South Africa's Budget 2009/10: public hearings

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Finance Standing Committee

15 February 2009
Chairperson: Mr K Moloto (ANC) and Ms L Mabe (ANC)
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Meeting Summary

Macquarie First South Securities' submission focused strongly on the importance of the Chinese construction sector for South African commodities trade. Forecasts were discussed for the mining and manufacturing sectors, government revenues, South African growth and trade. Inflation was expected to be back in the target range by end-2009 and 270 000 job losses were expected in the employment outlook. On revenue forecasts, they thought the approach by government relatively conservative but predicted that corporate tax would be significantly lower than expected. Special attention was paid to the implications of increased spending on infrastructure, an increased budget deficit and the problem posed by the financing implications of the public sector borrowing.

Members asked if the decision to keep corporate taxes at a minimum was justified in the wake of declining revenue and the increase in public sector borrowing. The R1.8 billion royalty relief to the mining sector was queried as to the role it could play in saving jobs. The presenter was asked if South Africa needed to get rid of the existing exchange controls. The general reluctance by banks to lend for property transactions was queried and interventions government could make to keep the property market alive, were sought. Members asked if there was space for stimulating small business to facilitate job creation and whether the budget had addressed job creation concerns regarding Small, Micro and Medium Enterprises (SMMEs). Members also asked how one could reconcile economic growth in relation to the Chinese construction sector. The health of the regulatory environment and South Africa’s banks was questioned as were the risks South Africa faced in terms of the deficit.

SANLAM reported that the Budget was a pragmatic response to a challenging economic environment over which SA had little control. Counter-cyclical fiscal policy was taken to the next level without abandoning fiscal discipline. There were, however, signs of strain showing. The necessity of effective and efficient policy implementation was emphasised.

The impact of the global recession was reviewed against South Africa’s manufacturing production. The close correlation between world and South Africa growth patterns reinforced the view of South Africa’s international dependency. It would consequentially be extremely difficult for South Africa to reach high growth figures unless the rest of the world recovers. Capital flows, net private flows, portfolio investment, the economic growth of South Africa versus the Organisation for Economic Cooperation and Development (OECD), real commodity prices, capital flows to emerging markets, international capital flows, fiscal balances and likely fiscal stimulus were examined in the international context. The domestic economy would be subject to lower consumer spending, lower private sector investment and the forecast was that it would be touch-and-go on a technical recession. The outlook for interest rates was said to be at the turnaround in the cycle, with further cuts to the repurchase rate virtually assured. The effective exchange rate had depreciated by 26%. The budget macro-economic projections and revenue projections were also presented. SANLAM noted that the primary balance turning negative presented a danger to South Africa in the long term. Other worrying trends were government savings becoming negative and the increasing government expenditure to GDP ratio.

Members asked whether the National Treasury should budget for bailouts to companies in distress. The impact of a move toward permanent staff from a contract workforce was queried. The 3,8% deficit was questioned as to its sustainability, if the world economy did not recover. Members noted that comparisons with certain countries (developed countries and China in particular) were inappropriate and questioned which countries were best for comparison to determine the relative strength of South Africa’s economic performance.

Pricewaterhouse Coopers (PwC) welcomed the lack of major changes in the tax proposals. They saw this as a period to correct technicalities and address some of the unintended consequences of past tax legislation changes. Their specific concerns were the continuing dissatisfaction with the provisional tax second payment and the compound interest proposed on late tax payments. The new dividends tax and change-over from Secondary Tax on Companies (STC), VAT, the sophistication of the South African tax system, economic growth and the shortened filing season were discussed. The deductibility of interest on share acquisitions was of concern as being an obstacle to international investment. They felt that the general administration of tax was to be applauded. While not strictly being a tax matter, exchange controls were raised as a matter for engagement between business and government.

The South Africa Institute of Tax Practitioners submission concentrated on the relatively poor returns and value for money in terms of the government’s expenditure on education and healthcare. They also highlighted the disproportionate tax burdens in South Africa, the unsatisfactory aspects of the tax proposals affecting small business corporations, VAT registration, excise duty on alcoholic beverages, tax submission deadlines and the increases in interest and taxable dividend exemptions.

The question arose if it was time for a rewrite of the Income Tax Act which was needlessly complex. The presenters were asked if they would advocate a move away from exchange controls. Members queried how employment could be stimulated using tax incentives to support small businesses. The poor return on the investment made by the relatively small pool of taxpayers was discussed. It was noted that the Minister of Finance had mentioned concern for government efficiency. Government needed a bigger hand in ensuring that allocated funds were spent properly. The bottom line remained of ensuring a good return on the investment.

In the afternoon, Federation of Unions of South Africa, Business Unity South Africa and IDASA submitted comment on the 2009/2010 budget. The organisations commented on the current global economic scenario and its effects on the South African economy. In general, the organisations supported Government’s policy in addressing the economic downturn and welcomed the tax relief measures for individuals contained in the budget. Expenditure on social grants, health, education, the extended public works program, continued capital expenditure and environmental fiscal reform was welcomed. The organisations criticised the increases in the fuel levy and the Road Accident Fund levy and expressed concern over the administration of the Road Accident Fund. The increased fuel levy was not conducive to promoting economic growth. BUSA and FEDUSA in particular were concerned over job losses resulting from the economic downturn. The organisations questioned the efficiency and effectiveness of Government spending and commented on the need to restore business and consumer confidence in the economy. The global economic meltdown was a complex issue and the duration of the current crises can not be predicted.

Members asked questions about steps taken to counter job losses, unfreezing the credit market, assistance required from Government, the skills training component in the EPWP, the speed of liberalisation of the economy, assistance provided to businesses in distress, the effectiveness of tax incentives, the wage subsidy, the current level of business confidence and alternative health and education systems.

Meeting report

Macquarie First South Securities comment
Ms Nazmeera Moola, MFSS Economist, reported that growth had ground to a halt in fourth quarter of 2008. Until then the down turn in the economy had been quite gentle. They had seen data in the previous week showing that mining manufacturing was contracting sharply as they saw demand from customers reducing. The production numbers for December 2008 were very weak and would probably be the same for January 2009. As a result of that they expected government revenues to be weaker than previously expected. Annual growth for sectors had been reviewed with the strongest growth in construction, transport, telecommunications, financial services and government. Forecasts for 2009 were optimistic with a forecast for South African growth in 2009 at 1.6%. The National Treasury estimated 1.2% and they had even seen forecasts as low as 0.4%. Even at a rate of 0,4 % of GDP, if South Africa managed to keep growth positive, we would be doing well as an emerging market.

