Maverick Tito Mboweni freewheeling on Budget 2019 – Eskom mess, and more

By Alec Hogg*

What a difference a year makes. Of the five people on the podium for the traditional “Budget lock up” press conference in 2018, only one was back in 2019. And that was SA Reserve Bank governor Lesetja Kganyago, who literally didn’t say a word last year, having been frozen out by unlamented former finmin Malusi Gigaba.

This time around, a packed auditorium was treated to wooden Malusi’s maverick successor, a freewheeling and confident Tito Mboweni, who expressed himself in a manner quite unprecedented for this usually sombre occasion.

Whether it was chiding fellow ANC members for not realising that the Soviet Union collapsed long ago, or laying into the erratic Public Protector, Mboweni did not hold back. SARB governor #8 (as opposed to Kganyago’s #10) is a relaxed communicator. So as far as press conferences go, this was as good as it gets.

From the content of Budget 2019, as you might expect, the conversation was dominated by the state’s R23bn a year capital injection into Eskom – a gift from taxpayers equivalent to around half of the Eskom’s annual debt servicing cost. But enough, the on-hand Treasury officials assured me,  to keep South Africa’s lights on.

Eskom is a subject on which Mboweni doesn’t mince his words. More than a decade ago when the first loadshedding happened, he was among the most outspoken critics. This time he is in the funder’s driving seat. And left no doubt that he intends extracting every ounce of flesh for taxpayers.

Drawing on his SARB experience, Mboweni explained how this is the Eskom equivalent of a bank being placed into curatorship: taxpayers will help, but disabused the world of any suggestion this is simply handing over a cheque.

That R23bn a year comes attached with Eskom’s soon-to-be (Treasury) appointed Chief Restructuring Officer who will play an identical role to that of a curator in a bankrupt financial institution. These CROs seconded from Treasury, Mboweni says, will become standard practice for every future public enterprise bailout, sorry, recapitalisations.

One of the lighter moments in the one and a half hour presser came when instead of posing his question, a “reporter” from the SABC on the video conference line from Pretoria introduced himself as “not a spokesman” and then proceeded to deliver a lengthy sales pitch that had the auditorium on Cape Town (and those five on the podium) heaving with laughter.

Mboweni brushed it off with a warning that should Treasury provide any part of the R6.8bn requested by the SABC, it would first be weighed up against all other calls on the nation’s resources (housing for the poor, infrastructure, etc) and would come with strings attached, including a CRO. Refreshingly, he added that the corporation would be better served sorting out its  internal business, running off a list of SABC owned radio stations that all compete with each other.

Something else that that hit me in both the speech and the explanations and answers during the press conference was Mboweni’s drive for simplicity. Tightly scripted as it was from the newly installed president, last year’s Budget speech still ran to almost 9,000 words, already down a fifth on the verbose Gigaba’s waffling in his mini budget the previous October.

Mboweni’s speech today was compressed into under 6,000 words. Indeed, the didactic press conference ran for longer than the official address to Parliament.

This simplicity has been carried through to the accounting: in effect, The Eskom bailout will be financed by fiscal drag, a reduction in the wage bill and an increase in the state’s overall debt. All very transparent and easy to follow.

There is another increase in the fuel levy, but the 29c a litre extra on petrol (30c on diesel) is only half of last year’s hike. Mboweni also urged a radical change in the Road Accident Fund, arguing that it is high time car owners took responsibility and bought their own insurance rather than relying on an amorphous pool funded at the petrol pump. See what I mean by refreshing?

The other tax adjustments are modest in the scale of the trillion rand plus national budget – a carbon tax will raise R1.8bn; on excise duties, there will be an extra R400m from tobacco and R600m from alcohol. Against this, zero rating of flour and sanitary pads would cost the fiscus R1.1bn.

Mboweni mentioned his experience in the private sector a few times, including referencing lessons from his involvement at Discovery (urging a move to paperless information) and PPC (where the banks “took the keys”).

His lessons from outside of the public sector also shows in the way the nation’s books are now being structured.

Numerous times in the speech SA’s finance minister referred to reallocating portions of existing budgets – primarily to cut consumption expenditure and expand government’s investment.

There is also a very private sector approach to overstaffing.

For the first time ever, public servants are being offered early retirement without any retirement fund penalty for leaving early. Treasury reckons 30 000 of the 55 to 59 year olds will take advantage of the offer. As that’s only a quarter of those eligible, it looks manageable.

Ironically, that R23bn a year for Eskom is a near mirror of the R22.9bn which last year Treasury said would be raised from the increase from 14% to 15% in the rate of VAT. So South Africans now join those dots pretty easily between that extra VAT and the plundering at Eskom by the Guptas, Zuma, Molefe, McKinsey, et al.

Next big challenge for Mboweni’s merry band at the Department of Finance is the managing any reaction from ratings agencies. Especially Moody’s, the last of the Big Three where South African debt is still investment grade.

Mboweni believes that grasping the nettle on Eskom and the state wage bill will resonate with tough minded global investors.

But even in the worst case where Moody’s loses patience and follows S&P and Fitch by downgrading the sovereign debt – and resulting in an immediate $8bn to $10bn outflow via forced divestments by funds in the World Government Bond Index, SARB governor Lesetja Kganyago is confident that the SA financial system will manage.

I left Parliament this year in a far better frame of mind than last. There was no smoke and mirrors this year, no bluster or obfuscation. Understanding Budget 2019 is simplicity itself. Summed up by this being the year of the aloe ferox rather than the plums once handed out by long-serving finmin Trevor Manuel.

Albert Einstein said the definition of genius is to take the complex and make it simple. Quite.

  • Alec Hogg is the editor of Biznews.com. He was in lock-up in Parliament from 6am today and will host a webinar for the Biznews community at 6pm this evening. To register for the webinar, click here.

