National Treasury Budget: briefing

Meeting report

FINANCE AD HOC COMMITTEE
1 June 2004
NATIONAL TREASURY BUDGET: BRIEFING

Chairperson: Ms B Hogan (ANC)

Documents handed out:
National Treasury presentation
National Treasury Budget Vote
National Treasury representatives (see Appendix)

SUMMARY
The Committee worked through Treasury's Strategic Plan and its Budget Vote 8 and questioned National Treasury about all aspects of the budget. There was much discussion around the number of posts that had actually been budgeted for since there were many vacancies in the Department. Other discussion topics were around Public Private Partnership (PPPs) projects, procurement, regional integration within Southern African Development Community (SADC), tax amnesty and the budget reform process particularly at local government level.

The Director General warned that it is important to tread carefully when dealing with issues of the privatization of state owned enterprises. When assets are disposed one wants to see the entry of other players into this sector. The benefits of privatization go beyond just getting the benefit of the proceeds. All State-owned enterprises (SOEs) and public entities that would approach Treasury for their borrowing activities would have their borrowing plans evaluated by a committee set up in the Department.

MINUTES
The Director-General of the National Treasury, Mr Kganyago, presented the major challenges facing National Treasury (see Powerpoint presentation)

Discussion
Ms R Taljaard (DA) suggested that there be some time allocated to ask questions around policy before the budget was examined. She then proceeded to point out that a shift had taken place to stimulate domestic demand. There was a renewed emphasis on state-led development. The concern was whether this shift and emphasis on the use of public entities would be inflationary and also whether this would be efficient. She wanted to know what the role of the private sector would be in this growth.

Mr Kganyago, the Director General, replied that there was no shortage on demand in South Africa. The focus however was on the supply side. This side of the economy had to be unblocked, this would raise the potential growth rate of the economy. There was not a new shift into state-led growth, but it was rather that the state's role in growth was being spelt out. The private sector was very important in bringing about growth. Public sector investment spending had been on the decline for the past two decades and the state was now changing this. The public-private partnerships (PPPs) had become more and more popular internationally and would be important in the future in South Africa. In PPPs there was a sharing of risks so that the state would not carry all of the risks.

Mr M Stephens (UDM) wanted to know how many jobs would be created per annum so that the Department could reach its target. He questioned which elements of the Treasury's plan was growth oriented since the Reserve Bank was following a restrictive monetary policy.

Mr Kganyago replied that monetary policy should rather be addressed by the Governor of the Reserve Bank and that he would rather speak about the fiscal policy. The fiscal policy was within the inflation targeting framework. The elements of the fiscal policy which were growth orientated was the fact that spending was more towards infrastructure and capital spending. The tax burden had also been brought down over the last four years.

Mr A Donaldson, Deputy Director General: Public Finance, said that the number of jobs to be created had not been worked out. They were involved however with StatsSA , the HSRC and the DTI to develop a better understanding of the growth rate. Over the last decade the growth rate had been 3% per year and had resulted in a growth in employment of 2%.

The Chair then suggested that they work through the Treasury's budget:

Program 1 Administration
Ms R Joemat (ANC) said that during the period of 2000 to 2002 there was an amalgamation of the two departments. According to the report there was a vacancy rate of 50%. She wanted to know how this arose. The overtime was also low despite the fact that the Department seemed to be under staffed.

Treasury responded that the vacancy rate currently was 43%. There were 850 approved positions of which 485 are filled. The process of filling up the vacancies was such that vacancies were filled as the need arose over the next 3 to 5 years.

Ms Joemat (ANC) said that if this was the case it had a major impact on the budget. The organogram for that particular year would have to be restructured.

The Treasury said that when the approved structure was presented, the number of positions was ascertained at 850 and this was budgeted for over the five years. This number was being filled slowly as the workload increased.

The Chair asked if the full 850 was included in the budget.

There was some disagreement amongst the Treasury representatives as to whether this was the case. Most members of the delegation said that the 850 was not in the present budget.

Mr Kganyago noted that the financial regulations unit was running at 50% capacity at the moment. This unit was created two years ago with one person and had gradually been growing. As new responsibilities had been assumed posts would be filled.

Mr A Donaldson addressed the issues around the personnel budget. He said that the 850 posts was something that had been carried over from the previous personnel administration regime. The Department of Public Services and Administration had approved the staff structures and posts. The budget allows for the building of capacity for the three years ahead. These numbers were not consolidated in the Strategic Plan. The expansion of capacity of 20% was envisaged over the next three years.