The fear was that the China would grow only at 4% or 5%. The question of why China mattered, was posed. The answer was because the SA mining sector was driven by demand for commodities by the Chinese construction industry whereas European demand for commodities had been quite stagnant. The key question now was whether the Chinese construction sector would recover as the year progressed. The focus had been misplaced last year in terms of concentrating on the slowdown in the US economy impacting on Chinese exports. The fact was that China was still growing at 17% in October 2008. Analysts ignored the fact that construction activity started slowing in March 2008. In late 2007, the Chinese government decided that the economy was overheating and enacted regulations to slow the market down. The result was an immediate fall in the demand for steel, iron ore and ferrochrome. The Chinese authorities were now aggressively trying to raise construction activity. If it picked up over the next few months, that would be positive for South Africa by the third quarter 2009. This was what their forecast was premised on.

Unfortunately - as much as one can use fiscal and monetary policy to counter the effects of the slowdown, one had very little control. Trade numbers were analysed in terms of dollar earnings in the range of our most important exports. The inflation outlook was a bit difficult to predict currently, due to the technical changes from Statistics South Africa. It was perhaps optimistic in the first half of the year but they forecast that it would be back below 6% by the second half of 2009. In employment they expected a 2.2% decline in 2009, translating into approximately 270 000 job losses. A lot of those jobs would be in manufacturing, retail and financial services. The government was looking for a 5,2% increase in revenue for the fiscal year. 5,2% in nominal terms would be the slowest rate since the 1970s. In real terms, it was the slowest growth rate since 1993. Therefore they expected government to be quite conservative in revenue forecasts. This was prudent, as aggressive revenue forecasts had negative consequences for departments.

The one area where there was concern was that provision on company tax was a bit optimistic. Mining profits were going to halve from last year's figures. This was a gauge of the rest of the economic sectors and if profits were reduced to this extent, chances were good that companies would not be able to pay the expected level of taxes.

There was some increase in social spending but there was a definite indication of an increase in infrastructure spending over the next couple of years. In their opinion, the most beneficial type of spending in the current environment was infrastructure spending, as it created jobs. Infrastructure spend also increased the long-term competitiveness of the country - something that social grants would never do.

The trends observed in the budget deficit of 3.8% and public sector borrowing were similar. The latter was very aggressive at 7,5% of GDP. This was very stimulatory and significant if one considered what the public sector would have to borrow out of the financial markets - the bulk of which would be taken out of the local bond market unless the government managed to secure certain loans from the World Bank.

Ms Moola said that she was not against this as it was the trend worldwide. The budget was stimulatory while not posing a threat to the country over the medium term. South Africa was not in a situation where there was a scramble to keep the banking system afloat. South Africa did not need the knee-jerk reactions taken by the US Treasury et al, nor could it afford them.

Mr B Mnguni (ANC) asked if the Minister’s decision to keep corporate taxes at a minimum was justified in the wake of declining revenue and the increase in public sector borrowing.

Ms Moola responded that the reason for the decline in corporate tax expectations was that profits were contracting. The worst approach would be to raise taxes. This would definitely exacerbate job losses as companies aim to control their margins. It would therefore not be prudent to raise corporate tax. The drop in corporate tax, however, had little to do with government intervention, rather it was a consequence of shrinking profits.

Mr Mnguni referred to the R1.8 billion royalty relief to the mining sector. He asked if this could play a role in saving jobs and relief for the sector as a whole.

Ms Moola responded that their mining analyst was of the opinion that the mining sector would see the biggest impact of job losses. However, companies might not retrench people due to political pressure. The companies that would benefit from the deferment of royalty payments would be the ones that had already recorded good profits. This would mainly be in the relatively buoyant gold and platinum trade such as Anglo Ashanti and Anglo Platinum.

Mr Mnguni referred to the existing exchange controls in place in South Africa and asked if business was of the opinion that they needed to get rid of these.

Ms Moola replied that she was certainly not of the opinion that exchange controls should be abolished. This was actually what insulated banks from the risky transactions that sparked the global economic crisis. South Africa had not been caught up in it, not because our bankers were smarter than their international counterparts, but because they were prevented from doing these risky transactions. She thought that while the exchange controls had room for improvement, they would still need prudential regulations.

Dr D George (DA) remarked that the presentation was interesting and scary. He pointed to the general reluctance by banks to lend for property transactions. He asked if there were interventions government could make to keep the property market alive.

Ms Moola noted that the Australian government had made moves to get banks to pledge to engage in lending in the housing market. The problem was that there was no penalty for not doing this and no incentive provided. However, as a first step, something like that could be tried. She jokingly added that South Africa would never have the kind of enforcement power as China – where they could execute their bank managers.

Dr George referred to the counter-cyclical fiscal policy promoted by the National Treasury and asked if it was possible for South Africa to spend itself out of the crisis. Related to this, he asked if there was space for stimulating business and entrepreneurs to facilitate job creation.

Mr K Marais (DA) asked if the budget had addressed job creation concerns for Small, Micro and Medium Enterprises (SMMEs) and their ability to create jobs. Had enough been done to support SMMEs.

Ms Moola replied that small business had been an issue in South Africa for many years. Only supplying credit had provided very little effective support for SMMEs. The National Treasury and SARS had, for their part, tried interventions on payroll taxes and VAT requirements in an effort to reduce bureaucracy. Despite this, there was still no effective access to financing and this was important, as one of the chief reasons small businesses failed was bad cash management.

Mr Marais remarked that this was quite a bleak picture but that facing up to the reality was necessary. For the future growth of the economy, job creation would be important. In view of the forecast 270 000 job losses and the recommendation that spending on infrastructure would be the most prudent spending priority, he asked if maintaining existing infrastructure would also be able to absorb job losses.

Ms Moola quoted a study that stated that 60 - 70% of new jobs created were by SMMEs, so a drive toward job creation should focus on SMMEs. In a breakdown of the overall spending on infrastructure, spending on 2010 infrastructure was relatively small. Spending related to the 2010 World Cup, however, was actually quite large. The spending plan was detailed beyond the World Cup in the Budget. 2010 was no longer the primary driver and they were now looking to spending that would benefit South Africa down the track. The results of the spending that had already taken place, were already observable and was important for sustainable growth. The maintenance of this infrastructure would certainly also create jobs. It would not be able to completely offset job losses but would help to provide people with skills.

