National Treasury Annual Report: briefing

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Finance Standing Committee

07 October 2004
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Meeting report

7 October 2004

Chairperson: Dr Rob Davies (ANC)

Document handed out:

Presentation to Portfolio Committee of Annual Report 2003/04
National Treasury Annual Report (offsite link)

The Director-General of the National Treasury presented the Annual Report that had received an unqualified audit report, and expanded on where the Auditor-General's report had noted weaknesses. He then presented his analysis on the current state of the economy and his worries about the current account deficit.

In the ensuing discussion, the Committee expressed concerns that government remained a prime driver of inflation; showed a lack of vision to take advantage of the current economic environment; underestimated the impact of administered prices on inflation; neglected to appoint top female managers at the National Treasury, and lamented the fact that the National Treasury were not able to retain or attract sufficient numbers of highly skilled financial experts.


National Treasury briefing
he National Treasury delegation consisted of: Ms T Pandy, Communication Unit; Director General, Mr l Kganyago; Chief Operating Officer, Mr L Wort; Deputy Director-General (DDG), Mr F Nomvalo (Office of the Accountant-General); Mr E Masilela (DDG Acting) (Economic Policy and International Financial Relations); Mr I Momoniat (DDG: Intergovernmental Relations); Mr A Donaldson (DDG: Public Finance/Budget Office); Mr P Hadebe (Asset & Liability Management) and Mr C Kruger (DDG: Specialist Functions).

The Director-General of the National Treasury, Mr L Kganyago, presented the annual report, that had received an unqualified audit report. The Auditor-General's report had noted that various weaknesses identified in the previous report in the controls over contribution to medical schemes, still existed. In addition to service level agreements not entered into with major service providers, approved policy and procedural manuals were not in place and their system information was not always supported by appropriate documentation.

The economy had recovered from the currency volatility of 2001. There was growing consumer and investor confidence anchored by the low interest rate environment, low inflation and currency stability. Government debt fell to 38.5% by end of the 2003/04 financial year. Debt-servicing costs decreased to 3.9% of the GDP.

The Director-General had not been particularly worried about the current account deficit. Historically, whenever the South Africa economy grew by anything close to 3%, the country would experience current account constraints. In other words, the current account constraint was a constraint on the country's ability to grow, partly because it could not be financed. Over the past three years, the country had adequately financed the current account and hence it had managed to aggressively build reserves. The flows through the account more than offset the level of the deficit.

Ms R Taljaard (DA) commented that anyone who would decry that there was a very benign environment to economic growth was out of touch with reality. However, she felt that there were a number of things requiring aggressive and intensive attention. She agreed that the lower interest rate environment was benign to growth. The report by Statistics South Africa on the CPI review codified the extent to which government was acting as a driver of inflation. She asked for an indication of how seriously this was viewed within government and what particular steps government intended to take to whittle this down. She could not see visionary steps that were going to be taken to capitalise on the benign environment for growth to create more jobs.

Mr Masilela replied that National Treasury took the issue of administered prices very seriously. He said that the question was the impact of utility prices on the economy. For example, when the price of electricity goes up it would normally have ripple effects across the economy. This means that if the production of a utility is inefficient, the inefficiency would be transmitted to the rest of the economy and consumers would have to absorb the inefficiency. National Treasury sought to deal with the issue by trying to ensure that the production of utilities was undertaken in the most efficient way. It was hoped that somewhere down the line the cost of production and the price at which the utilities were sold to the public would be at sustainable levels. This became a central link to inflation targeting. Treasury started with the exercise from the premise that it did not know what the price setting mechanism was in various sectors. It then engaged in studies on various sectors to establish if the price setting mechanisms in the sectors were close enough to a competitive environment of price setting. The conclusion was that price-setting mechanisms were not reflective of a competitive environment. It was on the basis of this conclusion that National Treasury approached the Cabinet with a proposal to influence price-setting processing. It was recommended that there should be an increase of consciousness on the meaning of administered prices. Treasury also provided a definition of administered prices. The definition of administered prices showed that administered prices consisted of prices controlled by government and those controlled by the market. The proportion of prices controlled by the government was smaller than that controlled by the market. Statistics South Africa would publish an index of administered prices in the near future.