Ms J Fubbs (ANC) said that from her understanding, the budget for the next three years accommodated a personnel of 850 posts. She wanted to know how many posts were included in the 2004/05 budget.

The Chair added that this question involving personnel was important. In the past the Committee had been told by the Reserve Bank and other agencies that there was a lack of staff. This impacts on the amount of work that can be produced since there were a number of new pieces of legislation involving the financial sector that were being processed. She did however say that she was astonished at the high evel of professionalism shown by the National Treasury despite the shortage of staff. She was however concerned that National Treasury could not continue to function in this way.

Mr Kganyago replied that he was surprised that the Reserve Bank and the Financial Services Board had reported this about their capacity. There might have been other problems there, but in meetings that he had had with these agencies, they had assured him that the backlog had been cleared. The budget for 2004/05 budgeted for 833 positions.

The Chair said that it was clear then that the budget was not aligned with the human resource recruitment policy.

Mr Kganyago replied that the process of recruitment might be the problem and not the alignment. It took three months to fill a position while the notice period was only one month. The Department had since started to do headhunting. The problem however was that some of these people were not looking for jobs. In the areas that deal with policy, recruitment would either have to come from academia or from industry. The approach now is to bring people in on an intern basis. These interns are people with senior degrees and will be brought in for a period of 12 months. If they make the grade after this time they will be absorbed into staff. Some of the work is also on a contract basis where people are appointed for the period that they are needed.

Ms Taljaard (DA) said that it seemed as if Treasury was acting in a very reactive way to a lot of the activities in the line departments. This was a matter of concern.

Treasury replied that propoer coordination was always something that was desired. Many changes had however taken place and so numbers are over estimated to allow for some movement.

The Chair pointed out that more detail was needed regarding the Department's human resource policy.

Ms Taljaard (DA) said that she had noted that an accredited procurement unit had been established in respect of the Preferential Procurement Policy Framework Act. She wanted to know what this unit would contribute to the aligning of Broad Based Black Economic Empowerment (BBBEE) Act and procurement.

Treasury explained that the Broad Based BEE Act was based on the balanced scorecard method of evaluating companies. One of the elements of the scorecard was procurement reform which the company had used. This balanced scorecard was a more broad means of evaluating companies and Treasury would now be using this method. The regulations in the PPPF Act had therefore to be aligned so that they matched those used in the BBBEE Act.

Program 2
Mr K Moloto (ANC) said that he had noted in the Strategic Plan that Treasury plans to convene a tax collection colloquium. He wanted to know what the goal of this colloquium was and what the other impediments were to tax collection.

Mr Kganyago replied that over the last few years there had been big changes to the tax system. It was now time for some introspection so that it could be seen what had been achieved and how this had contributed to growth. This colloquium would not just involve tax practitioners but other fiscal experts, domestic and international, which would assist the Department to take stock. It was hoped that this would take place towards the end of the year.

Mr Mnguni (ANC) referred to the memorandum of understanding between the Minister and the Governor of the Reserve Bank regarding franchise revision. He wanted to know what the critical issues were and if any agreements had been reached so far.

Mr Kganyago replied that the memorandum of understanding covered issues such as macroeconomic policy, financial markets, financial regulations and issues around banking. A number of standing committees had also been set up to deal with issues such as macroeconomic policies, international issues and inflation targeting.

Ms Fubbs (ANC) wanted to know what the significance was of the SADC tax database, what progress was made with this and what benefit it would be to South Africa.

Mr Kganyago replied that the SADC tax database was set up to create a platform to bring in foreign and domestic investors. Companies could therefore determine what the different tax regimes were in the various SADC countries.

Ms Taljaard (DA) said that in the planning system there was a provincial tax regulation act and a framework for provincial borrowing power for capital. There was also an Intergovernmental Relations Bill which was in the planning stages which would deal with co-operative governance. She assumed that this bill would precede the other two frameworks as a result of constitutional issues around co-operative governance. She asked whether there would be a time lag between these two processes. The deadline for legislation regarding the retirement fund industry was the 2004 budget. She wanted Treasury to give a date when this bill would be before Parliament. She also wanted to know when Treasury had become aware of breaches with respect of the tax amnesty and what steps had been taken by Treasury.

