18-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 18-K

For Foreign Governments and Political Subdivisions Thereof

ANNUAL REPORT

OF

REPUBLIC OF SOUTH AFRICA

(Name of Registrant)

Date of end of last fiscal year: March 31, 2015

SECURITIES REGISTERED*

(As of the close of the fiscal year)

Title of Issue	Amounts as to which registration is effective	Names of exchanges on which registered
N/A	N/A	N/A

Name and address of person authorized to receive notices

and communications from the Securities and Exchange Commission:

Sachin Davé, Esq.

Allen & Overy LLP

One Bishops Square

London E1 6AD

United Kingdom

* The Registrant is filing this annual report on a voluntary basis.

(1) In respect of each issue of securities of the registrant, a brief statement as to:

(a) The general effect of any material modifications, not previously reported, of the rights of the holders of such securities.

There have been no such modifications.

(b) The title and the material provisions of any law, decree or administrative action, not previously reported, by reason of which the security is not being serviced in accordance with the terms thereof.

There has been no such law, decree or administrative action.

(c) The circumstances of any other failure, not previously reported, to pay principal, interest or any sinking fund or amortization installment.

There has been no such failure.

(2) A statement as of the close of the last fiscal year, giving the total outstanding of:

(a) Internal funded debt of the registrant. (Total to be stated in the currency of the registrant. If any internal funded debt is payable in a foreign currency, it should not be included under this paragraph (a), but under paragraph (b) of this item.)

See “Tables and Supplementary Information,” pages 149-165 of Exhibit 99.D, which are hereby incorporated by reference herein.

(b) External funded debt of the registrant. (Totals to be stated in the respective currencies in which payable. No statement need be furnished as to intergovernmental debt.)

See “Tables and Supplementary Information,” pages 149-165 of Exhibit 99.D, which are hereby incorporated by reference herein.

(3) A statement giving the title, date of issue, date of maturity, interest rate and amount outstanding, together with the currency or currencies in which payable, of each issue of funded debt of the registrant outstanding as of the close of the last fiscal year of the registrant.

See “Tables and Supplementary Information,” pages 149-165 of Exhibit 99.D, which are hereby incorporated by reference herein.

(4) (a) As to each issue of securities of the registrant which is registered, there should be furnished a breakdown of the total amount outstanding, as shown in Item 3, into the following:

(1) Total amount held by or for the account of the registrant.

Not applicable.

(2) Total estimated amount held by nationals of the registrant.

Not applicable.

(3) Total amount otherwise outstanding.

Not applicable.

(b) If a substantial amount is set forth in answer to paragraph (a)(1) above, describe briefly the method employed to the registrant to reacquire such securities.

Not applicable.

(5) A statement as of the close of the last fiscal year of the registrant giving the estimated total of:

(a) Internal floating indebtedness of the registrant. (Total to be stated in the currency of the registrant.)

See “Tables and Supplementary Information,” pages 149-165 of Exhibit 99.D, which are hereby incorporated by reference herein.

(b) External floating indebtedness of the registrant. (Total to be stated in the respective currencies in which payable.)

The registrant has no external floating indebtedness.

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(6) Statements of the receipts, classified by source, and of the expenditures, classified by purpose, of the registrant for each year of the registrant ended since the close of the latest fiscal year for which such information was previously reported. These statements should be so itemized as to be reasonably informative and should cover both ordinary and extraordinary receipts and expenditures; there should be indicated separately, if practicable, the amount of receipts pledged or otherwise specifically allocated to any issue registered, indicating the issue.

See “Public Finance—Consolidated Government Expenditure” and “Public Finance—Consolidated Government Revenue,” pages 123-126 and page 131, respectively, of Exhibit 99.D, which are hereby incorporated by reference herein.

(7) (a) If any foreign exchange control, not previously reported, has been established by the registrant, briefly describe such foreign exchange control.

See “Monetary and Financial System—Exchange Controls,” pages 92-97 of Exhibit 99.D, which are hereby incorporated by reference herein. No foreign exchange control not previously reported was established by the registrant during fiscal year 2015.

(b) If any foreign exchange control previously reported has been discontinued or materially modified, briefly describe the effect of any such action, not previously reported.

See “Monetary and Financial System—Exchange Controls,” pages 92-97 of Exhibit 99.D, which are hereby incorporated by reference herein.

(8) Brief statements as of a date reasonably close to the date of the filing of this report (indicating such date), in respect of the note issue and gold reserves of the central bank of issue of the registrant, and of any further gold stocks held by the registrant.

See “Monetary and Financial System—Gold and Foreign Exchange Contingency Reserve Account,” page 97-98 of Exhibit 99.D, which is hereby incorporated by reference herein.

(9) Statements of imports and exports of merchandise for each year ended since the close of the latest year for which such information was previously reported. Such statements should be reasonably itemized so far as practicable as to commodities and as to countries. They should be set forth in terms of value and of weight or quantity; if statistics have been established only in terms of value, such will suffice.

See “The External Sector of the Economy—Foreign Trade,” pages 99-106 of Exhibit 99.D, which are hereby incorporated by reference herein.

(10) The balances of international payments of the registrant for each year ended since the close of the latest fiscal year for which such information was previously reported. The statements for such balances should conform, if possible, to the nomenclature and form used in the “Statistical Handbook of the League of Nations.” (These statements need be furnished only if the registrant has published balances of international payments.)

See “The External Sector of the Economy—Balance of Payments,” pages 103-109 of Exhibit 99.D, which are hereby incorporated by reference herein.

This annual report comprises:

(1) Pages numbered i to v consecutively.

(2) The following exhibits:

Exhibit A — None.

Exhibit B — None.

Exhibit 24 — Power of Attorney, dated December 4, 2015.

Exhibit 99.C — Republic of South Africa Budget Review 2015.

Exhibit 99.D — Description of the Republic of South Africa dated December 4, 2015.

Exhibit 99.E — Quarterly Bulletin No. 277 dated September 2015, published by the South Africa Reserve Bank.

This annual report is filed subject to the Instructions for Form 18-K for Foreign Governments and Political Subdivisions thereof.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Republic of South Africa, has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in Pretoria, South Africa, on December 4, 2015.

REPUBLIC OF SOUTH AFRICA

By:	/s/ Anthony Julies
	Attorney-in-fact for
	Hon Nhlanhla Nene (MP)
	Minister of Finance
	Republic of South Africa

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EXHIBIT INDEX

Exhibit		Description
24	Power of Attorney, dated December 4, 2015.
99.C	Copy of the Republic of South Africa Budget Review 2015.
99.D	Description of the Republic of South Africa dated December 4, 2015.
99.E	Quarterly Bulletin No. 277 dated September 2015, published by the South Africa Reserve Bank.

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EX-24

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned Minister of Finance of the Republic of South Africa (the ‘‘Republic”), by his execution hereof, does hereby constitute and appoint Lungisa Fuzile, Anthony Julies and Tshepiso Moahloli and any of them acting individually as his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, to execute and deliver the Republic’s Annual Report on Form 18-K (the “Form 18-K”) for the fiscal year ended March 31, 2015 and all amendments thereto, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorney-in-fact and agent which he may lawfully do or cause to be done by virtue hereof;

PROVIDED THAT, this Power of Attorney shall not constitute a delegation of the Minister of Finance’s powers to borrow money on behalf of the Republic in terms of section 72 of the Public Finance Management Act, 1999, as amended.

Dated: December 4, 2015	By:	/s/ Nhlanhla Nene
		Hon Nhlanhla Nene (MP)
		Minister of Finance
		Republic of South Africa

EX-99.C

Exhibit 99.C

Budget Review

2015

National Treasury

Republic of South Africa

25 February 2015

ISBN:	978-0-621-43286-2
RP:	09/2015

The Budget Review is compiled using the latest available information from departmental and other sources. Some of this information is unaudited or subject to revision.

To obtain additional copies of this document, please contact:

Communications Directorate

National Treasury

Private Bag X115

Pretoria

0001

South Africa

Tel: +27 12 395 6697

Fax: +27 12 407 9055

The document is also available on the internet at: www.treasury.gov.za.

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vi

Foreword

The South African economy faces a difficult few years ahead. Some of the difficulties are the result of a weak global outlook, while others have to do with the structure of our economy. But the net result is that economic growth is likely to remain subdued over the medium term, rising from a projected 2 per cent of GDP in 2015 to 3 per cent of GDP in 2017.

Slow growth means that the economy does not generate the tax revenue needed to balance our budget. To continue increasing our stock of debt, and the interest payments that will consume R420.8 billion over the next three years, would jeopardise the sustainability of the public finances. This requires government, as the custodian of public money, to take deliberate steps to narrow the budget deficit.

The 2015 Budget proposes revenue and spending measures needed to stabilise the public finances.

On the revenue side, government proposes a one percentage point increase in personal income tax rates for all but the lowest income bracket, along with increases in the fuel levies. On the spending side, budgeted expenditure over the next two years has been reduced by R25 billion across national, provincial and local government.

The fiscal constraints we face will affect the pace and breadth of government’s contribution to national development in the medium term. But core social and economic programmes will be maintained.

Progress has been made in containing costs and improving the composition of expenditure. Over the next three years, capital is the fastest-growing category of non-interest spending. Much more work remains to be done to improve the value derived from every rand spent on the public’s behalf, and a range of new initiatives will improve cost containment and strengthen expenditure planning. We aim to reach a fair, sustainable public-sector wage agreement that protects the purchasing power of public servants.

Today the economy is receiving a short-term boost from low oil prices, which reduce inflation and increase buying power. But the present electricity supply constraint is a serious hurdle to be overcome. Government is working to reduce the effects of electricity outages today, while ensuring that in the years ahead, there will be sufficient supply from a wider range of sources to power South Africa’s factories and mines, schools and households.

Slow economic growth puts our society and our long-term socioeconomic transformation project at risk. Beyond the short term, the 2015 Budget is about making the necessary adjustments to put the country on a path towards faster growth. This means shifting to a growth trajectory led by investment, not consumption, as proposed in the National Development Plan.

Projected public-sector investment totals R813.1 billion over the next three years. Reforms under way through the medium-term expenditure framework will put our economy on a higher growth path. Government has rolled out a wide array of initiatives to promote energy efficiency, bolster competitiveness, boost skills and job creation, cut red tape and improve business confidence. Government is also stepping up its work with municipalities, in partnership with the private sector, to reshape South Africa’s cities and improve their contributions to economic growth.

I am grateful to Cabinet, the Portfolio Committee on Finance and the Ministers’ Committee on the Budget, and Minister of Finance Nene and Deputy Minister Jonas for their guidance and leadership. And I owe special thanks to my dedicated and hardworking colleagues at the National Treasury and throughout government, who have helped us to prepare a budget that responds to the challenges we face.

Lungisa Fuzile

Director-General: National Treasury

vii

viii

Contents

Chapter 1	Rebalancing the economy for growth	1
	Introduction	1
	Balancing revenue and expenditure	3
	Building an economy for the future	5
	Overview of the 2015 Budget	10
Chapter 2	Economic outlook	15
	Overview	15
	Global outlook	16
	South Africa: economic outlook and trends	19
	Raising growth potential	26
	The economy and the fiscus	28
Chapter 3	Fiscal policy	29
	Fiscal outlook	29
	Fiscal framework	34
	Elements of the consolidated budget	35
	Debt outlook	38
	Risks to the fiscal outlook	39
Chapter 4	Revenue trends and tax policy	41
	Overview	41
	Budget revenue collection and outlook	42
	Growth, revenue trends and tax policy reforms	44
	Tax proposals	47
	Revenue impact of tax proposals	52
Chapter 5	Consolidated government spending plans	55
	Overview	55
	Consolidated government expenditure	56
	Revised medium-term expenditure plans	60
Chapter 6	Provincial and municipal expenditure	73
	Division of revenue	73
	Funding provinces	75
	Funding local government	78
Chapter 7	Financing government’s borrowing requirement	83
	Overview	83
	South African debt markets	84
	Medium-term borrowing strategy	86
	Risk considerations	91
Chapter 8	Financial position of public-sector institutions	93
	Overview	93
	Financial health and national development	94
	State-owned companies	95
	Development finance institutions	100
	Social security funds	103
	Government Employees Pension Fund	105
	Summary	105

ix

Annexure A	Report of the Minister of Finance to Parliament	109
Annexure B	Public-sector infrastructure update	121
Annexure C	Additional tax amendments	133
Annexure D	Financial sector regulatory reforms	152
Annexure E	Summary of Budget	156
Glossary		160
Statistical tables		176
Two annexures are available on the National Treasury website (www.treasury.gov.za):
W1	Explanatory memorandum to the division of revenue
W2	Structure of the government accounts

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Tables
1.1	Electricity intensity, employment and output	6
1.2	Macroeconomic outlook – summary	10
1.3	Consolidated government fiscal framework	11
1.4	Summary of tax proposals	11
1.5	Consolidated government expenditure by function	12
1.6	Division of revenue	13
1.7	Projected state debt and debt-service costs	13
2.1	Annual percentage change in GDP and consumer price inflation in selected regions/countries	17
2.2	Macroeconomic performance and projections (1)	19
2.3	Macroeconomic performance and projections (2)	19
2.4	Sector growth trends	21
2.5	Major export destinations for South African products	24
2.6.	Investments in Africa	25
3.1	Consolidated fiscal framework	30
3.2	Main budget non-interest expenditure	31
3.3	Selected items of goods and services: national and provinces	32
3.4	Consolidated operating and capital accounts	34
3.5	Main budget framework	36
3.6	National government debt-service costs	36
3.7	Revisions to main budget revenue and expenditure estimates	37
3.8	Consolidated budget balance	37
3.9	Public-sector borrowing requirement	39
4.1	Tax revenue performance	42
4.2	Budget estimates and revenue outcomes	43
4.3	Budget revenue	44
4.4	Personal income tax rate and bracket adjustments	48
4.5	Estimates of individual taxpayers and taxable income	48
4.6	Turnover tax regime	49
4.7	Changes in specific excise duties	50
4.8	Transfer duty rate adjustments	51
4.9	Total combined fuel taxes on petrol and diesel	51
4.10	Impact of tax proposals on 2015/16 revenue	53
5.1	Consolidated government expenditure by function	58
5.2	Consolidated government expenditure by economic classification	59
5.3	Economic affairs expenditure	62
5.4	Local development and social infrastructure expenditure	63
5.5	Post-school education and training expenditure	65
5.6	Basic education expenditure	65
5.7	Social protection expenditure	67
5.8	Social grants values	68
5.9	Health expenditure	68
5.10	Defence, public order and safety expenditure	70
5.11	General public services expenditure	71
6.1	Division of nationally raised revenue	74
6.2	Provincial equitable share	75
6.3	Conditional grants to provinces	77
6.4	Transfers to local government	80
7.1	Ownership of domestic government bonds	85
7.2	Financing of national government borrowing requirement	87
7.3	Domestic short-term borrowing	87
7.4	Domestic long-term borrowing	88
7.5	New domestic government bonds	89
7.6	Interest rates in RSA retail bonds	89
7.7	Change in cash balances	91
7.8	Performance against strategic portfolio risk benchmarks	91
8.1	Combined financial position of selected categories of public institutions	94
8.2	Selected state-owned companies’ capital expenditure programmes	96
8.3	Combined balance sheets of state-owned companies	96
8.4	Combined borrowing requirement of selected public-sector institutions	97
8.5	Guarantee exposure to major state-owned companies and development finance institutions	97
8.6	Consolidated balance sheets of development finance institutions	101
8.7	Combined balance sheet of social security funds	103
8.8	Government Employees Pension Fund actuarial valuation	105
Figures
1.1	Real investment spending by general government and public corporations	7
2.1	Commodity prices	18
2.2	Growth in gross fixed capital formation by sector	23
2.3	Components of the current account	24
2.4	Contributions to headline CPI	26
3.1	Spending growth by economic classification	32
3.2	National and provincial headcount growth	33
3.3	National government net debt outlook	38
3.4	Public-sector debt as percentage of GDP	39
4.1	Nominal growth in gross tax revenue and GDP	45
4.2	Effective tax rates	46
5.1	Nominal expenditure growth by function	57
7.1	Fixed-rate bond yield curve movement	84
7.2	Non-resident domestic government bond holdings	85
7.3	Domestic government bond maturities	86

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1

Rebalancing the economy for growth

In brief

• The 2015 Budget proposals support the long-term health of the public finances with a series of revenue and expenditure measures to narrow the budget deficit and stabilise debt. These measures include increases in personal income tax rates and the fuel levies, and a R25 billion reduction in budgeted expenditure over the next two years.

• Per capita public spending grew by about 80 per cent in real terms over the past decade. Since the global financial crisis began in 2008, however, increasing expenditure has been sustained by a large accumulation of debt. In a low-growth environment, this trend cannot be sustained.

• Government continues to prioritise infrastructure investment and social programmes that support those citizens most in need, and these commitments are reflected in the budget allocations. Total public-sector infrastructure spending of R813.1 billion is projected over the next three years.

• To eliminate poverty and reduce inequality, South Africa requires much higher levels of economic growth, supported by accelerated implementation of structural reforms identified in the National Development Plan. Working together, government, business, labour and civil society can speed up these reforms over the period ahead.

  ¢    Introduction

In the four months since the publication of the 2014 Medium Term Budget Policy Statement (MTBPS), the global economic outlook has weakened. There are mounting concerns that the world economy faces a lengthy period of slower growth, punctuated by bouts of volatility. At home, it is now clear that electricity shortages will constrain economic activity over the period ahead.   In this difficult environment, the 2015 Budget contributes to important changes under way that will place the economy on a more solid foundation for sustainable growth in the future. These include shifting from a growth path reliant on consumption to one led by investment, making the transition to a less energy-intensive economy, strengthening tradable sectors with significant potential for job creation, and investing in cities to reverse inequitable and inefficient patterns of human settlement. Budget contributes to long- term changes that will reposition the economy  

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2015 BUDGET REVIEW

	These changes all contribute to the vision of the National Development Plan (NDP). The Budget also reflects the policy priorities contained in government’s medium-term strategic framework (MTSF), which identifies the key actions required to implement the NDP.
Acknowledging economic realities can strengthen focus on necessary reforms	The economic outlook results in fiscal constraints that will affect the pace and breadth of government’s contribution to national development in the medium term. But frank acknowledgement of the realities facing the country can help government, business, labour and civil society focus on the work that can be done today to build for the future.
	Sustaining the social gains of democracy
	Over the past decade, the public finances have supported a large-scale redistributive effort to support national development and reduce poverty. National income, adjusted for inflation, is 50 per cent larger than it was 10 years ago. Over the same period, spending per citizen grew by 80 per cent in real terms, and real expenditure on social services doubled.
	Since the global financial crisis began in 2008, however, increasing expenditure has been sustained by a large accumulation of debt. Rising debt-service costs, which amount to R115 billion in 2014/15 alone, threaten the sustainability of social gains achieved over the past decade.

