Minister of Finance on Medium-Term Budget Policy Statement 2012

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Finance Standing Committee

25 October 2012
Chairperson: (ANC, Northern Cape) and Mr T Mufamadi (ANC)
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Meeting Summary

The Minister of Finance briefed the Standing Committees (Finance / Appropriations) and the Select Committees (Finance / Appropriations) on the Medium Term Budget Policy Statement. The global economy was still challenging, and this had restricted the level of growth of the gross domestic product. The budget deficit was moderating. Growth was expected to increase. The current economic downturn in Europe and the United States would continue while underlying problems were not being addressed. Internally, while trade within Africa and parts of the developing world was increasing, trade with European countries was decreasing. Problems in the mining industry and the volatility of the Rand were impacting on the economy. Investment by the private sector was slow. The majority of investment in the public sector was going to electricity and transport projects.

Members were told that the current account continued to increase, but this would be turned around. It was important for government to boost the economy in the current climate. Unemployment remained high, and economic growth was the only way to remedy this problem. The majority of government funding went to national departments, and almost as much to provinces.

There was no increase of expenditure in the medium term budget statement. In fact there had been a slight decrease. While some additional funding had been allocated to certain areas, such as higher than expected salary settlements, this had been more than offset by savings, re-allocation of under-spent funds and use of the contingency fund.

Members questioned the wisdom of using the contingency fund and said rising electricity costs would impact on the economy. Funds must also be reserved for maintenance of existing infrastructure. There was a high dependence on loans. Members queried the desirability of implementing the freeway e-tolling system, but were told that government would not interfere now that a court ruling had been made. Members stressed the need for job creation. Members were assured that there was involvement between government and business. It was suggested that an office should be established in order to monitor spending. Members bemoaned the low spending on science and technology, as innovation was needed.

The Minister was congratulated on the way Treasury was controlling spending. Treasury had made some policy suggestions but government had not followed through on them. It was suggested that the development of the Presidential complex at Nkandla was contrary to the call on the public to curb spending, and might lead to rebellion by taxpayers. These suggestions were dismissed by the Minister, but his colleague at Public Works would report shortly on the costs of the project. Members called for the establishment of a procurement office. Beneficiation would boost the economy. Clear plans were needed for infrastructure planning. The questions of strikes and vacancies in the public service also needed to be addressed.

Meeting report

Mr de Beer welcomed all present, noting that immediately after the Minister had delivered his speech the previous day, there had been positive reaction on the markets.

Minister of Finance briefing
Mr Pravin Gordhan, Minister of Finance, said that the global economy was still in decline. Events in one country affected another. He anticipated that growth in South Africa would slow down to 2.5%. Revenue collection was expected to be R5 billion less than expected. There would be no extra government spending. Debt would peak at 39% of gross domestic product (GDP) by 2015. The country had come a long way. There was a lot of scepticism over public spending. Credibility would be affected by what provinces did with the appropriations assigned to them, as would be the case with municipalities. What happened in these two spheres of government was as important as what happened at national level. National Treasury had to provide explanations for what was happening at lower levels of government. The public was owed an explanation on what was happening with their money. There was a good level of saving. There was concern over procurement processes. These would be higher when huge infrastructure projects were put in place. There were extreme uncertainties over the global economy. Yet, there were opportunities to be seized. The South African economy was more resilient than some others. Unnecessary pessimism should be avoided. South Africans should give themselves more credit.

Mr Lungisa Fuzile, Director-General, National Treasury, said that Members would have attended the interim budget speech the previous day and were familiar with some of the themes raised. In the immediate term, government would support the economy even if this did increase debt. The increase in debt from 4.2 to 4.8% was as a result of the reduction of revenue. Debt would peak at 39% of GDP. Overall expenditure had been kept constant, but some specific projects would receive extra finance. This would be achieved by re-prioritising spending away from certain projects.

Mr Fuzile predicted that the private sector would resume investing as confidence returned, leading to an increase in exports. Inflation was expected to remain within the target range. The current account would increase due to fewer exports being made. The problems in the mining sector were partially responsible for this trend.

