National Treasury Strategic Plan 2008/9 - 2010/11

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Finance Standing Committee

19 May 2008
Chairperson: Mr N Nene (ANC)
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Meeting Summary

Mr T Manuel, Minister of Finance, opened the presentation with a brief overview of several pertinent issues in the current economic environment. He began by referring to the so called “3 Fs”: financial market turmoil, food prices and fuel prices. Next he discussed the impact of global factors on South Africa as well as the rising contributions from rising food and fuel prices. He reviewed the forecast for economic growth in Sub Saharan Africa, which was estimated at 6%. He added that oil importing countries would carry the bulk of the burden. He concluded by reiterating that the NT would do what was in the best interests of the inflation target band. In this regard he said consumers were still living beyond their means and that adjustments were necessary. The NT would urge moderation and did not want erosion of the hard won gains of working families.

The discussion interrogated several pertinent issues. The chairperson opened it by asking about the report by the Harvard group. The NT was asked what the fiscal implications of 2010 would be. The capital injection to Eskom was a questioned and the committee wanted to know when the poverty index would be finalized. The Minister was asked what the NT position on inflation targeting was and a member expressed the opinion that abandoning it would dent the credibility of South Africa financial management. The NT was asked if the interest rate prediction was a bit optimistic considering the current global outlook. The use of an equalization fund was suggested to smooth out the monthly fuel price shocks. The committees asked how close the Treasury was to the extension of VAT zero rating. With reference to interest rate hikes, the Treasury was asked about the prevailing opinion that they did not really affect the poor as the poor did not have bonds. The NT was asked if the burden on consumers could not be reduced by reviewing administered prices. Other issues that were raised included employment equity for the disabled, conditional grants, recapitalisation of FET colleges and the financing of Sentech. The NT was asked about the possibility of reaching the growth targets and also wondered about the policy priorities of accountability and performance. Interestingly, the minister was asked to address the recent reports of an imminent water crisis. The committee also wanted to know if there was support for service providers who provide public goods.

Meeting report

 

Treasury Presentation
Mr T Manuel (Finance Minister) opened the presentation with a brief overview of several pertinent issues. He began by clarifying the work of the National Treasury for the committee. He said the role of the Treasury in the context of government was to use forecasting and other tools to anticipate challenges and adequately provide resources for government to do its work; to be adequate regulators of financial services; on the bond market, to manage the assets and liabilities of government; to handle the general procurement and management duties and also to keep the books in an audit ready state.

Next, he turned to global and domestic concerns. He referred, jokingly, to the so called 3 “F words” of which financial market turmoil was one. Here he was referring to the sub-prime crisis. He said it was inevitable that it would spread and quoted a statistic that the fallout was likely to impact 10 to 15 million families. He added that it was difficult to pin a number down and that the systematic impact would need a different understanding.

On food prices he referred to the proposed move to extend VAT zero rating. He said that South Africa did not make the list of countries hardest hit by the food crisis. Also mentioned were biofuels, climate change and changing consumption patterns. 

Fuel costs was the last of the 3 F’s and its current upward trend was noted. He said that the need for protection against these financial storms was important but it reduced the economy’s ability to perform.

On the impact of global factors, he said that the knock on effect from the closing US market, especially with relation to China would have impact on commodity prices, South Africa’s export position and domestic inflation. There was a need to concentrate on increasing agricultural output and utilize the fallow land in South Africa. He suggested that the oil price issue was the business of the Energy Summit. The forecast for Sub Saharan Africa was a growth rate of about 6%, but noted that the burden on oil importing countries was big. The Minister concluded by stating that a lot had happened “to us and not because of us”. Although these effects were exogenous, we ignored them at our peril. He highlighted the failures of the more eclectic approach of the past. He said the Treasury would look at it technically and learn from past mistakes. They would do what was in the best interests of the inflation target band. In this regard he said consumers were still living beyond their means and that adjustments were necessary. The NT would urge moderation and did not want erosion of the hard won gains of working families.

