Health Promotion Levy; Transformation of the Financial Sector Committee Report; Venda Pension matter

Meeting report

Transformation of the Financial Sector Committee Report
The Chairperson gave an overview of the transformation discourse. Participants in the hearings preceding release of the interim Transformation of the Financial Sector Report were more polarised than was usually the case during hearings: Those representing financially marginalised constituencies expressed frustration and anger at lack of transformation or its slow pace. However, the dominant players in the sector insisted that there has been significant transformation, even if some of the targets had not been achieved. The majority of Members believed that there has been more transformation in the financial sector than has been made out by stakeholders critical of the big players, but less transformation than the big players make out. He noted that the executive was about to gazette a financial sector transformation charter. A transformation summit to be convened by the Minister was also looming. However, the Standing Committee on Finance felt the necessary groundwork as a prelude to the transformation summit had not been done. The Committees would want its recommendations espoused in the Report to feed into the executive’s efforts. However, if that was not agreeable, the Committees were prepared to ensure the full implementation of the Report. He took the Committees through the responses to the interim Report.

The Committees made recommendations on reporting of data to the Financial Sector Charter Council and the Black Economic Empowerment Council (BEEC), and the need for sanctions for lack of compliance with reporting requirements. Participants supported this recommendation. The recommendation was informed by the need to find the necessary balances to ensure transformation benefits all but mainly the poor. Stakeholders believed there should be consequences for non-reporting and “naming and shaming’’.
The Committees had emphasised the need to capacitate and resource State Regulatory Institutions to perform effectively. The BEEC commented that being a new entity that started operating on 06 June 2016, the Broad-Based Black Economic Empowerment Commission must be well-resourced and capacitated to execute its mandate. The recommendation relating to restructuring or inadequate performance was applicable only to the Financial Sector Charter Council (FSC), not the B-BBEE Commission. The commission submitted that the Committees should revise its recommendations to reflect that inadequate performance did not apply to it yet.

Ms J Fubbs (ANC) recognised that the BEEC was recently established, therefore the capacity issue was not so much about its budget structure. The Committees were not referring to the BEEC but the FSC which was established in 2003. The FSC has had ample time to get its structure right but the structure still remained a challenge.

The Chairperson agreed.

Stakeholders expressed concern about the reliability of statistics. The Association for Savings and Investment South Africa (ASISA) said that for BEE Statistics to be trusted, the verification agencies must be trusted.

Mr F Shivambu (EFF) said the Committees should agree in principle that statistics on ownership and control of the financial sector should be generated by an independent but reliable body. He suggested that the Committees look into engaging Statistics South Africa (StatsSA) to generate credible statistics to assist Members in making informed decisions. StatsSA should be given a broad but concrete mandate to provide credible statistical information.

Ms Fubbs noted that many of the statistics did not identify the assumptions on which the generated statistics were based. Having a statistical baseline was necessary.

The Chairperson agreed that there had to be an independent body generating statistics. During the transformation of the financial sector hearings, the Committees had to conclude that there has been more transformation in the financial sector than has been made out by stakeholders critical of the big players but less transformation than the big players make out because disparate figures were being presented. StatsSA was a reasonable suggestion. However, whether it would have the necessary resources was a different issue.

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, said many regulators had vast access to statistical information. The challenge was getting them to harmonise and publish the numbers as they came with errors and differences in methodology.

The Chairperson stated that the Report made recommendations on aligning FSC with Generic Code targets. Nedbank acknowledged concerns about the misalignment of the 2016 Draft FSC Scorecard targets with the prescribed 2013 Generic Codes. It said that a one size fits all approach was not appropriate, but will participate actively in the realignment process to ensure that these concerns are addressed. He suggested that discussions on the response be deferred to a later date. Members had to apply their minds on whether the Committees should legislate specific targets on ownership in the current conjecture, or wait for FSC processes and the transformation summit outcomes. It was generally agreeable that charters were not effective as players were not compliant.

On making transformation a condition for licensing, many participants opposed linking transformation to licensing arguing that it will create instability. Stakeholders opposed this recommendation for the banking and insurance sectors citing capital adequacy requirements. BEEC pointed out that this was already legislated under requirement under section 10(1) of the B-BBEE Act. It said that all regulatory entities were required to integrate and require B-BBEE compliance for any authorisation or licensing process.