Mr Fuzile said that the global outlook had deteriorated as European debt and banking issues remained unresolved. South Africa had historical ties with the Eurozone, and growth there was expected to be very slow. Amongst the BRICS (Brazil, Russia, India, China and South Africa) countries, low growth rates were also expected, even in the case of China. Trade amongst Sub-Saharan African countries had increased.

Mr Fuzile said that Members were aware of domestic factors such as mining unrest and energy supply. New developments would increase business confidence. The mining strikes had cost R10.1 billion. If the labour problems were protracted there would be a greater impact, but it seemed as if this was now changing. The rate of job creation was slowing. Employers found ways of reducing labour costs, normally by reducing the work force.

Mr Fuzile said that growth would be stimulated by the public sector, in particular by state owned enterprises (SOEs) like Eskom. The private sector would invest more as confidence grew.

Mr Fuzile said that the Minister had referred to the National Development Plan (NDP). This had made proposals on how to deal with some of the challenges. A summit had been held recently. The most important need was that of implementing everything contained in the plan. It needed to be delivered on time and within budget. He mentioned a number of aspects of the plan, including the upgrade of municipal infrastructure.

Mr Fuzile said that the investment in electricity was more than in any other sector. In time, public sector initiatives should be bolstered by investment from the private sector.

Mr Fuzile said that export performance varied across destinations and products. A significant portion of manufactured goods was being exported within the Southern African Development Community (SADC). Trade patterns with China, India and Africa were encouraging in difficult times. If more exports went to these countries, prospects of growth and job creation would improve.

Mr Fuzile presented the current account deficit figures. This reflected financial relations between South Africa and the rest of the world. In the current year the deficit was R189 billion. South Africa must be seen as an attractive destination for bonds or foreign direct investment (FDI) in order to address this liability.

Mr Fuzile said that employment had decelerated. The economy could only be incentivised to a point. Growth was needed to boost employment opportunities. An unemployment rate of 25% had to be addressed by higher growth levels.

Mr Fuzile said that there had been volatility in the currency market. Some investors were jittery over developments. Sentiment towards the Rand had been negative for some time. Strikes had played a part, as had the deterioration in the current account. The Rand had depreciated by 10% relative to the same period a year previously. The competitiveness of a country depended on the real exchange rate.

Mr Fuzile said that the fiscal footing was based on long-term equity and short-term economic support. The primary deficit should be reduced to 0.4 % of GDP by 2015. The revenue figure was R900 billion, but the revised expenditure figure was R1.05 trillion. The deficit would rise to R114 billion by 2016. Revised deficit for the current year was 4.8%, reducing in the medium term.

Mr Fuzile said that the remuneration component of government spending had been the highest, but more was now being budgeted for capital expenditure. The multi-year agreement would give more certainty over the future salary bill.

Mr Fuzile said that borrowing in the public sector remained at 7.1%. He hoped that the infrastructure programme would drive growth. An amount of R3.2 trillion announced in April 2012 might have risen to R4 trillion. Many projects were still in a planning process before work could start. In many cases feasibility studies still needed to be conducted. R250 billion's worth of projects were ready to commence.

Mr Fuzile said that national government took 47% of national expenditure, provinces 44% and local government 9%. This latter figure was growing. The bulk of provincial spend was on social services, which would increase equity. These were personnel intensive, and increases in wages made major impacts. Funds had been shifted away from projects which were further from completion.

Mr Fuzile said that it was important to pause before looking at the appropriation adjustments. There had been a R1.9 billion downward adjustment in expenditure. R11.5 billion had been provided in additional appropriation, while R13.4 billion had been offset from contingency reserves, declared savings, repayments from local government, projected underspending and decreased state debt costs. The Division of Revenue Act (DORA) would have to be amended.

Mr Fuzile said that R27.7 billion would be added to the provincial equitable share allocation for 2013 due to wage agreements. Changes had been proposed for the equitable share for municipalities. The subsidy for free basic electricity and water allowances would have to be increased as tariffs increased. Conditional grants would be increased in order to make them more aligned. Some cities would be encouraged to engage in human settlement projects, also concentrating on the provision of electricity and safe water supplies.