Mr L Kganyago (Director General: National Treasury) provided more on the detail on the presentation. He started with the mandate to promote economic growth. He gave a brief overview of the plan according to the various divisions. He reviewed budget co-ordination and the sectoral priorities, adding that the bulk of this work took place in other departments and the job of the NT was to ensure consistency. He reported that the Infrastructure Delivery Improvement Programme (IDIP) was in full stream in all of the provinces. He outlined asset and liability management with regard to State Owned Entities as well as key focus areas according to programmes. He highlighted the NT on the Troika of the G20, ensuring policy changes were carried through and added that programmes were the core of policy work of the Treasury. He reviewed fiscal transfers and referred to programme 1 and the support of the entire National Treasury which included the minister and the Director General’s office. Staffing profile was outlined according to management and employees below management as well  as the organogram.

Discussion
The chairperson opened the discussion by raising the issue of the recently released Harvard report. He requested clarity on the group's status as it tended to be regarded as gospel.

Mr Manuel responded that he has had the privilege of being on such a panel, which discussed growth and development around the world to make sense of global issues. He noted that the report (Commission on Growth and Development report) would be released on the 21/05/2008. His general observation was that it mattered to heads of state and policy makers everywhere but that every country had to deal with its peculiar circumstances to develop context. According to the panel the economic development prospects of South Africa were that South Africa was in steady state equilibrium. The question they grappled with was how we could lift growth. They had generated 20 papers and 21 recommendations but he would not take the view that this was gospel. Some of the issues raised were the possibility of running a higher fiscal deficit as well as a current account deficit. There was a proposal on the labour markets and it was noted that not enough was being done to smooth the passage from school to work in South Africa. These were controversial proposals that must be engaged with reality. The recommendations must be received as that and not carved in stone. He said that economic policy is about taking tough decisions and that there were binding constraints must be dealt with to create opportunity. Policy change required experimentation and he would like Parliament to participate in this process.

Ms N Sibhidla (ANC) referred to programme 2 and 3. She asked what the fiscal implications of the 2010 World Cup would be. She also said that she was happy with the NT's contributions toward development objectives.

Mr A Donaldson (Deputy Director-General (Public Finance): National Treasury) responded that on the spending side the NT had added a further billion rand to the government's spending contribution. Inspections were completed in October. There were some delays reported but projects were under way. There were cost overruns on certain stadiums. The matter of transport costs was defined as a long term contribution to South Africa. Here the progress was a little harder to see. The procurement of buses was complete, however communications were not yet finalised. He said government spending had already run to R20 billion but the revenue generated by 2010 should offset the costs

Mr Manuel said that the NT had just concluded a detailed study focused on the big Development Finance Institutions (DFI). He said they had a reasonable understanding of second tier DFI's. He said they were implementing recommendations that there be an inter-ministerial standalone committee to tackle the system of DFI's. The aim was to tighten mandates and accountability and ensure better articulation between DFIs particularly their assets and scope for leveraging.

Ms Sibhidla asked what the conditions were on the capital injection planned for Eskom.

Mr Kganyago replied that this was not a grant and the Treasury maintained that Eskom must be funded by the electricity users. They were merely providing support and did not intend to undermine Eskom's balance sheet.

Dr D George (DA) asked when the poverty index would be finalised.

Mr Manuel responded that there were a slew of technical issues handled by Stats SA as well as international consultation. The issues they were grappling with were whether technical issues should be taken into the general domain and whether they should include hard politics or keep it technical.

Dr George asked if retirement fund reform was on track.

Mr Manuel responded that this was not just a single event, rather a series of events. He said important steps were taken toward reform and it was a tough target given there was still legislation to be completed.

Dr George wanted to know what progress there was on filling vacant positions.

Mr Kganyago responded that NT interns were grabbed up quickly as they were well groomed for the policy environment. He said the skills the Treasury needed were costly and scarce. He commented on the different culture in the NT, the passion to serve and realising their impact in the people of South Africa. There were a number of interventions in place such as the internship programme and accountancy training. This was a joint programme with the South African Institute of Chartered Accountants (SAICA) to train CAs. The intention was that some would stay at the Treasury and others would go on to other areas of public service.

