Budget 2004: briefing by Minister

Meeting report

FINANCE PORTFOLIO & SELECT COMMITTEES & JOINT BUDGET COMMITTEE: JOINT MEETING
19 February 2004
BUDGET 2004: BRIEFING BY MINISTER

Chairpersons: Ms B Hogan (ANC) [PC Finance]; Ms Q Mahlangu (ANC) [NCOP]; Mr N Nene (ANC) [Joint Budget]

Relevant document
Presentation by Treasury on Budget Speech
Budget 2004 documents

SUMMARY
The Committee decided that it would not be necessary to receive a briefing because they were all very familiar with the Budget. Minister Manuel and his team were requested to indicate whether South Africa had reached its revenue collection ceiling or whether future over-runs were expected, an update was requested on the study of the tax gap and whether it was factored into the current budget process, whether any details could be given on the specific sectors which were a cause of concern for the low effective tax rate, whether a holistic review of corporate taxation as well as the state enterprises Treasury configurations were expected in 2004, whether Treasury envisaged any future movements in tax policy which would incentivise savings, whether it was prudent to proceed with the Minerals Royalty Bill before a full scale review of the tax structure of the mining and petroleum sector was conducted and concern was raised with the need to address the taxation in the retirement fund industry.

Members also sought clarity as to whether the new bonds that would be issued would meet the needs of the elderly who were looking for alternative savings channels, whether the Financial Services Charter addressed the problem with the entry of SMMEs into the market and whether the numerous tax reliefs granted did not detrimentally reduce the tax base. Minister Manuel was asked to indicate the modalities that would be used by Treasury to get South Africa on the high growth path, what the impact of HIV/AIDS would be on the budget review process, how precisely the Extended Public Works Programme would ensure spending by provincial governments because they were guilty of underspending in the past, whether Treasury planned to release any guidelines for municipal bonds to inform municipalities that government would not be bailing them out of bad debt situations, whether government's privatisation programme was becoming derailed and concern was expressed with the apparent lack of confidence in the Financial Services Centre.

MINUTES
Introduction by Chairperson
The Chair stated that this would be the Committee's final hearing on the Budget for this Parliament's term, and would also be the last time that the Minster and Deputy Minister would be appearing before the Committee. She stated that the last five years have been a very interesting period of time, with robust engagements and much was achieved.

Introduction by Minister of Finance
Minister Manuel stated that the presentation (document attached) would be short because Members had "lived with the issue for the past 24 hours", and the aim was rather to jog the memory.

The Chair questioned whether the presentation was needed at all. She noted that Members agreed that the presentation should be waived and the Committee should instead engage the Department.

Discussion
Minister Manuel requested Members to raise questions regarding the tax policy at this point so that Mr P Gordham, SARS Commissioner, could respond to them, because he would be leaving the meeting early due to a prior engagement.

The Chair informed Members that the Committee would be having a hearing on tax issues on Monday 23 February, and perhaps the broader tax policy questions should be discussed during this meeting.

Ms R Taljaard (DA) [PC Finance] agreed with the Chair.

Mr K Moloto (ANC) [PC Finance] asked whether South Africa had reached its revenue collection ceiling, or would some over-runs in the revenue collection be experienced in future.

Minister Manuel responded that the slide in the presentation entitled "Tax percentage of GDP" indicated that there was a very substantial change over the last four fiscal years. As a total share of tax, because of the successive reduction in personal income tax, the percentage of tax had fallen significantly. In contrast the companies tax percentage had grown over the period, as a result of not only the share growing with the reduction of personal income tax, but also because there was much base-broadening. This shift was very substantial. It was thus the introduction of a policy change which brought with it a measure of volatility which was not previously there. The profitability was also the result of a series of other issues, which included exchange rate volatility and lower demand.

Commissioner Gordham stated that South Africa had not reached its ceiling, because as the economy grew the ceiling would rise. Thus the opportunities to collect taxes would improve accordingly. SARS considered there to be three primary drivers of taxation: firstly there were the macro-economic factors which probably constituted 95% of SARS' total revenue collection. Thus if there were any variances, such as those explained by the Minister, in any of the factors, that would affect the 95%. SARS wanted to expand the remaining 5% which was the tax-gap related activities.