Full transcript of Finance Minister Tito Mboweni’s pre budget presser

I don’t know where Peter Bruce is, whether he’s here or not because he was saying somewhere in one of his wanderings that the budget stability had nothing to do with me because it says I have no interest in the work I’m doing, so it’s wrong. I thought to correct him so the first part of my speech is actually aimed at Peter Bruce. I don’t know whether you’ve seen the copy of the speech yet but that thing that I took, an Oath of Office is aimed at Peter Bruce in his old age, so that he understands what we’re trying to do. So, he mustn’t go around saying, “Oh, that man is not interested. Look at his facial expressions etc.” so that’s aimed at him, not at Tim. Tim has done a lot of good of late. I think his time in the Karoo is a good investment and similarly, Carol is adjusting very well to the Cape.

This doesn’t mean that I only read Business Day, by the way. I read what Ranjeni rights from time to time and Offbeat from time to time. I’m always inquisitive. Peter Fabricius (I don’t know whether he’s here) … From time to time, he does write interesting things – often times, maybe out of context – particularly when he interviews me about Zimbabwe because they have to write something else. Anyway, here we are now, discussing the Budget.

So, what is the backdrop for this Budget?

  1. Slower economic growth but still within the focused framework that we put in place.
  2. Weaker revenue collection due to a number of factors. Clearly, with a weaker economic growth performance.
  3. By definition, the revenue side should also suffer but there are also some self-inflicted injuries, which have to do with the weakened capacity and capabilities at SARS, which we are fixing.
  4. You’ll notice that what we said at the time of the October medium-term Budget statement is different to some extent to what we’re saying now. Why? The contingent liabilities as a result of further state guarantees we have to give to state-owned enterprises, have gone higher. The commitments that we’re making now to Eskom, which we didn’t in October, also increases our liabilities. The guarantees we had to provide for SAA have also changed the situation. We’ll come back to Eskom, SAA, and the SABC – maybe slightly later.

So, we are now in the situation where the debt to GDP ratio over the medium term has gone slightly higher than in October but we are the government and we are, to a large extent, the masters of our own destiny. I’m saying ‘to a large extent’ because it’s part of the destiny, which is not determined by ourselves. Therefore, we have to take steps to correct the situation so in this Budget, we use the visual presentation of a plant. The most resilient, drought-resistant plant. I think it’s called the Aloe ferox, so we are in the Aloe ferox environment. I was saying to one of the people that I work with that I hope we are feeding this plant with organic compost, which is what I use at my little farm – we don’t use any other fertilizer but organic compost – and that this plant needs to be nurtured, watered, pruned, looked after, loved, talked to, touched, caressed, massaged.

I try and take a little bit of a swipe at my predecessor Trevor Manuel because he gave members of parliament plums so those were the plum years – lucky fellow – so, he had the plums. So, I’m saying that we are planting this Aloe ferox to help us go back to the plum years where it will be resistant, resilient, determined and fearless. So, that is what is happening in this Budget. My colleagues here can elaborate further on what we’re trying to do. I’m also demonstrating by the way, that we will not tolerate lawlessness as far as the tax regime is concerned. Those who produce cigarettes e.g. and sell them in the underground market will be dealt with very severely. I’m sure you’ll notice what my tough friend on my right here did yesterday by paying some courtesy visits to some people who have been behaving as if they can be above the law. I suspect there’ll be more courtesy visits to some people. I hope not at your houses. So please, do render unto Caesar what belongs to Caesar because Caesar can break your bones.

Okay, I think that’s the context and my colleagues are here to answer all the difficult questions, so we’ll hand over to you. Maybe we’ll start in Pretoria. Is there anyone in Pretoria who wants to ask any questions? Identify yourself and speak a bit loud.

I’m Jan Hattingh from the National Treasury. We’ve got four questions from the press this side.

My name’s Pieter du Toit of News24. In your speech, you ask a question: “Isn’t it about time the country asks if we still need these enterprises?” I was wondering whether you might offer an answer to your own question.

I posed the question in a very serious manner because I think that at a psychological level, we need to understand that we’re in the rejuvenation process but I think that most of us still think in the Soviet Union way. Now, the Soviet Union collapsed a number of years ago and we need to move with the times. Let me give you an example. We have the Road Accident Fund, which in my view, is a moribund structure and system. I’m quite convinced that if you buy a car; before the car is released to you, you must show that you have got sufficient insurance to cover accidents. It’s your responsibility. It can’t be the responsibility of the Road Accident Fund. It’s your personal responsibility. Therefore, buy your own insurance. Why should you burden all of us with your carelessness? But we still have this old system of the Road Accident Fund, so let’s have a conversation about this.

Are we still stuck in the past or are we going forward? So, I’m saying, “In short, let’s have a conversation. I’ve got answers. I know what needs to be done, but let’s talk about it.” In the private sector where I was; if a business unit doesn’t work, you shut it down. There’s no emotional attachment to something because ‘historically, we’ve always had this thing’ but in the government, it looks as though there are lots of things to consider (some of which are very fuzzy and makes no business sense). Let’s have that conversation, chief. I’m sure you have some ideas about what needs to be done. I do, but my job in the speech was to pose the question to agitate the conversation. The problem is that if I just put my answers to the question without having had the conversation, you might have a strike tomorrow and you don’t want that, so let’s have the conversation.

If you have R100bn, where would you rather put that within the transport environment? Do you put that in an airline that’s loss-making? Do you put that in support of the taxi industry, which accounts for well over 20% of the commuters in the country? Do you put R100bn in the railways, which transport the working class every day to and from work? You need to be very clear about what your primary objectives are and who are you serving at a primary level? Then it will be easy to answer the question. Where should you be putting your investments in the transportation environment, for example? So, I think there’s a lot of conversation to be had. Are we satisfied (as a country) with the fact that a significant proportion of South Africans cannot cross the river to the other side when the river is solid? No bridges. Kids can’t go to school. Are we satisfied with that?