Mr Fuzile said that the results of the census of 2011 would be released shortly. These would have to be analysed and the formulae adapted where necessary. The Committees would be briefed once Treasury had finished this exercise. Formulae would be implemented on a phased basis so as not to create too much of an impact on those municipalities and provinces which had their allowances downgraded.

Discussion
Mr R Lees (DA, KwaZulu-Natal) said that a contingency was never meant to be spent. It was now being put into expenditure. It was therefore incorrect to say that expenditure was not increasing. He likened this to using a slush fund, which should have no place in a budget. He asked what justified the confidence that investors would return to the country. The supply of electricity was being sorted out, but the cost was rocketing. He was curious about roll-overs. He asked if the figure mentioned included sums already transferred to provincial government but never used, or it these funds had not yet been appropriated. There were cases of fiscal dumping. He assumed that the allocation came from Treasury. On conditional grants, there was a universal view on post-construction maintenance. There was a lack of funding for this. Infrastructure had to be maintained. He asked if the Minister had any views on this. He took the point of working together, but this did not mean slavishly following a certain viewpoint. Leaders must be open to other opinions. He was pleased that the Protection of State Information Act had still not being enacted, as the document before Members was marked 'Secret'.

Min Gordhan said that this classification had been made in error, and could be deleted.

Mr Nhlanhla Nene, Deputy Minister of Finance, replied on the issue of the use of the contingency reserve. Adjustments were made on what had to be allocated. The situation now dictated it due to higher wage settlements and other issues. Money would continue to be put aside as a contingency in future years.

Min Gordhan said that National Treasury was known for its transparency. The likening of the contingency allocation to a slush fund was totally inappropriate. Certain departments, such as Defence, did have such secret funds. There were unanticipated events, such as the recent floods in the Eastern Cape and wage negotiations leading to higher settlements than expected. Treasury was accountable to Parliament for all spending, and the DA was entitled to use democratic responses to debate issues.
 
Mr Kenneth Brown, Deputy DG: Intergovernmental Relations, Treasury, said that money was not always the problem. In some cases, capital expenditure had been exceeded while that on maintenance had not been touched. In Uganda, government gave schools direct allocations to conduct maintenance. The low Extended Public Works Programme (EPWP) uptake was a concern. If municipalities were to move on this programme, funds were available. This would deal with maintenance issues. Life cycles had to be considered. A programme had been initiated. Water losses were at 30% in some municipalities. The eThekwini municipality had taken a loan of R30 million to maintain its water supply, and was now enjoying the benefit


Mr Andrew Donaldson, Deputy DG: Public Finance, Treasury, said that the contingency reserve had three elements – unforeseen and unavoidable expenditure, macro uncertainty and government priorities. It was the intent to provide for unspecified commitments over the medium term.

Min Gordhan asked how an evidence-based discussion could be started on electricity generation, transmission and distribution. The question of affordability had to be answered. One could simply say it was unaffordable. If government took money to invest in Eskom, it would have to come from some other programme. He did not want to see fiscal dumping. There was still some of this happening.

Mr Fuzile said that contingency planning was done every year. This was the most judicious way to do it. If it was indicated that it would be spent, it would indicate an overall deficit position as if it had already been given to departments to spend. If there was a macro-economic catastrophe of sorts, it could be accommodated in the overall spending plan without increasing deficits. If there was no contingency reserve, unexpected funds would lead to greater deficits. The base was revised every year.

Mr N Koornhof (COPE) congratulated the Minister on his speech the previous day. There had been a comment on consumer debt. Unsecured loans were at record levels, and some commentators feared a bubble. Debt levels were high, but he could not put a figure forward. He asked when a pronouncement would be made on this. He had attended a meeting held by the Bank of Austria, and there was confidence there of a recovery in 2013. There was more concern over the situation in the United States of America (USA).

