SAA Unallocatable Debt; Financial Board Amendment Bills: voting

Meeting report

FINANCIAL PORTFOLIO COMMITTEE
15 February 2000
SOUTH AFRICAN AIRWAYS UNALLOCATABLE DEBT BILL; FINANCIAL SERVICES BOARD AMENDMENT BILL: VOTING

Documents handed out:
Summary of motivation for debt sharing in respect of the Unallocatable Debt Bill (Appendix 1)
Supplementary submission by the Financial Services Board on the Amendment Bill (Appendix 2)

SUMMARY
Mr Molefe of the Department of Finance commented on his written motivation to the Committee on burden sharing and the South African Airways debt. After questions from the members, the Bill was voted on and agreed to without amendments.

Representatives from the Financial Services Board explained the most important amendments to the Financial Services Board Act. The Bill was voted on and passed with one amendment.

MINUTES
South African Airways Unallocatable Debt Bill
Mr Molefe, Chief Director: Asset Management in the Department of Finance, presented a written motivation for the government taking on this debt-sharing (as previously requested by the Committee).

He noted that a correction be made in paragraph 16. The first sentence in that paragraph should read that: benefits are much higher than the costs rather than costs are higher than the benefits, which gives the incorrect impression. The Chairperson drew members' attention to paragraphs 9,10 and 11 which makes the transaction more explicit.

Questions:
Mr Andrew (DP) asked how, in accounting budget terms, the transaction would be handled in government's books. Mr Molefe said that it would be reflected as a 'borrowing'. Mr Andrew's response was that, in terms of the annual budget, the purpose of borrowings was usually to finance loan or budget deficits. Mr Molefe said that in the books, below income, expenditure and deficit, the 'borrowing' would be reflected.

Prof Turok (ANC) expressed the view that the committee would benefit from a briefing on asset management by Mr Molefe and the Chairperson said that it would be scheduled.

Adv Schutte (NNP) referred members to the section on pension fund debt in Mr Molefe's document. He commented that a number of reasons existed for this shortfall and such historical antecedents should be noted.

Mr Andrew (DP) queried the figures in paragraphs 9 and 11 and asked whether the figures were in percentages. He made the point that GDP ratios would not have increased by 0,2 because of this transaction. On this same point Dr Luyt (FA) asked what the real effect of this transaction was. Mr Molefe firstly pointed out that the figures used in the paragraphs are from the 1998 Budget Review. In response to the question he said that the ratio increases by 0,2 percent and confirmed that the numbers were correct.

Mr B Nair (ANC) recalled that COSATU had expressed misgivings on the restructuring of Transnet and asked whether such a restructuring would be contemplated. Mr. Molefe's response was that Transnet's debt problem was linked to the pension fund. In order to resolve its debt problems an investigation was being done and a report would be made in March to the Committee of Ministers.

The Chairperson proposed that they move to a motion of desirability. Members had no objection to the motion. The Chairperson asked whether the Committee wished to go through the Bill clause by clause but Mr Andrews (DP) suggested there was no need. The Chairperson concluded that the South African Airways Unallocatable Debt Bill be reported as agreed to without amendments.

The Financial Services Board Amendment Bill
Two representatives from the Financial Services Board (FSB), Mr L Wessels and Dr FH Van Zyl, addressed the Committee on the notable changes to the current Act.

Mr Wessels gave a broad overview on the Bill's aims and its background. The Financial Services Board is a statutory body with roots in the distant past when its functions were still part of the Department of Finance and headed by a government official with a regulatory task. In 1990 the Financial Services Board Act was passed and a statutory body was created. Since then it has been a private, independent regulatory authority taking care of financial institutions as defined. Mr Wessels said the Amendment Bill is not of major consequence and outlined the changes:

Clause 1
A new definition of 'supervision' has been inserted. This definition will affect Section 3 of the current Act which deals with the functions of the FSB as well as S13(3) of the current Act which provides that the Executive Officer shall, subject to supervision by the Board, perform functions entrusted to him under the Act.

Mr Wessels noted that the Act itself only creates the machinery which itself has the regulatory authority. The Registrar in each financial institution, for example the Registrar of the Stock Exchange, is the Executive Officer. Where the Act refers to 'registrar' read 'executive officer'. Whether the FSB exercises absolute control over the executive officer was tested 18 months ago in a Cape High Court decision. There it was held that supervision means 'stewardship'. Some uncertainty still existed over its meaning. In questions and submissions before it the Nel Commission had to decide what was meant by 'supervision'.

The definition in Clause 1 now establishes two matters:
a) the FSB may determine matters and
b) the FSB may insist on periodic reporting.

