National Treasury Briefing 2009/10 Annual Report Summary

1. 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

2. 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

3. 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 R18.3bn 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

4. Introduction • 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

5. Major achievements • 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

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

7. Programme 2: - continued (Division 2 – Public Finance) • 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)

8. Programme 2: - continued (Division 3 – Intergovernmental Relations) • 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)

9. Programme 2: - continued (Technical & Management Support) • 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 2010FIFA 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

10. Programme 3: Asset & Liability Management • 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

11. Programme 4: Financial Management & Systems • 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)

12. Programme 5: Financial Accounting & Reporting • 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

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

14. Programme 6: - continued(Division 2 – International & Regional Economic 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

15. Programme 6: - continued(Division 3 – 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

16. Programmes 7, 8 and 9 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

17. Programme 1: Administration 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

18. Matter of emphasis – AG findings • 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