Surely, we’ll be putting more investment into country roads and bridges. Shouldn’t we be going all out to make sure that South Africans have access to water? Let’s have the conversation about where you deploy your scarce resources. I’ve got the answers but I’m sure South Africans like to talk. Just like the president, they like to have summits so let’s have a summit and discuss this question – where to go with the state-owned enterprises. Let’s have a summit to discuss that. At that summit, I’ll tell you what needs to be done and I will tell you that emotional attachment in the post-Soviet era is meaningless, but let’s have a conversation. Okay, second one – Pretoria.

Good morning, Minister. It’s Albert from the Land’s News. What is the expected reduction in the head count in the public sector and do you expect local government to follow your lead in terms of the freezing of salaries.

Okay, so the President (and this is a nice way to phrase what we’re trying to do) is that the older civil servants who wish to retire should be facilitated to do so graciously. The point here is to make sure that people who retire early do not lose out on their pension benefits. The DG can explain better what this means.

Well, I think we need to be very careful about this because the challenge in the South African Public Service might not be that we’ve got too many civil servants but that the pay levels to high. We need more police. We need more nurses – but at what pay level – to try and make sure that the wage-builder is manageable. This is going to be a long process with lots of conversations in the process but I think we are making a start. I hope that tomorrow the Minister of Public Service and Administration will release a section that explains the process through which people can take early retirement. We can’t postpone this forever. We must grasp the animal by the scruff of his neck and demonstrate that we’re a government (and not the petitioners) and we must govern.

Now, the numbers are not that large. I think in the book, you mention the numbers, don’t you?

Yes, between 25 and 30,000.

Somewhere between 25,000 and 30,000. Okay, he says I must take the remaining questions before I answer. Between the two of us, we’ve agreed that he’s Governor #10 and I’m Governor #8, so there are levels. Okay, last one from Pretoria before we come to Cape Town.

Good morning, Minister. Justin Brown, a journalist for City Press. In the Budget review, it mentions that the bail-out on Eskom comes with strict conditions. What are those strict conditions?

I don’t know whether it says so in the Budget review. I don’t like the word bail-out. I think what we have said is that we are… Let me just go back a little bit. If Eskom was a private-sector company and found itself in this kind of situation, they would probably go for a capital-raising exercise/rights issue. They would probably go for a rights issue. In this instance, the shareholder is one – the government – so the rights issue basically means we would have to inject liquidity into the system. I’ve been a part of two companies in the private sector, which had to do rights issues. You go back to your shareholders for more capital injection. In this instance, there’s one shareholder.

So, we’re saying Eskom has a debt book, which they must service. They must pay their debts but as a shareholder, we are then assisting Eskom almost via a rights issue type of method, to pay that debt. So, that R69bn over three years – R23bn per year – that we are providing to Eskom is meant to help them pay off their debts. It’s not meant for salaries. It’s not meant for salaries. I hope Phakamani doesn’t take offence at what I’m saying. It’s not meant in a bad way but it’s meant for that purpose. When I was on the board of PPC, we reached a stage where the banks literally took away the keys from us and they installed a Chief Restructuring Officer, so that’s what we’re going to do. We will now be installing a Chief Restructuring Officer that in the speech, we will call a Chief Reconfiguration Officer to be our ears and eyes inside every state-owned enterprise that we are going to provide cash for.

So, we can’t just be providing cash to state-owned enterprises, stand back, and hope things are going to work. Basically, we are going to put them under curatorship. That’s how you do things. You show your determination to resolve problems – that you’re not just a bank, but that you want to look after every Rand and cent that you provide. So, the detail is very easy. It’s a textbook case. We know what a Chief Restructuring Officer is supposed to do but, in this instance, we’ll call it the Chief Reconfiguration Officer because the lawyer said we can’t use Chief Restructuring Officer. But basically, not to work against the board of directors, or the Chief Executive, or the Group Executive but rather to work together to guard our cash. There’s no free lunch here. This is taxpayers’ money. We must look after it. Okay, Cape Town.

We’ve got two more questions from here.

We’ll come back. Let’s give Cape Town before they demand business from us.

Thank you, Minister. With the issue of Eskom, the unions seem to think this process going forward is a negotiation and your approach in the speech sets forward a process that’s really, for promoting finance. How much time do you have on Eskom before people need to start worrying about it? How much time to sort it out?

You don’t talk about the PIC in the speech. Is there a way forward that we cannot see?

Then, I have a question for DG Mogajane. DG, there’ve been a lot of disruptions in Treasury over the past few years. Former DG Fuzile’s testimony spoke about how disruptive it has been and the impact on morale. In the election before, you said this Budget is developed in light of an election that’s coming. Is there nervousness in the Treasury about the way you’re going forward and particularly in such a constrained situation that there could be more political changes that will have impact on the operation? Thank you.

 

Deputy, what’s the deal with the PIC?

Minister, when the board expressed intention to resign based on the set reasons, it was pending – the restart of a new board. If that’s the case, it means we’re working. The only difference is that we have taken a view that whatever investigations occur in the interim, to just take that to the Commissioner of Enquiry because some of us are already subjects of investigation. That’s while we are at work. Thanks.

Yes, so the board of the PIC then writes a letter to the Minister of Finance requesting to be relieved of their responsibilities but will remain in office until such time that a new board has been appointed. So, the Minister of Finance writes back to the board and says, “Thank you very much for making this offer. Thank you very much for the work you have done, etc. and that indeed, you remain in office until such time as and when a new board is appointed. Therefore, continue doing what is expected of a board of directors, so that’s the situation with the PIC. We did not want to bring the PIC into this speech as such but I think I see your point. Maybe we should have said something about it just to explain what we’ve just said. Where’s Roy? Where are you, Roy? Raise your hand.

Thank you very much. Good morning. In the last year or so, I introduced sessions and we called them DG discussions. This is where I meet various units and divisions in the Treasury just to have an easy route to our engagements. Now, my response would be based on that so it’s not going to be like what I think. It’s what I pick up from the colleagues as I engage with them and I try to keep them as often as I can because that’s when I get to understand what is at play. Now, I’m picking up – and that’s the kind of conversation that goes like this, that says – ‘here is an important job that you do at the Treasury and we kind of remind ourselves all the time what the Constitution gives us as responsibilities and what the PFMA says to us. We keep on asking ourselves, “Are we up for it? How motivated are we in order to do this really important job on behalf of South Africa?”

