Revised Fiscal Framework and Revenue Proposals (Medium Term Budget Policy Statement 2012 (MTBPS 2012)): public hearings

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Finance Standing Committee

29 October 2012
Chairperson: Mr C de Beer (Northern Cape, ANC) and Mr D van Rooyen (ANC) (Acting)
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Meeting Summary

The Finance Standing and Select Committees heard Business Unity South Africa (BUSA) presented its comments on the 2012 Medium Term Budget Policy Statement (MTBPS), reviewing the economic outlook - global (lower growth and higher risks) and domestic (weak performance), suggesting an overall approach, noting some positive features of the 2012 MTBPS, but also pointing out some vulnerabilities. Not all South Africa's problems could be blamed on global factors. There were numerous structural problems of South Africa's own making. The Marikana tragedy, industrial unrest, and violence, were being captured by ripple effects on the economy and by reassessments by the credit rating agencies. Some positive features included the MTBPS emphasis on the 'path to higher growth', highlighting the need for a buoyant private sector and an effective government to address the challenges of unemployment, poverty and inequality. BUSA endorsed the MTBPS emphasis on collaboration between key stakeholders in the economy and the renewed message of fiscal discipline. BUSA welcomed the use of tax compliance as a determinant of good standing when deciding to award a government tender and National Treasury's commitment to the appointment of senior procurement staff. Some vulnerabilities included the possibility that any further accidents to growth could push the ratio of gross debt to GDP to a danger level of 50%. The emphasis on infrastructural spending must create productive assets for the future. It was key to improve state capacity and promote the mobilisation of private sector capacity. BUSA urged National Treasury to facilitate a better planned and coordinated approach to affordability in decisions on administered prices. BUSA was deeply concerned at the drop in foreign direct investment flows to South Africa. South Africa could, however, prove the skeptics wrong. The 'virtuous circle' of high growth, democratic governance and social development was possible, but there must be commitment to the National Development Plan and the Vision for 2030. To ensure focus on attacking poverty and expanding a robust, entrepreneurial and innovative economy, the Government must create the conditions and environment for higher levels of public and private investments.

The Financial and Fiscal Commission (FFC) supported the MTBPS's main themes. It reviewed the general economic outlook, state debt, fiscal consolidation, the fiscal framework, and growth-enhancing fiscal consolidation: risks and opportunities. The FFC called for a balanced approach to energy price increases. The FFC estimated that energy price increases would have a minimal impact on economic growth, and result in a small net increase in employment mainly due to increased demand in investment products. However, there was no doubt that employment prospects for the poor would be negatively affected. Postponing investment in the energy sector could have quite massive impacts on economic growth. An end to the recession would see an increased demand for electricity from industry. The FFC called for a strengthening of existing interventions such as the free basic electricity for poor households. The other area of risk and opportunity was around infrastructure and trade. The FFC noted that increased growth was expected next to South Africa's borders, in sub-Saharan Africa. Growth in South Africa could only be achieved by simultaneously achieving fiscal consolidation as well as investment. Implementation of the MTBPS would be even more difficult than crafting it. It was very important to make sure that the development impact of social and infrastructure expenditure actually increased. The FFC supported Government's intention to intensify initiatives to combat waste, inefficiency, and corruption. It was also important to reduce underspending masquerading as saving. Equally important was the financial sustainability of provinces and municipalities. The FFC welcomed the progress by national Government on stabilising the finances of the three provinces under Section 100 administration, but the current environment undermined accountability, oversight frameworks, and sustained capacity building, and needed to be addressed urgently.

ANC Members asked what business could do to assist in building the capacity of the state and how cooperatives featured in BUSA's plans. The core of spending efficiency was the capacity, skills and training of South Africa's citizenry. How did business think that efficiency could be achieved? Did BUSA have any community-related programmes to ensure increasing the capacity of the citizenry? How often did BUSA interact with the National Treasury on planning, monitoring and evaluation? Was BUSA on the same wavelength as National Treasury in understanding the difficulties of the country going forward? BUSA's submission did not indicate that it had a plan for investment to grow the economy, nor did it indicate a collective will from business to invest to ensure job creation. BUSA expected Government to create incentives but BUSA itself did not seem to have a plan. How would BUSA measure corruption and stop it from increasing? Lack of capacity became an excuse for unsatisfactory performance. National Treasury and the FFC were complaining about their own lack of capacity. BUSA and FFC must clarify their views on reprioritisation while suspending, as a result, certain aspects of service delivery. In which direction was one driving the economy, when FFC said that planning was difficult but implementation was even more difficult? BUSA and FFC's views were sought on the appropriateness of the downgraded credit ratings recently given to South Africa. How much would this cost the economy? What was the FFC's core function? Where was the FFC as a consultative body when there was under spending? Was there any link between 'talking the country down' and the decline in foreign direct investment?

DA Members asked if BUSA had adequately taken labour unrest and uncontrolled wage increases into account in its projections, and asked BUSA how the credit rating agencies would view the MTBPS. Two years ago BUSA had indicated to Members that it was ready to assist with infrastructure building. Surely more could have been done, especially in terms of financing? About 39% of the nearly R12 billion budget for public-private partnerships remained unspent. Were the infrastructure programmes asking too much of the state-owned enterprises (SOEs)? Increased electricity tariffs would be very negative in their effect on the small business sector and amount to a form of double taxation.

