National Treasury Budget 2003/4: briefing

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Finance Standing Committee

22 May 2003
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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
23 May 2003
NATIONAL TREASURY BUDGET 2003/4: BRIEFING

Chairperson:
Ms B Hogan (ANC) [NA]
Co-chairperson: Ms Q Mahlangu (ANC) [Gauteng]

Relevant document
National Treasury Presentation on its Budget Vote
National Treasury's Budget Vote 2003/4 [.pdf file]

SUMMARY
During the discussion on the presentation Members raised the following concerns: whether the measurable objectives drafted by government are actually measurable, how Treasury actually develops capacity to formulate measurable objectives, whether Treasury's strategic plan could not be linked to its budget in a more concrete way, whether Treasury believes that it is meeting is targets satisfactorily, the key features of prudential financial management and the measures put in place to address deficiencies in it, the deadlines for the full rolling-out of aspects of the budget reform process, progress made on the introduction of a single financial regulator and Treasury's role in this process, Treasury's policy on the local and foreign debt profile, the compliance of the Preferential Procurement Policy Framework Act with the Department of Trade and Industry's draft Black Economic Empowerment Bill and the measures Treasury has put in place to address the levels of corruption in the Government Employees' Pension Fund.

MINUTES
Presentation by National Treasury
Ms Maria Ramos, Treasury Director-General, conducted the presentation (document attached) which outlined Treasury's strategic focus, objectives, organisational restructuring and achievements for 2002/3, its strategic priorities for 2003-2006, compliance with the PFMA, staff profile, estimates of expenditure and fiscal transfers.

Discussion
Programme 1
Measurable Objectives

Ms R Taljaard (DA) [Finance Portfolio Committee] asked what specific measures are in place to ensure that the measurable objectives crafted by government departments are in fact "measurable". Are they capable of actually being translated into data that can be utilised to focus on efficiency in spending?

Ms Ramos responded that Treasury is not alone in having difficulty in defining what is meant by "measurable objectives". The aim to not to just arrive at a target, but instead to indicate in concrete terms whether the targets that have been set are actually being met efficiently. This is the type of work that will be undertaken over the next few years. At the moment government has a "first shot" at identifying those measurable objectives, and this involves working with various government departments in refining those measurable.

Mr A Donaldson, Treasury DDG: Budget Co-ordination, added that it would be helpful to think of this issue in three separate phases. The first is one in which Treasury in effect invites government departments to propose measurable objectives, and how they should be measured. It is evident from the inputs and outputs in this year's Estimates of National Expenditure (ENE) that there are several proposals from government departments that need to be further refined. They either turn out to be unworkable, or need to be modified over time. Treasury probably has close to 1 500 proposed measures in the ENE this year. Mr Donaldson stated that he is of the opinion that this is too large a number, but it is important in this process to allow a wide range of candidates to be assessed.

The second phase will take a couple of years of refining and modifying those measurable objectives. Hopefully during this phase government will be able to draw on the assessment of departmental performance that it conducted within Parliamentary Committees as well. This will allow government to get a feel for what works and what does not in this process.

The third phase narrows down much more tightly the objectives that carry contractual weight in the relationship between Parliament and accounting officers. It also addresses the relationship between Ministers and their senior officials, in the form of performance agreements.

Mr Ismael Momoniat, Treasury DDG: Intergovernmental Relations, added further that there is another element that has to be taken into account, because the ENE does not deal specifically with provincial expenditure. Treasury has also tried to establish pretty uniform standards in the major government departments, such as the Departments of Education and Health, where it is trying to get consistent measurable objectives per programme on provincial budgets. The same approach outlined by Mr Donaldson will be followed, but here the MINMEC's will be involved as well. This will allow more standardised measurable objectives, to the extent that this will be possible.

Mr M Tarr (ANC) [Finance Portfolio Committee] asked whether it is Treasury's objective in next year's budget to actually report back on the measurable objectives that were set during this year?

Mr Donaldson responded that the PFMA assigns responsibility for publishing measurable objectives and reporting on them to government departments themselves, and not to Treasury. This has to be done as part of the department's Annual Report. This is important as it reinforces accountability, and one would not want to separate this responsibility from the department's own documentation.

Mr Tarr sought clarity on the extent to which Treasury is driving the process to get all national and provincial government departments to understand all the different concepts involved.

Mr Donaldson responded that capacity of Treasury to play that co-ordinating role is greatest in respect of provincial departments. This is so because there clearly is a co-ordinating role here in ensuring similar approaches and structuring of information between the Provincial Departments of Education and Health. Quite the same kinds of co-ordination problems do not occur at the national level. It is therefore probably true to say that Treasury has made a bit more progress in structuring that information through working groups, which the Budget Council ultimately oversees. These are to a very considerable extent by Mr Momoniat's division.