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CHAPTER 1: REBALANCING THE ECONOMY FOR GROWTH

Since 2012, government has pointed out that a deterioration of the economic environment would warrant a reconsideration of expenditure and revenue plans, and has taken steps to slow growth in expenditure. The 2014 MTBPS noted that the public finances had reached such a turning point, and outlined measures to reduce the budget deficit and stabilise debt. The burden of these necessary adjustments must be equitably shared as part of the social compact that underpins South Africa’s constitutional democracy.	Burden of necessary fiscal adjustments must be equitably shared
¢    Balancing revenue and expenditure
The 2015 Budget builds on the progress made in recent years to limit the growth of government expenditure. Bloated budgets for employee compensation have been curtailed and cost-containment measures have begun to yield results, reflected in reduced spending on goods and services that are not critical for service delivery.	Cost-containment measures have begun to yield results
Over the medium term, government will take several steps to strengthen budget controls. New Treasury instructions will contain costs and additional controls on personnel budgets will be designed. Procurement reforms will be rolled out, including an online tender system that enhances public scrutiny, strengthens competition and levels the playing field for small businesses. A price-referencing system will provide state agencies with a benchmark for costing commonly procured goods.
These measures, combined with hard budget constraints and strong oversight by Parliament, other institutions, the public and the media will help ensure that accounting officers across government direct limited resources to policy priorities. Tighter budgets are an opportunity to eliminate waste, improve efficiency and change the way government does business.
Sustainable public finances cannot be achieved through spending cuts or the expectation of faster growth on its own. A major part of the budget deficit is structural. As a result, in addition to measures aimed at moderating spending, higher tax revenues are required.	Gap between spending and revenue growth will not be closed automatically by improved conditions
Moderate tax increases proposed
There is broad acceptance that South Africa’s tax system is fair and efficient. It forms a part of the country’s social compact, raising the revenue necessary to support public services. Government is aware that improving the quality of public spending, combating corruption, and eliminating waste and inefficiency are vital to maintaining the goodwill that sustains revenue collection.
Over the past two decades, the tax policy framework has kept the overall burden on individuals stable. At the same time, a broadening of the tax base and efficient collections have contributed to sustained improvements in the social wage and real welfare gains for the poorest South Africans. The tax system is progressive, with a greater share of the burden paid by better-off households.	Since 1994, tax burden on individuals has remained stable
The 2015 Budget proposals build on the progressive character of the tax system by raising all marginal rates by one percentage point, except for the lowest bracket, which remains unchanged. Leaving aside other

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2015 BUDGET REVIEW

	adjustments, the rate changes will result in individuals with an annual taxable income of R200 000 a year paying about R21 more in monthly taxes. Those earning R500 000 will pay an extra R271 per month; and those earning R1.5 million will pay an extra R1 105 each month. Government also proposes an overall increase in the fuel levies of 80.5 c/litre, of which 30.5 c/litre is an increase in the general fuel levy and 50 c/litre is for the Road Accident Fund (RAF), as described below. South Africa’s fuel levies are comparatively low by international standards, and the recent decline in fuel prices creates space for an increase.
	These tax proposals (excluding the RAF fuel levy) will add R16.8 billion to revenue in 2015/16, offset by relief for inflation-related earnings increases amounting to R8.5 billion.
Existing levels of revenue cannot finance long-term policy objectives, such as national health insurance	The additional revenue will help to close the gap in the public finances over the medium term. Beyond that, however, several long-term policy objectives, including national health insurance and expanding the post-school education system, imply permanent spending increases that cannot be financed from existing levels of revenue. South Africans need to consider and debate the adjustments required to create room for these progressive spending policies. The impact of any proposed measures on employment and the cost of labour, as well as the long-term growth of the economy, needs to be taken into account.
	Earmarked taxes and fiscal imbalances
	Several imbalances associated with earmarked taxes have emerged in the fiscal system. The sector education and training authorities and the National Skills Fund receive funding directly from the skills levy. While these institutions continue to budget for large surpluses, other institutions in the post-school education system face significant shortfalls. An interdepartmental team will make recommendations on this matter before the next budget.
Legislation to replace the Road Accident Fund with a more equitable, fair system to be proposed	The structure of the RAF is unaffordable and inequitable, with benefits skewed by income level and absorbed by legal representation. The RAF’s existing liability is R98.5 billion and its accumulated deficit is expected to grow by 15 per cent over each of the next three years, as the earmarked fuel levy is insufficient to close the gap. To address the Fund’s immediate predicament, government proposes to raise the RAF levy on fuel by 50 c/litre. This steep increase will be insufficient to cover the shortfall. In 2015, government will introduce legislation replacing the RAF with a more affordable and equitable scheme. From 2016/17, the earmarked levy will be reserved to finance the new arrangement.
Once-off UIF relief to put R15 billion back into pockets of workers and employers in 2015/16	By 2013/14, the Unemployment Insurance Fund (UIF) had an accumulated surplus of R72.3 billion. Despite the more generous benefits mandated by a legislative amendment in 2012, the UIF estimates that earmarked contributions will add R51.8 billion to its accumulated surplus over the next three years. While government considers longer-term reforms, it proposes once-off relief for UIF contributors in 2015/16. Workers and employers each contribute 1 per cent of the first R14 872 of an employee’s remuneration. This threshold will be lowered to R1 000 with no change in benefits. In effect, employees will pay only R10 in monthly UIF contributions – and employers the same amount per worker – putting about R15 billion back into the pockets of workers and businesses in 2015/16.

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CHAPTER 1: REBALANCING THE ECONOMY FOR GROWTH

¢    Building an economy for the future
Adjusting to slower global growth
The world economy faces a protracted period of slow growth. Over the next three years, the United States is the only major developed economy expected to grow by more than 3 per cent annually, with economic activity remaining depressed in Europe and Japan. The outlook for emerging markets has deteriorated in recent months, with notably slower growth expected in China.	World economy faces protracted period of slower growth
Commodity prices have weakened over the past three years, and the price surge of the 2000s is unlikely to resume over the period ahead. Non-oil commodities make up a large portion of South Africa’s exports, and the rate of export growth is expected to be moderate in line with the outlook.
The recent decline in the price of oil is an important boost for the economy and the fiscus, but it is likely to be short-lived. Lower inflation during 2015/16 will strengthen spending and profits, and relieve pressure on the current account of the balance of payments. But the impact on growth will be limited by the effect of electricity supply constraints.	Oil price decline provides a boost for South Africa but is likely to be short-lived
Despite the expected weakness in the global economy as a whole, particular regions and sectors provide growth opportunities. South African firms are well placed to take advantage of rising demand on the African continent. To help businesses realise these opportunities, the capabilities of the state are being enhanced, critical public investments are being made and regulatory obstacles are being identified.
Responding to the electricity constraint
Of the structural weaknesses that need to be addressed for the economy to grow more rapidly, the low and unreliable levels of electricity supply are now the most binding constraint. The net effect on economic growth is difficult to gauge. The revised National Treasury forecast assumes that gross domestic product (GDP) growth will remain below 2.5 per cent for the next two years. However, there is a risk that the economic effect will be even more pronounced.	Net effect of electricity constraint on GDP is uncertain, but government is working to limit its impact
As discussed in Chapter 2, government is working to limit the effects of inadequate electricity supply on the economy. A predictable pattern of scheduled power cuts for maintenance (load shedding) and timely, accessible communications will help to mitigate the impact. Communication from Eskom and large municipalities will continue to play an important role, helping businesses and households to plan for outages. Additional capacity from co-generation, gas and eventually coal will be fed into the system.
Medium-term support to help stabilise Eskom includes funding totalling R23 billion, to be raised in a manner that does not widen the deficit. In combination with measures to improve Eskom’s efficiency and improve plant maintenance, the continuing shift towards cost-reflective electricity prices will encourage firms to reduce consumption and ensure sufficient investment in power generation over time.	Necessary shift towards cost-reflective prices will encourage reduced reliance on electricity

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2015 BUDGET REVIEW

	Building a sustainable and innovative economy
Structural reforms outlined in NDP include investment in manufactured exports and productivity growth	Achieving faster growth requires urgent implementation of structural reforms outlined in the NDP. These envisage shifting the economy towards tradable sectors through greater investment in manufactured exports and stronger productivity growth. The economy of the future will expand beyond core mineral sectors and have a stronger, more competitive industrial base.
Tourism, agriculture and agro-processing, light manufacturing and services can boost job creation	Over the medium term, this implies movement towards a less energy-intensive growth path that is able to create work for more South Africans. In the context of binding electricity constraints, government will pay closer attention to growth in tradable sectors that employ more people and consume less electricity for each unit of value they create. Over the next several years, the sectors best-placed to thrive and create jobs include tourism, agriculture and agro-processing, light manufacturing and services such as business process outsourcing.
	Table 1.1 Electricity intensity, employment and output, 2007 – 2010

Selected economic sectors	Electricity intensity1		Jobs2		Gross  value added3
Construction		1.0		445 846		126 435
Transport equipment		2.1		127 828		28 379
Machinery and equipment		2.9		153 439		22 519
Food, beverages and tobacco		15.6		207 195		85 706
Services		31.0		5 675 819		1 853 305
Textiles and leather		38.2		120 136		10 298
Transport		48.1		290 259		192 587
Wood and wood products		49.2		49 968		8 629
Agriculture		115.7		732 833		72 431
Chemical and petrochemical		154.8		90 123		73 791
Paper and paper products		165.3		88 643		9 929
Mining and quarrying		323.6		502 047		279 691
Non-metallic minerals		342.8		63 376		9 708
Iron and steel		1 426.1		52 313		16 861
Non-ferrous metal (including aluminium smelting)		1 993.0		23 244		9 214

	1.      Average megawatt-hours per R’000 000 of real gross value added at basic prices over the period 2.      Average employment levels over the period. Based on Quarterly Employment Statistics except agriculture, where figures are based on Quarterly Labour Force Statistics 3.      In R’000 000, 2013 levels
Regulatory obstacles to faster growth are receiving attention	Government also plans to reduce regulatory obstacles that might hinder growth in these areas. For example, it is reconsidering the implications of visa regulations for tourism and a range of other businesses, aligning incentives and policy to support agriculture and agro processing, and promoting employment-intensive aquaculture projects.

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Faster rollout of broadband infrastructure, platforms for innovation in mobile communications and other technology will also be supported to strengthen small, labour-intensive businesses, as well as the economy’s overall competitiveness. Regulatory reforms that reduce barriers to entry and promote shared access to broadband infrastructure will soon be proposed. Rationalising state agencies working in information and communication technology will complement this approach. The completion of the digital migration of television broadcasting will lead to greater availability of broadband spectrum.

Reforms promoting shared access to broadband infrastructure will soon be proposed

Government’s immediate priorities are framed by the nine-point plan to boost growth and create jobs.

Nine-point plan to boost growth and create jobs
1.      Resolving the energy challenge	6.      Moderating workplace conflict
2.      Revitalising agriculture and agro-processing	7.      Unlocking small business potential
3.      Adding more value to our mineral wealth	8.      Boosting the role of state companies
4.      Industrial Policy Action Plan	9.      Operation Phakisa, aimed at the ocean economy and other sectors
5.      Encouraging private investment

Towards investment-led growth
At the heart of the NDP is the need to shift South Africa’s economic growth trajectory from one led by consumption to higher levels of investment and exports. Investment should be in dynamic sectors that transform ownership and economic structure, and draw in a larger proportion of the economically inactive population.	Economy needs to shift from consumption to investment
Investment has risen from 15 per cent of GDP in 2002 to 20 per cent in 2014, supported by large public-sector infrastructure investments. But high levels of consumption by government and households have made South Africa vulnerable to shifts in global investor sentiment.
Figure 1.1 Real investment spending by general government and                    public corporations, 2007 – 2014

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2015 BUDGET REVIEW

	The current account deficit was 5.8 per cent in 2014, indicating continued reliance on foreign savings. Household debt remains high, making consumers vulnerable to interest rate increases.
	Government consumption and capital spending
Capital spending is fastest-growing element of expenditure	The 2015 Budget continues to prioritise investment. Apart from debt-service costs, capital spending, both directly and through transfers to municipalities, is the fastest-growing element of the budget. Over the next three years, national, provincial and local governments have budgeted R362.4 billion for infrastructure spending. The fiscal framework achieves a balance between current spending, largely on consumption items, and revenue. Consequently, as the deficit narrows over the next three years, the capital financing requirement will remain at 3.8 per cent of GDP.
	Sustaining high levels of capital spending depends largely on moderating consumption expenditure, the largest share of which is the public-sector wage bill. Over the past decade, public-sector unit labour costs have increased by more than 80 per cent in real terms, with an average annual growth rate of more than 6 per cent above inflation. Compensation of employees has contributed in large measure to the structural fiscal deficit.
Government budgeting for wage agreement that protects real buying power of public servants	Government is budgeting for a wage agreement that protects the real buying power of public servants. If current negotiations result in a settlement that departs significantly from inflation, government will have to effect substantial reductions in capital expenditure, introduce more stringent controls on public employment or find ways to curtail spending on other critical priorities.
	Investment by state-owned companies
New economic assets in electricity, rail, ports and pipelines will promote faster economic growth	Most public investment in economic infrastructure is financed on the balance sheets of state-owned companies. The creation of economic assets in electricity, rail, ports and pipelines is building a platform for faster economic growth. In certain areas, these investments have already begun to lift constraints. Transnet’s seven-year, R310 billion capital investment programme is modernising the freight logistics network and upgrading railways, ports and pipelines. Sixty trains now run daily between Durban and Johannesburg, compared with fewer than 20 a decade ago.
	The annual volume of investment by public enterprises has increased by more than 260 per cent in real terms over the past 10 years. However, the rate of investment growth by public corporations has begun to slow. Eskom’s budgeted capital spending is declining as several of its major construction projects near completion. Transnet has trimmed its capital expenditure estimates in response to lower commodity prices and slower global growth. The South African National Roads Agency Limited’s investment plans for national roads cannot proceed if the entity is unable to raise sufficient revenue. Coordinating investment decisions across numerous public and private agents has led to delays in the water sector.
Unresolved policy and regulatory concerns often hold back investment	Financial constraints are sometimes perceived as an obstacle to investment. But in many cases unresolved policy and regulatory concerns, along with governance and operational weaknesses, are at the root of the problem. For example, the outcome of debates on the user-pays principle and how it should be applied to achieve equity and efficiency will affect

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the business plans of all large state-owned companies. In addition, mandates need to be well specified, lines of accountability should be clear and developmental work that cannot be financed from commercial operations must be made explicit.

The 2015 Cabinet Lekgotla discussed a range of interventions, drawing on the Presidential Review Committee on State-owned Entities report of 2012, to ensure that state-owned companies are reformed to contribute more effectively to national development.

Strengthening state-owned entities

The Presidential Review Committee on State-owned Entities noted that there are about 715 such entities serving various objectives. The committee has recommended that government develop the following:

• A single governing law and an overarching, long-term strategy for public entities.

• A framework for appointing boards, clarifying the roles of executive authorities, boards and CEOs.

• A clearer approach to funding, including separate and adequate funding of developmental activities.

• A plan to rationalise the number of entities.

• Expanded private-sector partnerships to deliver economic and social infrastructure.

• A central remuneration agency to improve salary consistency, with incentives linked to performance.

• A streamlined empowerment framework to encourage transformation.

• Improved monitoring and evaluation against public entities mandates.

Reviving investment by the private sector
Despite strong corporate balance sheets, private-sector investment growth remains weak. Restoring confidence in the future growth of the economy is the key to unlocking the long-term investment commitment of private funds. Regulatory and other obstacles to private investment are receiving attention. Government plans to build on the success of its initiative to purchase renewable energy from independent producers. The programme illustrates the benefits of public-private cooperation, clear policy frameworks and the potential for South African firms to innovate.
Investment to transform urban spaces
South Africa’s urban infrastructure must be renewed. Population growth places enormous pressure on ageing transport systems, roads, housing, water and other amenities. Moreover, apartheid spatial planning dominates the urban landscape. Over the next three years, government will expand investment in the urban built environment, using resources more effectively to transform human settlements, and drawing in private investment to support more dynamic and inclusive economic growth.	Expanded investment in urban built environment aims to draw in private capital
The 2015 Budget begins a fundamental realignment to achieve these goals. The National Treasury will work directly with municipal governments, development finance institutions and the private sector to expand investment in urban infrastructure and housing. A series of transformative projects valued at over R128 billion has been identified for potential investment in large cities, supported by a project preparation facility at the Development Bank of Southern Africa (DBSA). To broaden funding streams, city governments will focus on improving their systems for revenue collection, expenditure management and land-use zoning.

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New fiscal package will encourage large cities to find innovative ways to finance large projects	Government will introduce a new fiscal package to mobilise additional financial resources for metropolitan municipalities to effectively finance these investment projects. The system of local government infrastructure grants, which currently finances more than half of capital spending in cities, will be reformed. Grants will be consolidated, conditions streamlined, and allocations made more predictable and responsive to the needs of specific investment projects. Financial incentives for better municipal performance will be strengthened. Government will also propose legislative reforms to strengthen the efficiency and fairness of municipal development charges. Working with the DBSA and private financial institutions, the National Treasury will help cities to borrow at lower rates and for longer periods.
	Metropolitan municipalities will announce further details on their investment plans when they table their budgets. An investor conference showcasing projects will take place in the next several months.
	¢    Overview of the 2015 Budget
	Economic outlook
GDP growth of 2 per cent projected in 2015, rising to 3 per cent by 2017	The National Treasury projects GDP growth of 2 per cent in 2015, rising to 3 per cent by 2017. The moderately improving growth outlook will be supported by continued economic growth in much of sub-Saharan Africa and, over the short term, better terms of trade and lower inflation associated with the oil price decline. Inadequate electricity supply, however, will impose a constraint on output and exports.
	Achieving faster sustainable growth and large-scale job creation requires structural shifts in the economy, higher exports, moderate real wage increases and, crucially, growing private-sector investment based on confidence in the long-term business environment.
	Table 1.2 Macroeconomic outlook – summary

	2014		2015		2016		2017
Real percentage growth	Estimate		Forecast
Household consumption		1.2		2.0		2.6		3.0
Gross fixed-capital formation		-0.6		2.2		3.4		3.8
Exports		0.9		3.3		4.6		5.0
Imports		-0.3		4.6		5.3		5.5
Real GDP growth		1.4		2.0		2.4		3.0
Consumer price inflation (CPI)		6.1		4.3		5.9		5.7
Current account balance (% of GDP)		-5.8		-4.5		-4.9		-5.2

	Across all tables in the Budget Review, the use of “0” refers to a value of small magnitude that is rounded up or down to zero. If a value is exactly zero, it will be denoted by “–”. If data is not available it is denoted by “N/A” Source: National Treasury
	Fiscal policy
Proposals aim to narrow budget deficit, stabilise debt and begin rebuilding fiscal space	The 2015 Budget implements government’s commitments to narrow the budget deficit, stabilise debt and begin to rebuild fiscal space. A combination of a lower expenditure ceiling and higher taxes will narrow the deficit to 2.5 per cent of GDP by 2017/18. Given weak economic conditions, these proposals have been designed to limit the dampening effect on economic growth in the short term.

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Over the medium term there are three main risks to the fiscal outlook: weaker-than-expected economic growth, a public-sector wage settlement significantly above CPI inflation, and the provision of additional direct fiscal support, equity injections or guarantees to public entities.

Table 1.3 Consolidated government fiscal framework

	2014/15			2015/16			2016/17			2017/18
R billion/percentage of GDP	Revised estimate			Medium-term estimates
Revenue		1 091.0			1 188.9			1 331.5			1 439.5
		28.1	%		28.4	%		29.3	%		29.2	%
Expenditure		1 243.4			1 351.0			1 448.8			1 561.7
		32.0	%		32.2	%		31.9	%		31.7	%
Budget balance		-152.4			-162.2			-117.3			-122.2
		-3.9	%		-3.9	%		-2.6	%		-2.5	%

Source: National Treasury

Revenue trends and tax proposals
Tax revenue as a percentage of GDP is expected to increase from 25.2 per cent in 2014/15 to 25.8 per cent in 2015/16. The 2015 Budget tax proposals are expected to add R16.8 billion to revenue in the next year, before accounting for fiscal drag, and carry forward over subsequent years.	Tax revenue grows to 25.8 per cent of GDP in 2015/16
The main tax proposals include:
•        Increasing marginal personal income tax rates by one percentage point for all taxpayers earning more than R181 900, and adjusting tax brackets and rebates to account for fiscal drag.
•        Raising the general fuel levy by 30.5 c/litre and the Road Accident Fund levy on fuel by 50 c/litre (a total increase of 80.5 c/litre).
•        Providing a more generous turnover tax regime for small businesses.
•        Strengthening the energy-efficiency savings tax incentive.

Table 1.4 Summary of tax proposals

R million	2015/16 Budget estimate
Budget revenue (before tax proposals)			1 180 579
Personal income tax		—
Fiscal drag relief		-8 500
Rate increase in income tax		9 420
Medical credits		-920
Business income tax		-150
Energy-efficiency savings tax incentive		-150
Taxes on property		100
Adjustment in transfer duty		100
Indirect taxes		8 325
Increase in general fuel levy		6 490
Increase in excise duties on tobacco products		602
Increase in alcoholic beverages		1 234
Tax proposals after fiscal drag 2015/16 (net):			8 275
Tax revenue (after tax proposals)			1 081 275
Budget revenue (after tax proposals)			1 188 855

Source: National Treasury

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2015 BUDGET REVIEW

	Medium-term expenditure plans
Aggregate spending will reach R1.56 trillion in 2017/18	The 2015 Budget allocates resources to core social and economic priorities while containing aggregate expenditure growth. Spending plans give effect to the priorities of the NDP and the MTSF. Although aggregate spending, which will reach R1.56 trillion in 2017/18, continues to grow in real terms across a significant proportion of the budget, this is not the case in all areas. Reducing wasteful expenditure and implementing more cost-effective service-delivery models will make more resources available for priority spending areas.
	Table 1.5 Consolidated government expenditure by function

R billion	2014/15 Revised estimate		2015/16 Budget estimate		Average growth 2014/15 – 2017/18
Basic education		189.5		203.5		6.3	%
Health		144.6		157.3		7.1	%
Defence, public order and safety		163.0		171.2		5.7	%
Post-school education and training		56.6		62.2		7.1	%
Economic affairs		189.4		206.2		6.0	%
Local development and social infrastructure		176.6		199.6		8.2	%
General public services		64.7		64.4		2.6	%
Social protection		143.9		155.3		7.0	%
Allocated expenditure		1 128.4		1 219.6		6.5	%
Debt-service costs		115.0		126.4		10.1	%
Unallocated reserves		—		5.0
Consolidated expenditure1		1 243.4		1 351.0		7.9	%

	1.      Consisting of national, provincial, social security funds and selected public entities Refer to Annexure W2 on the National Treasury website for a detailed list of entities included Source: National Treasury
	Relative to expenditure levels announced in the 2014 Budget, total spending in 2015/16 and 2016/17 has been reduced by R25 billion, or about 1 per cent of projected budgets. The bulk of reductions has fallen on the goods and services budget. Capital spending and transfers to local government for capital projects are among the fastest-growing expenditure categories.
	Division of revenue
Provincial and local governments must renew focus on service delivery and reduce costs	Fiscal constraints mean that transfers to provinces and municipalities will grow more slowly in the period ahead than they have in the past. Accordingly, provincial and local governments must renew their focus on core service delivery functions and reduce costs without adversely affecting basic services. The National Treasury is working with provinces and municipalities to improve the performance of conditional grants. Similar work is being done to help cities mobilise their own revenues and borrowing to finance infrastructure investments.
	Over the next three years, of the funds available after providing for debt costs and the contingency reserve, 47.9 per cent are allocated to national government, 43.1 per cent to provincial government and 9 per cent to local government.