He stated that as SARS progressed further in developing technical expertise, business intelligence and better risk management and profiling, it would get a better handle on the tax gap itself and the different sectors of the tax gap. There was crude tax evasion, very sophisticated tax structuring schemes on the other hand and much in between Al these issues must be factored in in some way. The revenue estimation process has also become much more advanced and sophisticated, and therefore the over-runs themselves might not become an indicator as to whether the administration itself delivered or not. In a sense a new paradigm or framework needed to be created to understand the productivity of the revenue service itself.

There was thus money out there and the only question which remained was how quickly SARS would be able to develop its capacity to actually find these funds.

Ms Mahlangu requested an update on the study conducted on the tax gap, and asked whether it had been factored into the current processes.

Commissioner Gordham replied that SARS had conducted this once-off study, and it now aimed to follow the route followed by the United States and introduce an annual or b-annual survey. This would involve the isolation of a collection of taxpayers which SARS had already begun to understand, and then check those sectors on an annual or bi-annual basis to examine that sector. They would be audited and the results would then be used to provide a better estimation of the happenings in those particular sectors, and also generally in the tax gap and in tax gap related activities. SARS was currently working on institutionalising this, so that it could better inform the enforcement-related activities it needed to undertake.

Ms Taljaard asked whether there was any additional detail on the specific sectors which caused concern for the low effective tax rate.

Commissioner Gordham responded that it should not be either surprising nor a mystery that there were sections of the South African economy that paid significantly less than 30% tax. Their tax rates needed to be questioned as to whether they were granted certain legislative exemptions, or whether they used structured finance deals and other measures which resulted in the low effective tax rate. SARS was currently asking these questions much more assertively, and interrogated those areas much more carefully with a view to understanding the different industry sectors, the type of businesses they ran, the models they worked with and the "schemes" that obtained in that particular area.

He stated that he was not at this stage at liberty to indicate which sectors were being examined, but several were being considered during 2004. SARS would like to meet with the representatives of that sector put its cards on the table. This kind of dialogue was already taking place with two or three sectors at a leadership level.

Ms Taljaard asked whether a more holistic review of corporate taxation would be conducted in the near future rather than a sectoral analysis, and whether any considerable form of benchmarking would take place.

Commissioner Gordham replied that each year the Minister of Finance would look at the pie chart contained in slide 17 of the presentation and ask whether that it how it should look one year hence. He stated that the type of question raised by Ms Taljaard would then be taken into account and the Minister would apply both an economic, political and judgement in determining what the tax rates should be for that year.

Minister Manuel stated that there were other elements to that as well. In 1994 the corporate tax rate was 48%, and it was now 30% plus the secondary tax on companies (STC). He stated that STC was advantageous from an administrative point of view because it was levied at the point of distribution. But if the system was in a stronger position to deal with Personal Income Tax (PIT) differently and tax at the dividends, then the tax rate could be levied at 30% across the board. He stated that it was once its effect was understood on a sector-by-sector basis that government would then be able to develop the norms, and it would then also be important for South Africa to compare itself to other parts of the world.

He stated that the approach of business was frequently also to look at this narrowly from a sectoral perspective. There would thus always be a large contingency of lobbyists in the industry, and they would tend towards a special concession or incentives for particular kinds of sectors. The coming together of policy and administration was paramount here. The broad approach taken by government was one which favoured a general lowering, rather than high rates with a series of exemptions.

The other side was the decision making side in which the courts were deciding tax matters, and were setting precedents that fell outside the discussions engaged by this Committee on amendments to tax laws. These different aspects thus had to be brought together and an understanding had to be developed. It was a complex situation, but government was not yet in a position to promise a full review towards lowering the effective rate, for as long as there was as much enthusiasm within SARS to collect what has not been collected.

Dr W Odendaal (NNP) [PC Finance] asked Minister Manuel to explain whether he believed there was room for further tax deductions, apart from a sectoral approach, to stimulate economic activity and economic growth and to create jobs in the informal sector.