The Manufacturing Circle pointed out the crisis in manufacturing. It illustrated the relationship between mining, reviewed monetary policy, and addressed administered prices, electricity and water. It pointed out South Africa's policy versus that of Brazil: Brazil was cutting industrial electricity rates by 28% with effect from 2013. South African manufacturers had found it hard to bear the steep, bunched-up increases in the electricity prices. It preferred a longer term and more gradual cost increase trajectory. Electricity discounts should be considered as an interim measure to assist manufacturers to adjust. The Manufacturing Circle had a technical working group with the National Treasury on macro-economic policy, regulatory issues, and customs (dumping and illegal imports). It had identified the need for a strong buy local campaign. It gave a report-back on incentives. It noted that planning, procurement, and contract management were areas in which the private sector had available capacity which could result in much better efficiency in delivering large scale infrastructure at more competitive costs. It saw the negative effect of industrial unrest on production and on investors' regard for South Africa as a major concern. Progress in social dialogue would be fundamental to South Africa's shared future prosperity.

Earthlife Africa – Johannesburg submitted that Parliament could not fulfill its constitutional duties if it did not have all the relevant information on the costs of the proposed nuclear procurement Failure to exercise its oversight could potentially constrain the State irrecoverably, and could inhabit the fiscal freedom of future generations. Earthlife Africa recommended that Parliament require the Department of Energy to complete an accurate cost analysis and should act in a more transparent manner and provide adequate information. It was important to learn from the lessons of the Arms Deal. Earthlife Africa noted that nuclear energy was a minor component of the South African energy sector and observed that the Nuclear Energy Corporation of South Africa's expenditure rose to R1.8 billion in 2011/12 at an average annual rate of 19% since 2008/09. Integrated resource planning (IRP) was an appropriate tool for planning electricity systems and, if applied correctly, should assure that consumers received a reliable, clean electricity service at the lowest cost. However, none of the technologies being discussed was proven. There were also unresolved safety issues. Overall, there was a risk that South Africa would commit itself to a large number of reactors that would impose huge additional costs on consumers. However, the more likely risk was that, as in 2008, the nuclear programme would prove impossible. If the nuclear programme was not abandoned now, the risks that efforts to make it happen would continue for several more years, wasting Government's time and money.

ANC Members asked Earthlife Africa if there was anything positive to say about nuclear energy. Was its presentation just lobbying? Had it concentrated only on the negative aspects of nuclear energy? They wanted a tabulation of alternative sources of energy and a comparison of costs. If the manufacturing sector lobbied for a discount on electricity tariffs, to whom should the cost burden of the discount be passed – to households? ANC Members asked what information Earthlife Africa could give the Committees, in due course, on the costs of the alternative energy sources that it had mentioned. Another ANC Member found the submission of Earthlife Africa confusing and contradictory. An ANC Member pointed out that economic growth was not necessarily synonymous with increased employment. There was little reference to skills development in the submissions. One must avoid the risk of employing cheap labour. The European crisis affected South Africa. Also the rand was very weak, and it was necessary to be realistic in costing.

A DA Member said that Earthlife Africa might be right that there was a veil of secrecy over the nuclear energy programme. However, the nuclear programme did not feature in the electricity price determination for the next five years. How relevant was the submission in terms of the current time frames? Nuclear energy had a peculiar funding model and was very expensive in the construction stage, though it was cheaper in the operational phase. It was important to have an in-depth analysis and comparison with other costs. State Owned Enterprises could not be judged by the same criteria as private entrepreneurs as they did not carry the same risks. The cost of electricity was so high because consumers had to pay upfront for the cost of investment for the future.

Meeting report

Introduction
Chairperson C de Beer (ANC) said that the fiscal framework could be seen as a set of rules and principles that guided fiscal behaviour, fiscal decision-making and fiscal evaluation over the Medium Term Expenditure Framework (MTEF) period. It was also a reality that the global economic reality had weakened with a broad-based slowdown in both advanced and emerging economies. As indicated on Friday, it was important to note as background from where South Africa had come. In 1994 the total revenue was R112.4 billion. Expenditure was R137 billion. Debt service cost was R24.1 billion. This was 48% of the gross domestic product (GDP). It was now R35.7% of GDP.

Business Unity South Africa (BUSA) submission
Economic outlook
Prof Raymond Parsons, BUSA Senior Policy Adviser, presenting BUSA's comments on the revised fiscal framework and Medium Term Budget Policy Statement (MTBPS), noted a close convergence between National Treasury and BUSA's economic forecasts.

Globally, the economic outlook was for lower growth and higher risks. Economic growth in developed countries was expected to average about 1.5% in 2012/13. In developing countries it was expected to average about 5.5% in 2012/13. In the Eurozone it was expected to average 0.1% in 2012/13. Growth had also slowed in China to 7.5%, although some analysts saw this as the lower turning point for the Chinese economy.

Domestically, the economic outlook was for weak performance. BUSA expected growth this year of about 2.5%, rising to about 3% in 2013. Consumer price inflation was expected to remain within the 3% to 6% target band over the forecast period, though with renewed pressure from food prices, administered prices and fuel costs. Gross fixed capital formation would rise by about 5.5% this year, mainly supported by public sector capital spending. Business and investor confidence was at present weak and vulnerable. With declining exports and rising imports, the current account deficit was likely to widen to about 6% of GDP.