Ms N Mokoto (ANC) pointed out the comparison made to the relatively better performance of Brazil in the global economic crisis. She asked what Brazil was doing to achieve this.

Ms Moola pointed out that Ms Mokoto had misheard and that she had reported that the growth forecast for Brazil was comparatively weaker. This was partly because Brazil was growing from a lower base. Much like South Africa, Brazil was commodity dependent and would mirror South Africa when commodity prices fell. The National Treasury had done as much as they could in the Budget. Beyond this, it would be useful to look at regulations to stimulate small businesses and the private sector.

Mr Mnguni referred to slide 4 of the presentation, and recalled the opinion that South Africa's growth was linked to the Chinese construction sector. He asked how one could reconcile economic growth and its relation to the Chinese construction, taking into account, the importance of the financial services sector.

Ms Moola responded that when one looked at mining's actual contribution to GDP it was only ± 7%. When the economic activity that surrounded the mining sector, particularly the transport and financial services that were mining based, it was a contribution of 25% to 28%. Furthermore 60% - 75% of South Africa exports were in commodities or beneficiated commodities. The exports would only stay ahead of imports if commodity prices rose to decent levels. The most important source of positive demand for these commodities was Chinese construction.

Mr Johnson referred to the postponement of the mining royalties and asked how workers would benefit, outside of a reduction in job losses and retrenchments. He added that profits were still being made by mines, yet workers did not benefit.

Ms Moola responded that many South Africans would not make profits this year. Toyota was one of the most efficient automotive companies in the world. Toyota was now facing a $5 billion loss. The theme of 2009 would be businesses losing money. It was no longer as simple as saying that workers were being disadvantaged even though businesses still made profits. These profits were now significantly reduced. Furthermore, the biggest job losses were happening at the mines not targeted for the royalties suspension.

Mr Johnson queried the health of the regulatory environment, pertaining specifically to South Africa’s banks.

Ms Moola responded that banking regulation in South Africa was actually sufficient and this was in part due to the National Credit Act (NCA). When the NCA was introduced in 2007, some of her clients had expressed concern about government intervention in the banking system. However, over the next year and a half she expected many developed countries to introduce similar legislation.

Mr Moloto asked if the financing practices had an impact on the financing of the current account deficit and what risks South Africa faced in terms of this deficit.

Ms Moola responded that financing the deficit was certainly going to be a challenge. In 2009 two events would help finance the current account deficit: the Vodafone purchase of a big chunk of Vodacom in April (contributing ± R 20 billion) and the World Bank loan to ESKOM was in the process of being signed. Macquarie Securities expected quite a big overall improvement of the deficit in 2009. The source of this would not be on the state side as parastatals were expected to import many of their component inputs. 35% of last year’s current account deficit was trade. 40% - 45% of it was due to net dividend outflows. They expected net dividend outflows to decrease dramatically (fewer offshore transactions for companies). By the 4th Quarter, the overall deficit should be at ± 4,5 of GDP, versus last year’s figure of 7,5 of GDP. The consequence of this forecast was that they were not that worried about the current account deficit.

A macroeconomic perspective on the 2009 Budget by SANLAM
Mr Jac Laubscher, Group Economist: SANLAM, reported that his overall assessment was that the Budget was a pragmatic response to a challenging economic environment over which SA had little control. They had taken counter-cyclical fiscal policy to the next level without abandoning fiscal discipline. Even so the strains were showing. They were balancing immediate needs with strategic thrust and it was a confirmation that the National Budget was the outcome of government policy in its entirety. He reiterated the necessity of effective and efficient policy implementation.

The global recession had not taken a massive dip until November 2008. There were virtually no credit flows and the global economy was not transacting, especially on the industrial production and merchandise trade side and this could be seen in the impact on inventories. South Africa manufacturing production was collapsing. It was clear in that South Africa GDP growth was closely correlated with that of the world – proof that we were definitely integrated to the global supply chain.

In this view, bouncing back was dependent on the credit situation and the jury was still out on that. The recovery was termed a “square root” (√) recovery – the economy would recover but at lower levels than its recent peak level. The South Africa versus Organisation for Economic Co-operation Development (OECD) figures reinforced the view of South Africa’s international dependency. It would be extremely difficult for us to make high growth figures unless the rest of the world recovers.

Capital flows showed the reduced availability of credit for financing. The net private flows depicted a halving of figures and more enormous reductions to the emerging markets. Portfolio investment had taken a big knock last year. As equity prices went down and the rand depreciated it would become very cheap for investors. That coupled with the prospect of a R5 billion loan from the IMF was set to result in the small uptick at the end of the graph on international capital flows.

On fiscal balances, it was clear that the transmission mechanism was still working and consequently SA’s needs might be less in this respect. Notable in the likely fiscal stimulus table, was that the expected growth rates of the developed nations were all negative, while Brazil, India and China remained in positive territory.

He reviewed economic growth of South Africa versus the OECD, real commodity prices, capital flows to emerging markets, international capital flows, fiscal balances and likely fiscal stimulus. The downturn in the domestic economy would be mainly due to lower consumer spending and a second round effect of lower private sector investment. The South African Reserve Bank (SARB) leading indicator versus GDP growth displayed a sharp downturn – it would therefore be touch-and-go on a technical recession (two consecutive quarters of negative growth). The outlook for interest rates was seen as a turnaround in the cycle with further cuts to the repurchase rate virtually assured.

The Governor of the SARB had expressed the probability of a further 50 basis points and with the Monetary Policy Committee meetings being more frequent, he expected at least 300 basis points to be cut this year. The effective exchange rate of the Rand was down 26%.

He reviewed the budget macro-economic projections and revenue projections, the Do’s and Don’ts of fiscal stimulus. Notable topics also included the National budget balance as a percentage of GDP. South Africa’s fiscal stimulus in perspective revealed that at 2,6 % of GDP, expected growth was set to be 1, 2 % - in line with other comparable emerging markets, such as Brazil.

The primary balance turning negative presented a danger to South Africa in the long term and required attention to bring it back to normal. Other worrying trends were government savings becoming negative and the government expenditure/GDP ratio increasing. We were expanding the size of the government relative to the size of the economy to quite a high level in comparison with other countries.