Min Gordhan confirmed the figure of 76% of unsecured debt. Some announcements on the 'bubble' would be made the following week. There was finger pointing between Europe and the USA on which continent was responsible for the current situation. Simple decisions were not being taken. Europe had set up medium term safety nets. A regulator and banking union would be part of this. Issues of sovereignty would arise. There was a leadership deficit.

Mr Fuzile said that patterns of fiscal dumping had changed due to Treasury's scrutiny. On the increase of debt, it was always important to place this in the correct context. At the time of the crisis, South Africa had been in a strong position regarding debt. The position in 2008 had been improving. Debt was being repaid. When the crisis came, it was not the right thing to stop expenditure. This would have had serious consequences for employment. The deficit had increased to 6% as a result. The switch in confidence back to the private sector was taking longer than expected. The deficit was set to drop over time. If the GDP expanded, the ability to service debt should increase. Debt was being managed actively. The market was working. The system of using one investor's money to pay another was working. The economy would continue to grow. This was not a call for complacency. One or two things could lead to a collapse. There was a team at Treasury which evaluated risks on an ongoing basis.

Mr S Swart (ACDP) said that like Napoleon, the Minister was dealing in hope. It was impressive that the budget deficit was only 0.2% higher than anticipated. He asked why foreign investment was not being attracted. He asked if this was due to problems at the mines. The debt figure sounded enormous, and he asked how this could be paid. While understanding that the matter was sub judice, he asked what progress had been made with South African National Roads Agency Limited (SANRAL) and the e-tolling.

Min Gordhan said that the process of consolidation was under way.

Mr Fuzile said that a statement had been released on e-tolling. More discounts and incentives had been announced. More would become public when the tolls were gazetted. There was no longer a legal impediment and therefore government should consider introducing the tolls. It would be incorrect for government to give an indication that it thought the process was wrong. The processes of SANRAL had been found to be acceptable in court. Recommendations on consultation and education had been implemented.

Min Gordhan said that the DA and the Opposition to Urban Tolling (OUT) lobby group had threatened legal action. This case would not be heard for some months, and then there would be an appeal process. This would create an extended period of uncertainty while there was still a huge debt. This could not be allowed, particularly on a nebulous base. The statements made by the leader of OUT were extremely irresponsible. Government now had to put a debt repayment plan in place. The public should not be discouraged from doing the right thing. The average monthly expense would be in the region of R150. Some categories had been seriously disadvantaged, and this had been addressed. The fiscus could not support irresponsible positions.

Mr M Swart (DA) said that job creation was essential. There was still a huge under-expenditure in government, currently reckoned at R11 billion. One of the areas for creating jobs was the EPWP fund. This would attract additional funding, but in the previous financial year, municipalities had only managed to spend some 54%.

Deputy Minister Nene said that there had been a marked improvement in the expenditure on infrastructure. Treasury was still not totally happy with this. There was no point in retaining funds that were not being spent. This was the logic in diverting funds from programmes to infrastructure. Something had to be done. The Development Bank of South Africa (DBSA) was now assisting with project management. In the rural areas, there was a problem with a lack of infrastructure. Contractors who failed to deliver were now facing consequences if they could not perform. Oversight mechanisms were being used to keep a check on service providers. Where penalties were applicable they must kick in.

Mr D Ross (DA) asked if there were any plans to approach the business sector. Business Unity South Africa (BUSA) had declared that it was willing to help with infrastructure development, but it seemed that no approaches had been made. He welcomed the interventions by Treasury on DORA allocations. Money should be spent, especially at local level, but he asked how this was being co-ordinated. He asked if an office would be established to oversee this process, or if an officer would be appointed.

Min Gordhan said that there was dialogue between business and government. There had been a meeting on infrastructure development the previous week, attended by major players in the construction industry. Careful planning was needed for major projects.

Mr Brown said that action had been taken on municipalities which had not produced their audits on time. Only eighteen municipalities were now outstanding in the current financial year (FY). The point was in how the integrity of the system could be improved. Where provincial administration was strong, such as in KwaZulu-Natal and Gauteng, municipal compliance was better. Treasury had deployed experts in a number of municipalities to support them. A bigger issue was the need for municipal managers and Chief Financial Officers (CFOs) in a number of municipalities.