After 2013 an improving global economy was likely to support stronger growth in local exports. At the same time, progress in the delivery of key economic infrastructure should support a more broadly based revival in capital spending, bringing faster gross domestic product (GDP) growth in 2014, possibly to about 3.8%.

Overall approach
South Africa had remained a modest 3.0% to 3.5% growth performer. Unlike some other leading emerging economies, it had not discovered the way to transform to 5%, 7% or even higher average growth performance. Thus after a short, speculatively-driven consumption boom during 2005/07 and a short, sharp recession in 2009, South Africa now found itself constrained in a 2.5% to 3% growth trajectory with a significant loss of growth drivers. Most analysts believed that South Africa's growth performance could not exceed 4% at best. This was inadequate to meet the challenges of unemployment, poverty and inequality.

In assessing where the emphasis must fall in policy decisions, BUSA believed that it was necessary to distinguish clearly between the factors over which South Africa had little or no control, such as the global economy, and factors over which it did have control, such as domestic policies. BUSA therefore agreed with the Minister of Finance in that South Africa had to look at itself. With deteriorating prospects for the world economy, a declining domestic growth trajectory, a limited tax base and on-going spending pressure, South Africa's fiscal space had diminished in the MTBPS. However, BUSA concurred with the Minister that not all South Africa's problems could be blamed on global factors. There were numerous structural problems in the domestic economy which were of South Africa's own making. The Marikana tragedy, industrial unrest, and violence, were being captured by ripple effects on the economy and by reassessments by the credit rating agencies.

Against this background, BUSA assessed certain features of the MTBPS as follows:

Some positive features
Fiscal sustainability over the medium term would depend on government's ability to adhere to overall spending targets and, above all, to keep its wage costs under control. BUSA welcomed the extent to which budgetary decisions were increasingly aligned with the framework of the National Development Plan (NDP). This put South Africa in a better position to take coherent and coordinated short term and long term decisions to deal with the stresses and strains in the current economic outlook. Encouragingly, the MTBPS placed emphasis on the 'path to higher growth', highlighting the need for a buoyant private sector and an effective government to address the challenges of unemployment, poverty and inequality.

The MTBPS provided a definitive statement on the limits that South Africa's debt to GDP ratio of fiscal deficit should not exceed in changed economic circumstances to avoid falling into a 'debt trap'. The MTBPS renewed the commitment to stabilising the debt at reasonable levels, as was essential for long term investment and confidence. The fiscal outlook must remain credible, with the right balance between consumption and investment spending by the state, including the sustainability of the state wage bill. Thus the public sector must be wise spenders not big spenders.

BUSA endorsed the MTBPS emphasis on collaboration between key stakeholders in the economy. The MTBPS ‘message’ must be seen in the context of the High Level Social Dialogue (HLSD) 'package' released by President Zuma on 18 October 2012.

BUSA supported the MTBPS renewed message of fiscal discipline. BUSA welcomed the use of tax compliance as a determinant of good standing when deciding to award a government tender.

BUSA welcomed National Treasury's commitment to the appointment of senior procurement staff. Public and private procurement was an essential stimulator of demand for small and expanding firms. Of critical importance was that both public and private sectors must implement a commitment to payment of invoices to small and medium-sized suppliers within 30 days

Some vulnerabilities
Headline fiscal ratios might appear safe but this could mask vulnerabilities. Because the economic recovery was slower than expected, government's target of a budget deficit of 3% of GDP had been pushed out by another year to 2015/16. Unless the state kept its recurrent expenditure under control, any further accidents to growth could push the ratio of gross debt to GDP to a danger level of 50% (the generally accepted rule of thumb for emerging as opposed to developed economies.

BUSA was concerned at the MTBPS frequent references to the rising public sector wage bill. It was essential that the emphasis on infrastructural spending must create productive assets for the future.

The MTBPS indicted that taxes might be increased if the economy did not recover. With estimated revenue falling by R5 million, of which R3.9 billion was due to lower collection of personal taxes, the National Treasury would be under pressure to find other forms of revenue.

To ensure the effective implementation and financing of key infrastructural projects, which had been an important part of counter-cyclical policy, it was key to improve state capacity and promote the mobilisation of private sector capacity whether through public-private sector partnerships (PPPs) or other creative mechanisms.

BUSA urged National Treasury to facilitate a better planned and coordinated approach to affordability in decisions around administered prices and their effect on the cost of doing business in South Africa.

BUSA was deeply concerned at the drop in foreign direct investment flows to South Africa by 44% in the past year. National Treasury needed to finalise its draft policy document on guidelines for cross-border investment in order to help stabilise the situation. The MTBPS did not refer to this.

Concluding comments
BUSA concluded that if South Africa could craft and implement the right short-term and long-term measures to address current challenges, it could prove the skeptics wrong. It was largely in South Africa's hands to write a different story. Also, the challenges of a better economic performance lay beyond fiscal policy and the National Treasury alone.

There was a 'virtuous circle' of high growth, democratic governance and social development, and this was possible in South Africa.

The NDP confirmed that all these considerations pointed to a need for a higher job-rich growth path, a faster pace of development, and a society wealthier in the broadest sense rather than the narrow. Therefore one must widen and deepen the commitment to the NDP and the vision for 2030.

To ensure that South Africa's energies were focused on attacking poverty and expanding a robust, entrepreneurial and innovative economy, the Government must create the conditions and environment for higher levels of public and private investments to create jobs and ensure rising incomes.
(See presentation and submission documents).