The Chair asked how Treasury in fact develops the capacity to actually formulate the measurable objectives. Could Treasury indicate the tools and mechanisms it would want to employ to build this capacity, so that people can start developing credible measurable tools? Specialist functional capabilities have to be installed somewhere in the department that would assist departments to have coherent indicators.

Mr Donaldson replied that there is a capacity development role in all of this. Treasury has not at this stage created a dedicated central unit for developing measurable objectives. There is a link between Treasury's role in the budget process and the Office of the Presidency's role in co-ordinating government's broader strategic planning. Over the course of the last 18 months Treasury has interacted more closely with Office of the Presidency, which has a responsibility to improve the monitoring of service delivery right across government. Quite an elaborate information system in being development spearheaded by the Office of the Presidency, which clearly has to relate to this aspect of budget preparation and reporting.

There is perhaps a case for a more dedicated unit, and some consideration could be given to this. It does however have pro's and cons. Centralised capacity involves tough issues and some expertise will be needed to do it. On the other hand, one would not want to divorce this exercise from other aspects of public finance teams, or provincial Treasury's engagement with departments. These people have to be involved in developing the measurable objectives. This link could possibly be weakened if a central unit takes over the responsibility of developing measurable objectives.

The Chair stated that she is not suggesting that a centralised unit be setup that would take over the functions of the division in the department. Instead it would act as a backup team for the different departments. The concern though is what the linkage is between those people that are drawing up the measurable objectives and Treasury official responsibility for liaising with every different government department.

Ms Ramos responded that the difficulty is that one has to be very careful that the specialised unit does not move in a separate direction and leave the budget analysts behind. It is true that one of the struggles have been to ensure that these budget analysts not only look at the numbers, but also understand the policy direction and objectives. There have been problems, especially when Treasury consisted of two departments. Treasury has made progress in trying to ensure that the budget analysts in each of the areas are more in tune with the policies of the individual government departments. This does not mean that they still do not take very robust discussions about spending and objectives.

In a way it has to be ensured that those budget analysts are very focused on whether or not the proper measurable objectives are being established. Ensuring that the measurable objectives are aligned to the core policy directives of the department is a big issue.

The project kicked off in 2002 in preparation for the 2003 budget, and there has been quite a bit of interaction between teams in the Treasury and the different government departments. Already there has been quite robust discussions on measurable objectives, and whether the correct definition of this concept is being employed. Departments also do not like being told that they are actually not using a measurable objectives or a proper measurable objectives, but merely a statement of intent. This will be quite a steep learning curve, both within Treasury and across government.

Mr Momoniat added that it has to be ensured that government departments report against the measurable objectives at the time of the budget in their annual reports. This was absent from the 2002 annual reports. The annual reports of some government departments, beyond the financial statements, do not say much about their performance.

Furthermore, it also has to be investigated whether the performance contract of each head of department is linked to the budget. The strategic plan of the government department should be read when the legislature looks at the budget of the specific department. The role of legislatures is very important here. If the Portfolio Committees do not go into these issues, the quality of information is going to be of a poorer value. It is important the Portfolio Committees understand these matters so that they can begin to hold departments to account. This will also allow them to go back to the performance contracts and measure these against the measurable objectives.

Mr Momoniat stated that he does not think that these two aspects are currently aligned. It is quite a massive exercise in government to get all players to change their mindset to look at these tools and to use them. These will only improve in quality when all players play their role, including the legislatures.

The Chair stated that the strategic plans of government departments will be produced after the release of the budget. She stated that she expected the two to be released simultaneously.

Ms Ramos responded that it has to be remembered that the strategic plan deals with a three-year period, and Treasury has been considering whether it is actually necessary to publish a new strategic plan every year. Effectively, there should be a close alignment to check that the strategic plan released this year relates to the strategic plan released last year. This in turn should clearly reflect what has been put into the ENE chapter. Thus Treasury's strategic plan is a slightly different version of the ENE, with less figures. The Annual Report looks back and evaluates what has been achieved and what the challenges are, and also gives a full account of the financial statements. Government departments have to be made aware of the fact that all these instruments are linked, and should be linked ultimately to performance contracts.

Mr N Nene (ANC) [Portfolio Committee] asked how the monthly reports fit in here. These are important for the monitoring of the system on a more regular basis.

Mr Donaldson replied that monthly reports at the moment cover spending, broken down by current spending and capital spending. In addition to this government departments submit quarterly consolidation of provincial reports. The important question is clearly whether the monthly reports should be extended beyond only information on spending to include non-financial aspects, as well as some sort of performance reporting. It would be quite unrealistic to think of monthly reporting on measurable objectives on the non-financial performance aspects of the reporting system.

There is a plausible opportunity to introduce some form of quarterly performance reporting. But this can only be done once a limited set of core performance-related objectives has been nailed down. Government departments have to have a system in place that can deliver this information on a timely basis. If they cannot deliver the information one month in arrears, then even a quarterly report will probably not work. This is part of the longer-term reform, but it will take some time to put in place.

