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The CHAIRMAN: I will hand over to Minister Chris Liebenberg who is going to give you an outline of the priorities of the Ministry for this year.

The MINISTER OF FINANCE, MR LIEBENBERG: Thank you. Good morning.

Ambassador, ladies and gentlemen:

I thought what Alec and I will do this morning is give you a brief overview of where we see our priorities lie over the next year. I will touch on a number of issues and then Alec will pick up the ball and run with it and score the tries, and after that we will go to question time if it carries your approval.

In the Ministry of Finance and State Expenditure we have the wonderful opportunity and challenge of, on the one hand, having to look at the economic issues, and on the other hand to put in operational issues to make the economics really happen. And what we are looking at this particular year is, on the macro economic side, really four issues that we think needs to be addressed.

The first one, of course, is economic growth and the issues that you've heard me speak on so often. The investment is a factor of GDP and savings is a factor of GDP. Those are the issues that need to be addressed before you want sustainable long-term growth.

The second issue, and that was touched on by the President in his address on Friday, is the employment levels and the whole issue of unemployment in this country that obviously is linked, to some extent, with growth. But growth in itself will not solve all the employment challenges that we face in this country.

The third one, of course, is price stability or inflation, and the fourth one is the balance of payments issue; the current account, capital flows, etcetera, etcetera.

Those areas we see as the issues for us to be addressed this particular year. Out of that flows certain fiscal issues and under the fiscal issues we have generally set ourselves milestones that were well publicised a little while back, two years back, in fact, and those milestones generally cover government consumption expenditure, tax as a percentage of GDP which we have said we want to maintain AT 25%, debt and interest as factors of GDP, etcetera, etcetera.

Now you will hear this afternoon, some of you heard this yesterday that attended a briefing that basically we are on line with our milestones, and I think that's quite an achievement in the year that we suffered from a drought, there was a low gold price, we had no inflow of restructuring assets proceeds and we increased the funding of the pension fund from just over 50 to just under 60%.

All of that was achieved or addressed in the year that we basically stuck to the milestones, specifically as far as the deficit is concerned.

On the operational issues, I am going to run through about ten items that we are busy with, our high focus areas for us and Alec will touch on another seven. Then we will just touch on briefly the impact that has on the Department of State Expenditure and the Department of Finance.

The first one, and probably the major challenge to us and certainly much bigger than we anticipated, is the restructuring of Internal Revenue and Customs and Excise. Re-creating a department of 12,000 people that has been neglected badly for a long, long time where people need to be re-motivated, recharged, re-employed and refocused; the medium term expenditure framework and the six-pack (indistinct) address for us.

We are busy with a budgetary reform exercise, not only to make it more transparent, but also to change the basis of budgeting. We have a workshop or a seminar coming up early April in which a number of overseas experts have been invited to participate. And I have said to a number of people, this might very well be the second-last year that the budget will be presented in March, as we go into that budgetary change and reform exercise. Because what we need to do is give Parliament a greater opportunity to participate.

At the moment, by presenting the budget on the 13th March, coming into effect on the 1st April, there is really very little time for Parliament to reject the budget for instance. This happened in the U.K. last year. So we need to change that cycle for to bring Parliament into the process much more effectively.

So either we will have to change the budget date or we will have to change our financial year to allow more time for that to happen. I am also very keen that we should go from a Cash Accounting basis to an Accrual Accounting basis. That will certainly address all these roll over issues and problems that we are facing at the moment.

We are also busy with a tax reform and a main player and that, of course, is the Katz Commission. We have also used this year to some extent the Smith Commission.

That brings me straight onto the next one, which is the pensions reform that we are busy with. The fundamental reform in the way we approach and tax and provide for pensions in the future, not only as far as the civil service is concerned, but as far as the private sector is concerned as well.

Another very exciting area in which we are busy with in the Department of Finance is the whole creation of a more effective and sophisticated debt management operation, looking more closely at liability management, asset management, risk management and in its process, also cash management, using funds and idle funds in the wider government much more effectively and productively than what has been the case up to now.

Alec and I have also started an exercise in corporate governance in which the king principles are being incorporated and being driven through the (indistinct). We are busy with two pilot exercises at the moment, and from that will flow rules and regulations for all (indistinct). But in its wake also comes financial governance.

Up to now government has not really given the leadership to government departments and (indistinct) as far as its financial direction is concerned. We are in the process of devising return on assets, return on investments, return on equity and flowing from, a dividend policy that will become policy for the whole government.

