Budget 2003: briefing by Ministry of Finance

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Finance Standing Committee

26 February 2003
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Meeting report

JOINT BUDGET, FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
27 February 2003
BUDGET 2003: BRIEFING BY MINISTRY OF FINANCE

Chairpersons:
Ms B Hogan (ANC) [Portfolio] ; Ms Q Mahlangu (ANC) [Select]; Joint Budget: Mr N Nene (ANC) [NA] ; Mr T Ralane (ANC) [NCOP: Free State]

Documents handed out
Treasury Presentation on 2003 Budget
Budget 2003
Committee Programme for Budget Hearings Week (see Appendix)

SUMMARY
During the discussion after the presentation by Treasury on Budget 2003, the Democratic Party contended that the Budget is missing an opportunity to attract key foreign investment and to speeed up privatisation and that the tertiary sector is not contributing enough to economic growth. Concern was raised that the Budget does not mention TRC reparations and the Minister pointed out that the 2001/2 budget had allocated R800m for this which was still available. Treasury was asked to provide comparative information on the manner in which social security grants are dealt with in other emerging economies. Reasons were sought for the increase in the borrowing requirement and whether this will be the trend in future, and clarity was sought on the policy underlying South Africa's proportion of foreign to domestic debt, because this has been on the increase.

Members also commented on the added expenditure for infrastructure development, the funds to be allocated to food relief projects, the planned measures to include Black Economic Empowerment initiatives in the Budget and on the considerations around the phasing in of the increase in the Child Support Grant. Treasury was asked to indicate the costing done to provide HIV/AIDS treatment in line with the Constitutional Court judgement and why this had not been accommodated in the Budget. The Minister noted that it had not included it as the costing was not complete. To provide for this, Treasury could look to Section 16 in the PFMA, a general appropriations adjustment estimate or do a special appropriation if needed. The manner in which the contingent liability of R4b in relation to the curatorship of Saambou was also raised.

MINUTES
Ms B Hogan (ANC) (the Chair) welcomed everyone present to the proceedings, and stated that she hopes that this joint meeting will be the start of a very useful process for the passage of the budget through Parliament.

Presentation by Treasury
A member of the Treasury delegation
conducted the presentation (see document) which provided a brief outlook of the Budget and highlighted the macroeconomic outlook, the Gross Domestic Product (GDP) growth and Consumer Price Index (CPIX), key indicators of fiscal policy, borrowing requirement, personal income tax relief and a summary of tax proposals, the division of revenue and recent budget reforms.

Discussion
Ms R Taljaard (DP) stated that it seems that Minister Manuel has reaped the benefits of sticking to quite a difficult macroeconomic policy under very trying political circumstances, but there are certain unaddressed areas of the Growth Employment And Redistribution (GEAR) policy where reform might not have been as speedy as desired. Of particular importance is the key need to attract foreign direct investment, and there is a slight disappointment on privatisation and the proceeds projections in the Budget during the Medium Term Expenditure Framework (MTEF) period. Although the other steps taken in the Budget will see inflows back from other sources, it does seem that South Africa is missing an opportunity here.

The issue of tax as a percentage of GDP is another area and, although there has been quite considerable tax relief over the last few years, is government satisfied that, in relation to the GEAR percentage, South Africa is moving as fast as it should be in this regard? A third important area is labour market flexibility. It is in these three areas that GEAR might not have moved as fast to reap the benefits optimally.

Allied to this are the growth rates of the economy and the desire to stimulate growth in order to create employment, and one of the key areas of interest here is to note the percentage of contribution of the tertiary sector to economic growth. The figure is approximately in excess of 60% of growth which is driven by the tertiary sector. Thus any shackles on the telecommunications industry or policy difficulties should be removed, and regulatory issues should be minimised in order to unleash this potential even further. This does however raise a complication with regard to employment creation, because South Africa clearly does not possess the necessary skills-base that can be absorbed to feed the growth in this crucial sector. What then is the broad game plan both to increase the stimulation of the tertiary sector and to deal with the unemployment problems, given that the tertiary sector will not be able to provide the absorption required.

Minister Manuel replied that one has to start from a slightly different point, which is to recognise the shifts in thinking within business. Many of the current concerns are not uniquely South African and if one considers things such as the length of time for which people are unemployed, one finds that increasingly in European countries, structural unemployment is starting to be seen. One also has to look at capital flows, and in this regard in 2002 the United States only attracted a fraction of what it did in the previous year with the result that it is currently sitting with a huge balance of payments deficit, on top of its fiscal deficit. Serious questions about the ability of executives to think in a different environment have also been raised.