Mr Masilela said that improvement of regulation of price setting was also important. It was hoped that in order to achieve higher levels of efficiency in the production of utilities there would be engagement with utilities producers to establish their efficiency levels. This would allow government to be able to respond to problems inherent in the way that utilities producers conduct their businesses.

With regard to steps to be taken in order to improve employment rates, Mr Masilela said that there was a strong link between administered prices and employment. Costs of production go down when efficiencies increase and this improves the investment environment. This in turn improves employment opportunities.

Mr Donaldson added that it was not true that administered prices always run ahead of the rest of prices. At times administered prices run at lower or higher rates of increase than other prices in the economy. The important issue was to highlight what lay behind such trends. The most important component of administered prices was the price of petrol. The faster growth in the petrol price was not the administered part of the price but the price of underlying fuel in international markets.

The D-G replied that the problem with regard to the annual report was that they focused on the past and not the future. The economy needed to keep a close look at four "platforms" if it was to stimulate growth.
The first would be to increase the share of investment in national income from the current 16% to 25% by 2014. This is quite a stretch and is an ambitious target. If that were done, the productive capacity of the economy would be raised significantly. A number of things would have to be done; some of which were captured in the State of the Nation address in terms of investment in infrastructure and industrial capacity. What was particularly striking was that over the past six months there had been very robust growth in private sector capital formation that had not been seen for decades.

The second platform had to do with human capital and investment in skills and training. International experience showed that countries that did this experienced growth.

The third area had to do with social development and fighting poverty and equality through the promotion of job opportunities and not the promotion of welfare. This would be a more sustainable way of dealing with the challenges the country was facing. He acknowledged that government should take care of vulnerable people.

The last had to do with the improvement of regulation of markets, public entities and efficient service delivery. He said that this was very closely related to the issue of administered prices and the kind of interventions that one would have to make. Based on these platforms the government could make a giant leap forward in terms of growth. Having macro economic policies did not itself lead to growth. In additional to macro economic policies one should also have targeted micro interventions.

Mr S Asiya (ANC) asked if National Treasury provided training to provincial treasuries to enable them to achieve unqualified audit reports. He also asked if there was a cut off period with regard to the extension of amnesty for undeclared foreign assets.

Mr Momoniat replied that there were various support programmes aimed at supporting provincial treasuries. However, some problems were of a political nature and National Treasury could not help.

Mr Nomvalo added that National Treasury worked very closely with provinces and that it would continue to offer support whenever requested to do so. He recognised the legislative imperative to give such support to provinces.

With regard to amnesty for undeclared foreign assets, the Director General replied that the amnesty was extended to 29 February 2004. 42 000 applications were received on the last day. The adjudication process would continue until late 2005.

Mr Asiya asked if the withholding of R45 million from the Mangaung municipality did not have a negative impact on the municipality in terms of development and service delivery. He also asked for clarification on how National Treasury managed to get rollovers given the fact that other departments were not getting them.

Mr Kganyago replied that National Treasury got the rollovers because the money was already committed. Over the past year Treasury made savings by simply changing service level agreements with some of its information technology service providers.

With regard to the withholding of funds, Mr Momoniat replied that only the Restructuring Grant was withheld. The grant was first introduced to help Johannesburg during its financial crisis. The grant was not part of the equitable share or the infrastructure grant. The grant was withheld because the municipality had consistently failed to meet its objectives. He hoped that Members of Parliament would ask the municipality why it had failed to meet its objectives.

Ms J Fubbs (ANC) asked why one two out of nine provinces managed to open Corporation for Public Deposits (CPD). She noted that the concession of the National Ports Authority (NPA) was postponed due to the fact that the loan covenants within Transnet stipulated that cross defaults would be triggered by the concessioning of ports. She asked if it did not appear, during the planning stage of the concessioning of ports, that they should check what Transnet had in place before proceeding with the bidding process.

The Director General replied that most problems surfaced by the time the actual work had to be done. The concessioning process was an initiative of the Department of Public Works. The Department drafted a piece of legislation to enable it to take the NPA out of Transnet. National Treasury found that the loan covenants of Transnet were problematic. Loans from banks were easier to deal with because one could negotiate with each bank. Bonds raised considerable problems because one had to find each investor and negotiate with them. This was not anticipated during the planning stages.