Exchange controls - After the President has spoken, who are we to reason why we are but to do and die. I don't think I need to say any more about that. We have said many a time that investor-friendly countries don't ever exchange controls. I was delighted to hear the President say it is not when, it is not if, it is when. Amen.

Money laundering - With the Registrar of Banks we are involved in an exercise to upgrade the whole basis of money laundering controls and legislation in this country. Draft legislation will come to Parliament within the next few months. We have consulted widely, not only in South Africa, but internationally and also used the information that we gleaned at the Commonwealth Finance Minister's Conference that Registrar Christo Wiese has used very effectively to incorporate that into the legislation.

That legislation we would like to take further and make it (indistinct) wide to the extent that we do have influence and persuasive powers with out other members.

Another area that we are busy with is the whole issue of mobilising new forms of finance. Not only internationally, but also type of finance. If we want to achieve the growth rate that we think is necessary, sustainable growth rate, then for this country there is much to be done on the infrastructure level.

If we have to wait until we have the necessary funds available on budget to do all those infrastructure developments, it is going to be a long time. So we have to devise ways and means in which we can share the risk and finance, and bring forward those infrastructure developments to sustain and support the growth rate that we need.

South Africa being accepted back into the world community, it has also put a different dimension on our relationships with the multi-lateral and bilateral organisations - World Bank, IMF, African Development Bank, etcetera, etcetera, etcetera. That is an area that take a lot of our focus and certainly of our attention of how we can use those organisations, their funding, their expertise and the analyses that they can make for us much more effectively to support the broad financial and economic vision that we have for this country.

Alec, would you like to pick up the other few if you don't mind?

The DEPUTY MINISTER OF FINANCE, Mr A Erwin: Thank you very much Chris.

If it sounds like a fairly large work programme, it is, and there is more come. But I think it is going to be a very exciting few years in what (indistinct) pretty substantial financial reform process.

Some areas that Chris mentioned that we have been working on - one is the medium-term expenditure framework. Very briefly, what this is, is a fairly systematic budgetary model, if you like. It works with the Departments, working out what their programmes are, what their budgets are likely to look like and also projecting those forward over a number of years. Then bringing that together, aggregating it and starting to compare that to the available resources that we would estimate from the economic analysis and macro-economic analysis.

This will give us a framework within which both National Departments and provinces can begin planning their budgets and we will begin a process of rolling budgeting. We cannot fit it in, the first effective year of that will be 1997/98. It will not be this coming budgetary year.

But in the process I think we have brought about a lot more uniformity, highlighted a number of problem areas in the whole expenditure pattern within Government.

The next area that I want to touch on, and I will come back to the six-pack in a moment, is what is also proving to be quite a significant set of changes in the development financing institutions as we refer to them. This started with the transformation team looking at the Development Bank of South Africa. It then got widened and Finance was leading this with Trade and Industry, Agriculture, Housing, Ministries, and what we have done is to examine all of the national development financing institutions - the Land Bank, Industrial Development Corporation, the proposed new Cooler, the Small-Medium Enterprise Operations, Agricultural Credit Boards, etcetera.

We have also gone through all the provincial development financing corporations. It was quite an exercise and we have now built up, I think, and accurate picture of the strength and weakness of this whole development financing fabric. We are likely to embody that in legislation during the course of this year of the format the Chris has touched on. (Indistinct) format, financial reportage format.

But we believe that this will allow those national institutions to improve their focus and improve their performance and it is closely linked to the mobilisation of new finance. The new Development Bank will be focusing a lot more on partnerships between the public and private sector, better utilization of government funding in projects. We have recently appointed a new Chief Executive Officer for that bank.

With regard to the restructuring of state assets, Finance clearly has played an important role here and there is tremendous scope for financial re-engineering within state assets. This process is quite closely associated with the one that Chris mentioned, new corporate government, dividend policy and cash management. I think in the process of developing those approaches, we are seeing a number of opportunities where state assets could be better utilized if there is some degree of financial engineering. I think this year we will see a number of those changes.

The Tender Board - We have had a project going since March last year involving all government departments and the provinces, the provincial Tender Boards and we have involved the private sector, Nedlac.

What we have done thus far is we have introduced ten new provisions in the tendering process; the main thrust of which to improve the access to the procurement system by small and medium enterprises, by enterprises from disadvantaged communities. That process started working late last year and I think already is having an impact.

But by July this year we propose to bring forward a new body of legislation that would bring about quite substantial changes in the procurement process. This is a joint project between Finance and Public Works.