Ms R Joemat (ANC) [Portfolio Committee] asked how the strategic plan could be linked to the budget?

Ms Ramos responded that these two should be inherently linked. One cannot budget for one thing and then have a strategic plan that says something completely different. This is where the role of the legislature becomes important, because the budget of a department has to be evaluated in terms of the strategic plan and the ENE. There should be a direct link between the contents of the strategic plan and the budget. If the strategic plan and the budget are not closely aligned, this will cause problems.

Mr Donaldson added that it has to be remembered that there is an earlier phase: the budget submission. The budget submission, both nationally and provincially, has to be accompanied by draft plans. These are reviewed by Treasury and are finally dealt with by Cabinet's review of budget requests, and departments receive allocations. These allocations are then the resources that are available that enable the department to prepare strategic plan. Thus the strategic plan is not just a set of ideas about what to do, it is in fact a resourced plan. This is in effect why it has to be preceded by the budget, because the department has to know what resources are available before it can nail down its strategic plan.

The real dilemma here is not really the link between the department's budget and its strategic plan, but is rather the link between the strategic plan and the Annual Report. Annual Reports are currently released rather late, so that they cannot be reviewed in terms of what was done in the Annual Report of the previous year. The real timing reform for budget processes going forward is to whether the Annual Reports cannot be brought forward enough for them to possibly be consolidated into a single document with strategic plans. This will enable a much tighter kind of Parliamentary oversight.

Ms Joemat stated that the MTEF budget projection for this programme exhibits very low growth. She asked whether the people in this programme have developed the skills needed?

Mr Donaldson responded that it is a low growth personnel budget only because Treasury has not yet caught up with what is on the budget. The 2002 Annual Report will show that there was actually underspending on this item. Thus in real terms there is still space within the programme's budget to build capacity over the next three years.

The Chair asked Treasury to indicate whether it Is happy with the extent to which department's MTEF's do actually correspond to their plans, especially the outer years. It merely come across as an inflationary increase.

Ms Ramos replied that in the preparations for the budget Treasury asks departments to submit draft strategic plans to it. There is a closer alignment now across the board between the contents of the strategic plan and the ENE. Much more careful budgeting is required for the outer years. There is an attempt to make the outer year budgets much more meaningful than merely an inflationary increase.

The Co-Chair asked Treasury to explain the value of the Myburgh Commission Report. Could Treasury also perhaps highlight one or two points that stood out.

Ms Ramos replied that one of the outcomes is that South Africans who followed that commission got a better understanding of the functioning of foreign exchange and markets, and the instruments used. The truth of the matter is that that Commission did not find anything that conclusively proved any collusion that drove the exchange rate down in the months of December 2001. There were some suggestions from the Commission on how to improve systems and processes on the exchange control side.

What has been learnt is that currency markets move in both directions, and that they overshoot both on the down side and the upside. The Rand is one of the most traded emerging currency markets in the world, and as a result it is a bit volatile. Currencies all over the world fluctuate unless on has a fixed exchange rate, which has its own problems.

The Co-Chair asked whether Treasury is satisfied with the extent to which government departments are complying with the PFMA.

Ms Ramos replied that real culture change comes from whether or not internally the department uses the information available and the development of the implementation of the PFMA to change behaviour. This is happening in some places, and in others it is clear that this is not happening quite at the same pace.

The Co-Chair asked when government departments will be fully compliant with the PFMA?

Ms Ramos responded that there is a rollout plan in place, and Treasury does report to the Standing Committee on Public Accounts (SCOPA) on a bi-annual basis on the progress made in implementing the PFMA in terms of the roll-out plan agreed upon.

Mr C Kruger, Treasury DDG: Specialist Functions, added that in the latest assessment it is in the area of the measurable objectives or the standardisation of the budget documentation, where it would seem that it is the provinces that have made the most progress in the 2003 period. This is really heartening and is a move in the proper direction. A stated earlier by Mr Momoniat, most of the delivery in the social development, health and education sectors actually takes place in the provinces. This is now all coming through, but much improvement still has to be made. The fill implementation will only be possible once the accrual accounting base, the consolidated reporting and the determination of the measurable objectives is also fully implemented.

Ms Taljaard sought clarity on the extent to which Treasury is making specific proposals on whatever social compact might emanate from the Growth and Development Summit, in respect of any structural economic reforms it might want to be realised.

Ms Ramos replied that she is not sure whether the outcome of the Summit will necessarily be a social compact. The work being done by the Summit falls in four key areas, and Treasury has been more actively involved in trying to understand what has to be done to raise the levels of investment in the South African economy. This will ultimately raise the levels of growth. These are the kinds of discussions currently taking place in the task teams and in the plenaries at NEDLAC on the Summit.