With regard to the failure to open CPD accounts, Mr Nomvalo replied that the project had real benefits for provinces. Some provinces were resisting joining the project. Two provinces decided to wait and see how the project unfolded in other provinces. Until recently provinces had always had surplus funds. This meant that Treasury would have been able to optimise borrowing cross the board. However, provinces felt that they needed to hold onto surplus funds although there was nothing that suggested that the funds would no longer be under their control. The funds would continue to be under their control but through the central bank. Once they were in a position where they had to borrow they realised the benefits of joining the project. As time went on most provinces became eager to join because they no longer had surplus funds. They possibly realised that they would not have enough money to deliver on various projects that they had.

Mr Asiya said that the procurement of goods and services remained a major problem in provinces. He asked if there were any plans to finally solve the problem.

Mr Kruger replied that the new supply chain framework was published on 5 December 2003 after approval to amend the process was given by Cabinet. It was decided that the process should be implemented in phases. Each accounting officer should approve an implementation plan. There were also discussions with the Auditor General (AG) on this issue and it was agreed that the AG would not audit strict compliance with the framework in totality during the first year. The AG would only concentrate on whether the implementation frameworks had been devised.

Mr M Johnson (ANC) asked how Portfolio Committee Members could be involved in government engagements outside South Africa.

The Director General replied that before 1991 National Treasury always took one Committee member and at least two Members of the Executive Council of Finance whenever they went to attend International Monetary Fund and World Bank annual meetings. He felt that given the current security environment in the
United States of America most Members would not be interested in going to the country.

The Committee agreed that Members should be invited to future meetings.

The Chairperson noted that, according to the Annual Report, National Treasury had met output targets as they were written. He felt that a debate could be engaged upon on the nature of the targets. He felt that the programme on provincial and local governments transfers seemed to suggest that there were problems in terms of those governments' ability to use funds. Some of the disbursements were delayed because provinces could not meet reporting requirements.

Mr Johnson said that the aim of learnership programmes was to absorb and provide experience to young people. He requested National Treasury to comment on the programmes.

The Director-General replied the National Treasury started with learnership programmes before there were even talks of government wide learnership programme because it was felt that it was a way of producing the skills it needed. He said that the kind of skills coming from university systems were not adequate to deal with fiscal policies that Treasury had to deal with.

Ms R Joemat (ANC) noted that National Treasury's Annual Report differed from those of the South African Revenue Services and Statistics South Africa in that it did not have both the Auditor General's logo and the signature. She said that the National Treasury was significantly male dominated at top levels. She asked if there was any plan in place to rectify the situation.

Mr Mngomezulu applauded the Member for observing the difference. He said that the Auditor General operated under the South African auditing standard. It would be a matter of concern if the annual reports of Departments were not similar. He added that there were requirements on how annual reports should look. One of the requirements was that the logo of the AG should be embedded on the top right of the page of a Department's annual report. The signature of the Auditor-General did not have to be scanned onto the report. He pointed out that the logo of the Auditor-General was attached to the report. The printed name of the AG was regarded as authoritative.

The D-G added that in the private sector one would normally find the name of the firms without the name of the person who was responsible for signing off the accounts.

On the representation of women in top positions, the Director-General replied National Treasury had attempted to deal with the issue in different ways. At one stage it was decided that no appointments would be made at senior levels unless the appointees were women. This worked for a while but National Treasury soon ran into problems relating to the necessary financial packages to attract the required people. He said that competition for the necessary skills was very tough. The biggest challenge was to have an accelerated growth path that would allow women employed in National Treasury to rise faster to management echelons.

Ms Joemat noted that with regard to meeting government borrowing requirements, National Treasury's target was a net issue of debt of R2.3 billion in the domestic market. However, the actual performance against target showed a revised issue of debt of R24 billion financed in the domestic market. She asked for clarification on this.

Mr Kganyago replied that the question was whether one would say that National Treasury was succeeding if it had an output measure that said that it would fund R20 billion the fiscal year but managed to fund R30 billion. He answered the question in the negative. This would mean bigger problems for National Treasury because it would have to get more money that it actually did not have. If there were additional expenditure one would end up having to fund more. National Treasury came short on revenue to the tune of about R800 million at the end of last year. It also had to issue additional paper to deal with the forward book of the Reserve Bank and this was not anticipated.