Minister Manuel responded that, from an administrative perspective, government had stated it in this Committee on previous occasions that tax administration was tax policy. Yet from an administrative point government tended to favour general rather than highly specific approaches in respect of incentives. However part of the rafts of revenue legislation presented to this Committee year after year included the granting of special incentives, and here it must be ensured that the objective of the incentive was actually met in the style of implementation. He stated that government would not be unique, as fiscal authorities, to grant tax incentives very sparingly because it tended "to muddy the waters quite a bit".

Ms Taljaard asked Minister Manuel to indicate whether he envisaged any future movements in tax policy to continue to incentivise savings.

Mr L Kganyago, Treasury Director-General, replied that the fundamental factors that drive savings must be understood. The reason why the South African gets it wrong is because its analysis of savings was static. In economic terms savings were basically that part of income that the individual did not spend, which suggested then that the policy choices faced when attempting to drive savings would suggest that there should then be rising levels of income so that there could be something to save out of that income.

The second set of issues with regard to the policy choices would then state that consumption would then have to be encouraged, which would mean that the tax stance taken would be one which sought then to tax consumption more than it would tax income. The balance that would then have to be struck was that many of the consumption taxes, in this case the largest consumption was VAT, was highly regressive, and in this process the result was that the poor were hit in a very bad way.

The third set of issues here had to do with behaviour, and whether it was possible to change the behaviour of people and their attitudes to savings. There were all sorts of models on this, and the Singaporean government in fact passed a law which required its citizens to save a specified percentage of their income into a particular savings scheme. The problem there was however that although people spent money, they ended up borrowing money to be able to continue with their consumption. In the end this measure neutralised the situation as, from a macro-economic perspective, it took government back to square one as the macro-balances still did not have high savings.

The last set of issues on the savings function was an understanding of the components of savings in South Africa. It was primarily corporate profits that have been driving the savings rate in South Africa, as the corporate surpluses were the largest proportions of South Africa's savings. Prior to 1996 government was borrowing the entire savings of the nation and was thus a negative contributor to savings, and the effects of this were evident over the past seven years.

Lastly was the South African individual who, in the main, was not saving. The current percentage on the savings by individuals stood at about 2%, which was very negligible.

He stated that he was not of the opinion that government needed an incentivising. If the corporate sector was profitable, then that was classified as savings and their effective tax rate indicated that they were capable of significant savings. Many exemptions were granted to individuals, but an analysis of the nature of savings by nature indicated that they deposited funds into a bank account or a fixed income instrument, which would then simply exempt the interest. Yet there was very little savings activity in those areas in which the interest exemptions were granted, and these were the extremely rich. Even in an environment in which there were low income rates there were increasingly fewer people who hit that ceiling. He stated that in the main individuals were savings using contractual savings, which were in any case also incentivised quite generously.

Ms Taljaard asked whether it was necessarily wise to proceed with the Minerals Royalty Bill first before the full-scale review of the tax structure in both the mining and petroleum sector.

Minister Manuel responded that it was important to recognise that this involved two different things. Royalty is rent, and was the perspective that existed in the Petroleum Resources Development Act which stipulated that the mineral wealth beneath the soil was the collective patronage as South Africans, and the right to extract would be leased from all. This was the very significant change from a situation in which rights accrued largely as a result of conquest, and this change must be implemented and the only way to achieve this would be to request the rent, and this was the royalty.

There were a number of issues that were not finalised in respect of the Royalties Bill, which were the particular levies which depended on the mineral extracted. There would also be situations in which royalties were also paid to holders of surface rights in particular instances, and probably the strongest of these would be royalties paid to the Bafokeng. There were then also issues that applied to the application of the royalties.

He stated that there would of course be interactions with the mining industries along the route, and different standpoints could even be expressed within that sector. The debates will however be tested.

Dr P Rabie (DA) [PC Finance] asked Minister Manuel to explain why sorghum beer alone was exempted from taxes in this year's budget.