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Table 1.6 Division of revenue

R billion	2014/15			2015/16			2016/17			2017/18
National allocations		491.4			523.0			553.8			586.1
Provincial allocations		439.7			468.2			496.3			526.4
Equitable share		359.9			382.7			405.3			428.9
Conditional grants		79.7			85.5			91.0			97.5
Local government allocations		89.1			99.8			103.9			110.0
Total allocations		1 020.1			1 090.9			1 154.0			1 222.5
Percentage shares
National		48.2	%		47.9	%		48.0	%		47.9	%
Provincial		43.1	%		42.9	%		43.0	%		43.1	%
Local government		8.7	%		9.1	%		9.0	%		9.0	%

Source: National Treasury

Debt management
Over the past five years, government has expanded its borrowing programme in response to difficult economic circumstances. As a percentage of GDP, net debt has grown from 21.8 per cent at the start of the financial crisis in 2008/09 to 40.8 per cent in 2014/15.
Government’s borrowing plans over the next three years reflect a prudent approach to accumulating and managing debt. The medium-term fiscal framework will result in debt stabilising at 43.7 per cent of GDP in 2017/18. The net borrowing requirement of R180.9 billion in 2014/15 is R1.1 billion higher than projected in the 2014 Budget, and is expected to decrease to R173.1 billion in 2015/16. Domestic capital markets will remain the main source of financing.	Debt projected to stabilise at 43.7 per cent of GDP in 2017/18

Table 1.7 Projected state debt and debt-service costs

R billion/percentage of GDP	2014/15			2015/16			2016/17			2017/18
Net loan debt		1 584.0			1 781.3			1 958.1			2 151.7
		40.8	%		42.5	%		43.1	%		43.7	%
Debt-service costs		115.0			126.4			141.0			153.4
		3.0	%		3.0	%		3.1	%		3.1	%

Source: National Treasury

The balance sheets of public institutions
Public-sector institutions make important contributions to government’s economic development strategy. Although the solvency of these institutions is strong overall, several poorly performing and inefficient entities represent significant specific risks to public finances.
Government is working with these institutions to develop sustainable financial frameworks supported by turnaround plans. Many of the interventions that have been launched will, in the short-term, focus on stabilising the finances of these institutions – in particular bolstering liquidity. Over the longer term, government will better align its portfolio of institutions and mandates to national development, and design complementary financing models.	Government working to align its portfolio of institutions and mandates to national development

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2

Economic outlook

In brief

• The South African economy is forecast to grow by 2 per cent in 2015, with a gradual improvement to 3 per cent in 2017.

• Weaker global growth prospects and slower growth in key emerging markets introduce a degree of uncertainty into the forecast, with volatility expected in capital markets and exchange rates.

• Lower oil prices over the short term should boost global growth, trade and consumption. South Africa’s terms of trade will benefit from the decline in the oil price.

• Real exchange rate depreciation and low inflation should support the competitiveness of South African firms, but the electricity supply constraint will curtail mining and manufacturing output, and exports.

• Low investor confidence could hinder investment in South Africa this year, but businesses with strong balance sheets are expected to upgrade machinery and equipment, and to continue investing in fast-growing African markets.

• The medium-term strategic framework supports a range of programmes that, in combination with infrastructure investment and structural changes in the real economy, will ultimately raise growth potential.

¢    Overview

Global economic growth projections have been revised down in recent months, and the pattern of slow growth is likely to persist, with consequences for all developing economies.

South Africa’s gross domestic product (GDP) forecast for 2015 has also been revised down. The National Treasury projects GDP growth of 2 per cent in 2015, rising to 3 per cent by 2017. The moderately improving growth outlook will be supported by continued economic growth in much of sub-Saharan Africa, as well as better terms of trade and inflation gains associated with the lower oil price, and a more competitive rand exchange rate. Inadequate electricity supply, however, will impose a serious constraint on output and exports over the short term.

Moderate improvements to growth outlook expected in period ahead

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Government has invited new bids for independent power producers and seeks to secure gas and renewables supply	Government is working with Eskom to mitigate the impact of power cuts. The measures include stepping up maintenance to ensure reliability of supply, renewing existing co-generation agreements and entering into new ones with private firms, and expediting the completion of new power stations. At the end of 2014, government invited independent power producers to build coal-fired power stations providing up to 2 500MW of electricity. Efforts are also under way to secure additional supply from gas and renewable sources. In combination, these efforts will improve the availability of electricity over the medium term, and plans are under way to ensure that South Africa can generate sufficient energy to power its economy over the long term.
	Economic growth and the National Development Plan
Achieving faster sustainable growth and job creation requires structural shifts	The slowdown in economic growth since 2012 has highlighted structural constraints in the domestic economy. While progress has been made on several fronts – such as talks to establish a more sustainable labour relations environment, and administrative reforms to reduce red tape in certain areas – the fundamental obstacles to more rapid growth remain in place. Achieving faster sustainable growth and large-scale job creation will require structural shifts in the economy, stronger supply-side value chains, higher exports, moderation in wage increases and, crucially, growing private-sector investment based on confidence in the long-term business environment.
National Development Plan and MTSF target infrastructure investment, private-sector partnerships	The integrated reforms required to achieve these goals are outlined in the National Development Plan, and are addressed in the medium-term strategic framework (MTSF). Initiatives under way include large public-sector infrastructure investments in electricity and transport; expanded partnerships to encourage private investment; better cooperation between government, the private sector, trade unions and civil society; incentives to attract new entrants in the economy; special economic zones to boost exports; programmes to reshape the urban spatial landscape; and programmes to improve the quality of education and skills development.
	Maintaining a prudent macroeconomic and fiscal policy stance that promotes low inflation, low interest rates and a competitive real exchange rate – and which narrows the budget deficit and stabilises the public-sector debt ratio – will provide a platform to strengthen structural change across the economy.
	¢    Global outlook
A protracted period of weak global growth is expected	A weak global economic recovery is projected over the next several years, with growth forecast to rise from 3.3 per cent in 2014 to 3.5 per cent in 2015 and 3.7 per cent in 2016. Volatility in capital flows is expected to continue.
	Among advanced economies, growth is picking up in the United States, but economic activity remains tepid in Europe and Japan. Weak domestic demand and falling inflation expectations have prompted the central banks of Europe and Japan to introduce additional monetary stimulus, which should support growth rates slightly above 2014 levels. However, the outcome of negotiations between Greece and its creditors could have destabilising economic and political consequences for the European Union.

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The forecast growth rates of large emerging markets have been revised downwards. In emerging markets and developing economies, growth is projected to dip to 4.3 per cent in 2015, improving to 4.7 per cent in 2016. China’s GDP growth rate is projected to slow to 6.8 per cent in 2015.

Table 2.1 Annual percentage change in GDP and consumer price inflation in selected regions/countries, 2013 – 2016

Region/country	2013		2014		2015		2016		2013		2014		2015		2016
Percentage	GDP projections1								CPI projections2
World		3.3		3.3		3.5		3.7		3.9		3.8		3.9		3.8
Advanced economies		1.3		1.8		2.4		2.4		1.4		1.6		1.8		2.0
United States		2.2		2.4		3.6		3.3		1.5		2.0		2.1		2.1
Euro area		-0.5		0.8		1.2		1.4		1.3		0.5		0.9		1.2
United Kingdom		1.7		2.6		2.7		2.4		2.6		1.6		1.8		2.0
Japan		1.6		0.1		0.6		0.8		0.4		2.7		2.0		2.6
Emerging markets and		4.7		4.4		4.3		4.7		5.9		5.5		5.6		5.2
developing economies
Brazil		2.5		0.1		0.3		1.5		6.2		6.3		5.9		5.6
Russia		1.3		0.6		-3.0		-1.0		6.8		7.4		7.3		6.0
India		5.0		5.8		6.3		6.5		9.5		7.8		7.5		6.7
China		7.8		7.4		6.8		6.3		2.6		2.3		2.5		3.0
Sub-Saharan Africa		5.2		4.8		4.9		5.2		6.6		6.7		7.0		6.5
South Africa3		2.2		1.4		2.0		2.4		5.8		6.1		4.3		5.9

1. IMF World Economic Outlook, January 2015

2. IMF World Economic Outlook Update, October 2014

3. National Treasury forecasts

The growth outlook for sub-Saharan Africa remains robust, averaging 5 per cent over the next three years, despite lower commodity prices. Economies in the region have diversified over the past decade, attracting increased foreign direct investment and benefiting from rising investment in ports, electricity capacity and transportation. Buoyant growth in agriculture and services has also broadened economic activity. For net oil importers, the decline in oil prices should offset lower non-oil commodity export prices over the short term. However, the region faces significant risks. These include uncertainty about the consequences of lower commodity prices on investment, unresolved security issues and weak demand from Europe. Robust economic growth outlook for sub-Saharan Africa

How will the price of oil affect South Africa and the region?

The International Monetary Fund (IMF) estimates that lower oil prices could raise global growth by between 0.3 and 0.7 percentage points. Fitch Ratings estimates that the price decline could boost sub-Saharan African growth to 5 per cent in 2015. South Africa, Kenya, Tanzania, Cote d’Ivoire and Ethiopia spend 20 per cent or more of their import bill to buy oil.

South Africa is an oil-intensive country, meaning that it uses a relatively high proportion of oil to produce a unit of GDP, particularly for transportation. Lower oil prices are expected to boost the South African economy as inflation falls and disposable income rises due to improved terms of trade. The net effects of a lower oil price, however, depend on several factors, including the duration and extent of the price decline, currency depreciation, the oil intensity of trading partners, the ability of local firms to respond to increased demand, and taxes and subsidies on oil products.

Commodity prices

In recent months, crude oil prices have declined sharply, falling from US$102/barrel in August 2014 to US$48/barrel in January 2015. There is, however, great uncertainty over the long-term trajectory of oil prices, which have already begun to rise from the January trough.

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Non-oil commodity prices have declined, driven by weaker growth in China	Non-oil commodity prices have declined significantly since 2012, and most are expected to remain at similar levels for much of 2015. The common factor behind these price trends is weak global growth, particularly the slowing Chinese economy. Coal prices declined by 20 per cent year on year to US$66 per ton at the end of 2014, and are expected to remain subdued in 2015. Platinum prices are projected to recover in 2015, supported by a supply deficit and strong demand for catalytic converters. The price of gold has remained volatile but has declined marginally over the past year.
	Figure 2.1 Commodity prices, 2010 – 2014*
	*Precious metals, and industrial metals and coal indices are trade weighted using South Africa’s export ratios
	The world economy and South Africa
Volatility in global monetary policy and capital flows expected over medium term	Lower commodity prices, slow growth among major trading partners and volatility in global monetary policy and capital flows will directly affect South Africa over the next several years. The European monetary stimulus is expected to have a muted impact on GDP growth in Europe, and the anticipated weakness of the euro will limit South Africa’s currency competitiveness. Weaker commodity demand from China in particular is expected to have a negative effect on South Africa’s exports.
Continued growth in African markets is a growth channel for South African exports	The net result of these trends, however, is offset by several developments. South Africa’s deepening trade links with sub-Saharan Africa, where investment has begun to diversify towards manufacturing, services and infrastructure, should continue to provide expanded export markets, though there may be negative effects from reduced Chinese demand. In the short term, lower oil prices are expected to reduce transport costs and improve the terms of trade. Disciplined government spending will reduce the economy’s vulnerability to capital outflows, and create sufficient space for monetary policy to support investment and a competitive real exchange rate.

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¢    South Africa: economic outlook and trends
Projected GDP growth is revised down from 2.5 to 2 per cent in 2015, with a gradual rise to 3 per cent by 2017. Average growth over the forecast period is 0.4 percentage points lower than at the time of the 2014 Medium Term Budget Policy Statement.	GDP expected to reach 3 per cent by 2017
The economic forecast takes into account a wide range of factors. Global growth has been revised downwards. While there is uncertainty about the impact of key variables (see box on following page), in comparison with the pre-2008 period, a protracted period of lower global economic growth is expected. Terms of trade gains might provide temporary relief for domestic prospects, but they are likely to be offset by constraints on output growth, notably the electricity constraint. Inadequate and unreliable electricity supply has also reduced investor and consumer confidence.

Table 2.2 Macroeconomic performance and projections, 2011 – 2017

Calendar year	2011		2012		2013		2014		2015		2016		2017
Percentage change	Actual						Estimate		Forecast
Final household consumption		4.9		3.4		2.9		1.2		2.0		2.6		3.0
Final government consumption		1.7		3.4		3.3		1.9		1.6		0.7		0.7
Gross fixed-capital formation		5.7		3.6		7.6		-0.6		2.2		3.4		3.8
Gross domestic expenditure		4.9		3.9		1.4		1.1		2.4		2.7		3.1
Exports		4.3		0.1		4.6		0.9		3.3		4.6		5.0
Imports		10.5		6.0		1.8		-0.3		4.6		5.3		5.5
Real GDP growth		3.2		2.2		2.2		1.4		2.0		2.4		3.0
GDP inflation		6.7		5.5		6.0		6.1		6.1		5.5		5.5
GDP at current prices (R billion)		3 025.0		3 262.5		3 534.3		3 801.7		4 112.8		4 443.2		4 829.9
CPI inflation		5.0		5.7		5.8		6.1		4.3		5.9		5.7
Current account balance (% of GDP)		-2.2		-5.0		-5.8		-5.8		-4.5		-4.9		-5.2

Source: Reserve Bank and National Treasury

Table 2.3 Macroeconomic performance and projections, 2011/12 – 2017/18

Fiscal year	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
Percentage change	Actual						Estimate		Forecast
GDP at current prices (R billion)		3 081		3 328		3 610		3 880		4 192		4 539		4 926
Real GDP growth		3.0		2.1		2.2		1.4		2.0		2.6		3.0
GDP inflation		5.9		5.8		6.1		6.0		5.9		5.5		5.4
CPI inflation		5.6		5.6		5.8		5.6		4.8		5.9		5.6

Source: National Treasury

Over the medium term, the electricity supply constraint will curtail output and limit expansion. Investment growth has been revised down, but private investment growth is expected to pick up as firms invest in maintenance and upgrading of equipment. Public-sector investment will remain robust, but will moderate due to lower estimates in the medium-term investment plans of Transnet and Eskom. The positive impact of low oil prices on GDP growth in 2015 is expected to recede in 2016 as oil prices are projected to increase.

Household consumption is projected to grow by only 2 per cent in 2015 as a result of subdued employment growth, lower income growth and high debt levels. Higher purchasing power and lower inflation will not fully offset these effects.

Household consumption projected to grow by 2 per cent in 2015

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Economic growth scenarios

The current economic environment is characterised by high levels of uncertainty in the global outlook, the oil price and the net effect of the electricity supply constraint. Consequently, it is useful to discuss the main assumptions used by the National Treasury in compiling the GDP forecast.

Growth rate assumptions are as projected in Table 2.1. The oil price is projected to rise from current levels to US$75/barrel by 2017. Platinum prices are expected to rise from current levels of US$1 200/oz to US$1 450/oz in 2017. Coal prices are projected to increase marginally. Gold prices are likely to remain at current levels, while iron ore prices are expected to fall marginally in line with slowing growth in China. The forecast assumes electricity disruptions to output and consumption consistent with intermittent load shedding.

GDP growth scenarios to 2017

A number of scenarios are possible depending on the outcome of these assumptions:

• Further deterioration in electricity availability in the current year, reducing growth to 1 per cent in 2015. The mining and manufacturing sectors would be most affected due to their high electricity intensity. Lower employment growth would negatively affect disposable income and household consumption.

• A decline in global growth by more than anticipated, pushing commodity prices down. A 0.5 percentage point decline in the annual growth rate for global demand, and a 10 per cent fall in export commodity prices, would lower GDP growth to 1.5 per cent in 2015 and 2.1 per cent in 2016.

• Better-than-expected availability of electricity or greater energy efficiency could boost growth in 2015 by 0.4 per cent, strengthening the benefits associated with lower oil prices and positive terms of trade.

Despite a more competitive rand, export growth has been revised down from 4.2 per cent to reflect supply-side constraints. Exports are projected to grow by 3.3 per cent in 2015 and by 5 per cent in 2017. Import growth has also been revised down in line with weaker domestic demand and reduced imports of capital equipment.

Updating the measurement of gross domestic product

All countries update their national accounts data from time to time to reflect broad changes in economic activity. South Africa has conducted these updates at a five-year frequency since 1999. In November 2014, Statistics South Africa and the Reserve Bank published two revisions of national accounts data:

• Benchmarking of data to 2010 to reflect a more current structure of the economy.

• Introducing the United Nations 2008 System of National Accounts (SNA), which will change the methodology used in measuring GDP, adjusting for aspects of the economy that have become more prominent.

Using the rebased nominal GDP numbers, the budget deficit as a percentage of GDP narrows by 0.2 percentage points in 2014/15. The level of nominal GDP in 2014 is about 4 per cent higher (about R159 billion) as a result of the exercise.

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Trends in the real economy
The National Treasury’s forecasts of the near and medium-term outlook are informed partly by analysis of recent trends and initiatives. During 2014, strong growth in agriculture and an improved performance by construction were offset by contractions in the mining and electricity sectors. Supply shocks and flagging demand also weighed on the performance of manufacturing, where growth was flat.	Growth in agriculture, construction in 2014 offset by contractions in mining, electricity

Table 2.4 Sector growth trends, 2012 – 2014

	2012		2013										2014
Percentage	Year		Q1		Q2		Q3		Q4		Year		Q1		Q2		Q3		Year1
Agriculture, forestry and fishing		0.6		-2.9		-1.1		3.6		6.9		1.5		3.3		5.3		8.2		4.6
Mining and quarrying		-2.9		14.3		-4.5		12.3		17.2		4.0		-23.0		-3.1		1.6		-1.4
Manufacturing		1.9		-7.8		11.7		-6.6		12.3		0.7		-6.4		-4.0		-3.4		0.1
Electricity and water		-0.1		-4.8		3.0		1.9		-6.0		-0.6		0.2		-0.5		-1.1		-1.1
Construction		2.1		-0.8		5.1		0.6		3.6		2.7		3.7		2.1		2.2		2.9
Wholesale and retail trade;		3.6		0.9		2.2		0.3		1.8		1.9		1.5		-0.2		3.4		1.3
hotels and restaurants
Transport and communication		2.5		2.0		1.6		2.6		1.6		2.0		1.4		3.9		2.2		2.1
Finance, real estate		3.0		4.8		5.0		2.8		2.6		3.0		1.4		1.2		2.4		2.3
and business services
Personal services		2.1		1.2		2.7		1.2		1.2		1.8		1.5		1.5		1.3		1.5
General government		3.6		1.3		2.8		2.8		4.6		3.1		2.3		3.9		2.2		3.3
GDP		2.2		1.4		3.7		1.2		5.1		2.2		-1.6		0.5		1.4		1.5

1. Year-to-date growth trend

Source: Reserve Bank

Agriculture’s robust performance is attributable to favourable weather conditions, high levels of production in summer field crops and animal products, and strong meat and wheat prices. Despite recent high temperatures and low rainfall that may affect certain provinces, production estimates suggest that positive growth will continue during 2015.
Real value added in the mining sector contracted by 1.4 per cent during the first three quarters of 2014. The poor performance was largely the result of a five-month strike in the platinum sector, compounded by weaker global demand, electricity constraints and long-term maintenance requirements. Underground mine production continues to fall as mines get deeper and ore grades decline. The significant reduction in platinum group metals production was offset by increased iron ore, coal and manganese output.	Strikes and weaker global demand contributed to weak mining performance
After recovering steadily since the 2009 recession, with annual growth of about 2.8 per cent and rising investment, manufacturing production contracted in each of the first three quarters in 2014. This resulted from weak domestic demand, strikes in the metals, steel and engineering sector, and refinery maintenance. Over the forecast period, manufacturing and mining, which are highly energy intensive, are expected to be seriously affected by electricity constraints.
In construction, growth is expected to improve during 2015, supported by the observed increase in the real value of building plans passed – an indication of future building activity – and continued government investment. Private-sector construction investment, however, has yet to gather pace.	Indications of positive growth in construction sector during 2015

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Growth in the transport and communication sector was supported by infrastructure investment, rising passenger and freight demand, and increased competition in telecommunications. Transnet and the Passenger Rail Agency of South Africa’s capital expenditure programmes, in locomotives and trains, are beginning to show results. Increased volumes on the Richards Bay coal line and the Sishen-Saldanha iron-ore line contributed to sector growth.

Measures to address South Africa’s electricity supply constraint

South Africa’s electricity supply constraint has worsened, largely owing to inadequate maintenance, leading to unplanned outages. Government’s ministerial electricity “war room” is working to address the following:

• Short-term funding, maintenance and diesel supply concerns.

