SA Automotive Masterplan; National Credit Amendment Act impact assessment; with Minister

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Trade, Industry and Competition

10 September 2019
Chairperson: Mr D Nkosi (ANC)
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Meeting Summary

The DTI indicated that the South African Automotive Industry was contributing 6.8% to GDP, i.e. 4.3% through manufacturing and 2.5% through retail. It accounted for 29. 9% overall manufacturing output and 14.3% of exports. It employed about 110 000 people in vehicle and component production. About R7.2 billion was being invested by vehicle assemblers annually. However, although the industry contributed to 54.3% of Africa’s production, by producing 601 178 units, this only amounted to 0.64% of global production. Thus the SA market remained a small market in the global context. DTI said investment had been growing in the industry over the last five years, reaching an annual capital expenditure of about R8.2 billion in 2017; excluding the R4 billion invested by component suppliers. Production had also been increasing but was yet to eclipse the levels reached in 2006. However, henceforth, some plants would double their production capacity.

The South African Automotive Industry Masterplan (SAAMP) vision had been extended to 2035 to account for two model vehicle lifecycles. Its key objectives include:
• producing 1% of global production - projected to be 1. 4 million units by 2035
• increasing local content in assembled vehicles from less than 40% to 60%.
• double employment levels to 224 000 employees in the industry
• improve manufacturing competitiveness levels to that of leading competitors while deepening value addition, especially for regional market supply.
These objectives would also realise the development of infrastructure, technology and associated skills.

Members were pleased with the Automotive Industry briefing and asked what other sectors could use this industry’s successes as a benchmark. Which other sectors could drive policy certainty, much like the automotive industry, to attract more investments?

Members asked about the status quo of transformation within manufacturing and exporting. Is there a programme that aims to transform the racial profile of ownership in this sector? Is this programme working in collaboration with tertiary institutions to capacitate people with knowledge about the entire value chain of the industry?

DTI indicated that participants had started conducting incubators where they would train young black people for component manufacturing - VW in Uitenhage was the first to run it and it was successful. East London was also running a world class training centre that not only trained people for Mercedes Benz but also for other players in the industry. One of the companies in Tshwane was partnering with high schools to drive interest amongst learners, encouraging them to pursue careers in the automotive industry.

The National Credit Amendment Act briefing included the Socio-Economic Impact Assessment Study (SEIAS) results and proposals by the National Credit Regulator (NCR) and the National Consumer Tribunal (NCT) on the processes they would use for the Act.

The minimum criteria for eligibility for the debt intervention was income not more than R7 500 and a maximum unsecured debt of R50 000. In the most likely scenario, a total of 510 803 applicants were expected to apply. Both the NCR and NCT worked on a presumptive and conservative middle ground of 750 000 customers.

The SEIAS acknowledged the legitimate need for the measures introduced by the Act. However, it raised a number of possible unintended consequences these measures would have on the target group; such as an increase in the cost of credit and reduced credit supply to this group due to increased risk. Given the increased demand for largely consumptive credit among the target group, it could also force them into the informal, unregulated markets.
Members noted the SEIAS findings and recommendations and welcomed the Minister’s proposed approach to address the unintended consequences identified by the SEIAS, while maximising the benefits to the targeted group. Members said that it would support the implementation process as it remained of the view that the Act is a building block for developing an inclusive and sustainable financial inclusion model. It emphasised that the enforcement of the law would be critical in achieving this.

The NCR proposed that it would implement the debt intervention programme over 60 days, in four phases: application, operation, legal and post-application phases. A key factor for NCR’s state of readiness was the need to procure premises that were more suitable to accommodate its staff and all projected office equipment. For the first year, the budget for implementing infrastructural requirements was R127 million.

The NCT assumed that it would be processing up to 250 000 applications yearly over a three-year period. Therefore it would require 33 additional part-time Tribunal Members on the assumption that each member would adjudicate a minimum of 32 cases per day and work for 20 days per month. The adjudication budget was R51.87 million for the first year, assuming each Tribunal member was paid R6 550 daily. Infrastructural investment was the same for the first two years, at R85.5m and R90.5m in the third year.

Some Members were concerned that the Act should not have been signed into law before the SEIAS had been conducted. The SEIAS concluded a net negative impact which should cause the Minister to take heed.
National Treasury had insufficient funds for the Act's implementation. When could the Committee expect the DTI decision on its exploration of the NCR and NCT budgets for the debt intervention? The importance of addressing the concerns raised by the SEAIS was emphasised.

The Minister of Trade and Industry said that the report did indicate that the SA macroeconomic system would not be undermined by the possible negative impact of the Act. He added that mischaracterising this negative impact could have a damaging effect on South Africa's credit rating. He assured the Committee that the implementation of the Act would be managed carefully and in a fully consultative manner; with the aim of maximising its benefits for the over-indebted, low income consumers and minimising any potentially negative impact on legitimate credit providers. Where law changes may be required, DTI would return to Parliament through Cabinet processes to propose them.

Meeting report

South African Automotive Masterplan (SAAMP) briefing
Mr Mkhululi Mlota, DTI Chief Director: Automotive Unit, said that government had been providing helpful support to the Automotive Industry for decades. The Motor Industry Development programme (MIDP) was introduced on 1 September 1995 and it facilitated long-term policy certainty. From 2013, the Automotive Production and Development Programme (APDP) was established and it was to be integrated into the SAAMP which would extend until the year 2035.

Mr Mlota said that the Automotive Industry’s major production was mainly concentrated in KwaZulu-Natal (KZN), Eastern Cape (EC) and Gauteng. There were also component manufacturers based in the Western Cape and North West. The European light motor vehicle manufacturers represented in SA were Mercedes Benz, BMW, and Volkswagen and they were all wholly owned subsidiaries. Japanese and American manufacturers like Nissan, Toyota, Isuzu and Ford were also 100% controlled subsidiaries. Other major marques imported from Europe and Asia were also growing in the SA market. As from 2018, there were 200 component firms in Gauteng; EC had 150 and KZN had 80. Out of the 582 183 light motor vehicles produced in 2018, 33.2% were produced in Gauteng, 23.5% in KZN and 43.3% in EC. Of the 350 003 units exported, 50.% were made in EC, 34.6% in Gauteng and the remaining 14.6% in KZN.

The industry was contributing 6.8% to SA’s GDP i.e. 4.3% through manufacturing and 2.5% through retail. It accounted for 29.9% overall manufacturing output and 14.3% of exports. It employed about 110 000 people in vehicle and component production. About R7.2 billion was being invested by vehicle assemblers annually. However, although the industry contributed to 54.3% of Africa’s production, by producing 601 178 units, this only amounted to 0.64% of the global production. The SA market thus remained a small market globally.

Although SA had major potential in the regional market, it was undermined by the policy position on the rest of the continent – some countries were allowing the importation of used vehicles mainly from the East and from America via the Middle East. Also, the sub-1000cc (one litre engine) vehicles from the European Union into the Southern African Customs Union (SACU) were duty-free. The average local content used in vehicles produced in SA was still below 40%; SAAMP’s new target for localisation was set at 60% to drive job creation, more industry participation and ultimately empower the disadvantaged. Although the associated core technologies (such as drivetrain, powertrain, and infotainment) were unlikely to be sourced in SA by 2035, the local content target was achievable. Another limiting factor was the stricter emission standards that were to be imposed in major export markets.