The current situation facing South Africa is quite different, and what arises repeatedly here is "where is the vision, where are the principles". On the issue of privatisation one has to start from a slightly different view with regard to the modesty of the proceeds that the review indicates. Part of the concerns raised, especially by the State of California with regard to energy, is that if such measures are rushed into, it will create problems. If Telkom is taken away, the only two sizeable entities that remain are Transet and Eskom, and it would be "exceedingly hard going" to attract a State-owned enterprise into South African Airways. The point to be made here is to focus on the practicalities and not the ideology.

The better approach to be followed would be that adopted with regard to ports, where there are two different strands of activity: the first is in Durban where there is a concessioning of ports, and the other is Coega where there is a combination of parastatals and private sector involvement in its development. Treasury would not be true to itself nor to Parliament should it suggest that there would be larger numbers of privatisation.

With regard to foreign rate investment, it is hard to make projections because of the uncertainties. Minister Manuel stated that Ms Taljaard is correct in suggesting that the exchange control amnesty will be resource positive in South Africa. The fact here is that people are actually very scared of filing fraudulent tax returns, this is the biggest reason why people would want to respond. This bears testimony to a series of other policy measures and activities aimed at addressing this matter.

As far as tax to GDP ratio is concerned, the ratio currently stands at 24,7%, which is "around" the 25% aimed at. If the series of other taxes are factored in, a much higher figure will be arrived at. This figure would be perfectly acceptable in view of the National Skills Authority's (NSA) 1998 figures.

In respect of labour market flexibility, he cautioned against the view that there has not been movement, as there have been amendments to a number of elements of the labour market legislation in South Africa. Of importance here would be a study conducted by the International Labour Organisation (ILO) which suggests that the South African labour market is not as rigid as some would like to argue .

The point made regarding the tertiary sector is well taken. It is the growth sector and is likely to remain that way, but by its nature so many of the jobs require a higher level of skill than South Africa is currently able to provide. South Africa will run into absorption ceilings here. One of the important issues here is the R3,6b levy for the Skills Development Fund in the new fiscal year, which marks an increase from R3,3b in the current fiscal year. This originates from changes to existing labour legislation in recognition of the importance of skills, but one of the concerns here is that there is very little to suggest any focus on the output, because R3,6b has been allocated despite the fact that there are no measurable objectives in place. The problem here is that, generally, the outputs of SETAs (Sector Education and Training Authorities) are vague and understated.

Ms L Mabe (ANC) stated that an issue was raised this morning on Radio SA regarding the failure of the budget to deal with reparations emanating from the Truth and Reconciliation Commission. The caller was concerned that this omission indicates the government is not serious about such issues.

Minister Manuel responded that in the 2001/2 budget R800m was allocated to the Department of Justice and Constitutional Development for reparations, but this money was held up for reasons of which we are all aware. The broad sense is now that the threat of litigation has passed, and this discussion can now be taken forward by the Department of Justice and Constitutional Development. The R800m is still on the Vote of the Department of Justice and Constitutional Development and it has not been ceded, and the suggestion that there are no funds for reparations, as stated by the caller to a radio programme this morning, "certainly does not accord with the reality". This is the problem created when people jump to conclusions before they ask the question.

Ms Mabe stated that Budget requires provinces to undergo labour intensive programmes to ensure that jobs are created at that level, as well as at the local level. Are the provinces and local government ready to ensure that the funds that have been allocated for such problems will not be spend towards the end of the financial year, so that at least what is budgeted for can yield some fruits before the end of the financial year.

Minister Manuel replied by referring Members to Section 32 of the Public Finance Management Act (PFMA), the last having been set for the quarter ending December which includes national/provincial spending. The situation is not as bad as it seems, as there have been considerable improvements certainly in the spending and allocation in the provinces. These issues were all dealt with during the Budget Speech.

A meeting was held with the MECs for Finance to attempt to allocate the additional funds into specific areas, such as education and health. The MECs took the results of this meeting to their provincial executive and came back with written assurances as to how that money would be spent.

With regard to Local Government, when the Municipal Finance Management Bill is eventually assented to, it would certainly help here in the same way that the roll out of the PFMA has helped national and provincial government expenditure.

Mr B Mnguni (ANC) suggested that everyone would probably welcome the fact that the budget is both expansionary and more developmental, but would this not trigger demand-pushed inflation? If so, how would this be addressed?

Minister Manuel responded that he does not have the same concern, and the repo rate hikes that occurred during 2002 were not as a result of the contradictions between fiscal and monetary policy. What was discussed with both this Committee and the South Africa Reserve Bank (SARB) was the extent to which the inflationary impulses were domestic versus foreign. The question that was raised time and again was if it was outside control, why was the escape clause not invoked, but this is a matter to be decided by SARB. Minister Manuel stated that he does not see the risks of demand-pushed inflation.

Mr K Moloto (ANC) stated that the budget indicates that significant funds have been allocated to social security grants, and asked Treasury to explain whether any comparison has been done to see how South Africa is faring in relation to other developing countries with regard to the allocation of social security grants.