• Speeding up the completion of the Medupi and Kusile power stations.

• Procuring additional co-generation capacity of about 800 MW over the next six months.

• Increasing gas generation. Government has released a request for proposals for 3 126MW of power from natural gas, with initial power expected to be available by 2020. Steps are also under way to switch Eskom’s open-cycle gas turbines from diesel to natural gas.

• Obtaining up to 2 500MW from independent power producers generating electricity from coal; this power should start being added to the grid by 2020.

Government is in talks with business and considering a wide range of options to improve energy efficiency and manage demand. Options under consideration include expanding the use of smart meters, “buying back” power from large industrial users and varying tariffs by time of use. Over time, progress towards tariffs that reflect Eskom’s costs of producing electricity will encourage businesses and households to use energy more efficiently.

Over the period ahead, South Africa will procure imported hydro power (2 609 MW) and 13 more renewable power projects totalling 1100 MW from the private sector. South Africa has already contracted a total of 4 100 MW of renewable energy from 66 different private-sector projects since 2011, of which 32 are supplying 1 522 MW to the grid. A framework for investment in gas infrastructure has been released for public comment.

Government has also initiated discussions with several potential partner countries to explore nuclear power production. Like any substantial long-term investments of this magnitude, proposals would be subject to rigorous feasibility, affordability and environmental impact assessments. Final contracting would be subject to fair, transparent and competitive procurement processes within the requisite legal framework.

Frequent unplanned outages and low plant availability are expected to persist for the next three years. Reforms under way, however, will over time lead to the development of a vibrant, diversified and competitive electricity sector, which will change the supply mix, expand private participation, and ensure robust and flexible supply.

	Employment and remuneration
	The unemployment rate was 24.3 per cent at the end of 2014, or 34.6 per cent including discouraged job seekers. Among the unemployed, long-term joblessness is 66 per cent, underlining how lengthy exclusion from the labour market erodes skills and reduces employability. Unemployment for those between 15 and 24 years old remains extremely high at 48.8 per cent.
Worryingly, private-sector job creation remains weak	The Quarterly Labour Force Survey (of individuals) shows that in 2014, 143 000 jobs were created. Worryingly, private-sector job creation remains weak. The public sector has contributed 59 per cent of the formal non-agricultural jobs created since 2010, and 88 per cent of jobs in 2014, most of which were in public works programmes, state-owned entities and local government.
	Employment in mining and manufacturing has declined. The mining sector lost 8 000 jobs year-on-year by the third quarter of 2014. Manufacturing employment has lost 18 000 jobs since the beginning of 2014, largely due to greater reliance on higher skills, technology and capital. The Quarterly Labour Force Survey reports that the agriculture sector gained 28 000 jobs in 2014.

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The labour intensity of production continues to decline. While this boosts unit labour productivity and can enhance competitiveness, total output is not growing fast enough to absorb existing job seekers or new workforce entrants. Reducing unemployment and inequality will require a large increase in job creation by the private sector.
Domestic expenditure
Tighter financial conditions have reduced overall consumer debt levels to 78.3 per cent of disposable income, down from a high of 89.3 per cent in 2008, but consumer confidence remains subdued.	Overall consumer debt stands at 78 per cent, down from previous highs, but confidence is subdued
Gross fixed capital formation grew by just 0.2 per cent in the first three quarters of 2014, due mainly to a 2.8 per cent contraction in private investment. While business confidence is likely to remain subdued, continued growth in general government investment should contribute to a recovery in private investment. Economic infrastructure accounted for nearly 60 per cent of investment spending by general government in 2013.
Figure 2.2 Growth in gross fixed capital formation by sector,                   2005 – 2014
Balance of payments, exchange rates and inflation
South Africa is running an elevated current account deficit of 5.8 per cent of GDP. Negative terms of trade have worsened the trade balance since 2012, but the sharp decline in oil prices is expected to reverse this trend and narrow the current account deficit to 4.5 per cent of GDP in 2015.
The weaker rand raises import costs. Imports of machinery and equipment are expected to moderate in line with reduced investment by state-owned companies. Large infrastructure projects tend to rely on a higher proportion of imported capital equipment than general government infrastructure investments, such as roads and water pipes.	Machinery, equipment imports to moderate in line with reduced investment by state-owned companies

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Figure 2.3 Components of the current account, Q2 2011 – Q3 2014

Exports to China fell by 15 per cent in 2014 in response to lower commodity demand. In contrast, exports to Africa grew by 11 per cent. The continent now accounts for 19.2 per cent of the export portfolio. The share of exports to Europe has also increased, to 25.8 per cent in 2014, mainly due to strong vehicle sales. Gold exports declined significantly.

Table 2.5 Major export destinations for South African products, 2013 – 2014

	2013		2014		2013		2014		2013		2014
	% share				% growth				Contribution to  export growth (price preference system)
Africa		18.3		19.2		19.1		11.0		3.3		2.0
SADC 1		13.6		14.2		21.1		10.4		2.7		1.4
Americas		10.6		10.8		2.6		7.6		0.3		0.8
Brazil		0.8		0.8		-0.1		5.5		-0.0		0.0
United States		8.3		8.2		6.1		4.2		0.5		0.3
Asia		36.6		35.8		17.2		3.3		6.1		1.2
China		13.9		11.2		34.8		-15.0		4.0		-2.1
India		3.6		5.1		-6.9		50.3		-0.3		1.8
Japan		6.7		6.2		19.5		-2.7		1.2		-0.2
Europe		24.8		25.8		18.2		10.0		4.3		2.5
Other2		1.2		1.3		6.6		17.5		0.1		0.2
Unallocated3		8.5		7.2		-12.6		-10.7		-1.4		-0.9
Total		100.0		100.0		12.7		5.8		12.7		5.8

1. Southern African Development Community. Data excludes trade with the Southern African Customs Union

2. Includes Oceania

3. Commodities, such as gold, sold through exchanges

Source: Quantec

Exchange rates and competitiveness

The rand depreciated by a nominal 11.0 per cent against the US dollar in 2014, following a 14.9 per cent decline in 2013. The real effective exchange rate declined by only 4 per cent due to persistently higher local inflation. The US dollar continues to strengthen against both developing

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and developed-market currencies on expectations of higher growth and interest rates. Further sharp depreciation of the rand is not anticipated in 2015 as investors appear to have priced in risks, and inflation expectations appear anchored. But the currency is likely to remain susceptible to bouts of volatility in response to shifts in global capital flows, commodity price fluctuations, the borrowing levels of state-owned enterprises and domestic growth constraints.
The gains from sustained real currency depreciation and reduced input costs flowing from lower oil prices could boost exports. However, the currencies of some important trading partners and competitors with lower inflation than South Africa are weakening in real terms against the dollar. Locking in competitiveness gains requires prudent fiscal policy, moderate real wage increases and productivity gains.	Locking in competitiveness gains requires prudent fiscal policy, moderate real wage increases and productivity gains
Financial account and investments
The financial account of the balance of payments recorded R183 billion in net foreign capital inflows in the first three quarters of 2014. Foreign direct investment (FDI) recorded a net capital outflow of R21 billion over the same period as domestic firms continued to expand abroad, particularly in Africa. South Africa is the largest recipient of FDI on the continent and is also one of the largest contributors to FDI projects in Africa. Outward FDI nearly doubled to US$5.6 billion and increased its share of greenfield investments into Africa from 3 per cent between 2003 and 2008 to 7 per cent between 2009 and 2013. Over time, dividend flows from these assets can help improve the current account balance.	Outward FDI nearly doubled to US$5.6 billion

Table 2.6 Investments in Africa,1 2002 – 2013

	2002		2007		2012		2013
Annual investments into Africa (R billion)		5.5		12.6		24.3		36.8
Dividend receipts from Africa (% of total)		2.0		11.5		12.0		14.9

1. Including Southern Africa Customs Union Region

Source: Reserve Bank and South African Revenue Services

Inflation
Headline inflation rose from 5.8 per cent in 2013 to a peak of 6.6 per cent in June 2014, but subsequently declined to 5.3 per cent in December 2014. A spike in maize and wheat prices combined with the effects of the weaker exchange rate led to the initial rise, but strong global and domestic harvests and the sharp fall in world oil prices eased pressures during the second half of 2014.
The inflation-targeting regime is robust. The gradual increase in both headline and core inflation (which excludes more volatile items) despite a weaker currency suggests that inflation expectations remain well- anchored, albeit at the upper end of the 3-6 per cent target band.	Inflation remains within the target band
The main risks to the inflation outlook arise from regulated prices, particularly where infrastructure costs need to be recovered (electricity, water and transport). Inflation is projected to decline to 4.3 per cent in 2015 from 6.1 per cent in 2014.

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	Figure 2.4 Contributions to headline CPI, 2012 – 2015
	¢    Raising growth potential
NDP envisions investment in dynamic sectors that transform ownership and economic structure	The National Development Plan points out that faster economic growth and job creation require a broad shift from consumption to investment in South Africa. This investment should be in dynamic sectors that transform ownership and economic structure, and draw in a larger proportion of the economically inactive population. As government, business and labour work toward realising the development plan’s vision, the economy confronts several domestic constraints that are particularly binding over the medium term – inadequate and unreliable electricity supply, skills constraints, regulatory uncertainty, and concentrated markets that discourage new entrants.
	Improving growth potential in the medium term
Government acting to lift legislative and regulatory hurdles to faster growth	Government’s medium-term strategic framework (MTSF) outlines programmes to improve productivity and competitiveness across the economy. Reducing uncertainty by passing key legislation and publishing critical regulations will support the MTSF objectives. Government is also taking steps to improve the competitive landscape for business by reducing red tape, promoting investment and encouraging innovation.
	In the present circumstances, government can encourage firms and sectors that are not reliant on high electricity usage to expand output and employment, benefiting from current trade patterns and the weaker rand exchange rate. Supporting opportunities in more labour-intensive sectors like agriculture and tourism, and in higher value-added manufacturing, for example, is consistent with the goal of structural transformation but less likely to be affected by electricity constraints. These sectors will also diversify exports and relieve current account pressures.
	Incentives to increase employment without affecting competitiveness or labour productivity will complement these initiatives and increase economic participation. Similarly, immigration reform to attract critical skills and encourage tourism and trade would boost economic growth, because skilled migration and tourism create jobs.

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Although more needs to be done to support structural change and raise growth potential, government has made progress in a range of areas.
Building critical infrastructure and raising productivity
The public-sector infrastructure programme has begun to lift constraints to growth. Transnet’s seven-year, R310 billion capital investment programme is modernising the freight logistics network, introducing more than 1 000 new locomotives and upgrading railway, ports and pipeline infrastructure. Sixty trains now run daily between Durban and Johannesburg, compared with fewer than 20 a decade ago. Telecommunications investments in the construction and upgrading of fibre-optic and mobile networks, and the introduction of municipal WiFi, will boost information technology access and affordability. Faster, cheaper and more accessible broadband is critical to support both small businesses and overall competitiveness.	Faster, cheaper broadband is needed to support small businesses and overall competitiveness
Reducing energy consumption and promoting energy efficiency
Enhanced tax incentives will promote greater energy efficiency. Interventions such as the solar water heating initiative and the energy- efficiency and demand-side management grant to municipalities will encourage households to use energy more efficiently. The evolution towards cost-reflective electricity prices will encourage firms to reduce consumption and direct investment towards less energy-intensive sectors.
Employment creation and building skills
Various incentives and programmes have been introduced to assist job seekers and build skills. In 2013/14, the Expanded Public Works Programme created over 1 million jobs of varying duration. To date, the Jobs Fund has created 30 701 permanent jobs and trained 75 163 work seekers. In December 2014, the employment tax incentive supported the employment of over 216 000 young workers, from a peak of 268 000 in August. Expanding education is key to developing skills required in the modern economy, and over the past three years, 92 new schools have been built as part of the accelerated school infrastructure development initiative and two new universities opened their doors last year.	Tax incentive supported employment of 216 000 young workers in December 2014
Regulatory and business environment
Several regulatory reforms and administrative improvements have been completed to enhance business conditions and confidence. These include the South African Revenue Service customs modernisation program; streamlined company registration processes; amendments to the Competition Amendment Act (2009) that strengthen penalties for anticompetitive behaviour; recent cuts in mobile telecommunication rates by the regulator; and government’s One Environmental System, which will shorten the process of obtaining mining, environmental and water licences. Draft legislation to establish a transport economic regulator, to be tabled in 2015, should promote greater competition in the sector.	Regulatory reforms to streamline company registrations and penalise anticompetitive behaviour

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	Incentives, new sectors and new business
	The establishment of special economic zones, various tax incentives and grant funding for upgrading equipment and processes should help local firms become more competitive. The turnover tax and venture capital tax incentives were revised in 2014. The R&D tax incentive has approved 428 projects valued at R2.9 billion in 2013/14. Operation Phakisa (Hurry up) has established “delivery labs” to cut red tape and speed up rollout. The first two such labs focused on the oceans economy (offshore oil, marine transport and aquaculture) and health services. As a result of the first lab, Transnet National Ports Authority announced R9.65 billion in infrastructure projects at Saldanha Bay.
	Structural changes under way in primary sectors
Changes in agriculture, manufacturing and mining are positioning these industries for future growth	Important structural changes are under way in agriculture, manufacturing and mining. These are expected to boost long-term growth potential.
	•        Since 2010, manufacturing has increased gross fixed-capital formation by a compound annual average of 10.3 per cent, with a focus on replacing or upgrading machinery and equipment. This has improved local firms’ international competitiveness and boosted exports.
	•        In clothing, footwear and textiles, new production and clustering systems enable firms to respond flexibly, with short lead times, to local demand – changes that could substantially boost job creation.
	•        Mining production and investment have shifted towards newer, better-performing export sectors, such as iron ore, coal and manganese.
	•        Agriculture has become more export focused. Labour-intensive horticultural exports (such as grapes, citrus and tree nuts) are growing as a share of output, replacing highly mechanised grain exports such as maize. Investment growth has averaged over 10 per cent since 2010.
	There are notable developments in emerging sectors such as oil and gas. The port of Saldanha has seen significant increases in rig-repair and fabrication work, with new operators and private investors. An oil-servicing zone within the Saldanha industrial development zone is planned for services and suppliers into the African industry. Government will encourage exploration for both shale and offshore gas. Recent local investments by Google and Amazon suggest the potential to expand entrepreneurial and technology-based firms, demonstrating the sophistication of the economy and possible future growth avenues.
	¢    The economy and the fiscus
Narrowing the budget deficit and consolidating debt ratio will provide a platform for structural reforms	In the period of low global growth forecast over the next several years, South Africa has begun to promote structural reforms needed for the long term. Implementing the National Development Plan and the MTSF, delivering social and economic programmes, and completing critical infrastructure projects are intended to improve growth potential. Reducing macroeconomic imbalances, including narrowing the budget deficit as a proportion of GDP and consolidating the debt ratio, will provide a sound and predictable basis for achieving these structural reforms. This is the principle underlying fiscal policy, which is discussed in Chapter 3.

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3

Fiscal policy

In brief

• Government is committed to reducing the budget deficit and stabilising debt. Despite weaker GDP growth, the projected deficit for 2014/15 is 3.9 per cent of GDP, just below the October 2014 estimate.

• Main budget non-interest expenditure has been reduced by R25 billion over the next two years compared with the 2014 Budget estimate.

• Capital is the fastest-growing area of non-interest expenditure over the medium term, while goods and services decline in real terms. Compensation stabilises as a share of total expenditure.

• Taxes will increase by R16.8 billion in 2015/16 as a result of higher personal income tax rates, a 30.5 c/litre increase in the general fuel levy and various excise duties. The Road Accident Fund fuel levy increases by 50 c/litre, generating R9 billion over the next two years.

• The Unemployment Insurance Fund (UIF) monthly income contribution threshold is reduced to R1 000 for one year, with no change in benefits. This will reduce the UIF surplus by about R15 billion in 2015/16.

• Risks to the fiscal outlook include weaker-than-expected GDP growth, an increase in the wage bill that is significantly higher than inflation and the weak balance sheets of several state-owned entities. Government is actively managing these risks.

¢    Fiscal outlook
In October 2014, government announced a package of measures to narrow the budget deficit, stabilise debt and begin to rebuild fiscal space. The 2015 Budget implements these commitments. A combination of a lower expenditure ceiling and higher taxes will narrow the deficit from an estimated 3.9 per cent of GDP in 2014/15 to 2.5 per cent of GDP by 2017/18. Net debt is projected to stabilise at 43.7 per cent of GDP in 2017/18.	Budget implements government’s commitments to narrow budget deficit and stabilise debt
The fiscal outlook reflects downward revisions to economic growth, with forecast revenue reduced by R36 billion over the medium term compared with the projections made in October 2014. These developments are partially offset by several short-term factors. A rebasing of GDP data captures an increase in the size of the economy, and has slightly reduced

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the budget deficit and debt-to-GDP ratio. The significant decline in oil prices has reduced inflation and improved South Africa’s terms of trade. Lower inflation also allows departments to purchase more goods and services without breaching the expenditure ceiling, and may facilitate a sustainable wage agreement.

Government is introducing additional measures to contain costs and draw on underutilised resources, sustain service delivery to the poor, and promote growth.

Table 3.1 Consolidated fiscal framework, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
R billion/percentage of GDP	Outcome									Revised estimate			Medium-term estimates
Revenue		842.2			908.7			1 008.1			1 091.0			1 188.9			1 331.5			1 439.5
		27.3	%		27.3	%		27.9	%		28.1	%		28.4	%		29.3	%		29.2	%
Non-interest expenditure		870.6			951.3			1 036.1			1 122.6			1 218.6			1 302.0			1 403.5
		28.3	%		28.6	%		28.7	%		28.9	%		29.1	%		28.7	%		28.5	%
Interest payments		81.7			93.3			109.3			120.8			132.4			146.8			158.3
		2.7	%		2.8	%		3.0	%		3.1	%		3.2	%		3.2	%		3.2	%
Expenditure		952.3			1 044.6			1 145.3			1 243.4			1 351.0			1 448.8			1 561.7
		30.9	%		31.4	%		31.7	%		32.0	%		32.2	%		31.9	%		31.7	%
Budget balance		-110.1			-135.8			-137.2			-152.4			-162.2			-117.3			-122.2
		-3.6	%		-4.1	%		-3.8	%		-3.9	%		-3.9	%		-2.6	%		-2.5	%

Source: National Treasury

	Addressing the structural deficit
	Since 2012, government has pointed out that a deterioration of the economic environment would warrant a reconsideration of expenditure and revenue plans. Economic growth has been revised down for the fifth consecutive year and is likely to remain below 3 per cent over the next two years. Despite the implementation of a spending ceiling, weak economic growth has produced a persistently large budget deficit.
Structural shift in fiscal policy to reduce a structural budget deficit	While fiscal policy has supported the economy for the past seven years, this countercyclical approach has reached its limits. The budget deficit is largely structural and cannot be reduced through a cyclical upturn in revenues. Accordingly, the 2015 Budget proposals will:
	•        Reduce the expenditure ceiling by R25 billion over the next two years, compared with the 2014 Budget baseline.
	•        Increase personal income tax rates and the general fuel levy, raising an additional R16.8 billion in 2015/16.
	•        Strengthen budget preparation and expenditure controls to improve efficiency of resource allocation and the composition of spending.
	•        Withhold additional resources for changes to personnel numbers.
	•        Ensure that the financing of state-owned companies does not increase national government’s budget deficit.
Weight of expenditure consolidation takes place during second year of the framework	Given weak economic conditions, these proposals have been designed to limit the dampening effect on growth in the short term. The slowdown in spending growth is less pronounced in 2015/16, with the weight of expenditure consolidation shifted to the second year of the framework. UIF contributions have been temporarily reduced in 2015/16.

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Development finance institutions plan to expand their loan books by 33 per cent over the next two years to support the economy.

From 2017/18, real expenditure growth will be more closely aligned with long-term average real GDP growth. This reform will bolster fiscal sustainability, while allowing the budget to play a more predictable role in stabilising the economy.

Maintaining the expenditure ceiling

The main budget expenditure ceiling has been in place since 2012, and remains a cornerstone of the fiscal framework. Government is on track to achieve the spending target set in the 2014 Medium Term Budget Policy Statement (MTBPS) for 2014/15. Between 2003/04 and 2009/10, real expenditure growth averaged 9 per cent. Real spending growth of 2.5 per cent is projected for 2015/16, declining to 0.7 per cent in 2016/17.

