Accounting Standards Board on its 2013/14 Annual Report; Parliamentary Budget Office on impact of investment in South Africa

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Finance Standing Committee

29 October 2014
Chairperson: Mr D van Rooyen (ANC) (Acting) and Mr Y Carrim (ANC)
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Meeting Summary

The Accounting Standards Board (ASB) briefed the Committee on its annual report, focussing on financial performance, cost containment, strategy of the ASB 2015-19 and discussed a letter dated 23 July 2014. The ASB reported that its performance was limited by its narrow mandate and demanded a review and extension of its mandate. The existing mandate was not wide enough to allow the ASB to achieve its objectives. The members of the Committee responded that the ASB should engage with other stakeholders, including National Treasury, the Department of Trade and Industry and the Auditor General. Members felt that the ASB showed substantial achievements and sought clarity on unclear issues, such as whether it would train managers in accounting standards, whether the extended mandate would not encroach on the Auditor-General’s mandate, how standards would be enforced, and whether it was applying the Employment Equity Plan.

The Parliamentary Budget Office (PBO) briefed the Committee on the Impact of Investment in South Africa, focussing on foreign direct investment (FDI). The PBO stressed that there was, according the research findings, a strong nexus between the FDI and economic growth. For this reason, South Africa had formulated policy to attract both domestic and foreign investment. By promoting the FDI, it was hoped that South Africa’s economy would grow. However, the economist did make the point that there were other countries which had achieved economic growth despite not seeking to attract FDI, and differing views were held on the point, which he summarised. Members asked for clarity (although there was no feedback given during the meeting) on the performance of FDI in relation to the agriculture, mining and energy sectors, whether FDI would create jobs, and whether the trade liberalisation policy was given any thought.. Several Members then set out their own views on the issues and suggested that perhaps more debate was needed whether the country should be seeking to attract FDI or concentrating on promoting local investment, and even looking to change local perceptions and South Africa's own products. The Chairperson commended the very high quality of the presentation and report, and urged Members to take notes of the critical issues and arguments in preparation for further discussion in the next week, and particularly to identify any shortcoming and possible actions to close the gaps.

Meeting report

Accounting Standards Board (ASB) 2013/14 Annual Report briefing; follow-up on matters debated in previous Committee meeting

Ms Erna Swart, Chief Executive Officer, Accounting Standards Board took the Committee through presentation, focussing on performance, financial performance, cost containment and strategy of the Accounting Standards Board (ASB) for 2015-19. She indicated that she would deal further with a letter dated 23 July 2014.

Ms Swart noted that the mandate of ASB was to promote transparency and effective financial management of REAL, to set standards for the Generally Recognised Accounting Practice (GRAP) as required by financial management legislation, to prepare and publish guidelines and directives, and recommend implementation dates to the Minister of Finance, after there had been consultation with the Auditor-General (AG).

Ms Swart noted that ASB contributed to the achievement of responsive accountable, effective and efficient local government systems, and an efficient and effectively oriented public service. ASB’s objectives include influencing development of international standards, setting standards of GRAP, facilitation of the implementation of GRAP, monitoring the application of GRAP, realising the potential of people in South Africa, communicating with its stakeholders, and managing ASB efficiently, effectively and economically.

Ms Swart said that numerous private and public entities were applying GRAP and that there were some entities that needed still to adopt GRAP.

Ms Swart highlighted the ASB’s achievement in terms of the objectives that she had mentioned (see attached presentation for full details) and the elements of cost drivers. The ASB’s budget was R11.147 million. In terms of cost containment, she said that the ASB renegotiated its lease escalation, looked carefully into the cost of all services, and travel costs; cancelled most of its subscriptions; and proposed a cut in transfer payment.

Ms Swart noted that the ASB’s mandate should be reviewed and that the project group to identify barriers to GRAP implementation should be established. In the letter dated 23 July, Ms Swart had suggested that there should be a mechanism to consult with Members of Parliament, and had also suggested that the ASB's mandate should be clarified, including building its capacity.