Mr D van Rooyen (ANC) realised that while there was agreement, innovation was a key lever to the development agenda. In the consolidated expenditure statement, the science and technology sector was experiencing the lowest growth. He asked if there was any prospect of an improvement. The impact of re-allocations had to be considered. While some projects were not performing as planned, there would be an impact on service delivery.

Mr Donaldson shared the concern on spending on science and technology. This function included environmental science. Capital spending had included the purchase of the SA Agulhas research vessel. There was a need to see more partnerships between science councils and government. More partnerships with the private sector were needed. Treasury was being cautious with the numbers. Spending on science should increase. He said that in the 1998 MTBS there had been lower baseline allocations. The reductions had been too deep, and had had to be reversed in the following year.

Mr T Harris (DA) congratulated the Minister on controlling expenditure. He could not recall an interim appropriation when there had been no increase in spending. He was concerned that there was a reliance on departments not spending their budgets. It was clear that Treasury was controlling spending, but was not in control of policy implementation. Treasury spoke to various programmes, such as a thinly disguised form of youth wage subsidy, but government did not follow up on these plans. Practical implementation by government was lacking. It did not help allocating money to programmes if government did not adopt the policies. While the country was being called on to tighten its belt, the R200 million to be spent on the Presidential complex in Nkandla was inconsistent with this call. He could see a backlash from taxpayers when their money was spent on such personal projects in the current climate. He described the project as a plan by the President to 'prop up' his administration. He was pleased to see the greater emphasis on the NDP rather than the Growth Path. He battled to get a handle on infrastructure spending given the massive numbers. Construction companies, most of which operated internationally, all reported poor results. He questioned if the spending was actually taking place. He asked what mechanisms were in place to reduce the number of government employees or if the Minister simply hoped that government would take up this suggestion. The budget had a direct role in determining administrative prices, and he had not seen enough of this for his liking.

Min Gordhan said that Treasury was not manipulating numbers. The gross expenditure remained the same. If Members did not have an understanding they should have the humility to ask for an explanation. No treasury was responsible for implementing electricity, rural, water or other policies. Departments should explain themselves to the Committees. Treasury was responsible for allocating funds, not policy. He shared the concerns on implementation. Treasury wanted to paint a picture of what it thought should be done to move the country forward, and would express itself if it felt that red tape was getting in the way of micro economic reforms. The Office of the President should be respected. Treasury would answer what questions it could, other questions must go to the Presidency. On Nkandla, he did not have the correct numbers. The Minister of Public Works was trying to get to the bottom of the costs before making public statements. He found the suggestion that the project would be used to “prop up” the Zuma Presidency regrettable. Treasury had been working on a culture of settling tax obligations. Mr Harris could make better use of his time than counting references to the NDP. Certain types of employment needed to be restricted to focus on front line service people. Consideration should be given to overtime payments, and on paid sick leave. Some people were on paid leave for a year. Departments should explain this to Parliament. He agreed that different arms of state could not move in different directions on administrative prices.

Mr E Sogoni (ANC) said that it was a good Medium Term Budget Statement (MTBS). Some issues did need to be accelerated, one of which was the establishment of a procurement office. The ANC would really like to encourage Treasury to go through with this plan. Another familiar issue was that of beneficiation. He was not sure where the blockages were. This would contribute to creating employment opportunities. He hoped that the managers of the job creation fund would ensure that fund served its purpose. On roll-overs, he was sure that there would be engagement with the responsible departments. This was an ongoing tendency, and the Public Finances Management Act (PFMA) was wary of this practice. It reflected badly on those departments. The other issue was that of infrastructure expenditure. Resources should be enough, but the issue was of implementation. He liked the DORA. It was clear. For a department to implement an infrastructure project, clear plans were needed. This was not reflected in the Appropriations Bill, and it should be included. There was a traditional striking season world-wide. In 2012, it seemed that the mining unions in particular had upped the ante. In future, he asked how it could be ensured that this did not happen in future.  His last question was on savings. Members appreciated that this was happening, but what was concerning was that many programmes could not be implemented because of a lack of personnel. Many vacancies were funded, but people were not being employed. In the State of the National Address of 2011, the President had called on departments to fill vacant posts. He asked if Treasury would repeat the same encouragement, especially in critical fields. There were moratoriums.