Table 3.2 Main budget non-interest expenditure, 2011/12 – 2017/18

R million	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
2013 Budget Review		812 063		878 642		955 333		1 029 262		1 107 564		—		—
2013 MTBPS		—		877 443		949 109		1 027 762		1 106 064		1 185 110		—
2014 Budget Review		—		—		947 853		1 027 662		1 105 943		1 184 424		—
2014 MTBPS		—		—		—		1 021 855		1 095 761		1 168 940		1 267 025
2015 Budget Review		—		—		—		1 020 105		1 095 904		1 168 973		1 267 486

Source: National Treasury

Tax policy reforms
The 2015 Budget proposes a one percentage point increase in marginal personal income tax rates, except for the lowest bracket, and increases in the fuel levies amounting to 80.5 c/litre. The proposed change in personal income tax is expected to raise R9.4 billion in 2015/16. A 30.5 cent increase in the general fuel levy is projected to raise an additional R6.5 billion in 2015/16. In combination, these increases will reduce the budget deficit by 0.4 per cent of GDP, before relief for fiscal drag. The 50 cent increase in the earmarked Road Accident Fund (RAF) fuel levy generates an additional R9 billion to help close the RAF’s cash deficit.	One percentage point increase in marginal personal income tax rates except for lowest bracket
Government proposes a temporary reduction in the monthly UIF contribution threshold from the current R14 872 to R1 000, reducing the UIF’s surplus by about R15 billion in 2015/16. Because it will be funded from the UIF’s accumulated surplus, this reduction will not add to government debt.
The financial positions of the RAF and UIF are discussed in Chapter 8.
Improving the quality of expenditure
The 2015 Budget proposals reduce growth in baseline expenditure by R25 billion over the MTEF period compared with the 2014 Budget. Since 2012/13, government has reallocated resources from underperforming programmes to critical frontline services. These measures have begun to improve the composition of expenditure. Capital remains the fastest-growing item of non-interest spending over the medium term, with compensation and goods and services growing slowest.	Resources reallocated from underperforming programmes to critical frontline services

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Figure 3.1 Spending growth by economic classification,

            2011/12 – 2014/15 and 2014/15 – 2017/18

Cost-containment measures first announced in 2013 have resulted in a decline in spending on non-core goods and services items, and will be strengthened. Between 2013/14 and 2014/15, expenditure on business consultants and advisory services, catering and entertainment, and travel and subsistence is estimated to fall by R1.5 billion. Spending on these items will be monitored and the Auditor-General will audit compliance.

Table 3.3 Selected items of goods and services: national and provinces, 2011/12 – 2017/18

	2011/12			2014/15			2017/18			Average annual real growth
Share of total goods and services	Outcome			Estimated outcome			Estimated budget			2011/12  – 2014/15			2014/15  – 2017/18
Travel and subsistence		7.8	%		6.3	%		5.7	%		-5.4	%		-4.4	%
Catering, entertainment and venue rental		1.8	%		1.5	%		1.2	%		-4.9	%		-8.1	%
Consultants		10.1	%		9.0	%		8.9	%		-2.1	%		-1.4	%
Stationery and printing		2.2	%		2.2	%		1.9	%		1.8	%		-5.3	%
Administrative and operational payments		12.8	%		13.9	%		13.9	%		4.7	%		-1.0	%
Medicine and medical supplies		11.2	%		12.0	%		13.5	%		4.2	%		2.9	%
Learner and teacher support material		2.5	%		2.9	%		3.5	%		6.3	%		5.1	%
Fuel, oil and gas (police vehicles)		2.7	%		2.4	%		2.7	%		-2.8	%		3.6	%
Total goods and services											1.7	%		-1.0	%

Source: National Treasury

Ensuring a sustainable wage bill

Between 2006 and 2009, the national and provincial bill grew by 17.1 cent, reflecting above-inflation wage increases, while headcount grew by 3.9 per cent per year. Between 2009 and 2014, headcount growth fell to 1.3 per cent per year. Real compensation growth fell from 9 per cent in 2010/11 to 2 per cent in 2013/14.

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Figure 3.2 National and provincial headcount growth

In the 2014 MTBPS, government announced a freeze on personnel headcounts for 2015/16 and 2016/17, with any additional personnel paid for from existing allocations. Public-sector salary negotiations are under way. A multi-year agreement that protects public servants’ purchasing power would allow for a stable, predictable wage bill and reprioritisation of resources towards areas of need. Agreement that protects public servants’ purchasing power would support sustainable wage bill

Assessing compensation budgets

During 2015, the National Treasury will launch a comprehensive assessment of compensation budgets to tighten control of the public-sector wage bill. It will build on research undertaken by the Department of Public Service and Administration. The department’s 2011 Personnel Expenditure Review found that:

• Between 2006/07 and 2010/11, national and provincial personnel expenditure grew by over 15 per cent per year, despite little evidence of a corresponding improvement in service delivery.

• There were more than 350 salary scales and over 500 different allowances, leading to administrative complexity and providing opportunities for irregular remunerative practices.

• Between 2007/08 and 2010/11, total local government personnel spending increased by 60 per cent, from R27.3 billion to R43.6 billion.

A 2014 study conducted by the National Treasury estimated that most public-sector workers were in the top 30 per cent of wage earners nationally. Typically, higher-income earners experience inflation in line with or slightly below consumer price index (CPI) inflation. Yet wage demands remain in excess of CPI inflation.

Sustainable financing of state-owned companies

State-owned companies have a combined asset base of more than R364 billion. Well-managed entities can contribute to economic growth and national development. Several large state-owned companies, however, are in financial distress. Government is working to ensure the long-term sustainability of these entities. It is also taking several short-term measures to address immediate requirements.

•        Eskom will receive allocations of R23 billion, to be raised through the sale of non-core government assets.

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•       South African Airways has been granted a R6.5 billion going-concern guarantee to finalise its 2013/14 annual report, in addition to the R7.9 billion in guarantees already extended to the airline.

•       The South African Post Office has been provided with a R270 million overdraft guarantee and a R1.7 billion going-concern guarantee.

Financial support to these entities is being raised in a manner that does not add to the budget deficit. A fuller discussion of these matters is provided in Chapter 8.

¢    Fiscal framework

The consolidated deficit in 2015/16 (3.9 per cent) is marginally wider than was estimated in the 2014 MTBPS (3.6 per cent) due to a once-off R15 billion reduction in UIF contributions, as well as lower-than-expected tax revenue. Deficit estimates for 2016/17 and 2017/18 are closely aligned with 2014 MTBPS projections, as tax policy proposals and higher social security fund surpluses offset the impact of lower economic growth.

Table 3.4 Consolidated operating and capital accounts, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
R billion	Outcome									Revised estimate			Medium-term estimates
OPERATING ACCOUNT
Current revenue		830.7			893.4			993.1			1 079.3			1 184.5			1 323.7			1 434.5
Current payments		838.6			921.1			1 010.9			1 095.6			1 181.4			1 261.9			1 334.1
Compensation		347.4			376.6			409.5			445.3			479.5			509.6			539.6
Goods and services		150.8			162.7			174.6			180.3			187.7			200.3			209.4
Interest payments		81.7			93.3			109.3			120.8			132.4			146.8			158.3
Current transfers and subsidies		258.6			288.5			317.5			349.2			381.8			405.2			426.9
Current balance		-7.8			-27.7			-17.8			-16.3			3.0			61.8			100.4
Percentage of GDP		-0.3	%		-0.8	%		-0.5	%		-0.4	%		0.1	%		1.4	%		2.0	%
CAPITAL ACCOUNT
Capital receipts		0.2			0.3			0.3			0.4			0.5			0.5			0.5
Capital payments		62.3			66.3			74.5			86.3			97.5			103.7			111.4
Capital transfers		48.4			52.3			55.8			57.7			63.6			67.9			70.9
Capital financing requirement		-110.5			-118.2			-130.1			-143.6			-160.6			-171.1			-181.8
Percentage of GDP		-3.6	%		-3.6	%		-3.6	%		-3.7	%		-3.8	%		-3.8	%		-3.7	%
Financial transactions1		8.2			10.1			10.6			7.5			0.4			7.0			4.2
Unallocated reserves		—			—			—			—			5.0			15.0			45.0
Budget balance		-110.1			-135.8			-137.2			-152.4			-162.2			-117.3			-122.2
Percentage of GDP		-3.6	%		-4.1	%		-3.8	%		-3.9	%		-3.9	%		-2.6	%		-2.5	%

1. Transactions in financial assets and liabilities

Source: National Treasury

Consolidated non-interest expenditure will grow at an annual real average rate of 2.1 per cent over the next three years. The share of compensation as a percentage of non-interest spending has moderated from 41.4 per cent in 2011/12 to 40.6 per cent in 2014/15, and will stabilise around this level over the medium term. Assuming that cost-of-living adjustments will be aligned with CPI projections and overall headcount numbers remain broadly constant, the consolidated wage bill is expected to grow at a nominal annual average of 6.6 per cent over the MTEF period.

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Nominal growth in current transfers and subsidies is expected to moderate from 10.1 per cent in 2013/14 to an average of 6.9 per cent over the next three years. Goods and services budgets are expected to decline in real terms.	Goods and services budgets decline in real terms
Capital payments are expected to increase in nominal terms by an annual average of 8.9 per cent over the medium term in line with projected infrastructure expenditure in education, transport and water. Capital transfers grow by a nominal annual average of 7.1 per cent.
The capital financing requirement as a share of GDP will remain broadly unchanged at about 3.8 per cent over the three-year spending period. From 2015/16 onwards, government will close its current deficit – the difference between current revenue and spending on compensation, goods and services, interest, and current transfers and subsidies. The resultant savings are expected to reach 2 per cent of GDP in 2017/18, equivalent to nearly 60 per cent of government’s budgeted capital spending.	From 2015/16 onwards, government will close its current deficit
¢    Elements of the consolidated budget
The consolidated budget includes the main budget as well as spending by provinces, public entities and social security funds financed from own revenue.
Main budget framework
The main budget framework summarises spending financed by revenue and borrowing deposited into the National Revenue Fund. The main budget deficit, which represents government’s borrowing requirement, will be 4.7 per cent of GDP in 2014/15, declining to 3.2 per cent in the outer year. The main budget primary deficit, which is the difference between revenue and non-interest spending, is projected to narrow over the medium term, moving into a primary balance in 2017/18.	Main budget primary balance expected in 2017/18
Gross tax revenue is projected to reach R1.29 trillion in 2017/18, accounting for 26.2 per cent of GDP. Non-tax revenue is expected to marginally increase to R18.6 billion in the outer year from R18.1 billion in 2014/15 due to lower-than-expected mineral and petroleum royalties as well as lower interest earned on government’s total cash balances.
Transfers to South Africa’s SACU partners are projected to be R51 billion next year, then decline to R36.5 billion in 2016/17, reflecting a reduction in customs duties associated with lower import projections. As the economy recovers and imports rise, SACU transfers are expected to increase to R45.4 billion in the outer year. A combination of lower-than-expected real yields, the timing of new debt issuance and the weaker exchange-rate forecast is expected to increase receipts from financial transactions.
Main budget non-interest expenditure will grow by 2.1 per cent in the current fiscal year and by 2.5 per cent in 2015/16 in real terms. As a share of GDP, non-interest spending is projected to decline to 25.7 per cent in 2017/18 from 26.3 per cent in the current fiscal year. Transfers to local government continue to grow faster than transfers to national departments and provinces, with the local government equitable share growing at an average of 8.6 per cent over the MTEF period.	Transfers to local government grow faster than transfers to national departments and provinces

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Table 3.5 Main budget framework, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
R billion/percentage of GDP	Outcome									Revised estimate			Medium-term estimates
Revenue
Gross tax revenue after proposals		742.6			813.8			900.0			979.0			1 081.3			1 179.2			1 289.7
Non-tax revenue		19.2			16.2			18.9			18.1			17.0			17.9			18.6
SACU1		-21.8			-42.2			-43.4			-51.7			-51.0			-36.5			-45.4
National Revenue Fund receipts2		5.2			12.3			11.7			8.9			2.0			5.4			2.5
Main budget revenue		745.3			800.1			887.3			954.3			1 049.3			1 166.0			1 265.4
		24.2	%		24.0	%		24.6	%		24.6	%		25.0	%		25.7	%		25.7	%
Expenditure
National departments		389.4			420.0			453.2			491.4			523.0			553.8			586.1
Provinces		355.8			380.9			410.6			439.7			468.2			496.3			526.4
Local government		68.3			76.4			82.8			89.1			99.8			103.9			110.0
Non-interest allocations		813.5			877.4			946.6			1 020.1			1 090.9			1 154.0			1 222.5
Debt-service costs		76.5			88.1			101.2			115.0			126.4			141.0			153.4
Unallocated reserves		—			—			—			—			5.0			15.0			45.0
Main budget expenditure		889.9			965.5			1 047.8			1 135.1			1 222.3			1 309.9			1 420.9
		28.9	%		29.0	%		29.0	%		29.3	%		29.2	%		28.9	%		28.8	%
Main budget balance		-144.6			-165.4			-160.5			-180.9			-173.1			-144.0			-155.5
		-4.7	%		-5.0	%		-4.4	%		-4.7	%		-4.1	%		-3.2	%		-3.2	%
Primary balance		-2.2	%		-2.3	%		-1.6	%		-1.7	%		-1.1	%		-0.1	%		-0.0	%

1. Southern African Customs Union. Amount made up of payments and other adjustments

2. Previously classified as extraordinary receipts

Source: National Treasury

Debt-service costs continue to be the fastest-growing component of main budget expenditure, increasing by 10.1 per cent in nominal terms over the medium term. The costs of financing government debt are projected to increase from R115 billion in 2014/15 to R153.4 billion in 2017/18, accounting for 3.1 per cent of GDP.

Table 3.6 National government debt-service costs, 2013/14 – 2017/18

	2013/14		2014/15				2015/16		2016/17		2017/18
R million	Outcome		Budget		Revised		Medium-term estimates
Domestic loans		93 192		106 212		106 810		117 043		131 018		142 844
Short-term		11 742		14 818		14 608		15 189		18 481		21 429
Long-term		81 450		91 394		92 202		101 854		112 537		121 415
Foreign loans		7 993		8 689		8 206		9 397		9 953		10 532
Total		101 185		114 901		115 016		126 440		140 971		153 376
As percentage of:
GDP		2.8		3.0		3.0		3.0		3.1		3.1
Expenditure		9.7		10.1		10.1		10.3		10.8		10.8
Revenue		11.4		11.9		12.1		12.1		12.1		12.1

Source: National Treasury

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Table 3.7 Revisions to main budget revenue and expenditure estimates, 2014/15 – 2016/17

	2014/15						2015/16						2016/17
R billion/percentage of GDP	2014 Budget			2015 Budget			2014 Budget			2015 Budget			2014 Budget			2015 Budget
Revenue
Gross tax revenue		993.7			979.0			1 095.1			1 081.3			1 208.7			1 179.2
Non-tax revenue		18.0			18.1			18.7			17.0			20.2			17.9
SACU1		-51.7			-51.7			-57.3			-51.0			-59.7			-36.5
National Revenue Fund receipts		2.9			8.9			1.6			2.0			3.4			5.4
Main budget revenue		962.8			954.3			1 058.1			1 049.3			1 172.6			1 166.0
Percentage of GDP		25.4	%		24.6	%		25.5	%		25.0	%		25.8	%		25.7	%
Expenditure
Current payments		305.5			305.7			327.0			324.2			353.8			351.6
of which:
Compensation of employees		130.1			130.3			137.5			137.6			146.6			146.6
Goods and services		60.5			60.4			62.8			60.1			68.0			64.0
Debt-service costs		114.9			115.0			126.6			126.4			139.2			141.0
Transfers and subsidies		812.8			810.3			877.6			873.0			932.2			925.6
Payments for capital assets		17.7			15.5			18.6			16.7			19.3			17.4
Payments for financial assets		3.6			3.7			3.3			3.5			0.3			0.3
Unallocated reserves		3.0			—			6.0			5.0			18.0			15.0
Total expenditure		1 142.6			1 135.1			1 232.6			1 222.3			1 323.6			1 309.9
Percentage of GDP		30.1	%		29.3	%		29.7	%		29.2	%		29.1	%		28.9	%

1. Southern African Customs Union. Amounts made up of payments and other adjustments

Source: National Treasury

Social security funds, public entities and provincial balances

The social security funds, provinces and public entities continue to accumulate cash surpluses, which partially offset the main budget deficit.

In aggregate, social security funds continue to hold a large cash surplus. The surplus is projected to increase from R19 billion in the current fiscal year to R29.6 billion in 2017/18. Relative to the 2014 Budget, surpluses of social security funds in the current year and over the MTEF period have been revised up by R28.7 billion. Surpluses projected for public entities in October 2014 have been lowered by R2.5 billion in 2014/15 and R13.4 billion over the MTEF period due to a combination of expected higher spending on infrastructure, grants and compensation of employees.

Table 3.8 Consolidated budget balance, 2011/12 – 2017/18

R billion	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
Main budget		-144.6		-165.4		-160.5		-180.9		-173.1		-144.0		-155.5
Social security funds		15.2		17.8		12.5		19.0		11.6		27.8		29.6
Provinces		6.7		6.7		4.1		2.9		0.2		0.6		1.7
Public entities		13.0		5.1		6.1		5.7		-0.3		-0.6		3.0
RDP Fund1		-0.5		-0.1		0.6		0.9		-0.6		-1.1		-1.1
Consolidated budget balance		-110.1		-135.8		-137.2		-152.4		-162.2		-117.3		-122.2

1. Reconstruction and Development Programme Fund

Source: National Treasury

As a result of reductions in the equitable share, provinces are expected to reduce their surpluses by about R12 billion over the next three years compared with the 2014 MTBPS estimates. The remaining surpluses are likely to be used to repay debt, and clear balances and accruals accumulated over several years.

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	¢    Debt outlook
	Net loan debt (i.e. gross debt less cash balances) is expected to stabilise at 43.7 per cent of GDP in 2017/18, about 2.6 percentage points lower than the 2014 MTBPS estimate. This reduction reflects both higher nominal GDP and changes to the debt issuance strategy.
Gross borrowing requirement projected at R247 billion in outer year	Total nominal gross debt stock is projected to grow from R1.8 trillion in 2014/15 to R2.3 trillion in 2017/18. When combined with redemptions, government’s gross borrowing requirement is R229 billion in 2014/15, growing to R247 billion in 2017/18.
	Figure 3.3 National government net debt outlook, 2005/06 – 2020/21
	Public-sector borrowing
Public-sector borrowing requirement will be R246.8 billion in 2014/15	The public-sector borrowing requirement will be R246.8 billion, or 6.4 per cent of GDP, in 2014/15. This reflects an upward revision of R16.6 billion since the 2014 Budget as a result of higher borrowing plans by state-owned companies. Eskom increased its 2014/15 borrowing estimate by R10 billion, with the additional amount is accounted for by the South African National Roads Agency Limited (SANRAL).

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Table 3.9 Public-sector borrowing requirement,¹ 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15						2015/16			2016/17			2017/18
R billion/percentage of GDP	Outcome									Budget 2014			Budget 2015			Medium-term estimates
Main budget		144.6			165.4			160.5			179.8			180.9			173.1			144.0			155.5
Social security funds		-15.2			-17.8			-12.5			-15.2			-19.0			-11.6			-27.8			-29.6
Provinces		-6.7			-6.7			-4.1			-3.0			-2.9			-0.2			-0.6			-1.7
Public entities		-13.0			-5.1			-6.1			-8.5			-5.7			0.3			0.6			-3.0
RDP Fund2		0.5			0.1			-0.6			—			-0.9			0.6			1.1			1.1
Consolidated government		110.1			135.8			137.2			153.1			152.4			162.2			117.3			122.2
		3.6	%		4.1	%		3.8	%		4.0	%		3.9	%		3.9	%		2.6	%		2.5	%
Local authorities		4.8			7.3			7.6			9.7			9.0			9.5			9.8			10.0
		0.2	%		0.2	%		0.2	%		0.3	%		0.2	%		0.2	%		0.2	%		0.2	%
State-owned companies3		28.9			57.3			75.3			68.8			85.4			83.8			65.3			61.5
		0.9	%		1.7	%		2.1	%		1.8	%		2.2	%		2.0	%		1.4	%		1.2	%
Borrowing requirement		143.8			200.4			220.2			231.6			246.8			255.4			192.4			193.7
		4.7	%		6.0	%		6.1	%		6.1	%		6.4	%		6.1	%		4.2	%		3.9	%

1. A negative number indicates a surplus and a positive number a deficit

2. Reconstruction and Development Programme Fund

3. South African National Roads Agency Limited and Trans-Caledon Tunnel Authority are included as public entities under consolidated government borrowing

Source: National Treasury

Total public-sector debt – the summation of gross government debt, state-owned companies and local government – was 59.1 per cent of GDP in 2013/14. It will increase more slowly in line with slower government debt accumulation and lower borrowing by state-owned companies.

Figure 3.4 Public-sector debt as percentage of GDP,

                  1994/95 – 2012/13

Risks to the fiscal outlook

Over the medium term, the three main risks to the fiscal outlook are weaker-than-expected economic growth, which would reduce revenue collection, widen the primary balance and raise debt-service costs; a

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public-sector wage settlement significantly above CPI inflation; and a call on the fiscus for direct support or guarantees to public entities beyond current estimates.

Government would need to consider contingency measures if any of these risks were to materialise. These could include further reductions in baseline allocations or deferring new programmes. Government is taking measures to actively manage these risks by:

•        Alleviating short-term power constraints and limiting delays to additional generation capacity coming online.

•        Slowing growth in the public-sector wage bill by withholding additional resources for changes to personnel numbers, reviewing funded vacancies and working to ensure a sustainable cost-of-living adjustment.