Minister Manuel replied that it was not the case that no tax was imposed on sorghum beer, but rather that its current tax rate was not increased. He stated that the presenters who would be addressing the Committee on Monday 23 February should be requested to provide Members with the research findings on this matter, and there was analysis as to who bought what and what the effects would be. He stated that there was an exceedingly large lobby that requested the excises on all alcohol to be increased very substantially, this included the Road Accident Fund (RAF). Minister Manuel stated that the jury was still out on this matter and a cautious approach was taken to this matter because of the employment effects of these matters.

The Chair stated that the taxation in the retirement fund industry remained an issue, and she seemed to raise it every year. She asked whether a vigorous and earnest response could be expected to the reformulation of the taxation in this industry in the coming year.

The Director-General responded that in 2002 Treasury committed itself to sorting this matter out in two years, and that two year period expired at the end of this year. Progress was made in the meetings held with industry players, but at the time that the commitment was made Treasury did not foresee the complications that it would encounter along the way. A report on Comprehensive Social Security as released since 2002 and it stated that this matter could not be isolated purely as a tax issue, but instead the entire retirement provision in South Africa had to be considered. It thus took much longer than Treasury had initially anticipated. He stated that he was informed by the Financial and Fiscal Commission (FFC), the Financial Services Board (FSB) and SARS that it should be ready by the next budget.

Ms Mahlangua asked whether the Capital Gains Tax Act and the policy shift in moving from a source based to a revenue based taxation system was factored into South Africa's revenue collection.

Commissioner Gordham replied that this was factored into the revenue estimate on a year-by-year basis.

The Chair stated that the question of savings would have to be addressed by the Committee much more intensively, particularly what was available in the financial services industry besides the incentivised savings schemes. The evidence presented before this Committee suggested that the levels of the poor who were in debt were rising dangerously, which was the other side of the coin. Both these aspects must be addressed by the next Finance Committee.

The Chair asked whether the bonds that would be issued to individuals in any way began to meet the needs of the elderly who were looking to alternative savings channels, because the traditional savings accounts were not yielding the returns they had anticipated.

The Director-General responded that the retail bond would basically add a savings vehicle for those groups referred to by the Chair. Despite the fact that South Africa had a very sophisticated bond market, the size of the deals in the bond market had been such that the individuals could not participate in that market. He stated that the last time he had checked the smallest deal ticket in the bond market was R200 000, and it was thus very clear that many people could not participate. It was for this reason that the retail bond was introduced which reset the threshold at about R1000. He stated that it provided a very safe investment vehicle for people, and would essentially be sovereign risk so that people would not be exposed to the kinds of credit risks involved in other vehicles.

In 2003 the financial services sector published a Financial Services Charter (FSC) in terms of which it committed itself to extending financial services to 80% of the people in the income categories LSM 1-5. This initiative must be given a chance to be rolled out. The discussion processes revealed that the sector was actually putting forward very innovative means of getting these services to the poor. Evidence also revealed that the poor were actually incredible savers, but they merely did not have the instruments to begin to utilise those vehicles. The problem was that they did not have access to credit, and could thus not access long-term saving schemes. The rolling out of these savings vehicles would provide the poor with other instruments by which they could invest their savings in safe vehicles so that they could fund their long-term survival.

Mr M Mpahlwa, Deputy Minister of Finance, added that Treasury accepted the point that an extensive debate on the issue of savings was needed. The levels of household indebtedness would also have to be examined, because on the one hand government would have to address the "wrong ways" people have resorted to in order to access some financing. The kind of people who were in the clutches of the micro-lenders would also have to be examined, and it was not always necessarily the poor South Africans. Thus this very weak area of micro-credit would have to be addressed. The bigger challenge was however the intensifying of the intelligence of South Africans around issues such as investment, savings and savings instruments.

Mr M Tarr (ANC) [PC Finance] stated that he had heard on a local radio talkshow that SMMEs involved in the tourism sector were finding it particularly heard to enter the market because they had to put up a huge amount of capital up-front before they could get in. Once they did gain entry they were faced with very high interest rates. He asked Minister Manuel to indicate whether the FSC addressed the small business SMMEs. He asked whether there was any fiscal-type policy that would enable government to address the problem as well, perhaps by government underwriting part of the risk.

