SAA Unallocatable Debt Bill; Non-Profit Organisation Report: briefing

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Finance Standing Committee

07 February 2000
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Meeting report

PORTFOLIO COMMITTEE ON FINANCE
8 February 2000
BRIEFING ON SAA UNALLOCATABLE DEBT BILL, ADOPTION OF REPORT ON NON-PROFIT ORGANISATIONS AND DRAFT PROGRAMME FOR DISCUSSION

Documents handed out
South African Airways Unallocatable Debt Bill
Draft programme for the first quarter of the year 2000 (attached to end of minutes)
Draft Report of the Portfolio Committee of Finance on the Ninth Interim Report of the Commission of Inquiry into certain aspects of the Tax Structure of South Africa: Fiscal Issues Affecting Non-Profit Organisations

SUMMARY
South African Airways Unallocatable Debt Bill

The transaction which had necessitated the South African Airways Unallocatable Debt Bill was explained. Prior to the corporatisation of South African Airways on 1 April 1999 the airline had a debt of R4.0575 billion and assets of the same amount, leaving it with a net asset value of nil. The effect of this debt was that SAA could not be sold to a strategic partner. In order for 20% of SAA to be sold to Swissair, the government entered into a burden-sharing agreement with Transnet. Thus government accepted liability for a portion of the debt of South African Airways (a Transnet subsidiary) and in return government shares, proportionately with Transnet, the proceeds which come from the privatisation of SAA. The deal means that R3 billion of SAA's debt would be taken over by the South African government and Transnet. The government took on R1.3 billion and Transnet R1.7 billion of the debt. However, these amounts could not be set off against each other; the taking over of the debt and the taking of the profits had to be shown separately. The South African Airways Unallocatable Debt Bill deals with granting the Minister the power to borrow the money from the National Revenue Fund to pay Transnet.

Procedurally, there was some confusion as to how the Bill was to be dealt with, as S16 of the Exchequer Act did not encompass this type of borrowing. The Chairperson decided that the Bill be dealt with as a ''straight S75 bill'' but that the legal advisors should look at the matter for the purpose of clarity in the future.

The committee also looked at the report on the fiscal issues affecting non-profit organisations (which was drafted primarily, but not entirely, in accordance with recommendations made by the Katz Commission). The report was not adopted, as certain members did not have the opportunity to go through the report. The matter will be resumed on Friday.

Finally, a draft programme for the first quarter of the year was handed out. No final decisions regarding the programme were made.

MINUTES
South African Airways Unallocatable Debt Bill
The Chief Director of Asset Management in the Department of Finance, Mr Molefe, briefed the committee.

Introduction
An Inter-Ministerial Cabinet Committee decided that SAA, which is a division of Transnet, should be corporatised, by making it a company on its own. However, because of the debt which SAA had (an amount in excess of 4 billion rand), the Department feared that no company would be interested in buying SAA. To overcome this problem, the following arrangement was agreed to:
1.) One billion rand of SAA's debt was to be allocated to SAA's balance sheet with effect from 1 April 1999 (the date of its incorporation). [Thus, SAA would be responsible for only one billion rand of a debt in excess of 4 billion rand]. The remainder of the debt was deemed to be ''unallocatable debt'' and did not go onto the balance sheet of SAA at the time of its incorporation. (The remainder of the debt, an amount in excess of 3 billion rand, would be reflected in the Transnet books).
2.) In respect of this ''unallocatable debt'' the government entered into a ''burden-sharing'' arrangement with Transnet. In terms of this agreement Transnet would be responsible for R1, 724 billion of the unallocatable debt, and the government would be responsible for the remaining R1, 333 billion of the debt.
3.) The Department decided that this amount of R1, 333 billion would be given to Transnet in the form of bonds.
4.) Also, in accordance with this burden-sharing agreement, government would receive a specific amount from the proceeds of the sale of 20% of SAA to Swissair.

This debt which the government had now assumed liability for had not however been budgeted for in the usual way, and was therefore not included in the 1999/2000 budget. Legislation now had to be tabled to allow Government to borrow money from the National Revenue Fund and to approve transfer thereof to the Transnet Group for the purpose of discharging the debt.

Discussion
Dr Woods (IFP) asked why the amount which the government would receive from the proceeds of the sale of 20% of SAA was not offset against the amount (the debt) for which the government was now responsible.
Mr Molefe replied that when the privatisation proceeds were received, it would be shared in the same ratio as the debt was shared. He said that, in the big picture, the two amounts would cancel each other out, but, they could not be regarded as directly offsetting each other as they were two completely different transactions. The one transaction dealt with the receipt of a debt while the other transaction dealt with the proceeds of privatisation. They had to be reflected as such (separately) in the books of government.