After the briefing, Mr Vuyo Jack, Chairman: ASB apologised for not being able to arrive on time for the start of the meeting. He commented that ASB was faced by a challenge of documenting the standards of GRAP in all South African official languages. It was further constrained by a limited budget. 

Discussion

Dr M Khoza (ANC) stated that the ASB should focus on training the municipalities how to implement the standards of GRAP. A target was set to have clean audits by 2014. Although it seemed that ASB was able to celebrate some achievements, it was far from achieving the planned target. The challenge derived from some offices having a financial officer who had no background in the accounting practices, and he urged that all staff dealing with financial matters needed proper accounting training.

Dr Khoza sought clarity on the four board meetings per year with at least three technical documents per meeting and said that the meetings were reducing in number, and this was worrying, given the major task entrusted to the ASB. He asked if the staff were committed and passionate about their work,

Ms P Kekana (ANC) sought clarity on whether all municipalities had now moved or were moving in full swing to apply the GRAP standards. He wanted more detail from ASB on the mechanism employed by the ASB to bring down its budget.

Dr D George (DA) sought clarity on the issue of revising the mandate. He commented that the presentation was short and contained all information that the Committee wanted to know; he commended this and suggested that all entities should follow the same format of presentation. He asked what should be taken into consideration by an entity, in terms of reporting on its financial statements and annual performance. He asked if the ASB interacted with the National Treasury on the issue of revision of mandate. He also asked if ASB had given thought to developing the standards of annual financial statement presentation

Mr D Ross (DA) seconded Dr George on the issue of developing the standards of annual financial statement presentation, and asked why this had not been developed already. He said that the ASB was requesting the Committee to approve its expansion of or strengthening of its mandate, but asked ASB to be more specific on why the mandate should be revised and what challenges it was facing. He noted the comment about staff shortage, and he asked how many people could be employed.

Ms T Tobias (ANC) sought clarity on the payment of chattered accountants, and on why the ASB did not reach out to all entities that need to adopt the standards of GRAP. She asked why the ABS’s internal audit system was not feasible. She wanted more information on the issue of outsourcing the jobs, and the money that was spent in that regard. She also wanted more detail about the cancellation of subscriptions and asked how the ASB would be kept updated on various relevant matters.

Mr D van Rooyen (ANC), who was acting as Chairperson at this point, sought clarity on whether the ASB was implementing the Employment Equity policy and how it dealt with skills shortage.  He wanted to know exactly what the role of the ASB was, in enforcing the accounting standards. Referring to the ASB’s mandate, he sought clarity on what it was asking should be included in its defined mandate, and why should be the case. On the remuneration, he sought clarity on how bonuses were determined. He asked whether the ASB had obtained a clean audit  from Auditor General. He also asked whether ASB played any role when it came to auditing entities’ financial performance.

He then asked whether Mr Y Carrim (ANC), the permanent Chairperson of the Standing Committee on Finance, wanted to chair the meeting at this point.  

Mr Carrim apologised for coming late and requested Mr Rooyen to carry on chairing the meeting.

Ms Kekana sought clarity on whether the ASB had engaged with the National Treasury on the issue of revising the mandate.

Dr Khoza expressed her concern about the revision of the ASB’s mandate, stating that it might be in conflict with the mandate of the Auditor General.

Ms Tobias commented that ASB was a very interesting organisation that set accounting standards in conformance with international accounting standards. South Africa was not an island on its own. It had signed various international treaties. Therefore, the ASB should set out standards in line with the international standards. It was not right for the ASB to set out standards in terms of annual financial statement reporting without also setting out standards to determine whether financial statements were meeting the planned targets or whether the planned targets were achieved. She therefore suggested that the ASB should establish a template, and provide it to managers, so that they could check whether the money was being spent to meet the targets planned. This would enable entities to identify the problems they were facing in committing funds to the planned targets.

Ms Tobias stressed that proper implementation of the standards of GRAP was much needed. The country could not wait for young students to complete accounting studies and take up their positions and so the current managers should be trained. South Africa was challenged by shortage of skills, due to discriminatory education imposed by the apartheid regime, and that was a factor that must be recognised.