Last night, we were having a nice dinner with some of the colleagues and we were saying ‘it’s a calling’ and we were again reminding ourselves that working for government in this way and the way that we’re doing, remains a calling. So now, answering your question is as simple as that. The morale is high but obviously, at the institution we’ve got more than 1,100 people in the Treasury. Some would be unhappy here and there because of various reason but it’s important that we get to understand and we get to engage them and find out what their issues are. Not forgetting that the Treasury has been hurt over time in the last few years when firstly, Mr Nene left, when Mr Pravin came back and he left again, and now we have Minister Mboweni. Now, you can say that it’s been 4/5 Ministers in the space of 18 months or so. Yes. It’s not easy, because you have to adjust and keep colleagues motivated on what I said is a higher calling.

Rallying around that higher calling is what keeps us going and makes us continue to want to be more and do more. I don’t get a sense that we are worried as to who’s coming. Jokingly, some of the colleagues were saying that we’re so used to the fact that anyone can come because what motivates us is the kind of work that we do and what actually informs that work. It’s important to understand that and if you understand the kind of Treasury officials we are – it’s that. Colleagues can simply leave and get a good job but they remain. The challenge will always be if the private sector comes and poaches them. In a nutshell, the morale is high. There are obviously a few disgruntled ones and I am not going to deny that, but it’s important to keep colleagues engaged in the kind of good work that we do on behalf of South Africans.

Yes, one of the things that DG has had to adjust to is that I don’t like too much paper so they’re having to send documents to me electronically. They’ll say, “Come to the office to sign documents” and I’ll say, “I can sign electronically” so they’re getting used to my electronic signature but it’s a psychological mindset change there, which is quite interesting to observe. Well, cabinet still uses lots of paper. When I was there at Discovery, Adrian Gore decided that from this particular day onwards, no board member is going to receive documentation via paper. It would all be electronic. So, even people like myself, had to undergo a training session to learn how to use Boardpad and it works – paperless board meetings. So, you don’t have to wait until all the documents have been printed before you can send documents to people. As soon as a document is ready, send it electronically. You read it, agree with it or not, and send it off. It’s all piles and piles of paper. I think the world has changed a bit. I’m sure the editor of BizNews will agree. I receive his publication every morning electronically and it’s fine. I still have a bit of a problem with Tiso Blackstar and my subscription there is not working very well. It’s not my fault. It’s Tiso Blackstar’s problem. The system’s not working very well but I think there’s something called Press Reader or something like that, which I’m being forced to use. I still don’t know how to use it properly but I’m getting there.

Finance Minister Tito Mboweni.

Eskom negotiations: I think it is fair to say that when a particular culture is embedded in an organisation, we are bound to face a number of challenges before that culture is undone. So, to expect that the people at Eskom will just override/accept the kinds of changes that we seek to introduce would be folly. It’s going to take a bit of time and the conversations are correct. We need a forum of some sort to discuss these issues at Eskom. It’s unavoidable. The Trade Unions, board holders, management, consumers, SANCO and whomever such as NERSA: to confront the reality that things cannot be as they’ve always been. The status quo is not working and therefore, we have to cross the Rubicon onto the other side of Rome. It’s unavoidable but we can’t force the solution on everybody. We need to discuss it whilst making it very clear that conversations cannot go on forever. That is basically the position and I’m sure the DG here, Phakamani and other people will be in conversations all the time to try and move things forward – it’s unavoidable.

Lastly, on the Treasury stuff. I think that we should really be highly appreciative of the work that the staff at the Treasury do. Really, two institutions, which in my view stand out in the public service, the National Treasury and the SA Reserve Bank – credible institutions, which employ the best professionals in the civil service, and they must be given space to do what they have to do. I often say to Governor #10 here that he has an ally in Governor #8 and so, we’ll make sure that the institution is allowed to do what it’s supposed to do. In fact, if we check their phone records, we’ll find that he phones me more often then I phone him because I don’t want to interfere with his work. He must act independently, without fear or favour or prejudice, and because I have acted without fear or prejudice in the past, I know what it is to sit on that chair.

In fact, the more you try and want to interfere with the Central Bank the more independent it’s going to be and there’s nothing you can do about it, otherwise you’ll have to change the Constitution and I don’t actually want to do that when you are faced with so many things. You have to fix the water in Giyani. You have to fixe rural roads. You have to fix the management of public hospitals. You have to fix SAA, Eskom – do you want to worry about the independence of the Central Bank? Really, truly speaking? Honestly? When you are facing so many problems? So, the more independent he is – I’m happy because he doesn’t have to phone me every day and I’m fine with that. In fact, I don’t even want to take his call sometimes. He forgets, you see the agreement is that 10-days before the MPC he mustn’t call me and I won’t call him 10-days before or 4-days after the MPC meeting because 10-days before I might be seen to be interfering with his work. Two-days or 4-days after I might be seen to be complaining about their decision. So, me, I don’t want to be there, and that’s the next two – I don’t want to get involved. So, he must do his job.

But you know? He gets paid more than me… That’s the problem. That’s one of the things I noticed going back to the public service – they don’t pay you know. The Minister of Finance, the Minister of Arts and Culture gets paid the same amount of money – it really doesn’t work. I need to form a charity of my own.

Thank you, Minister and 8th Governor of the Reserve Bank. Now I know why media had to register online for the first time this year. My question for you is, notwithstanding keeping spending in check as much as possible, reducing the Public Sector Wage Bill – this Budget still has higher Budget deficits for the next few years, higher debt to GDP ratios, higher debt service costs, and there is actually very little detail on the financial support for Eskom. How do you think it’s going to be received by Moody’s, which is the Rating Agency to have us on investment grade? Do you think they’ll keep us on investment grade? My second question is on the NHI, which is sort of a looming future cost to the fiscus. There hasn’t been a great deal said about it in this Budget, and I just wondered if there is a definite plan to get it on track very soon.