The Deputy Minister replied that the very reason that the FSC was introduced was precisely because government was attempting to address this problem. He stated that when government conducted its own evaluation of the FSC it was satisfying to know that 80% of all aspects which the FSC sought to address were matters that would really ensure broad-based access and broad-based empowerment, The very reason for having the FSC was to enable government ultimately to crack the blockage which undermined all efforts that were made to unlock the growth of SMMEs.

He stated that South Africa has also recently tended to group micro-businesses together with the small and medium businesses, whereas they were really what were called "survivalist" businesses. The micro-enterprises could not be expected to be financed in the same way as the small and medium businesses. Treasury was thus working to deepen its knowledge and understanding of the issues related to micro-credit that was properly regulated and that did not rip-off individuals.

Mr B Mnguni (ANC) [PC Finance] asked whether the numerous tax reliefs granted did not reduce the tax base to such an extent that 10 years down the line future generations would again have to pick up the slack and pay heavy taxes again, in order to once again broaden the tax base..

The Deputy Minister responded that it was important to understand that South Africa came from an environment in which its tax rate was high but on a narrow base. This was partly due to the system that was in place in the first place, which did not register all people that should have been paying tax. Thus part of the tax base-broadening exercise was aimed at ensuring that people who were supposed to be paying tax where in fact registered as taxpayers.

In the economic environment consumption was an important factor in the performance of the San economy, and thus the issues of tax relief and government's ability to enable people to spend had positive spin-offs. Government was now of the view that it needed to progress beyond an economy that was just driven by consumption, and the medium to long-term objectives were to expand participation of people in economic activities. This was an important shortcoming in the current economy. He stated that if these measures were successful, then the problem sketched by Mr Mnguni would not materialise. The objective was to achieve inclusiveness in the South African economy, so that more employees and also entrepreneurs could be included in the economy.

Ms Taljaard stated that there was great consensus on the need for an accelerated growth path, but there was however not a great degree of consensus on the modalities to be employed to achieve that high growth path. This needed to be discussed and modalities must be identified, as this was not mentioned in the Minister's Speech. There were aspects of domestic policies that could assist in taking South Africa onto the high growth path, and this included the labour market debate specifically. She requested Minister Manuel to indicate how exactly South Africa would catapult onto this high growth path, and whether some of the current policies in place would facilitate this.

Minister Manuel replied that there were few topics that engaged Treasury like this one has. He stated that at the end of the day there was no finite answer to this issue. Minister Manuel stated that he had read some very interesting literature on this matter recently, and The Director-General had conducted much work on this matter as well. At the end of the day it must be recognised that South Africa was a small country, it was a savings-shy country and it had a phenomenal skills deficit.

He stated that if it was believed that ordinary South Africans would have a labour market that was as flexible and which saw them as commodities which should not be protected, then government would have to pay the political price for that. Yet if one started from a premise which was historical and political in South Africa which recognised the wrongs that were committed against people and why protection made sense, which informed the labour market policies which government adopted, a slightly different position would be adopted.

Minister Manuel stated that a discourse on this matter would be welcomed, and perhaps the new Committee could engage the Department on this matter.

Dr Odendaal stated that retirees were allowed to take R120 000 without paying tax, and asked why this figure has been retained.

Secondly, Dr Odendaal stated that the fuel price has now been increased to 5c per litre in order to "bail out the Road Accident Fund" (RAF), which had been mismanaged for a long period of time. He asked Minister Manuel to explain whether he believed this measure would really solve the problems inherent in the RAF.

Minister Manuel suggested that these two matters be left over for discussion in Monday's meeting.

The Chair agreed.

Mr Z Kolweni (ANC) [NCOP] asked whether South Africa would experience the same problems currently experienced by a well established economy such as Japan, where government was unable to meet its pension fund commitments.

Minister Manuel responded that there were a number of contributors to this. The one issue was that people in Japan and western Europe were living longer, and thus the population had aged quite considerably. There were also thus fewer economically active members of the population, and therefore carrying the load became quite heavy. This was the type of challenge that faced countries such as Germany and France, and was the reason for example for their breaking away from the stability pact. Part of the complication in Japan was that private savings took a knock as the result of a bubble that occurred in 1982-1984, which was occasioned largely by property price speculation. Banks had invested very heavily in properties, the market fell and there was a resultant asset liability mismatch in banks and the result was that people lost savings.