Mr A Williams (ANC) said section 10(1) of the B-BBEE Act had to be strengthened so that it becomes enforceable. It should be clear that there were stern consequences for failure to comply.

Mr Shivambu said the licensing conditions should be legislated to ensure full and non-negotiable compliance. Currently, no players were compelled to comply. Players should be well aware of the risk of losing their operating licenses if they fail to meet transformation benchmarks.

Ms Fubbs said the thrust should be to enable access of new and emerging players into the financial space. There was need to identify new entrants and entrepreneurs and reduce the barriers to entry through mechanisms such as lower licensing fees.

Mr Momoniat said the need for transformation was well understood. However, the contention was on how this could be realised effectively. If transformation was reduced solely to ownership, it could become complex as arguments around property rights would arise. Members would need to ponder upon the impact of such measures on investment and listed companies, both domestic and foreign-owned. The economy depends on listed companies- that was where big capital is. The transformation charter process was worthy because all the stakeholders were in one room and negotiating a way forward. There was no problem with taking away licences for non-compliance but taking away the banking licenses of big players would lead to systemic risks and crises. The way forward would be having the B-BBEE Act as the instrument for transformation. Mass-based transformation, not transformation for the elite was important- an evidence-based discussion was needed. The focus should be on increasing net wealth of assets across the board. He cautioned that the ultimate threat of withdrawing licenses was not the best way to go.

Mr Shivambu felt Treasury’s alarmism should be dismissed. Inequality was still reflected by ownership within the financial sector and imbalances of the past must be redressed through legislation consistent with the Constitution. There would always be compliance periods but transformation commitments cannot be shifted. The charters must spell out the deracialisation commitments. Laws should be made and people were expected to comply- lawmakers were not hostages of big players.

Mr Williams agreed the Committees could not move away from the need for conditions of licensing to deal with transformation. Members should not be intimidated by what could and could not happen. He agreed with Mr Shivambu.

The Chairperson said the desire was not to collapse the financial sector. Nobody would want to withdraw any licenses. However, some of the issues identified by Treasury must be duly considered. Treasury and stakeholders would need to strike compromises. He doubted big players would allow themselves to collapse in some quest to resist transformation. Members had to deal with the practical problems around transformation objectives and licensing criteria.

Ms Fubbs said whilst concerns harboured by Treasury about stability of the financial sector were well understood, the reality was that- 23 years after apartheid- little had happened on the transformation front. There was need to diagnose the reasons behind the delays. She appealed that Treasury appreciate the challenges bedevilling the country- the socio-economic environment had to be recognised. Certain realities had to be accepted.

National Treasury input
Mr Roy Havemann, Chief Director: Financial Markets and Stability, National Treasury, presented a study on ownership of JSE-listed companies. The structure of ownership of South African companies was linked to policy priorities on transformation and inclusive growth, macroeconomic and financial stability, and competition. Therefore, black ownership should not be considered in isolation from other types of ownership - and their relationships with investment and economic growth. Transformation of ownership was important for reducing inequality and promoting inclusive growth but the economy also needed a vibrant and inclusive equity market and an effective allocation of domestic and foreign capital towards growth-enhancing investment.
Treasury showed that foreigners and SA institutions own more than 80% of JSE-listed South African companies. It questioned whether the BEE ownership rules in the government’s codes and charters were realistic or genuinely transformational. The study found that only 14% of the shares in SA companies listed on the JSE were directly owned by corporates, trusts or individuals. Foreign investors owned 38%, while domestic retirement funds owned 24% and other SA-based institutional investors and investment managers owned a further 24%. Benchmarks for measuring whether listed SA companies have adequate black ownership need to be reconsidered. Black economic empowerment codes have failed to fix inequalities, partly because of the focus on shareholdings rather than on black management of companies. BEE deals tend to favour direct owners over indirect owners, who hold their stakes through vehicles like pension funds. It was strongly recommended that BEE codes must recognise indirect black ownership, and ensure that future deals do not transfer shares from indirect black owners to direct black owners. Major financial companies have made progress toward achieving black ownership, but transformation was substantially lagging, in particular in management control and employment equity.

The Chairperson indicated Members would discuss the Treasury report on a later date during a joint committees’ workshop.