Mr Mnguni referred to the overall assessment and the strains mentioned. He asked for clarity on what the specific strains were on the South Africa economy.

Mr Laubscher replied that these strains would include the primary balance, which implied rising government debt. If we did not return to a zero balance, the debt to GDP ratio would increase, meaning less funds available for current and capital spending. The savings shortage on the part of government was another strain. If government dis-saves, it would have to use more of the domestic savings and be more dependent on foreign capital. Most importantly, South Africa should aim to return to a zero primary balance.

Mr Mnguni asked if the National Treasury should budget for bailouts to companies in distress.

Mr Laubscher responded that he did not believe in bailouts – companies should bear the responsibility for imprudent management. The motor industry had been highlighted as a primary bailout target in many developed countries. This industry was strongly import dependent. Discipline in this regard would reduce the exorbitant expansion seen in this and other sectors in recent years.

Dr George commented on the reduction in the manufacturing sector. Referring to the increasing use of contract workers in recent years, he asked what the impact of a move toward permanent staff would be on the manufacturing sector.

Mr Laubscher responded that it was well known that contract workers were usually the first to go due to the relative ease of dismissing contract workers. Permanent workers carried the constraint that they were more difficult to dismiss. Despite that, there were many other merits to motivate for a move to a permanent workforce.

Mr Marais asked if the 3,8% deficit was sustainable if the world economy did not improve substantially.

Mr Laubscher responded that the R50 billion was a hefty reduction in budget revenue estimate. The National Treasury had much more information available to them, than the private sector - on which these decisions were based. The sense was that government had been conservative and built in protection if the bounce-back did not occur globally, as expected. South Africa might end up with a higher deficit.

Mr Marais noted that the comparison with certain emerging market economies were not suitable (such as China and India) and wondered to whom SA should be compared, in order to determine the relative strength of South Africa’s economic performance.

Mr Laubscher replied that South Africa should choose its peer group as well as role models. He was of the opinion that SA should not use comparisons with developed economies but that this often happened because the data was more readily available. He personally compared South Africa to countries like Brazil, Chile and Mexico in Latin America and Thailand, Malaysia and India in Asia. These comparisons were based on finding similarities in the structure, resources and problems of these economies. Comparisons to developed countries and more prosperous emerging markets such as China, Argentina and Venezuela were often too harsh and should be avoided.

Budget 2009 Tax Proposals – Initial Comment by Pricewaterhouse Coopers
Prof. Osman Mollagee, PWC Director: Tax Technical and Training, commented generally that the fact that no major changes were proposed in terms of tax was welcomed. This could therefore be a period to correct technicalities and address some of the unintended consequences as the focus for 2009.

The initial assessment of the budget proposals elicited some specific comments. Dissatisfaction remained with the provisional tax 2nd payment. The compound interest on the late payment of tax was an issue as the simple interest charged was already non-tax deductible. On the new dividends tax and change-over from Secondary Tax on Companies (STC), they wanted to ensure that this stayed on the radar. It was worrying that there had been no further discussions in the interim.

The presentation reviewed provisions on VAT, the sophistication of the SA tax system and economic growth and the shortened filing season. The deductibility of interest on share acquisitions was a concern as the inability to deduct interest was a major international investment obstacle.

On administration, they felt that there was more to applaud than criticise. While not strictly being a tax matter, the future of exchange control needed to be discussed as this was not currently happening. Business wanted government to say something. Engagement on whether the relaxation of exchange controls would be beneficial would be appreciated business.

South Africa Institute of Tax Practitioners submission

Mr Stiaan Klue, SAIT Chief Executive Officer, focused on the two key areas of South Africa’s expenditure: education and healthcare. Education expenditure as a percentage of GDP was well above the world average and had remained this way for quite a numbers of years. This was the biggest single expenditure item of the South African budget. The problem was not the amount of money spent but the outcomes of SA’s education system. In all international tests of South African learners, such as the Progress in International Reading Literacy Study (PIRLS), South Africa had faired very poorly. This led to the fact that the South African labour force was poorly educated when compared to other emerging markets. The proportionally few economically active South Africans have one of the highest tax burdens in the world. This situation was furthermore not supportive of attracting international talent to South Africa in the current severe skills shortage.

On healthcare, the message was clear South Africans do not get as good a delivery on healthcare as many other African countries and other emerging market countries. South African taxes as a percentage of GDP were fairly high for an emerging market country and it was clear that one of the main ways to address this problem was that delivery of government services would have to improve.

Regarding revenue, there was a statement that total tax to GDP would not go over 25% of GDP in the first MTBPS in 1997. There had however been a full 10 years outside this 25% barrier. A further contributing factor was electricity and water rates, as they could be used as a form of tax (the rates were used to subsidise poor households). The effective tax to GDP ratio was thus brought closer to 30%.

Tax burden was that currently 25% of individual taxpayers paid 75% of all personal income tax. This was massive in anybody’s terms and needs. Only 0,25% of companies in South Africa pay 55% of corporate taxes, while less than 5% of all companies paid 91% of all company tax. This was a huge burden by any standards and needed to be addressed in future.

SAIT's specific comments concerned -
- Small business corporations: As a key area in the economy and the sector that made the greatest proportional contribution to job creation, it was disappointing that the budget continued virtually no additional tax relief.
- VAT registration: They welcomed the increase in the VAT threshold to R1 million from 1 March 2009 (following the announcement in the 2008 Budget Speech) as this would enable very small businesses to deregister as vendors, thereby saving the related VAT compliance costs. They were, however, concerned about the problems that many small businesses encountered in trying to register as vendors, either because they had to register to comply with the VAT legislation, or, where they elected to register for valid business reasons. Concerns about excise duty on alcoholic beverages and the tax submission deadlines were reviewed. Increases in interest and taxable dividend exemption were welcomed, but SAIT was of the opinion that the increases were insufficient to induce individuals to save.

Dr George asked if the time was right for a review of the tax system.

Prof Mollagee responded that he had referred to the recent announcement of the re-write of the Income Tax Act. The current legislation was needlessly complex. If South Africa had an economy that was not comparable to developed countries, such as the USA and the UK, we should question if our tax system should be harsher than theirs. This review was something that needed to be started as the Income Tax Act was last consolidated in 1972.

Mr Mnguni asked if the presenters would advocate for a move away from exchange controls.

Prof Mollagee responded that there were varying opinions on exchange controls. The
main issue was that there was silence on the part of the National Treasury on the matter. Direction was needed from Treasury.

