SARB Amendment Bill: public hearings; Auditing Profession Amendment Bill: adoption

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Finance Standing Committee

18 November 2020
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Video: Standing Committee on Finance , National Assembly

In this virtual meeting, the Standing Committee on Finance heard public input on the private members’ bill proposed by Mr J Malema (EFF) to amend the South African Reserve Bank Act. Oral presentations were heard from Business Leadership South Africa (BLSA), the ANCYL Crisis Committee (ANCYLCC), the Institute for Race Relations (IRR) and National Treasury.

BLSA noted its opposition to the Bill, proposing that it was unconstitutional and would introduce risks to sustainable growth.

The ANCYLCC supported the Bill, arguing that it was globally an anomaly for the central bank to be privately owned, and advocated for nationalisation of the Bank in the public interest.

The IRR opposed the bill, submitting that nationalisation had little positive effect and potentially would harm investor confidence and interfere with the independence of the Bank, or lead to potential interference in the Bank. The IRR also stated that the Bill was unconstitutional.

National Treasury proposed that, while the idea of a nationalised bank was not revolutionary, the possibility of infringing on the Bank’s independence and mandate in future could significantly harm investor conference. Treasury also noted that the Bill failed to account for a number of legal concerns and the potential financial implication.

Members’ discussions centred around constitutionality of the Bill and whether compensation for shareholders would be considered by the Bill’s proponents.

The Chairperson indicated that Parliament’s legal division which assisted Mr Malema, the Bill’s tabler, would have to sit with him and look at responses to submissions. He requested that the parliamentary research division do a socio-economic impact assessment as part of the legislative process. He added that all the loopholes in the processing of the Bill had to be closed before the Bill could be properly considered.

The Committee considered and approved the Auditing Profession Amendment Bill with amendments.

Meeting report

Auditing Profession Amendment Bill
The Chairperson noted that the Committee had omitted to adopt amendments to the Auditing Profession Amendment Bill in the previous meeting.

Adv Frank Jenkins, Senior Parliamentary Legal Adviser, noted that the Committee needed to adopt amendments clause-by-clause.

The Committee agreed with all amendments to the Bill as proposed.

The Bill was moved by Ms P Abraham (ANC) and seconded by Ms D Mabiletsa (ANC).

Positions were reserved by the DA and EFF.

SARB Amendment Bill: public hearings

Business Leadership SA (BLSA)
Ms Nonhlanhla Mohlaba, Policy and Legislation Coordinator, said that BLSA did not support the Bill, as it was of the view that it introduced substantial risks to sustainable and jobs-heavy economic growth, and was also unconstitutional.

Changing the governance structure and nationalising the Bank would negatively affect the Bank’s credibility, South Africa’s monetary policy and the Bank’s current international standing. BLSA saw SARB nationalisation as a move with little benefit and high risks, exacerbated by state failure.

In light of the Minister of Finance announcing moves to make moving money across borders easier, which would make South Africa a more attractive investment destination, SARB nationalisation seemed like a move in the opposite direction.

Both perceived and actual central bank independence were core components of global indices and ratings of the South African economy.

Given degradation of state institutions over the years due to state capture, the SARB was one of the only institutions holding SA’s debt ratings up. The Reserve Bank operated in a set of global monetary policy and financial sector norms which allowed South Africa easy access to the global financial sector. Tampering with this could have disastrous consequences.

BLSA also noted legal concerns with the bill. The shares of the SARB were a form of incorporeal property. S22 of the SARB Act contemplated that shares could be bought and sold, and S24 contemplated the payment of dividends to shareholders. Shares in the Reserve Bank thus had a market value. Repealing S22 of the SARB Act in its entirety would amount to expropriation of the shares without compensation, which would violate S25(2)(b) of the Constitution.

(See Presentation)

ANCYL Crisis Committee (ANCYLCC)

Mr Ngoako Selamolela, Member, ANCYLCC, recalled the resolution taken in 2011 by the ANCYL to dispose of private shareholders in the SARB, and the subsequent ANC resolution in 2017 to nationalise the Reserve Bank.

In the entire world, there were only 8 Reserve Banks wholly or partially privately owned. The international trend was for central banks to be wholly state-owned, in the same way as a defence force. The ANCYLCC saw private ownership of the Bank as a serious anomaly.

The ANCYLCC saw it as wrong that private shareholders had equal influence over appointments to the Board of the SARB. Private shareholders would protect their own private interests. An institution with the responsibilities of the SARB could not be subject to private interests. This undermined South Africa’s sovereignty. The notion that the shares of the SARB were used to re-capacitate and capitalise the bank was false.

The ANCYLCC recommended that the Amendment Bill be passed by Parliament, and proposed a range of amendments to aid the nationalisation of the Bank. In this vein, it proposed deletion of all definitions relating to private shareholders. It also proposed decreasing the number of directors on the Board to 7, to be appointed by the President. It proposed deletion of S4(3) from the Act. It further proposed the revision S5(2) to exclude elected directors. The ANCYLCC argued that the Minister should be empowered to select audit firms for the Bank.

