Committees' Report on the Revised Fiscal Framework; Briefings by the Council for Debt Collectors and SASRIA Ltd

Meeting report

Consideration and Adoption of the Committees’ Report on the Revised Fiscal Framework
The Committees had met on 3 November 2011 to consider the joint report on the Revised Fiscal Framework.  The major area of concern had been the Committees’ Observations section in the report.  Members were requested to submit suggestions to the Committee Secretary by close of business and agreed to finalise the amended report on 4 November 2011.

No additional changes were required on pages 1, 2 and 3 of the amended draft report.

Mr R Lees (DA, KwaZulu Natal), Mr S Swart (ACDP) and Dr Z Luyenge (ANC) pointed out technical and grammatical corrections to section 3 (Committees’ Observations) on pages 4 and 5 and to section 5 (Recommendations) on pages 6 and 7 of the draft report.

Mr Lees disagreed with the observation that “job creation was incorrectly left for government and there is a dire need for a firm commitment by the business sector with regard to job creation …”.  He acknowledged that government had performed better in job creation but he did not accept that the private sector had done nothing about creating jobs, as was implied.

Mr S Marais (DA) agreed with Mr Lees.  The reality was that the public sector had shown the fastest growth in employment.  The private sector responded to stimulus and support and there was little incentive to create employment.  Jobs were created when the economy flourished.  The South African economy was not growing and a new fiscal framework that supported conditions for job creation was required.

Ms T Memela (ANC, KwaZulu Natal) understood that the degree of commitment in the business sector had not been satisfactory.  The major burden had been on the State.  Job creation by the private sector had only recently improved after much engagement between government and the private sector.

Mr N Koornhof (COPE) agreed that the onus to create jobs had not been solely on government.  The Committee had been concerned over the slow rate of job creation.  The point was that government could not continue to be the largest employer in the country.

Mr Mafumadi agreed that the observation should not create the impression that the private sector did not support government’s job creation objectives.

Mr Marais asked for clarity on the observation that “a shift towards bulk infrastructure would be useful”.

Mr Koornhof understood that the Minister of Finance had referred in his statement to a shift in the composition of public expenditure towards the provision of infrastructure, which would be more productive for the country.  He suggested that recommendations 5.5 and 5.8 were merged as both points referred to the State wage bill.  The challenge was to get the labour unions to accept the recommendation that salary increases for government officials should not exceed 5% for the following three years.

Mr Marais understood that the average percentage increase would be restricted to 5%, which implied that different percentages could be applied to different job categories.

Mr Lees felt that the Committees should not set limitations on the percentage of salary increases but should rather recommend that the proportion of the State’s wage bill of total expenditure was reduced.  The administration should be allowed to reward good performance and award larger increases where appropriate.

Mr Swart said that the National Treasury had already developed the framework for a 5% cost of living adjustment, which was supported by the Committees.  He agreed with Mr Koornhof that the restriction on the percentage salary increases would be contentious.

Mr B Mashile (ANC, Mpumalanga) pointed out that recommendation 5.5 required engagement with the unions on monitoring the government wage bill and recurrent expenditure.  He suggested that the recommendation was phrased more clearly.

Mr E Mthethwa (ANC) suggested that the recommendations encapsulated the principles and avoided being too technical.  The administration should be allowed to deal with the detail.  There were a number of factors involved in determining wage increases and it was not appropriate for the Committee to dictate how remuneration should be dealt with.  He suggested that the 5% restriction was omitted.

Mr T Chaane (ANC, North West) pointed out that the recommendation to restrict salary increases to 5% had been made previously but had been exceeded.  The Committee should rather ensure that the recommended percentage was enforced.  He suggested that the Committees facilitated a meeting between the National Treasury, the unions and the Department of Public Service and Administration (DPSA) to find an effective and lasting solution to the problem.  The Committees did not know what had informed the National Treasury on the 5% cost of living increase but was aware that the Treasury was concerned over the size of the State’s wage Bill.  The State wage bill should not exceed 40% of gross domestic product (GDP) but currently stood at 42%.

Mr Koornhof said that the escalating State wage bill was the largest area of concern and needed to be addressed by the Committees.  The action taken by the National Treasury had resulted in attacks by the unions.  It was essential that salary increases did not exceed the 5% target as any failure to meet the objective would have significant negative consequences for the fiscal health of the country.