Mr Mlotha said that before the SAAMP would be in full effect, the APDP structure would be maintained until 2020 and amended in 2021. This policy had four key directives. Since 2012, the policy imposed stable and moderate import tariffs: 25% for completely built up vehicles (CBUs) and 20% for components used by vehicle assemblers. It provided a volume assembly allowance for vehicle assemblers with a plant volume of at least 10 000 units per annum to import a percentage of their components duty free. This allowance was valued at approximately 3.6% of a vehicle price. A production incentive, in the form of a duty credit, valued at 10% of manufacturing value-added, would also be given to these assemblers. There would also be an automotive investment allowance in the form of a direct cash grant to support investment in new plant and machinery. This benefit was valued at between 20% and 35% of the project value. It was payable over three years from start of production and the benefit level was influenced by factors such as expenditure on local tooling, local research and development as well as employment creation and localisation.

The South African Automotive Industry Masterplan (SAAMP) vision had been extended to 2035 to account for two model vehicle lifecycles. Its key objectives include:
• producing 1% of global production - projected to be 1.4 million units by 2035
• increasing local content in assembled vehicles from less than 40% to 60%.
• double employment levels to 224 000 employees in the industry
• improve manufacturing competitiveness levels to that of leading competitors while deepening value addition, especially for regional market supply.
These objectives would also realise the development of infrastructure, technology and associated skills.

After the year 2020, the amended APDP would keep the import duties stable. However, there would be a need to harmonise duties on sub-1000cc (one litre) vehicle engines from the EU - by negotiating an increase from the current level of 0% to 18% in line with the Economic Partnership Agreement (EPA). The year 2020 would also see the change in the current volume assembly allowance into a volume assembly and localisation allowance (VALA) that would be based on a vehicle price, excluding all imported content. At current local content levels this would mean a reduction in benefits by almost a third (from 3.6% to 2.4% of sales). The production incentive would be increased from the current 10% to 12.5% of manufacturing value added to encourage further localisation. The Automotive Investment Scheme (AIS) was to be reduced by 5% if there was no investment in local tooling but fiscal resources permitted it to broadly remain as a cash grant payable over three years.

Other proposed interventions included reviewing the ad valorem tax regime to remove the current bias against locally assembled vehicles. This review was subject to further consultation and consideration in a process led by National Treasury. Another was to introduce a registration requirement for new vehicle brands entering South Africa: there was a recognised need for an adequate service and available of maintenance parts along with demonstrated service capabilities and facilities.

These amendments would come at a cost. This cost related to the Trade Related Investment Measure (TRIM) payable in form of duty rebates: R16 billion in the volume assembly allowance (VAA) and production incentive (PI) rebates; as well as R11 billion in foregone duties on re-exported imports. Only R2 billion of direct fiscal costs (AIS grants) incurred, relative to the significantly higher annual economic gross value added (GVA) of R74 billion by vehicle assemblers and component manufacturers. Post 2020, the amendment would reduce the industry’s TRIM-related benefit by nearly R2 billion annually - based on 2016 prices, volumes and local content; with firms only being able to recover this benefit if they increase their local content or grow their production volumes – as per the objectives of SAAMP.

DTI and the International Trade Administration Commission of South Africa (ITAC), in consultation with the South African Revenue Service (SARS), developed the relevant APDP guidelines and regulations. Other stakeholders that played a key role in developing SAAMP were the Automotive Supply Chain Competitiveness Initiative (ASCCI) and the Automotive Industry Development Center. They assisted with shop floor interventions, incubation support and Supplier Park management. Several DTI divisions dealt with crucial focus areas such as trade agreement matters as well as the promotion and facilitation of investment and exportation.

Engagements with Treasury on the ad valorem tax were taking place and engagements with the industry on a transformation fund were already at an advanced stage. Also, the Terms of Reference and the framework for the Executive Oversight Committee were being finalised. Prior to all of this, a study exploring possibility of collaboration with some sub-Saharan countries had just been completed. The plan was to assist these countries with their industrialization efforts and to secure markets for local products – allowing SA to export vehicle kits for final assembly in these countries.

Mr Mlotha said that the industry had become increasingly multinational over the last two decades. Most of the vehicle assemblers were at level eight on the BBBEE scorecard but ownership remained a challenge. Tier 1 automotive component manufacturers were facing the same challenge. Some of the measures for industry transformation included introducing an employee cohort into the industry to represent SA’s demographic profile more accurately, across the spectrum of employment categories - including artisans, professionals, management and executives. Given the auto industry’s advancing skills requirements, employee education and skills development were to remain a priority, thus ensuring the transfer of technical and management skills into the SA economy. Original Equipment Manufacturers (OEMs) and Tier 1 suppliers within the value chain were encouraged to prioritise lower tier, majority black-owned supplier development; to substantially increase the involvement of majority black-owned component manufacturers within the industry by 2035. OEMs also needed to focus on enterprise development opportunities through their national dealership structures and authorised repair facilities.

Mr Mlota said that investment had been growing in the industry over the last five years, reaching an annual capital expenditure of about R8.2 billion in 2017; excluding the R4 billion invested by the component suppliers. Production had also been increasing but was yet to eclipse the levels that were reached in 2006. However, henceforth, some plants would double their production capacity. In 2018, SA exported more than 50% of the vehicles produced but also imported about 50% of the ones retailed locally. Further work was being done in improving the administration of the APDP and creating a clear, transparent monitoring and evaluation framework so as realise SAAMP objectives by 2035.

The Chairperson suggested Members focus on the identified challenges that the South African Automotive Industry was facing. It was important to identify potential partners to assist in addressing these challenges.

Mr M Cuthbert (DA) noted one of the industry’s six objectives was to double employment to 224 000 employees. He recounted that previously it was indicated that if incentives were provided, there would a guarantee in the number of jobs created. He asked if this was still the case. Was this objective incorporated in the agreements for the incentives?

Mr W Thring (ACDP) asked if there were goals and measures to take the industry into the poorer provinces, in light of the economic challenges that these provinces were facing and to alleviate the level of unemployment they were facing. Almost 50% of vehicles were being imported from other countries. He asked if there were any initiatives to create a local vehicle brand to help boost the economy.

Mr Thring welcomed that the APDP aimed to increase the local manufacturing of vehicle component parts. This was key to beneficiation, which had not yet been optimised. What is the uptake on beneficiation, considering the increased local manufacturing of component part?

Mr Thring asked the DTI what other industry sectors could use the successes of the Automotive Industry as a benchmark. Which other sectors could drive policy certainty, much like the Automotive Industry, to attract more investment?

Mr Thring pointed out that the statistics for SA OEM sales local content value was only up to 2014/15 with no update of its current state. There seemed to be a regression in the percentage of local content being produced. What is the reason for this?

Mr F Mulder (FF+) asked for an elaboration of the challenge for empowerment levels being relatively poor. He asked if this related to the challenges with BBBEE policy. He asked how the market entry of other countries, such as Rwanda, would impact the SA market of the industry. He pointed out that there was no mention of electric vehicles. These vehicles would have an influence on the tooling and manufacturing of vehicle spare parts.