Thanks Minister. Carol Paton from Business Day. In the Budget Review, well first of all the President said last week that Eskom will not be privatised. In the Budget Review it says that an equity partner will be sought for the transmission company. How is that different to privatisation? Thanks.

Okay, the next one? Is there somebody else, Tim?

Minister, your estimate of GDP growth is at 1.5% for the year, it was 1.7% at the beginning of the year. This is not a huge miss but it has been, if I count correctly, the tenth consecutive time that the Treasury has over-estimated growth at Budget time and had to revise it downwards at the end of the year. I just wondered what your feeling was about why we were missing so often? I don’t just mean this year but I mean generally speaking. I had a quick question for the Deputy Minister Gungubele, I would just like to know why the PIC did not perfect its security in respect of the Independent Newspapers loan?

Okay, the issue about privatisation is clearly… In SA, despite the fact that we are in the post-Soviet Union era but in SA it’s still a hot potato. You remember people talk about neo-liberals and the Washington consensus – that kind of people, the enemy. So, privatisation is associated with this new liberalism, Washington consensus, 1996 Class Project – that is what they used to call us and so on. I’m happy he’s in the Cabinet now, and he’s going to have to take decisions – the Class of 2019, I don’t know what he’s got – a project. I always take pot shots at him, but it’s okay. He’s a good man. So, it’s a very de-motive issue. I think there has been insufficient debate in SA over the years about a basic issue like disposing of assets, which are just cash guzzlers.

I’ll give an example of a sieve that I’m quite convinced there are still people who think that you can pour water onto a sieve and the sieve is going to fill up. So, there’s a young man in Polokwane called Pat Mugabe. When he saw me tweeting about this thing about a sieve. So, he tweeted back and said, ‘no, Minister, you are quite wrong. You can actually fill up a sieve with water.’ So, I said, ‘what kind of water is this? He said no, there are two or more states of water. There’s a liquid state and there’s a solid state, and then there’s an evaporation state. He said, you could freeze the water and put it into a sieve and it will fill up, in a solid state.’ So, I said to him, look here young man, (he’s an engineer), I said, don’t play games here. Once the thing dissolves it’s going to come out of the sieve. So, you say, okay, putting into a terrible SOE is like putting ice into a sieve to hold for a while, but then it’s going to melt and disappear.

But we have a lot of conversations that we still need to have. So, the President is correct when he said, Eskom will not be privatised, he’s quite right. He’s correct. So, what is going to happen with Eskom is a suggestion or the decision to create three divisions of Eskom. A generation division. A transmission division, which you can call the national grid, actually, I think I spoke about this here. And then the distribution side. But what logically follows from that is that on the generation side you can have as many players as possible so, there’s no Eskom monopoly in the generation. There’ll be a competitive market situation, on the generation side. The monopoly will remain on the national grid, the transmission. But on the distribution side you’re also going to have many players there, there’s Eskom, or Municipalities or whoever, and one must be open to that dynamic reality. It’s not privatisation but it’s the participation at the generation and distribution side of many players. Already we have independent power producers on the generation side so, that’s the reality we have, which we have to live by.

In fact, colleagues, if you think about this carefully to the end everybody, including the working-class should be happy when you have many players on the generation side because if one of the players is Eskom and they can’t fix Medupi then we’re going to have somebody else who is going to supply the power so that we don’t have all our eggs in one basket so, this thing of overdependence on one generator of power will become an issue of the past. We can’t have this level-4…

Is it a mistake in the Budget Review where it says that the transmission company will get a stake, a private equity partner?

Yes, but it’s not privatisation. Let me put it this way. The PIC is a huge and significant lender to Eskom and if they were willing to swap the debt into equity that will still be a SOE. So, that’s fine with me. It’s fine with me as long as I don’t have to put more money there – it’s fine with me. Yes, sir?

Team talked about the focus. There’s Duncan Peterson there. He’s a Chief Economist at the Treasury so, me and him have this conversation all the time. I say, ‘Duncan, your focus for the outer years are always out of kilt.’ I said, ‘maybe you should stop this focus.’ He said, ‘no, I can’t stop the focus because we need that to have a sense of direction and the focus is base-one on the consistency obviously, of the equations. But more importantly, on the assumptions, so if the assumptions change the focus is going to change automatically. So, I’ve been trying to encourage him, and I’ve been trying to encourage Duncan that maybe we should be beginning to talk about a range of possible outcomes, as the baseline changes and the focus changes. So, I think he’s thinking I’m trying to impose the Central Banking way of thinking of the fam chart. But he actually has a fam chart in his head. It’s just that when he writes the Budget Review, he puts specific numbers. Now, outcomes to the future can’t be a specific number but you need the number to be able to do your work. That’s what the situation is but I think we’ll be moving into the fam chart direction, if Governor #10 agrees.

The Ratings Agencies – the staff at the Treasury have been in touch with the Ratings Agencies, having conversations with them. Very difficult conversations. I listened to one conversation yesterday and it was a very difficult conversation. They were almost saying, ‘you are damned if you do, and you’re damned if you don’t.’ I said, but we have to move forward. I think, during the course of next week when Roy and Dondo and I don’t know who else, on the roadshow – they are going to be able to assess in detail what is happening. But I think if we are doing practical things to fix Eskom or the electricity sector – in my view, that should be viewed as possible.

If we are installing a Chief Reconfiguration Officer at these entities that should be seen as positive. If we are doing something about the Wage Bill that we are doing – that should be positive. If we are saying that the green shoots that we see on the economy are showing that there’s a potential for further growth – that should be positive. If we are saying, inflation remains within the inflation target range – that’s positive. So, there are many positives that the Ratings Agencies should take into account but it’s a very difficult conversation. DG, do you want to deal with the NHI?