Mr Kganyago replied that the Department had underestimated the work that would be involved here. It involved more than just tax issues, but needed a review on retirement provision in the country. It was hoped that a draft bill would be ready before the end of 2004. With reference to the breaches in the tax amnesty, he said that the Scorpions were working on the case and that the breaches were not internal.

A member of the Treasury pointed out that the Intergovernmental Relations Bill does not deal with the fiscal powers of the provinces. There was other legislation which deals with this and is being implemented.

Dr G Koornhof (ANC) referred to a new SADC finance protocol and asked whether it had been signed and what the implications were for South Africa. He also wanted to know what progress had been made with the macroeconomic policy unit that had been set up and the project that it had embarked upon regarding regulating and pricing mechanisms in public utilities.

Mr Kganyago replied that the SADC finance protocol had not yet been finalised and therefore had not yet been signed. This was because there was a serious capacity problem in the SADC secretariat. This secretariat was now being restructured. Most memorandums of understanding had been signed except one. He did not expect the protocol to be signed this year. Referring to the pricing in utilities, he said that a study had been done and a report submitted to Cabinet last year. Cabinet had asked that more work be done. They would be reporting back to Cabinet that month.

Mr S Asiya (ANC) referred to the Strategic Plan and suggested that the Committee be briefed at some point on the content of the SADC finance protocol that was mentioned in the plan. He also wanted to know whether there was any move towards integration of financial regulations in the memorandum of understanding that had been reached with the Reserve Bank.

Mr Kganyago replied that the Minister and the Governor had set up a joint task team to work on the integration of financial regulations. This Committee should report to the Minister and Governor by the end of July.

Ms Taljaard (DA) asked what input Treasury had made on the peer review mechanism of the NEPAD (New Partnership for African Development). She also pointed out that some of Treasury's policies were informed by many of the African Union (AU) protocols. Since some problems were being encountered in the EU with convergence, she questioned whether it would be good to emulate the same in the AU.

Mr Kganayago said that the Treasury's input into the peer review mechanism was restricted to the surveillance of economic governance and to identify standards of good economic governance. The issue on integration in the AU was a big one. Even though the foreign ministers had committed themselves to a single currency in 30 years, the central bank governors had advised that this would possibly only be realised in 50 years. Regional convergence was first needed before it could happen across the continent as macroeconomic convergence was needed. The issue around integration was therefore still debatable and that the problems in the EU had to do with credibility problems. Integration was a goal that had to worked towards however.

Ms D Ramodibe (ANC) asked what progress was made with PPPs and what activities were entailed in this unit. It had been mentioned that a code of good practice had been published on BEE. She wanted to know what impact this had had on PPP.

Treasury replied that there were two training courses which were being run by the PPP unit. This was a two day training course which is being run in partnership with the National Business Initiative (NBI) which had been run since 2001. To date over 1000 people had been through the training. This year a new course had been introduced which was specifically for transaction advisors. The unit at present had 50 projects which were registered. There was slow but steady progress in registering PPPs. The draft code of good practice for BEEs in PPPs was published last year and was still under discussion.

Ms Joemat (ANC) said that a she had noted that a shift had taken place in the way donor funding was given by the International Development Cooperation (IDC) to support for policy and strategy with a strong emphasis on poverty alleviation. She wanted to know whether the Department was evaluating this shift

Mr Donaldson said that the IDC handled a number of agreements which were normally run over three to five years. The shift to works itself into the programs over the length of the programme. There was also internet based monitoring system which allowed one access into any assistance programs.

Mr Mnguni (ANC) asked if the PPPs were in competition with government or if they were helping government reach its objectives. He also wanted to know how they were financed.

A member of Treasury's delegation said that the PPPs were not in competition with the government. The private sector was brought in to provide managerial expertise, capital and technical capacity. So far PPPs have not lead to any job losses in the public sector.

Ms Fubbs (ANC) asked what progress had been made with respect to the international financing architecture reform.