The ANCYLCC called upon MPs to place the interests of the country first and nationalise the Bank. The claim that the Bill was unconstitutional was false, as S25 of the Constitution did not prevent expropriation of property by the State in the public interest. There had not been any value added to the Bank from being privately owned. The notion that the independence of the Reserve Bank would be threatened by state ownership was laughable, and had not been the case elsewhere in the world. The independence of the Reserve Bank was a question of policy direction, and not a question of ownership.

(See Presentation)

Institute of Race Relations (IRR)

Dr John Endres, Chief of Staff, IRR, argued that the Bill should be rejected as it was unconstitutional in that it did not provide for compensation for shareholders whose property was being expropriated, and because it had not undergone a socioeconomic impact assessment.

The SARB had been one of the most successful and best run public institutions in South Africa. In 2009, government had set SARB an inflation targeting band, and since 2010 the inflation rate had only breached this band marginally twice. Credit for this superb performance was due to Governor Lesetja Kganyago and the Monetary Policy Committee (MPC).

Under high inflation, everybody suffered. An institution with the track record of the SARB should not be meddled with lightly. The Bill proposed removing some of the small checks and balances introduced by private shareholders. While private shareholders had very little practical impact, they had an intangible effect on the perception of the Reserve Bank.

Examples from around the world and throughout history showed the importance of an independent central bank. In Turkey, in November 2020, the President fired the central bank governor, appointing the fourth new governor in five years.

In Turkey, inflation had been above 10% in the past 3 years. In 2020, the Turkish government had spent 65bn USD propping up its currency, and yet the Lira was down 30% on the dollar in 2020. This showed the importance of central bank independence. Other examples that showed this were Venezuela and Zimbabwe. Talk of central bank nationalisation would evoke these examples in the minds of investors, and place in doubt the future of the Bank. This would make it far more difficult to attract investment.

While private shareholding of the central bank was unusual, so was nationalisation of the central bank. Only two central banks had been nationalised since 1980.

(See Presentation)

National Treasury

Mr Ismail Momoniat, Head of Tax and Financial Sector Policy, National Treasury, noted the views of various parties on the nationalisation of the SARB.

The SARB was established in terms of S223 of the Constitution, and pursued its mandate of protecting the value of the currency while balancing this with the need for sustainable economic growth as per S224.

The idea in itself was by no means revolutionary, and effectively replaced private shareholders with the Minister of Finance. Whilst the Bill did not directly change the mandate and independence of the SARB, there was no comfort to investors that this was not the first step towards changing its mandate. Even the mere perception that this may happen at some point would send a powerful negative signal to investors on future monetary policy and currency value. Treasury’s key concerns with the Bill were around what it did not do: it ignored the rights of shareholders codified in the SARB Act, and could generate fears over interference in the SARB. The Bill did not address how the shares could be purchased, assuming that they could be expropriated.

Treasury was not sure that the Bill solved any actual problems with the SARB, as government was already in control of appointments in the SARB and the Bank retained full independence in determining monetary policy, from both government and its shareholders.

The powers of the SARB Board were limited to corporate governance. Of the 15 directors on the Board, only 7 were appointed by private shareholders – so SARB’s corporate governance was already subject to majority government control.

There were significant consequences to changing the ownership structure:

The SARB Amendment Bill, as a private members’ bill, had not had a socio-economic impact assessment raising the issue of the impact on the economy, nor a legal assessment of its constitutionality.

The SARB Act allowed for two million ordinary shares, although this could be increased. 12.65% of shares were held by foreign nationals.

S224(2) of the constitution provided that the SARB discharged its duties independently. Given the country’s experience with state capture in the past 10 years, Treasury saw a risk of enabling this kind of behaviour in future by providing sole shareholding and therefore corporate governance authority to one Minister.

Treasury had fundamental objections to the Bill based on its constitutionality, its impact on future investment and thus the economy and hobs, its lack of detail on funding and its conflict with other legislation. The Bill also did not align with the current policy objectives and funding priorities of government. Mr Momoniat proposed that passage of the Bill would likely cost billions and become tied up in long legal battles, causing paralysis at the Bank and uncertainty in monetary policy.

Issues of constitutionality had also been raised before. The Bill did not make provision for compensation, and the deprivation of property could only take place in terms of a law of general application as per S25 of the Constitution.

The economic implications of the Bill would likely be huge. Foreign shareholders may be entitled to claim compensation under bilateral investment treaties. Some shareholders had in fact actively instigated nationalisation so they could have access to a share of the assets of the SARB.

The Bill could also be interpreted as a Money Bill, which would mean that it could procedurally only be introduced by the Minister of Finance.