On the economic front there are a range of structural micro-economic reforms, some of which have already started, and that need to remain on the agenda. One of these includes reducing the costs of investment, which involves identifying those areas that contribute to delays, inefficiencies etc.

Programme 2
Ms S Nqodi (ANC) [Portfolio Committee] sought clarity on the 50 projects in Treasury's Public Private Partnership Unit (PPP) pipeline at any time. Does this reside with Treasury alone, or with all departments at national or provincial level?

Mr Donaldson responded that the PPP unit does not initiate any projects itself, nor does Treasury for that matter. It plays a supportive role when other government departments initiate a project, and then provides advice and assistance to some extent. Also the Treasury regulations provide for approval at certain stages. The reference to about 50 projects is just an indication of the overall portfolio Treasury is looking after. Projects often take two to three years between the first initial conceptualisation and the final conclusion of the agreement via a contract. Thus 50 projects under review at any time means that there are about ten or fifteen projects that might get approved each year.

The work of the unit has expanded somewhat, partly because the ambit of Treasury oversight of these projects has been extended from national and provincial departments to include government agencies and non-departmental agencies, except where those organisations have been granted exemptions because they have their own capacity to manage projects. Thus a PPP initiated by an off-budget agency by a national or provincial department will now also have to come to the Unit.

Ms Nqodi asked whether Treasury can give a documented report on the number of these PPP's, and whether it has been able to monitor progress on this project.

Mr Donaldson replied that one of the core requirements of the PFMA regulations for PPP's is that the contract must include a monitoring plan. A department undertaking a PPP must provide assurance and specific plans as well as budgetary allocations for a monitoring team, or a contract management capacity. Thus a PPP project now has to have an ongoing monitoring and management capacity built into it, before it is concluded. Treasury is able to report on projects that have already been concluded, but most are quite young.

Ms Nqodi asked whether there is any possibility of these becoming intensive labour projects?

Mr Donaldson responded that in principle a project could well include commitments or contractual obligations relating to employment. It would be appropriate for some kinds of projects and not for others. Treasury could certainly provide information on which projects create employment and which do not.

Mr K Moloto (ANC) [Portfolio Committee] sought clarity on the key features of prudential financial management. How will it assist in managing volatility?

Mr L Kganyago, Treasury DDG: Economic Policy and International Financial Relations, replied that the prudential regulations are supposed to be the end stage of the process. They are meant to create an environment within which different financial institutions would have to comply with certain minimum standards of risk management etc. Key to those is actually the asset allocation of the various institutions. No details are available yet, but it would probably resemble the European Union or Australian states regime, where there are certain guidelines or limits set. The asset managers are then given the room to move within those limits.

One of the key elements used here is what is now called the prudential person rule. This means that when decisions on investments are taken by insurance companies, pension funds etc., these decisions are taken reflective of the risk profile of whose behalf the money is managed. The challenge it brings to South Africa is that in the case of pension funds, for example, one would have to empower the trustees to be able to understand what exactly is "prudential" for the people they represent.

Treasury has done much work in this area. A joint task team between Treasury, the South African Revenue Service (SARS), the South African Reserve Bank (SARB) and the Financial Services Board (FSB) has been established to put the final framework for adoption sometime in the future. No fixed date has yet been determined.

Mr Moloto asked whether there are institutions in place to manage the issue of macro-economic policy convergence in SADC. What are the issues that have emerged from those discussions? Has there been any agreement on a sort of peer review of each other's policies, to ensure that everyone is moving in the same direction?

Mr Kganyago responded that the Memorandum of Understanding had been signed by the various member States in August 2002. Three weeks ago it was proclaimed as having come into effect. Four measures have been identified as the criteria for convergence. The first is the inflation rate within SADC. The second is the deficit as a percentage of GDP, the third is public and publicly guaranteed debt as a percentage of GDP. The fourth is the balance of payments as a percentage of GDP. Countries would then have to work on their own individual convergence programmes. The idea here is to create a surveillance unit within the SADC secretariat in Gaborone, which would monitor the convergence programmes of the member States and report to a Committee of Finance Ministers. Thus the Ministers of Finance would be responsible for the political oversight of this macro-economic convergence programme within SADC.

Ms Taljaard asked what the deadlines are for the rolling out of the following three elements of the budget reform process: the review of the intergovernmental fiscal framework, Parliament's role in the budgetary process and money Bills and the implementation of the PFMA and the role of measurable objectives.

Ms Ramos replied that there is a formal roll-out plan for the PFMA with set dates, and this has been tabled with SCOPA. Treasury now reports to SCOPA on a bi-annual basis on its progress in implementing the PFMA, as well as on targets that have or have not been met. This plan can be placed on Treasury's website once it has been considered by SCOPA.