Mr Kganyago replied that the international financial reform, which was sparked by the Asian crisis, was being spearheaded by the G7 countries plus some developing countries. This group is known as the Group of Twenty Systemically Significant Countries. South Africa was the only African country that was part of this group. A number of discussions had been held. The most important dealt with the issue of the prevention of a currency crisis. The agreement was that a prudent macroeconomic policy was needed by each country. The codes and standards used by countries to avoid a crisis was also discussed. South Africa had had all its codes and standards examined. A crisis resolution mechanism was put in place to help countries which had sound policies but were still hit by a currency crisis. The mechanism was called the Contingency Credit line (CCL) of the IMF. In practice however this did not work well as one was expected to access help before the crisis happened. This facility was therefore abandoned last year. Another mechanism was the sovereign debt restructuring mechanism. This was opposed by South Africa because the G7 did not want to be part of the mechanism. This one was therefore also a failure. In its place is a voluntary code of practice.

Mr Moloto (ANC) asked whether there were any measures in place should there be a liquidity crisis in the Common Monetary Area (CMA).

Mr Kganayago said that in CMA, one tended to give up one's own monetary policy to the dominant one. In this case, for example, Namibia and Lesotho would have to follow what South Africa did where interest rates were concerned. He did not see that there would be any liquidity crisis in the region as their currencies were on a 1:1 level with South Africa.

Ms Taljaard (DA) asked when a timetable would be made public with respect to the liberalising of exchange controls. This would help everyone involved since there was lots of uncertainty about this in the market at the moment. She was also concerned that the introduction of the retail, in order to enhance a culture of savings, would trigger tax.

Mr Kgangayo said that the end state of the liberalisation was not yet there, and that they were very eager to define it. This was informed by many factors. One of these was the work that was being done by the G20 countries. This work had to do with capital account management. The other factor had to do with the work done by the IMF which now felt that some exchange controls were necessary. The introduction of a staggered approach could cause more problems. There was no timeline at present for this liberalisation of exchange controls. It was not possible to exempt retail bonds alone from taxation. If this had to happen, it would cause a distortion. People would use it only because it was exempt from tax.

Mr Mnguni (ANC) referred to the computer generated CGE model that was able to analyse government's policy. He asked for an example of this.

Mr Donaldson said that there were no concrete outcomes from the model. The modeling capacity of the Department was constantly evolving. The impact of taxes, consumption and VAT rate could all be tested with the model. He said that it could be arranged for the Committee to meet with the team and see how the model worked.

The Chair felt that this was a good idea and something that should be pursued.

Mr Vezi (IFP) asked for Treasury's response to the statement by the IMF that the liquidation process in the country was slow and cumbersome.

Mr Kganayago agreed that the liquidation process was slow. The Department of Justice was investigating this.

Program 6
Mr Asiya (ANC) asked what progress was being made on the local government reforms since the programme had started.

Treasury replied that there had been an international agreement with the World Bank for the Local Government Management Grant. Money had been borrowed and the bank was asked to provide expertise to build capacity. This expertise was to be used to implement budget reforms in the municipalities. Experts in this field were then obtained from overseas and placed with municipalities for a period of two years as a technical advisor. It was hard to ascertain what progress had been made because of the processes involved.

Mr Moloto (ANC) asked what capacity Treasury had to track provincial spending.

Treasury replied that provincial spending could be tracked through monthly and quarterly reporting that had to be done by provinces. A gazette was also published on the Treasury website. The challenge was for Parliament and provincial legislatures to use the information. The one weakness however was that the numbers given only tell part of the story. The non-financial information would normally be more important. Mr Donaldson added that monitoring could also be done through the expanded public works programme as funds were routed through provincial programs.

Ms Taljaard (DA) asked if there would be any reduction in the number of conditional grants and what Treasury's opinion was on increasing the number of grants. She also wanted to know how it would be possible to monitor if projects were economically productive since funds would now be channeled through the Expanded Public Works Programme.

Treasury replied that most conditional grants were covered in the Division of Revenue Bill. They were however trying to improve the formula used in giving the grants. It was felt that the number of grants had to be reduced. Accountability was at the provincial level. The infrastructure grants were not project specific, but had to fit in with the budget.

Mr Asiya (ANC) asked what lessons had been learn from the implementation of the Municipal Finance Management Act (MFMA). He also wanted to know whether municipalities were ready for the act.

Treasury replied that that budgeting at municipal levels was different. With the international advisors however, reforms were taking place. The implementation of the MFMA was a big challenge. There was no other choice however but to implement it on 1 July 2004. The local government division had been having workshops dealing with this.