Responding to a question by Mr Feinstein (ANC), Mr Molefe said that the reason that Transnet needed the government to assume a portion of the liability was so that Transnet could keep their ''gearing ratio'' under control. He explained that, one of the main investors in Transnet, required that money would only be lent to Transnet if its gearing ratio did not exceed a certain limit. [Thus, if their debt is too high, then their gearing ratio will increase and they will be in default of the agreement with one of their investors.]

When Mr Feinstein asked why this request for the Minister to borrow the money had not appeared in the Adjustments Estimate, Mr Molefe replied that there had been a timing problem. He said that the Bill was prepared before June last year and his Department had hoped to get the Bill passed before Parliament at that time. They had been informed, however, that Parliament's schedule was very tight. They then tried to put it in as urgent legislation in August and were told that it was not possible. By this time, it was too late for them to put it into the Adjustments Estimate.

Mr Feinstein then asked if it was wise to lay out huge sums of money now without a guarantee that there would be a strategic benefit for government.
Mr Molefe said that he was convinced that the investment was a prudent one, especially considering that SAA had already shown a profit. He said that, with time, the amount which government spent on discharging the debt, would be repaid through the profit which it would make from the investment.

Dr Davies (ANC) posed the following questions:
Is there anything more than a general understanding with SAA that if more capital is realised through this partnership that government has a preferential claim to get dividends?
Will the future R610 million be offset against this debt?
What kind of gearing ratio does SAA think is acceptable to its strategic equity partner?
The costs of privatisation is large. Will government be laying out large sums for small returns?
Is there a general figure which can be used for describing a gearing ratio?

Mr Molefe gave the following reply:
A certain level is considered optimal gearing, but an acceptable gearing ratio differs from industry to industry. In the case of SAA, R1 billion was considered sufficient.
Regarding the issue of offsetting, there would be no direct offsetting as the transactions had to be reflected separately. In the long run, however, the amounts will cancel each other out.

The Chairperson asked if all the proceeds from privatisation would go to the alleviation of government debt and Mr Molefe said that it would.

Ms Jumat (ANC) asked if there was a specific figure in place regarding the interest which was also payable by government. Mr Molefe replied 16.5%.

Mr Feinstein was concerned with the procedural element and said that it was normal practice for this to come through the Adjustments or Supplementary Estimate. He wanted to know if this (the borrowing of the money by the Minister) would be reflected there and where this mechanism fitted into the overall appropriation of the budget?

Mr Molefe said that S16 of the Exchequer Act dealt with the circumstances in which the Minister could borrow money. This particular kind of mechanism did not fall within the ambit of that legislation. Thus, some kind of enabling legislation was necessary as this mechanism was not covered by the Exchequer Act.

In response to criticism by Mr Andrew (DP), Mr Molefe again apologised for not bringing the Bill before parliament earlier. He said that ''maybe [they] should have found a way of putting it through the Adjustments Estimate''. They were informed that Parliament's programme was very tight and the judgement call was on them.
He conceded that they may have made a bad choice.

Mr Koornhof (UDM) asked whether they had approached the Minister of Finance to include this in the Adjustments Estimate. Mr Molefe replied that they had not.

The Chairperson, Ms Hogan, noted that as S16 of the Exchequer Act did not allow for this kind of borrowing, special legislation would have been necessary anyway. Ms Hogan said that the procedure with which this Bill was to be dealt with was not completely clear because the Bill had two elements:
1) There was an element of appropriation (it involved a capital transaction and interest, this normally went through appropriation).
2) There was also an element which empowered the Minister to borrow.
Thus, it was a ''grey area'' as to specifically which type of Bill this was, but it seemed to be a straight S75 Bill.

The Chairperson said that she did not want to get bogged down in procedure and recommended that they proceed with the matter as is. However, she asked that the legal advisors spend time on this matter to determine what type of Bill this was in case something similar arose in the future. She noted that it would be undesirable for the Minister to bring an appropriation bill outside of the Adjustments Expenditure.

The Chairperson concluded this portion of the meeting by making the following remarks:
She said that the legal advisors should look at the appropriation bill in terms of section 16 of the Exchequer Act so that there could be clarity in the future as to the path that these bills had to take. Cosatu had requested the opportunity to make a submission on this Bill on Friday, at which time they would also look at amendments to the Bill. The debate on the Bill is scheduled for 22 February, and the Bill has to be passed by 31 March.

Mr Andrew raised the point that organisations wishing to make submissions should submit documents so that the committee could decide if the document justified a hearing. Mr Davies objected, saying that this would have the effect of disempowering people. The Chairperson said that this matter would be discussed by the committee as they did not have a hard and fast policy on this yet. However, in the present case, COSATU had made strong representations on the privatisation issue, and, it was for this reason that their submission was agreed to.