This was very similar to the recent "dot.com" boom in which pension funds were invested in speculative and high risk offshore "dot.coms", and there was a failure by pension fund trustees to regulate what happened to the fund. This also impacted on individual spending behaviour, as the Director-General explained earlier. South Africans did not want to spend because they did not want to be left without savings.

Ms Mahlangu stated that the Minister referred to the impact of HIV/AIDS on employment in the budget review, and sought Treasury's view on in impact of HIV/AIDS in the foreseeable future. She asked whether this had been taken into consideration in consultations with the relevant stakeholders in the private sector.

The Director-General replied that the Department's own assessment on the impact was based on what the impact would be on economic growth after government had put the comprehensive response to the HIV/AIDS pandemic. The initial demographic work focused on the impact on the labour market, especially on the impact on consumption and employment trends. Additional numbers had to be run after the programme was announced, and the Department's assessment indicated that without the comprehensive response, the growth rate would have been slowed down by about 0.5%. After the impact of the comprehensive response, that figure would drop down to about 0.3%. He stated that these were still initial estimates, but a number of studies were conducted elsewhere that focused on specific sectors.

Ms Mahlangu stated that there had been problems in the past with the lack of spending by provincial governments and to some extent by municipalities around infrastructural development. She asked Minister Manuel to explain how the Extended Public Works Programme (EPWP) would ensure such spending.

Minister Manuel responded that the provincial spending trend would be included in the intergovernmental discussion on the Division of Revenue Bill. The lack of spending was not the problem, but rather the number of difficult challenges that were facing the Department. On the one hand government had developed a system of intergovernmental fiscal relations which worked reasonably well. Part of this was the principal which saw transfers t provincial governments, and then allowing them to exercise the fiscal choices over the way in which they spend. This happened in an environment in which the three big ticket items of health, welfare and education consumed the overwhelming of the available resources.

In the last few years there was growth especially on the welfare side. The Department of Social Development budget comprised two separate elements: the first was the welfare services budget which itself was under pressure, and the other was the social security transfers which has been burgeoning. There was stability in social security in respect of old age pensions, there was reasonable predictability in terms of child support grants but much uncertainty was introduced in terms of disability grants. Growth here was at a very high level.

Minister Manuel stated that questions were often asked by NGO's as to why the disability grant was only increased by R40 increase. He stated that that part of the problem was that if any person could demonstrate that they were disabled to be entitled to R740 per month for not doing anything, why should that person instead want to be a farmworker where the minimum wage was R600. The Minister of Labour indicated this week that farm labourers were in some instances paid less than R200 per month. These were thus all the balances that government tried to manage.

The Social Security Agency legislation was currently on the table, and once the Agency was established the transfers would be effected between national government and individuals directly. This would then no longer be part of the equitable share of provinces, and all the possible difficulties associated with this would then be avoided.

Ms Mahlangu stated that Minister Manuel's speech indicated that government would be issuing municipal bonds, but it was made clear that no "bailouts" would be entertained. She asking Minister Manuel to explain whether any guidelines would be devised for municipalities to ensure that they understood that they would not be bailed out when they enter into the bond market. The guidelines should also explain who exactly would take responsibility should the municipality fail in the bond market.

The Director-General replied that the Department's approach had always been that it aimed to minimise the amount of contingent liabilities that government had. A similar approach was taken in the municipal bond market that government would not want to guarantee the bonds issued by other levels of government The rationale here was very straightforward: when government issued debt it was subjected to certain disciplines of the market, and so too were the people who lent the money. Serious disciplines were in place which rendered the money would be lost if the lenders went bankrupt, and by the same analogy the person would be shut out of the market if they did not meet their obligations.

If central government guarantees were provided but those certain disciplines were removed, it would result in reckless lending such as the kinds evident around 1997/1998 in the lendings to provincial governments which were running at a deficit. Banks thought that somehow a guarantee should be given by national government in this regard. He stated that if this same argument were applied at local government level it would reveal the kind of moral hazard occasioned by the introduction of guarantees there as well.

