NATIONAL TREASURY BRIEFING TO JOINT MEETING OF FINANCE PARLIAMENTARY

COMMITTEES ON 2009/10 ANNUAL REPORT

Presenter: Lesetja Kganyago | Director General, National Treasury | 14 October 2010

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OVERVIEW: FINANCE MINISTER Highlights

• Stronger than expected GDP growth in 1H 2010 followed by moderation

• Countercyclical macroeconomic policies, high commodity prices and improving external demand have supported the recovery

• Stronger revenue collection by SARS, but expenditure is also still growing

• Low inflation supports decline in prime interest rates to lowest level in 30 years

• The 2010 FIFA World Cup added about 0.5% to annual growth and contributed roughly R3.6 billion in tax revenues to the fiscus

• Employment is stabilising after large job losses during the recession

• Investment by state-owned enterprises is growing more moderately off a high base. Total public sector infrastructure spending of R845 billion over the MTEF

• The current account narrowed to 3.5% in 1H 2010…. expected to widen gradually over the MTEF as domestic demand and imports rise

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OVERVIEW: FINANCE MINISTER Risks

• Weaker economic data since July points to slower growth in 2H 2010

• Export volumes still subdued, even after strong bounce in the second quarter

• Exchange rate appreciation as capital flows from low-growth developed countries to emerging markets with higher returns reduces competitiveness and poses risk to balanced growth

• Strong real wage growth dampens job creation, especially in public sector

• Weak private investment due to low capacity utilisation and policy uncertainty

• Infrastructure investment challenges for general government

• Performance of the state still worrying especially at local government level

• Municipal debt increased from R18.3 bn in 2008 to R27.5bn in 2009. While this is a low level of aggregate municipal debt, the weak revenue base of many municipalities is a challenge

• State debt costs rising from 2.4% in 2009/10 to 3.2% in 2012/13 eating into fiscal resources

• The National Treasury is responsible for managing South Africa’s national government finances, and draws its mandate from Chapter 2 of the Public Finance Management Act, together with Chapter 13 of the Constitution

• We continued to monitor the impact of the global financial crisis and were able to find appropriate responses (interest rates were cut five times, increased the pace of government expenditure etc)

• The budget process was enhanced as a result of the Money Bills Amendment Procedure and Matters Related Act, (Act 9 of 2009)

• We increased our capacity by creating a division handling our international and regional economic policy

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Introduction

• Credit ratings maintained at BBB+ by Fitch and Standard and Poor’s, while Moody’s upgraded our long-term foreign currency rating to A3 from Baa – demonstrating confidence in our macro-economic and fiscal policies

• Debt as a percentage of GDP remained low relative to many developed economies

• Infrastructure spend boosted economic activity especially in the construction sector

• Created a specialised audit services unit to provide forensic investigation and consultancy services to different entities on tender-related issues

• Our financial sector regulatory standards helped ensure that our banking system remained sound and relatively unscathed by global financial crisis

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Major achievements

• Ensured that the budget framework for MTBPS and Budget Review were tabled on time and included an estimate of the structural budget balance

• Continued to find savings as part of the drive to ensure efficiency in the public sector – will update in October

• Notable improvement in the quality of performance information, public entity indicators and consistency of targets especially related to allocations

• Introduced a simplified version of the consolidated government account in the 2010 Budget

• Produced an updated version of the Reference Guide to the Economic Reporting Format with corresponding classification circulars, used by departments to classify transactions

• Increase in the number of reports from departments receiving ODA funding

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Programme 2: Public Finance & Budget Management (Division 1 – Budget Office)

• Provided valuable policy analysis on sector-specific and departmental issues

• Conducted pre-MTEC meetings with each department to improve the inputs into deliberation of the medium term expenditure committee

• Ensured that all national departments have measurable objectives per programme and a selected set of 10-12 service delivery indicators

• The consolidated government paper is being further developed following comments received from members of the IDTT for Social Security and Retirement Reform, and the Inter Ministerial Committee