There are now three tiers of supervision. Firstly, in respect of activities the executive officer may not perform without the approval of the Board. Secondly, in respect of guidelines issued by the Board which the executive officer must follow and thirdly, in respect of the functions which the executive officer may perform. Should the registrar be acting on his own or be subject to supervision, there is now a reasonable measure of control and independence.

Questions:
Mr Andrew (DP) said there was general agreement that there must be greater clarity on 'supervision'. In respect of the relationship between the FSB and registrars he understood there to be forms of appeals against the decision of registrars, making 'stewardship' and 'supervision' much tighter. The Amendment Bill leaves the appeal mechanism in place. Mr Andrew asked why there was a need for this additional tier of supervision. He felt that it would not add to efficiency. In regard to the first category where the registrar cannot act on his own he also asked whether this was adding to efficiency. Furthermore, how would acts be qualified from day to day?

Mr Wessels said that it was more prudent to let the registrar be subject to control than to be a statutory registrar on his own even though there are appeals. Regarding the qualification of acts it has been distinctly left to the Board to determine tiers. In respect of important matters of principle it would be a first tier matter and for matters of less serious consequence a second tier matter. There was still important interaction between the Executive Officer and the members of the Board and Mr Wessels could see no unnecessary impediments in the way of the Executive Officer.

Regarding appeals, Mr Andrews(DP) said that the answer given by Mr Wessels added to his concerns. Firstly, he had a problem envisaging what are the categories of functions which cannot be performed without the Board and secondly he was concerned that the Board only meets once every three months which posed commercial dangers. Mr Wessels assured him that there was provision in the Act that the FSB may be called together at short notice for very important matters.

Dr Van Zyl agreed that there were day-to-day frustrations and daily requests for authorisation. In practice, he said, the registrar would always ask the Board for guidance where he is uncertain. He felt, therefore, that the Act would merely be giving effect to what is in practice.

Prof Turok (ANC) had no problems with Clause 1 but observed that 'supervision' in Clause 1 differed in usage to Clause 2. He suggested that different wording such as 'oversee' be used in the two clauses. Prof Van Zyl however said that 'oversee' has a negative connotation, different to 'regulate' and 'supervise'.

Prof Turok said that the key element in the Bill was compliance with the laws. There would have to be supervision of, for example, how stockbrokers comply with laws. He said that the committee would be interested in receiving reports from FSB on the scale of compliance and non-compliance once the Bill is in place.

In answering Prof Turok's questions, Mr Wessels said that they were trying to streamline wording. He agreed that the emphasis had changed from exercising control over activities to compliance with the laws. Regarding the extent of compliance, however, apart from an annual report to the Minister, registrars also make distinct reports to Parliament. Broad compliance is required in respect of reporting. Mr Wessels expressed the opinion that South Africa's financial institutions are compliant. He did point out, however, that in recent Acts more powers are given to the registrar to act against people who perform functions as if they were a financial institution but were not registered.

A question arose as to the dictionary definition of 'supervision' and Mr Wessel replied that its use in S13(3) of the current Act relates to the executive officer exercising his powers under supervision while in Clause 3 it takes on the normal definition which is to control.

Referring to Prof Turok's earlier suggestion that alternative words be used in Clause 1 and Clause 2, Mr Nair (ANC) suggested that 'management' or 'manage' be used in Clause 1 instead of 'supervision'. Mr Wessels felt that 'manage' would not be the right word and this would require amendments to other parts of the of the current Act.

In answer to a question from Mr Andrew's referring to Clause 2(c) on what would be done for the education of users, Mr Wessels said that the FSB has an education department . He hoped that he would be able to report favourably on investor education in the future.

Clause 3
Deals with the functions of the State President. However, the Minister of Finance will appoint the Board members since the Board already reports to the Minister.

Clause 6
Board members will not retire simultaneously. Mr Wessels said that the term of office is usually three years and members are not usually appointed simultaneously. Even if they are, their exit must be staggered. Prof Van Zyl added that members must continue at least until new members are appointed.

Clause 10
This refers to remuneration packages of the Board. The Board is given an open hand to fix packages. But the Board will exercise its powers in consultation with the Minister. Mr Wessels referred here to S18(b).

Clause 11
Former employees of the Department are now in the Board pension fund and their rights are entrenched by S20.

Clause 12
This clause is aimed at what occurs in practice. The FSB is funded by the industry. If the industry is not in agreement with proposed levies there could be a process of consultation with the industry and a settlement could be reached. Otherwise industry will have to challenge the Board in Parliament and the Board may be subject to a review. There is no appeal in this instance.