We are obviously, not different from Government, which has committed itself to rolling NHI and the nature of that NHI is funded. The challenge is now where does the funding come from? Two-years ago in the same forum, we were asking, ‘are you going to increase VAT in order to fund NHI?’ At the time, I think the issue was that what conditions do you put in place for a very successful NHI to take place and is it a fix in the National Health System, and of which, NHI then becomes a component thereof. So, let’s define and if the White Paper is there then we obviously have to engage with it.

But the reality is that there are a number of factors that one has to look at, including the interGovernmental fiscal arrangements currently, because the National Health Act and the Annual Division of Revenue Act, for instances, allocates in a particular way in which is something that is embedded in our budgetary processes. So, one, in making sure that there’s enough funds for NHI you have to ensure that that conversation is complete how funds are going to flow. What the current funds in the system are going to be re-diverted to, setting up the fund in itself because currently, you’ve got a health component in the equitable share and funds are transferred to Provinces and that results in the Provincial Health Budget. So, there’s that you must deal with.

A few years ago, when we started talking about NHI we introduced grants, both the NHI indirect grant and the NHI direct grant, to just test and see what is it going to be like.  Currently, there’s about R4.3bn in the current baselines. We may not have lifted that in the speech in the way that, I think, some of you expected but there’s current funding that addresses particular interventions that come as a result of Government rolling out NHI.

We’ve kind of creamed off some medical tax credits about two-years ago and we specified certain interventions that we wanted to make around children’s reading glasses, and those who have got hearing problems, etc., as part of the whole rollout. Also, the NHI pilots and we identified sites so that we can learn good lessons as to what kind of a rollout process should we embark on once NHI has been rolled out fully to Provinces. So, it’s incorrect to suggest that NHI is not focussed. It is, it continues to become focused. There are funds allocated to NHI but remember, it’s about changing the National Health System. It will also impact on how Provincial health budgets are structured and how best to put that money.

In some cases, and the reality going to be is that the existing monies that are currently in the Health System should or will be diverted to an NHI fund, once a rollout is full and complete. So, we always make a big mistake of looking at NHI and the rollout and the financing thereof outside the current funding arrangements that allocates billions of Rands into health-related funding because essentially, it’s going to be the same pot.

Now, there will definitely be once we’re rolling full, and flat out, as per the White Paper there will be huge costs associated with that and that’s why the time, we give a series of options around looking at the tax regime and exercising some tax measures to actually fund the NHI and we give examples and scenarios in the White Paper. So, in short, there is funding associated with the NHI and that remains a core program that Government wants to embark on.

Quite right and I suppose one of the immediate issues is just to make sure that our public hospitals function properly, instead of getting caught up in these big things. Just to make sure that the linen is collected and washed, and doctors are at their posts and the nurses are there, and to make sure that the services provided at the Government hospitals are better than those at the private hospitals then all of us will flock to the Government hospital, and it’s doable. And don’t get consumed with these difficult things, conceptually and so on. There’s nothing conceptually difficult about getting a hospital to function. You just need to get it managed properly. Let the patients receive their meals at breakfast, lunch, and dinner time, and the doctors come to administer their medication.

Don’t get caught up in some imagination that in some future with this ‘stay’ the Lord has returned. I think the Lord can return today to the public hospitals we just need to manage them properly. We just need to make sure that people don’t steal medicines from the clinics and the pharmacies. Basic things – it’s not complicated. So, DG, as you see in the speech there, we indicate they have budget and (NHI) included but we got caught up in too much of the conceptual debates, away from the practical things. When Ranjeni goes to hospital in Dannhauser – he needs to work, isn’t it. That’s Dannhauser right? She comes from Dannhauser some little dorp in the midland but normally when she writes you think she comes from Johannesburg.

Now, there’s a question here that I’m going to leave the Deputy Minister to deal with. By the way, he’s still the Chairman of the Board of PIC so, they want to know what’s happening with the Independent Newspapers loan.

Thanks, Mr Mboweni. Upfront, I just want to say when we entered a relationship with whomever we relate with, having established that relationship through equity or a loan. Upfront, the immediate security is the asset we put in the institution but over and above that before a deal is approved there are due diligence processes that are undergone to answer those questions upfront even before you end to say, if things were to go, in a worst-case scenario what are you going to do? So, immediately, what we said to independent newspapers is that because the relationship, we thought, is no longer… because the relationship is not to continue with the relationship, it meant certain things need to occur. 1) They barrier us out, and 2) they pay back what we call the loan. We are at that point and depending on whether indeed these things do happen our contract has got all other recourse measures, which we should do and at this point we have not yet reached that stage.

Tito: I was going to ask Caesar here to say something about whether we are rendering unto Caesar and what belongs to Caesar.

Mark Kingon: Thank you, Minister. Maybe just to comment with regards to what we’ve seen in the media over the past 24-hours. The warrant of execution is obviously in the public domain but it is not our norm to comment on taxpayers’ affairs in terms of specifics. But we are busy with many prongs of focus in terms of the illicit economy to ensure that we are ensuring, Minister, that what is needed to be rendered to Caesar is in fact rendered. So, you’re going to see and you are seeing actions within the tobacco space, which I think all of you are aware of the commentary out there of R7bn. In the fuel space where we’re seeing considerable round-tripping and ghost export as such in the fuel industry, where duties are not being paid. Clothing and textiles – there’s a focus to protect obviously firstly, and obviously to collect duties to protect our economy and the jobs that we do have in that area.