• Ongoing work in consultation with the Presidency and other line departments on comprehensive public expenditure review (together with Intergovernmental Relations and Budget Office)

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Programme 2: - continued

(Division 2 – Public Finance)

• Published the Provincial Budget and Expenditure Review documents which track sectoral trends in provinces

• Published provincial and municipal data within set time frames (PFMA section 32 reports and MFMA section 7 reports)

• Finalised the provincial and local budget framework in September 2009

• Implemented financial management reforms in 120 provincial departments (far exceeding the target of 30)

• Conducted funding compliance assessment in 17 non-delegated municipalities as part of the NT budget review of these municipalities

• Published and tabled a report on municipal over- and under-expenditure (per municipality)

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Programme 2: - continued

(Division 3 – Intergovernmental Relations)

• The Technical and Management Support group continued to provide valuable technical and project management support to a number of departments

• The group is made up of PPP, 2010 WC Unit, IDIP, NDPG & TAU

• At the end of the financial year, TAU was supporting 60 projects and had completed seven. Analysis commenced on 5 tertiary hospitals identified by the national Department of Health as potential PPPs

• The 2010 FIFA World Cup unit provided support to the Minister and Deputy Minister of Finance, the Technical Co-ordination Committee, Inter-Ministerial Committee and Organising Committee, regarding the hosting of the 2010 FIFA World Cup

• Through IDIP, 27 full time Technical Assistants were deployed to the 9 provincial education, health and public works departments

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Programme 2: - continued

(Technical & Management Support)

• Met government's borrowing needs (R187.4 bn)

• Worked to establish a DFI council

• Monitored the weekly issuance of SOE bonds in the capital market and followed-up with SOEs that did not receive full subscription of their bonds

• Provided financial oversight over Schedule 2 and 3B entities

• Assisted in reviewing economic regulation in the electricity and aviation sectors and determining the impact on SOE financial sustainability

• Reviewed the strategic benchmark strategy to align the debt portfolio to the risk benchmark of 70/30 fixed vs. non-fixed rate domestic debt

• National and provincial governments saved about 3% on borrowing costs by not borrowing from commercial banks

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Programme 3: Asset & Liability Management

• Introduced strategic sourcing principles to 24 national departments and 5 provincial treasuries (municipalities & constitutional institutions still outstanding). PALAMA responsible for the roll out of comprehensive training strategy

• Established the SCM Compliance Monitoring Unit in conjunction with the Office of the Accountant General to detect and fight tender related fraud

• Released for public comment draft interim measures to align preferential procurement with the aims of the BBBEE Act and its related strategy (strategy still being discussed)

• Roll out of certain modules of the Integrated Financial Management System underway in lead sites - National Treasury and the Limpopo Provincial Treasury have implemented the asset management module. Other modules to follow. Challenges experienced due to the turnaround strategy at SITA not being fully implemented

• Renewed 30 of the 32 transversal term contracts due for renewal (total is 59)

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Programme 4: Financial Management & Systems

• Developed and published 19 GRAP tools and checklists for use by departments

• Finalised a strategy to align the cash to accrual implementation plan with the IFMS roll-out plan

• Published monthly statements of actual revenue and expenditure for the National Revenue Fund every last working day of each month

• Trained 1 334 officials to provide support to provincial treasuries to better prepare provincial consolidated financial statements and provincial revenue fund statements, and implement GRAP standards

• Conducted internal audit reviews at 26 municipalities as planned

• Assessed financial management skills of 7 496 officials from 283 municipalities

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Programme 5: Financial Accounting & Reporting

• Contributed to discussions in the G-20 and Financial Stability Board

• Reviewed the effectiveness of the financial regulatory system in South Africa in collaboration with key financial regulators

• Published for comment a framework to modernise Regulation 28 of the Pension Fund Act