Mr Marais recalled the comment on corporate tax, the reduced profits and the resultant job losses. He referred to the concessions to stimulate employment. He asked how tax incentives to SMMEs were used to support that.

Prof Mollagee responded that he was not an advocate of viewing the tax system in isolation. He understood the intention of using incentives to promote and encourage investment, however it had been shown that tax incentives alone were not an adequate driver in encouraging that kind of investment.

Mr Marais referred to the laissez-faire approach on sin taxes. He pointed out that the tobacco and liquor industry were paying a larger proportion of their profits to government. He was of the opinion that this defeated the objective and that these producers were getting smaller.

Mr Klue responded that producers often passed on the tax increases to consumers in the form of higher prices and so tended not to absorb the full tax burden. It therefore did not have a huge impact on companies.

Dr George asked what government could do to improve the value proposition for the taxpayer.

Mr Mnguni noted that many South Africans live below the bread line and asked what the proposal would be to remedy the situation and what a reasonable tax burden would be.

The Chairperson asked what the appropriate tax burden would be when one took the structure of the South Africa into account. He noted that the tax burden was a reflection of the level of employment in the economy. He was of the opinion that if more people worked and were eligible to pay taxes, that would address the tax burden issue.

As the three questions appeared related, Mr Klue answered them together. He responded that the value proposition was a function of the high tax burden. The return on the investment (made by the relatively small pool of taxpayers) was very poor. Taxpayers did not get services for the taxes they paid. They had to foot additional bills for healthcare, education and other services. The Minister of Finance did mention concern for government efficiency and the need to show how the costs translated into efficiency. Government needed a bigger hand in ensuring that allocated funds were spent properly. The bottom line remained of ensuring a good return on the investment.

Mr Mnguni pointed to the issue of benchmarking. He quoted a study that stated that most African countries could not collect tax efficiently and ended up dependent on foreign donor funding. In light of this, he asked if South Africa should relax collection regulations.

Prof Mollagee replied that he was not suggesting reducing the tax rates. The distinction should be made between tax law and tax efficiency. It should be borne in mind, that South Africa had a mixture in terms of the level of sophistication of the taxpayers. SA should make the tax regime more accessible, understandable and simple.

Ms Mokoto referred to the comments on the return on investment on the education and healthcare expenditure. She stated that government had made a commitment to efficiency. This commitment could be seen in the amounts allocated to these items. She asked what the suggestions were for areas government should prioritise. She added that criticism without solutions did not help.

Mr Klue responded that the submissions should not be seen as criticism. He felt that government, business and civil society should "take hands" instead of being defensive. We all needed to take a hard look at the facts and address them appropriately. They should have forums to share their points of view. Increasing service delivery was a starting point in getting value for the taxpayers. Corruption had to be reduced and greater accountability was needed. When taxpayers see service delivery increasing, the culture of tax compliance would be improved in South Africa.

Mr Marais stated that his objective was to look at incentives to employment and the related role of corporate tax. The viewpoint was expressed that if corporate tax was reduced and a tax credit was provided for employing first-time job seekers, that would stimulate employment. That was what he had meant with the original question.

Prof Mollagee responded that sufficient work had been done on providing corporate tax incentives to stimulate employment. There were incentives for learnerships and spending in place for first-time employees. In order for the incentive to be effective, there was a need for employable individuals. The point was relevant but might only be part of a solution.

Mr Marais stated that in relation to the levying of sin taxes, there was a trend of heritage wine estates being sold to foreigners. He commented that for this reason the statistics on sin taxes having very little impact on producers were perhaps incorrect.

Federation of Unions of South Africa (FEDUSA) submission
Ms Gretchen Humphries (Deputy General Secretary, FEDUSA) presented the submission from FEDUSA to the Committee (see document).

South Africa was not immune to the worsening world wide financial crises and faced a slower growth rate due to the negative effects on export demand, availability of financing and lower export prices. The 2009 budget expected a R50 billion decrease in Government revenue. The International Monetary Fund (IMF) proposed the timely implementation of temporary and medium-term fiscal stimulus packages to stimulate economic growth. Against this global economic scenario, FEDUSA felt that the budget deficit of 3.8% was defendable.

FEDUSA was particularly concerned by the loss of employment resulting from the lack of economic growth in the country. The organisation encouraged a more expansionary fiscal policy to support a gradual recovery in domestic demand and to sustain investment in public infrastructure. The long term goal should however be the attainment of a higher growth rate, which was necessary to reduce the current high levels of unemployment and poverty. FEDUSA therefore supported the initiatives to promote the improvement of education and skills, the lowering of the cost of doing business, the more efficient use of scarce resources and the improvement in the quality of Government spending.

FEDUSA cautioned that the variables affecting the balance of payments were likely to change, with consequential negative effects on inflation and the exchange rate. The organisation suggested increasing exports by promoting investment in export industries and supported the tax measures included in the medium term economic framework.

FEDUSA felt that the increase in the fuel levy negated the marginal lowering of individual income taxes. The presentation included comments on tax policy. The tax relief to personal taxpayers and the increase in deductions for medical scheme contributions were welcomed. The postponement of the payment of mineral and petroleum royalties by the mining sector was supported, provided that the R1.8 billion savings was applied to mitigating the effects of the expected retrenchments in the mining sector.

FEDUSA supported the environmental fiscal reform measures announced in the budget but felt that the increase in the fuel levy should have been postponed to a more appropriate time. The increase in the Road Accident Fund (RAF) levy may increase the RAF’s financial position but FEDUSA continued to be concerned by the ineffectiveness of the Fund’s administration.

FEDUSA supported Government’s proposed expenditure in social grants, health, education, the Extended Public Works Program (EPWP) and the provision for funding for the IDC, the Development Bank of Africa and the Land Bank. FEDUSA felt that the budget did not make adequate provision for job-creation and that welfare payments should be linked to personal responsibility. The organisation deplored the lack of a skills training component to the EPWP but considered the program to be crucial for creating short- and long term employment opportunities. FEDUSA suggested that vacancies in the public service were filled without delay and that adequate working conditions were provided to personnel working in the public sector.

In conclusion, FEDUSA felt that South Africa used the correct response to the current downturn in the economy, focused on short and medium term fiscal measures and had a sound and well-regulated financial sector.