Minister Manuel replied that part of the difficulty in trying to draw comparisons here is that there are not any immediate comparisons in developing countries. This kind of provision by the South African state is virtually unknown in Asia. In fact in 1997 there was a financial crisis and the governments of some of those Asian countries were even able to cut other social expenditures to help education. South Africa's entire approach here is quite different and it would be both unthinkable and unconscionable for government to unmake a law passed by Parliament regarding the appropriation of revenue, and for Treasury to then spend State funds in a different manner.

The trends in Latin America are different, where the commonly held view is that the social security system in Mexico encourages people to get across the border into the United States. There are now between 8 and 12 million Mexicans working illegally in the United States. Brazil also has to be considered carefully, because its big problem is the pension system which is so unbelievably complex. For example, the offspring of the daughters of Generals who fought in the war against Paraguay and Uruguay somewhere in the nineteenth century are still entitled to pensions. How that decision was taken and why it was never changed is uncertain. Also, public servants that have served up to ten years are entitled to a pension for life equivalent to 100% of their exit salary. These are thus intricate issues and there are complex negotiations regarding the rate at which the adjustments is made. Some of these matters present a big challenge for President De Silva. Part of the difficulty are the old commitments that hamstring other developments.

Chile is a much smaller country and is more developed, but it has pushed the social grant system so that it has something that is a close to the Singaporean Central Provident Fund (CPF), where it is all held in a central place and the Government Investment Corporation (the Singaporean GIC) does investment, although these days much of this is done outside Singapore. Thus in Chile this is all done through the private sector.

There is thus a very hard push and statutory support for people belonging to pension funds which will provide for them in retirement. The short answer thus is that it is very hard to find comparisons for the approach followed by the South African government.

Ms R Joemat (ANC) noted that there is an increase in the borrowing requirement, although it is only 1% to the GDP, and this will be funded primarily by domestic lending. Will this be the trend for the future, especially as the need for the borrowing for the deficit is increasing up to 2006.

Mr Maria Ramos, Director General: Treasury, responded that it is true that the next three years for the MTEF period will see an increase in the financing requirement, primarily because the deficit is projected to go up to 2,4% for the 2003/4 year, and to then come down to 2,3% in the 2005/6 financial year. This does translate into a higher borrowing requirement than a nett financial requirement.

There are a couple of important points to make in relation to the overall nett financing requirement over the next three years. It includes a R7b issuance programme of no coupon bonds to SARB to settle the balances on the Golden Foreign Exchange Reserve Account (GFERA). In other words, the losses that have been built up for the forward book will be settled over the next three years, and in fact in this fiscal year Treasury has already issued R7b worth of non coupon bonds to SARB. The importance of this is that these bonds are issued to SARB and if it needs to convert them, it would approach Treasury, with the result that those bonds do not necessarily make it into the capital market. The Treasury therefore has an agreement with SARB that the conversion from non coupon bonds into interest-bearing bonds is on a schedule agreed with Treasury.

The remainder of R23b, the figures for 2003, of the R30,1b that Treasury has to finance R7b is for SARB for the GFERA. The rest will be financed in the short end of the market to the tune of R6b, in the form of treasury bills in a number of short-dated instruments. Treasury is planning to do around $1b in foreign currency issuance in this year, and the remainder of just over R2b will be nett issuance into the capital market into the longer end of the market.

There are several things Treasury takes into consideration with regard to increasing the deficit of the nett borrowing requirement, and one of those is the fact that Treasury has put an enormous amount of time and effort in this country into ensuring that its debt position is sustainable. It is therefore important for Treasury to ensure that a number of key ratio's trend downwards even though the deficit may be a bit higher that it will be for this year. The ratio focused on the Treasury here is the debt service costs, both as a percentage of the budget spending, but also as a percentage of GDP. These costs do come down over a three year period, and in terms of budget expenditure they come down from 15,8% this year to something in the order of 13,6% or 13,9% in 2005. This is significant if one remembers that not so long ago debt service costs were as high as 21% of the total budget. As a percentage of GDP debt service costs come down from 4,2% this year to 3,8% over the MTEF expenditure period.

The other ratio that is worth looking at is the debt as a percentage of GDP and this is also nett-loan debt, which comes down from just over 42,3% this year to a projected 36,8% of GDP. This is the total nett-loan debt, which includes both foreign and domestic debt. There are not too many countries out there that have these kinds of ratio's. The downward trend is important because it is a means to continually release resources to spend on other things.

The Chair referred to the indication that the deficit would be financed through domestic debt, and stated that the Golden Phone Exchange Reserve Contingency Account increases very dramatically from a mere R9,2b in 2000 to R28b, reaches a peak in 2003 and then starts to go drop. Could Treasury just unpack the base of this development.