Mr D Macpherson (DA) welcomed the goal to increase local content from 39% to 60%. Many manufacturers had been forthright about the unfeasibility of this goal. Some of these reasons were said to be associated with cost and accessibility of vehicle components. There was probably a Mexican standoff between the manufacturers and the industry. However, the reality was that the industry needed the local manufacturers more than vice versa.

Mr Macpherson said that the ad valorem tax arrangement had been a longstanding agreement which SA consumers benefited from. It allowed local manufacturers to obtain tax credits to import vehicles, which enabled customers to buy them at substantially cheaper prices. However, the Finance Standing Committee was looking at abolishing this tax arrangement and this would be a devastating setback for the manufacturers. It was crucial for the Department to engage the Finance Standing Committee and appeal against the abolishment of this arrangement because it would have implications on SAAMP henceforth.

Mr Macpherson said he had written letters to Transnet about their inefficient port construction which had an impact on VW’s nearby business branch. How can the efficiency and performance of ports be guaranteed?

BMW exported a lot of left-hand drive vehicles to markets such as the USA. He asked how the risk of the USA not renewing the African Growth and Opportunity Act (AGOA) in 2025 affected manufacturers exporting to the US - seeing that US Congress was moving towards the idea that AGOA did not need to continue operating. What discussions was the industry having about this risk?

Mr S Mbuyane (ANC) asked about the status quo of transformation within manufacturing and exporting. Is there a programme that aims to transform the racial profile of ownership in this sector? Is this programme perhaps working in collaboration with tertiary institutions to capacitate people with knowledge about the entire value chain of the industry?

Mr Mbuyane asked who the beneficiaries of the production incentives were. it would helpful for DTI to have a list of these beneficiaries to track if transformation was being realised. This industry was being dominated by a particular race. The tax agreement should be removed if necessary because it dealt with SA’s independence as a country.

Ms P Mantashe (ANC) asked if it was not risky to concentrate on only the automotive sector in provinces like Eastern Cape. What would happen if the industry collapsed. Where would this leave the province?

Ms Mantashe said that SA’s major export countries were now imposing strict emission standards. Is there a plan to mitigate the effects of these standards on our exports? She asked why it had taken so long to impose the 18% import duty.

She appreciated that DTI was now looking forward to the establishment of a public-private partnership (PPP) in the industry; as well as the goal of moving local content to 60%. She appreciated that the BBBEE policy had been applied since 1996 and she hoped it was really being applied in the Automotive Industry. She hoped that SAAMP, along with BBBEE policy would be effectively extended to other industries as well.

Ms J Hermans (ANC) thanked the Department for the presentation. She hoped that the success of the Automotive Industry would inspire other industries. She supported Mr Thring’s suggestion for a vehicle brand to be developed in SA. She wittily proposed a name for it: Mzansi Springbok.

Ms Hermans asked for a detailed breakdown of the gender profile within the industry; saying that it was imperative to honour the President’s transformation undertaking of ensuring that women were represented in all key sectors that influence the state of the economy.

Ms N Motaung (ANC) asked if there was a percentage of ownership in the industry allocated to women. Was support offered to young people by providing bursaries to pursue careers in the engineering field?

Mr Lionel October, DTI Director General, replied to Mr Cuthbert that the DTI was part of a market economy and was not a centrally planned economy where it could dictate how many employees companies should have. Instead, DTI created a minimum floor of employment and obligated the incentivised companies not to retrench any of their employees. The incentives were linked to empowerment in that vehicle companies were obligated to buy some components from local manufacturers. As from 2021, the incentive would only be given if the companies produced at least 50 000 units of vehicles.

Given that there were only seven (out of 149) countries with Automotive Industries, it would be easy for the DTI to lose the industry if it imposed certain policies that the industry did not agree to; hence the Department having to sometimes concede to the industry on certain matters.

Mr October said that for an automotive company to be efficient and profitable, it needed to produce at least 10 million vehicles. SA was only consuming about 600 000 vehicles. Although the industry was concentrated in Gauteng, KZN and Eastern Cape, diversification would be realised through the manufacturing of components in some of the other provinces. Companies like Isuzu were approaching black industrialists for important vehicle components. It would be highly unlikely for OEM owners to obtain part-ownership of multinational corporations like BMW, Mercedes Benz and VW. However, progress was being made towards realising black-ownership of dealerships. Some industry participants had started conducting incubators where they would train black young people for component manufacturing - VW in Uitenhage was the first to run it and it was successful.

Mr October stated that the industry’s success was not contingent upon the government imposing its will. DTI negotiated SAAMP over nearly three years with the industry; this included undergoing research studies across the world, with industry leaders. The OEM finally accepted the DTI goal of 60% local content.

Mr Mlota said that industrialisation in countries like Rwanda might negatively affect SA’s market in the automotive industry in the long run. The industry can avoid this by ensuring that it remains part of the market in the short and medium term. SA had already started exporting vehicle kits for final assembly in these countries; this ensured that SA continued their growth. Indeed, these countries may eventually develop capacity but it would take them quite some time. If they change their policies to accommodate further industrialisation, SA would still offer advice.

Mr Mlota said vehicle assemblers had the obligation to offset duties on their imported vehicles and the components they used to build vehicles. When the components were imported as packages, they would typically attract a duty of 20%; duty for components that were individually imported would vary from 30% for tyres, down to nearly 0% for other ones, especially those that were not manufactured in SA. The end users of the rebate certificates earned by vehicle assemblers and component suppliers, especially those who exported directly, would become one of the major vehicle assemblers. These credits were, however, tradable and therefore the independent importers – those who did not manufacture within the country – could have access to them. The incentives ultimately went to the producers. There were more than 400 component suppliers within the industry; they all could earn the rebate certificates and either use them or sell them to a company that would import vehicles and components.

Mr Mlota said that East London was running a world class training centre that not only trained people for Mercedes Benz but for other players in the industry. One of the companies in Tshwane was partnering with high schools to drive interest amongst learners, encouraging them to pursue careers related to the automotive industry.

Mr October replied that the new industrial policy adopted by DTI aimed to extend the Master Plan model to ten other sectors including agriculture, agro-processing, clothing, sugar and poultry.

Mr October indicated that the DTI had discussed the ad valorem tax arrangement with the industry; both parties agreed that it needed to be reviewed. However, a tripartite agreement including the Finance Standing Committee was required. The rebate system was an essential part of the DTI programme for the automotive industry. He announced that he had written to his DG counterpart in Treasury to say that the tax arrangement matter had to be resolved. DTI had an executive council led by the Minister, and NUMSA and the OEMs were represented in engagements about matters that affected the industry.

The Chairperson asked Mr October to clarify some of the terminology that was used to describe the core technologies used – including drivetrain, powertrain and infotainment - as part of localisation.

Mr Cuthbert asked what the current employment floor was. He asked what the agreement for the floor was in the context of Vision 2035. Is this calculated for individual manufacturers or for the entire industry?

Mr Mulder indicated that his inquiry about moving towards electric vehicles was still unaddressed.