Ms Tobias referred to other comments from colleagues on the issue of the mandate, and suggested that the ASB should engage with the National Treasury and Auditor-General and come up with a proposal that could be approved by the Committee. The ASB should involve all stakeholders in the process.

Ms Tobias emphasised again that current managers should understand the reporting model so that they did not struggle so much when reporting.

Dr Khoza remarked that the reporting model developed by Financial Services Board (FSB) was working well, and she had proposed that it could be followed. The new standards of GRAP could not be adhered to if the ASB did not take into consideration both education and awareness.

Mr Jack firstly responded to issues around the meetings of the ASB, and explained that the ASB structured sub-committees that dealt with particular issues or that studied policy documents. It also created a technical committee which looked at internal control matters. There would be an awareness campaign on the standards of GRAP. However, education was not part of its mandate. Its mandate was limited to providing guidelines. On the issue of education, it collaborated with the National School of Government to train municipal managers and it was in the process of lobbing the Department of Higher Education to include these standards in the accounting curricula. The standards were approved by the National Treasury. On the issue of amending the mandate, the ASB would ensure that its line of mandate was not in conflict with one of the Auditor-General.

On the issue of conforming to the Employment Equity Plan (EEP), he explained that the ASB had a balanced staff. There were four members of the technical committee, and two of them were black. ASB was still engaging with the Department of Trade and Industry on the clarification of the EEP.

Mr Jack explained that the bonuses were determined on the basis of performance, and there was extensive consultation.

Mr Jack clarified that the budget figures had dropped because no funding was requested for the positions that were not filled. Some work was performed by staff employed by the State. Some positions were filled in September 2014.

On the issue of languages, the ASB used on three main languages, namely, English, Afrikaans, and Zulu.

Ms Swart spoke to the comments on the revision of the mandate. She explained that it was most essential to revise it. The current mandate was concerned with setting standards of annual financial statement reporting.  The international accounting board had changed its focus on oversight of financial reporting. The ASB was aware that the National Treasury had changed the finance monitoring policy. However, the ASB mandate should include a reference to financial performance in terms of meeting targets.

The Chairperson stated that Committee could have adopted the ASB report, but it would need time to pay specific attention to some specific matters. He asked that Members should look at areas where the Committee's intervention was requested, and it would revert on these points. On some issues, the Committee would engage with stakeholders. He asked for the view of the National Treasury on the report.

Ms Swart replied that the National Treasury supported it.

On the issue of mandate, the Chairperson suggested that Ms Swart should engage with the National Treasury, the Minister responsible and the Director General of the Department of Trade and Industry.

Ms Tobias remarked that Members needed time to report back to their respective political parties caucus before coming back to the Committee.

The Chairperson confirmed that the Committee would not be taking a decision now, but would provide some guidelines.

Parliamentary Budget Office (PBO) briefing: Impact of Investment in South Africa

Mr Y Carrim (ANC) resumed the Chair.

Mr Brandon Ellse, Economist, Parliamentary Budget Office, took the Committee through the attached presentation. He noted that, in August 2014, the Committee requested the Parliamentary Budget Office (PBO) to investigate the impact of investment on the South African economy. The PBO submitted a full report to the Committee in September 2014. He would be providing an over view of the key findings of such report.

Mr Eilse said that the main intention of the presentation was to explain key investment concepts, to provide a brief overview of the literature on the impact of direct investment, to provide a summary of the current state of investment in South Africa and an overview of South Africa’s plan to attract and manage investment.

He noted that several countries, including Japan, Taiwan and South Korea had achieved economic growth in the absence of significant foreign direct investment (FDI) inflows. In actual fact, economic growth was a response to the FDI, The National Development Plan (NDP) and other governmental policy documents subscribed to the notion of FDI, as these documents explicitly identified a critical need to promote both domestic and foreign investment in South Africa. 