The Chair said that the budget reform process had produced many changes. She wanted to know what issues still had to be dealt with. She felt that there was still much work to do regarding measurable objectives and key performance indicators. She asked whether National Treasury was seeing that departments were more clear about measurable objectives.

Mr Donaldson replied that the introduction of measurable objectives was the main challenge in the first year. Other challenges involved the annual reports which Departments drew up. Much could be learnt from this. Guidelines also needed to be given for accounting reforms. Budgeting was done over three years, but it was also necessary to see beyond the three years. There was a need to give more information regarding this. There also needed to be more transparency regarding consolidated spending by agencies of Departments. It was also a challenge to show spending in PPPs since part was from the private sector. The revenue side of the budget also needed work.

A member of Treasury's delegation added that it was important that the Portfolio Committees see the Annual Reports and have hearings regarding these.

Afternoon session
[First few minutes of this discussion not captured]
Mr C Kruger, Deputy Director-General: Specialist Functions, said that the Budget Council directed that focus should be on the management of the immediate situation. One of the things to be done was to phase out the Financial Management System (FMS) and migrate all the users to the Basic Accounting System (BAS). The reason for this is that the FMS is very outdated. Most users have been migrated to BAS. At the same time the standard charter of accounting has been implemented in its current form. The only Departments that are not on the BAAS system are the Police and Defence and the North West government.

Ms J Fubbs (ANC) asked if the reason why some Departments were not moved into the BAAS system. In essence she wanted to know if the systems that those Departments are using are compatible with the BAAS system.

Mr Kruger replied that all systems were assessed as part of the FMS phase one of the project. The problem with the existing systems is that they do not have all the functions. This has been captured in the master plan submitted for consideration and timelines for providing the additional functions that are required in the new system.

Ms Fubbs said that the Strategic Plan said nothing about training and requested that the Committee be given such information because it would assist the Committee in performing its oversight role

Mr S Asiya (ANC) commented that the BAS and FMS systems were copied from Australia and New Zealand respectively. Last year Australia decided to combine the two because they found that there was a problem with the Asset Register. He asked for the presenters' opinion on this.

Ms Fubbs said that the Strategic Plan shows that the repeal of the State Tender Board has to be finalised by 2004. She asked what would replace it and when.

The Director-General replied that the general feeling is that nobody likes the State Tender Board.

Mr Kruger replied that in terms of s76 (4)(c) of the Public Finance Management Act (PFMA) a framework "may" have been issued. Treasury delayed the implementation of this law in order to assess the situation after the promulgation of the Preferential Procurement Policy Framework Act. Two years ago, Treasury and the World Bank appointed consultants to assess the implementation throughout all levels of government and its entities. Deficiencies that were identified in the system were used as the basis for further reform. It became clear that there is a need to improve financial management and that the old procurement and provisioning systems were outdated. As a result a framework was issued to guide further implementation of a new integrated supply chain management function. As part of the Municipal Finance Management Act (MFMA) a similar framework would be issued. This would become applicable from 1 July 2004.

The repeal of the State Tender Board would be done in terms of amendments that would be effected to the PFMA hopefully during the course of this year. In the interim, regulations dealing with the State Tender Board were amended so that the new framework could be applied and ultimately to get away from the State Tender Board arrangements. Departments that are not yet ready to use the new framework may still use the old system until the State Tender Board has been done away with.

Ms Fubbs observed that procurement regulations would be promulgated in July 2004. One would assume that the Committee would have been given an opportunity to look at them. She asked when the Committee would be given such an opportunity

Treasury responded that the regulations would be provided before the repeal of the State Tender Board.

Mr M Johnson (ANC) observed that Programme 5 in the Strategic Plan says nothing about fronting. He asked if the issue of fronting in procurement processes has been adequately addressed in the Black Economic Empowerment Act.

Mr Kruger replied that the issue is being addressed. Regulations to the PPPF Act would be amended so as to align it with the balanced scorecard methodology in the BEE Act.

Ms R Taljaard (DA) commented that when the Committee had deliberated on the Municipal Finance Management Bill there were indications that some of the provisions that were being bought to bear in the MFM Bill might be included in the PFMA. She asked when the Committee would receive a progress report on this so that when the amending process begins, the Committee would have some background or some indication as to what the problems are.