Mr S Mazosiwe (ANC, Eastern Cape) understood the argument for capping the percentage of wage increases but warned against creating a situation where Parliament was in disagreement with the labour unions.  He agreed that determining salary increases was an administrative function but the extent of the State wage bill was a matter for serious concern.

Mr Marais said that the administration could not be given a blank cheque and that it was important to avoid creating the impression that the State could not balance its books.  The Committee must indicate its concern.  A wage bill of 40% of GDP was too high.  The benchmark was 33% and it was essential that the percentage of GDP of the wage bill was reduced.  The major concern currently was to grow the economy.

Mr Mafumadi observed that all the stakeholders shared the concerns over the extent of the State wage bill.  The Revised Fiscal Framework indicated a decline in capital expenditure and it was necessary to reverse the trend.  The Committee supported the initiatives of the National Treasury to reduce the State’s wage bill over the medium term expenditure framework (MTEF) period.  The Committee would support any measures introduced by the National Treasury.  He proposed that the report merely reflected that the Committees wished to see that the State wage bill was reduced.

Mr Mashile queried the responsibility of the National Treasury for expediting infrastructural development through partnerships with the private sector. He understood that the Treasury only played a facilitating role.

Mr De Beer recalled that the Minister had referred in the statement to a special unit in the National Treasury that was responsible for private/public partnerships (PPP’s).  He suggested that the Treasury was invited to brief the Committee on the objectives and operations of the unit.

Mr Mazosiwe asked if the recommendation concerning PPP’s should be included in the recommendations.  There were many such partnership arrangements that had been in existence for some time.

Mr Mthethwa said that there was a need to review PPP’s.  Not all such partnerships had been successful, for example the PPP’s formed with the Department of Correctional Services for managing prisons.

Mr Mashile referred to the recommendation on the National Treasury advising the Department of Public Works (DPW) to exclude escalation clauses in new building contracts.  He pointed out escalation clauses were a standard feature in rental agreements.  It was not feasible to demand fixed prices.  He felt that the recommendation should be omitted as it violated the law of contract.

Mr Koornhof explained that the recommendation did not apply to existing contracts.  Escalation clauses should be minimised (not disallowed).  The concern was over the absence of penalty clauses if contractors failed to complete building projects on time.  It was necessary to ensure that the State was not charged exorbitant fees and charges.  There was a tendency to charge government the maximum possible tariff and the DPW had to do more to ensure that the State was not over-charged.

Mr Mashile agreed that penalty clauses should be included in contracts.  The DPW had to enforce penalty clauses and deal with variation orders more effectively.  The Committee should avoid tampering with contractual escalation clauses.

Mr Mafumadi said that the recommendations should not be vague.  The Committees needed to make concrete proposals that would ensure that government benefited from competitive pricing.  The Committee should engage with the responsible Department whenever problems arose and not be limited by the extent of the Revised Fiscal Framework Report.

Mr Marais had forwarded his comments too late to be included in the draft report.  In principle, the report should cover the Minister’s statement.  The Minister had commented on the need to eliminate fruitless and wasteful expenditure and the importance of direct foreign investment.  The Committee needed input from the National Treasury on how wasteful expenditure could be eliminated, how foreign investment could be encouraged, how procurement process ‘leakages’ could be blocked and how the fiscal framework and budget process could be strengthened

Mr Mafumadi had considered the submission from the Democratic Alliance and agreed with most of the points that had been made.  The input would be included in the final report.

Mr Lees said that maladministration had cost the country R30 billion.  Such wasteful expenditure must be controlled.  He suggested that the savings generated by curbing wasteful expenditure were applied to programmes that would grow the economy.  He felt that the allocation of R208 million to deal with acid mine drainage was not sufficient.

Mr Mafumadi disagreed that the Committee should be making recommendations about increasing the amounts allocated to programmes.  The Committee should be concerned and support the policy direction rather than getting involved in the details.

Mr Marais referred to the statement that “the House accepts the 2011 Revised Fiscal Framework”.  He reserved the right not to support the Revised Fiscal Framework and was unable to support the report if the statement was included.

Mr Mafumadi advised that the Rules of Parliament allowed the declaration to be included in the report.

Mr Mthetwa proposed a motion that the Standing Committee on Finance accepted the report.  The motion was seconded by Mr Koornhof.

Mr Mashile proposed a motion that the Select Committee on Finance accepted the report.  The motion was seconded by Ms Memela.

The Committees adopted the report, with amendments.  Members of the Select Committee on Finance were excused from the remainder of the proceedings.

