Adjustments Appropriation Bill[B28-15]; Finance Bill [B31-15]; and New Development Bank Special Appropriations Bill [B32-15]: consideration; Proposed division of revenue and conditional grant allocations to provinces and local government: consideration

Meeting report

New Development Bank Special Appropriations Bill: National Treasury briefing
Ms Vuyelwa Vumendlini, Chief Director: Global and Emerging Markets, National Treasury, tabled the New Development Bank Special Appropriations Bill (the Bill). She reminded the Committee that the New Development Bank (NDB or the Bank) is a multilateral development bank with the purpose of mobilising alternative sources of financing, strengthening the cooperation among BRICS countries, and complementing existing efforts by other development partners and international institutions for global growth and development.

The founding document for the NDB consisted of two agreements. The Inter-governmental Agreement captured the broad agreement on key principles regarding the Bank. The Articles of Agreement captured the technical specifications for the establishment of the Bank

BRICS countries are the only founding members of the Bank. However, the Articles provide for the inclusion of other United Nations members. BRICS countries would maintain at least 55% of the voting shares of the Bank. The shareholding of non-BRICS countries would be capped both individually and collectively.

There are to be three levels of governance: the Board of Governors, Board of Directors, and Management. The Chair of the Board of Governors will be chosen on a rotational basis, in line with the chairing of the BRICS. The President shall be from the one of the founding members, in rotation and shall be the chief of the operating staff of the Bank.

Voting would be proportional to shares, so that BRICS will have bigger voting powers compared to non-BRICS members, and major policy decisions would be taken by the Board of Governors by consensus.

The authorised capital of the Bank is US$100 billion. The subscribed capital is US$50 billion, which is allocated equally amongst the founding members. All members are going to have equal shareholding so that each country would contribute US$10 billion.

The New Development Bank would provide support in the form of loans, guarantees, equity participation and any other financial instrument to public and private projects in member countries. A Special Fund would be created within the Bank at the earliest occasion, with the participation of all founding members, for the purpose of helping project preparation and implementation. China is going to be the largest contributor to the Special Fund.

The Bank shall have its headquarters in Shanghai. Its subsidiary, the African Regional Centre, is going to be in Johannesburg. The Johannesburg office is going to be launched concurrently with the headquarters of the Bank. The Africa Regional Centre is going to be responsible for creating and maintaining the New Development Bank’s relationship with African states and regional bodies. Moreover, it is going to host project preparation capacity and to bring projects the Bank is interested in funding to a “bankable” stage.

Ms Vuyelwa Vumendlini informed the Committee that the purposes of the New Development Bank Special Appropriation Bill is to appropriate additional money in the 2015/16 financial year in order for the National Treasury to pay the first capital instalment of US$150 million to the New Development Bank. The proposed appropriation is deficit neutral, since it is conditional on the payment into the National Revenue Fund of the required proceeds from the sale of State assets in the 2015/16 financial year.

Discussion
A Member of the Committee wanted to know if the headquarters of the New Development Bank would be in Johannesburg or Shanghai.

Ms Vumendlini reported that the headquarters would be in Shanghai. Johannesburg would host the African Regional Centre, which would be the subsidiary of the Bank. All the countries had equal shareholding. BRICS countries would remain the major shareholders of the Bank with 55%, while new members would share the rest.

Mr T Motlashuping (ANC, North West) asked why China is the biggest contributor to the Special Fund if all the countries had equal shareholding. He also asked what would happen if there was no consensus.

Ms Vumendlini indicated that China had made an offer to contribute more, specifically to the , Special Fund when the African Regional Centre is up and running. In relation to the consensus, she noted that the requirement was for consensus at Board of Directors level. It would depend upon the issues, but if this could not be reached, then the majority rule would apply.

Mr L Gaehler (UDM, Eastern Cape) wanted to find out about the period of service for the first President of the Bank. He also asked when the next payment was going to be made.

Ms Vumendlini stated that the term for the President is five years. It was not renewable. The next payment or instalment would be after 18 months when the agreement had come into force – namely in January 2017. Some of the payments would be financed by the sale of Vodacom shares.