Mr Ismail Momoniat, Deputy Director-General: Intergovernmental Relations, replied that he was surprised by how the PFMA was able to deal with complex issues. There is a need for an update on the budget reforms. The issue of the governance of grants also had to be covered in the Division of Revenue Bill. Parliament wants to pass this Bill quickly. A lot of financial management of grants provisions would be covered in the PFMA. The whole issue of annual report in terms of the MFMA has to be institutionalized even for the national and provincial governments. The Public Audit Bill would repeal a lot of provisions in the PFMA. There are also technical issues that have to be resolved. For instance it is assumed that the National Revenue Fund is part of Treasury's budget vote. In practice the Auditor General regards it as a public entity for auditing purposes. There is a need to deal with separate funds.

With regard to the European Commission funding for the office of the Accountant General, Ms Taljaard asked the presenter to be specific on what the money was spent on.

Mr Freeman Nomvalo, Deputy Director-General: Office of the Accountant-General, replied that the funding is for the Financial Management Improvement Project (FMIP). This entails broad improvement in financial management across government and the development and management of Generally Recognised Accounting Practice (GRAP). This funding would finance some of the training issues that would arise from the implementation of GRAP.

Programme 3: Assets and Liability Management
Ms Taljaard said that one of the concerns is not only the imperative of direct foreign investment but also what has been happening due to the lack of proceeds to the public sector borrowing requirements. There has been an increase in the public borrowing requirements. She asked how Treasury envisages the route of Public Private Partnership (PPP) that has been put forward in the public domain for discussion to contribute to efficiency. She also asked how PPPs and input costs that would flow from the increased efficiencies would be harnessed to lower inflationary pressures.

The Director-General replied that in the main when assets are disposed one wants to see the entry of other players into this sector. The benefits of privatization go beyond just getting the benefit of the proceeds. One gets the Foreign Direct Investment (FDI) or in the case of Telkom, portfolio inflows because there were shareholding participation by foreigners. The most important things have to do with the efficiencies and the reduction in input costs because what is privatized are large entities. A question arises whether to chop the utility down into smaller bite-size pieces so that people could compete with it. Given the size of the utilities, if such kinds of adjustments are not made one might find that the entrants see this formidable competitor who already has a head start and they would be reluctant to come in. Hence the restructuring of Eskom ended up chopping it into generation, transmission and distribution so as to make it more manageable. One could then use the licensing requirement to allow other players to come into the generation part.

With regard to input costs the Director-General said the questions is what do you do when you cannot have the players coming in. One would have try and mimic what the price would have been if one had competition. This brings in the capacity of sector regulators. One need to strengthen the capacity of sector regulators.

On the issue of proceeds, the Director-General replied that it is very important to be careful about speculating about proceeds because this could set one up for failure. Once the expected proceeds are pronounced people would want to know the assets that are going to disposed and then do their numbers. Once the results would come and people would say you have budgeted this much and when you dispose of these assets they would be right where you have predicted. This would undermine the competitive process in terms of one reaching the maximum proceeds from those entities. Alternatively one could have put a high figure and people would say that the expectations are unrealistic. The Telkom experience was instructive because a figure was set and when the markets were not favourable, everybody said the plans should go ahead so as to demonstrate commitment to privatization. The result is that Telkom was given away. Shares were sold at R28 each and within a month, a share was trading at around R70. The government became a victim of its own transparency. This has an impact on the public sector-borrowing requirement (PSBR) because the government ended up collecting far less than what it would have collected. If the shares had been sold at around R70 each the public borrowing requirement would have been less. There are other factors that contribute to the current public sector-borrowing requirement like the infrastructure spending of SOEs. The important thing is the change in quality in the public sector-borrowing requirement. Whereas previously that requirement tended to finance current expenditure, there is now a qualitative shift. It is now going to infrastructure and capital

Ms Taaljaard asked how the PPP route in parastatals arena would contribute to increased Spatial Development Initiatives (SDI) and other aims. She also asked how investment in PPPs would contribute to the public sector borrowing being reduced. She felt that the Strategic Equity Partnership could be seen as a form of PPP. She asked the presenters to explain the difference between the newly pronounced PPP route and what was traditionally known as the Strategic Equity Partnership.

