ATC151124: Report of the Standing Committee on Appropriations on the New Development Bank Special Appropriations Bill [B32-2015] (National Assembly – Section 77), dated 18 November 2015
REPORT OF THE STANDING COMMITTEE ON APPROPRIATIONS ON THE NEW DEVELOPMENT BANK SPECIAL APPROPRIATIONS BILL [B32-2015] (NATIONAL ASSEMBLY – SECTION 77), DATED 18 NOVEMBER 2015
Having considered the New Development Bank Special Appropriations Bill [B32 – 2015], referred to in terms of Section 13 of the Money Bills Amendment Procedure and Related Matters, Act No. 9 of 2009, the Standing Committee on Appropriations reports as follows:
Section 213(2) of the Constitution of the Republic of South Africa, provides that money may be withdrawn from the National Revenue Fund only in terms of an appropriation by an Act of Parliament. The Appropriation Act sets out to appropriate money from the National Revenue Fund for the requirements of the State and to prescribe conditions for the spending of funds withdrawn. In executing this mandate, the Standing Committee on Appropriations, hereinafter referred to as the Committee, was established in terms of section 4(3) of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009, and herein referred to as the Act. In line with Section 13 (2) of the Act, the Committee has a responsibility to hold public hearings on any money bills and report thereon to the National Assembly.
To this end, radio promotions at local radio stations ran from 02 to 06 November 2015 inviting general public comments and only one submission was received from Mr M Mosala. In addition to the National Treasury which briefed the Committee on the Bill in its entirety, the Financial and Fiscal Commission (FFC) was also invited for comment.
- Background and Overview of the New Development Bank Special Appropriation Bill
At the 6th BRICS Summit, the Governments of Russia, India, China and South Africa (BRICS) signed the Agreement establishing the New Development Bank. After the signing of the Agreement establishing the New Development Bank (NDB), South Africa ratified the Agreement through Parliament on 18 June 2015.
The legislatures of every BRICS country ratified the agreement and it came into force on 3 July 2015. The Bank aims to mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, complementing the existing efforts of multilateral and regional financial institutions for global growth and development.
The New Development Bank (NDB) shall have an authorized capital of US$ 100 billion and subscribed capital of US$ 50 billion. The founding members shall each have an equal share in the Bank; with the result that each BRICS country will contribute US$10 billion. The subscribed capital shall have a paid-in and callable component. The callable component shall be 80 per cent of subscribed capital (amounting to US$ 8 billion), and the paid-in component shall be 20 per cent of the subscribed capital (amounting to US$ 2 billion).
The purpose of the Bill is to appropriate money for the first instalment of the paid-in capital towards the capitalisation of the BRICS-led NDB for the current financial year of 2015/16, in accordance with the Agreement.
The Minister of Finance submitted that the Special Appropriation Bill allows South Africa to honour the first payment on time for the operationalisation of the NDB. It is envisaged that future instalments shall be subjected to normal budgetary processes.
The proposed appropriation is deficit neutral since it is conditional on the payment into the National Revenue Fund of the required proceeds from the sale of State assets in the 2015/16 financial year.
It is thus noted that Sub-Saharan Africa is one of the world’s fastest growing economic regions though developmental bottlenecks make it increasingly difficult for the region to achieve its growth potential. Addressing these challenges is a priority for the region. To fulfil its mandate, the Minister of Finance indicated that the Bank shall:
- Support both public and private sector infrastructure and sustainable development projects;
- Support regional projects, i.e. projects supporting more than one country
- Provide technical assistance for the preparation and implementation of these projects
- Establish the Africa Regional Centre to be based in Johannesburg, strategically located to enable access by other African countries to the New Development Bank.
2.2 Provisions of the New Development Bank Special Appropriation Bill
Clause 1(1) of the Bill provides for the appropriation of an amount in rands, that is equivalent to 150 million United States dollars, for the first instalment of US$ 150 million, at the applicable rate of exchange at the time of payment, and is subject to the payment into the National Revenue Fund of the requisite amount from the sale of State assets.
Clause 1(2) stipulates that the accounting officer of the National Treasury must pay the amount referred to in clause 1(1) in accordance with the Agreement between the BRICS countries. Clause 1(3) enables the Minister of Finance to impose conditions on the appropriation to promote and enforce transparency and effective management of funds and stop the appropriation until any conditions so imposed are met. Clause 1(4) provides for reporting on the stoppage of the appropriation to the relevant Parliamentary Committees.