A number of specific legal concerns were also raised, especially regarding the Reserve Bank’s status as a Systemically Important Financial Institution.

In conclusion, Mr Momoniat proposed that while full ownership may be desirable in the long term, in the present there would be huge costs and significant trade-offs, as well as negative impact on investment and economic growth. The Bill did not address many key questions. The risk of slowing growth could not be taken while SA was stuck in a low growth trap. Governance arrangements would be made significantly weaker. Treasury thus opposed the Bill.

(See Presentation)

Mr F Shivambu (EFF) proposed that Treasury was captured by a faction led by Mr Momoniat, which exerted political power over government decision-making. The basis of the objection by National Treasury were false alarms not dissimilar to those racist alarms raised when South Africa was transitioning to its first black government. There was no solid economic or political reasoning for not nationalising the SARB. The biggest investment destinations in the world had nationalised central banks, whereas South Africa saw decreasing foreign investment. When the SARB Act had been amended to diminish maximum possible shareholding, there had been no claims for billions of Rands from shareholders.

Mr Shivambu did not think a rational human being or court would provide billions in compensation for the expropriation of the low-yielding shares. The false alarms being raised implied that a black government could not own its own central bank.

Mr Shivambu said that it was not true that there was no socio-economic impact assessment or an assessment of the Bill’s constitutionality. SARB was relatively independent at the current point due to the Constitution. There was nowhere in the Constitution that did not allow members of parliament to talk about the performance of the Reserve Bank. He asked for an opportunity to respond in detail to stakeholders. He dismissed the nonsensical submissions of the IRR and National Treasury.

Dr D George (DA) asked the ANCYL Crisis Committee whether it was speaking on behalf of the ANC or the ANCYL only. He stated that he was aware that the Bill was unconstitutional due to the lack of provision of compensation for shareholders. He asked the ANCYLCC if it would be willing to provide for compensation for shareholders. He recalled that he had visited the Bank of England during Governor Gill Marcus’ tenure when a similar nationalisation issue was raised, noting that the BoE had had to pay an enormous amount of money to shareholders when the Bank was nationalised. He noted that the nationalisation issue was not one of race, but rather one of guaranteeing independence of the Reserve Bank.

Mr G Skosana (ANC) asked the IRR, given its depiction of the SARB as a diamond of the public service, did it not think that the positives raised about the Bank were due to governance and management, not due to private ownership. He contended that poor management and poor leadership generally had caused poor performance in the public service, not the fact of public ownership. Mr Skosana asked the ANCYLCC for their view on comments from other stakeholders that the ownership was of marginal importance. He also asked Mr Selamolela for his thoughts on whether expropriation of shares would have a high financial burden.

Mr Selamolela replied that, when one appropriated in the public interest, it was law that reasonable compensation was paid. This was a common practice across the world. The New Deal and Marshall Plan were both based on expropriation.

Mr Skosana restated his question to Mr Selamolela, asking for his comment on the proposal from other stakeholders that private ownership had very limited impact on the operations of the Reserve Bank.

Mr Selamolela said that Dr Endres was either lying or talking about matters he was ignorant of. Mr Selamolela noted that private shareholders elected 7 of 15 members of the SARB Board. He also proposed that the Governor of the Reserve Bank was also lying when he said that there was no private ownership of the SARB, only private shareholders.

Mr Momoniat saidd that the idea of nationalising the SARB was not inherently revolutionary. However, the issue was whether it was a costless exercise to move towards a nationalised Bank, and whether this process was warranted by the almost non-existent impact of private ownership. If shareholders held out for higher compensation when the Bank’s shares were purchased, the state would have to go through an expropriation process which would be lengthy, and the government would be unsure of winning. This would cause years of uncertainty in the Bank. It was difficult to cost the years of uncertainty and the loss of credibility the Bank would face. In the context of state capture, nationalisation would be a further issue.

Dr Endres replied to Mr Selamolela, noting that he missed the 2010 amendment to the SARB Act limiting private shareholders to electing a minority of Board members, making their impact relatively minimal. If, as Mr Skosana said, the impact of private shareholders was relatively minimal, this should not be an issue at all.  He stated that the presence of private shareholders, while it did not have a concrete value, had a positive impact on the perception of the Reserve Bank. If one messed with the legal infrastructure that supported the edifice of the SARB, one put in doubt the credibility and quality of the institution. He proposed that race did not and should not play a role in the issue of central bank nationalisation. He added that the SARB was a well-run institution and should not interfered with.

The Chairperson noted that stakeholders should avoid having discussions with each other, as the parliamentary committee was not the appropriate forum.

Now that the Committee had received written and oral submissions, the legal division which assisted Mr Malema, the Bill’s tabler, would have to sit with him and look at responses to submissions. He requested that the parliamentary research division do a socio-economic impact assessment as part of the legislative process. He added that all the loopholes in the processing of the Bill had to be closed before the Bill could be properly considered.

The meeting was adjourned.

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