The provinces - I think we have made fantastic progress in developing the Treasuries and the financial structures in the provinces. I think yesterday Chris indicated some of the problems that the provinces have faced. I think they were far more severe than anything that the national departments faces. We have now got to a position where, I think, we know, give or take a little bit, exactly what has happened in the previous dispensation where the provinces are now able to draw up budgets for 1996/97 that are based on very much more accurate information.

We had, what I think is a remarkable situation where, in this year's budget, one province was prepared to sacrifice some of the additional amount we allowed them on budget because they said, no we finished our budgeting process, we did not take that into account; take it and use it for a province that is quite badly squeezed. So, we are getting to a whole new process of co-operation around the budget with the provinces.

The other piece of legislation will come forward very soon as the so-called Special Pensions, the 189 Pensions or struggle-pensions. The standing committee will hold hearings in a few days' time. We want to bring that into Parliament in March. This will effectively give pensions to those persons who contributed to the Democratisation process. There is a bit of fine tuning to do, but it is likely to cost us round and about R200 - R250 million a year. We do have certain financing options that we are still examining there.

I think this will make an important contribution to many, many people who worked very hard and now fight sever financial straights.

Finally, if you look at what we have been saying, you will see that the so-called six-pack is very much alive and well. The first of those programs was belt tightening. There are about 24 projects that we are currently working on government - The major one's of which have turned out to be the cash management and debt management. But there are a wide range of other projects which will be taken forward by the new expenditure evaluation unit in government.

The budget reform - we have talked about a major budgetary reform. I think it is well on track. The medium-term expenditure framework being part of that budget reform. The restructuring of state assets, I think, is well on track. It will be across a wide front in this coming year.

The reform of the public service and what I am listing here are the elements of that six-pack programme, has made progress. The main advance this year was the new grading system - more streamline, simplified grading system which will particularly benefit categories such as nurses, policemen, doctors and others who had slipped very far down the payment structures.

The next step in this programme is the Presidential Review Commission which, building on the white paper that the Public Service have put out, will bring about a fundamental change in the structure of the Public Service over the next few years.

With regard to provincial financial relations, I think we have made a lot of progress as I indicated. I think we are very close to reaching agreement what the new Constitution should look like in regard to inter-governmental financial relations. It is not going to be massively different from what is in the Interim Constitution, but I think there are some important fine tunings that takes into account the realities of these inter-government relationships as we have experienced them over the last year or two.

The other programme in the six-pack was internal monitoring. We have started to develop an Internal Audit capacity and training programmes. A new professional institution will be established finally this year for public sector financial managers. We have been working very closely with the private sector to develop these courses and ensure that whatever qualifications people obtain in the public sector are transferable to the private. So Internal Audit Departments have starting to function, in fact, in the coming financial year in a number of departments.

So I think the six-pack always was a big programme. I think it is proceeding well, retaining its coherence and giving us quite a big work agenda. Thanks.

The CHAIRPERSON: We have about seven minutes for questions and I will take questions from the floor.

QUESTION BEING ASKED: (Indistinct). Expectations for the coming year. A figure of 5% has been mentioned. Is that realistic?

The MINISTER OF FINANCE, MR LIEBENBERG: The date is the 13th March for that question.

QUESTION BEING ASKED: Chris, two questions, really. The milestones that you have mentioned before that you are broadly in line with, what would they be in the sense of what do you regards as being milestones that you judge your performance by in terms of the economy? And secondly, what will determine the timing of the loosening of exchange controls?

The MINISTER OF FINANCE, MR LIEBENBERG: They mean the milestones that was set against government consumption expenditure. It was set against the deficit before borrowing, the tax to GDP ratio, and the government debt to GDP. We set it over a five year period. The most highly profile one against that was the deficit before GDP that we have said we wanted it to be 4½% by 1999. I have very little doubt that we are going to make that.

QUESTION BEING ASKED: (Indistinct).

The MINISTER OF FINANCE, MR LIEBENBERG: I think Mr Stals is getting a speaking terms after us, is that right Chris? He can then pick one up further.

QUESTION BEING ASKED: (Indistinct).

The MINISTER OF FINANCE, MR LIEBENBERG: Indeed, indeed. It is a question of sustainability and over what period you want to judge yourself, and the misconception that high deficits create employment. It is actually the other way round if you talk sustainable.

If you want a sustainable economy that performs well, you got to get your macro economic fundamentals in place - that is your deficits, your inflation and your borrowing levels, etcetera, etcetera. With us, that also affects the balance of payments because of the import propensity that we have. At the moment there is still a lack competitiveness in South Africa, so balance of payments is a key factor. So if we want to solve unemployment in the long term then, on a sustainable basis, we had better get our macro economic fundamentals in place.