The DG responded that one of the effects of running a forward book is that there are, particularly as the exchange rate depreciated in 2001, losses incurred on that book. It was also partly because of the way in which those losses were accumulating that Treasury decided that it makes more sense to reduce the forward book borrowing, than to continue to see those losses increasing. Treasury expects to see the nett open forward position dropping, and the losses generated on the forward book will ultimately decline. Treasury also expects to begin to see some profits on that book, especially if one considers the extent to which the exchange rate has appreciated over the last six to nine months.

The Chair referred to the foreign loan redemptions, and noted that the revised figure jumps from R2,8b to R21b in 2004. Could these foreign loan redemptions be unpacked by Treasury.

The DG replied that the big redemption in 2004 is the three year syndicated loan facility that matures next year, and one of the bonds will be maturing the year after. This is the explanation for the increase. In 2003/2004 there is actually no big maturity of foreign currency debt.

The Chair sought clarity on the policy underlying South Africa's proportion of foreign to domestic debt, because this have been in ascendancy. What are the policy considerations guiding the continual upward trend?

The DG replied that Treasury has developed a risk-management model which suggests that South Africa could carry up to 25-26% of its portfolio in foreign currency debt. At the moment the figure stands at just around 20% of the portfolio, and Members will remember that this was actually much lower two years ago. The reason for the increase and for the current state of the redemption figures is that Treasury has borrowed quite a bit in the foreign currency markets to reduce the nett open forward position exposure. The nett open forward position exposure in December 2001 stood at $4,8b and government then borrowed including a $1,5b via three year syndicated loan facility in partnership with the SARB, and it has been able to reduce the nett open forward position down to $1,5b at the end of January. Thus at the moment the ratio of foreign to domestic currency of around 20-21%, and it will probably peak at around 21%.

As a percentage of GDP the foreign currency remains pretty low by international standards, something in the order of 7/8% of GDP in foreign currency debt over the next three years. This figure is not alarming and is in fact pretty low by international standards. Treasury has always taken a prudential approach to foreign currency debt because international capital markets can be quite unpredictable, and there have been times in the last five or six years when South Africa has ventured into market which then proved unsuitable for emerging market economies. Although South Africa has never had a problem with raising capital in a foreign currency market. Government has also been pretty conservative primarily because it wants to make sure that it has this balance right.

South Africa is also one of the few emerging market countries that is in the very privileged position to finance its entire deficit in the domestic markets. In fact, there are two things that make South Africa an "outlier" when comparing it to other emerging markets: it has a very deep and very liquid domestic capital market, which most countries do not have. Secondly, South Africa is one of the few emerging market economies that have not "dollarised", which is also a pretty unusual feature.

Dr G Koornhof (UDM) was pleased with the focus on infrastructure development spending, especially on labour intensive infrastructure projects at a local level. This was the right way to go. Is it correct in contending that there has been a quantum jump in infrastructure expenditure especially through the 2003/2004 financial year, yet there is a slight levelling off as a percentage of GDP with regard to the trends and projections.

Mr Mandisa Mpahlwa, Deputy Minister of Finance, replied that he is not sure whether "quantum jump is less than quantum leap". It can be said that the picture as far as infrastructure is concerned is actually looking very positive and very healthy, both in terms of what has been seen over the last few years and in terms of both the plans for the allocations going forward and enhanced capacity to spend on infrastructure. One of the things that Minister Manuel raised with regard to expansionary budgets is not only expansion, but also the capacity to absorb whatever resources are available. Government's confidence in allocating more and more resources over the medium-term is also based on its belief that there is a growing capacity to spend these resources at all levels of government.

Furthermore, Treasury has quite a number of programmes going around infrastructure investment. There are the Public-Private Partnerships (PPP) that are really starting to pick up, and the budget review indicates quite a range of projects that have been done via these PPP's. There are also parastatals which have plans to significantly increase infrastructure investment.

With regard to provinces and local government, the emphasis that Treasury placed during 2002 was on seeing infrastructure not only as a vacuum, but also as a means to improve the quality of life of people, which includes roads, schools and health facilities etc. The Critical Information Programme is also picking up, and is mainly located in the Department of Trade and Industry. Here there is collaboration between all three spheres of government in particular areas where particular economic activities are planned, such as Koega, Richards Bay etc. These are all the things that are really helping to provide a good picture of what we are likely to see as far as infrastructure is concerned.

Dr Koornhof stated that the Budget also refers to the R1,2b to be allocated to food relief projects, and asked Treasury to explain whether it has already decided who the line functionary would be here, and how it plans to implement this. Will major food retailers be involved should the line functionary be the Department of Social Development and it decides on the provision of food parcels, for example? Will the private sector also become involved or is it a project in which the government alone will be involved?