The Director General agreed that SDI could be seen as some form of PPPs. The issue about the Transnet loan covenants is very straightforward. These are basically restrictions that lenders put and normally deal with what asset one can dispose of or what the dividend cover could be. At the heart of the delay of the restructuring of Transnet lie those covenants. Most of them state that any significant restructuring that involves getting rid of major assets has to be cleared with all of the borrowers. Transnet has bonds turning in the market everyday. The restructuring of Transnet has turned out to be more complicated than we initially thought. The assets that were identified are Portnet; Spoornet and Petronet. When one wants to touch any of these, one needs the concurrence of the lenders of Transnet. It is going to be a very big exercise and highly complicated.

Mr Moloto observed that the Estimate of National Expenditure (ENE) on intergovernmental cash co-ordination indicates that phase 2 would be completed by June 2004 where as the Strategic Plan says that it would be completed by December 2005. He asked Treasury to explain the inconsistency.

Mr Nomvalo replied that the move to December is not a change of attitude. It was envisaged that the project would be completed by June. The problem is that one or two provinces had problems around interests they would have to pay should they have to borrow bridging finance and operational issues. There were also other issues around the formulation of the memorandum of understanding between the provinces, Treasury and the South African Reserve Bank to ensure that the operation is well regulated.

A committee member asked Treasury to comment on its findings on the borrowing activities of State-owned enterprises (SOEs). He also asked if there are any areas of concern that the Committee has to know about.

The Director General replied that all SOEs and public entities that would approach Treasury for their borrowing activities would have their borrowing plans evaluated by a Committee set up in the Department. South Africa is more advanced than most countries because it has the entire redemption schedule of SOEs and government projected two years going forward. A team of people from the World Bank also wanted to use our model in other countries. The Treasury monitoring part has to do with experience in South African Airways. Corporate governance was not what it was supposed to be and hence the decision to review the treasury operations of all the SOEs irrespective of whether we are fully owning the enterprise. The first phase of this has been completed. The second phase entails putting into regulations things that could be done and those that should not be done by these SOEs.

The Director-General replied that the issue about the Transnet loan covenants is very straightforward. These are basically restrictions that lenders put in and normally deal with what asset one can dispose of or what the dividend cover could be. At the heart of the delay of the restructuring of Transnet lie those covenants. Most of them state that any significant restructuring that involves getting rid of major assets has to be cleared with all of the borrowers. Transnet has bonds turning in the market every day. The restructuring of Transnet has turned out to be more complicated than we initially thought. The assets that were identified are Portnet; Spoornet and Petronet. When one wants to touch any of these one needs the concurrence of the lenders of Transnet. It is going to be a very big exercise and highly complicated.

Programme 7: Civil and Military Pensions
Mr Mnguni asked if the Minster is still the sole trustee of the Government Employees Pension Fund. He also asked when the board of trustee is going to be elected.

Treasury replied that the Minister is still the sole trustee pending the appointment of the board. Resolution 12 of 2002 calls for the appointment of a board of trustees. Eight trustees would be nominated by the employer, seven by the employee organization and the final trustee would be elected from pensioners. The Department of Public Service and Administration was tasked with the co-ordination of the nomination of 15 of the trustees.

Mr Mnguni was concerned with the pace of the payment of special pensions. He said that there are a lot of ex-combatants who are dying in horrible situations. He asked as to when they could expect some pay-out as agreed. He also asked if there is any compensation that they are getting.

Mr T Magwaza (CEO - Special Pensions Administration) replied that the board has finalised phase one of the payments. The second phase is currently underway. 10492 applications have been approved from 33 440 application. 20 524 applications were rejected. There is currently 2424 late application to be considered.

The Chairperson asked if the review board of the Special Pensions is running optimally.

Mr Magwaza replied that 5063 applications were received and 3122 were finalised. 399 were approved and 2728 were rejected. 1936 are still outstanding. The only problem that exists is that the actuary has not yet been replaced.

Ms Taaljaard focused on the medical scheme contribution for retired civil service servants. She asked the presenter to explain what is going to happen with the funding of a more general medical scheme. She wondered if it is wiser to go to private sector pricing arrangements.

Treasury replied that people who retired before 1 July 1992 would get a full subsidy. All their medical costs are covered. Those who retired after 1 July 1992 get a subsidy of two-thirds or five-sixths of the premium.

Programme 8: Fiscal Transfers
The Chairperson asked why security services is still listed as a fiscal transfer.

Mr A Donaldson, Deputy Director-General: Public Finance, replied that this would have to change. There have been discussions between Treasury and the Ministry of Intelligence on this. Such discussions would still be pursued this year.