Mr Vezi asked how advanced was the design for the pilot Apex fund for micro credit.

Mr Masilela replied that the fund was shelved due to technically difficulties. However, it was back on track. He advised that the question should be directed to the Department of Trade and Industry.

Mr B Mnguni (ANC) was surprised that National Treasury managed to get an unqualified audit report despite the high vacancy rate (43%) in the institution. He asked if there was any way of lowering foreign debt as a percentage of the GDP so that more funds could be released to fight poverty and create job opportunities.

The Director-General replied that if one wanted to bring the debt down one should cut down on borrowing. There should be a lower fiscal deficit so that the debt grows at a slower pace. As the economy grows it would bring down the ratio as a percentage of the GDP.

Dr P Rabie (DA) said that Ms Maria Ramos (former National Treasury Director-General) had said that Treasury had a unique problem in the sense that people with analytical and financial skills were much sought after by the private sector. He noted that there had been a number of resignations from the Treasury. He asked National Treasury to indicate the levels of positions that those people occupied. He also asked if those people were recruited by the private sector and if there were attempts and deadlines within which the positions would be filled.

The Director-General replied that it was a mixture of people in senior management and professionals below senior management. About 70% of them went to the private sector and parastatals, and the other 30% to commercial banks and other institutions of a financial nature. One of the vacant positions was advertised last year. However, National Treasury could not find the right candidate for the job. He hoped that Deputy Director-General posts would be filled in this financial year.

Mr Mnguni noted that 33 international specialists were seconded to local government in order to help with finance and related matters. He asked if there were any visible improvements. He noted that the Eastern Cape continued to experience financial problems. He asked how National Treasury was helping to control the situation in the province.

Mr Momoniat replied that how successful the specialists were depended on how well municipalities worked. They had been successful with regards to formulating three-year budgets. With regard to the Eastern Cape problems, he said that there had been some financial stress in the province. Some Departments overspent. He was convinced that there was no crisis but the province should take corrective steps before the problem became too big.

Ms Taljaard said that there were three causes of problems relating to the persistent current account deficit. These were the strong Rand, trade balance and the strategic arms procurement project. She said that in the absence of industrial participation in respect of export earnings and investment inflows sufficient to compensate for the incoming corvettes and other products bought in accordance with the arms deal, the arrival or the corvettes had an impact of the current account. The lack of consequences in some of the implementation areas of the industrial participation project also impacted on the current account. She asked for comment on the implementation of the Industrial Participation (IP) project and whether industrial participation participants should be allowed to be involved in privatisation as was happening in the Komatiland-SAFCOL consortium. She also asked what incentives were being rolled out to attract participants instead of participants footing the bill for their own involvement. She felt that it was unfair to engage National Treasury and not the Department of Trade and Industry (DTI) on these issues but at the same time necessary because they impacted on the current account. A question would always be asked if National Treasury was engaging with DTI on the failures of the IP project particularly as they relate to the arms deal and its impact on the current account.

The Director-General agreed that the DTI should deal with issues around the IP project. National Treasury's concern would be whether it believed the current account deficit was unsustainable. He did not believe that it was unsustainable. However, even if it was unsustainable the exchange rate was a good shock absorber. Should the deficit become unsustainable there would be corrective measures given flexible exchange rates. He noted that some people had initially believed that the country should be worried when the deficit amounted to 3.5% of the gross domestic product. It should be easy to finance a deficit in an environment wherein there is free flows of capital. Some countries had higher current account deficits, but were still able to sustain them.

The Director-General said that he was not particularly worried about the current account deficit. Historically, whenever the South Africa economy grew by anything close to 3% the country would experience current account constraints. In other words the current account constraint was a constraint on the country's ability to grow partly because it could not be financed. The country did not have access to capital markets and offsetting capital inflows. It should be understood that it is fine to have capital inflows but at one stage those capital inflows should be paid for. When they have to be paid for this would be reflected in the current account.

He said that over the past three years the country had adequately financed the current account and hence it managed to aggressively build reserves. The flows through the account more than offset the level of the deficit. The current account was a manifestation of domestic balances. By definition the account was nothing but a difference between investment and savings. The country was experiencing robust growth in investment for a given level of domestic savings. It goes without saying that the difference had to come from somewhere hence the country was running a current account deficit. When the economy grows robustly it would reflect on the current account deficit particularly if there were shortages of domestic savings.