Ms Hermans requested a breakdown of statistics of the women who were part of the sector. He suggested that there should be targets to deliver the President’s goals for gender and racial transformation.

Mr October replied that the Deputy Minister had just organised a meeting with Transnet to address the problems associated with using some railways. Auto plants resorted to this transportation method for the vehicles because transporting large numbers of vehicles on roads was less efficient. The Deputy Minister managed to get Transnet to visit the plants and start addressing this matter.

Mr October explained that the incentive applied across the board. The companies could only receive them once they invest in equipment and employ a certain minimum number of people. DTI would supply 20% of the funds and the companies would invest the 80%.

Mr Mlota explained that the drivetrain refers to the engine that drives the vehicle. Conventionally, internal combustion engines were used but there was an imminent move towards hybrid vehicles that have electric motors. The powertrain refers to the assembly of these electric motor systems. Infotainment speaks to the move towards connecting vehicles by using information systems to facilitate continuous communication amongst the vehicles; this forms the basis of driverless vehicles.

Mr Mlota replied that SAAMP did not include electric vehicles but the industry was looking into locally producing electric motors that would be used in public transportation buses, in the long run; as well as other appropriate support mechanism to encourage localisation of components. There were already three OEMs that were selling electric vehicles.

The Chairperson appreciated the positive discussion in the meeting about the automotive industry. He compared it to the meeting the previous week on the Sugar Industry, which had a contrary and depressing nature. This was a reflection of the commendable work of DTI on the automotive industry.

Mr Thring noted that his question on the percentage of local content had not been answered.

Ms Mantashe asked why Mr Mlotha was introducing the 18% import duty only now. Can we trust that he has the best interests of the public?

The Chairperson asked Mr Mlotha and Mr October to submit these responses in writing.

Minister's remarks on National Credit Amendment Act and its impact assessment
Mr Ebrahim Patel, Minister of Trade and Industry, said that the National Credit Amendment Act (NCAA) was established to set out a series of changes to the National Credit Act to respond to the identified problem of over-indebtedness of South African citizens earning not more than R7 500 per month. It was to only apply to a certain group of people, with a specified type of credit. It formed a hierarchy of interventions and institutional arrangements. These would start with a debt restructuring plan. Under particular circumstances and with particular consequences, it provided for debt extinguishing.

Minister Patel said that Parliament had been concerned about the constitutionality of the debt extinguishing. Parliament appointed Senior Counsel, Adv Wim Trengove, to assess whether an earlier version of the Bill would pass constitutional muster. Adv Trengove came to a hypothesis, saying that the matter came down to question of a deprivation of private property – whether Parliament could pass a law to permit the extinguishing of money that belonged to a credit provider. Looking at the constitutional provision on property, he said that it permitted this deprivation in a law of general application. The NCAA was deemed to be of general application in that it would apply to credit providers and their debtors, generally. He considered the procedural fairness of the deprivation – if it protected the right of the deprived to be heard before the Bill was effectuated. He concluded that the debt forgiveness mechanism of the Bill satisfied the procedural fairness requirements. He reviewed the jurisprudence that had emerged from the Constitutional Court, used it as a precedent to assess if there was sufficient reasonableness for the deprivation of property - if it was substantive for Parliament to pass a law on. He concluded it as sufficiently reasonableas per Section 25(1) of the Constitution as the mechanism was only applicable to people earning R7 500 or less (with a maximum unsecured debt of R50 000). These were people who could not afford the normal remedies of debt relief that were available for people with a much higher income.

An earlier draft of the Bill had a provision to empower the Minister to prescribe debt intervention measures in the case of an economic shock that led to widespread job losses, or in the case of a natural disaster. However, it was found that this provision would not pass constitutional muster because it would give the Minister too much law-making power. These provisions were removed with the exception of debt extinguishing.

Before the Fifth Parliament Committee completed its work, it requested DTI to conduct a socio-economic impact assessment (SEIAS) on the Amendment Bill. To do this, DTI compiled the Terms of Reference in consultation with National Treasury, National Credit Regulator and the National Consumer Tribunal. These were presented to the Committee on 16 May 2018 for approval. A renowned economic consultancy firm, Genesis Analytics, was appointed to conduct the socio-economic impact assessment study on the Bill. The project-steering conglomerate consisted of DTI, Treasury and the NCR. The study commenced on 2 November 2018 and was completed on 27 May 2019. The NA and the NCOP both voted on the Bill and it was passed in March 2019. The President assented to the Bill in August 2019 and it became a formal Act of Parliament and was referred to the Minister for implementation.

Minister Patel said that the SEIAS Report found that the Bill addressed a valid and compelling gap in the statutory protection system for lower income groups because it would assist them with debt relief. The report stipulated that the introduction of debt extinguishing was not a radical proposal because the concept was already embedded in SA’s Law of Insolvency. Weighing up the benefits and the challenges, the SEIAS authors believed that Parliament may have not been aware of the unintended consequences of the Bill; that this proposed solution may have not been the most appropriate. They pointed out the danger of creating a dual system in which the formal credit systems no longer provided credit to people earning R7 500 or less. It also found that the cost of implementing the proposal outweighed the benefits. If the Act was to be implemented, there were certain precautions to be considered to mitigate the concerns they identified.

Minister Patel said that in implementing the Act, the Ministry would have to ensure that these concerns were mitigated and that the institutions identified in the Act have the requisite support and resources. The Ministry would communicate the provisions of the Act in an accurate and complete manner so as not to mislead the creditors and the debtors. There would be engagements with interested parties, such as credit providers, to ensure that the implementation modalities take the risks and challenges into consideration. The necessary regulations would need to be effected with maximal clarity and accuracy to allow courts and regulators to have some degree of precision and a scope of discretion that represented Parliament’s intentions. There was a need to strengthen oversight over the regulators to ensure that they carried out the Act according to law. If any gaps were identified in the Act, DTI would come to Parliament to discuss further amendments to address the gaps. The Minister had powers to adjust the target group amounts (both income level and debt limit) but only once per year and thereafter every 24 months. In doing so, he would have to consult stakeholders and then table a report in the National Assembly, summarising the consultations and provide a rationale for the proposed adjustment. The National Assembly may approve the proposed adjusted amount.

Department briefing on the SEIAS
Dr Evelyn Masotja, DTI Deputy Director General: Consumer and Corporate Regulation, said DTI recognised that the NCAA on debt intervention was in effect. This legislation was established to address the plight of the low income target group in debt review mechanisms such as measures of natural insolvency and sequestration administration. The NCAA promoted financial literacy – educating people on how to manage their finances and avoid over-indebtedness. It obligated debt counsellors to report cases of reckless lending and called for criminal sanctions to be imposed on mashonisa (illegal lenders). However, it would not apply to secured credit agreements.