Business Unity South Africa (BUSA) submission
Adv Abri Meiring (Executive Chairman: Business Parliamentary Office Advisory Board) introduced the delegates from BUSA: Prof Raymond Parsons (Deputy Chief Executive Officer: BUSA), Mr Roger Baxter (Chairperson: Tax Policy Committee, BUSA) and Ms Simi Siwisa (Director: Economic Policy, BUSA). The submission from BUSA comprised two sections, namely the economic environment and the tax consequences of the budget (see document).

Prof Parsons referred to recent headlines in the Financial Times, describing the current financial environment as the worst slump in 50 years. The message given by the budget acknowledged the serious nature of the prevailing financial crisis and its effects. The South African economy needed to consider the global situation and deal with the negative effects in a country-specific manner.

BUSA had identified four major points of departure in its assessment of the global financial situation. The unusual nature of the prevailing situation resulted in a number of complex factors coming into play. Most countries had adopted counter-cyclical policies, crafted according to their country-specific needs. BUSA urged that the psychological impact on business and consumers was taken into account when assessing the measures introduced to counter the financial crisis. The psychological impact of what was perceived to be done was as important as the actual impact the measures may have on the economy and will help to rebuild confidence by business and consumers. Strategies to stabilise the economy needed to be identified but also need to be sustainable and build on the existing economic framework. BUSA recognised the importance of protecting the most vulnerable persons in society, namely the poor and unemployed.

BUSA was included in the task team set up by the President in December 2008. The task team comprised representatives from Government, labour, business and the community. The task team had three main objectives, namely to provide input into the budget and to ensure that the contributions made by the team were reflected, to follow up on the decisions taken and assist in the implementation of those decisions and to identify other proposals that could assist in the country successfully weathering the crisis. The task team was due to report to the President on Thursday, 18 February 2009.

Mr Baxter presented an overview of the prevailing world economic scenario. An overall world economic growth rate of 0.5% was forecast and the International Monetary Fund (IMF) predicated a negative growth rate for the US economy in 2009. He recalled that the New York Times predicted in 1999 that the Clinton administration’s pressure on the banking system to lend to the low income group could lead to severe economic repercussions in a bearish market. The current financial crises resulted in a loss of 25% in the value of household equity. The presumption that emerging markets were unaffected by the global economic meltdown was incorrect as all economies were interlinked in the global economy and it became clear that a revision of economic policy was necessary. The financial crisis had a significant impact on trade as demand for manufactured goods and commodities dropped.

Mr Baxter said that the duration of the crisis can not be predicted. The effects of the Japanese banking crisis lasted five years but the Swedish banking crisis only lasted eighteen months. Many more economies were involved in the current crisis, with a significant increase in the range of issues affecting the global economy. It was estimated that global capital flows will be halved. Two thirds of South African exports were made to those countries which were hardest hit, namely the USA, UK and EU. Countries faced recession and depression if the credit markets remained frozen. He noted that the large bail-out measures initiated by some countries to beleaguered banks had not resulted in the unfreezing of the credit market. He warned that the imbalances built up during the economic boom over the last 15 years would take time to be addressed and that the recovery of asset value would also take some time.

Mr Baxter said that the impact of the global crisis on South Africa was lessened by Government’s prudent fiscal policies over the last few years. These policies provided a buffer, enabled capital expenditure programs and resulted in a robust financial sector. As an open economy, South Africa was however not immune and required an investment of R200 billion per annum to fund its savings gap. The low global economic growth rate resulted in less demand for our exports. Many companies went into survival mode and curtailed capital expenditure, with resultant job losses. BUSA recommended that the macro economic framework was kept in place. Mr Baxter remarked on the working groups established to address the current financial crisis.

BUSA suggested that Government continued to inspire confidence in the economy and warned against the negative impact of a change in economic policy. It was essential that the buffer was kept in place for as long as possible. Counter-measures were necessary to protect the poor and ongoing large capital expenditure programs will alleviate financial hardship. BUSA suggested that the opportunities presented by the current crises were fully exploited.

BUSA endorsed the five key principles outlined by the Minister of Finance in his budget speech and supported the suggested comprehensive Government expenditure review and initiatives to enhance the country’s exports. Mr Baxter said that it was important to retain a balance between efforts to grow the economy and maintaining fiscal responsibilities.

Adv Meiring presented BUSA’s comments on the taxation proposals contained in the budget. He expressed appreciation for the 2008 Tax Statistics published by the National Treasury and South African Revenue Service (SARS). Comments on the macro taxation environment included the reduction in the tax to gross domestic product (GDP) ratio, the appropriateness of the tax policy objectives for 2009/2010 and the importance of an efficient tax administration and collection function.

BUSA considered the reduction in the corporate tax rate and the changes to the corporate taxation policies to be beneficial for the economy. The organisation felt that industrial policy incentives needed to be closely monitored by Parliament. The postponement of the mineral and petroleum royalty payments was regarded as an ad hoc emergency relief measure.

The steep increases in the fuel and RAF levies were considered to be aimed at generating revenue. The reasons provided by National Treasury in the 2009 Budget Review document were not considered to be credible. The country’s mass public transport system was weak and transport costs comprised a major proportion of the earnings of most workers. BUSA believed that addressing transport inefficiencies was a key factor in increasing the country’s global competitiveness and the increased levies would have a negative impact on growth unless the revenue generated was directly applied to benefit roads and transport. BUSA remained extremely concerned over the precarious position of the RAF and urged the Portfolio Committee on Transport to exercise vigilant oversight of the Fund.

In general, BUSA supported the use of fiscal measures to promote environmental protection and sustainable development. The organisation however felt that the incentive for energy-efficient equipment usage was bogged down in bureaucracy. BUSA suggested that the automotive industry and industries involved in the production of plastic bags and incandescent light bulbs were consulted to ensure that the fiscal measures taken were effective in achieving the aim of changing consumer behaviour.

BUSA supported SARS’ resistance to introduce further zero-rated items and a differential rate for luxury items into the Value Added Tax (VAT) system. The tax relief granted to individual tax payers was welcomed. Adv Meiring pointed out that large numbers of small businesses would benefit as partnerships and sole proprietorships were taxed at this level. BUSA remained involved in the processes to achieve social security and retirement reform. BUSA members were particularly concerned that the proposed wage subsidy to balance compulsory social security contributions appeared to have fallen by the wayside.

BUSA urged that a substantive investigation into the competitiveness of South Africa as an investment destination was undertaken. A certain and predictable tax-friendly business environment would position South Africa as a desirable investment destination when the world economy recovered.