Ms Taljaard said that the redeeming of foreign loans and disbursement pertaining to the arms procurement programme would have an impact. Reasons for this would include the fact that it would run at the same level that the increased requirements of financing an expansionary deficit needed. It would also run in the context wherein the proceeds of privatisation were not flowing from the programme to deal with the requirement to ensure that the public sector borrowing requirement did not increase.

The Director-General replied that the policy was that huge projects requiring payment in foreign currencies should be financed using offshore resources. In 2002 most people were worried by the costs of the procurement programme given the weakness of the Rand. However, now that the Rand had strengthened no one was saying that the programme was cheaper.

A member of the delegation added that a significant portion of the current account deficit was made up of the corvettes and aircraft being delivered. These items had been paid for already and therefore posed no financing risk.

On intergovernmental fiscal relations, Ms Taljaard said the framework for the review of the equitable share formulae and other grants in relation to provinces and local authorities would take cognizance of the shift in the social grant function as well as the restructuring of the electricity distribution industry. These two things dramatically impacted on the revenue of provinces and local authorities. She asked for some comment on the nature of the study to ascertain the impact on revenue flows.

Mr Momoniat replied that the review was a work in progress and that there would be much to say when the medium budget statements are made. On the social grants he said that one had to adjust the equitable share formula.

Mr Mnguni believed that National Treasury was the overall custodian of government assets and liabilities. He asked if the government knew all property that it owned and if there were plans on what to do with properties that were no longer required by the government. He said that in terms of the Labour Relations Act, a person was not supposed to serve in an acting capacity for a period of more than six months. However, some people in National Treasury had been serving in such capacity for longer than six months. He asked for comment on this.

The Director-General replied that the National Treasury only managed financial assets and liabilities. "Acting" positions were extended due to restructuring processes within Treasury.

Ms Fubbs said that both reports of the Auditor General and the Audit Committee noted with concern that the deficiencies in the controls over contributions to medical schemes had not been resolved. However, the Management Report did not mention this. She asked why the Management Report did not mention this problem especially given the fact that its Audit Committee mentioned it.

The Director-General replied that the situation was much better than before. People who had retired from public service could have their medical expenses met by the Government Employees Pension Fund (GEPF). They could join any medical scheme and then ask for contributions from the GEPF and this raised problems of control.

Mr le Roux added that there were plans to resolve the issue. However, some involved policy issues and would take time to resolve.

Another member of the delegation added that the problem was that there was an agreement, which was in contradiction with the law. The agreement provided that members who retired before 1992 should receive 100% medical subsidies without caps. This contradicted the Medical Schemes Act and Income Tax Act. By law National Treasury could not reduce a deemed benefit without the agreement of the other party.

Mr Asiya asked if South Africa had sufficient accounting systems to properly manage the asset register.

The Director-General replied that in terms of assets management guidelines all Departments should compile registers of all assets under their control.

Dr Davies said that one of the output objectives of Programme 3 was to keep a presence in foreign markets. The target was to issue bonds equivalent to $1 billion. The actual performance against the target was an equivalent of $1, 4 billion, which contributed to the reduction of the Net Open Forward Position. He said that this meant that South Africa had been historically under-borrowed. He asked if there was any sense of what the maximum exposure should be. This was important because one of the quickest ways through which countries got themselves into conditional relations with the International Monetary Fund was through unsustainable foreign exposure.

Mr Hadebe replied that South Africa's foreign debt was one of the lowest in the world. The decision to enter foreign markets was not based on the fact that the government could not finance its debt but because it needed to set benchmarks for South African institutions. Unfortunately in 1998 the Reserve Bank tried to defend the Rand and the government lost R23, 6 billion. To cater for this the government had to increase its borrowing in order to reduce the loss. The foreign involvement seeks to keep up with foreign markets for benchmarking and to redeem foreign bonds. In 2001 the government borrowed $1, 5 billion and this was redeemed last year by borrowing in the domestic market.

The Director-General added that there was a suggestion that the tolerance for emerging markets should be 30% of the total outstanding debt. National Treasury did not think this was sustainable and chose anything between 20 and 25%. The figure was currently standing at 15%.

The meeting was adjourned.



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