• Reviewed the strategy to effectively tax financial instruments, limit tax avoidance and create a level playing field for the tax treatment of debt and equity – proposals included in the 2010 Budget e.g. Islamic finance, Interest allocation for financial operations

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Programme 6: Economic Policy & International Financial Relations (Division 1 – Tax & Financial Sector Policy)

• Approved the legal structure to establish SADC's Project Preparation and Development Facility

• Compiled policy briefs for meetings of SACU, SADC and the ADB

• Completed the ratification of the Agreement of Collaborative Africa Budget Reform Initiative

• Co-chaired G20 working groups on International Finance Institution reform and growth and development

• Assisted in securing a US$ 3.75 billion WB loan to enable ESKOM’s infrastructure development aimed at increasing power generation in South Africa

• Increased coordination and cooperation with other emerging market and developing countries on issues such as the reform of the Bretton Woods Institutions, modalities of G20 engagement and OECD outreach

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Programme 6: - continued

(Division 2 – International & Regional Economic Policy)

• Improved the quality of macro-economic forecasts for the medium-term expenditure framework

• Well developed policy focus for macroeconomics chapters of the MTBPS and Budget Review

• Produced a new chapter on employment in the Budget Review

• Econometric modeling on: the structural budget balance; the Gini-coefficient and employment; the impact of the exchange rate on the economy; the impact of the World Cup; and the impact of electricity price increases

• Policy analysis and advice on: the G-20 mutual assessment process; the international financial crisis; drivers of rand volatility; impact of export taxes on the economy; growth-enhancing policies; assessment of monetary policy frameworks; youth wage subsidy experiment and discussion document on youth employment options; high-frequency analysis of economic indicators

• Meetings with domestic and international investors

• Meetings with IMF Article IV surveillance team and helped coordinate OECD Economic Survey of South Africa

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Programme 6: - continued

(Division 3 – Economic Policy)

These three programmes are primarily our fiscal transfers programmes

• Programme 7 (Provincial and Local Government Transfers) deals with transfers to provinces and municipalities and these were made as planned. Refer to the main document on page 96

• Programme 8 (Civil and Military Pensions) deals with payment and administration of special pensions, military pensions, other statutory pensions, and post-retirement medical subsidiesis the Pensions programme. The administration of the Government Employees Pension Fund (GEPF) was separated from the fund and the government component responsible for administering both programme 8 and civil pensions was established. More information is on page 101

• Programme 9 (Fiscal Transfers) refers to transfers made to public authorities and other institutions, including multilateral development banks and international development bodies of which South Africa is a member. See page 106 for transfers made in the 2009/10 financial year

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Programmes 7, 8 and 9

This is the department’s support office which provides Corporate Services,Communications, Legal and Security services to the other programmes.

Highlights include:

• Vacancy rate reduced to less than 8% (6.75%)

• Established an Enterprise Risk Management unit which developed a comprehensive ERM strategy, including a fraud prevention plan, and successfully completed risk assessments for 70 per cent of the department

• Ran successful leadership and training programmes, and also exceeded the target of an average 5 training days per annum per employee

• The Paper Trail Project was finalised and implemented. A fileplan system was also implemented in 90 per cent of the department and has improved records management

• NT profile in the 2009/10 financial year: of total staff component, 56 % female, 78% black. At senior management level, 66% is black, 42% female

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Programme 1: Administration

• The irregular expenditure of R2.7 million relates to the previous financial year (2008/09) and not the year of review (2009/10) and has been recorded as such

– Due to late extension of a contract of employment agencies providing short term contract staff on demand

– To avoid interruption of service provision on existing assignments

– On conclusion of new contracts there was an oversight in classifying these as such in the relevant year (2008/09) by line staff

• The matter was investigated and appropriate corrective action recommended

– Training line staff on the SCM processes and PFMA regulations

– No employee personally benefitted from the incident

– There was no financial loss to the state resulting from the occurrence

– Controls have been reviewed and tightened to detect and/or prevent recurrence

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Matter of emphasis – AG findings