Dr Masotja indicated that the SEIAS found a total of 20. 2 million credit active consumers; 11.7 million of which were part of the low income target group. The study stated that it was highly probable that some consumers in this group were facing high levels of debt stress even if they do not de jure qualify as over-indebted. An estimated 510 803 consumers would de facto apply for the intervention, with a corresponding book value of R4.1 billion. The study argued that consumers who did not qualify to be part of the local group may, in good faith, believe they qualify or, in bad faith, view the intervention as an attractive option in the short term because it would bring immediate relief from debt stress and it had no application costs. During the development of the Bill, it was estimated that 1.7 million consumers may qualify for debt intervention. However, the study found that 359 276 consumers would de jure qualify. This figure was derived from the analysis and triangulation of data from three credit bureaus. The study discovered that the size of the problem may have been overstated. This was a relatively small number of consumers as it made up only 3.1% of the 11.7 million consumers who earn R7 500 or less, with unsecured debt of R50 000 or less; it made up only 1.8% of all (20.2 million) credit active consumers.

Dr Masotja said that the study assessed the impact of the Bill in two scenarios: the baseline scenario, which was regarded as most likely, and a high-uptake scenario which was deemed less likely but possible, depending on the responsibility of public communication about debt intervention. In the most likely scenario, a total of 510 803 applicants would apply. In the less likely scenario, there would be 2 089 290 applicants, with an outstanding book value of R16.1 billion. The most likely scenario was emphasised. The study estimated that 177 759 over-indebted consumers would benefit from debt restructuring under the debt intervention measure. Of the applicants, 99 237 consumers representing a book value of R266 million, would qualify for debt extinguishment; 85 815 of which would actually have their debt extinguished. The study confirmed that this was less than what was predicted by stakeholders and represents only 0.49% of all credit active consumers. The 99 237 was a de jure prediction using the proxy against the credit consumer database; the 88 815 was a de facto prediction derived from the predicted number of applications. Of all applicants accepted, 42 907 of them were expected to withdraw or terminate. As a result, insurers were expected to benefit from the introduction of mandatory credit life insurance; the informal market of mashonishas was expected to gain about R7.7 billion in new demand.

The Bill had some notable positive impact. Parliament had correctly identified a gap in statutory protection for lower income consumers because the study found that 96% of consumers in this target group were currently excluded from debt review. This may have been caused by a poor understanding of debt review and a stigma that may be linked to it; the study recommended there may be a need for further research to determine other reasons for this.

On the other hand, the study suggested that although it had now been proven that there was a valid problem to address; Parliament may not have had sight of all the unintended consequences of the Bill - as remarked by the Minister. The study suggested that the proposed solution may not be the most appropriate to achieve the laudable goals of helping vulnerable consumers. In fact, it was likely that the proposed solution would ultimately harm the wider group of lower income earners. The relatively small size of the problem raised questions about the disruptive and discriminatory impact of the proposed solution. Without denigrating the lived misery of vulnerable consumers caught in a debt trap; in light of the relatively small size of the challenge in national terms, the study suggested that legitimate questions must be raised about whether the impact of the Bill was proportionate. These included the impact of developing an entirely new legal and administrative system; disruption to credit markets; differentiation in law between richer and poorer people; long term discrimination of poorer people; impact on the welfare of 11. 7m consumers; and the costs (both public and private) that must be incurred to operationalise the system. These were especially questionable if there was already a system in place that may require only relative tweaking at lower cost to achieve the same positive outcome, without many of the negative impacts.

The study found that while it was not credible that credit providers would stop lending to this market (which accounts for 54% of total credit consumers), the report believed it was credible that formal credit providers would adjust lending patterns to the perception of higher risk created by the debt intervention system; compounded by low levels of trust in the capacity of the regulator to undertake the process efficiently and fairly. The credit providers would increase the cost of capital for this group and once this was at maximum regulated levels, they would tighten the lending criteria and affordability assessments; redirecting some capital allocation to other consumer segments.

The impact on formal credit providers would be relatively contained in the short term, constituting only R3.9 billion (0.8%) of the existing credit book. The first-round losses to banks, retailers, micro-lenders, and other credit providers were relatively contained in relation to the wider credit markets. There were second-round losses for retailers in the form of lost sales of R1.9 billion. For certainty, these were large absolute numbers and were expected to disproportionately impact credit providers who had aligned their business models to lower-income consumers. However, in relative context, they represented only a small proportion of the total.  The potential losses incurred by formal credit providers, in general, were thus relatively contained. According to available evidence, it was unlikely that the introduction of the debt intervention measure would have a significant impact on the banking system stability because the scale of impact was minimal in relation to the credit book.

The study recognised that credit providers would need to internally develop systems that would enable them to comply and to run the debt intervention process in parallel with the debt review process. The credit providers would need to employ new teams to process and manage the interventions. To the credit providers, this system was likened to the debt review process. Some of them noted that a period of 18 and 24 months would be required for implementation. The driving force for timing would be the readiness of the NCR and the NCT and this would assist the impacted stakeholders.

The debt counsellor industry could only lose a small amount of revenue and a likely 36 jobs. Debt counsellors stood to lose a customer base which was equivalent to the number of consumers in the target group presently in debt review - about 13 941 consumers. This represented a calculated loss of revenue of about R5 2 million across the industry, a (worst-case) job loss of 72 jobs and likely loss of 36 jobs.

The unintended consequence of the Bill would be the effective splitting of the credit market into two risk profiles at the R7 500 income point - lower risk (above) and higher risk (below). The credit providers were expected to introduce an implicit, and possibly explicit, distinction in future credit risk assessments. Consumers who were potentially part of the target group would be viewed differently to those who were not. This was considered to be particularly worrisome for financial inclusion of the target group. The net result of the Bill was that formal credit extended to consumers in the target group would fall by R12.8 billion (17.9%). This was not unique to the introduction of the debt intervention measure, as there had been a downward trend since 2007. From 2007 to 2018, unsecured credit, provided to consumers with a monthly income of ≤R7 500, fell by a Compound Annual Growth Rate (CAGR) of 3.7%. Of the R12.8 billion, it was estimated that 60% (R7.7 billion) would be taken up by the informal credit market. Given the consumptive and non-discretionary nature of the credit used by this group, the study did not expect the demand for credit to diminish. Consumers accessing unregulated credit were to be left in a more vulnerable position. This would push more lower-income consumer demand from regulated markets to unregulated markets, where they would have no legal or regulatory recourse - where there were higher levels of abuse.

In terms of impact on the NCR and NCT, the study estimated that 102 161 consumer applications would be made per annum, whereas the NCR estimated 26 410 applications. The study estimated that it would cost the state R407 million per annum - R376 million for the NCR and R31 million for the NCT. This was expected to drop slightly in year two (because systems are fixed costs) and thereafter continue in perpetuity. The year one projections were 275% more than the NCR and NCT initial estimates (which were R148 million pa, i.e. R127 million pa for the NCR and R21 million pa for NCT). The study raised a concern that the public price tag raised questions about the cost-effectiveness of the approach, especially as the public sector would be replacing an existing private system to undertake the same function. The extra claim on the fiscus would need to be weighed against a budget deficit and tax shortfall as well as the government’s aspiration to bring down the public sector wage bill. The Bill was expected to downgrade the NCR from being regulatory to a mere service provider. It was not clear how the NCR debt intervention activities would be overseen and to whom the NCR would be accountable in that area of work.