Ms Siwisa concluded the presentation by stating that, although BUSA supported the budget proposals, Government’s efficiency in spending tax revenue can be improved. The organisation was encouraged by the Minister of Finance’s announcement of national units to evaluate education and health expenditure and supported the proposed R782 billion infrastructure program.

IDASA submission
Mr Len Verwey (Analyst, IDASA) introduced Mr Ahmed Mohamed (Researcher, IDASA) and presented IDASA’s comments on the fiscal policy and social spending aspects of the 2009/2010 budget (see document).

Mr Verwey drew a comparison between the 2008/09 and 2009/10 forecasts and the effects of the downturn in the economy experienced in the third quarter of the current fiscal year. A nominal increase of 5.2% in tax revenue equated to the expected inflation rate. The continued rate of expenditure resulted in a deficit of 3.9% of GDP. He noted that the total amount of expenditure of R738 billion remained more or less constant to the amount budgeted for the previous year. Expenditure as a share of GDP increased from 27% to 29%. The budgeted deficit was consistent with a contracting economy.

IDASA recognised the inadvisability of increasing taxes when the economy was contracting. The increase in Government spending to between 5% and 6% reflected the limitation on Government Departments’ ability to spend. Overall, Government expenditure increased to 29.9% of GDP. The deficit was expected to increase from R629 billion in 2009/2010 to R919 billion in 2011/2012. Re-financing the debt may help to ensure that the outstanding debt remained constant.

IDASA was unable to comment on the medium term growth projection of 3% by 2012. The growth rate was based on the assumption that there will be an economic recovery during the same period. The organisation warned that an increase in debt was likely if the projected growth rate failed to materialise and considered the projected growth in GDP to be optimistic.

IDASA noted an increase of 11.9% in social spending if the ESKOM allocation was excluded from the calculations. Total expenditure on health increased by 7.6% and education expenditure increased by 10.3%. Taking inflation into account, the budgeted amounts reflected a slight de-prioritisation in these two areas. IDASA noted that the expected increase in beneficiaries of social grants was only 2% and appeared to be based on the assumption that there will be an economic recovery by 2012.

Mr Verwey concluded by commenting on Government’s ability to spend tax revenue efficiently and effectively. IDASA had researched provincial spending patterns on health and education and was concerned over the uneven nature of expenditure over the fiscal year. The continued peak in spending during the fourth quarter was of particular concern and raised questions about the efficiency and effectiveness of capital expenditure by provincial departments.

Dr D George (DA) asked what steps were taken by FEDUSA to counter the job losses resulting from the economic downturn and low expected growth rate. He remarked that banks appeared to be reluctant to lend and asked BUSA what the business sector can do to assist with unfreezing the credit market. He asked what business expected from Government in this regard. He asked IDASA to clarify whether the organisation considered social spending to be insufficient or inefficiently or ineffectively applied.

Ms R Mashigo (ANC) asked for clarity on the comment made by FEDUSA that the EPWP lacked a skills training component. She said that the EPWP had an observable skills training component and the budget included incentives for training. She asked why BUSA suggested that the industry was consulted with regard to the environmental levies announced in the budget. The purpose of the levies was to discourage the use of plastic bags, which was detrimental to the industry.

Mr B Mnguni (ANC) asked FEDUSA how the postponement of the R1.8 billion mineral and petroleum royalty would assist in retaining jobs in the mining sector. He wanted to know if BUSA continued to advocate further trade and exchange control liberation and how the organisation viewed the liberation of the economy in the light of the current economic meltdown.

Mr K Moloto (ANC) asked what BUSA expected from Government to assist businesses in distress and whether the organisation considered the measures proposed by the IDC to be adequate. He asked for an explanation of the origins and likely impact of the global imbalances created by the previous economic boom. He asked if BUSA regarded the incentives introduced by Government as being successful and requested clarity on the suggestion made that annual reports were submitted to Parliament.

In response to Dr George’s question, Mr Verwey said that South Africa spent a significant percentage of its budget on social spending. The amount allocated was sufficient but the amounts allocated to education and health increased at a lower rate, which appeared to indicate a slight de-prioritisation of these two areas. The efficiency and effectiveness of social spending was however questioned.

Replying to Dr George and Mr Mnguni’s questions, Ms Humphries advised that FEDUSA was on the task team appointed to deal with the economic crisis. The task team was expected to propose various initiatives and incentives to counteract job losses. FEDUSA was currently involved in the re-training of 5000 artisans, who had been retrenched in an attempt to provide them with new skills. She said that the three major mining trade unions, namely NUMSA, NUM and UASA were represented in FEDUSA. Mines were closing and workers were being retrenched at an alarming rate and the industry was losing many skilled people as a result. She said that BUSA would be in a position to provide statistics that would illustrate the gravity of the situation in the mining sector.

Mr Baxter explained that South African banks were less severely affected than overseas banks because of a limited exposure to the sub-prime lending market. South African banks were not forced to write off too many loans that would have affected their liquidity and resultant loss of confidence. The banking sector was under good regulation and supervision and offshore inflow was less than 10%. Access to credit was not frozen but banks had tightened their credit criteria and took a conservative approach to lending. Access to credit was expected to ease as interest rates fell and the cost of borrowing was reduced. The development fund institutions like the IDC assisted businesses in distress by providing monetary assistance.

Mr Baxter said that the imbalances occurred when developed countries such as the USA borrowed from countries with net savings (such as China) but used the funds to boost domestic consumer expenditure rather than infrastructure development. Interest rates were driven lower to encourage liquidity. The value of assets was pushed up by the availability of low-interest credit and it will take some time for the value of assets and consumer confidence to recover from the collapse in asset prices caused by the economic meltdown.

Responding to Mr Moloto’s questions, Prof Parsons quoted the Minister of Finance’s comments during his budget speech – “a sound banking system, healthy fiscal position, credible monetary policy and appropriate foreign exchange control regulations will continue to limit our exposure to the international downturn while serving as key building blocks for financing future growth and development”. Concerning trade liberalisation, the Minister had said that “trade arrangements cannot be subordinate to short-sighted protectionism”. Prof Parsons explained that governments were tempted to resort to protectionism when times were bad but the effects were to deepen the depression. He said that “beggar my neighbour” policies will not work and must be avoided at all costs as everyone will become poorer. He suggested that the Dohar round of tariff negotiations be revived.