Mr K A Moloto (ANC) referred to inflation targeting. He asked about shifting the target band to 4-8% and to what extent this adjustment would assist the situation. He expressed the opinion it would dent South Africa's credibility. He asked if the inflation rates of our trading partners informed on the band range and wondered if it would not be prudent for South Africa to stick it out.

Mr Manuel that there was a constitutional imperative of price stability but there was a lot of pressure to use an escape clause in present circumstances. He said that inflation targeting was without equal for now, that the Treasury took a long view and that they acknowledged the problem of targeting credibility. The NT wanted inflation targeting to have credibility but did not want it to be so tight. On the whole the Treasury feels that it was a range worth fighting for because inflation was now a global phenomenon.

Mr Moloto said that accommodating inflation to curb effects on employment was erroneous as employment in South Africa was structural not cyclical.

Mr Manuel responded by agreeing with Mr Moloto on the structural nature of unemployment.

Mr Moloto asked if non performing loans were still manageable.

Mr Manuel responded that in some of these instances there was absolute trust as far as the banks were concerned. The NT was trying to get other institutions to be as compliant as banks.

Mr Moloto referred to the new Parliament being elected next year and stated that they had never called the NT to discuss the Saambou collapse. He said he would like protocols to be developed on how to engage issues such as what kind of information Parliament could have access to. He acknowledged that this may not always be possible as some information was sensitive. He requested the Minister's views on this.

Mr Manuel agreed protocols were a necessary discussion. He added that the quality of the regulation was very important and that they should try to work through these protocols early.

Mr B A Mnguni (ANC) commented on the ever rising projections for the oil price and the added effects of food and energy price increases. He asked if the interest rate prediction was not a bit optimistic.

Mr Manuel responded asking what was so wrong with optimism. He said the key question on oil price was how much was structural and how much of it was speculative. He concluded that it was probably not structural right now. They would have evaluate what the supply constraints were. He noted President Bush's discussions in the Middle East and OPEC's insistence that there were no supply problems. He said that issues such the conversion constraint and refining capacity had to be remembered. Changing demand patterns were a factor and even if you added the net effect of China and India's demand and fuel efficient cars you must be able to compute a supply change. He highlighted the aspect of a speculative bubble factor here and said that the food price had much the same argument. He added that parliaments around the world are discussing all the same issues.

Mr N Singh (IFP) referred to oil prices and the related increases in fuel prices. He remarked that this price was largely exogenous and on the shock the monthly increases have on consumers. He asked if an equalisation fund could be investigated.

Mr Manuel responded that the principle of an equalisation fund was premised on the state subsidising fuel with the intention that it could be smoothed out on a quarterly basis instead of monthly shocks. He said that at the moment the oil price was a one way bet and the government would not be able to absorb these sustained increases. It would only delay the shock, not prevent it. What they had in place was specific duty on oil (rate per litre) as opposed to an ad valorem duty.

Mr Singh wanted to know how close the NT was to recommending that VAT be extended to other products and imposing higher taxes on luxury items.

Mr  Manuel quoted the maxim “tax administration is tax policy”. He said an important consideration would be what loopholes would be created. This was the problem with having multiple rates. VAT had stayed at 14% since 1992. This was a phenomenon in tax terms. The basket of items that were zero rated were fairly constant. The difficulties would be caused the regressive nature of VAT. He said it was hard to design a system to deal with food problems as a tax measure. He commented that it has been very unsuccessfully dealt with everywhere else.

Mr Singh asked what programmes were in place to deal with massive government under spending.

Mr L Fuzile (DDG (Intergovernmental Relations): National Treasury) said that the measurable outputs were that the NT was helping municipalities build capacity. They were assisting with financial management and were getting good outcomes to their technical assistance programme. He referred to the financial management grant and could appoint a young professional to gain hands on experience in financial management. He said the NT had a grant via the Development Bank of South Africa training 163 technical assistants. The issues of quality and turnover have been raised. On the latter the need is to have a system where as soon as one expert is trained, a new professional should be trained by new expert. He also noted an initiative to give the residents of the particular municipal regions preference. He said that budget information from municipalities was timeous and of quality and could be published although there was room for improvement. There was routine publishing of the municipal quarterly reports and indications that they had improved upon comparison, bearing in mind that qualitative improvements were more difficult to measure.