Mr F Essack (DA, Mpumalanga) wanted to establish what the implications would be if the there was any country that defaulted.

Ms Vumendlini indicated that defaulting would point to a lack of trust. The bank would be an AAA rating bank for sourcing of funds.

Mr Essack commented that a lot could be done for local issues with the money from the Vodacom shares. He wanted to know what would happen if South Africa failed to pay for the second phase, and which assets were going to be used for that payment.

Mr Dondo Mogajane, Deputy Director-General: Public Finance: National Treasury, indicated that that this point was something that National Treasury was constantly considering. It would like South Africa to be a key player and use the Bank to its advantage to boost the infrastructure of the country.

Adjustments Appropriation Finance Bill: National Treasury briefing
Mr Dondo Mogajane, Deputy Director-General: Public Finance: National Treasury, told the Committee that the Adjustments Appropriation Finance Bill is aimed at implementing the recommendations of the Standing Committee on Public Accounts in relation to unauthorised expenditure and to set up a funding mechanism. The recommendations were adopted by the National Assembly on 23 June 2015. This Finance Bill provides for the ratification of national government's unauthorised expenditure, in the Presidency, Social Grants and the Department of Trade and Industry (dti),  arising from the 2004/05, 2007/08, 2008/09 and 2010/11 financial years. The Bill follows the procedure for authorisation of unauthorised expenditure as outlined in section 34(1)(a) and (b) of the Public Finance Management Act, 1999 (PFMA).

The Bill firstly authorised that unauthorised expenditure incurred by the Presidency (2008/09 and 2010/11) and the Department of Women, Children and People with Disabilities (2010/11) be appropriated as a direct charge against the National Revenue Fund, to cover the overspending of the vote appropriations.

He explained that the Presidency overspent its 2008/09 budget of R316.7 million by R14.5 million or 4.6%. This was in respect of expenditure incurred for:

- Hosting of the National Orders and Awards Ceremony
- Legal fees
- Travel and subsistence and related expenses incurred for the mediation in Zimbabwe
- Leave gratuity payments made to former Deputy President
- Hosting of the National Disability Summit; United Nations Conventions and the creation of additional Ministries in the Presidency

The Presidency overspent its 2010/11 budget of R812 million by R28.4 million or 3.5%. This was in respect of expenditure incurred for:

- Accruals carried forward from the 2009/10 financial year
- Creation of additional Ministries for National Planning, and Planning, Monitoring and Evaluation, following the government restructuring process of 2010
- Legal fees
- Travel and subsistence due to increasing international commitments by the principals in conflict resolution processes on the Continent, which were not planned for and fell outside of the adjustments budget process
- Computer services to address additional capacity requirements emanating from new ministries, as well as costs relating to the Presidential hotline
- Leave gratuities obligations and municipal transfers for vehicle licenses

Since its inception, the budget for the Department of Women, Children and People with Disabilities (DWCPD) had grown in real terms, although the understanding had been that it should spend within its budget, and manage its budget pressures through the budget process. This department had overspent its 2010/11 budget of R106.192 million by R3.728 million or 4 4%. Sources of budget pressures leading to unauthorised expenditure had included:

- R674 000 for international travel and accommodation
- R2.594 million for the celebration of National Women’s Day
- R460 554 in telecommunications related expenses

The Standing Committee on Public Accounts (SCOPA) had recommended that the unauthorised expenditure be financed as a direct charge against the National Revenue Fund. The Department of Women, Children and People with Disabilities no longer existed. The additional funding recommended by the SCOPA should be allocated to its successor, the Department of Women in the Presidency.

The Department of Trade and Industry (dti) also incurred 37.3 million in unauthorised expenditure. This came from compensation due in terms of the Bilateral Investment Treaty (BIT); staff debts written off; General Export Incentive Scheme (GEIS) debts written off, and other debts written off.

National Treasury argued that the unauthorised expenditure was beyond the Department’s reasonable control. SCOPA recommended a direct charge against the National Revenue Fund.