The municipal bond market was expected to function in a manner so that the bonds that were issued by municipalities, and these would probably be the larger municipalities with some credit lending, they would access this market and so doing they would have their bonds listed via the bond exchange. As the bonds were listed on the bonds exchange people were meant to understand the nature of the credit that they were exposed to. There were of course complications, such the consequences if a municipality went bankrupt. No guarantees would be provided by central government and, even if it wished to provide such guarantees, it would have amounted to very bad fiscal policy.

Mr I Momoniat, Treasury DDG: Intergovernmental Relations, added that the decision not to introduce general guarantees was also in line with the Municipal Finance Management Act, which contained an entire chapter on borrowing as well as on some of the provisions that applied when there was a default. He stated that he agreed with Ms Mahlangu and stated that there was now a need to look at the implementation issues. There were some municipalities such as Johannesburg that were ready to enter the bond market, and the Development Bank of South Africa was looking at specific bonds, but Treasury was preparing guidelines on all aspects including the borrowing aspects.

He stated that part of the transparency included in that Act was that municipalities could only borrow for capital, and the borrowing would thus be linked to their capital budgets and so forth. This was aimed at avoiding some of the problems that were encountered in the past with reckless borrowing, particularly for consumption expenditure, which was illegal.

Mr J Theron (DA) [PC Finance] stated that it was projected for 2002/2003 that R5bn would be proceeds from privatisation and restructuring of public enterprises, but about R8m realised. For the next two years 2004/2005 R2,5b was projected for this item. He asked Minister Manuel to explain whether the privatisation programme was becoming derailed

Minister Manuel responded that the Department had never said that it would have a 'bargain basement sale'. Some people thought that the objective was merely to sell, but the government viewed this as the wrong approach. This issue had been reconsidered around the world. The mess around the power outages in California, the northeast of the US, and Ontario had compelled this. Minister Manuel questioned what was in State's domain. Political parties were free to campaign that these decisions should not be in State jurisdiction. Regardless, the government was not going to have a Bargain Basement Sale In 1994, they had said that they would review these matters on a case by case basis. This was still the process. He stated that the surveying was not a derailment.

The Chair stated that the figure would come out to 44 billion. In this coming year, it would go up again to 42 billion. She asked the Committee to explain the increase of the public sector buying requirement that occurred between the previous year to last financial year. Was this a matter of extraordinary receipts that had not been realized. How did the dates of Paris Titles feature in the figures in terms of the FAA debt and the post office debt.

Mr K Naidoo, Treasury Chief Director: Fiscal Policy, replied that the increase in the public sector borrowing requirement from R7bn to R34bn had two big reasons and two small reasons. The largest increase was the increase in the main budget deficit from R13bn to R31bn between 2002-3 and 2003-4. This was responsible for the R18bn increase. The second reason was the R8bn that was received in privatization proceeds in 2002-3. This accounted for about R25bn of the increase and was mainly from the Telecom sale that was less than a R1bn during this fiscal year. The smaller increases were in provincial deficits that had increased by a R1bn and non-financial public enterprise surpluses that had decreased by a R1bn. Non-financial public enterprises were still running surpluses of about R4bn, but this was about a R1bn higher that the previous year. In the future, the surpluses would decline, becoming a deficit, as the infrastructure plans were implemented.

Ms Taljaard stated the Budget Review indicated that there was going to be a full review of all state enterprise treasury configurations and the treasury issues in those state owned enterprises. One would assume that this was a consequence of what had happened with the South African airways symbol and hedging laws. She asked for the Committee to explore this issue in more detail and explain what would happen in the future.

Minister Manuel responded that he would revisit Ms Taljaard's about the state owned enterprises and treasuries after the Committee had ordered these matters properly; reviewed investment decisions; and recognized the improvements that must be made. This was part of the restructuring process and was not privatization. The proceeds were a nominal amount. This amount was deemed to be from the release of some of the remaining Telecom shares. In respect to the treasuries of state run enterprises, work was still in progress. There were celebrated programs in at least two large state run enterprises. While there was a call for governance, it should be recognized that some things had not gone according to plan. For example, what happened with SAA should not have happened. There were some governments should not have happened. These treasuries should be responsible. Why should these treasuries behave with large trading flaws? How did they account for their debt issues? How did they manage those kind of processes? The current proposal was that some of those functions needed to be centralized.