The study concluded that debt extinguishment should still be introduced into credit law through the debt review process. According to constitutionality and equity, laws for the relief of chronic over-indebtedness should be universally accessible. Without universal access, the societal risk is that less powerful citizens can become shackled to debt in perpetuity. There would be occasions when, due to a change in the circumstances of the debtor or poor financial management, the prospect of repayment would be virtually zero. In these cases, most credit providers typically have systems of debt write off already in place informally. It would be appropriate on both pragmatic and ethical grounds for the law to recognise an extinguishment of debt in these cases. The introduction of debt extinguishment into South African law was deemed not to be a radical proposal because a similar process was already available in insolvency law, in which debt obligations could be extinguished in a process of rehabilitation. Moreover, a de facto system of debt extinguishment was already being practiced in the form of write off where repayment seemed impossible. Thus, the debt review system could provide a second tier of debt extinguishment for the low-income consumers by essentially formalising the informal process of write off.

Introducing debt extinguishment into credit law, applicable to all consumers equally, was found to be less exclusionary. It would not drive the financial exclusion inherent in the Bill which was driven primarily by the establishment of a two tier system – one for the rich and one for the poor and the delineation of a separate process that identifies and isolates the poorer consumers. The study found that the driver of risk for the private sector was not only the introduction of debt extinguishment but that debt intervention decisions over debt extinguishment were driven by the state; by officials in whose capacity and impartiality the private sector had little confidence. The study recommended that it would be less exclusionary if debt extinguishment was introduced into the credit law for access by all consumers in legislated circumstances, thus preserving the constitutional principle of all being equal under the law. This would not visibly differentiate lower income consumers from other consumers, in an obviously separate system. The Bill created an unintended signal to credit markets that qualifying lower-income consumers should be treated in a separate system. This was the driver of exclusion.

The study suggested that credit providers should be responsible for the subsidy which the debt review will process for lower-income consumers on a case-by-case basis. There were four subsidy options:
• Option 1: State subsidy - The state could subsidise debt counsellors to take on lower-income consumers by paying a portion of debt counsellor fees.
• Option 2: Consumer funded by levy - A small industry-wide levy could be raised on every credit transaction (e.g. R1 per transaction) to be paid by the consumer, collected by the credit provider and sent to a central subsidy fund. This would diversify the cost of funding the debt intervention system across the credit active population and would amount to a cross-subsidy by consumers earning more than R7 500 a month to those earning less.
• Option 3: Credit provider funded by levy - A small industry-wide levy could be raised on every credit transaction (e.g. R1 per transaction) to be paid and collected by the credit provider on every credit agreement to a central subsidy fund.
• Option 4: Credit provider funded on a case-by-case basis when in debt review: The National Credit Act could be amended to make it an offence for a debt counsellor to turn away a consumer on the basis of cost or affordability. Instead, the debt counsellor would be obliged to take on the debtor. They would notify the credit providers that a sub-economic application for debt review had been made. The creditors would be offered the opportunity to proceed by subsidising the fees of the counsellor in proportion to their share of the debt or, where this would not be attractive, agree to waive their portion of the debt.

In the view of Genesis Analytics, the most attractive option would be Option 4. This approach would create no extra cost for the state. It would, however, have the intended effect of drawing credit providers into taking some responsibility for solutions for over-indebtedness. Asking creditors to share part of the cost of unwinding over-indebtedness or to waive their debt would bring closer a missing nexus between credit providers, the problem of over-indebtedness and the solutions to it. Finally, it would allow for the formalisation of the process of debt write off that was already applied by all credit providers privately – in a coordinated, formalised process. The study analysed a similar system of debt relief order that was applied in the United Kingdom. One of the key lessons learned from it was the necessity for consequence management of consumers regarding debt intervention and how to address predatory and reckless lending.

The study concluded that the proposed Bill would result in a socio-economic impact that is net negative for the South African society and the economy, while attempting to achieve some debt relief for a group of vulnerable citizens. The study found that it was unlikely that the debt intervention would have a significant economic impact at a macro-economy level. The scale of the impact was seemingly too small to impact the national economy. There may be counterbalancing positive effects because the vulnerability of over-indebted consumers could constrain the economy and cause social instability. The main drivers of negative impact were found to be the extra fiscal stress and the long-term effects of bi-furcating the credit market at the R7 500 income point.

The study recommended two options:
1. Parliament should reconsider the Bill. Instead, Parliament should introduce debt intervention within the bounds of the current debt review system, with mechanisms for a subsidy for low-income consumers.
2. For the Bill to be passed in its current form but with the following mitigating factors:
- Debt intervention must be responsibly communicated to credit rating agencies and consideration must be given to a strained sovereign credit rating climate. Communicating to the public would mitigate unwarranted, opportunistic entry into the intervention process.
- The enforcement of the law on unregistered illegal credit providers, reckless lenders and false testimony by consumers. The NCR should prosecute a number of high profile cases of reckless lending as well as cases of falsification by debtors to establish clear warnings to both sides of the market and to establish legal precedent for future cases.
- Define over-indebtedness as being three or more months in arrears or at least one unsecured credit agreement with negative disposable income.
- Provide for oversight and accountability by the NCR in the administration of debt intervention.
- Address the moral hazard by advising consumers to access debt extinguishment only as a last resort and that the extinguishment posed some consequences.
- Retain the exclusion of developmental finance as this would assist to shift some formal sector credit extension away from consumptive credit towards productive credit.

On the other hand, the study recommended that debt extinguishment through the debt review system should carry material consequences for the debtor. Just like insolvency orders, debt extinguishment orders should bear material consequences for the debtor so that the process would not be abused. These consequences should not be dissimilar to the consequences of personal sequestration. This is important to retain equal treatment of all persons under the law. The consequences should include mandatory financial literacy training as proposed in the Bill (which can be administered and certified by the NCR) as well as an exclusion from formal credit markets during the process and for two years after rehabilitation. Moreover, creditors should be allowed to pursue secured assets under debt review as under the insolvency law, with the exception of primary residence.

The study recommended the retaining of the criminal sanctions introduced by the Bill. The portion of the R407 million that was no longer needed by the NCR and NCT, under the standalone debt intervention system, should be redirected towards improving the inspectorate and prosecutorial capacity of the NCR. Another key recommendation was that the mandatory credit life insurance provision in the Bill should be introduced to the National Credit Act; the insurance market already services credit providers with credit life products. Consultations with insurers indicated that there was an ability to scale the number of products and to service a larger pool. A larger pool would bring down the cost of insurance. However, for lower income consumers the study recommended that insurance should be mandatory for purchase by the credit provider rather than the consumer to minimise the consumer hidden costs and to maximise the chances that the insurance is exercised. This insurance would effectively be a form of credit default insurance rather than credit life insurance.

The study respectfully recommended that Parliament or the DTI should further research why consumers in the target group did not use the debt review system. Without this understanding, there was a risk of harming the economy in an attempt to fix the wrong challenge.

Dr Masotja  said DTI envisaged the negative impact on the credit providers and the target group to be in the long term; the implementation of these mitigating measures could thus address this. The anticipated impact was based on the assumption that credit providers would increase the cost of credit and limit the extension of credit to every consumer earning R7 500 or less, with a total credit of R50 000 or less; forcing these consumers into the informal market. The DTI observed that the Bill provided for the Minister to review the debt intervention measure after three years of implementation. This was one of the measures put in place to ensure that the unintended consequences identified in the SEIA were mitigated.