Health Promotions Levy discussions
Ms Yanga Mputa, Chief Director: Legal Tax Design, National Treasury, gave an update on the Health Promotions Levy (HPL). Treasury last briefed the Committee on the HPL and Jobs Mitigation and Creation Plan (JMCP) on 5 September. Since then, Treasury attended the first Sugar Task Team meeting; discussing implementation of the JMCP and broader policy issues related to the sugar industry. It met with the South African Sugar Association (SASA) to discuss the gazetting of a new import duty, and with the Food and Allied Workers Union (FAWU) to brief them on the National Economic Development and Labour Council (NEDLAC) HPL process and JMCP. Treasury also briefed FAWU on the progress of the Sugar Task Team, highlighting the need for FAWU to participate as an important stakeholder. FAWU’s main concern was that they were not part of the NEDLAC process.

Treasury had submitted comments to NEDLAC on HPL and was awaiting sign-off by all constituencies on the final report. NEDLAC was to provide timelines on submission of the final report to the Committee.

The Chairperson said that during his engagement with the NEDLAC CEO, Mr Madoda Vilakazi, Mr Vilakazi indicated that there were no issues outstanding and signing-off was only procedural. He urged stakeholders to expedite the process as changes could also be considered even after the Bill was tabled by Treasury. He also urged FAWU to be part of the Sugar Task Team. The Congress of South African Trade Unions (COSATU) had suggested that adding to implementation delay by a year, HPL should be phased-in within the course of 2018. He asked why Treasury was not amenable to the proposition.

Ms Mputa said the strongest objection was that the effective tax rate had substantially been reduced from 20% to 12%. Health lobby groups felt health objectives would not be met. Further concession would only make the HPL ineffective.

Mr D Maynier (DA) asked how much revenue was expected at the new tax rate, and the extent of job losses.

Ms Mputa said Treasury had not made any revenue projections as this was a health promotion levy. On job losses, estimates were made for two scenarios- one without product reformulation by industry and based on the scenario, 5000 to 7000 job losses were estimated. If industry reformulates its products and reduces sugar contents by 37%, job losses could be between 1500 and 2000.

Mr D Hanekom (ANC) commented on mitigation measures. Stakeholders had reached a stage where they have watered the levy way down; the health consequences were serious to an extent that any further concessions would make HPL ineffective. The health consequences were serious and there was no concrete reason for further postponements and phasing-in.

Mr Matthew Park, Parliamentary Liaisons Officer, COSATU, reiterated that the NEDLAC forum was a useful process which yielded win-win outcomes. The phasing-in was informed by the need to give industry some time to readjust. He emphasised that COSATU was taking health concerns seriously as well.

The Chairperson said the Committee would draft a report to capture the host of issues raised by stakeholders on HPL. He asked Treasury to highlight the main themes on the non-HPL proposals.

Ms Mputa replied that the main highlights on non-HPL proposals were increases in the dividends withholding tax; increases in the marginal tax rates and tax thresholds.

The Chairperson noted that the majority in the Committee were agreeable to the proposals and would vote on the Bill on a date yet to be advised. However the expectation was that voting would be after the medium-term policy budget statement.

The Democratic Alliance reserved its position on the proposals.

Venda pension fund matter discussion
The Chairperson stated that after the Public Protector issued a report on the implementation of remedial action on the maladministration during the privatisation of the Venda pension fund, the Minister of Finance had indicated he was dealing with the matter.

Adv. Frank Jenkins, Parliamentary Legal Advisor, said Parliament was expected to support the Public Protector's report and ensure that the recommendations made took effect. It would be appropriate to invite Treasury to hear about the extent to which it had gone in implementing the implementation plan, certainly before the end of 2017. The Minister’s report outlined a five phase implementation plan starting from June to November 2017. The Committee’s task would be to ensure that the plan was implemented.

The Chairperson noted that the Venda pension fund matter had been in the media intermittently. The Committee had to hold Treasury to account. The Committee had to draft a report to be discussed in the House at the latest convenience. He commented on the South African Revenue Service debacle. It was well understood that if there must be a role the Committee should play in the SARS so-called ‘rogue intelligence unit’, it had to be done. The issues had to be separated as some of them fell under the purview of the intelligence committee. The Committee had to agree in principle that it would deal with the matter but had to have the demarcations right. It would need to look at the auditing aspects of the KPMG relationship with SARS. The Committee would come up with a position after engagements with relevant parties and the House chairperson.

The meeting was adjourned.