According to the report, FDI was proposed to be a driver of economic growth, with the assumption that this would culminate in a net benefit to the State and citizens of a country. An overview of the report provided arguments for and against that proposal Amongst others, the views expressed included:
- Direct capital investment financed within a country was generally accepted to be more likely to result in greater benefits than foreign FDI
- Several business practices had emerged that limited the potential effect of FDI in developing countries.
- FDI inflows were found to be neither sufficient for, nor a necessary condition of economic growth.

The impact of FDI on growth in South Africa from 1956 to 2003 was positive. However, since 1994, the relationship had been unclear, as periods of relatively higher growth had not coincided with higher FDI inflows. The FDI in South Africa, as a percentage of GDP, was relatively low compared to its peer countries.

In terms of South Africa’s plan to attract investment, the Department of Trade and Industry (dti) gave effect to the investment focussed recommendations in the NDP through the Industrial Policy Action Plan (IPAP) as well as through its own programmes. It encouraged investment through a range of incentives, including tax incentives.

Mr Ellse noted that South Africa had formulated policy to attract both domestic and foreign investment. By managing the FDI, South Africa would be able to increase the likelihood of a positive spill-over effect.

Discussion

Mr Ross sought clarity on how the FDI was performing, in terms of agriculture, mining and energy. He remarked that the presentation was very useful and informative and thanked the PBO for its excellent report.

Ms Tobias commented that economic planning was nothing more than assumptions. Sometimes, economists thought they were correct, when hindsight proved that they were not. Assumptions might not work. That was why there were changes in their approaches, or sometimes economists based their assumptions on experiences. Some economists held the view that for the economy to thrive a country had to promote the FDI; whilst others held the opinion that a country would thrive if it promoted domestic investment. These were two contending views. The Committee should look at these views to determine their repercussions.

Ms Tobias reminded the Committee that in the 1980s, South Africa, due to economic sanctions, promoted domestic investment and this approach was successful until it was sabotaged by liberation movements. She sought clarity on whether the FDI was necessary for South African economic growth, and the differences between capital inflows and the FDI inflows, and how local economic activities could be promoted. She made a reference to the Jive soft drink, a local product which was preferred by Capetonians (especially Muslims) over other soft drinks. She asked if it was not true that the local economy would be promoted if citizens promoted South African home-grown products, and added that it was also necessary to think about whether to change the perceptions of our citizens. She opposed the FDI and suggested that local investment was more viable and patriotic as it promoted small businesses, especially women who were selling food in the street. That, she stressed, was where the local investment started.

Mr N Kwankwa (UDM) remarked that the findings of the research had found a strong relationship between the FDI and economic growth, in the sense that when the FDI was high the economy was high, and when the FDI was low, the economy went down too. He asked whether, during the course of the PBO doing a literature review, it had found whether the FDI was creating jobs, and how local companies could be protected. 

Dr Khoza remarked that there was a strong relationship between the trade liberation policy and the issue of productivity. The PBO might claim that the FDI was good for the country but the FDI actually did not create jobs for the people. In other countries, such as Australia, it would be found that domestic investment was preferred over foreign investment. A family could own a farm and the State could promote its productivity. He also asked whether the PBO had looked at the trade liberalisation policy, because it could not be said that there was one-size policy that fitted all. That was a fundamental issue that had to be explored.

The Chairperson thanked the Members for engaging with the presentation and raising their concerns. He noted that both the report and presentation were of very high quality. Mr Ellse had explained the economic theories comprehensively and clearly. Members of the Committee should take notes of the issues that were critical so that they could be discussed in the following week. Their duty was to find the trade-offs, or debate how the gaps could be closed. The quality of the FDI should be determined in the context of examining whether it would create jobs for local people, or how South Africans would benefit from foreign investment. He thanked the PBO sincerely for its presentation.

He remarked that the presentation was based on the professional analysis. Such analysis should be used to engage with upcoming fiscal reports.

The Chairperson announced that the Thursday meeting had been postponed because the Minister was unable to attend, and adjourned the meeting

 

 

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