Clause 15
This is the secrecy provision; it extends disclosure, subject to public interest, in respect of self regulatory bodies and foreign financial services.

Clause 16
Regarding the limitation of liability; for acts or omissions conducted in a grossly negligent manner there is no limitation.

Question:
Mr l Green (ACDP) asked to what extent the Open Democracy Bill and the public's right to access to information would impact on disclosure. Mr Wessels said that cognisance was to be taken of the Act but there were certain exclusions regarding sensitive material and felt there would be no conflict.

Clause 17
Reference to the FSB was no guarantee that the Bill and the Board' s standards were being complied with. In commercial life the customer should beware because it could not be guaranteed that all institutions will comply with the law.

Mr Andrew(DP) referred to the Public Accounts and Audit Act to which the Bill referred incorrectly. The Chairperson proposed that it be corrected as an amendment. It would correctly read: Act 18 of 1991.

Clause 19
This refers to an updated version of the Banks Act.

Clause 20
This contains transitional provisions. For instance, pension rights are preserved.

The acting Chairperson proposed that a motion of desirability be accepted. All the members were in agreement. The Bill was accepted with the one amendment correcting the reference to the Public Accounts and Audit Act.

Note: Mr Feinstein (ANC) was acting chairperson in the absence of Ms Hogan (ANC) due to ill health.

Appendix 1:
BURDEN SHARING - SOUTH AFRICAN AIRWAYS DEBT
DEPARTMENT OF FINANCE: ASSET AND LIABILITY MANAGEMENT

10 February 2000

BACKGROUND
1. The master plan on the restructuring of Transnet originally proposed that government takes over Transnet's entire pension fund debt, pensioner medical aid liability. This would enable Transnet to manage its business from a sounder financial base and to restructure more effectively.

2. It was however agreed that it would be impossible to take over this magnitude of debt without seriously putting in jeopardy government's deficit reduction targets. Against this background the IMCC on 30 April 1998 decided that a phased approach be adopted on the basis of a burden sharing arrangement between government and Transnet subject to:

· Re-establishment of the principle that the restructuring of certain key business units be fast tracked;

· Clear priorities be determined in respect of business units that will be restructured;

· Firm time horizons be set for restructuring initiatives;

· The principle being accepted that no special purpose vehicle be established and the liability being retained on Transnet's balance sheet;

· All proceeds from the restructuring of Transnet (net of restructuring costs, capital injections or write-offs of core business debt), will constitute a first claim by Transnet for purposes of redeeming the pension fund debt; and

3. The IMCC endorsed the principle of burden sharing in respect of debt that could not be allocated to the SAA balance sheet at corporatisation. The external restructuring strategy for SAA, involving the introduction of a strategic equity partner as quickly as possible were also endorsed in principle by the IMCC.

PROPOSALS ON BURDEN SHARING IN RESPECT OF SAA DEBT
4. HSBC and Transnet estimate that the gross debt attributable to SAA amounts to R4, 057 billion. Of this amount R3,051 billion is deemed to be unallocatable debt attributable to SAA and it comprises;

R' 000 000
Core Business Debt : 2,724
Pension Fund Debt: 1.333
Total: 4,057
Allocated to SAA: -1,000
To be Shared: 3,057

5. It was estimated that only an amount of R1, 0 billion of debt can be carried on the balance sheet of SAA. This is provided that a turnaround strategy for SAA (which was approved in principle by the IMCC Sub-Committee) is implemented and will introduce a strategic equity partner and render SAA profitable by 2002.

6. This will ensure that sufficient provision is made for the recapitalisation of SAA's fleet and that the debt gearing ratio would be around 50 percent at 31 March 2002. This would be in line with that of comparable airlines.

7. Four options for the treatment of the unallocated debt attributable to SAA (R3, 057 billion) were considered, namely:

I. The estimated unallocated debt attributable to SAA be held centrally by Transnet after corporatisation of SAA;

II. All the estimated unallocated debt be removed from Transnet's balance sheet and become a direct liability of government:

III. The debt burden is shared on a 50-50 basis between Transnet and the government, i.e., part of the estimated unallocated debt (i.e. R1, 5 billion) be removed from Transnet's balance sheet and taken over by government. R1, 5 billion debt be retained on Transnet's balance sheet; and

IV. The government takes over only the pension fund portion of the debt, i.e., R1, 333 billion. This was mainly because of the historical nature of this portion of the debt, which was a hangover from the SATS pension fund deficit.

RECOMMENDATIONS
8. It was decided that:

· Option IV, namely that the government take over only the pension fund portion of the debt (R1, 3 billion) be adopted by the IMCC. This is consistent with an earlier undertaking by the government to assist Transnet with the pension debt. The Transnet gearing ratio (including the Macquarie ratio) improves as a result of Government taking over this debt.