Fiscal issues affecting non-profit organisations
Synopsis of the report
The report is based on various submissions, but primarily on the report of the Katz Commission. It is in favour of NPOs receiving taxation privileges as this would enable them to deliver more effectively. South Africa has developed a rich network of NGOs and their ability to mobilise resources are very important. As they play an important role in South African society, it is appropriate that they should receive certain tax privileges.

However, these tax exemptions means that certain policy considerations have to be looked at. These include:
1) The State will forego revenue. This loss of fiscus must be balanced against society as a whole.
2) According to the report of the Katz Commission SARS have a strong role in monitoring NGO's, example, the investments that they can invest in. The Chairperson disagreed with this, saying that SARS cannot be a watchdog and that they were the wrong body to do this.
3) The Chairperson agreed with the Katz Commission that income derived from trading should be tax exempt, while other income should be taxed. The difference between the two should be clearly set up.
4.) Their was also the issue of donors to NGO's getting tax privileges. The line which had to be drawn in this regard (as to which donors would qualify for tax privileges and which would not) could not be too broad or too narrow.
5) The Katz Commission also suggested lifting restrictions on estate duties which would allow for the establishment of foundations.

Proposed amendments to the report
Professor Turok said that it was a good report and proposed the following amendments:
1) That the words ''drying up of foreign funding'' in the second last sentence of section A, be left out.
2) That the last sentence of the first paragraph of section B refer to ''capacity'' to determine developmental priorities, and not the ''right to determine developmental priorities''.
3) That paragraph 3 in section B make a clear distinction between income derived from related trading activities, and income derived from unrelated trading activities. The Chairperson noted that this distinction was dealt with in detail later in the report, but, if Professor Turok felt strongly on the matter, he could draft an amendment and present it to her.
4) In 6.1.3(v)(b), the words ''for NPO's that primarily deliver services'' be deleted and replaced with ''for NPO's which are not membership organisations and which primarily deliver advice and services'' with the bulk of expenditure … .
5) In 6.1.8, paragraph 2, the word ''national'' should be added before developmental priorities, so that the sentence read ''… should be made subject to the national developmental priorities …''.

The Chairperson said that these proposed amendments would not be discussed now. This matter is to be discussed and finalised on Friday.

The committee then looked through the draft programme for the first quarter (see below and then concluded the meeting.

Appendix 1:
Draft Programme for First Quarter of the Year 2000

PortfoIio Committee on Finance

Friday, 4 February 2000 - Opening of Parliament

Tuesday, 8 February 2000
09:30 - 13:00
Briefing on SAA Unallocatable Debt Bill [B1-2000]
Adoption of Report on NPO's
Draft programme for discussion

Friday, 11 February 2000
09:30 - 13:00
Hearing on SAA Unallocatable Debt Bill

Tuesday, 15 February 2000
09:30 - 13:00
Formal Consideration of SAA Unallocatable Debt Bill
Briefing and formal consideration of Financial
Service Board A/B

Tuesday, 22 February 2000
09:00 - 13:00
Joint meeting with the Portfolio Committee on
Trade and Industry - Micro-lending Industries

Wednesday, 23 February 2000
10:00 - 13:00
Budget Day - Lock-up session

Documents to be provided and lunch to be served

2 February 2000
I
Thursday, 24 February - 3 March 2000 - Budget Week


Thursday, 24 February & Friday, 25 February 2000 - Preparation days

Monday, 28 February 2000
09:00 - 13:00
Address by Minister of Finance and Directors-General of Finance and State Expenditure

14:00 - 17:00
Intergovernmental Fiscal Relations - Division of Revenue Bill (Department of Finance and FFC)

Tuesday, 29 February 2000
09:00 - 13:00
Department of Finance & SARS - Tax policy

14:00 - 17:00
Governor of South African Reserve Bank - Monetary Policy

Wednesday, 1 March 2000
09:00 - 13:00

Thursday, 2 March 2000
09:00 - 13:00

Friday, 3 March 2000
09:30 - 13:00
Adoption of Committee Report on Main Appropriation Bill

Tuesday, 7 March 1999
09:30 - 13:00
Consideration of Taxation Laws A/B Briefing on Financial Institutions (Investment of Funds) Bill

2 February 2000
2
Fnday 10 March 2000
09:30 - 13:00
Hearing on Financial Institutions (Investment of Funds) Bill

Tuesday, 14 March 2000
09:30 - 13:00
Formal Consideration of Financial Institutions
(Investment of Funds) Bill
Supplementary Estimates

Friday, 18 March 2000
09:30 - 13:00
Joint meeting with the Portfolio Committee on Trade and Industry - Micro-lending industries

Tuesday, 21 March 2000 Public Holiday

Recess from 24 March -3 April 2000

Tuesday, 4 April 2000
09:30-13:00

Tuesday 11 April 2000
09:30 - 18:00
Budget Votes and Annual Reports
- Finance
- State Expenditure
- SARS
- Statistics SA

As at 2 February 2000

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