The Deputy Minister responded that the Food Price Monitoring Committee has been established, but stated that he is not sure whether he can accurately answer the question as to who would be involved in this initiative. From Treasury's point of view, irrespective of what happens at that level, it is important that the issue of consumer activism is raised. The issue of food pricing "has certainly occupied the consciousness of public across the board", and consumer organisation, consumer bodies and consumer activism is one of those things that is still weak in South Africa. At the height of food price inflation, an issue that was talked about was the newspapers that would publish on an ongoing basis just what has been happening in terms of prices in different places. These are some of the things that Treasury considers important.

But what is not being considered here is the introduction of "price controls" either through legislation or the sort, but instead what is being focused on is the behaviour of retailers etc.

Minister Manuel added that it is important to see the commitments this year, especially the commitment to supply 100 000 tons of maize to the World Food Programme (WFP) for distribution in Southern Africa. Government opted to do this via the WFP because it would be inordinately costly to take responsibility for transport and distribution. Minister Manuel stated that he is not sure whether that programme will continue, as it depends on harvest, crop estimates committees and what the demand patterns would be. If government had purchased this week rather than a few weeks ago, the price would have been very substantially different.

With regard to food relief, the R170m allocated for 2003 covers this, but what happens next year is both a Plan A and B. Plan A would entail probably some transfers into Southern Africa, and Plan B would be all of it available for South African distribution. There will remain to parts to the programme done collaboratively. The first part would be to identify those areas of special need down to a local level and distribute food relief, often through NGOs. This is a temporary measure, and the big challenge is to ensure that recipients understand it is a temporary measure, because government could not maintain it on an ongoing basis, and it probably does not accord well with the broad policy stance. This would be done by the Department of Social Development through provincial departments and in close collaboration with a series of NGOs that they have identified.

The second part is the more developmental aspect would be run by the Department of Agriculture, and encourages people to plant. Everything from an assessment and distribution of the small hand tools when necessary to the distribution of starter packs of seeds, so that people can be empowered to take these issues forward for themselves. There were some pilot projects under poverty relief especially in KwaZulu-Natal, but Minister Manuel stated that he would not be in a position to answer questions of detail on where they would go and how they would decide what seeds and so on. This would be the approach taken, in broad brush strokes.

Mr R Mohlala (ANC) [Budget Committee] stated that Minister Manuel mentioned during his Speech that it needs to be ensured that more South Africans rely, for their livelihoods, on normal participation in the economy. With regard to poverty alleviation and reduction, even if it does not necessarily bring about economic growth it does support economic stability, and if it improves and raises productivity it will necessarily raise the standard of living of South Africans. Having said this, the question then is how government will ensure that the vision of the policy formulators is actually shared by the policy implementers to ensure that the beneficiaries are those that actually reap the benefits of what was actually intended. This is important because in far too many situations the implementation stage is the problem. If one looks at the initiative regarding the starter pack seeds as mentioned by Minister Manuel, the distribution process does not necessarily have to be so bureaucratic if government really wants to achieve the intended consequences of the policy.

Minister Manuel replied that he agrees with Mr Mohlala, and the issue of the quality of service delivery is important. The key issue is what has to be done to improve management in general and project management in particular. These are the distinct challenges. In some areas this is working better, as is the case with disaster management after the floods in Limpopo in which they developed a new skills set with regard to project management, and here they have improved their cap-expenditure substantially. This is important, and here management has to be held accountable.

With regard to poverty alleviation and reduction, an additional R1b was raised for public works programmes to local government, because it will be better dealt with at that level. It also allows local government to ensure that these job opportunities are recycled and that more people are involved, as part of the accountability initiative. There are a series of issues that impact upon the lives of poor people, especially in the rural areas, and these include road maintenance, the provision of sanitation including ventilated pit latrines, dipping facilities for their cattle etc. All these could be part of the public works programme, and these are the kinds of issues that can create employment.

The Deputy Minister added that this issue has to be considered as a multi-stakeholder issue. An aspect of it is what Departments do when the conduct or performance of officials in those departments is not up to scratch. A task team is currently engaged in the Eastern Cape to deal primarily with the backlog in cases. Treasury does recognise that there are various stakeholders involved here, including unions and NGOs, and thus all have to work together.

Mr Mohlala stated that, with regard to the restructuring of State-owned assets, where people deliberately deal with privatisation alone, even though it is merely one of the aspects of restructuring. It is quite clear that the only time that government will make money out of privatisation or a blanket sale of State-owned assets is at the point of privatisation, because no more money will be made on that asset beyond its sale. This then has to be borne in mind when considering what has accrued from one year to another

The Deputy Minister responded that the steps taken here have to bear in mind the followed: firstly, even at that point of privatisation government may not make as much money as the asset is worth. Secondly, when the matter is carefully considered as whole range of opportunities may be opened up post the point of privatisation. Thus all these issues have to be carefully considered.