•        Working with state-owned entities to develop and implement realistic turnaround plans (see Chapter 8).

40

4

Revenue trends and tax policy

In brief

• Nominal gross tax revenue for 2013/14 amounted to R900 billion, a 10.6 per cent or R86.2 billion increase from the prior year.

• The 2014 Budget projected 10.5 per cent growth in tax revenues for 2014/15. This has been revised down to 8.8 per cent, reflecting weaker-than-expected economic growth.

• The 2015 tax proposals reflect government’s commitment to stabilise the fiscus, while ensuring that the tax system remains fair, efficient and progressive.

• The main proposals are to raise personal income tax rates for all but the lowest tax bracket by one percentage point, and to increase the fuel levies by a total of 80.5 c/litre.

• Reforms will improve the turnover regime for small business and support greater energy efficiency.

¢    Overview

An efficient and progressive tax system is a cornerstone of South Africa’s democracy, supporting the values of social solidarity as reflected in the Constitution. Tax revenues enable government to redistribute wealth, supply public services and increase domestic investment. Accordingly, the tax system needs to be fair, transparent, efficient and sufficiently flexible to adjust to changes in economic activity.
Tax revenues for 2014/15 are expected to be R14.7 billion below the 2014 Budget Review forecast and R4.6 billion below the 2014 Medium Term Budget Policy Statement forecast. This mirrors deteriorating GDP growth over the past year. The economic outlook presented in Chapter 2 projects only moderate improvements in economic growth over the medium term, and this is reflected in lower revenue estimates in 2015/16 and beyond.	Weak economic growth reduces tax revenue estimate by R14.7 billion
The fiscal measures adopted by government include adjustments to tax policy. To ensure sustainable public finances, an increase in tax revenues is required. The main tax instruments that will be adjusted to generate additional revenues this year are personal income taxes and fuel levies.

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	¢    Budget revenue collection and outlook
2013/14 revenue driven by customs duties, and personal and corporate income tax	Nominal gross tax revenue for 2013/14 amounted to R900 billion, a 10.6 per cent or R86.2 billion increase from the prior year. Revenue performance was driven by customs duties, personal income tax, corporate income tax and value-added tax (VAT). Dividends tax revenues declined for the second successive year. Mineral and petroleum royalty revenues rose sharply, reflecting the resumption of production following mining strikes, and higher prices for certain export commodities.
	The 2014 Budget Review projected 10.5 per cent growth in nominal gross tax revenues for 2014/15. This has been revised down to 8.8 per cent owing to sharp falls in estimates of corporate income tax and customs duties, as shown in Table 4.1.

Table 4.1 Tax revenue performance, 2008/09 – 2014/15

Annual percentage change	2008/09		2009/10		2010/11		2011/12		2012/13		2013/14		Revised 2014/15
Personal income tax		15.6		5.1		10.6		10.3		10.2		12.3		13.0
Corporate income tax		18.0		-18.4		-1.5		14.1		5.0		11.3		3.2
Dividends tax		-2.8		-22.7		11.1		27.9		-10.1		-12.3		23.6
Skills development levy		15.7		6.5		10.9		17.6		11.8		9.6		5.8
Transfer duties		-33.4		-5.0		13.7		-28.0		11.6		28.3		22.1
Value-added tax		2.6		-4.1		24.1		4.1		12.6		10.5		9.6
of which:
Domestic		9.1		4.2		5.1		7.4		10.1		8.7		8.9
Import		18.1		-23.6		16.9		23.9		9.4		17.6		3.0
Refunds		26.0		-5.9		-11.7		26.4		6.0		13.0		2.9
Customs duties		-14.0		-14.0		36.1		28.4		14.0		13.3		-9.7
Specific excise duties		10.8		5.5		7.9		10.6		11.7		2.3		10.2
Electricity levy1		—		—		49.5		28.7		24.2		10.5		-2.5
Fuel Levy		4.8		15.9		19.4		6.3		10.4		8.1		10.3
Tax revenue		9.1		-4.2		12.6		10.2		9.6		10.6		8.8
Mineral and petroleum royalties2		—		—		—		57.9		-10.6		28.4		-12.5

1. Electricity levy introduced in 2009/10

2. Mineral and petroleum royalties introduced in 2010/11

Source: National Treasury and South African Revenue Service

	The lower customs duty and VAT revenues are mainly the result of a slowdown in imports of motor vehicles and manufacturing equipment. A misclassification of fuel levies on imported petrol and diesel has been corrected, and this revenue is now reflected under the general fuel levy. The performance of mineral and petroleum royalty revenues was adversely affected by mining sector strikes during the first half of the year, as well as a sharp decline in commodity prices. The impact of these downward revisions has been softened by upward revisions in personal income tax and dividends tax revenue. Personal income tax remains buoyant as wage settlements continue to outpace inflation.
	Table 4.3 shows the actual revenue collections for 2011/12 to 2013/14, revised estimates for 2014/15 and over the medium-term.
Tax proposals and lower spending ceiling expected to close structural deficit	Tax revenue as a percentage of GDP is expected to increase from 25.2 per cent in 2014/15 to 25.8 per cent in 2015/16. This reflects the 2015 Budget tax proposals, which are expected to add R16.8 billion to revenue in the next year, before accounting for fiscal drag, and carry forward over

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subsequent years. Combined with the lower spending ceiling, these additional revenues should be sufficient to close the structural deficit in the public finances over the medium term.

Table 4.2 Budget estimates and revenue outcomes, 2013/14 and 2014/15

	2013/14						2014/15						%
R million	Budget		Outcome		Deviation		Budget		Revised		Deviation		change1
Taxes on income and profits		505 475		507 759		2 284		556 951		556 700		-251		9.6	%
Persons and individuals		308 930		309 834		905		335 944		350 000		14 056		13.0	%
Companies		176 965		177 324		359		198 935		183 000		-15 935		3.2	%
Dividends tax		17 000		17 309		309		19 250		21 400		2 150		23.6	%
Other taxes on income and profits2		2 580		3 292		712		2 822		2 300		-522		-30.1	%
Taxes on payroll and workforce		12 300		12 476		176		13 440		13 200		-240		5.8	%
Taxes on property		10 375		10 487		112		11 477		12 603		1 126		20.2	%
Domestic taxes on goods and services		326 044		324 548		-1 496		361 320		355 718		-5 602		9.6	%
Value-added tax		239 286		237 667		-1 620		267 160		260 600		-6 560		9.6	%
Specific excise duties		28 943		29 039		97		31 080		32 000		920		10.2	%
Ad valorem excise duties		2 402		2 363		-38		2 623		3 232		609		36.7	%
General fuel levy		43 300		43 685		385		47 517		48 200		683		10.3	%
Other domestic taxes on goods and services3		12 114		11 794		-320		12 941		11 686		-1 254		-0.9	%
Taxes on international trade and transactions		44 775		44 732		-42		50 463		40 779		-9 684		-8.8	%
Customs duties		44 500		44 179		-321		50 300		39 900		-10 400		-9.7	%
Diamond export levy		68		93		25		81		87		7		-6.4	%
Miscellaneous customs and excise receipts		206		460		254		82		792		710		72.1	%
Total tax revenue		899 000		900 013		1 013		993 650		979 000		-14 650		8.8	%
Non-tax revenue4 of which:		30 541		30 626		85		20 869		27 006		6 137		-11.8	%
Mineral royalties		6 500		6 439		-61		7 167		5 636		-1 531		-12.5	%
less: SACU5 payments		-43 374		-43 374		—		-51 738		-51 738		—		19.3	%
Main budget revenue		886 167		887 265		1 099		962 782		954 269		-8 513		7.6	%
Provinces, social security funds and selected public entities		124 322		120 838		-3 484		136 466		136 722		256		13.1	%
Consolidated budget revenue		1 010 489		1 008 103		-2 386		1 099 248		1 090 991		-8 257		8.2	%

1. Percentage change between outcome in 2013/14 and revised estimate in 2014/15

2. Includes interest on overdue income tax, and small business tax amnesty levy

3. Includes turnover tax for small businesses, air departure tax, plastic bags levy, electricity levy, CO₂ tax on motor vehicle emissions, incandescent light bulb levy and Universal Service Fund

4. Includes mineral royalties, mining leases, departmental revenue and sales of capital assets

5. Southern African Customs Union. Amounts made up of payments and other adjustments

Source: National Treasury

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2015 BUDGET REVIEW

Table 4.3 Budget revenue, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
R million	Outcome									Revised			Medium-term estimates
Taxes on income and profits1 of which:		426 584			457 314			507 759			556 700			620 890			678 652			744 473
Personal income tax		250 400			275 822			309 834			350 000			393 890			433 842			479 189
Corporate income tax		151 627			159 259			177 324			183 000			202 032			218 211			236 691
Taxes on payroll and workforce		10 173			11 378			12 476			13 200			14 690			16 140			17 800
Taxes on property		7 817			8 645			10 487			12 603			13 692			14 823			16 089
Domestic taxes on goods of which:		263 950			296 921			324 548			355 718			389 427			422 378			458 883
VAT		191 020			215 023			237 667			260 600			283 794			313 690			346 711
Taxes on international trade		34 121			39 549			44 732			40 779			42 576			47 207			52 466
Tax revenue		742 650			813 826			900 013			979 000			1 081 275			1 179 199			1 289 711
Non-tax revenue2 of which:		24 402			28 468			30 626			27 006			19 038			23 302			21 143
Mineral and petroleum		5 612			5 015			6 439			5 636			6 221			6 730			7 301
less: SACU3 payments		-21 760			-42 151			-43 374			-51 738			-51 022			-36 513			-45 444
Main budget revenue		745 291			800 142			887 265			954 269			1 049 291			1 165 988			1 265 409
Provinces, social security funds and selected public entities		96 873			108 594			120 838			136 722			139 564			165 526			174 122
Consolidated budget revenue		842 165			908 737			1 008 103			1 090 991			1 188 855			1 331 514			1 439 531
As percentage of GDP
Tax revenue		24.1	%		24.5	%		24.9	%		25.2	%		25.8	%		26.0	%		26.2	%
Budget revenue		24.2	%		24.0	%		24.6	%		24.6	%		25.0	%		25.7	%		25.7	%
GDP (R billion)		3 080.9			3 327.6			3 609.8			3 879.9			4 191.8			4 538.8			4 926.1
Tax/GDP multiplier		1.13			1.20			1.25			1.17			1.30			1.09			1.10

1. Includes secondary tax on companies/dividends tax, interest on overdue income tax and small business tax amnesty levy

2. Includes mineral royalties, mining leases, departmental revenue and sales of capital assets

3. Southern African Customs Union. Amounts made up of payments and other adjustments

Source: National Treasury and South African Revenue Service

	¢    Growth, revenue trends and tax policy reforms
	Tax revenue is highly sensitive to economic performance. During the first five years of South Africa’s democracy, nominal gross tax revenues grew at an annual average of 12.1 per cent. From 2001, revenue performance accelerated, buoyed by strong commodity prices and improved tax administration, with growth rates in excess of 17 per cent after 2004. The onset of the global financial crisis and the recession saw revenue decline by 4.2 per cent in 2009/10. Since then growth in tax revenues has stabilised, but weakening economic performance has led to slowing revenue growth.
Tax revenue has remained above 24 per cent of GDP since 2009/10	From 1994/95 to 1999/2000 tax revenue averaged 22.8 per cent of GDP. Improvements in tax administration, the introduction of capital gains tax and higher corporate profits pushed the share of tax revenue as a percentage of GDP to 23.4 per cent between 2000/01 and 2004/05. The ratio peaked at 26.4 per cent in 2007/08, largely as a result of sustained commodity prices and profitability. As a consequence of the recession and the related decline in revenues, tax as a share of GDP fell to 23.5 per cent in 2009/10. Since then, tax revenue performance has remained buoyant, consistently sustaining a share of GDP above 24 per cent.

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CHAPTER 4: REVENUE TRENDS AND TAX POLICY

Figure 4.1 Nominal growth in gross tax revenue and GDP,                   1995/96 – 2013/14
Evolution of tax policy
Tax policy reforms aim to raise revenue in a manner that is fair and efficient, while maintaining social solidarity and supporting long-term economic growth and job creation. An equitable and progressive tax system imposes a similar tax burden on individuals at similar income levels, with a higher proportion of tax paid by those who have higher incomes. An efficient tax system will not unduly influence the economic decisions of taxpayers or make compliance overly burdensome.	An efficient tax system will not unduly influence taxpayers’ economic decisions
The three main sources of tax revenue are personal income tax, corporate income tax and VAT. Tax policy reforms since 1994 have broadened the tax base, increasing the portion of total income that is taxable. Government introduced capital gains tax and broadened the inclusion of fringe-benefits “in kind” as part of taxable income. Alongside this broadening of the tax base, government has consistently provided tax relief to individuals, offsetting the impact of inflation (i.e. fiscal drag).
Efficiency improvements at the South African Revenue Service (SARS) and expansion of the pay-as-you-earn system (where employers pay tax on behalf of employees) have also enhanced the ability of the state to collect revenues, allowing for net tax relief in previous budgets.
The headline corporate income tax rate was reduced from 40 per cent in 1994 down to 28 per cent in 2008. Yet corporate income tax increased substantially as a share of taxable income until the recession of 2009, supported by strong corporate profitability and high commodity prices. This trend reversed with the onset of the global financial crisis, with negative nominal growth rates of -18 per cent and -1 per cent in 2009/10 and 2010/11 respectively. Corporate income tax revenues have recovered but remained volatile in response to shifting commodity prices and labour unrest, with nominal growth rates fluctuating between 5 per cent and 14 per cent between 2011/12 and 2013/14. In general, revenues from this instrument are more volatile than VAT and personal income tax.	Corporate tax revenues have recovered but remain volatile

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2015 BUDGET REVIEW

Support for social or industrial policy estimated at 15 per cent of gross tax revenue	Government has provided significant tax relief and incentives to business, including depreciation allowances that seek to support investment. Tax expenditures, or revenue foregone, to support social or industrial policy objectives is estimated at R120 billion, or 15 per cent of gross tax revenue. A tax expenditure statement appears in Annexure C.
	The VAT rate has remained unchanged at 14 per cent. While South Africa’s corporate and personal income tax rates are comparable to many Organisation for Economic Cooperation and Development (OECD) countries, its VAT rate remains comparatively low. Since VAT is directed at consumption, it is regarded as more efficient than other taxes, with a less damaging impact on long-term economic growth. Other indirect taxes, such as fuel taxes, were increased more or less in line with inflation.
	Figure 4.2 shows the combined effect of broadening the personal income tax base and reducing the marginal personal income tax rates.
	Figure 4.2 Effective tax rates,* 1994 – 2013
	*   Effective rates show revenue collected as a share of the total tax base. Personal income tax collection is shown as a share of wages paid in the economy. Corporate income tax is shown as a share of net operating surplus. VAT is shown as a share of household consumption expenditure.
Effective personal income tax rate remains below peak of 20.6 per cent	Between 1998 and 2002, the top personal income tax rate was decreased from 45 per cent to 40 per cent. Between 2005 and 2014, the tax-free threshold (below which individuals do not pay personal income tax) for taxpayers below 65 years old increased by an average of 8.1 per cent per year, from R35 000 to R70 700. The net result is that the effective personal income tax rate has remained below its 1999/2000 peak of 20.6 per cent.
	The need for additional revenues to close the structural deficit requires increases in some tax rates. There is little room, however, to broaden the tax base since this approach has largely been exhausted.

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Davis Tax Committee recommendations

The Davis Tax Committee, established in 2013, is advising government on future refinements to the tax system. The committee has noted that compared with rates in other countries, there appears to be some scope to increase taxes on capital income, marginal personal income tax rates and indirect taxes such as fuel levies and VAT. The committee’s interim report on small and medium-sized enterprises was released for comment in 2014, and its recommendations on changes to the turnover tax regime for micro businesses are included in these tax proposals. The committee has also published a report on base erosion and profit shifting.

The National Treasury expects reports on the overall tax system, VAT, estate duty, wealth and mining taxes, to be published soon. These reports will inform policy considerations in the 2016 Budget.

¢    Tax proposals
The 2015 Budget tax proposals aim to increase tax revenues, limit the erosion of the corporate tax base, increase incentives for small businesses and promote a greener economy. The main tax proposals include:	Increase of one percentage point proposed to marginal rate for individuals earning above R181 900
•     Increasing marginal personal income tax rates by one percentage point for all taxpayers earning more than R181 900, and adjusting tax brackets and rebates to account for fiscal drag
•     Raising the general fuel levy by 30.5 c/litre and the Road Accident Fund (RAF) levy on fuel by 50 c/litre (a total increase of 80.5 c/litre)
•     Taking further steps to combat base erosion and profit shifting
•     Providing for a more generous turnover tax regime for small businesses
•     Increasing excise duties on alcohol and tobacco products
•     Reviewing the diesel refund scheme
•     Strengthening the energy-efficiency savings incentive
•     Raising the electricity levy
•     Changing transfer duty rates and brackets.
The main tax proposals are set out below. Proposals of a more technical nature are presented in Annexure C. In addition to these proposals, a draft carbon tax bill is expected to be published for public comment during 2015.
Personal income tax
To raise additional tax revenues while enhancing the progressive character of the tax system, government proposes to increase the marginal personal income tax rates by one percentage point for all income tax brackets except the lowest, which will remain at 18 per cent. This also requires a one percentage point increase in the tax rate for trusts.
To provide relief for inflation-related earnings increases (fiscal drag), all income tax brackets and rebates will be increased by 4.2 per cent. The tax-free threshold for individual taxpayers below 65 years will increase from R70 700 to R73 650. Table 4.4 illustrates the proposed changes for 2015/16.	All tax brackets and rebates to increase by 4.2 per cent

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2015 BUDGET REVIEW

Table 4.4 Personal income tax rate and bracket adjustments, 2014/15 – 2015/16

	2014/15		2015/16
Taxable income (R)	Rates of tax	Taxable income (R)	Rates of tax
R0 - R174 550	18% of each R1	R0 - R181 900	18% of each R1
R174 551 - R272 700	R31 419 + 25% of the amount above R174 550	R181 901 - R284 100	R32 742 + 26% of the amount above R181 900
R272 701 - R377 450	R55 957 + 30% of the amount above R272 700	R284 101 - R393 200	R59 314 + 31% of the amount above R284 100
R377 451 - R528 000	R87 382 + 35% of the amount above R377 450	R393 201 - R550 100	R93 135 + 36% of the amount above R393 200
R528 001 - R673 100	R140 074 + 38% of the amount above R528 000	R550 101 - R701 300	R149 619 + 39% of the amount above R550 100
R673 101 and above	R195 212 + 40% of the amount above R673 100	R701 301 and above	R208 587 + 41% of the amount above R701 300
Rebates		Rebates
Primary	R12 726	Primary	R13 257
Secondary	R7 110	Secondary	R7 407
Tertiary	R2 367	Tertiary	R2 466
Tax threshold		Tax threshold
Below age 65	R70 700	Below age 65	R73 650
Age 65 and over	R110 200	Age 65 and over	R114 800
Age 75 and over	R123 350	Age 75 and over	R128 500

Source: National Treasury

Medical tax credits

Monthly medical scheme contribution tax credits will, from 1 March 2015, be increased from R257 to R270 per month for the first two beneficiaries and from R172 to R181 per month for each additional beneficiary.

Table 4.5 Estimates of individual taxpayers and taxable income, 2014/15

Taxable bracket	Registered individuals				Taxable income				Income tax payable before relief				Income tax relief and medical tax credits				Personal income tax rate increases				Income tax payable after rate increase
	Number		%		R billion		%		R billion		%		R billion		%		R billion		%		R billion		%
0 - R70 0001		8 435 314				182.0		11.5		—				—				—				—
R70 001 - R150 000		2 725 505		38.8		287.2		14.4		14.1		3.6		-1.4		15.4		0.0		0.0		12.7		3.2
R150 001 - R250 000		1 747 426		24.9		340.6		17.0		36.7		9.3		-1.8		19.0		0.3		3.6		35.2		8.9
R250 001 - R350 000		1 080 762		15.4		319.2		16.0		49.7		12.6		-1.8		18.8		1.2		13.0		49.1		12.5
R350 001 - R500 000		687 085		9.8		283.7		14.2		56.9		14.4		-1.6		17.3		1.6		16.9		56.9		14.4
R500 001 - R750 000		429 454		6.1		258.7		12.9		64.9		16.5		-1.4		14.8		1.8		19.2		65.3		16.6
R750 001 - R1 000 000		164 738		2.3		141.1		7.1		41.4		10.5		-0.6		6.8		1.1		11.8		41.8		10.6
R1 000 001 - R1 500 000		110 686		1.6		132.2		6.6		42.8		10.9		-0.4		4.6		1.1		11.9		43.4		11.0
R1 500 001+		78 543		1.1		236.6		11.8		87.5		22.2		-0.3		3.3		2.2		23.6		89.4		22.7
Total		7 024 199		100.0		1 999		100.0		393.9		100.0		-9.4		100.0		9.4		100.0		393.9		100.0
Grand total		15 459 513				2 181				393.9				-9.4				9.4				393.9

1. Registered individuals with taxable income below the income-tax threshold

Source: National Treasury

	Turnover tax regime for micro businesses
Proposals include a more generous tax regime for small business	The turnover tax regime was introduced to limit the compliance burden on micro businesses with annual turnover of up to R1 million. These rules eliminate the need for a great deal of paperwork and compliance expenses. The Davis Tax Committee recommended that this incentive be made more

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generous to improve the participation of small businesses in the economy and the tax system. Government proposes to adjust the rates and thresholds to make the turnover tax more attractive, as shown in Table 4.6.

