDZs). However, it was lending to institutions that either had sound projects which were generating sufficient revenues to repay the loan or the institution itself. The intention was not for DBSA to lend to unsound institutions. These loans were not intended as grants.

Regarding the entire infrastructure programme and backlogs, not all of the R110 billion was necessarily the investment task of the DBSA. The investment would be done in conjunction with the fiscus by way of conditional grants to some of the municipalities that were very weak, or even to some of the municipalities that were strong but were building infrastructure in areas where there were many poor people. The DBSA gave loans where there was a sound business case, while the fiscus provided loans where there were weaknesses.

The R119 million referred to on page 211 in connection with Alexkor was a contingent liability, not a guarantee. It had arisen because there was a land claim on Alexkor's assets. A deed of settlement had been agreed between the community, Alexkor, and Government. In respect of that there was a settlement that had to be made. In the 2012/13 budget National Treasury had made allocations to Alexkor to settle this outstanding liability as well as other outstanding amounts owed by Alexkor or Government.

The 2.6% of GDP for the debt service cost was in line with projections. Obviously it was a function of the amount of debt issued and the interest rate charged on that debt. As the debt levels rose, as projected, then the debt service cost would increase. Foreign investors provided support; currently they took up about 32% of the bond portfolio, and this had helped to drive down the cost of borrowing. When Moody's Investors Services had downgraded South Africa's credit rating, the interest rate increased by about 20 basis points. This pushed up the cost of debt. Fluctuations or weaknesses of the exchange rate increased the cost of servicing foreign debt. Luckily foreign debt was – at about 10% - a relatively small part of the portfolio. There was also a floating rate portfolio which was linked to inflation. So if there were changes in inflation, that could also drive interest rate costs. All these factors needed to be kept under review. This was why National Treasury sought fiscal consolidation.

Debt service costs did not include the repayment of the debt. The net borrowing requirement and the gross borrowing requirement were to be distinguished. The gross borrowing requirement was also to repay or to roll-over some of the existing debt in the portfolio.         

Mr Coen Kruger, DDG: Specialist Functions, replied to a question on strategic sourcing. As was indicated on page 81 of the Annual Report, when the training on strategic sourcing did in fact start, it was realised that factors such as the high turnover of officials necessitated that the training be much more comprehensive and integrated. So the training was expanded to all areas of supply chain management. Unfortunately officials were not amenable to e-learning or e-learnerships, and there would have to be a level of enforcement.

The DG responded on the allocation of resources to poor municipalities. Essentially, National Treasury would use, as indicators, profiles of households, in other words the combined income of members of a household, or National Treasury would use backlogs, which gave some indication of the standard of living in an area.

The DG explained further on callable capital. When the DBSA was established, it was given R200 million in cash. Government indicated commitments to make available R4.8 billion which was what Ms Halstead had referred to in callable capital. In essence it indicated to a would-be lender to the DBSA that in the event that the DBSA were to get into trouble, which was not anticipated, Government would stand ready to assist. It was an insurance to the would-be lender to the extent of R4.8 billion. The equity-like nature of callable capital arose from that. It did mean that the DBSA could have access to cash liquidity which would prop up the balance sheet of the institution. A crucial point was that, from the R200 million cash injection, the DBSA was able to build a loan book, or a balance sheet, as those who owed it money appeared on its asset side as debtors, of between R35 billion and R 40 billion, simply because people understood that this was an institution whose owner, being Government, was standing behind it, and could make available that R4.8 billion fairly quickly if needed to prop up the balance sheet.

The idea of expanding the callable capital of the DBSA and the interim arrangement of the guarantee was predicated on the understanding that, in the current environment, where economies and financial markets were experiencing a difficult time, and where Government wanted to expand its infrastructure investment, particularly by municipalities, who were the main clients of the DBSA, the National Treasury would like to ensure that the balance sheet of the DBSA was supported, so that when the DBSA went out to raise capital, those who lent to it took this into account so as to reduce the borrowing costs to the DBSA. This allowed it both to raise the capital and pass on the lowered cost of raising that capital to the borrowers – the municipalities in this case.   