Mr N Nene (ANC) noted that Black Economic Empowerment (BEE) does not feature on today's presentation as one of the areas of focus of the budget. Was its exclusion deliberate? Mention is made in the Speech that government plans to make available R10b over the next five years to support the funding of new ventures and business expansions that meet the agreed upon criteria, and also states that these would be funded via the extraordinary proceeds of the exchange control measures that were announced yesterday. How will this be financed if these measures do not yield the required revenue? Where will the black empowerment fund be located?

Minister Manuel responded that it is not a budgetary issue in the way that a number of the other issues are but is an important part of the economic plan, and what was stated during the Speech would resonate entirely with what the President has said. Detail is being worked through, and about three weeks is needed to sort out much of the detail with the Department of Trade and Industry, and is therefore very much a work in progress. Treasury is not saying that the yield arising from the amnesty will provide the R10b, but it has said that it is a reasonable sense of balance if the levy facilitates the expansion of the economy through BEE. This cannot be the only source.

The National Empowerment Fund (NEF) has to be revamped, as mentioned yesterday during the Speech. The enabling legislation probably has to be very substantially amended for the NEF, and use this as a vehicle. There is an agreement between Treasury and the Department of Trade and Industry on the details of this process, and this will be worked out over the course of the next few weeks.

The NEF is located broadly within the family of the Department of Trade and Industry, and there are representatives of the Treasury on the revamped board, which might be an entirely interim arrangement.

The DG added that, with regard to the financing of BEE, the contingency reserve stands at R3,3b in 2003, and Treasury's expectations are that in year one this would be a capital fund which will facilitate BEE transactions. There are already plans in the contingency reserve to finance some of these in year one at least, and in the two outer years the contingency reserve is quire generous. In any case it is expected that some of the other revenues would come through during the outer years. The NEF is already sitting with capital, but the only thing is that it has not been able to utilise this capital, and this has to be addressed as stated by Minister Manuel.

Ms Q Mahlangu (ANC) [NCOP: Gauteng] stated that during 2002 Minister Manuel stated that taxation in the banking sector was still a work in progress, and Minister Manuel is now requested to provide an update on this.

Minister Manuel replied that when this matter was raised during 2001 there were particular reasons for doing so. By 2002 Treasury could report that the effort of focusing on that particular sector had yielded a handsome amount for the revenue fund. From a tax angle, the relations for the banking sector have now normalised, and there are open channels of communication between the South African Revenue Service (SARS) and the banking sector. As this is no longer a problem it was not thought necessary to continue raising the issue.

Dr P Rabie (NNP) referred to the joint amnesty regarding exchange controls and taxation and asked whether it is possible for Treasury to furnish a figure that is a viable reflection of this.

The Deputy Minister responded that the idea really is not to raise revenue, but is instead to create the opportunity for people to regularise their affairs. People have been influenced by a whole range of factors here, including historical, volatility etc. to do certain things, and the signals that Treasury has been getting is that their are people out there who do believe that they may have made mistakes. It is really an opportunity for people to regularise their affairs as far as exchange control violations and income tax law violations is concerned. Attempts have been made to build in incentives that encourage people to keep their money in the country, for example the case with blocked Rands, and here differential rates apply in terms of whether people keep their money in the country or not.

The DG added that the difficulty here is to determine just how much is offshore, as stated earlier by Minister Manuel, and it is not possible to ascertain this right now. What makes it so difficult to determine is the fact that no-one wants to admit to having broken the law, and the accurate figures of the size of this amount will probably only be identified when people come clean.

With regard to blocked Rands, the fee currently stands at 10%. There is a differential because, with regard to the for-expenditure amnesty, there is recognition of the fact that some people may have chosen to buy fixed assets offshore and it is not that easy to sell these assets and to repatriate the proceeds.

Mr L Kgwele (ANC) [Budget Committee] stated that, although the Budget has been welcomed overall throughout the country, some of the criticisms received are based on interpretations that are not properly informed by government policy that would enable them to correctly criticise that policy. Mr Kgwele stated that he could not help but notice the level of ignorance of some of the comments that were levelled here, especially those dealing with HIV/AIDS that could not even pick government's multi-sectoral approach to this.

Minister Manuel responded that he had read an article on the Preferential Procurement legislation that was passed by this Committee and how it was applied in the Department, and thought that the article could not possibly be based on the same legislation that was passed. How does it get to the point that a person could publish such a report publicly and not even know that he is so far off the wall? Minister Manuel submitted that these things are elementary outcomes of poor management, but they have to be addressed.