He further explained that the dti is the custodian of the BIT, and thus any ruling against the State in regard to this Treaty are paid from the dti allocation. The Pumlani Lodge argued that the value of their investment declined because of high crime rates. The Tribunal found the State liable, and awarded damages of R6.5 million plus interest. The dti finally paid out R15.7m, which included the award, interest and legal fees. This award was paid from voted funds, but the interest portion was the unauthorised amount (R6.1m).

Staff debts written off by the dti had included salary over-payments and bursary debts. Debts could not be recovered because staff had resigned or retired. The debts were written off because the debtors could not be traced, or because recovery would be uneconomical, or in a few instances because recovery would cause undue hardship

He then turned to the GEIS debts written off,  and noted that GEIS was used to boost exports and evade sanctions. The scheme had loose documentary requirements, but required firms to keep records for five years. Subsequent audit found over claiming and raised debtors. 22 debtors did not repay their full amount and their debts were written off as unauthorised expenditure. 14 settlement offers were accepted for a lesser amount, to avoid litigation, five companies could not be traced and two companies had no assets.

In relation to the “other” irrecoverable debt, it was noted that a dti official who had been dismissed won a case against the dti at the Commission for Conciliation, Mediation and Arbitration and the amount of R25 000 was paid as settlement in this case, by way of
R15 000 to the South African Labour Market and Allied Workers Union and R10 000 to the General Public Service Sectoral Bargaining Council

Mr Dondo Mogajane then turned to the unauthorised spending on social grants by the Department of Social Development (DSD) . In 2007/08 DSD under-spent by R 37.7 m. However, there was over-spending against the Comprehensive Social Security Programme of R24.1m. This was driven by over spending on social grants. DSD over-spent its social assistance budget of R62.45 billion, by R26 million (0.04%) in 2007/08. Due to under-spending in other sub-programmes in Programme 2, the total under-spending amounted to R24.1m. In this year, the Social Assistance Transfers allocation was specifically and exclusively appropriated through the Appropriation Act 2007/08. However, due to this classification, virement rules could not be applied to reduce the social grant overspending. Therefore, even though there was an overall under-spending against the vote budget, and an over-spending of R24.12mn against the Programme 2 budget, the amount classified as unauthorised expenditure for 2007/08 had been R26.17m.

Overspending in the social assistance budget took place under the Old Age, Foster Care, Care Dependency and the Child Support Grants. Of these, the main driver of over-spending was the Child Support Grant (CSG). This could be attributed to CSG’s age extension policy; he explained that in 2005/06, the CSG age-eligibility was extended from 11 year olds up to 14 years old. That was why, between 2004/05 and 2005/06, the CSG eligible population grew by 2.9 million. This fact had led to large fluctuations and unpredictability in CSG beneficiary numbers. 2.2 million additional CSG beneficiaries came on to the system over the course of 2005/06 and 2006/07.

In 2007/08, a further l.3 million CSG beneficiaries came on to the system. The CSG take-up rate in 2007/08 was 82%; the highest from 2004/05 to 2012/13. The CSG take-up rate in the previous year (2006/07) was 78.6% and in the subsequent year (2008/09) had declined to 80.1%, so it could be seen that the CSG take-up in this year represented an anomaly. There had been large fluctuations in reported CSG beneficiaries which gave rise to the uncertainty on the year-end CSG numbers. Additionally, R166 million was back-paid to Eastern Cape and Free State in April 2007.

He reminded the Committee that the social grants programme is demand driven. The behavioural aspect of the programme makes it unpredictable. Apart from behaviour related to the take up of social grants, accumulation of back pay, application complexities and external risks all need to be factored into projections. For this reason, it was generally accepted that a 1% variation might be expected. He pointed out that the overspending of R26 million against a budget of R63 billion in 2007/08 represented less than this, as it was a 0.04% variation.

Because this overspend could not be directly elated to any negligence or lack of oversight and thus cannot be recovered from any person, it was recommended that approval be granted, in terms of section 34(1) of the PFMA, to authorise the over expenditure as a direct charge against the National Revenue Fund (NRF) and that this be followed with the appropriate funding.