A few years ago there was some discussion on a White Paper on budget reform, but Treasury realised that budget reform is such a mammoth task that it does not have sufficient time to do it. The strategic plan attempts to recognise that the bulk of budget reform has already occurred, but there are also enhancements of that budget reform process going forward. The development of measurable objectives is one important enhancement which is linked directly with the PFMA.

Treasury does not at the moment have the capacity to take people out of the budget reform process to produce a White Paper, especially as about three-quarters of that White Paper would have already taken place. An overview of the budget reforms that have already taken place and of those that are scheduled to take place over the next three years as set out in the strategic plan can be made available to Members.

Mr Momoniat added that Treasury does want to review the formula used in the intergovernmental fiscal framework for the 2004 budget. It is highly dependent on the results of Census 2001. This data has to be incorporated because some of the formulae, especially at local government level, are now becoming pretty outdated.

Ms Ramos added further that it is also important to identify what information is useful from a Parliamentary oversight point of view. This is important, because at the end of the day all of this is time and personnel consuming. An enormous amount of energy was put into the ENE document, in an attempt by Treasury to provide Parliament with information that it thinks is useful. Getting feedback from Parliament as to whether those kinds of reforms and information is relevant is important. It is thus very much a two-way street.

Mr Donaldson stated that when one sets out on such a journey of budget reform, some of the time one is following a roadmap and some of the time one is just hacking one's way through the jungle. The White Paper process was discontinued because there were a number of core areas in which Treasury was charting its own way. There is a balance to be struck between following a planned course and adapting to the issues that come up in the course of budget reform.

The Chair stated that she appreciates the fact that the drafting of a White Paper is difficult, but it is difficult for Parliament to gauge the direction in which Treasury is going. This also affects Parliament's oversight role. Thus the document referred to by Ms Ramos would be useful, so that Parliament can have the indicators.

Ms Taljaard stated that the Division of Revenue Bill released this year is a good example of the kind of information that Parliament would find very useful.

Mr Tarr stated that real problem here is Parliament's lack of capacity to independently evaluate what comes before it. Parliament needs its own budget analysts.

The Chair agreed. Parliament's Committee system is drastically undersourced, with the result that it cannot perform its oversight role properly. She stated that Ms Mahlangu will take the Chair for the remainder of this meeting.

Dr G Koornhof (ANC) [Portfolio Committee] sough clarity on Treasury's progress on the tax to be levied on retirement funds.

Mr Kganyago responded that Treasury had hosted a consultative workshop in October/November 2002, and both international and domestic academia as well as industry players were present. The idea is that by the time of the next budget Treasury will be ready with proposals on this matter.

Dr Koornhof asked whether there have been any provincial take-ups on the provincial tax.

Mr Momoniat replied that since the passage of the 2002 legislation dealing with the process to approve new taxes, Treasury has not found any rush to impose any new taxes. Provinces are not even looking at new taxes. The Western Cape, for example, is only considering surcharges on the fuel tax. Provinces have not formally applied for provincial tax, but they do have people looking into it. Perhaps they are not rushing for new taxes because their collection methods for existing taxes are not even optimal.

The Co-Chair asked what the impact of these provincial taxes would be on the residents of the province, who are already paying al other forms of tax. Would it affect the 25% tax rate that government is currently pursuing?

Mr Momoniat responded that this matter did arise when the tax regulation process legislation was considered by Parliament. The provinces would have to look at the macro-economic objectives of government. Taxes can only be raised within that framework. But these issues can only be dealt with when specific proposals have been submitted.

Ms Joemat asked whether there are any plans to consolidate the different taxes that small businesses have to pay.

Ms Ramos replied that this is a very important point, and stated that there are also a number of regulations in other areas that do pose barriers to entry for small businesses. SARS is currently looking into simplifying the tax aspects. Treasury did do a study a while back on the compliance costs involved here, and the conclusion drawn was that there are actually far too many.

Ms Taljaard asked whether Treasury is able to quantify the value of the interactions on its international obligations, as well as its resource implications.

Mr Kganyago replied that these relate to a set of international institutions to which South Africa has to contribute money. In the main these are SADC, the World Bank and the African Development Bank, in which South Africa has to take shareholding. For the past four years South Africa has had an executive director on the International Monetary Fund (IMF), but those costs are borne by the IMF itself. This does not mean that South Africa does not have any costs here, because at home it still has to create the capacity that guides those interventions.

Some of the successes Treasury has experienced here are: the G20, IMF, World Bank work. Firstly, the G20 was created as a group of 20 systemically significant countries, of which South Africa is one. This focused on reshaping the financial architecture, which involved the prevention and resolution of crises. South Africa's record in the G20 is actually quite impressive. Secondly, the Minister's role as the Chair of the IMF Development Committee was very pivotal in reshaping the terms of the highly indebted poor countries. The result was that the Board decided to allocate additional funds to the two constituent countries. If South Africa had not laid the foundations, the Memorandum of Understanding for SADC's macro-economic convergence and tax co-ordination would not have been realised.