Then obviously, illicit flows in the broader scope of things – there is a focus. I think you are all aware of many comments being made with regards to, at the State Capture Commission where direct notice has been given of tax abuse. Fraudulent invoices being created. People splitting salaries, in the one instance, by the person’s own admission. These things are being dealt with by the Illicit Economy Unit. In addition, I think it is good news, although it does impact the Budget Line, you will recall at MTPBS we had a R20bn additional amount allocated for refunds for VAT. The credit book for VAT peaked at around R41bn in September 2018. We are, and I’m grateful to say, and I haven’t got the exact figure today but as of yesterday we were sitting at R24.8bn VAT credit book. So, we have brought it down significantly. Thanks to the efforts of various factors. The team is working extremely hard and obviously, looking at our risk processes. The large business unit, which has been setup and will be finally announced on the 1st April, for formal launch – that is getting going and we believe through these efforts we can redeliver what is needed to Caesar, Minister. Thank you.

Yes, but you must break some bones man. I think I’m going to take the last round of questions, starting from Pretoria, and then coming to CT – we close because we need to go and eat and go to the House to talk to the Parliamentarians about the Hessians that are coming and so on. Pretoria?

Mr Mboweni, I work for Financial Mail – I will vet them to fix this absolution. You have not made a comment whatsoever about Prasa, and Petrol SA in your speech. I think that PetroSA has been bankrupt for a while and is begging you for money. The last question – are you, after May, available to serve in the Government that pays you less than the private sector? Please don’t tell me about the President’s prerogative. I’m asking you if you are available to serve in the Government, after the election? Thank you, sir.

Another one, Pretoria, which is less futuristic.

Minister, I’m from the SABC. In your speech there’s little that has been said about the kind of financial assistance that is going to be given to SABC. I’m not their spokesperson but you know what has been happening there, staff fallout and so forth. But we’ve been expecting the National Treasury to give us a clear indication as to what exactly will happen with the assistance that is going to be given to the SABC? A lot of good things have been happening at the SABC. You could look at their strategy broad map. A lot of improvements have been done in various regions of the SABC so, we should give confidence to the National Treasury that good things are happening as an organisation – but we will make sure that the SABC will continue.

Thank you, very much. That was a very good pitch. Pretoria, you are done. Let’s come to Cape Town now.

Hi, Fifi here from CNBC Africa. You say regarding the Moody’s downgrade that… Oh, no let me not doomsday, but you say, regarding the conversation with Ratings Agencies that National Treasury were damned if it did, or damned if it didn’t. Have you prepared for the eventuality of a worst-case scenario, in which Moody’s does downgrade SA? Perhaps I would also like to ask Governor Kganyago. He’s also been thinking about this given that in January you were quoted as saying that, ‘nothing materially had changed in SA to warrant a Moody’s downgrade.’

Minister, also your two economic colloquiums that you have held. How much of the idea is raised by the economist and the Harvard professors who were brought into this Budget? Finally, Minister Gungubele, on the PIC – our Deputy Minister Gungubele, in the PIC Minister Mboweni had mentioned something about the PIC being a big lender to Eskom and that possibly if the PIC was willing to swap their debt for equity, Eskom would still be owned by the State. Has this come up in conversation and is this something that the PIC would be willing to do?

The Ratings Agency, why do you look for a downgrade, why not an upgrade? So, we will continue the conversations with the Ratings Agencies. I know as Governor #10 will say, they will look at the fiscal stance and then make their recommendations according to how they read the fiscal stance. So, we just have to explain ourselves to the best that we can of why the fiscal stance is the way it is, and the obvious thing is for them to go to Committee and make a decision and we have to live with that decision.

I discovered something about South Africans, which I should have known but I wasn’t quite aware that it was that bad. So, we invited a number of professors of the economies from SA to come to a colloquium in Pretoria, in December. So, there must have been about 50 of us in the room. The majority of who were South African economists and professors. There were only two Harvard professors but for some reason the bulk of the others had an intellectual inferiority complex because these ones came from Harvard, it was Ricardo and David Lawrence. In January there were three, it was Ricardo, David Lawrence and Dani Rodrik. But our people suffer from intellectual inferiority because these ones are Harvard professors therefore the whole colloquium was branded as a Harvard professors thing. It’s not true.

The majority were South African. They need to have the intellectual standing to say, ‘I have also published.’ Now if you have not published sufficiently like Ricardo Hausmann that’s your problem. You must just publish more. So, the interesting thing, by the way, is that two of the participants at the colloquium in December wrote a petition complaining about their non-invitation. But they were there and they joined up with Bantu Rock and Ronnie Carstens, who is not an economist, to the best of my knowledge. But they wrote a petition complaining about the fact that they say, I’m using overseas based economists and not SA economists but they were in the meeting. I think there’s a bipolar problem there. They were in the meeting – Lumkile Mondi was one of the people, he was in the meeting but he signed the petition, and this other young man from Stellenbosch University. I can’t be held responsible if you feel intellectually inferior – that’s your problem, but some of the ideas that came out of the conversations in December and January have found their way into the speech. They definitely have and some of them found their way into my tweets anyway, maybe some of you don’t like them.

The SABC – SABC says they need R6.8bn so the DG is having conversations with the SABC to see what to do but my basic view is if you’re going to make allocations for these SOEs, who must know that something else must give. If R6.8bn must go to the SABC, R6.8bn must come off another Budget Item – that’s life. You can’t have your cake and eat it. So, which is going to give? I don’t know but that’s why Dondo is there to sort it out. Maybe he’ll go to church and prays first but should we agree to make available R6.8bn to the SABC – you can rest assure our Chief Restructuring Officer will be at Auckland Park, rest assured. There’s no question of giving money without supervision. Those days are over. If you want money from us, we’ll put you under curatorship. That is what he does to banks, when they are in trouble. He puts them under curatorship so, we are going to put these institutions under curatorship.

My advice to them – avoid the National Treasury. Do your job appropriately. Avoid Dondo – he looks nice, but there’s a couple of henchmen that he has. They are not very nice. Where’s Mampo? Mampo doesn’t play games. She’s as hard as anything. She’s even harder with me. ‘Minister, there’s no money – period.’ I said, ‘but you know, the President’s Office there’s no…’ ‘No, there’s no money – go and explain to the President.’ But we’ll find out at the SABC but I think the SABC needs to have a very serious conversation about why they’ve got so many duplications in their services? For example, Radio 2000 competing with Metro, competing with Lotus FM – they’re all over the place. So, they need to rationalise their structure and why do they have TV1, TV2, and TV3? When they could easily hive off as a SABC 3, I don’t know. Oops, did I say something wrong? But they need to rationalise their structure. You can’t have this omnibus thing that just…  I’m fully aware though that you must be careful how you treat the SABC because if they decide not to broadcast the Soweto Derby then we are in trouble. So, we want to safeguard that but we’ll help the SABC but they must move forward.