In regard to all the unauthorised spending for which permission was being sought retrospectively, he noted that additional systems had now been put in place. In the area of social development, the three main stakeholders, being National Treasury, DSD and the South Africa Social Security Agency (SASSA) were each running their own independent projections to monitor social grants expenditure. They held quarterly projection meetings together and produced monthly model updates, as well as giving quarterly expenditure reports. An adjustment factor had been incorporated into model, to try to accommodate non-demographic driven factors, such as back pay and other administrative complexities.

Discussion
Mr O Terblanche (DA, Western Cape), commenting on the unauthorised expenditure in the Presidency, said public money should be spent responsibly. The buying of computers cannot be something “unforeseen” and clearly should have been planned.

Mr C De Beer (ANC, Northern Cape), commenting on the unauthorised expenditure in the Presidency, stated that the word “other” in the financial statements should be removed; this issue should be taken back for National Treasury correction. It was not a good word to use

Mr Essack wanted to know who authorised so many instances of unauthorised expenditure in the departments. He also wanted to know why virement rules could not be applied to reduce social grant overspending. He asked how seriously the quarterly reports were being taken.

Mr Mogajane said the Constitution stated clearly where money should go and the PFMA stated clearly how money should be spent and who must take responsibility. He explained that the virement rules prescribed that if there were to be virement within a programme, then the relevant Director General had to take responsibility. Regarding quarterly reports, he stated that Parliament should engage with National Treasury and the department concerned on matters dealing with expenditure. Committees should hold the departments they oversaw accountable for spending.

A Member of the Committee wanted to know the meaning of “back-paid”, in relation to the report that a social grant had been back-paid in Eastern Cape and Free State.

Mr Mogajane said he would reply in writing with the full details on this.

Mr Mogajane informed Members that expenditure issues picked up in the Presidency, dti and in the areas of social grants pointed to “budget management gone wrong” in a particular department. National Treasury would continue to try to emphasise the correct principles of public finance management to the to departments. He indicated to Members that matters that were dealt with in 1998 were different from those being done now. There were no tools to engage with each other at that stage, but they were in place now and there had been progress, and having empowered the departments on the basics, it was now necessary to move to a proper understanding on how to deal with matters. The PFMA was clear on where the responsibility lies but it was difficult to communicate with all these accounting officers and to get reports from the departments on time.

He further informed the Committee that the work that National Treasury does is reinforced by Cabinet. In the early 2000s it would interact with quarterly reports and strategic plans. In 2003 the National Treasury visited the provinces to see how they were working against their strategic plans, to give it some idea on how the provinces were making plans and dealing with expenditure. It discovered that the spending was not matching the work done, and that departments faced serious challenges, particularly in regard to capacity and skills.

Committee's Draft Report on the proposed division of revenue and conditional grant allocations to provincial and local spheres of government.
The Chairperson asked Members to look at the recommendations of the report.

Mr Essack asked if whether it was procedurally correct to consider the report in this meeting.

Mr Motlashuping suggested there was no reason to delay the meeting, since Members were given the report in electronic format prior to this meeting.

The Chairperson asked that the Members concentrate on the recommendations because the report captured some of the work the Committee has been doing. It was procedurally correct that it be considered in this meeting, as the report had to go to the House for confirmation.

Mr Essack repeated that he and Mr Terblanche felt it was procedurally incorrect to consider the report in the meeting.

The Chairperson ruled that it was procedurally correct.

A member of the Committee Section staff took the Members through the observations and recommendations of the report.

Mr De Beer referred Members to a table on page 2 that dealt with proposed division of revenue.

Mr Essack stated that the DA reserved its rights on the adoption of the report, but the majority of Members adopted the report.

Adoption of Minutes

Minute adoption
The minutes of the meeting held on 13 October 2015 were adopted.

The minutes of the meeting held on 23 October 2015 were adopted.

The minutes of the meeting held on 27 October 2015 were adopted.

The minutes of the meeting on 28 October 2015 were adopted

The minutes of the meeting held on 4 November 2015 were also adopted.


The minutes of the meeting held on 17 November 2015 were adopted.

The minutes of the meeting held on 19 November 2015 were adopted.

The meeting was adjourned.