Financial and Fiscal Commission (FFC) submission
Mr Bongani Khumalo, FFC Acting Chairperson and CEO, reviewed the general economic outlook (graphs, slides 5 and 6); and state debt (graph, slide 7).

Economic growth was at risk. State debt was rising, even though it was still within sustainable limits, and posed a significant risk going forward, especially if that debt was used wastefully or inefficiently.

Much as Government was committed to fiscal consolidation (graph, slide 8), it appeared from the figures as reckoned against the commitments, that South Africa was progressing very slowly, and more slowly than expected.

Dr Ramos Mabugu, FFC Research & Recommendations Programme (RRP) Director, discussed growth-enhancing fiscal consolidation: risks and opportunities, the FFC was aware of fears that if Eskom’s price requests were granted, they might destabilise macroeconomic forecasts. The FFC called for a balanced approach. The negative aspect was pricing and consequences on consumption. The positive aspect was investment and the resultant revenues. The FFC estimated that energy price increases would have a minimal impact on economic growth, and result in a small net 0.2% increase in employment and 0.17% decrease in unemployment mainly due to increased demand in investment products. However, there was no doubt that employment prospects for the poor would be negatively affected. There was also concern at the cost of providing electricity for municipalities. (Slide 9)

Dr Mabugu pointed out that postponing investment in the energy sector could have quite massive impacts on economic growth. Because South Africa had been in a recession, the actual notional demand for electricity had been subdued. An end to the recession would see an increased demand for electricity from industry. There was no doubt about the need for greater investment. The FFC called for a strengthening of existing interventions such as the free basic electricity for poor households, and strengthening the social assistance programme as ways of responding to that impact on the marginally poor.

The other area of risk and opportunity was around infrastructure and trade. The FFC noted that increased growth was expected next to South Africa's borders, in sub-Saharan Africa. South Africa's main trading partners, in the Southern African Development Community (SADC) and with China, saw a big jump in trade. The FFC thought that growth projections needed to continue focusing on that strategy. However, Europe and the rest of the developed world were still in terms of levels and volume South Africa's biggest trade partners.

Mr Khumalo alluded to the division of revenue (slide 11) to the contingency reserve, which made provision for unavoidable expenditures. He then referred briefly to medium term spending priorities – job creation, education, health, and social development (slides 12-16); proposed changes to conditional grants (slides 17-20); local government policy issues (slides 21-24); and review of actual spending and adjustment estimates (slides 25-28). He noted the progress on the Local Equitable Share (LES) formula and FFC would continue to engage with Government and stakeholders on this initiative. The amount of resources flowing to local government had almost doubled over the past five years. He did discuss these aspects further, since the details were relevant more to the agenda of the Appropriations Standing and Select Committees.

FFC Commissioner Tania Ajam said that this MTBPS resonated quite strongly with what the FFC had been recommending since the start of the global recession, bearing in mind that growth in South Africa could only be achieved by simultaneously achieving fiscal consolidation as well as investment for future growth. It was important to note that while the MTBPS was a very good plan and crafting it had been difficult, implementation would be even more difficult. Given that South Africa was in a situation, where, unlike in the past, baselines were staying the same, and the country had to live within a very tight resource envelope. It was very important to make sure that the development impact of social and infrastructure expenditure actually increased. The FFC also supported Government's intention to intensify initiatives to combat waste, inefficiency, and corruption. It was also important to reduce underspending masquerading as saving. Equally important was the financial sustainability of provinces and municipalities. The FFC welcomed the progress by national Government on stabilising the finances of the three provinces under Section 100 administration, but the current environment undermined accountability, oversight frameworks, and sustained capacity building, and needed to be addressed urgently. (See submission document for details.)
(See submission documents.)

Discussion
Mr B Mashile (Mpumalanga, ANC), noting that Prof Parsons was taking up an academic appointment, observed that business was depleting the capacity of government by attracting staff away from the public sector, and asked what business could do to assist in building the capacity of the state. How did cooperatives feature in BUSA's plans? How would BUSA assist cooperatives to fulfill their indented role? Did BUSA think that South Africa was heading towards a crisis?

Mr J Bekker (Western Cape, DA) was worried about labour unrest. Had BUSA adequately taken this unrest and its influence into account in its projections? He was also worried about uncontrolled wage increases. What could happen?

Ms Z Dlamini-Dubazana (ANC) was interested to understand fully the contribution of the business sector. The Minister had noted the importance of efficiency in spending. One could not achieve spending efficiency without capacity in the public sector and in the community itself. How did business think that efficiency could be achieved? The core of the matter was the capacity, skills and training of South Africa's citizenry.

Dr Z Luyenge (ANC)'s question was a rider to the previous two questions in relation to the role of the citizenry in improving capacity in general to respond to their economic needs. Did BUSA have any community-related programmes to ensure increasing the capacity of the citizenry? How often did BUSA interact with the National Treasury on planning, monitoring and evaluation? Was BUSA on the same wavelength as National Treasury in understanding the difficulties of the country going forward?

The Chairperson said that the issue of Section 100 intervention had been referred to the Finance Select Committee in the National Council of Provinces (NCOP), and that Committee had agreed that such an intervention must be reviewed on a quarterly basis, not biannually. The Committee's report would be tabled in the NCOP in November.

Mr Mashile asked about the Southern African Fuel Switch Programme and feared making an accumulation of debt a burden for future generations.