Mr Kgwele stated that, with regard to accountability and efficiency of the public service, as mentioned by Minister Manuel it is important that the service providers should be held accountable. Is Minister Manuel satisfied that, as far as the devolution of powers to municipalities is concerned, those specific areas would be able to be given a space in this Budget.

Minister Manuel replied that the budget estimates contains a table that actually sets out which have been concluded and which are currently in negotiations, and what is happening here is that a best practice is being developed. What often happens in Departments is that they outsource work and then do not even manage the outsourcing, with the resulting "double whammy" of poor management and the consequence of that is more costly services brought in and people who remain in the system and are not retrenched. It is thus a very costly exercise. There is thus no panacea for outsourcing, but the trends at the Chief Albert Luthuli Hospital in Durban are going to be seen as cutting edge, as the systems are very advanced.

With regard to the devolution to local government Minister Manuel stated that there are two parts to this. The first is that there are obligations placed on local government by the Constitution, and Treasury has been cajoling local government to take its responsibilities full on, and this is not actually devolution as such. There are areas in which, in a planned way, some functions are transferred. An example here would be public works programmes, because it has been found that such programmes work better in a local government environment, and this would be supported and monitored.

Mr Kgwele asked what were the considerations around phasing in the increase in the child support grant. Is it because it is necessary that to ensure that capacity is built, and to ensure that no fraud and corruption is built into it?

Minister Manuel replied the first consideration here is that the Department of Social Development had taken a lot of advice on this matter, and the cut off at 14 years is being looked at now because it is manageable. The problem here is that the system will work because "the main planks" are in place, which is the means-tested system. If there is anyone who has registered a child for the Child Support Grant (CSG), we should be drawn and quartered because it has to be means tested. If these issues are not focused on then government would not be able to resource what needs to be resourced. The systemic failures in the public service have to be addressed so that "the system does not fail the intended beneficiaries". This is the basis for the social compact the President spoke about during 2002.

When the National Education Health & Allied Workers Union (NEHAWU) speaks it has to begin to take responsibility for its members in this kind of environment, and cannot merely make a set of demands and then fold their arms and expect government to respond. It is about delivering on these kinds of issues, it is fundamental to transformation.

Government has battled here because in February 2002 there were about 1,3-1,4 million children receiving this grant, and on 9 February 2002 the President, in his State of the Nation Address, called for this figure to be increased to 3 million. There was a big push to reach this figure and the result was about 2,4 children. Are there still 5 to 600 000 children in need of the CSG is a question that must be answered, and the chances are that these are the poorest whose parents do not have the skill or the access to register these children for birth certificates. The additional problem created here is that when striving for this target government fails to get to those areas of need, because in order to resolve this problem the Department of Home Affairs has to be roped in at the front with systems that allow for proper registration of those children so that they become beneficiaries. It is these kinds of issues within the entirety of government that has to be corrected, and these estimates of national expenditure become important because they contain the measurable objectives.

Mr M Tarr (ANC) indicated that he is interested in the whole question of value for money and in particular the performance measures which are now included in the budget estimates. South Africa is very much at the cutting edge in including these. In KwaZulu-Natal, for example, there is a huge lack of understanding in departments with regard to performance measures, what inputs and outcomes are and how they should be measured. A number of measures are included in the budget that sound good, but it appears that it would be very difficult to put any numbers to them. Is there not room for dedicated individuals to consider performance budgeting and the whole civil service per se, and developing the right measures, or whether this is being done at all.

Minister Manuel replied that this is contained in the budget estimates, and it is an ongoing trend.

Ms Taljaard referred to the Defence Budget Vote, and noted that there are at least four areas in which there was an increase in the MTEF expenditure. The first was to do with air defence operational direction, the second was to increase the helicopter capability yet again, the third was in relation to the SAS Amatola and related spending and the last was the R1,1b for the four maritime helicopters. These issues were not included in the documentation that was voted on by the Cabinet in 1999, so arguably these could be seen as the hidden costs of the arms deal. Is there a projection, particularly with regard to skills training and retention and in relation to operation and maintenance budgets, as to what any additional cost increases would be, where these would come from in relation to the budget envelope and, with reference to the maritime helicopters, whether South Africa is in negotiations for further export credits and/or loan agreements.

Minister Manuel replied that the Department of Defence would be in a better position to answer these questions and stated that, while he does not know enough of the detail, all the Treasury does via the Estimates of National Expenditure (ENE) is to synthesise submissions from the various Departments.

With regard to the helicopters, Minister Manuel stated that these were part of the initial contract. He stated that he does not know much about these things but he knew enough to understand that the Corvettes are always accompanied by maritime helicopters. Government opted to defer the decision on this, and this has now gone through.

Ms Taljaard stated that although this was part of the initial decision-making in a sense, clarity is sought as to whether there were other financing negotiations around this already. Surely the negotiations of either export credit or financing in relation to the maritime helicopters would have to be addressed.