But I said earlier we have got a structural unemployment situation in South Africa, not only cyclical one. So we need to do more than just increasing the growth rate to ultimately address the unemployment levels. That will involve looking more specifically at areas that has got a propensity for generating jobs. That would be things like tourism, informal sector, small-medium and micro enterprises.

Then we better had sit down and look wider and more conceptually at other industries where we may have a comparative or a competitive advantage and see how we can use that advantage for more job creation. And an interesting one that my colleague Trevor Manuel has mentioned on a number of occasions now is the petrochemical industry. And they talk about creating 150,000 jobs downstream through co-ordination, let me call it that, of that specific industry.

The DEPUTY MINISTER OF FINANCE: (Indistinct). People loose sight of a another very important issue here. In a situation where delivery of basic social goods like electricity, water, housing is a major problem we have, where that is outstripping employment in an inflationary environment to try and deliver in a rising price situation, is a cul-de-sac, you are not going to achieve it. So price stability and delivery are really two very important factors if you are going to improve the standard of living of people.

The MINISTER OF FINANCE, MR LIEBENBERG: I did not answer the question about exchange controls and the date for that, that they have asked a little earlier.

We have indicated the trend and the direction. I think it would be silly for us to put time scales and dates to that issue. Then we might as well lift the whole lot straight away, and it is because we want to be responsible that we want to have the flexibility of dictating the time what we do, when we do it.

QUESTION BEING ASKED: I would like to hear a little more about the money laundering proposals. What is the extent of the problem and the type of the solution?

The MINISTER OF FINANCE, MR LIEBENBERG: In South Africa we don't have, talking about the solution first of all, we do not have effective legislation to prevent money laundering. The legislation that is to be used is really aimed at other areas. So firstly we have got to get effective legislation on the Statute book. That is solution number one.

Flowing from that, of course, is going to come, in its wake, will come the whole monitoring and control measurements. Once has to decide where you place that, how that is going to be done. We have looked at a number of structures internationally where it would appear to have been done very well. The structure that they have got in Australia has a great appeal for us. The legislation that they have got in Malta has helped us a lot.

But where we are in a common monitory area it would be pointless just for South Africa to apply or initiate that legislation. We will have to take it wider, at least to the common monitory area partners. And seeing that that is a core of SADEC, we might as well address the whole of the 12 SADEC countries with that particular issue.

Where will the controls be placed - The person driving the legislation and the control, seeing that it is a banking-related matter, the most appropriate area seems to be the Registrar of Banks that is situated within the Reserve Bank. The controls - We have control measures within our exchange control functions that is being used to that type of controls. It only seems natural that you should use the skills that are there to extend that to money laundering.

QUESTION BEING ASKED: (Indistinct).

The MINISTER OF FINANCE, MR LIEBENBERG: We don't really know. I cannot quantify those figures. I really cannot. We hear stories. We see what is happening in Customs and Excise, we hear reports. We have information from outside agencies, but it is very difficult to place a monetary or quantify the monetary value of money laundering in South Africa. There are certain industries that we know do become susceptible to money laundering. Those areas seem to be doing well in South Africa and obviously we will be watching them closely.

QUESTION BEING ASKED: (Indistinct).

The MINISTER OF FINANCE, MR LIEBENBERG: I think we have made our position quite clear, merely by the creation of the Smith Committee that we perceive to be a problem in the Pensions administration or in the Pensions industry in South Africa. The problem form where we sit is that the allowances and the benefits that flow through is too rich in relation to what is should be. There needs to be an equity into that system.

I am not going to tell you here today exactly what we are going to do. What we are going to do, though, is address that issue one way or the other. It would be silly for us, though, to do something that kills an industry which at the moment is the biggest provider of savings in this country where we do have a savings problem. Our savings ratio is too low to sustain the growth rate that we have in mind.

So the last thing we want to do is kill the goose that lays the golden egg, and contractual savings is the biggest section of our savings. It would also be unfair and we indicated that last year in our budget speech that we do not want to introduce taxes retrospectively. We do not want to introduce taxes that have not been well researched. In the Katz Commission report he has indicated that even in his pension recommendations there is still areas that needs to be researched a little further. Obviously we are going to look at that. The standing committee has made recommendations. Obviously we are going to look at that very closely.

We would also be very reluctant to impose taxes where the vested rights or the accumulated rights of the people up to now are affected.

The CHAIRPERSON: Thank you very much.

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