Briefing by the Council for Debt Collectors (CDC)
Members of the Committee on Justice and Constitutional Development attended the first briefing to Parliament by the CDC.

Ms Shirley Machaba, Chairperson of the CDC introduced Advocate Andries Cornelius, Chief Executive Officer and Ms Ellanor Maritz, Chief Financial Officer to the Committee.

Adv Cornelius presented the briefing to the Committee (see attached documents).  The CDC was established in accordance with the Debt Collectors Act (Act 114 of 1998).  The first Council was appointed in 2000.  In terms of the Act, debt collectors were required to register with the CDC and comply with the code of conduct adopted in 2003.  As at 28 February 2011, 13,245 debt collectors had been registered.

The objectives of the CDC included regulating the occupation of debt collectors, regulating the recovery of fees, investigating complaints against debt collectors and instituting disciplinary procedures against debt collectors for misconduct.  Approximately 6000 telephonic complaints were dealt with each year and 520 formal complaints were finalised per annum.

The Chairperson, Vice Chairperson and eight additional Council Members were appointed by the Minister in accordance with the Act.  There were 18 full-time posts in the secretariat, under the management of the Chief Executive Officer. 

The CDC derived revenue from the payment of prescribed application and annual subscription fees.  The total amount of revenue for the 2010/11 financial year was R10.7 million.  Total expenditure was R10.5 million.  Since its inception, the CDC had received unqualified audit reports.

The CDC had a policy of informing debt collectors, the public and other role players of its activities by means of electronic and printed media, a website and by conducting awareness campaigns.

Current challenges included the recent appointment of a new Chairperson and Chief Executive Officer, the development of new strategic plans and the purchase of premises (for which the approval of Parliament was required).  Newly appointed Councillors received induction training.  The CDC planned to take over the administration of the trust accounts of defunct debt collectors; to train more learner debt collectors; to promote the development of a learnership programme and to play a more active role in the training of debt collectors.  There was a need for attorneys to be registered with the CDC as debt collectors and for the fees charged by attorneys to be regulated.

Discussion
Dr Luyenge asked if the CDC was represented in the provinces and how the provincial authorities were communicated with.  He asked if the CDC had appropriately qualified personnel, who were responsive to the objectives of the Council.  He asked if the CDC had a formal relationship with the Sheriffs of the Courts.  He asked if debt collectors found guilty of misconduct were blacklisted.  He asked how debt collectors were monitored and evaluated.  He wanted to know what the impact was of the appointment of a new Chairperson and a new CEO.

Ms P Adams (ANC) asked how successful the CDC’s awareness campaigns were and how the outcomes were measured.  She asked if any campaigns were aimed at educating consumers on how to save and avoid getting into debt.  She observed that the CDC had reported a significant surplus in 2003 but the amount of profit had declined to a relatively small amount in 2011.

Mr Koornhof noted that the total income in 2006/07 was double the amount of expenditure.  In 2010/11 income had barely exceeded expenditure.  He wanted to know what the reasons were for the downward trend.  He asked if the surplus was transferred to the National Treasury at the end of each financial year.

Mr Marais said that the briefing had made no mention of the CDC’s obligation to consumers and to the economy as a whole.  He asked if consumers who paid back their debt were removed from the list of persons considered to be bad credit risks.  He asked what guidance was given to consumers on saving and debt.

Ms D Schafer (DA, Member of the Portfolio Committee on Justice and Constitutional Development) asked if debt collectors were obliged to register with the CDC and what protection was provided to consumers against unregistered debt collectors.  She asked if the subscription fees were prescribed, if any complaints had been received about the amount of the subscription fee levied by the CDC and if the Council was able to collect the fees from debt collectors.  She asked how the CDC monitored debt collectors to ensure that the code of conduct was complied with.

A Member of the Portfolio Committee on Justice and Constitutional Development asked if the Chairperson of the CDC was appointed by the Minister of Justice and Constitutional Development.  That Committee would require an annual briefing on the audited financial statements of the CDC and details of matters that had been discussed with the Minister.