Ms Taljaard sought clarity on the specific measures being discussed to roll out "what is do-able" in terms of the social security net and, on the other hand, to see what is needed to stimulate domestic demand.

Mr Kganyago responded that "demand stimulation" seems to imply that there is in fact a shortage of demand. Mr Kganyago stated that he does not believe this to be the case. Instead, for South Africa to be able to move forward and set the country on a higher growth path, some significant supply-side interventions are actually needed. This is where Treasury began discussions on the micro-economic reforms. Having said this, Treasury's stance on the budget over the last two years has been one of an "expansionary phase". This expansion has taken place both on the expenditure and tax sides. This is the best way to ensure expansion without necessarily compromising the macro-economic balances that Treasury has set itself, "which have come to be the envy of our peers".

Ms Taljaard asked for an update on the debate between Treasury and SARB on the introduction of a single financial regulator.

Ms Hogan asked what Treasury's role is in financial regulation, because this is not clear even in the budget.

Ms Ramos replied that this is a difficult matter, and it is not unique to South Africa. There are agencies which implement and which have some responsibility for setting the overall policy environment, and it is sometimes difficult to decide what is policy and what is merely a technical adjustment. Treasury has a very small team of people dealing with this, but this pool is being expanded slightly. Treasury is responsible, at the very broad level, for setting some policy parameters. Treasury actually plans to meet with the FSB this year to conduct an assessment of the financial architecture, before a new legislative programme is introduced. She apologised for not being able to provide any further clarity as to when the financial regulator will be introduced.

Mr Kganyago added that this is a very small unit and only consists of six people. If it were running at full capacity, it would consist of 15 people. The unit had been repositioned to look more at financial sector policy, so that the regulator could continue regulating. No policy capacity was left behind in Treasury when this function moved over to the FSB, and this capacity was only created about five years ago in Treasury. Thus a policy capacity has to reside in government when it outsources one of its functions, as this would guide the activities of those agencies..

Ms Taljaard asked whether the Constitutional barrier which prevents Parliament from intervening in budgetary matters of government departments is a possible reason for the emergence of this issue.

Ms Ramos responded that the issue of the single regulator has less to do with the independence of the central bank. Although banking supervision does lie with SARB, the enabling legislation provides that there are many things that the Minister of Finance (the Minister) actually has to sign off on. Thus banking supervision is not core to the independence of SARB. This has not been part of the debate, nor has it hindered the implementation of the single regulator.

Treasury has done a significant amount of work on the issue of the single regulator, and remains of the view that its introduction makes most sense for an environment such as South Africa's. The essence of the discussions, primarily with SARB, has been to convince them that this model makes the most sense. SARB does have some reservations as to whether it is the best option.

Programme 3
Mr Moloto asked what has necessitated Treasury's decision to undertake a review of 320 State-owned enterprises at this point in time.

Mr B Molefe, Treasury DDG: Asset and Liability Management, replied that this is an ongoing process that needs to be undertaken periodically. Treasury has decided to take a close look at the key financial ratios of State-owned enterprises, and this was done about three years ago. This process will be undertaken again. It will look at their ability to generate income, how they are funded, corporate governance remuneration policies, personnel policies etc.

Mr Moloto asked what has necessitated Treasury's decision to undertake a review of the risk management model, and what are areas of concern here?

Mr Molefe responded that this process has been divided into three broad areas. The first is counter-party risks. The limits on these risks has to be reviewed continuously, as the nature and financial health of counter-parties change. The second is sovereign risk, which refers to the management of South Africa as a credit risk. This deals with the interaction with credit rating agencies, as well as the issues that affect South Africa as a credit, and how investments are encouraged in those areas where investors have concerns. The third is market risk, which deals with the continuous monitoring of both the domestic and international markets in which South Africa has issued bonds.

Ms Joemat sought clarity on Treasury's internal government cash co-ordination process, and whether it will still meet its 2004 deadline.

Mr Molefe replied that the Phase 1 and Phase 2 targets of this process will be met. The idea is to co-ordinate the activities of the provinces' cash management with that of the national government, through accounts in the Commission for Public Deposits (CPD). This has been approved by the Budget Council and three provinces have agreed to be pilots. In the Budget Review Treasury reported that it has used provincial cash surpluses whenever it has needed funds. This was done by bilateral agreement with the provinces, and will streamline that process through accounts in the CPD.

Ms Taljaard sought clarity on Treasury's continued role in the future planning of future Initial Public Offerings (IPO's), and what are its resource commitments to these?

Mr Molefe responded that the Department of Public Enterprises has primary responsibility for the restructuring of State-owned assets. Treasury becomes involved on the finances side to look at the financial integrity of the restructuring processes. It is a process that includes several government departments.

The Co-Chair asked what the impact is of the lack of adequate information on the CPIX on Treasury's introduction of the inflation-linked bond.