Min Gordhan agreed that DORA required clear planning. The recommendation that this should be extended to the Appropriations Bill should be put forward.

Mr Fuzile replied that Treasury tried its utmost to ensure that criteria it used in recommending roll-overs met with prescribed rules. If there were instances were there were grey areas it was due to unclear circumstances. He used the word 'recommend' advisedly, as Treasury did not have the final say in such matters. Parliament had the authority to approve applications. National departments did not keep cash reserves. Accounts were swept at pre-determined intervals. Roll-over approvals were based on allocations made previously. Treasury had been strict in this regard. Of the R1.5 billion, most would fall in the category of projects. Treasury was guided by the prescripts of DORA, which required that unused funds should be returned to Treasury for a new round of requests.

Min Gordhan noted suggestions on the jobs fund. The key to resolving strikes was improving the labour relations system. The Rand was tied to the Euro. Many factors influenced its performance. The Rand was a global commodity. Members could be briefed on exchange rates at some other time. The example of the Zola Hospital was a good example. Such overruns should not be tolerated. He asked what the provincial administration was doing. Billions of Rand were disappearing weekly, legitimately or otherwise. Treasury would work on head count initiatives.

Mr M Makhubela (COPE, Limpopo) asked what strategy was in place to entice investors back.

Mr M Radebe, Gauteng Legislature, said that the Zola Hospital costs had escalated from R300 to over R800 million. There was a procurement office in Canada. Tender processes were very open, and there was no suspicion of corruption. This example should be followed. On the SANRAL issue, the option should not be rejected whilst a lot of money would go to social sectors. Private Public Partnerships (PPPs) would be needed for other projects. There had been a mention of the Gautrain. The number of users had increased, and the number of allocations could now be decreased in terms with the ridership agreements. He was happy if some funds went to non-governmental organisations in PPPs. Spending in the agricultural sector had not been prominent. This was a labour intensive sector.

Min Gordhan said that Treasury was in the process of appointing a procurement officer. Interviews with candidates had been held.

Mr Donaldson said that the claim on Gautrain ridership would fall away as more people used the service. This was a provincial and not a national responsibility. The figures regarding EPWP were better than indicated.

Mr Sakhiwe Khumalo, Chairperson of Finance, Gauteng legislature, said that capacity in the public sector should be tightened in order to realise projects. Recent developments regarding borrowing rates should be considered. He asked if South Africa was in a good position to encourage foreign investment.

Mr de Beer had visited the Limpopo province. A head count had been done on officials at their Department of Health. This would eliminate some additional expenditure by eliminating ghost employees.

Mr Mufamadi noted the presence of support staff for the Minister.

Dep Min Nene said that there was capacity in the SOEs, but there would be uncontrollable delays from time to time. 

Min Gordhan said that there was investment on the stock market. There was excellent investment in the bond market. A requirement for R2.1 billion had been oversubscribed. In terms of FDI, things were happening. Walmart was a recent example. Investors were buying South African businesses. The scale should be increased. National interests should be put ahead of political party squabbles. More and more overseas investors were interested, and he mentioned an example of Indian investors with whom he had recently been in discussion. Labour relations and instability were a factor. Channels of communication existed between management and labour, and these needed to be rebuilt after recent events. He was willing to listen to any points made by Mr Lees, but nothing had yet been forthcoming. Constructive dialogue was needed.

Mr de Beer said that responsibility now lay with Members. Public hearings would be held on the MTBS. He sketched the programme for implementing the public hearings. He thanked the provinces that had attended the meeting. He had requested support for the municipality in which he was deployed. A laboratory had been built in the town, giving the residents internet access. Members must go to their constituents. Policy had to be discussed. South Africa must be promoted.

The meeting was adjourned.


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