Eskom was indulging in 'fun days' for its reasonably paid workers. How did such expenditures affect the stability of the private sector, the workers, and the level of output needed to sustain incomes and the fiscus?

Mr S Montsitsi (Gauteng, ANC) said that there were problems in transformation as the Minister for Trade and Industry had seen fit to revise the Black Economic Empowerment (BEE) score. BUSA's submission did not indicate that it had a plan for investment to grow the economy, nor did it indicate a collective will from business to invest to ensure job creation. What were BUSA's plans on these two issues? BUSA expected Government to create incentives but BUSA itself did not seem to have a plan.

Dr Luyenge deplored the levels of corruption which grew day by day. How would BUSA measure corruption and stop it from increasing? From the dawn of democracy there had been a cry of insufficient capacity from all corners of South Africa. This lack of capacity became an excuse for unsatisfactory performance. One was serious about closing the gap between the haves and the have-nots, but if National Treasury and the FFC were pointing at the lack of capacity, they were also complaining about their own lack of capacity when they had a transversal function of monitoring and evaluation of other departments. BUSA was now sharing the same sentiments as National Treasury when it insinuated that there should be less spending (some might say 'saving'). The notion of saving was foreign to Government, because it was not a for-profit organisation. One should not 'save' at the expense of service delivery. He asked BUSA and FFC to clarify their views on reprioritisation while suspending, as a result, certain aspects of service delivery. In which direction was one driving the economy, when FFC said that planning was difficult but implementation was even more difficult? He agreed with Chairperson de Beer on the need for quarterly reporting on Section 100 interventions, but how could such interventions be effective without capacity in the department concerned? FFC and BUSA must be clear on alternatives.

Mr D Ross (DA) asked BUSA how the credit rating agencies would view the MTBPS. Two years ago BUSA had indicated to Members that it was ready to assist with infrastructure building. Surely more could have been done, especially in terms of financing? There was a lack of clarity on the funding options for the infrastructure build. Also there was lack of clarity on the involvement of BUSA. The 2012 budget review of the public sector infrastructure expenditure for the last financial year was disconcerting. About 39% of the nearly R12 billion budget for public-private partnerships remained unspent. Were the infrastructure programmes asking too much of the state-owned enterprises (SOEs)? What details had BUSA of these infrastructure programmes? Was there sufficient implementation, and consultation with BUSA when the Presidential Infrastructure Coordinating Commission (PICC) met? Was BUSA happy with the progress? He asked the FFC for its views on the R45 billion allocation to renewable energy. He questioned Eskom's formula for determining electricity tariffs, given that it was an SOE. Increases in tariffs would be very negative in their effect on the small business sector and amount to a form of double taxation.

Chairperson Van Rooyen asked for BUSA and FFC's views on the appropriateness of the downgraded credit ratings recently given to South Africa. How much would this cost the economy? How did the severe scenario envisaged compare to a crisis?

Ms Dlamini-Dubazana asked what the FFC's core function was. She had expected more from it, especially as the law required Parliament to use its recommendations. Where was the FFC as a consultative body when there was under spending?

Ms J Tshabalala (ANC) asked BUSA and FFC what remedies they envisaged to ensure that the situation did not get worse.

Mr Mashile asked FFC and BUSA on those who 'talked the country down'. Was there any link between such talk and the decline in foreign direct investment?

Responses
Prof Parsons offered to respond in writing to some of the questions. He affirmed his availability to give advice. His move to academia was, indeed, enlarging his capacity. The most important thing that could emerge from these discussions was agreement on the need for a coherent and cohesive approach. BUSA had 18 months ago as part of its input to the National Planning Commission (NPC) given a set of recommendations – BUSA's 'roadmap'. BUSA would be happy to make that document available. His impression was that the credit rating agencies were taking a neutral attitude to the MTBPS. If one wanted to hold up a mirror to a country, there were several tests that one would apply; whether it was the global competitiveness Index (GCI or the International Monetary Fund (IMF) reports, one should not become too obsessed with any one particular index. There was a whole chapter in the NDP on corruption, and BUSA had previously made recommendations. BUSA was guided by a recognised global corruption index which it used to advise on which actions business could take, bearing in mind that it took two parties to carry out a corrupt act. He would be willing to make further information available. Infrastructure was an important issue, because the awareness of that gap referred to by Members, that had led to the President's calling together the social partners. He referred to the High Level Social Dialogue (HLSD) 'package' released by President Zuma on 18 October 2012, and quoted at length on this work in progress. Unless one could find a balanced policy, as advised by the FFC, the decisions taken on administered prices would be counter-productive. Businesses were closing down because of the cumulative effect of these increases. He emphasised that local authorities played an important role in the effects of electricity tariffs on business. BUSA emphasised the importance of empowering the citizenry in helping improve capacity and delivery. BUSA had regular meetings with National Treasury's economists to examine trends. The Minister of Finance would be meeting with business and labour at the National Economic Development and Labour Council (NEDLAC). However, perhaps there was need for better communication with some other Government departments. BUSA would have to reply later on cooperatives. BUSA shared the Minister's view on South Africa's challenges. The Greek and Spanish crises were examples of the price of procrastination. South Africa had some good cards to play, if it played them. The GDP was not only the gross domestic product, but also the gross domestic politics. It was two sides of the same coin. Hence the need for consensus, and to find salvation among ourselves, rather than in the global economy.

