Labour input to Finance Portfolio Committee on the Financial Sector Charter

Chair of the Portfolio Committee, Honourable Members of Parliament, comrades

and friends,

Let me start by thanking you for this opportunity for the NEDLAC constituencies to report on the Financial Sector Charter. We hope this meeting will make a real contribution to ending the current deadlock in the process.

Labour's engagement with the transformation of the financial sector arises out of our members' concrete experiences.

Before 1994, millions of workers experienced legal and institutionalised discrimination based on race and gender. That discrimination is now largely illegal.

Nonetheless, our members still face institutional discrimination and disadvantage. The financial institutions as a whole do not adequately serve the poor, the vast majority of whom are black, especially black women. This situation is aggravated by continued discrimination against people with HIV.

A second complex of problems arises from the failure of the financial institutions adequately to fund low-income housing and micro enterprise. Systematic red-lining by banks of targeted communities remains common.

The dominance of a few Financial institutions presents a third set of challenges, since it raises costs and lays the basis for inequalities throughout the economy. Finally, the biggest challenge of all is to direct financial sector investment to retain and create jobs. With 40% unemployment, this must be the priority for all our efforts to retransform the economy.

At the Growth and Development Summit last year, all the NEDLAC constituencies agreed that investment is far too low overall. Moreover, where investment takes place, it is largely skewed toward heavy industry - chemicals, minerals and auto - which can create only relatively few jobs.

At the same time, vast sums leave the country every year for investment abroad. Meanwhile, the financial sector encourages short-term financial investment into South Africa. This type of investment does not bolster productive investment. But by pushing up the value of the rand, it can cost jobs. Moreover, speculative inflows and outflows add to economic instability.

How far does the proposed Financial Sector Charter go toward addressing these

problems?

We have to distinguish between targets and the governance structures. Overall, labour welcomes the targets as a genuine first step toward growth, job creation and equity. But the deadlock over the governance structure risks undermining this progress.

On the targets, we are particularly pleased that the Charter goes beyond employment equity and ownership. Critically, it provides for the direction of substantial funds into low-income housing, credit for SMEs and basic infrastructure, In addition, it lays the foundation for cheaper and more accessible accounts for the poor and pensioners.

In short, the Charter provides an important step in the transformation of the financial sector to serve the needs of our people and our society. It provides a sound basis for further engagement.

The main gap is the failure to encourage investment by larger firms in production in ways that will encourage employment. In the context of the GDS, we are exploring proposals to support new productive investment where it will create relatively large numbers of jobs. We would like to see this approach incorporated into the Charter. Overall, the amounts the targets fall short of the GDS agreements to direct 5% of investible assets to appropriate investments.

We are also concerned that the funding provided for so-called BEE transactions is far too high. In effect, these funds will increase the debt of most companies which could have substantial macroeconomic implications. In addition, the Charter does not limit support to genuinely broad-based transactions that empower workers and communities.

Despite these concerns, we appreciate the effort to shift the industry toward a more sustainable, equitable and progressive development path.

Unfortunately, this effort may be undermined or even ended by the current deadlock on the structure of governance for the Charter. The debate emerges in terms of the structure of the Charter Council - who should participate, how should it take decisions, what should its functions be?

In part, this deadlock arises from a weakness in the overall conceptualisation of BEE Charters. Essentially, the new Act says government will privilege sector where businesses themselves set transformatory targets. At the same time, it requires stakeholder participation. Indeed, most of the Charters cannot survive without broader support.

But the Act provides no guidelines on how stakeholders should participate and engage. This has led to bitter contestation in many sectoral charter processes and govt should give clearer guidance in this regard.

In the case of the Financial Sector Charter, the debate essentially revolve; around whether the Charter Council should be constituted by business, with very limited seats for community and labour representatives, or if it should be a genuine consultative structure where all the parties have a strong voice.

In the event, any proposal that disempowers labour and community participants won't work. The proposals all need our support, both as consumers and as pension fund trustees. Unless our members provide active support and input, the targets for low-income housing, new accounts and pension investment cannot succeed.

The importance of broader participation emerges from the background to the Charter process. There can be no question that the Charter responds well to social needs because it grew out of our strong involvement in the Financial Sector Summit, where all the NEDLAC constituencies had a voice.

At the same time, we recognise business's concerns that the monitoring process should be objective.

For this reason, Labour has proposed the following solution.

First, all stakeholders should be represented on the Council, without giving numbers of seats. Once we limit some parties' seats relative to others, we create ill feeling and appear discriminatory. Thus, we simply cannot accept the business idea that they should have 16 seats and labour and community together should have, at most, six.

Second, the Council secretariat would organise the technical capacity to manage the scorecard process. The Council itself would review the process. Members could raise objections based only on differences of interpretation and the evidence. They effectively change the targets through the scorecard process. Any dispute-settlement process would then have to base its decision on an analysis of the evidence.

In addition to this function, the Council members would be responsible for clarifying the interpretation of targets, where necessary, and monitoring progress. On that basis, the Council could set new targets by agreement of all the parties.

Before concluding, let me briefly reflect on the role of pension funds in the transformation process. As you are surely aware, organised labour has long been committed to ensuring that our pensions contribute to the development of the country. Clearly, our members would be prepared to harness their pensions to achieve these objectives, including if necessary a lower rate of return, if their children could get jobs. With over two thirds of black youth unemployed, every worker's pay and pension must now stretch far too far.

Again, however, we need stronger leadership from the government. As it now stands, pension fund trustees - that is, shop stewards and union leaders – must independently decide what kind of projects will contribute to development, with virtually no guidance from the state, or appropriate vehicles. They can make some incremental changes, but they simply do not have capacity to identify appropriate projects.

In the run up to the Pensions Conference that was agreed at the GDS, we have agreed to develop a model mandate to assist our trustees in engaging with investment managers. But the process would be greatly assisted if the government would identify the sectors, kinds of projects and mechanisms that would contribute to job creation and growth. That, in turn, requires a structural policy that defines strategies on production structure, ownership and regional development.

Honoured MPs. comrades and friends,

To deal with the current deadlock in the Financial Sector Charter requires real political leadership. Government cannot continue to act as if it has no role in resolving the debate. After all, many financial institutions are involved essentially because they want to keep access to government, including state tenders.

At the same time, all the parties agree that the broad BEE Charter process will fail if it is not inclusive of the key stakeholders. We therefore expect in particular the Minister of Finance to assist by proposing a viable, equitable and inclusive model for the Charter Council.

We need urgent support to break the logjam in the Financial Sector Charter so that we do not lose the impetus and mobilisation that has brought us so far. Above all, we need a solution that maintains the gains achieved while ensuring a sustainable and inclusive process forward.

Thank you