Ms Ramos replied that Treasury has to wait for the full adjustment. If inflation has been overstated, Treasury would have incurred more debt-service costs than would otherwise have been the case.

Ms Taljaard asked whether Treasury has devised a policy on what percentage of the debt profiles would be local debt, and how much would be foreign debt. If so, what is the specific monitoring of this entail?

Ms Ramos responded that South Africa's foreign currency debt currently stands at about 17,8% of the total portfolio. It has increased, but it has also increased as Treasury has tried to close out the Net Open-Forward Position (NOFP). The models arrived at suggest that South Africa is comfortable at a level between 20-25% of its portfolio in foreign currency debt. Treasury has always been conservative here and has tried to keep to the lower end. As the NOFP was closed off there has been quite a significant improvement in South Africa's overall short-term external debt position. As a percentage of GDP South Africa's foreign currency debt is just under 7%, which is still pretty low by international standards.

Mr Molefe added that the IMF has suggested that South Africa consider increasing its foreign debt to about 40% as a percentage of total debt. But this will probably not be accepted, as 20-25% is the absolute maximum.

Ms Taljaard asked whether there is any data available on the revenue that has been generated by parastatals that have been granted tax exemptions.

Ms Ramos replied that Treasury could probably ask SARS whether it has data on this matter, and Mr Molefe's office can ask the parastatals concerned as well.

Programme 4
Mr Moloto asked whether Treasury has conducted any study of the level of skills in financial management in government. What measures does Treasury intend putting in place to remedy any deficiencies here?

Ms Ramos responded that a study was conducted, and was reported to SCOPA. IPFA was commissioned to do a review of the training needs in financial management across government. It revealed that, at the time at which the study was conducted, many financial managers who did not have an elementary knowledge of how to work a financial calculator, let alone anything else.

Mr Kruger added that the Report indicated the tremendous gaps throughout the financial management sphere. Supply chain management is an integral part of financial management, and is a specific area that Treasury has to focus on. The framework that may have been issued under Section 74(c) of the PFMA was however outstanding. Treasury has been working closely with the provinces because they are key to this process, to ensure that a uniform process is followed in whatever is implemented by way of procurement reform. At the outset of the procurement reform process which began at about 1995, government had two objectives in mind. The first is to improve financial management in the area of procurement and provisioning and, secondly, to achieve certain socio-economic objectives through government's procurement activities. Section 76(4)(c) and Clause 106(1)(d) of the Municipal Finance Management Bill will go a long way in actually resolving the financial management side, which is long overdue.

Ms Nqodi sought clarity on Treasury's compliance with its procurement policy framework with the Department of Trade and Industry's Black Economic Empowerment (BEE) Strategy. How many of these BEE's, if any, have benefited from this process, especially those run by women.

Ms Ramos replied that Treasury is finalising a revision of the PPPF Act, to bring it in line with the definitions contained in the draft BEE Bill being dealt with by the Department of Trade and Industry. That legislation does include a definition of Human Development Index (HDI), and the PPPF Act will be brought fully in line with these definitions.

Treasury has an internal process for reporting on the number of its contracts going to BEE companies. Treasury is now trying to get government departments to report, probably on a quarterly or bi-annual basis, as part of their PFMA reporting on how they are implementing the PPPF Act, its objectives and regulations.

Mr Kruger added that most of the problems occurred in the interpretations of the definitions of the terms HDI and BEE in the Preferential Procurement Policy Framework (PPPF) Act, when seeking to promote government's socio-economic objectives. Yet these two terms actually have very different meanings if one looks closely at that Act. HDI included BEE but is not exclusive to BEE, because it also included the issue of the promotion of women representivity as well. Yet the definition of BEE was very different to that. The definitions in the Department of Trade and Industry's BEE Bill seeks to address these very problems in defining those terms.

The problem with definitions is that people will always try to find loopholes in them in order to circumvent the law. Treasury thus decided to monitor the extent to which the existing Act and its regulations benefit HDI's. The quality of the statistics are not credible because Treasury knows people changes the equity structure of their companies immediately after being awarded tenders. The PPPF Act and its regulations also have to be aligned with the BBE Bill. The definition in the new BEE Bill really describes BEE as a process, rather than as a definition.

The current definition of HDI in the PPPF Act and its regulations includes points that could be granted for participation by women. The quality and sustainability of these arrangements is very doubtful at this point, because the convenience arrangements are so rife. Treasury does have statistics, for what they are worth, but they are of a poor quality because of all the "fronting"..

Ms Ramos emphasised the point that there has been quite a bit of "fronting" that has taken place, because companies were set up just to do a specific tender. The whole thing was then dissolved shortly after the tender was awarded. The same happened with companies supposedly run by women.