Mr Khumalo reassured Members that the FFC did not have a problem of capacity. The MTBPS had been crafted under very difficult circumstances internally and externally. It must be accepted that there were capacity challenges, institutional and individual, in the state. Statements made in the context of the difficulties were based on actual observations. There was a need to think differently. Money was returned to the fiscus, and was considered to be savings, but at the same time it was known that there was a shortfall in service delivery. So it had to be asked if resources were being allocated to where they were needed and where they would be effectively utilised. In economics and public finance one referred to allocative efficiency – matching the resources to the need.

The FFC was set up to advise Parliament, provincial legislatures and organised local government on financial and fiscal matters and on the division of revenue among the three spheres of government. This was the FFC's constitutional mandate. It was not the role of the FFC to intervene by itself in a municipality, province, or governmental department. Its recommendations were primarily intended for Parliament, rather than the Executive. Many parliamentary committees sought the FFC's advice.

Mr Khumalo explained, with reference to the Southern African Fuel Switch Programme, the use of debt productively. If future generations inherited the benefit, there was no problem.

It was difficult to respond to questions on what Eskom actually did with monies allocated to it, or monies that it raised. However, it was important not to postpone investment.

Mr Khumalo referred Members to the written submission for more information on Section 100 interventions. Moreover, the FFC had already made to Parliament a submission on Section 100 interventions.

Dr Mabugu replied that the 'severe scenario' referred to the impact of the global crisis on the South African economy. However, in addition to the external shocks, there were now the internal shocks in the form of labour strikes which were affecting the key sectors for driving the recovery process.

Manufacturing Circle submission
Mr Coenraad Bezuidenhout, Manufacturing Circle Executive Director, presenting the Circle's responses to the MTBPS, pointed out the crisis in manufacturing. He illustrated the relationship between mining, manufacturing production, and vehicle sales, and annual growth in South Africa from January 2010 to June 2012 (graph, slide 3); South Africa's imports and exports, January 2011 to June 2012 (graph, slide 4); trade deficit entrenches on lower exports and increased imports (bar chart, slide 5); manufacturing imports from developed and the Brazil, Russia, India, China, and South Africa (BRICS) group of countries (illegible slide 6); that the Purchasing Managers' Index (PMI) contracted to a three year low in September 2012 (graph, slide 7); employment in manufacturing 2008 to 2012 (illegible graph, slide 8); and that 440 000 businesses had closed in five years (graph, slide 9).

He reviewed monetary policy. He indicated cost pushes and rand strength (table, slide 11); rand volatility and South African competitiveness – the manufacturing narrative (slide 12); the implied exchange rate volatility – South Africa and the Peer Group 2005 to 2010 (graph, slide 13); growth reserves versus measures of adequacy – South Africa 2008 to 2016 (graph, slide 14); and rand volatility and South African competitiveness – manufacturing narrative (slide 15).

He addressed administered prices, electricity and water. He showed the growth rates of administered prices between 2000 and 2010 (illegible slide 17); pointed out South Africa's policy versus that of Brazil: as Eskom readied itself to motivate for further increases at nearly three times the inflation rate (16%) over the next five years, which could lead to increases to consumers as much as 19%, Brazil was cutting industrial electricity rates by 28% with effect from 2013; and noted the cost push effects of electricity: South African manufacturers had found it a great challenge to bear the steep, bunched-up increases in the electricity prices against a background of numerous other domestic inefficiencies, the resultant cost-push thereof and South Africa's unequal trade position (slide 20; also see previous, hardly legible, slide 19).

The Manufacturing Circle had specific proposals on electricity: it would prefer a longer term and more gradual cost increase trajectory. This would be easier to achieve if the National Energy Regulator of South Africa (NERSA) was better capacitated to interrogate Eskom price increases, and Eskom were better sensitised to economic growth and job creation imperatives and their important role in helping to exercise them in South Africa. The Manufacturing Circle proposed that electricity discounts be considered as an interim measures to assist manufacturers to adjust. It also gave broader proposals on administered prices (slide 22),

Progress to date comprised a technical working group with the National Treasury covering such issues as macro-economic policy, regulatory issues, and customs (dumping and illegal imports (slide 24); and identifying the need for a strong buy local campaign (slide 25). A report-back on incentives was provided (slide 27; see also written submission).

In its written submission, the Manufacturing Circle commended the Minister in reminding the international community that South Africa, relatively speaking, was a haven of macro-economic stability. Government's intention was to maintain fiscal health while firmly supporting the productive side of the economy through better spending on infrastructure, economic competitiveness, education and health care. Measures to improve procurement, reduce corruption, and support capital spending were positive. The Manufacturing Circle was heartened by the Minister's acknowledgement of shortcomings in planning, procurement, and contract management. These were areas in which the private sector had capacity to make available which would result in much better efficiency in delivering large scale infrastructure at more competitive costs. The Manufacturing Circle applauded savings achieved and the reprioritisation of spending, but believed it was correct that the Minister had again emphasised the importance of moderating the public sector wage bill. The Manufacturing Circle saw the negative effect of industrial unrest on production and on investors' regard for South Africa as a major concern. Progress in social dialogue would be fundamental to South Africa's shared future prosperity.

The Circle reviewed fiscal policy, monetary policy, electricity, water, administered prices, local procurement issues, trade issues (customs control and illegal imports), and gave an overview and report back on the effectiveness of industrial policy incentives.