Table 4.6 Turnover tax regime, 2014/15 – 2015/16

	2014/15		2015/16
Turnover (R)	Rates of tax	Turnover (R)	Rates of tax
R0 - R150 000	0% of taxable turnover	R0 - R335 000	0% of taxable turnover
R150 001 - R300 000	1% of the amount above R150 000	R335 001 - R500 000	1% of the amount above R335 000
R300 001 - R500 000	R1 500 + 2% of the amount above R300 000	R500 001 - R750 000	R1 650 + 2% of the amount above R500 000
R500 001 - R750 000	R5 500 + 4% of the amount above R500 000	R750 001 - R1 000 000	R6 650 + 3% of the amount above R750 000
R750 001 - R1 000 000	R15 500 + 6% of the amount above R750 000

Source: National Treasury

Base erosion and profit shifting
Many countries face the problem of businesses exploiting gaps in international tax rules to artificially shift profits and avoid paying tax. These avoidance measures, practiced widely by multinational firms, substantially reduce their contributions to national tax bases. In recent years, government has taken measures to limit artificial reductions of taxable income through cross-border interest payments.	Amendments to improve transfer-pricing reporting and rules for controlled foreign companies
Building on these steps, government will propose amendments to improve transfer-pricing documentation and reporting, and change the rules for controlled foreign companies and the digital economy. These proposals are in line with matters examined in a recent OECD report, “Addressing Base Erosion and Profit Shifting”, which examined the practice. A December 2014 report by the Davis Tax Committee on the same subject highlighted these concerns in the South African context. Tax returns will place a greater focus on indicators of potential base erosion and profit shifting.
Excise duties on alcoholic beverages and tobacco products
Since 2002, tax rates on alcoholic beverages have consistently increased above inflation. The amendments for 2015/16 continue this trend, with excise duty rate increases of between 4.8 and 8.5 per cent. The excise duties on tobacco products increased between 5 and 7 per cent.	Amendments propose above-inflation increases in excise duties on alcohol and tobacco
An additional excise duty category is proposed for grain-based fermented beverages (flavoured alcoholic beverages using 100 per cent unconverted grains). The rate for these beverages will initially be linked to the excise duty for beer, and may be reviewed to ensure a level playing field with fruit-fermented beverages.

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Table 4.7 Changes in specific excise duties, 2015/16

	Current excise	Proposed excise	Percentage change
Product	duty rate	duty rate	Nominal		Real
Malt beer	R68.92 / litre of absolute alcohol (117c / average 340ml can)	R73.05 / litre of absolute alcohol (124c / average 340ml can)		6.0		1.2
Traditional African beer	7.82c / litre	7.82c / litre		—		-4.8
Traditional African beer powder	34.70c / kg	34.70c / kg		—		-4.8
Unfortified wine	R2.87 / litre	R3.07 / litre		7.0		2.2
Fortified wine	R5.21 / litre	R5.46 / litre		4.8		0.0
Sparkling wine	R9.11 / litre	R9.75 / litre		7.0		2.2
Ciders and alcoholic fruit beverages	R3.45 / litre (117c / average 340ml can)	R3.65 / litre (124c / average 340ml can)		6.0		1.2
Spirits	R137.54 / litre of absolute alcohol (R44.36 / 750ml bottle)	R149.23 / litre of absolute alcohol (R48.13 / 750ml bottle)		8.5		3.7
Cigarettes	R11.60 / 20 cigarettes	R12.42 / 20 cigarettes		7.0		2.2
Cigarette tobacco	R13.03 / 50g	R13.94 / 50g		7.0		2.2
Pipe tobacco	R3.63 / 25g	R3.89 / 25g		7.0		2.2
Cigars	R61.87 / 23g	R64.96 / 23g		5.0		0.2

Source: National Treasury

	Other reforms under consideration include providing excise duty relief to wine-based spirits (e.g. brandy). The rationale is that brandy is at a cost disadvantage compared with other forms of alcoholic spirits, because it takes 4-5 litres of wine to produce a litre of brandy. Sparkling wine accounts for a very small proportion of alcoholic beverage sales and the nature of this market results in large price discrepancies. This may require a review of the way the excise duty on sparkling wine is calculated.
Excise tax burden for wine, beer and spirits will be 11, 23 and 36 per cent, and 40 per cent for tobacco	Government proposes a change in the way the targeted tax burden on alcoholic beverages and tobacco products is expressed. VAT will be removed from the calculation and, as a result, the excise tax burden for wine, beer and spirits will henceforth be 11, 23 and 36 per cent, excluding VAT and rounded to the nearest whole number. For tobacco products the rate will be 40 per cent. These proposals are detailed in Annexure C.
	Transfer duties
Transfer duty relief provided to middle-income households	Average house prices have recovered slowly over the past two years following a post-2009 decline. The rates and brackets for transfer duties on the sale of property on or after 1 March 2015 will be adjusted to provide relief to middle-income households. The new rates will eliminate transfer duty on all property acquired below R750 000, decrease effective transfer-duty liability for properties acquired up to about R2.3 million and increase liability for properties above this amount.

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Table 4.8 Transfer duty rate adjustments, 2014/15 – 2015/16

	2014/15		2015/16
Property value (R)	Rates of tax	Property value (R)	Rates of tax
R0 - R600 000	0% of property value	R0 - R750 000	0% of property value
R600 001 - R1 000 000	3% of property value above R600 000	R750 001 - R1 250 000	3% of property value above R750 000
R1 000 001 - R1 500 000	R12 000 + 5% of property value above R1 000 000	R1 250 001 - R1 750 000	R15 000 + 6% of property value above R1 250 000
R1 500 001 +	R37 000 + 8% of property value above R1 500 000	R1 750 001 - R2 250 000	R45 000 + 8% of property value above R1 750 000
		R2 250 001+	R85 000 + 11% of property value above R2 250 000

Source: National Treasury

Fuel taxes
The steep decline in world oil prices over the past year has resulted in decreases in the local fuel price. Fuel levies are imposed at fixed cent/litre rates on petrol, diesel and biodiesel. The levies aim to raise revenue, reduce pollution and compensate for road accidents.
Government proposes to increase the general fuel levy by 30.5 c/litre. At the same time, the RAF levy, used to finance third-party motor vehicle personal accident claims, will be increased by 50 c/litre to support the RAF. It is proposed that these increases become effective on 1 April 2015.	Combined increase of 80.5 c/litre in fuel levies
The estimated overall fuel tax burden after this proposed increase will be about 41 per cent, which is comparable with the level in many other developed and some developing countries.

Table 4.9 Total combined fuel taxes on petrol and diesel, 2013/14 – 2015/16

	2013/14						2014/15						2015/16
Cents/litre	93 octane petrol			Diesel			93 octane petrol			Diesel			93 octane petrol			Diesel
General fuel levy		212.50			197.50			224.50			209.50			255.00			240.00
Road Accident Fund levy		96.00			96.00			104.00			104.00			154.00			154.00
Customs and excise levy		4.00			4.00			4.00			4.00			4.00			4.00
Illuminating paraffin marker		—			0.01			—			0.01			—			0.01
Total		312.50			297.51			332.50			317.51			413.00			398.01
Pump price: Gauteng (as in February)1		1 077.00			1 026.69			1 206.00			1 129.17			1 009.00			926.09
Taxes as percentage of pump price		29.0	%		29.0	%		27.6	%		28.1	%		40.9	%		43.0	%

1.     Diesel (0.05% sulphur) wholesale price (retail price not regulated)

Source: National Treasury

Diesel refunds

The diesel refund system allows for a refund of all or part of the fuel levies to producers in the agriculture, forestry, fishing and mining sectors. The administrative system in place since 2000 faces significant technical problems and legal challenges. Some eligible firms are unable to benefit from the system, while others appear to be making disproportionate refund claims. To address these concerns, government proposes to delink diesel refunds from the VAT system from 1 April 2016. The National Treasury and SARS will explore alternative, more equitable rules and administrative procedures after consultation with the affected industries.

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Full diesel fuel levy exemption provides a perverse incentive to use diesel excessively	Government also proposes to reduce diesel fuel levy refunds to 20 per cent and 50 per cent of the general fuel levy respectively for land mining activities and generation of electricity by Eskom’s open-cycle gas turbines. The current full exemption provides a perverse incentive to use diesel excessively. This change will become effective from 1 April 2016. In the interim, government proposes several technical amendments to this system. These are discussed in Annexure C.
	Electricity levies
Government is considering an increase in electricity levy from 3.5c/kWh to 5.5c/kWh	Given electricity supply constraints, additional measures are needed to manage demand. Government is considering an increase in the electricity levy from 3.5c/kWh to 5.5c/kWh. The additional revenue will be used to fund the broadening of the scope of the energy-efficiency savings tax incentive to include co-generation and an increase in the amount available for this incentive. Also under consideration is enhancing the accelerated depreciation for solar photovoltaic renewable energy. In the absence of a carbon tax, the electricity levy promotes energy efficiency and reduced greenhouse gas emissions. The 2c/kWh increase is a temporary measure to be withdrawn when the carbon tax is introduced in 2016.
	Government is examining loopholes that unduly favour intensive electricity users, and will consider a levy that would apply to users and exporters of electricity who consume in excess of 800 000 MWh per year. To prevent the possibility of double taxation, a credit of 5.5c/kWh could be provided for users if the price they pay is above 37 c/kWh. Before any measures are proposed, government will consult with industry, the electricity regulator, Eskom and other interested parties.
	Energy-efficiency savings tax incentive
	The energy-efficiency savings tax incentive will be increased from 45 c/kWh to 95 c/kWh and extended to cogeneration projects. This incentive was introduced in November 2013 to complement the proposed carbon tax. It encourages firms to support a greener economy. Businesses can claim deductions based on energy saved. In future, this allowance will be funded through a recycling of revenues from the carbon tax.
	¢    Revenue impact of tax proposals
Net tax revenue impact of proposed changes is an additional R8.3 billion	Table 4.10 illustrates the estimated change in tax revenues flowing from the tax policy proposals. The gross tax revenue impact of these changes will be R16.8 billion, with an estimated net increase of R8.3 billion after taking into account relief for fiscal drag.

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Table 4.10 Impact of tax proposals on 2015/16 revenue

R million	Effect of tax proposals
Tax revenue (before tax proposals)			1 073 000
Non-tax revenue			19 038
less: Southern African Customs Union payments			-51 022
Main budget revenue			1 041 015
Provinces, social security funds and selected public entities			139 564
Consolidated revenue (before tax proposals)			1 180 579
Tax proposals before fiscal drag 2015/16 (gross):			16 775
Tax proposals after fiscal drag 2015/16 (net):			8 275
Personal income tax		—
Fiscal drag relief		-8 500
Rate increase in income tax		9 420
Medical credits		-920
Business income tax		-150
Energy-efficiency savings tax incentive		-150
Taxes on property		100
Adjustment in transfer duty		100
Indirect taxes		8 325
Increase in general fuel levy		6 490
Increase in excise duties on tobacco products		602
Increase in alcoholic beverages		1 234
Tax revenue (after tax proposals)			1 081 275
Consolidated revenue (after tax proposals)			1 188 855

Source: National Treasury

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5

Consolidated government spending plans

In brief

• Government’s spending plans are focused on achieving the objectives of the medium-term strategic framework, which have been derived from the National Development Plan.

• Government proposes to reduce the expenditure ceiling by a total of R25 billion in the next two years, with an unallocated reserve provided for in 2017/18.

• Real spending will grow by an annual average of 2.3 per cent over the next three years. Debt-service costs are the fastest-growing category of spending.

• Existing resources will be shifted to policy priorities, while maintaining faster growth in infrastructure and social spending programmes.

• Cost-containment measures will be applied to improve efficiency in all spending programmes.

¢    Overview

The 2015 Budget allocates resources to South Africa’s core social and economic priorities while containing aggregate expenditure growth. Spending plans give effect to the priorities of the National Development Plan (NDP) and government’s medium-term strategic framework (MTSF). Although aggregate spending, which will reach R1.56 trillion in 2017/18, continues to grow in real terms across a significant proportion of the budget, fiscal realities mean that this is not the case in all areas.

Budget gives effect to NDP and medium-term strategic framework priorities within expenditure ceiling

Relative to expenditure levels announced in the 2014 Budget, total spending in 2015/16 and 2016/17 has been reduced by R25 billion, or about 1 per cent of projected budgets. In addition, government has placed R45 billion in an unallocated reserve for 2017/18 to serve as a buffer against fiscal or economic shocks.

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In revising their plans to take account of slower growth in their budgets, departments and agencies have sought to reduce spending on non-critical activities. They have also postponed the inception of new programmes, except where these can be funded by reducing spending elsewhere. As far as possible, spending on infrastructure investment and core social programmes has been protected.

Compensation as a share of expenditure declines slightly over MTEF period

Government continues to register progress in improving the composition of expenditure. Overall, the bulk of budget reductions have fallen on the goods and services budget, which at R200 billion in 2016/17 is more than 5 per cent lower than was projected in the 2014 Budget. Compensation as a share of allocated expenditure also declines from 35.5 per cent to 34.5 per cent over the MTEF period. Achieving this, however, depends on the outcome of public-sector wage talks. Additional steps have been taken to contain public spending.

Containing costs in public spending

Responsibility for managing public resources is shared. Principal responsibility lies with the accounting officers of state institutions, whose job it is to ensure that allocated resources deliver the maximum value for money. Accounting officers are held accountable by external authorities such as the Auditor-General, the National Treasury and Parliament.

Several tools augment these relationships. Treasury instructions, transversal contracts that maximise state purchasing power and other rules impose statutory requirements on accounting officers against which their performance can be audited. Recent initiatives include:

• A review of Treasury Instruction 1 of 2012, which set limits on the costs government can incur in procuring goods and services such as hotel accommodation, flights, rental cars and consultants. In 2015 the National Treasury will expand this instruction to limit spending in a range of areas, such as conferences and workshops. Details of these measures will be published by the end of the first quarter of the fiscal year.

• A national price-referencing system developed by the Chief Procurement Officer, which will help government to improve the quality of spending by providing state institutions with data on the ranges within which the price of commonly used goods and services should fall. The new system will be rolled out on 1 April 2015.

• An eTender portal will widen government’s access to potential suppliers. It will allow small firms to evaluate tenders in a transparent manner, and bid on an equal basis, since they will no longer have to pay to see tenders. The system will also increase the level of effective competition between actual and potential suppliers. It will be available for national and provincial use from 1 April 2015 and for local government from 1 July 2015. National and provincial departments must publish all tenders greater than R500 000, and municipalities must publish all tenders greater than R200 000 online. Award notices will be posted, improving transparency and accountability.

	Reducing wasteful expenditure and implementing more cost-effective service-delivery models will make more resources available for priority spending areas. As government works to realise the MTSF outcomes, it continues to look for ways to optimise service delivery. Over the medium term, realising the MTSF objectives will help to lay the foundation for stronger economic growth and social development.
	¢    Consolidated government expenditure
Consolidated expenditure grows by 7.9 per cent	Consolidated government expenditure is projected to grow by 7.9 per cent over the MTEF period, from R1.24 trillion in 2014/15 to R1.56 trillion in 2017/18. This is 2.3 percentage points a year ahead of projected inflation.
	Real expenditure growth over the three-year period ahead will be slower than it has been over the past three years, though the slowdown is not uniform across all functions. For example, spending growth for social

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services (including social protection, health, basic education and local economic development) will be 7.2 per cent over the medium term, but spending growth on general public services is expected to slow to 2.6 per cent. Apart from general public services, spending in all functions grows faster than projected inflation.
At an annual average of 10.1 per cent, debt service is the fastest-growing item of expenditure, driven by the increase in government borrowing since 2008/09.	Debt service is fastest-growing item of expenditure
Figure 5.1 Nominal expenditure growth by function,   2011/12 – 2014/15 and 2014/15 – 2017/18
Reflecting the commitment to improving the composition of spending, allocations to local development and social infrastructure grow at 8.2 per cent over the MTEF period.
Spending on post-school education and training, which is critical to alleviating skills constraints and to spreading economic opportunity, also grows strongly at 7.1 per cent a year. Growth in this function is driven by expanded revenues from the skills levy, as well as increased transfers to the National Student Financial Aid Scheme, subsidies to higher-education institutions and continued construction of two new universities.
Spending growth on economic affairs will slow over the medium term because the economic competitiveness support package, a short-term programme introduced in the wake of the global recession, will wind down. Growth in spending on defence, public order and safety, and general government services slows despite increases in average personnel costs.	Strong growth in spending on local development and social infrastructure
Table 5.1 sets out consolidated government expenditure information over the MTEF period. It includes the spending estimates of national and provincial departments and public entities, as well as transfers of nationally raised revenue to municipalities. State-owned companies’ revenues from commercial operations are excluded, as are the revenues raised by municipalities.

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Table 5.1 Consolidated government expenditure by function,¹ 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Percentage
R million	Revised estimate		Medium-term estimates						of total MTEF allocation by function			Average annual  MTEF growth
Basic education		189 454		203 468		216 036		227 816		16.7	%		6.3	%
Health		144 558		157 294		167 485		177 525		13.0	%		7.1	%
Defence, public order and safety		163 018		171 150		181 248		192 719		14.1	%		5.7	%
Defence and state security		47 445		49 364		52 303		55 450		4.1	%		5.3	%
Police services		78 237		82 724		87 305		93 235		6.8	%		6.0	%
Law courts and prisons		37 336		39 063		41 639		44 034		3.2	%		5.7	%
Post-school education and training		56 612		62 238		65 556		69 594		5.1	%		7.1	%
Economic affairs		189 430		206 164		219 526		225 549		16.8	%		6.0	%
Industrial development, trade and innovation		64 636		69 688		73 132		74 718		5.6	%		5.0	%
Employment, labour affairs and social security funds		56 439		64 138		70 111		72 945		5.3	%		8.9	%
Economic infrastructure and network regulation		68 355		72 338		76 284		77 887		5.8	%		4.4	%
Local development and social infrastructure		176 612		199 570		210 235		223 813		16.3	%		8.2	%
Housing development and social infrastructure		157 649		179 224		189 170		201 581		14.7	%		8.5	%
Rural development and land reform		10 220		10 709		11 443		12 021		0.9	%		5.6	%
Arts, sport, recreation and culture		8 743		9 638		9 622		10 212		0.8	%		5.3	%
General public services		64 743		64 385		66 750		69 824		5.2	%		2.6	%
Executive and legislative organs		12 375		12 335		12 827		13 507		1.0	%		3.0	%
General public administration and fiscal affairs		37 077		38 622		38 912		41 132		3.1	%		3.5	%
Home affairs		7 778		6 349		7 483		7 281		0.5	%		-2.2	%
External affairs and foreign aid		7 513		7 078		7 528		7 905		0.6	%		1.7	%
Social protection		143 926		155 297		165 997		176 523		12.8	%		7.0	%
Allocated by function		1 128 354		1 219 566		1 292 833		1 363 364		100.0	%		6.5	%
Debt-service costs		115 016		126 440		140 971		153 376					10.1	%
Unallocated reserves		—		5 000		15 000		45 000
Consolidated expenditure		1 243 370		1 351 007		1 448 804		1 561 740					7.9	%

1. Consisting of the main budget and spending by provinces, public entities and social security funds financed from own revenue

Source: National Treasury

The 2015 Budget includes baseline expenditure reductions of R25 billion over two years (R10 billion in 2015/16 and R15 billion in 2016/17) relative to the projected budgets announced in the 2014 Budget. These reductions include:

•        Reductions to current spending by national departments of R2.3 billion in 2015/16 and R3.9 billion in 2016/17, to be achieved mainly through decreases in budgets for non-core goods and services.

•        Reductions to capital spending of national departments by R280 million (2015/16) and R911 million (2016/17), mainly on non-critical items of machinery and equipment.

•        Reductions in allocations to public entities of R2.4 billion (2015/16) and R2.6 billion (2016/17).

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•        Reductions in transfers to provinces of R4.4 billion (2015/16) and R6.6 billion (2016/17).

•        Reductions in conditional allocations to local government of R921 million in 2015/16 and R1.4 billion in 2016/17. No reductions were made to the local government equitable share.