Minister's further responses
The Minister had indicted to Mr Harris in a debate that the DA and the ANC probably had different world views on the economy. Even in the media there was not adequate honesty. In many of the types of questions that had arisen, there had to be a distinction between debating policy as the choices made, on the one hand, and talking down the economy. It was dangerous at the moment to talk down the economy. It was in no South African's interest to do so. It was important to keep the debate on the subject of whether a certain course of action was right or whether a different way of doing things was possible, or if we had taken a course of action properly or adequately. Government was willing to listen to fair criticism, but talking down the economy was not helpful in the current environment.

Mr Harris' first point had exemplified what the Minister had just said. South Africa was a small speck on the global stage. He would try to see if next time he could take Mr Harris along to these meetings so that he could see this. 'So there are no concerns about the South African economy.' In fact the maps that the IMF would show indicated South Africa in a reasonably good light. If one considered the fiscal space of different countries, and there was a map that the Managing Director (MD) of the IMF had shown at the formal meeting of what was called the IMFC, that showed that despite what one thought of the challenges facing South Africa, the IMF said that South Africa had modest or medium fiscal space, whereas some of the other countries were in red, which meant that they had no fiscal space, for example, in Europe. South Africa was not in Europe's category. South Africa's debt GDP ratio was below 40% and was not expected to reach even 45% in the next couple of years.

Mr Harris had referred to ratings. The Minister referred to the Wikipedia website on Moody's Investors Services. Moody's had an interesting history dating back to 1909. In the specific instance in the current environment of Standard and Poor (S&P) the editorial in Business Day 16 October 2012 [it is not on Business Day's website] would be quite instructive. This was the point that he had raised when he met S&P in Tokyo, that S&P should have waited until the Medium Term Budget Policy Statement (MTBPS) to see South Africa's figures, what South Africa did, and how stretched it was fiscally. Why anticipate the figures? Why not wait until the ANC conference in December rather than speculate? People who sat at a distance should not make political judgements. 'Look at our numbers, and our numbers are fine.'

It also had to be remembered that South Africa did not borrow this extra trillion rand because it just wanted to. It did so to ensure that the country did not suffer the worst when the recession hit. If all things were equal, South Africa would not have borrowed this money, because South Africa had had 5% growth, revenue was flowing in, and Government could not even spend all the money that it had in 2008 before the recession hit. 

Mr Harris had referred to EU bail-out structures, and asked whether South Africa had such bail-out structures. The answer was simple – South Africa did not need any.

Mr Harris had then referred to fiscal consolidation versus support for growth. This was another debate that one should have. If growth was that easy, the world should be able to return itself to 6% growth, and Africa should be growing at 10% not 5%, and China would be back at 11 or 12% growth, not at just below 8%. There was something mystical about growth.

In the budget, the National Treasury had consistently removed fiscal drag through personal income tax (PIP) relief. One had sustained real growth in expenditure of 2.6 to 2.7% despite the recession. The R25 billion competitiveness fund had been established. The local procurement rules had been changed. With the SOEs there was huge investment in economic and social infrastructure. The problem with social infrastructure was that delivery systems were weak, not that the money was not there. National Treasury had provided guarantees to Eskom, to Transnet, and to others who needed them to give them leverage to borrow and to deliver. The social grants had been expanded to support household consumption. He gave the example of agriculture in the GDP figures. It was necessary to get the right balance between the public and the private sectors. 

As to incentives for employment, the Minister noted that the DA had a particular axe to grind on the subsidy previously mentioned – the Youth Wage Subsidy. There were political processes under way. It would compromise both business and labour simply to go ahead and implement the Youth Wage Subsidy. Government preferred the route of consensus. There were also other incentives in the system, which had been getting increased subscription.

In response to Mr Ross, the Minister said that to use 'bottomless pit' in reference to Eskom was impolite. 'Let's be nice to them.'

It would be useful for the Committee to receive a briefing on the matrices and methodologies of the credit rating agencies.

The current difficulties in the mining industry would lower production and exports, and result in job losses. However, the whole mining industry was not paralysed.

All of us needed to appeal for a strengthening of the labour relations systems, so that workers did believe that they had a channel through which they address their points of view and grievances, and it was necessary to get the mines working again sooner rather than later.