It noted that the response to the Manufacturing Competitiveness Enhancement Programme (MCEP) had been very positive, with manufacturers seeing it as a flexible programme that tried to address competitiveness issues sincerely, rather than trying to pick winners. The Critical Infrastructure Programme (CIP), the Motor Industry Development Programme (MIDP), and the Enterprise Investment and Manufacturing Investment Programmes (EIP/MIP) were deemed to be accessible with application turnaround time of between three and eight months. These programmes were considered by Manufacturing Circle Members to be structured effectively. There were no reports of successful applications under the Jobs Fund. The lack of success was ascribed to a lack of upfront clarity in respect of requirements relating to the types of investments that were likely to succeed, the amount that needed to be invested per job that would be created, and the exclusion of the creation of indirect jobs from consideration. The Manufacturing Circle noted the outsourcing of Jobs Fund approvals to improve the success of the programme. (See submission documents).

Earthlife Africa – Johannesburg submission
Ms Trusha Reddy, Earthlife Africa - Jhb spokesperson, quoted from the National Planning Commission, and Sections 195 and 215(1) of the Constitution (slide 1).Parliament could not fulfill its constitutional duties if it did not have all the relevant information on the costs of the proposed nuclear procurement at its disposal. Moreover, it must have up to date information on the expenditure planned for the nuclear procurement programme. The failure of Parliament to exercise properly its oversight powers at this early stage would not only be in conflict with its constitutional duties, but could potentially constrain the State irrecoverably, and could inhabit the fiscal freedom of future generations.

Concerns
Mr Tristen Taylor, Earthlife Africa – Jhb Project Coordinator, outlined concerns: insufficient or inaccurate estimates of the true cost of proposed future nuclear power; a fleet of nuclear power stations would involve a level of investment unprecedented in South Africa; could bind the state and future generations to its detriment and be costly to change; high opportunity costs; and costs at the Nuclear Energy Corporation of South Africa (NECSA), repeating mistakes (slide 2).

Recommendations
He presented Earthlife Africa – Jhb's three main recommendations. Firstly, the Committees should recommend to the National Assembly and the National Council of Provinces that the Department of Energy (the DoE) complete an accurate cost analysis; and the DoE's Integrated Resource Plan (IRP) 2010/30 was inadequate as a basis for decision-making, while Parliament lacked comprehensive information on the cost of the nuclear programme, and procurement of a 'fleet' of nuclear reactors rather than single reactors violated the requirements of cost-effectiveness and financial management. Secondly, the DoE should act in a more transparent manner and provide adequate information to the public and to Parliament. Thirdly, any large-scale procurement must be conditional upon greater parliamentary oversight. (See slides 3-7). He emphasised that it was important to learn from the lessons of the arms deal.

Economic aspects
Prof Stephen Thomas, Professor of Energy Policy, University of Greenwich, referred to the 1998 White Paper on Energy. Nuclear energy was a minor component of the South African energy sector, but despite its small contribution, it had received a major portion of the then Department of Minerals and Energy's budget. The Pebble Bed Modular Reactor programme (PBMR) loss was R9.4 billion as of 2011. NECSA's core business brought in R1.1 billion of revenue in 2011 but its expenses were R1.62 billion. (See slide 8). He referred to the Estimates of National Expenditure (ENE) for Vote 29. NECSA expenditure rose to R1.8 billion in 2011/12 at an average annual rate of 19% since 2008/09. (See slide 9).

Integrated resource planning (IRP) was an appropriate tool for planning electricity systems and, if applied correctly, should assure that consumers received a reliable, clean electricity service at the lowest cost. However, the nuclear programme of six reactors of 1 600 MW commissioned at 18 month intervals from 2022 onwards was not an output of the IRP calculations, if it was an input assumption imposed by the Government.

None of the technologies being discussed was proven in the sense of having operating reactors anywhere in the world. There were also unresolved safety issues. The background to this discussion was a period of 14 years when the Government worked on the assumption that a nuclear programme was desirable and feasible, first with the Pebble Bed programme and then with the failed call for tenders for nuclear capacity in 2008. This resulted in a large waste of public money, but, more importantly, a period of 14 years when other options that could have been delivered were not exploited as fully as they should have been. South Africa could ill-afford another significant period when a non-viable option was pursued.

Overall, there was a risk that South Africa would commit itself to a large number of reactors that would impose huge additional costs on consumers. However, the more likely risk was that, as in 2008, the nuclear programme would prove impossible. Since 1998, when the Pebble Bed Modular Reactor programme was launched, the Government had operated on the assumption that nuclear power plants would make up a significant proportion of generation. The result was that other options had been neglected. If the nuclear programme was not abandoned now, the risks that efforts to make it happen would continue for several more years, wasting Government's time and money and leading to more neglect of alternatives, before the Government again, as it did with the PBMR and the failed tender of 2008 had to admit defeat.
(See submission document).

Discussion
Chairperson de Beer felt that the section of this submission which dealt with spending on energy should have been submitted also to the Appropriations Committees, which were meeting concurrently that morning.   

Mr E Mthethwa (ANC) asked Earthlife Africa - Jhb if there was anything positive to say about nuclear energy. Was its presentation just lobbying? Had it concentrated only on the negative aspects of nuclear energy?

Mr Montsitsi wished that Earthlife Africa – Jhb had been able to tabulate alternative sources of energy, and compare the costs, as it was clear that the organisation would not support Government's nuclear energy initiative.