[The Macquarie gearing ratio refers to the formula that is stipulated in a cross border lease agreement that Transnet entered into regarding locomotives. The agreement stipulates that this gearing ratio may only deteriorate by a maximum of five percent from a base rate of 66,1%]

· On the basis of the improved capital structure, SAA should raise any new debt that is required for its capital investment programme on its own balance sheet.

· The detailed SAA turnaround strategy has been made available to the Department of Finance before the debt is taken over;

· The government may do a debt swap (R153 or other long-dated government stock for T11is) with Transnet to effect the transaction. This is to ensure that the government does not sit with an odd lot of bonds in its portfolio.

· Any further future proceeds from the restructuring of SAA will be shared between Transnet and Government under similar terms that apply to the burden sharing principle; and

· Future dividends from SAA that accrue to Transnet will also be shared between Transnet and Government under similar terms that apply to the burden sharing principle. This will assist to alleviate pressure on the Government loan book.

THE EFFECT OF AN ADDITIONAL R1, 3 BILLION DEBT ON THE FISCUS

9. Taking over of T11 bonds (16,5%)

10. 
    Convert* T11 bonds to R153 bonds

	T11	R153
	Buy Back	Sell
Market Yield	16.00%	15.54%
Nominal (R' million)	1 333	1 582

11. 
    *The government may do a debt swap with Transnet in effecting the conversion.
    
    The cost of selling R153 bonds

14. The preceding analysis on the impact of the burden-sharing agreement on the government's fiscal targets does not take into consideration the positive impact of government's portion of the proceeds from the partial sale of SAA. The 20% of SAA that has been sold for a consideration of R1 400 million. Government shares in the proceeds in the same proportion in which it shares in the debt. This implies that government 5 share in the R1 400 million consideration is:

R1 333m/R3 057m * R 1 400m = R610 million

This means that government will now borrow R610m less to finance the deficit.

15. Furthermore, before corporatisation, SAA's net asset value (Assets less Liabilities) was RO and the entity was making losses. The prospects of closing down the business were real. Post the transaction, SAA is now valued at R7 billion and has begun to make profits. The value of Transnet's 80% shareholding, (and Government owns 100% of Transnet), is now R5,6 billion. This is higher than the R3 billion cost of taking over the debt that Transnet and Government have incurred.

16. The costs, therefore, of taking over the debt of SAA and introducing a strategic partner are much higher than the benefits. The total impact is currently difficult to calculate because of the nature of the airline industry but will be more visible after a further two years.

Appendix 2:
FINANCIAL SERVICES BOARD AMENDMENT BILL

SUPPLEMENTARY SUBMISSION BY THE FINANCIAL SERVICES BOARD TO THE HONOURABLE MEMBERS OF THE PORTFOLIO COMMITTEE OF FINANCE

1. This Bill has been the subject of debate at two meetings of the Committee during the second half of 1999.

2. On those occasions each of the amendments or additions to the Financial Services Board Act, 1990 proposed by the Bill was dealt with and members' proposals and questions entertained.

3. Following those discussions further amendments to the original draft of the Bill were introduced. The purpose of this submission is to focus members attention on the amendments effected to the Bill since the last meeting so as to facilitate discussions when the approval of the Bill will be sought on 15 February 2000.

4. Clause 13: Sec 18 of the Act: Consultation with Minister
The ambit of consultation with the Minister has been widened. The minister may now compel discussion with him on any matter regarding the powers and duties of the FSB. Similarly the FSB may call on a discussion with the Minister on any matter.

5. Clause 18: Sec 26 of the Act: Constitution of Board of Appeal
Additional wording has been introduced to make clear that appointees to the board of appeal should be persons of wide experiences and expertise in their respective fields (while no minimum length of practice has beer stated).

6. Clause 18: Sec 26 of the Act: Reference to Public Accountants' and Auditors' Act
Honourable members' attention is respectfully drawn to an error in subsection
(C) of section 26(1). The correct number of the Act referred to 5 Act No 80 of
1991. Act No 70 of 1993 is an Amendment Act of the Public Accountants' and
Auditors' Act No 80 of 1991.

It is suggested that this is a technical error of no significance which could simply be corrected in the reprinting of the Bill and that, unless other amendments are made, no formal amendment is justified.

7. There are no other specific matters to which the Committee's attention should be drawn as no other amendments were effected to the previous draft of the Bill.

LG T WESSELS
HEAD: LEGAL AND POLICY
FINANCIAL SERVICES BOARD
10 FEBRUARY 2000