The DTI would consider the proposed research on why consumers in this target range do not take up debt review and would take further action on the enforcement proposals. The communication and awareness of the Act would be taken into serious consideration. The definition of over-indebtedness was to be reconsidered in the subsequent amendments process. No other significant policy issues emanated from the SEIA, for consideration towards improving the National Credit Act. The impact was to be reviewed and there was scope in the NCAA to amend the debt amount and the target income level should the need arise.

Dr Masotja said that DTI was in the process of reviewing the budget for immediate implementation of the NCAA and was working on reprioritisation. Implementation would follow a phased approach, starting from 15 to 24 months, with the initial budget being lower than projected. In the next six months, processes were underway to spend on information and communications technology (ICT) and other once-off set up costs –following a budget request made to Treasury. The industry funded levy was proposed as an additional option to fund the debt intervention measure; this was not unique to South Africa.

Dr Masotja said that the Amendment Act proclamation by the President was projected for January 2021. Implementation would commence from January 2021, with several experts and stakeholders from industry forming part of the implementation plan at various stages. The remaining processes were expected to be ready by November 2021. The final regulations were scheduled to be completed by May 2020. The DTI, NCR and NCT had established task teams to address ICT, implementation, regulations and finance roll out.

National Credit Regulator (NCR) on its NCAA process proposal
Ms Nomsa Motshegare, NCR CEO, said that according to the Eighty20 Consulting Report presented in 2018, about 1.5 million consumers were expected to be eligible for debt intervention. As stated by the DDG, the SEIAS found that the target group consisted of 359 276 consumers. Based on NCR statistics. packaged on a quarterly basis, NCR worked on a presumptive and conservative middle ground of 750 000 customers applying for debt intervention; this was half of what the Eighty20 Consulting Report had stated and more than double found by the SEIAS.

NCR would assist each debt intervention applicant over a period of 60 days, in four phases being: application, operation, legal and post-application phases.

• For the application phase, application forms would be provided in all 11 official languages and several platforms would be availed for the consumers to submit their forms; these included a mobile application that would be developed, online applications on the NCR website, a call centre, walk-ins, mobile units for rural areas and through Provincial Consumer Protection Offices. All the required supporting documentation and information would be collected through these platforms. A high level assessment would then be conducted to determine whether consumers meet the minimum criteria of income of R7 500 or less and a maximum unsecured debt of R50 000. This assessment would include drawing credit bureau reports.

• During operation phase, the NCR would be conducting a more detailed assessment to determine over-indebtedness, prescribed debt and reckless lending. The debt intervention officer would establish which debt intervention measure is applicable to each applicant. Negotiations with credit providers would be conducted during this phase should a consumer qualify to have his/her debts restructured. Consumers who were subject to a suspension order would be referred back to this stage (from the post application phase) once the time periods expired and the application is due for review.

• In the legal phase, legal advisors would be responsible for the drafting of referrals to the NCT, service and filing of applications to all affected parties as well as drafting of any further pleadings necessary in the process. The matter would be argued – typically with the credit providers opposing the applications - and orders would be obtained from the NCT.

• The post-application phase would be responsible for updating all affected parties and for ensuring that consumers were referred back to the operational stage once the time period for the debt Intervention order (suspension) had expired and the application was due for review.

Ms Motshegare outlined a few factors that influenced the NCR’s state of readiness and the timeframes for implementation. NCR was in the process of procuring premises that were more suitable to accommodate its staff body and all projected office equipment; this was expected to be finalised within eight months from the date of advertisement. Over a period of about 12 months, the agency was planning to enter into a Memorandum of Understanding (MoU) for financial literacy training and developing the associated training material. Appointing a system developer would take three months while the intellectual technology procurement and installation would take about 15 months. The cell phone app and the online application system would each be completed about six months after appointing a developer. She indicated that the agency presently had a debt help system which would have to be enhanced. Human resources would be procured as and when required.

For financial literacy training, the NCR was to consider the available material, including the material used by the industry, and improve it to accommodate the targeted consumers; this would include its translation into all official languages. The agency would appoint suitably qualified trainers - the Provincial Consumer Protection Offices and relevant SETAs would be approached to determine their capacity to assist with training of consumers. For online and cell phone app applicants, online training videos would be developed, followed by an assessment to be conducted. For applications received via the call centre, telephonic counselling would be provided. All other applicants would be offered face-to-face counselling through the NCR’s resources.

For the first year, the total budget for implementing infrastructural requirements was projected to be about R127 million. The major expenses included human resources costing about R45 million; Information Technology (IT) around R24 million and consumer education about R29 million. In the subsequent two years, the expenses were expected to slightly decrease mainly because start-up costs (such as IT) would only be incurred in year one. NCR did not want to solely rely on the fiscus as a funding resource. Due to this, 20% of required funding would be obtained from registrants’ fees. There would be the interest earned from Payment Distribution Agents (PDAs) fees, albeit this amount was fluctuant. Another tool would be to apply a small, industry-wide levy on every credit transaction (e.g. R1 per transaction). The other 80% of the funding would be an allocation from DTI.

National Consumer Tribunal (NCT) on its NCAA process proposal
Prof Joseph Maseko, NCT Executive Chairperson, said that the NCR latest estimate as outlined during a joint CCRD meeting held on 3 September 2019, was that there would be about 750 000 consumers who would qualify for Debt Intervention. Consequently, NCT made an assumption that it would be processing up to 250 000 applications yearly, over a three-year period. Based on these case numbers, NCT would require 33 additional part-time Tribunal Members. Further assumptions were that each member would adjudicate a minimum of 32 cases per day and work for 20 days per month. The adjudication budget was estimated to be about R51.87million for the first year, assuming that each Tribunal member was paid R6 550 daily. NCT estimated an additional R16.3million for processing opposed applications which require a hearing by a Tribunal Member.

The NCT Debt Intervention process would include receiving an assessed application for Debt Relief from the NCR, registering the applicant (consumer) and allocating them to the Tribunal for adjudication. If the consumer qualified for debt relief, and there was consent between the consumer and the credit provider, the Tribunal member would issue an order to the NCR for the suspension of the debt. If the consumer did not have sufficient income, and where there was an existing suspension of the Credit Agreement order issued (in terms of section 87A(2)(b)(i)), the Tribunal member would issue a temporary order, with a return date to the NCR and the Credit Provider (in terms of section 86A(9)(b)). The NCT would receive applications for the extension of the suspension of the Debt in terms of section 87A(5)(b)(ii). It would grant an order for the extension of the suspension in terms of section 87A(5)(c) and issue this to the NCR. On opposed applications, the NCT would conduct a hearing from which a ruling would be issued and submitted to the NCR. The NCT representatives involved in the Debt Intervention process were: the Registrar - to handle the regulation and case management; the Chief Financial Officer - to oversee finances; the Chief Information Officer and a Tribunal Member for adjudication.