Adv Cornelius responded that the current staff complement of the CDC was 18.  The CDC operated from a central office in Pretoria and had no provincial offices.  The jurisdiction of the Council covered the entire country and when necessary, staff traveled to other areas.  Communication and awareness campaigns were conducted nationally.  The current staff complement was adequate for the workload.  When necessary, additional staff was appointed on a temporary basis, for example to take over the administration of the trust account of a defunct debt collector.  The CDC had no formal relationship with the Board of Sheriffs, which reported to the Court.  The CDC made use of Sheriffs to serve documents.  The CDC was not involved in the relationship between debtors, creditors and debt collectors and played no role in the blacklisting of debtors.  The conduct of debt collectors was monitored through the incidences and types of complaints.  Debt collectors had to submit audited annual financial statements to the CDC, which were used for financial monitoring purposes.

Adv Cornelius referred Members to Annexures B and C to the 2011 Annual Report of the CDC, which listed the audience numbers of participating radio stations and the talks that were held on community radio.  The CDC had appointed a company to conduct the awareness campaigns and had reached approximately 5 million listeners in 2010/11.  The impact of the awareness campaigns was monitored by assessing the telephonic complaints received.  The Act specified that the CDC must regulate debt collectors and consumers were protected only by means of penalising debt collectors who violated the code of conduct.  Currently the CDC could impose a fine of up to R1.2 million for serious misdemeanors and order the debt collector to repay the amount that was collected.

Ms Machaba paid tribute to the previous Chairperson of the CDC, who had laid a solid foundation for her to work on.  Certain Councilors had been re-appointed and were very experienced.  She was appointed only recently and had not yet had sufficient time to review the strategy of the CDC.  Her background was in governance and although the CDC was not subject to the Public Finance Management Act (PFMA), her intention was to ensure that the organisation complied with the good governance principles applicable to government entities.  The decline in the surplus declared was attributed to escalating establishment costs and increased staff levels and staffing expenditure.  Application and subscription fees had not been increased since 2003.  Accumulated surplus amounted to R30 million and was invested in accordance with the Council’s investment policy.  The accumulated surplus was equal to the operational expenditure for a period of three years.  The CDC received no government funding.

Adv Cornelius explained that debt collectors were required to deposit the money collected into a trust account.  Attorneys had a fidelity fund against which claims could be made.  The CDC did not have a fidelity fund.  An amount of R25 million was required to establish a fidelity fund for debt collectors.  The accumulated surplus was sufficient to cover operational costs for three years but financial assistance from the State would be necessary to establish a fidelity fund.  The fees charged by debt collectors were prescribed and may not exceed the amount owed.  Disciplinary action was taken by the CDC against debt collectors who charged more than the prescribed fee.  The CDC appointed an auditor to investigate any mismanagement of a debt collector’s trust account.  The CDC received no payment from members of the public.  All debt collectors must be registered with the CDC and it was a criminal offence to operate as an unregistered debt collector.

Mr Mafumadi advised that the Committee would appreciate further interaction with the CDC on the environment in which the Council operated.  The National Treasury had commenced a process whereby the operations of all State financial entities were reviewed.  The Committee was responsible for conducting oversight over financial entities and would require further briefings to determine what assistance could be provided to increase the effectiveness of the CDC.  The Committee would review the mandate of the CDC and would require briefings on the annual reports of the organisation.  He thanked the CDC for the information that was provided.

Briefing by the South African Special Risks Insurance Association Limited (SASRIA)
Mr Adam Samie, Chairperson of the Audit Committee, SASRIA introduced Mr Cedric Masondo, Managing Director and Ms Karen Pepler, Financial Director to the Committee before presenting the briefing to the Committee (see attached document).

Insurers and re-insurers decided to exclude political risk cover and declined to pay out claims arising from the 1976 Soweto riots.  SASRIA was a Section 21 company, established in 1979 for the purpose of offering riot and civil commotion cover.  The Conversion of SASRIA Act (Act no. 134 of 1998) converted SASRIA to a limited company of which the State was the sole shareholder.  The Act made provision for the actuarial determination of assets surplus to the needs of SASRIA and a special dividend of approximately R11 billion was paid to the government. SASRIA operated in the short-term insurance sector and was subject to the Reinsurance of Material Damages and Losses Act (Act no. 56 of 1989).

The various types of insurance risk cover offered by SASRIA were listed.  The briefing included an overview of the company’s business model.  SASRIA operated on the basis that applications for cover would not be refused and continued to pay out regardless of the number of claims lodged.  SASRA purchased re-insurance cover on the open re-insurance market.  The Company had a strong balance sheet and adhered to the principles of good governance.

Mr Masondo summarised the five key strategic objectives of SASRIA and took the Committee through the analysis of insurance activities by class of business.  The briefing was illustrated by graphs and charts indicating the trends in gross written premiums, claims trends per peril, gross claims incurred and the loss ratio.  The graphs reflected the increased number of labour strikes and service delivery protests during 2010/11.