Mr Mnguni asked Treasury to account on the financial initiatives relating to the implementation of NEPAD (New Partnership for Africa's Development) in Africa.

Mr L Kganyago (Director General: Treasury) replied that the approach was that all South Africa's activities in NEPAD have to be integrated within the current budgets. In Treasury there is a directorate devoted to NEPAD and other African programmes. This Unit looks at NEPAD, African Development Bank, the African Union and other institutions. In all international work Treasury uses NEPAD as a platform for engagement with the rest of the world. When NEPAD was announced, it was said that it has to be treated seriously and integrated into our activities. Many government departments asked if there would be specific resource allocation for it. The answer has been that NEPAD has to be a priority and this means that something has to give way to it. it looks like departments have manage to cope with the situation. Treasury took all its responsibilities regarding NEPAD and did not have to increase its budget.

Mr Donaldson added that the contribution that South Africa makes to the Secretariat of NEPAD is funded by the Department of Foreign Affairs. The Secretariat has been engaged in efforts to seek financial assistance from other African countries. At this stage most of its costs are still met by the South African Department of Foreign Affairs. There are also other NEPAD initiatives that are supported by the African Renaissance Fund that is under the Department of Foreign Affairs.

Ms R Taaljaard (DA) said that the Development Bank of South Africa (DBSA) was mentioned in Minister's speech last year as one of the institutions that would fund Black Economic Empowerment (BEE). There have been some announcements on the Independent Development Corporation and the National Empowerment Fund. She asked if there are any indications on what would happen to the mandate of the DBSA in respect of BEE and whether there would be any specific allocation implications for this in terms of the Medium Term Expenditure Framework (MTEF) period.

Mr Kganyago replied that Treasury has not yet seen any review of the mandate of the DBSA. Minister Manuel has had concerns about the focus of the DBSA.

Mr Donaldson could not add much on the DBSA's mandate and its role in financing BEE. In relation to funding of economic empowerment, he said that an amount of R2b has been set aside. Part of this amount would be in this year's budget. There is at this stage no specific funds channeled to the DBSA for participation in empowerment projects. It is up to the DBSA board to take a view on empowerment projects.

Ms J Fubbs (ANC) commented that the Financial Intelligence Centre Act (FICA) imposes certain requirements before one could open a bank account. The feeling is that this might have a negative impact on micro businesses that do not have banking accounts yet.

The Chairperson said that one only needs an identity document and an account to authenticate identity.

The Director-General replied that requirements in terms of the FICA raise interesting issues. It is not like banks were caught by surprise. They knew all along that these requirements exist. If banks do not finish the verification process by June they might have to close the accounts or be in breach of the law. Banks were told to indicate how much time they would need to finish the verification process and the Minister would look at the merits of each case. The concerns they raised are not so much on businesses but relate to individuals. The problem is that some people, especially in informal settlements, might not have any accounts and also do not receive statements on rates or taxes. A declaration before a Commissioner of Oaths would be sufficient.

Ms Fubbs said that the 2004/2005 allocation as reflected in the Strategic Plan shows a decrease in the budget and the budget increases slight in 2005/06. She accepted the decrease in 2003 to 2004 as justifiable but wondered if the slight increase in 2005/06 is sufficient to meet the objectives as contained in the Strategic Plan.

Mr Donaldson replied that one could not pretend that there is high degree of precision in the three-year estimates for a new institution like the Financial Intelligence Centre (FIC). On the numbers, there are initial capital costs to set it up. There is also the project of getting the database up and running and this will take some time. It should be noted that in the Estimates Of National Expenditure (ENE) chapter on the Treasury Budget Vote that although there was a R35m transfer to the FIC in 2002/03 it carried forward R32m to the next year.

Ms Hogan thanked the Director-General and his team and adjourned the meeting.

Appendix:
National Treasury representatives

Minister T Manuel Minister of Finance

Mr L Kganyago Director-General: National Treasury

Mr I Momoniat Deputy DG: Inter-governmental Relations

Mr A Donaldson Deputy DG: Public Finance

Mr C Kruger Deputy DG: Specialist Functions

Dr F Le Roux Deputy DG: Pensions Administration

Mr F Nomvalo Deputy DG: Office of the Accountant-General

Mr P Hadebe Deputy DG: Asset & Liability Management

Mr L Wort Chief Operations Officer