2.3 Hearings on the New Development Bank Special Appropriation Bill
In its submission, the Financial and Fiscal Commission (FFC) indicated that with respect to funding considerations for the NDB, it was important to note that while South Africa was liable for US$8 billion in callable shares, the callable shares will be reflected as provisions that are defined as liabilities for which the payment date/amount is uncertain. National Treasury submitted that this is similar to other commitments to institutions such as the World Bank and the International Monetary Fund.
The FFC highlighted positives from the founding frameworks of the NDB which include the Articles of Agreement allowing the option of financing certain projects in local currencies as this will reduce systemic risks associated with forex lending to unhedged borrowers. In addition, there will be improvements and modernisation of risk management and monitoring techniques for funds allocations and also improvements in the mobilization of savings and the allocation of resources. The FFC also indicated that the presence of a large, internationally diversified bank has a lower probability of failure and may increase stability.
Key concerns raised by the FFC include the increase in volatility through import shocks from South Africa or other BRIC countries with posible reductions in exposure when the going gets tough. The lack of stability in the exchange rate and inflation rate was also a risk factor. Furthermore, the presence of NDB financial products may crowd out domestic banks that may not be able to compete for deposits with NDB and possibly reduce lending to Small and Medium Enterprises.
In its overall assessment, the FFC indicated that the selling of state assets to obtain funding can be viewed as a mechanism that fosters robust debates on the budget framework which otherwise would not have taken place were the project to be financed from tax revenues. The FFC indicated that the government should be ready to package projects that are ready for NDB financing.
3. Committee Findings and Observations
Having considered all the submissions made by the above stakeholders on the New Development Bank Special Appropriation Bill, the Standing Committee on Appropriations made the following findings and observations:
3.1 The Committee notes that while the budget strategy of selling assets for funding the New Development Bank may be budget neutral, the government’s balance sheet may still be negatively affected if the return from the investment does not eventually exceed the dividend Government was receiving from the sold asset. The Committee calls for comprehensive cost benefit analysis to be engrained into such funding strategy given the size of the investments.
3.2 The Committee views the need for strengthened monitoring mechanisms over funding allocations for the NDB as critical in ensuring that the envisioned developmental goals are achieved.
3.3 The Committee notes with concern that the sale of state assets is a suspensive condition in the Bill for the initial payment although it welcomes National Treasury’s submission that future funding will be subject to the Medium Term Expenditure Framework budgeting process. The Committee calls for transparent and rigorous mechanisms in the allocation of all future funding of the NDB.
3.4 The Committee notes the need for greater coordination amongst government departments and legislature on the processing of international agreements with significant funding implications.
3.5 The Committee notes the envisaged positive spinoffs emanating from the presence of a large diversified bank such as the New Development Bank. The Committee notes possible improvements in the risk management and monitoring techniques for resource allocations and the mobilization of savings.
3.6 The Committee notes the submission by the FFC that the developmental needs of both South Africa and the entire African Continent are significant enough to allow for the New Developmental Bank to co-exist with already established developmental banks.
The Standing Committee on Appropriations, having considered the briefings and comments by invited stakeholders on the New Development Bank Special Appropriation Bill, recommends as follows:
4.1 That the Minister of Finance should ensure the following:
4.1.1 That the National Treasury submit quarterly reports on the New Development Bank’s financial and non-financial performance to Parliament.
4.1.2 That funding allocations to the New Developmental Bank strictly adhere to the fiscal principles of long-term debt sustainability, counter cyclicality and inter-generational equity.
4.1.3 That the National Treasury in partnership with relevant stakeholders develop a pipeline of domestic and continent wide projects that will be ready to benefit from funding by the New Development Bank.
4.2 That the National Treasury in partnership with relevant stakeholders develop and implement a public awareness campaign across all sectors on the work of the New Development Bank and how it will assist domestic enterprises.
5. Committee Recommendation on the Bill
Notwithstanding the recommendations in section 4 above, the Standing Committee on Appropriations recommends that the National Assembly adopts the New Development Bank Special Appropriation Bill [B32-2015], without amendments.
The responses to the recommendations as set out in section 4 above by the relevant Executive Authorities must be sent to Parliament within 60 days of the adoption of this report by the National Assembly.
Democratic Alliance (DA) reserves its right not to support the Bill.
Report to be considered.
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