Ms Pepler presented the statement of comprehensive income.  SASRIA had entered into three treaties to protect the Company’s balance sheet.  The decline in investment income was attributed to reduced interest rates and volatile equity markets.  Gross insurance premiums written had increased by 28.7% in 2010/11 to R1 billion but pre-tax profit had declined by 11.9% to R616 million.  The graph illustrating capital growth reflected the slowdown in the rate of growth resulting from the adverse conditions experienced in 2010/11.  The bulk of assets held by SASRIA were in liquid investments and equity.  Total equity amounted to R3.47 billion and total liabilities amounted to R644.3 million in 2010/11.  The briefing included an overview of the financial highlights during the previous financial year.

Mr Samie explained that SASRIA would need to hold capital of R10 billion to cover single events with massive outcomes, for example the recent terror attacks in Spain, Kenya and India (Mumbai).  Approximately 25% of claims arose from random acts of violence during labour and service delivery protests.  These acts of violence resulted in significant damage to government and private property.  SASRIA had to increase the amount of re-insurance purchased.  Government had an obligation to the insurance sector to reduce the damage to property caused by violent labour and service delivery protest action by dealing with the causes more effectively.

Mr Masondo concluded the briefing with a summary of SASRIA’s corporate social investment (CSI) initiatives.

Discussion
Mr Marais asked if SASRIA had any CSI programmes aimed at the disabled community.  He asked how SASRIA determined the percentage of premium increases.  He asked if SASRIA paid dividends to the State Revenue Fund.  He observed that SASRIA generated significant profit.  Such substantial profits could be regarded as another type of tax on the citizens of the country.  There was no need to increase premiums if the Company paid substantial dividends to the shareholder.  He understood that SASRIA had to be financially viable but the Company was not intended to be a cash cow.  He asked what future risks had been identified for SASRIA.

Dr Luyenge wanted to know how SASRIA managed the impact of inflation and if the company operated suspense accounts for unclaimed and declined claims.  He asked if SASRIA was represented in the provinces.

Mr Samie explained that the ratio of net written premiums to capital determined whether an insurance company was adequately capitalised.  SASRIA was deemed to be solvent with a ratio of 25% and the company had excess capital.  Risk assessment included considering a worst case scenario such as the 9/11 terror attacks in the USA.  The impact of major single events was determined by actuarial calculations.  The risk was re-insured at a cost to the Company.  The ideal situation would be if the Company had sufficient reserves to cover the cost of a major event.  SASRIA had experienced an increase in the number of claims resulting from civil unrest in 2010.  The exposure to smaller claims was escalating and the ratio was approaching 75%.  It was not obligatory to purchase SASRIA cover.  Premiums were collected from private citizens who purchased SASRIA cover.  Premiums were increased to keep pace with inflation and to include cover for the new rioting risk.  A portion of the surplus was paid to the shareholder in the form of dividends and the remainder was invested.  It might be necessary to review the Company’s dividend policy and discontinue the payment of dividends in order to build reserves.

Mr Masondo explained that 2010 had been a good year for SASRIA as large events such as the 2010 FIFA Soccer World Cup had generated more new business for the Company.  SASRIA had launched a new product, which had contributed R40 million in premium income.  SASRIA’s premiums were competitive and the premium rate per R1,000 cover was much less than the rate charged by Lloyds of London for similar products.  The risk of single major events had increased but this type of risk differed from the risk of political unrest.  SASRIA had increased its premiums twice in a period of 30 years.  Premiums were adjusted according to the degree of risk and were not increased on an annual basis.  Cover was purchased for a period of twelve months to cover the particular risk during that period.  The situation of unclaimed benefits did not arise.

Mr Mafumadi observed that the report of SASRIA was a valuable barometer of the impact of strikes, service delivery protests and natural disasters.  The Committee would have liked to spend more time on the claim experience of SASRIA as illustrated in the graphs included in the presentation document.  The financial sector was expected to make a larger contribution to achieving government’s objectives, particularly in job creation.  The Committee would appreciate further interaction on SASRIA’s CSI initiatives.  Engagement with the Committee extended beyond the annual reports of State-owned entities.  The Committee could provide assistance to the Company if required.  He thanked the CDC and SASRIA for the information provided in the briefings to the Committee.

The meeting was adjourned.