Dr G Koonhoff (ANC) [PC Finance] stated that the Budget Speech had stated that social grant beneficiaries had increased from 2.9 million people to over 7.4 million people This was a tremendous achievement. However, at the same time, the budget framework encouraged small business development; job creation; job training; and expanded public works programs. In the past, there had been inequitable access to the economy, with a majority of the people not having training; education; or job opportunities. This would have to be overcome. However, in the future a balance would be needed to prevent people from depending on the government for their main source of income. Where and when did the Committee foresee that this balance would be reached?

Minister Manuel replied that they must commit to finding a good balance. They knew that if people dwelling in Townships were able to lower the proceeds of crime, they did not mind being classified as employed. The people did not want a public works program that would pay people a stipend. Poaching was a problem. Often what poachers could earn in a night, honest workers could not earn in a months time. Even when community projects had been implemented, labor had to be brought in from outside of these areas. This was an exceedingly difficult situation. Communities would have to be organized, with the restructuring of their fabric. This must involve all three spheres of government. A hard look at policy position was needed. This was articulated in the President's state of the nation speech last year. It was reiterated in the budget speech last year. These speeches should remind Parliament of the objective to wean people off government assistance. After all, 7.4 million people, one of every four South Africans, were in the social security system. Social security could not be fiscally sustained if it continued to grow at its current rate of 13 and half percent. This trend meant that infrastructure could not be blown out to develop the economy. They would have to make choices that were mindful of the fiscal constraints.

Ms Taljaard wanted to follow up on the privatization issue because there was a lot of type casting that occurred during this type of debate. Most informed people were quite aware that there was an ever shifting line between the public and private sectors. Not only was this in the realm of privatization, but it was also in the realm of other areas of the civil service position and the entire public management doctrine within this position. It would be short sighted to pretend that there was always a mantra of a Bargain Basement Sale. The reply and response to the Chair's question on the public sector borrowing requirement did cause concern because the targets that were laid down for the Department of Public Enterprises were not laid down by anyone other than the Department of Public Enterprises itself. It was necessary to ask the Department why it had not been meeting its own targets for two years in respect to the public sector borrowing requirement that was highlighted. The impact of this was quite clear. These targets were fixed by the government itself. When they were not realized, questions were relevant and appropriate. She demanded a more considerate response because of the extent that the public sector borrowing requirement had been impacted.

The Chair stated that Ms Taljaard made a good point. When dealing with the budget, it was necessary for the Budget Committee to ask the Department of Public Enterprises why it was not able to obtain its target.

Mr Moloto stated that he thought Africans welcomed building South Africa as a financial center. However, there were serious issues about the confidence people have in corporate governance. The public was worried about money disappearing into black holes. He questioned whether the national treasury was investigating this issue in order to build public trust?

The Director General replied that developing South Africa as Africa's financial center had been discussed. However, regulating terms in South Africa were extraordinarily high. If there were companies from other countries lifting on South Africa's exchanges, it was necessary for these companies to comply with South African power and design standards. That should give comfort everyone. It should be remembered that regulators across the globe had relied on the report received from annual financial statements. The question would become who would police the corporate governance structure. Officials were supposed to protect shareholders and employees from excesses by management. Problems arose when management was found to be guilty of these excesses. Government officials would take appropriate action to confront this potential situation. South Africa was perceived to be one of the pioneers of implementing appropriate governance standards. These standards should be part of the public policy discourse. Often this dialogue focused exclusively on governance in the public sector while governance in the corporate sector was ignored. If South Africa was to become a financial center, it would have confront all of these issues. Every financial center, New York; London; and Milan included, were grappling with the failures of corporate government. Becoming a financial center introduced risks to investors and to employees.

Ms Mahlangu stated that the past five years had been an exciting time in the history of South African Parliament. All the MPs had grown in the process. She did not know who would be on there next year, and she wanted to express gratitude to the Committee.

The meeting was adjourned.