The Co-Chair asked whether the measures put into the PPPF Act to guard against this "fronting" have not been sufficient, hence the need for the amendment to address the deficiency?

Ms Ramos responded that she does not believe that it is entirely a deficiency in the law. It is a situation in which the law may actually be sufficient, but it is in the implementation of the law that things have failed. It is very difficult to follow up on this because the company seems to meet all the legislative requirements on a superficial level. It will be easier to follow up with the bigger contracts where there is more money involved.

Mr Kruger agreed that it is not only the law. Companies are very dynamic structures, because by their very nature people invest and disinvest on a regular basis. Thus the face of the company may comply with the law when the contract is awarded, but it could look very different three or four months after the tender has been awarded. Thus mechanism have to be found to ensure that this "fronting" does not happen, and to ensure that it is a sustainable arrangement. This is therefore a much more complex issue. For this reason the new BEE Bill sets targets and begins to develop specific Charters around particular companies and sectors, so that the actual progress can be measured on a broader front.

Ms Nqodi asked whether Treasury could introduce a quota on companies run by women.

Ms Ramos replied that the point here is that this is not problematic only in relation to women. There have also been many successes in procurement programmes that have met all the legislative requirements. As it is, the point system does make provision for women, and Treasury can pay attention to this. But just because the quota is introduced, it does not guarantee that the desired outcome will be achieved. She stated that she is aware of many anecdotal examples of such cases. Government departments really have to be made to understand what the rules of the game are.

Mr Kruger agreed, and stated that Treasury also has to enhance the ability to measure the extent of the success achieved.

Ms Taljaard asked whether it would not be better to measure the success rate of officials that have attended courses in terms of the number of officials that have benefited from the courses, rather than via the number of courses attended.

Mr Kruger agreed with Ms Taljaard. Initially though Treasury had to ensure that the proper courses are used and that they are properly accredited. The biggest challenge at the outset was to get a sufficient number of courses available, as this would stimulate competition and also keep the costs down. Treasury is currently doing so, and Treasury is working with IPFA and the South African Management Development Institute (SAMDI) to accredit more courses over the next three years. The overall training responsibility will shift to SAMDI once the momentum is going. At this time the actual number of officials that have benefited will also be measured.

Ms Taljaard asked Treasury to the explain the World Bank review on deficiencies in the governance, interpretation and implementation of the PPPF Act.

Ms Ramos proposed that a separate session be scheduled with this Committee to take Members through the experiences with the PPPF Act and its implementation, the developments on supply chain management and how this is to be rolled out as well as some of the research findings on the procurement front.

The Co-Chair agreed, and stated that any further discussion of this matter should be postponed until that session.

Programme 5
The Co-Chair stated that this programme has been dealt with extensively when Programme 2 was discussed, as well as the discussions on the PFMA.

Programme 6
Mr Momoniat stated that this has been dealt with exhaustively by the Committee via its deliberations on the Division of Revenue Bill.

Programme 7
The Co-Chair asked to what extent is Treasury putting measures in place to address the level of corruption taking place in the Government Employees' Pension Fund (GEPF).

Ms Ramos replied that it is important to note that it is the GEPF that first identified that there was a problem, and that commenced an investigation. The problem relates not only to people within the GEPF but also to persons outside it. In fact, two GEPF staff members were arrested last week. There is no tolerance of corruption in the GEPF, and those contravening the law will be brought to justice.

Dr F Le Roux, Head: GEPF, added that he would not like to divulge too much at this point because the matter is currently sub judice. The end of Phase 1 of this investigation has more or less been reached, but the rest of the investigation will probably last for the better part of the remainder of this year. Certain cases were picked up when the GEPF's internal audit was looking specifically at instances of fraud. A firm of forensic auditors was commissioned to attempt to find a link between the various cases opened in different provinces. They were able to establish this link, and SAPS were then contacted. SAPS even set up a special Task Team that focused on this matter. This process was closely co-ordinated into a single initiative. A total of ten persons outside the GEPF have now also been arrested, and SAPS have indicated that further arrests are imminent.

Programme 8
Ms Taljaard asked whether it is possible to separate out the Secret Services accounts from Treasury. If so, when will this take place?

Ms Ramos responded that Treasury would like to see a different kind of arrangement, but it is currently waiting for the Ministry of Intelligence to respond. It should move onto the budget of that Ministry.

Ms Taljaard asked Treasury to indicate the countries involved in the total cancellation of bilateral official debt owed to South Africa.

Ms Ramos responded that these are the debts that were written off to Namibia and Mozambique,

The Chair asked Treasury to give an idea of the bonuses being paid in the department.

Ms Ramos replied that Treasury has paid in the last fiscal year about R6m in bonuses to staff. At the Senior Management Structure (SMS) level this has been granted to 66 people out of a total of 79.

The Chair stated that a separate session has to be scheduled with Treasury to discuss the issue of special pensions.

The meeting was adjourned.

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