The Manufacturing Circle was asking for discounted prices for electricity for manufacturing industry. It was, however, clear to all role players that there was indeed a shortage of energy. Eskom was attempting to make provision to expand its capacity and ensure that there was sufficient energy. However, if the manufacturing sector lobbied for a discount, where did this place households? To whom should the load of the costs of the discount be passed?

Ms Dlamini-Dubazana found insight from Earthlife Africa - Jhb's paper. She asked what information Earthlife Africa - Jhb could give the Committees, in due course, on the costs of the alternatives that it had mentioned.

Chairperson de Beer asked Earthlife Africa – Jhb to assist the Committees with such a document.

Mr Ross was sure that Earthlife Africa – Jhb would be happy with the R45 billion allocation to renewable energy. To a certain extent the organisation might be right that there was a veil of secrecy over the nuclear energy programme. However, the nuclear programme did not feature in the electricity price determination for the next five years. How relevant was the submission in terms
of the current time frames? He agreed that nuclear energy had a peculiar funding model and was very expensive in the construction stage, though it was cheaper in the operational phase. It was important to have an in-depth analysis and comparison with other costs.

Mr Ross asked the Manufacturing Circle if South Africa was heading towards a crisis. There was no commitment to inflation-related administered prices. What was included in the cost-reflective prices? SOEs could not be judged by the same criteria as private entrepreneurs as they did not carry the same risks. The cost of electricity was so high because consumers had to pay upfront for the cost of investment for the future, as well as for the cost of the interest on money borrowed for that purposes. What could be done? 440 000 jobs had been lost in the manufacturing sector. National Treasury needed to be involved.

Mr Mashile found the submission of Earthlife Africa – Jhb confusing and contradictory.

Ms Tshabalala pointed out that economic growth was not necessarily synonymous with increased employment. There was little reference to skills development in the submissions. One must avoid the risk of employing cheap labour. The European crisis affected South Africa. Also the rand was very weak, and it was
Chairperson de Beer said that there would be further opportunities to make submissions in separate public hearings in February 2013 on the fiscal framework and revenue proposals, and on the division of revenue and appropriations. Earthlife Africa – Jhb should make a submission to the Appropriations Committees in the hearings on the division of revenue in terms of budget allocations. He curtailed time for responses.

Responses
Mr Tristen Taylor, Earthlife Africa – Jhb Project Coordinator, replied that whether or not his organisation had negative views on nuclear energy was irrelevant to today's discussion. Earthlife Africa – Jhb was presenting the concerns of citizens who cared about the Constitution and were doing their patriotic duty. There was a constitutional crisis brewing. The long-term and overall cost of the nuclear energy programme was not known. There was danger of approving an unknown cost. Moreover, it was the NPC that was saying that the costs of the programme were unknown. He pleaded for an accurate cost assessment. This submission was highly relevant in view of the expenditures involved as against the need for the alleviation of South Africa's widespread poverty. None of the claims for the export potential of the PBMR had come to fruition. As a result, nearly R10 billion of state expenditure had been lost, largely on expenditure on consultants for the PBMR, that could have been devoted to education or combating HIV/AIDS. Earthlife Africa – Jhb had seen it in the past, and warned against making the same mistakes again. Moreover, the current procurement process was inadequate. Earthlife Africa – Jhb sought to enable the Committees to be proactive.

Professor Steve Thomas said that there was a mixture of illusion, ignorance, and delusion. Nobody knew what one of these new generation power plants would cost, because no one had completed such a plant as yet. He had complained about the use of consultants for the IRP of 2010 because in 2008 the Government had gone out to tender and obtained real prices from companies. However, subsequently a cost estimate was obtained that was so low that it was clearly ludicrous. One of the attractions of nuclear energy was that it was a big solution to a big problem, but this was an illusion.

Ms Reddy said that Earthlife Africa – Jhb's intention was not to presuppose technology choices for energy, but rather to question the cost-effectiveness of the nuclear option and open a discussion on whether the cost estimates had been accurate and fully considered.

Mr Coenraad Bezuidenhout agreed with Ms Tshabalala that the European crisis was having a big effect, as Europe was South Africa's major trading partner. Obviously South Africa needed to diversify, especially as South Africa was bedeviled by some of the predatory practices of some traders from south-east Asia. Although there were political and economic problems it was essential to open more doors into Africa. National Treasury's help was needed in leveraging the strength of the financial sector. He offered to send, in writing, within a week or so, detailed information on the Manufacturing Circle's partnerships with the Sector Education and Training Authorities (SETAs). It would be ideal if South Africa's economy was inherently competitive and if not a single discount or incentive was necessary. However, the bunched-up increases in electricity tariffs (administered prices) were a problem. The National Energy Regulator of South Africa (NERSA)'s processes needed to be reviewed. In the interim, jobs were being lost, so a short-term measure was required, in other words a discount to the manufacturing sector, and all high-multiplier industries, where jobs could be created. It was pointless to have cheaper electricity for households if the householders could not afford any electricity at all because they had no jobs.

Conclusion
Chairperson de Beer said that tomorrow the Committees would jointly consider their Report, which was to be tabled in both houses on Thursday afternoon.

Apologies
Mr T Mufamadi (ANC), Chairperson of the Finance Standing Committee, was attending the announcement of the Census 2012 results in Pretoria.






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