The Minister replied to Ms Tshabalala that it was necessary to create a climate of confidence both for internal and external investors. Under the Chairperson's leadership, all of us needed to work out how to make a contribution to creating a climate of confidence in South Africa. There was indeed a terrible investment climate around the world. The confidence issue did not arise because of the strikes, or because the ANC was going to have a conference, as some in this room would suggest. The confidence issue had been there since 2008/09, since the recession came. People were worried that another shock wave would come South Africa's way. Notwithstanding that, one needed to point out the positives, of which there were many for South Africa, and many opportunities. It was also important to find a way to put the national interest first, rather than party political interests.

The Minister had just received a short message service (SMS) message: 'today's bond auction saw a strong demand. We were, as usual, looking to raise R2.1 billion. We received R7.3 billion rand in bids'. If South Africa's situation was really so bad, would there be such willingness to lend to South Africa?   

Conclusion
The Chairperson did not take follow-up questions because of the lack of time, but reminded Members that, on the fiscal framework issues, this was a report-back on progress made. This Committee would engage with the MTBPS immediately that it was presented next week [25 October 2012] so there would be an opportunity to compare what had been presented and achieved with the future projections.

He commended the National Treasury on its comprehensive report-back on its strategic and annual plans that it had presented to the Committee and which the Committee had adopted.

For the past two financial years, the National Treasury had received unqualified audit reports, with findings. Nothing had changed. This was an area that required further attention, especially as compared with previous years. He agreed with the Minister that there was perhaps a need to sit with the other finance committees to hear a follow-up about interventions, as raised by Ms Adams earlier. However, this was more to know what had been learned from those interventions, rather than about what had happened, including what role Parliament should be able to play and the model for interventions. Sometimes Government put National Treasury in an invidious position. He noted that five% of the vacancies in National Treasury existed because successful candidates declined to accept offers of employment. If that issue of capacity was not addressed, one would continue to experience many problems. With reference to the training in municipalities, he asked for a report that quantified the impact of the training that had been given, as the DBSA had, at great expense, done the same thing for the last 18 years. The impact might not be felt because of the turnover of councillors. Sometimes there was a mismatch of where people were actually deployed in the system itself. Some of the national departments were struggling on their own just to deal with some of their own internal issues. Now one was giving them an added responsibility to assist in the provinces. This was to set them up for failure. What systems should one put in place to assist those departments? He commented on South African Airways (SAA), a topical issue. The Minister and Department were quite defensive on this matter. They said that it was not a bail-out but a recapitalisation. As National Treasury moved in to assist, one saw the captain and the entire crew abandoning ship, while leaving the passengers on board. It was important to get a sense of what was happening at SAA. It might be a public enterprise issue, but the finances were approved at the level of this Committee. On a lighter note, the issue of labour unrest, raised by Ms Tshabalala, with reference to the document, it was better to say 'let's find a balance' rather than 'let's strike a balance'.           

The Minister explained that there had been a process of interaction between the Minister of Public Enterprises and himself on SAA, which had some difficulties in resolving management issues. However, SAA had particular logistical problems because of its position at the southern tip of Africa. This presented a huge number of disadvantages. These included flights over very long distances and the cost of fuel. There was also the nature of SAA'a aeroplanes, and whether they were sufficiently fuel-efficient. A diagnostic study had been done. Colleagues in the National Treasury were aware of that. One looked forward to SAA's new strategy. It was hoped that any financial or operational inefficiencies in SAA would be dealt with as well. It would be useful for the Committee, perhaps in partnership with the Department of Public Enterprises to have an interaction on this subject. He thanked Members for their excellent questions. 

The Chairperson thanked the Minister and his team, reminded Members that he would be checking their attendance in the sitting that afternoon of the National Assembly, and adjourned the meeting.

Apologies
Mr D van Rooyen (ANC), who was writing examinations; Mr N Koornhof (COPE) who was attending a JSC Cluster; Adv S Swart (ACDP); and the Hon. Nhlanhla Nene, Deputy Minister of Finance, who was attending other meetings in Pretoria.