Mr S Marais (DA) congratulated the NT for performing so well. He asked what the relevance of the Harvard report was and whether it will be taken seriously or simply ignored.

Mr Manuel responded that they had gone to great lengths to get advice. Its purpose was to accrue knowledge and the process was driven forward by curiosity. He said that all the proposals must be evaluated and added that public participation had to be encouraged in this process. He also thought the NT tended to get stuck in macroeconomic policy. He remarked on the need to make decisions based on what we actually had, not on what we wish we had. This would not be a route that was purely academic and thought the advice was chosen wisely. He suggested that the portfolio committee look at the wide variety of research considered.

Mr Marais asked about the effects of the interest rate hike on the poorest of the poor and the view that it only affects those with bond. He wanted to know what the NT's view was on that.

Mr Manuel concurred with spirit of the question and responded that this highlight the importance of risk in the financial system. He said the poor do not have access to credit or mortgages etc., therefore the poor are not as affected by interest rate hikes but notes that the increase in food prices will make the poor much worse off. He reiterated that interest rate hikes impact those with debt much more and that South Africa had a major debt problem.

Mr Marais said he would like to add another exogenous factor to the -3 Fs - Administred prices, as a factor that also influenced inflation and the interest rate. He asked if there was another approach was not possible to decrease the burden on the consumers.

Mr Manuel responded that administered prices accounted for about 20% of the basket, consisting of electricity, fuel, wage price increases, maintenance costs, transmission and distribution. He said that they could carry these costs, for example subsidising electricity, but would do so at the expense of other services. The cost must carry through somehow.

Mr Marais asked what was being done about staffing transformation pertaining to the disabled.

Mr Kganyago responded that the target must be pursued. The NT was approaching organisations that dealt with the disabled. There was a problem here with people not wanting to be referred to as disabled.

Mr Marais referred to good governance, intergovernmental relationships and efficient spending of budgets and asked what the NT was doing to address this, specifically referring to Eskom.

Mr Kganyago responded that governance was a broad area. He said the NT would confine itself to financial governance. This was the responsibility of the accounting officers. He said the review of State Owned Enterprises (SOE), including Eskom was not an easy exercise as they had to invoke the PFMA in order to obtain information. He stated that they did pick up failure to comply with the best standards of Treasury management. This was acknowledged by the SOEs and corrective measures were taken. He referred to a forum where the National Treasury met with the provincial treasuries to share ideas as well as an intergovernmental team to do benchmarking and generate reports for the budget council.

Ms N R Mokoto (ANC) asked about conditional grants and recapitalisation of FET colleges. She stated that the NT was targeting 50 public FETs. She wanted to know when the grant would be extended to target the other FETs.

Mr Donaldson responded that the 50 FET colleges currently were the result of a merger of former technical colleges. This was the full FET landscape now he said that there was work in progress on FET financing and the extension of that to provinces.

Mr Kganyago said the grant was administered by the Department of Education, not by the NT.

Ms Mokoto asked if the Integrated Financial Management System (IFMS) was on course, and what lessons had been learnt so far. In addition, she asked how the IFMS and the Public Finance Management Act (PFMA) balanced each other out and if loopholes had been identified.

Mr Manuel responded that the system was quite unparalleled. The PFMA allowed for improved oversight by Parliament which could prevent lapses by improved monitoring and early identification of risk. He said Parliament’s role was paramount as it was a construct to hold the Treasury to account. He added that it was the responsibility of the accounting officers to report on how taxpayers’ money was spent

Mr Kganyago responded that there was a focus on strategic intent that was embedded in PFMA. He said the NT had identified certain loopholes and this would dovetail with the IFMS and having the same programme manager helped. He said the systems do not drive management, rather the other way around. He said it was beneficial that the IFMS came after the PFMA. He added that IT skills were particularly scarce in government and they had to outsource them.

Ms Mokoto asked about the media reports of an imminent water crisis in the same spirit as the energy crisis. She wondered if the media could be believed and what measures were in place to ensure good quality water provision.