The other issues, and very quickly – PRASA I think personally, if I had my way, I would put more money into railways to make sure that we have an efficient railway system that transports people from home to work efficiently and safely. When I’m in Europe I use the railways quite a lot. It’s quite comfortable. Even the good old British Rail system now works nicely. Their railway station is now clean and wonderful. You can have a cup of coffee because it’s too cold there and it’s nice to use a railway system. Most people working outside London they come into London they use the railways. The Underground is a bit messy now, but I’m sure they’ll fix it but I’ll put money into the railways, honestly.

Given a choice between SAA and the Railways – I’ll put money on the railways because it’s not the working class that flies SAA. It’s you guys, the middle class and the upper classes. In fact, in SA it’s worse. The racial composition is bad for people who fly SAA. But the majority of our people are using taxis and trains and that’s where we should put money. That’s where you’ll get value for money and make the population happier. That’s what I’d do but I’m just one person in a group.

Petrol SA we didn’t say much about that.

The after-May question is a very interesting one because nobody knows what’s going to happen after May. There’s an election on the 8th May – we don’t know who’s going to win that election but I made a deal with DD Mabuza. I made a deal with him. I said, don’t worry, Deputy President if you win the elections, I won’t abandon you so quickly. What does that mean? But I made a deal with him but he must first win the elections and then we can discuss how to implement our deal. But it’s very important, you’ll see in the speech there I made the quotation from the Oath of Office and the Speaker of the National Assembly says, ‘Minister, can you do you something about your facial expression? Can you look a little interested and bubbly?’ Even though we pay you so badly but can you look like you’re interested in being Minister of Finance. Show some oomph and so. So, I’m trying to do that now – am I succeeding? Show some life. I’ll be around for a while, don’t worry about that. DG, don’t worry about it. Don’t ask me again.

I’m told we’ve run out of time but Governor #10…

Fifi, I think you asked the question about Moody’s and how we have planned for it. As Central Bankers you always plan for the worse and you hope for the best so, what we did was to then stress-test the financial system and we had them look at three important channels, through which a Moody’s downgrade, if it was to happen, what it would mean for SA. Firstly, it’s got implications for the cost of capital in the country. Bearing in mind that anybody who wants to lend money to this county they first start my lending to Government and if there is anything left then then can lend to everyone else.

Secondly, is that with the rising cost of capital you will then have an impact on investment and through that channel on economic growth and that’s with an impact on economic growth you are then going to have an impact on employment. If you are having fewer people working as a result of that those people will not be able to service their debts. And if they are not able to service their debt that fits itself into the banking system and people would default and what does that mean for the banking system?

So, let’s go through the first channel – through the cost of capital. Firstly, if we are to be downgraded, we will fall out of the World Government Bond Index and understand that being in the World Government Bond Index actually reduced our cost of capital as a country because investors who have to crack that index, end up buying our bonds just so that they can replicate the index and as it stands foreigners own about 38% of our domestic denominated bonds. That becomes a very important channel so, it becomes important for us to actually be having a macroeconomics setting that are constantly credit positive because that has got implications for the cost of capital.

If that cost of capital goes up, understand that the Constitution says the first charge against the National Revenue Fund is the cost of servicing debt. So there is less money available for Government to spend on other things. But then that means that everybody else in this economy is going to pay higher for any money that they borrow. It’s just straightforward. No conspiracy – just simple, economic relationships. With that the cost of capital of the banks will also go up, and if it goes up you are going to pay more for your mortgages, for your credit cards, for our cars, and so forth so, it is very important that we are rational about how we deal with this.

So, we said that rising the cost of capital will impact on investment and if it impacts adversely on investment you are going to have less growth. With less growth, you are going to have fewer jobs and I know people will say but we’ve had growth but we have had jobless growth. That’s serious rubbish because this economy continues to create jobs as long it is growing. There might not be any economies that grow and do not create jobs but I am yet to find one economy that creates jobs and is not growing – it just doesn’t happen.

So, jobs will be shared and as jobs are shared, we expect that people will not be affording their servicing of their debt and that will then fit itself into the banking system. We have stress tested the banking system and we had three scenarios and the most adverse of the scenarios was that this downgrade leads to a protracted deadline in economic growth and then feeds itself through those channels that I’ve described. If it then happens in that manner for a protracted period and we took it all the way to 5-years, we still found that the banking system has got enough capital to be able to withstand such a scenario. So, that is how we think about it and the banking system in SA, you might not like the fact that we have got conservative bankers but if you think of bankers that are not conservative means then just ask the Americans and the British and see what their adventurous bankers did to their taxpayers in 2008.

So, we have got conservative bankers who had planned for this scenario and we are confident that based on what we had modelled as a scenario that the banking system will be able to withstand that. It might not turn out the way we thought, in which case we will just have to prepare ourselves for that but we have prepared ourselves for any downgrade that might take place.

Thanks, now you might need to pursue the DG with the other question that you asked about the other things. We’ve run out of time but Deputy Minister, there was something about the PIC.

Just quick one, we’ve got options. For instance, PIC is discussing the possibility of taking their loan of Eskom, which could deliver immediately R10bn to them. Those discussions are ongoing. Also, the possibilities are being looked at once the structures are separated. Of course, from a commercial imperative point of view, and developmental imperative point of view. So, options are there. Discussions are ongoing.

You are unusually very brief today. I wish that brevity could continue into the future. It will make my life very easy. Thank you very much, ladies and gentlemen.