The DG replied that she would have to check up on this. There are options in terms of financing agreements but there is also the option to finance it as part of the normal financing, and this is therefore a choice as to which works out best. This will be followed up and Treasury will report back to this Committee.

Ms Taljaard referred to HIV/AIDS and government's multi-sectoral approach which, obviously, no-one disputes, and asked Treasury to explain whether there is a reason for the delay in the costing project which is currently being undertaken, which would presumably also be multi-sectoral. Is there a reason for its non-inclusion in this budget, given that the R3,3b was already in the MTEF period? Is there detail available as yet on the costing to comply with the Constitutional Court ruling across Departments and what the implication will be?

Minister Manuel responded that the ENE indicates that the Department of Health plans to spend the R3,3b on - as a result of the Cabinet decision on 17 April 2002 - matters such as Pregnant Mother to Child Treatment (PMTCT), post-exposure prophylaxis etc. These items are thus set out as that Department's commitment to Parliament. There is nothing sinister as to why this is provided for and nothing else because it is work in progress, and it might be about six weeks before the interdepartmental work is in a sufficiently complete for the Minister and his Deputy to view it. Then there will be Cabinet discussions, and it has not been because people are dragging their heels. The difference between getting up and "toyi-toying" and saying that Government has to "provide full anti-retroviral treatment blah blah blah" without examining costs and continuity, is the easiest thing in the world. This might have been done during the Eighties, but here a different set of issues are being dealt with.

If the aim is for this to improve the quality of life of people living with HIV/AIDS, a considered response that is affordable has to be presented, and the shortcuts have to be avoided. Thus the reason why it is not included in the budget is because the work is not complete. If there is Cabinet approval and it is not provided for and it cannot be accommodated within the Vote of a Department, Treasury would look to Section 16 in the PFMA, and the other alternative is to take it through either the general appropriations adjustment estimate, or to do special appropriations.

The Chair noted that she is aware that the Treatment Action Campaign (TAC) did engage in an extensive exercise on costing, that involved the University of Cape Town's Actuarial Department. This information could be made available to Members and to Treasury.

Ms Taljaard stated that the Budget Review indicates that there is a contingent liability of R4b in relation to the curatorship of Saambou. Is there any indication of how this will be funded, and if it arises before the indication that it is only due in seven years, is there an indication as to what contributed to the high cost of this curatorship, when it will be paid and how it will be paid when the contingency arises.

The DG responded that Treasury is providing a provisional figure of R4b, because not all the transactions regarding the liquidation of Saambou have actually been completed, and the actual figure will only then be fixed. The liability actually becomes due in 2007, and Treasury is thus providing for it now. If the package is completed well before then, then a decision may well be made then to meet that liability before 2007.

The size of the liability is complicated because there were a number of small depositors and Government ahs always provided support for them in the past. There was a complex liquidation process and at some point Treasury would want the report fully on the completed process to Cabinet and to Parliament.

The Chair congratulated Treasury on what is very much a "feel good" budget, even after some very, very tough years and hard times.

The meeting was adjourned.

Appendix 1: Portfolio Committee on Finance Programme for Budget Week
Programme - Budget Week 2003
(Dated 28 February 2003)

Monday, 3 March 2003
09:30 - 11:00 Financial and Fiscal Commission
11:00 - 11:15 Tea
11:15 - 13:00 Briefing & Formal consideration of the Division of Revenue Bill

Tuesday, 4 March 2003
09:00 - 13:00 Budget hearing: Tax Policy
09:00 - 11:00 Treasury & SARS
11:00 - 11:15 Tea
11:15 - 12:00 Prof M Lester
12:00 - 12:45 Prof P Le Roux

Wednesday, 5 March 2003
09:30 - 13:00 Macroeconomic perspective on the Budget
9:30 - 10:30 Dr I Abedian, Standard Bank
10:30 - 10:45 Tea
10:45 - 11:45 Prof C Okeahalam, Wits University
11:45 - 12:45 Ms Sandra Gordon

Thursday, 6 March 2003
09:30 - 13:00 Organised Business
09:30 - 10:15 BBC
10:15 - 11:00 AHI
11:00 - 11:15 TEA
11:15 - 12:00 SACOB
12:00 -12:45 South African Foundation (to be confirmed)

Friday, 7 March 2002
09:30 - 13:00 Organised Labour & Organisations
09:30 - 10:30 Fedusa
10:30 - 11:30 Idasa
11:30 - 11:45 TEA
11:45 - 12:45 NACTU (to be confirmed)

Friday, 14 March 2003
09:30 - 13:00 Adoption of Committee Report on Appropriation Bill
(Tuesday, 18 March 2003 - First Reading Debate: Appropriation Bill - NA)

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