Mr Manuel responded that he would ask the press not to cry wolf about these issues. He said it was an infrastructure issue concerning the chain from the rain to the tap to ensure that rainwater was harvested. The Lesotho Highlands project was very important in this regard. The maintenance of pipes was also important. A big problem was maintenance left too long. The NT had partnerships with local government to ensure that water schemes were properly maintained with a focus on quality, testing and being held accountable. This was an ongoing process and there were huge variations across the country with certain municipalities being able to deliver while others could not. He said there was a hefty price to be paid by those most vulnerable (infants and the elderly). He remarked that municipal competence was imperative and that there was no panacea or quick answer. There must be regular, detailed oversight. He said he does not think that crisis should be reported, however shortcuts should not be taken. On of the issues the NT was grappling with was how much water people should be provided with. He said they must allow that issue to be resolved, noting the recent court ruling.

Mr Mnguni wanted to know what the way forward in reaching the growth target in the MTEF in light of market volatility and increasing prices.

Mr Kganyago responded that the MTEF figures were revised downward. He said they were projections rather than targets and the main target of 6% growth would be delayed. He referred to the 2 stages of ASGISA and said that they had the first stage – 4,5% growth – in the bag, due to the collective effort of the microeconomic government sections.

Ms J Fubbs (ANC) asked about policy priorities and the two indicators the NT stated: (1) No. of training courses and (2) No. of individuals trained. She wondered if they had looked at the qualitative outcomes of these courses as she has not seen this in the documentation.

Mr Kganyago said that courses were accredited indicating their level of quality. He said they were trying to track down the participants to find out how useful the course has been for the work environment

Ms Fubbs asked what was being done about the practice of “financial gymnastics”

Mr Donaldson responded that the PFMA was currently restrictive and one had to bear in mind that departments such as Trade and Industry and Environmental Affairs and Tourism were responsible for support and development in the economy. Furthermore they were not able to predict spending flows and required a degree of flexibility. They were reviewing the PFMA but this was not a case of manipulation of rules.

Mr K Naidoo (DDG (Budget Office): National Treasury) responded that the Official Development Assistance was to amount to R1,3 billion over the next 3 years and was invested largely in infrastructure. He said the donor aid was channeled through the RDP fund and was approximately R 2 million. He added that a report on the flow of funds could be provided.

Mr Moloto asked about the capital structure of SOEs, specifically the issues of scheduling and borrowing powers.

Mr P Hadebe (DDG: Asset and Liability Management) responded that they had undertaken financials with SOEs and had so far experienced problem with only 3, while the other 10 had done well. Overall some concerns were raised and they were in discussions.

Mr Moloto asked about the forecast on the external account and inflation.

Mr C Loewald (DDG (Economic Policy): National Treasury) responded that by commenting on household consumption, investment and depreciation stating that they could all moderate the external account on the downside. On fuel and food prices, he said they had expected them to be lower. He said they were quite optimistic about food prices going forward because of good agriculture numbers, however he added that it was safe not to be too optimistic as they will stay quite high. He said the capital account should be sustainable and there were sign that the global market would continue to stabilize.

Mr Mnguni asked what was happening with the financing of Sentech

Mr Donaldson mentioned the meeting Sentech had had with the portfolio committee on communications and said that further work would need to be done on a business plan. He said their core business was as a signal distributor and they provided a service to broadcasters. He said the digitisation deal was not yet completed with the SABC as the SABC Board currently had other concerns. Sentech was looking into the retail space but was still a small business and it was agreed that they should focus on their public interest broadcast services.

Mr Mnguni requested information on the progress of regional integration with SADC.

Mr I Momoniat (DDG: Tax, Finance and International Economics): National Treasury) reported that the minimum threshold on SADC protocols had been passed. The countries would now have to approve it in order for it to technically take effect. He said South Africa would be chairing SADC in the next year and would have to deal with the nitty gritty of issues.

Ms Fubbs stated that she thought grants distorted funds allocation in the budget. In relation to this, she asked if there was some kind of support for service providers who have to provide public goods.

Mr Manuel responded that that came down to corporate governance.

Meeting adjourned.


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