In response to Ms Mashigo’s question, Adv Meiring said that the levies on plastic bags and incandescent light bulbs were imposed in an attempt to change behaviour and were not intended to generate revenue. He said that research was available in the retail and manufacturing sectors, which will assist Government in determining whether or not the levies that were imposed would be effective in changing consumer behaviour. BUSA offered to facilitate access by Government to the information available.

Adv Meiring said that the issue of the effectiveness of tax incentives versus a broader reduction in taxes was still under debate. Past experience however showed that such incentives were not successful and were not effective because they were not measured. Tax incentives can however be successful if well targeted, well managed, well measured and well monitored and Parliament’s oversight responsibility can play an invaluable role in this regard.

Mr S Marais (DA) complimented the presenters on the submissions. He noted that BUSA had remarked on the disappearance of the wage subsidy from the radar screen and mentioned the proposal from the Harvard Group on stimulating employment through the wage subsidy. He considered the issue of providing small businesses with incentives to employ and train employees as very important and asked how the matter can be brought to the attention of the National Treasury.

Mr Moloto repeated his question to BUSA on the role that can be played by the IDC and Government in assisting businesses in distress.

Ms N Mokoto (ANC) asked FEDUSA to clarify the statement in the submission “for the budget to have been genuinely “pro-poor” it should have paid far more attention to creating opportunity”.

Mr M Johnson (ANC) referred to IDASA’s comments on Government spending trends and the observed spike in fourth quarter spending by some departments. He asked whether the issue was Government’s capacity to spend rather than the limited funds available. He asked BUSA for comment on the expected duration of the economic downturn. He asked for clarity on the comment that Government had limited space for policy maneuvering. He asked for BUSA’s assessment of the current level of business confidence in the country.

The Chairperson asked BUSA and IDASA to comment on alternative systems to provide more value for money spent on health and education. She asked if money spent on private health care was more efficiently applied than the money spent on the public health care system. She asked FEDUSA whether suggestions that workers worked shorter hours would assist with reducing the number of jobs lost in all sectors of the economy. She was concerned over the speed at which the economy was liberalised and the effect the liberalisation had on South Africans no longer benefiting from home-grown companies like SASOL and ABSA. She asked if ABSA was adversely affected by its link to Barclays Bank.

Prof Parsons explained that accurate forecasts were difficult because of the unusual circumstances prevailing in the economy. He pointed out that both the IMF and South Africa had revised forecasts on a regular basis. He said that BUSA shared the Minister’s forecasts in broad terms but warned that there was a downward risk on growth targets and the expected lower rate of inflation. BUSA said that the best case scenario would be realized if the budget was speedily implemented. Business and consumer confidence was at a low level but will return if the budget proposals were seen to be implemented. He said that a positive fiscal policy, lower interest rates and a lower inflation rate were conditional requirements for the return of confidence in the economy.

Adv Meiring responded to the questions on the wage subsidy. He explained that the concept of the subsidy was welcomed by business as a way of countering the introduction of compulsory retirement savings that was mooted to promote social grant reform. Estimates indicated that a contribution of 12% to 15% of salary was required to provide a retirement benefit equal to 40% of final salary. Small business in particular felt that the wage subsidy was necessary. BUSA recognised that the wage subsidy program was still a work in progress but considered the wage subsidy to be important in reducing unemployment. BUSA was unaware that the creative ideas developed by the Harvard Group were taken on board or even discussed.

Mr Baxter reported on discussions held with the Harvard Group on some of the innovative ideas developed to promote employment, for example the concept of “speed-dating” to link matriculants with prospective employers and reducing the cost of employment. Government assistance required to assist businesses in distress included having the broad macro framework in place and continued spending of long term capital expenditure projects. BUSA had engaged with the various sectors affected by the downturn in the economy and encouraged the sectors to come up with suggestions to minimize job losses, such as working short time and taking extended leave. He pointed out that late payment can have a severe effect on liquidity and encouraged Government to ensure suppliers were paid within 30 days rather than 45 days. He said that it was difficult to ascertain whether a business was in distress as a result of the economic downturn or whether it would have gone out of business anyway. The IDC could assist businesses by providing bridging finance, particularly in cases where the business is affected by late payments. He said that some sectors were clearly more stressed by the downturn than others.

The response to the Chairperson’s questions, Mr Baxter said that the liberalisation of the economy assisted South Africa to achieve an average growth rate of 5% over the last few years. A similar policy in China resulted in helping significant numbers of people out of poverty. He felt that the rate of liberalisation was not too fast but agreed that a prudent approach was necessary.

Ms Siwisa said that the problems in the health and education systems were not the system per se but rather the quality of the people working in the system. She said that the quality of graduates from the education system was unacceptable and did not address the demands of the country. The quality of health care, particularly in the rural areas, was unacceptably low. She said that there was not a single perfect system but greater accountability and better oversight was required.

Ms Humphries reported on the alternatives to retrenchments discussed between FEDUSA and organised labour. She said that exceptional measures were necessary during exceptional times and some of the suggestions under discussion included working shorter hours, extended leave and re-skilling of workers. Workers were reluctant to implement the proposed measures and FEDUSA was in discussion with the unions to help persuade workers to buy into the proposals to avoid retrenchments. The task team appointed to find solutions to the retrenchment of workers was scheduled to report on 12 March 2009. She offered to brief the Committee on the report from the task team.

Mr Mohamed explained that the uneven spending patterns of national and provincial Government departments were cause for concern. Typically, departments spent a small percentage of their budgets in the first and second quarters before accelerating spending in the third and fourth quarters of the fiscal year. The spending pattern indicated a lack of management control, planning efficiency, allocation of resources and effective use of resources. The problem was referred to in the previous President’s State of the Nation Address in 2006 and was again referred to by the Minister of Finance in the 2009 budget speech. He expected that the Money Bill currently before Parliament will help to alleviate the problem.

Mr Verwey remarked that any changes in the health and education systems required three to five years to implement. He felt that the issue was not the system but rather the level of priority accorded. He said that lack of capacity was too often used as an excuse to evade accountability. There was a lack of incentives to improve performance and he suggested that a policy of improvement should be based on building a meritocracy, where careers were advanced through good performance. He stressed the importance of robust oversight by Parliament and insistence on regular performance reports from the sectors concerned.

The Chairperson thanked the delegates for their presentations.

The meeting was adjourned.

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