Prof Maseko said that this work load necessitated additional administrative support staff. The NCT planned to appoint eight Case Officers, three Administrative Officers, three ICT staff members and three Human Resource Coordinators or facilities. NCT needed investment into addressing its infrastructural needs. Additional office space would be required as 17 additional employees were to be appointed; to accommodate them, 500 square metres of office space were needed and the related costs would amount to R1.6 million. Furniture and fittings, leasehold improvements and office equipment would cost an additional R1.5 million. There was a need for computers for the staff and part-time Tribunal Members; these computers would need servers and software licencing for the Case Management System. These would cost about R5.4 million. The bulk of the overall annual budget was to be allocated towards general adjudication fees as well as separate fees for adjudication on opposed matters. There was some capital expenditure that would not recur in the subsequent two years. The projected budget was approximately the same for the first two years, at about R85.5 million; it would escalate to about R90.5 in the third year.

NCT’s current main source of funding was a grant from the DTI. This grant made up 90% of the NCT revenue budget and this revenue would be crucial in meeting the case load arising from the implementation of the NCAA. NCT did not have the latitude of obtaining additional funding other than from government because it operated as an independent administrative court. Upon availability of the required funds, NCT, in collaboration with the NCR, would commence the design of processes and systems for the implementation of the NCAA within the next six months. The two agencies would determine a project plan of activities and timelines for these actions. NCT envisaged that all people, processes and systems would be implemented and ready for operation by December 2020.

Mr Mulder thanked the Minister for his comprehensive introductory remarks. He expressed his concern that the NCAA was incomplete; asked why the Bill was not referred back for review. It was oxymoronic to describe some of the outcomes of the SEIAS as unintended consequences because they could have been addressed if the Bill was further reviewed. He felt that a lot of work still needed to be done before the NCAA could be implemented and that DTI may not be capacitated to oversee that process.

Mr Macpherson said that this was a red-letter day for the Committee because for two years, Members had submitted opinions about the perils of this Amendment Act and all of them had now been proven to be true by the SEIAS. Any net negative impact conclusion by a report should always cause the Minister take heed. The unintended consequences should have been taken more seriously. One of the biggest consequences was that credit providers would further drive up their cost of credit, forcing consumers to resort to borrowing from the informal market. Capitec Bank had already changed their credit business model which was accommodating low income citizens.

Mr Macpherson claimed that the R407 million in estimations made by the NCT and NCR, was significantly inaccurate. Implementation of the Act hinged on being funded by Treasury. This would be a challenge as Treasury had already indicated that these funds were not available. This would have been avoided if previous recommendations were considered: Parliament should have introduced debt intervention within the bounds of the existing debt review system. This system could have been revised to subsidise low income consumers.

Mr Macpherson said that consumers had been approaching parliamentary constituency offices, inquiring about the debt intervention before the Bill was even signed into law. People had high expectations but the moral hazard was even greater. The problem was that the Bill was going to exclude millions of people from getting legal and affordable credit while enriching mashonisas.

Mr Macpherson pointed out that Adv Trengove’s opinion only looked at one aspect of deprivation of property. It did not consider the potential increase in the target group interest rates and for magistrates to completely eliminate interest rates – this was a fundamental deprivation of property as it was arbitrary and not general in application. He suggested that the final Bill in its entirety should be submitted for a legal opinion.

Mr Thring said that the Bill should not have been signed into law before the SEIAS was conducted. This would have prevented the public embarrassment that had since ensued.

Mr Thring said that as Treasury had insufficient funds for the implementation of the Bill, Treasury would have to collect more tax revenue and this responsibility would unfairly be shouldered by citizens. This would be unacceptable.

Mr Mbuyane welcomed the presentation. The Committee should not be talking about the SEIAS but should be working towards implementing the Act and making the necessary changes. He asked if the NCT and NCR had training and awareness programmes planned to inform the masses. He commended the NCR mobile unit and cell phone application initiatives.

Ms Mantashe welcomed the signing of the Bill into law and acknowledged the SEIAS outcomes. It was important to point out concerns about the implementation of the Act which the NCR and NCT needed to take into consideration and address. The Committee would continue supporting and overseeing these agencies to ensure that the Bill was properly implemented. She was glad that the SEIAS did not raise any policy issues in its areas of concern.

Ms Mantashe advised the NCR to utilise provincial offices to limit the costs and to ensure that intervention was accessible in all parts of the country. She asked when the Committee can expect the DTI decision on its exploration of their funding proposals for the debt intervention.

Ms Mantashe said that she had faith in the institutions that had been established and that she trusted that the NCR and NCT would be equal to the task at hand. She was encouraged by the financial literacy programmes that would ensue after three years, as part of the NCR implementation plan. She expressed her support for the Ministry’s decision to implement the Bill and stressed the importance of addressing the concerns raised by the SEAIS.

The Chairperson said that the Fifth Parliament Committee’s Legacy Report pointed out that Parliament was not required to submit a SEAIS on a Committee Bill. However, this Committee must consider a number of studies and reports from Treasury, Black Sash, NCR and NCT.

The Chairperson said that the Committee was inheriting work from the Fifth Parliament Committee and that there were some positive areas. The Committee would have to find the resolve for progress towards realising the implementation of the Act. He welcomed the reports presented today, saying that they were detailed and informative.

Minister Patel reiterated that when a law had been passed by Parliament and assented to by the President, the role of the Executive would be limited to implementing it. It was not within the discretion of the Executive to make adjustments to the Act. Also, the President may send the law back to Parliament only on the grounds of constitutionality, not his personal opinion.

Minister Patel recounted that there were concerns within the Committee when the Bill was still being debated; there were public hearings and representations made to Parliament. This was a democratic process in which all the concerns about the Bill were ventilated and a final decision was made. This decision would bind every related party. Therefore, the Executive could not overlook the will of Parliament. Its role was to maximise the benefits and minimise the challenges of the Act.

Minister Patel explained that an unintended consequence refers to an effect of an action that is different to the intended purpose of that action. This does not mean it was unforeseeable but it was still unintended. In the case of the Bill, Parliament had intended to support excluded and over-indebted persons. The study revealed that it posed some unintended, negative consequences on the target group. The regulations, through discretion of the Minister, within legal bounds, had to enable effective implementation without these negative consequences. He was open to engaging with the relevant stakeholders during the boot-up period, such as banks, Black Sash and credit providers, to hear their views on how the Act could be implemented. He would commission the work from DTI to consider whatever may be needed to ensure a sustainable financial inclusion model that would have a net positive impact.

Minister Patel indicated that some of the SEIAS Report recommendations did not require any changes in the law but required a different way of implementing the Act. The Ministry would give careful consideration and use the sensible ideas. Where law changes may be required, DTI would return to Parliament through Cabinet processes to propose them.

Minister Patel took note of the budget requirements drafted by the NCR and NCT. DTI would engage these agencies in an attempt to make the requirements more affordable.

He stressed that public representatives had the responsibility to manage unfeasible public expectations, particularly the incorrect message that all of their debt would suddenly be extinguished.

He comforted Members, saying that the report did indicate that the SA macroeconomic system would not be undermined by the possible negative impact of the Act. He added that mischaracterising this negative impact could have a damaging effect on South Africa's credit rating.

The Chairperson said that the Rules of Parliament would need to be changed for the SEIAS to be mandatory for Committee Bills.

The meeting was adjourned.

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