Table 5.2 Consolidated government expenditure by economic classification,¹ 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Percentage			Average
R million	Revised estimate		Medium-term estimates						of total MTEF			annual MTEF growth
Current payments		746 375		799 602		856 695		907 252		59.7	%		6.7	%
Compensation of employees		445 289		479 511		509 638		539 563		35.6	%		6.6	%
Goods and services		180 297		187 677		200 297		209 437		13.9	%		5.1	%
Interest and rent on land		120 788		132 413		146 761		158 251		10.2	%		9.4	%
of which:
Debt-service costs		115 016		126 440		140 971		153 376		9.8	%		10.1	%
Transfers and subsidies		406 947		445 415		473 059		497 762		33.0	%		6.9	%
Municipalities		96 564		107 235		111 464		118 037		7.8	%		6.9	%
Departmental agencies and accounts		26 587		30 289		31 333		33 369		2.2	%		7.9	%
Higher education institutions		26 047		27 021		28 001		29 342		2.0	%		4.1	%
Foreign governments and international organisations		2 215		2 017		2 198		2 289		0.2	%		1.1	%
Public corporations and private enterprises		28 509		31 460		33 110		33 256		2.3	%		5.3	%
Non-profit institutions		26 749		27 884		29 066		30 492		2.0	%		4.5	%
Households		200 276		219 509		237 886		250 977		16.5	%		7.8	%
Payments for capital assets		86 302		97 498		103 704		111 361		7.3	%		8.9	%
Buildings and other capital assets		67 078		77 219		81 953		86 461		5.7	%		8.8	%
Machinery and equipment		19 224		20 279		21 751		24 900		1.6	%		9.0	%
Payments for financial assets		3 746		3 492		345		365		0.1	%		-54.0	%
Total		1 243 370		1 346 007		1 433 804		1 516 740		100.0	%		6.8	%
Unallocated reserves		—		5 000		15 000		45 000
Consolidated expenditure		1 243 370		1 351 007		1 448 804		1 561 740					7.9	%

1. Consisting of the main budget and spending by provinces, public entities and social security funds financed from own revenue

Source: National Treasury

To accommodate the lower expenditure ceiling while increasing support for spending priorities, the unallocated reserves for 2015/16 and 2016/17 have been reduced. A reserve of R45 billion is provided for in 2017/18 to provide a buffer against economic or fiscal shocks.
The economic classification of the main spending increases over the MTEF period reflects some progress in rebalancing the fiscus and improving the composition of spending. By the end of the MTEF period, a larger proportion of non-interest spending will go towards building capital assets. The main trends are as follows:	Cost-containment and reprioritisation measures limit growth in goods and services spending
•        Compensation of employees is projected to grow by 6.6 per cent a year. Subject to the outcome of public-sector wage talks, compensation is expected to make up 34.5 per cent of allocated expenditure in 2017/18 compared with 36.5 per cent in 2011/12.

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	•        Cost-containment and reprioritisation measures limit growth in allocations for goods and services to 5.1 per cent per year. Allocations for critical items such as medicine will grow faster than inflation.
	•        Transfers to municipalities increase by 6.9 per cent a year, supporting the provision of free basic services to the poor. Transfers to households, which includes housing subsidies, grow by 7.8 per cent.
	•        Payments for capital assets grow by 8.9 per cent a year, making this the fastest-growing category of expenditure apart from debt service.
	National expenditure outcome
National underspending of 0.6 per cent of budgeted expenditure in 2013/14	In 2013/14, national expenditure amounted to R1.048 trillion (including transfers to provinces and municipalities) out of a total adjusted appropriation of R1.054 trillion. This represents underspending of 0.6 per cent – the same level achieved in 2012/13. Underspending on infrastructure programmes, especially in health and education, was the main contributor to the shortfall. This is being addressed through initiatives to improve spending, as discussed in Annexure B. Spending on social grants also came in R1.4 billion under budget following the clean-up of the grants system by the South African Social Security Agency.

Expenditure and performance reviews

The National Treasury and the Department of Planning, Monitoring and Evaluation in the Presidency have completed a series of performance and expenditure reviews. The reviews assess whether services have been designed and delivered in a cost-effective manner, with a view to proposing reforms.

The reviews have observed that policies are often designed without fully assessing the costs and implications of choices being made. Significant savings are possible if departments make adjustments. Recent reviews have taken place in the following areas:

• Housing: The full cost of RDP houses significantly exceeds the capital subsidy, with serious implications for the budgets of relevant institutions – especially municipalities – as well as the pace of housing delivery and the affordability of current policy commitments.

• Public transport: By a variety of measures, public transport in South Africa is very expensive for both users and government, largely because apartheid’s spatial legacy results in inefficient patterns of transport use. Government is working to change the spatial layout of the cities through improvements in land use planning over the long term. In the short term, the densification of the cities in specific nodal areas and along identified corridors will assist in reducing the costs of public transport. Improving the integration of the transport system and its governance would also yield increased efficiency.

• Foreign missions: Government spends over R3.5 billion a year to maintain foreign missions. Rapid spending growth is largely attributable to higher property costs and rising staff costs. While the costs of locally recruited staff are too high, cost of living allowances for South African staff are more generous than those offered by other countries and international organisations – between 20 and 50 per cent higher than the United Nations, for example. The location of some of the most expensive missions is not aligned with trade relations or other economic interests.

During 2015/16, expenditure and performance reviews will examine government accommodation, school infrastructure, provincial roads, and information and communication technology costs at schools.

¢    Revised medium-term expenditure plans

Achieving NDP’s vision requires partnerships between government, business, labour and civil society

The NDP sets out a long-term vision for a prosperous South Africa, one in which a much higher proportion of adults are working, where poverty has been eliminated and inequality reduced. Achieving that vision requires partnerships between government, business, labour and civil society. It also requires that public institutions deliver the high-quality services and infrastructure needed to achieve rapid and sustained economic growth, while maintaining macroeconomic stability.

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The MTSF sets priorities for government’s work over the next five years to ensure that such progress is made. The following sections, organised by function group, set out some of government’s plans to achieve these goals. More detailed information on departmental spending plans can be found in the statistical tables in the Budget Review and the Estimates of National Expenditure. Spending plans for provinces and municipalities are discussed in the Explanatory Memorandum to the Division of Revenue, available at www.treasury.gov.za, and in provincial and municipal budgets.
Economic affairs
This function group addresses three MTSF outcomes linked to the structure and performance of the economy – decent employment through inclusive growth; an efficient, competitive and responsive economic infrastructure network; and protect and enhance our environmental assets and natural resources. Excluding tax rebates afforded to industry amounting to about R19 billion a year, about R650 billion will be spent in pursuit of these goals over the next three years. The winding down of the economic competitiveness support package means that total allocations will grow more slowly, at an annual average of 6 per cent over the medium term.	About R650 billion for economic affairs over medium term
Job creation and inclusive economic growth
Faster job creation depends above all on boosting the economic growth rate and greater private-sector investment. Government spending supports this but also makes a direct contribution to job creation by focusing support on productive activities across the economy.
The Competition Commission plays an important role in ensuring greater economic efficiency and increased opportunity for new and smaller businesses. Over the medium term, it will receive additional support of R25 million to investigate private healthcare costs. To support more rapid economic growth, and the development of new sources of energy, a sum of R65 million has been set aside to ensure the optimal regulation of shale gas exploration. Over the medium term, the newly established Department of Small Business Development will spend about R3.5 billion on non-financial support to small businesses through training and mentoring. It will also seek to reduce regulatory barriers to small firms, especially informal businesses in townships.
One element of Operation Phakisa, government’s programme to speed up project implementation, is aimed at unlocking the economic potential of South Africa’s oceans. This effort is allocated R296 million to fund scientific expeditions by the SA Agulhas II and the Algoa, and to conduct essential research on climate change and deep ocean environments.	Initiative to unlock economic potential of oceans surrounding South Africa
Medium-term allocations of R35.9 billion support government’s active labour-market interventions. At 21 per cent a year, the Community Work Programme grows fastest, allowing it to expand its presence to every municipality by 2017. The Jobs Fund is expected to spend about R4 billion over the next three years on projects that create permanent jobs and address structural constraints to growth and employment.
Rapid growth in spending by social security funds reflects the increase in expenditure by the Road Accident Fund, which is discussed in Chapter 8. These increases are funded by an increase in the fuel levy.

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Table 5.3 Economic affairs expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Economic infrastructure and network regulation		68 355		72 338		76 284		77 887		226 510		34.8	%		4.4	%
of which:
Bulk water infrastructure		19 540		20 086		23 615		23 867		67 568		10.4	%		6.9	%
Road infrastructure		46 680		51 227		51 604		52 880		155 711		23.9	%		4.2	%
Employment, labour affairs and social security funds		56 439		64 138		70 111		72 945		207 193		31.8	%		8.9	%
of which:
Employment programmes1		10 328		10 625		12 428		12 862		35 915		5.5	%		7.6	%
Social security funds		39 475		47 127		50 837		52 247		150 211		23.1	%		9.8	%
Industrial development, trade and innovation		64 636		69 688		73 132		74 718		217 537		33.4	%		5.0	%
of which:
Environmental programmes		6 121		6 432		6 772		6 971		20 175		3.1	%		4.4	%
Research and development, including research institutions		14 691		15 786		15 845		16 586		48 217		7.4	%		4.1	%
Agriculture and farmer support programmes		11 296		11 557		11 893		12 534		35 984		5.5	%		3.5	%
Economic development and incentive programmes		12 358		13 881		14 858		13 823		42 562		6.5	%		3.8	%
Total		189 430		206 164		219 526		225 549		651 240		100.0	%		6.0	%
of which:
Compensation of employees		35 383		37 884		40 553		43 037		121 474		18.7	%		6.7	%
Goods and services		42 276		45 225		48 502		50 887		144 614		22.2	%		6.4	%
Transfers and subsidies		70 154		78 314		84 184		84 951		247 449		38.0	%		6.6	%
Buildings and other fixed structures		33 063		36 449		38 164		39 262		113 875		17.5	%		5.9	%
Machinery and equipment		2 486		2 124		2 200		2 479		6 802		1.0	%		-0.1	%

1. Includes the Expanded Public Works Programme and the Jobs Fund

Source: National Treasury

	Transport and telecommunications infrastructure
Policy on broadband spectrum will reduce uncertainty that has held back investment	A policy on broadband spectrum usage will be completed by March 2016, reducing the uncertainty that has held back investment in this sector. The Department of Telecommunications and Postal Services plans to connect 1 296 government institutions and 972 schools to broadband services by March 2016 using a range of technologies. A total of R1.1 billion has been allocated for this purpose over the MTEF period.
	To improve road safety, R1.1 billion is reprioritised from the taxi recapitalisation programme and other road budgets to upgrade the R573 (the Moloto Road) in Mpumalanga. An amount of R648 million is also reprioritised for the rehabilitation of road infrastructure damaged in various natural disasters.
	Local economic development and social infrastructure
Strong growth in allocations for housing and basic services infrastructure	Expenditure on local economic development and social infrastructure will grow at an average annual rate of 8.2 per cent over the next three years, rising from R176.6 billion to R223.8 billion. Over 90 per cent of expenditure will be allocated to housing and the services provided by local governments in pursuit of several MTSF outcomes: •        Sustainable human settlements and improved quality of household life

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•        Responsive, accountable, effective and efficient local government

•        Vibrant, equitable, sustainable rural communities contributing towards food security for all

•        A diverse, socially cohesive society with a common national identity.

Table 5.4 Local development and social infrastructure expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Arts, sport, recreation and culture		8 743		9 638		9 622		10 212		29 472		4.7	%		5.3	%
Housing development and social infrastructure		157 649		179 224		189 170		201 581		569 975		90.0	%		8.5	%
of which:
Human settlements		32 441		33 393		36 042		38 201		107 636		17.0	%		5.6	%
Public transport, including commuter rail		35 646		41 270		44 681		48 724		134 675		21.3	%		11.0	%
Municipal equitable share		43 290		50 208		52 869		55 512		158 589		25.0	%		8.6	%
Municipal infrastructure grant		14 429		14 956		15 548		16 435		46 939		7.4	%		4.4	%
Regional and local water and sanitation services		6 906		10 134		9 617		10 667		30 418		4.8	%		15.6	%
Electrification programmes		4 220		5 778		6 034		6 393		18 206		2.9	%		14.9	%
Rural development and land		10 220		10 709		11 443		12 021		34 172		5.4	%		5.6	%
of which:
Land reform		932		1 177		1 254		1 412		3 842		0.6	%		14.8	%
Agricultural land holding account		1 773		1 672		1 738		1 716		5 126		0.8	%		-1.1	%
Restitution		2 681		2 603		3 181		3 341		9 125		1.4	%		7.6	%
Total		176 612		199 570		210 235		223 813		633 619		100.0	%		8.2	%
of which:
Compensation of employees		18 547		20 962		22 091		23 384		66 437		10.5	%		8.0	%
Goods and services		15 269		16 098		17 846		18 890		52 833		8.3	%		7.4	%
Transfers and subsidies		123 775		137 843		145 055		153 511		436 410		68.9	%		7.4	%
Buildings and other fixed structures		8 976		13 789		13 415		15 292		42 496		6.7	%		19.4	%
Machinery and equipment		8 571		9 184		10 204		11 079		30 467		4.8	%		8.9	%

Source: National Treasury

A budget of R570 billion over the MTEF period for local government infrastructure and services includes reductions of R3.76 billion (0.7 per cent). This reduction is in response to persistent underspending on these budgets and the presence of surpluses in the accounts of the entity responsible for trading raw water.
Apart from the local government equitable share, human settlement investment makes up a major area of expenditure in this function. Over the next three years R107.6 billion will be allocated to develop bulk municipal infrastructure and to finance affordable housing, including social housing.
Using the R18.2 billion allocated for national electrification over the MTEF period, government aims to connect 810 000 poor households to the electricity grid. A further R489.2 million is provided for 65 000 non-grid connections in remote areas. In addition, 229 water and sanitation projects will be implemented, with 76 new regional bulk water schemes expected to be completed by 2017/18. Allocations also provide for expanding sanitation services to an additional 182 275 households. A total of R1.5 billion has been added to grants for post-disaster rehabilitation and reconstruction of housing, roads, water and municipal infrastructure.	810 000 poor households to be connected to electricity grid over medium term

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44 new passenger rail train sets to be acquired over next three years	Rapid growth in expenditure on public transport is driven by allocations to the Passenger Rail Agency of South Africa for the rolling stock fleet renewal programme. The agency is expected to take delivery of 44 train sets (528 coaches) over the next three years. An allocation of R134.7 billion provides for rail- and road-based public transport over the MTEF period.
	Municipal infrastructure grants administered by the Department of Cooperative Governance will rise from R14.4 billion in 2014/15 to R16.4 billion by 2017/18. Budgeted growth in this area flows from reprioritisation of funds previously allocated to support municipal administration costs in newly demarcated areas.
Review under way to reduce overlap and duplication between departments	The Departments of Agriculture, Forestry and Fisheries, and Rural Development and Land Reform will review their programmes to reduce overlap and duplication. The land restitution process was reopened in 2014 and claims will be accepted until 2019. Rural Development and Land Reform has reprioritised funds within its baseline to open new offices to accept applications.
	An allocation of R4.7 billion will support land reform over the medium term. This will focus on smallholder farm development and acquisition of strategically located land for redistribution. Government plans to acquire about 1.2 million hectares of land over the next three years and over 1 000 farms will benefit from the recapitalisation and development programme.
	Post-school education and training
Government to spend about R200 billion on post-school education and training	This function supports the MTSF’s outcome, a skilled and capable workforce to support an inclusive growth path. Expenditure of nearly R200 billion is anticipated over the medium term and will support an expansion of access to quality education and training to broaden economic opportunities and build skills.
	Transfers to universities for subsidies and infrastructure make up 42 per cent of expenditure in this function. These increase from R26.2 billion in 2015/16 to R29 billion in 2017/18, including R3.2 billion for the on-going construction of two new universities (Mpumalanga and Sol Plaatje).
Rising allocations boost enrolments	Spending and loan disbursements by the National Student Financial Aid Scheme are expected to reach R11.9 billion in 2017/18, up from R9.2 billion in 2014/15. Rising allocations for this function will support an increase in university enrolments from 972 000 to just over 1 million, as well as increased enrolments in technical and vocational education and training college enrolments from 800 000 to just under 1.2 million. In addition to providing work placements for students and graduates, the 21 Sector Education and Training Authorities and the National Skills Fund (funded through a ring-fenced payroll tax) will focus spending on increasing the number of people training for and qualifying as artisans.

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Table 5.5 Post-school education and training expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Post-school education and training expenditure		56 612		62 238		65 556		69 594		197 387		100.0	%		7.1	%
of which:
University subsidies		21 455		22 942		24 131		25 340		72 414		36.7	%		5.7	%
University infrastructure		2 700		3 301		3 503		3 676		10 480		5.3	%		10.8	%
National Student Financial Aid Scheme1		9 222		9 974		11 324		11 885		33 182		16.8	%		8.8	%
Vocational and continuing education and training		8 096		8 516		8 986		9 439		26 941		13.6	%		5.2	%
Skills development levy institutions2		13 808		16 742		16 787		18 361		51 890		26.3	%		10.0	%
Total		56 612		62 238		65 556		69 594		197 387		100.0	%		7.1	%

1. Includes cash disbursements from the NSFAS capital account

2. Includes direct charges from the National Revenue Fund for the 21 Sector Education and Training Authorities and spending of the National Skills Fund

Source: National Treasury

Basic education

This function supports the MTSF outcome, quality basic education, which is a central priority of the NDP. The sector’s policy focus over the medium term will be to improve curriculum delivery, providing sufficient learner and teacher support material, and increasing the supply of qualified teachers. Accelerating the delivery and improvement of school infrastructure has also been prioritised.

Table 5.6 Basic education expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Basic education		189 454		203 468		216 036		227 816		647 320		100.0	%		6.3	%
Compensation of employees		144 731		156 490		165 849		175 777		498 116		77.0	%		6.7	%
of which:
Provincial compensation of employees		144 317		156 049		165 379		175 276		496 705		76.7	%		6.7	%
Goods and services		17 150		17 001		17 579		17 856		52 436		8.1	%		1.4	%
of which:
Workbooks		916		958		1 008		1 059		3 025		0.5	%		5.0	%
National school nutrition programme		5 462		5 704		6 006		6 306		18 016		2.8	%		4.9	%
Learner and teacher support materials (LTSM)1		3 655		3 446		3 551		3 973		10 970		1.7	%		2.8	%
Transfers and subsidies		28 637		32 339		33 665		35 486		101 490		15.7	%		7.4	%
of which:
Subsidies to schools2		12 137		13 539		14 217		14 897		42 653		6.6	%		7.1	%
Payments for capital assets		11 658		12 593		14 341		15 011		41 946		6.5	%		8.8	%
of which:
Education infrastructure grant		7 327		9 518		9 774		10 331		29 622		4.6	%		12.1	%
School infrastructure backlogs grant		2 541		2 309		2 430		2 620		7 359		1.1	%		1.0	%
Total		189 454		203 468		216 036		227 816		647 320		100.0	%		6.3	%

1. Includes the cost of the CAPS (Curriculum Assessment Policy Statements) rollout completed in 2014/15

2. Section 21 (including some provision for LTSM) Special and Independent schools

Source: National Treasury

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2015 BUDGET REVIEW

Compensation of employees averages 77 per cent of expenditure in provincial departments	Proposed allocations to basic education over the MTEF period reach nearly R650 billion and grow at an annual average of 6.3 per cent. These account for nearly 17 per cent of total functional expenditure. Compensation of employees in the provincial departments is the largest component of spending, averaging 77 per cent of the total. Provincial personnel planning will receive more attention to ensure that appropriate learner:teacher ratios are maintained.
	Government aims to increase the number of qualified teachers entering the public service from 8 227 in 2012/13 to 10 200 in 2017/18, compensating for teachers who are leaving the system. To this end, the department plans to award R3.1 billion in bursaries.
Every learner in Grades R to 9 to receive two workbooks per year in main subjects	An amount of R3 billion is allocated over the medium term to print and distribute 170 million workbooks to learners in Grades R to 9 at 23 562 public schools, with each learner receiving two books per year in numeracy, mathematics, literacy, language and life skills. Braille workbooks will be supplied to learners who require them.
	All schools are expected to meet minimum norms and standards for school infrastructure by 2016. The school infrastructure backlogs grant and the education infrastructure grant to provinces are allocated R7.4 billion and R29.6 billion respectively over the medium term.
More than 500 unsafe and inappropriately constructed schools to be replaced	Because spending on the backlogs grant has been slow since its inception in 2011/12, Cabinet reduced the grant’s planned medium-term expenditure by R413.6 million. The grant will be used to replace 510 unsafe and inappropriately constructed schools. It will also provide water to 1 120, sanitation to 741 and electricity to 916 schools. Cabinet also reduced the budget of the education infrastructure grant by R687.5 million. This grant continues to grow, but more slowly than before, at an average annual rate of 12.1 per cent over the medium term.
	Social protection
	This function supports MTSF outcome, a comprehensive, responsive and sustainable social protection system, a necessity in a country with high levels of poverty and unemployment. The spending focus is primarily on increasing access to social assistance, and reforming and standardising practices in the social welfare sector. Social protection expenditure will grow from R143.9 billion in 2014/15 to R176.5 billion by 2017/18, accounting for 12.8 per cent of functional spending during the MTEF period.
By the outer year, about 17.5 million people will be receiving social grants at a cost of R148.9 billion	The budget for social assistance has been increased by R7.1 billion since the 2014 Budget to cater for increases to beneficiary numbers (mostly in the child support grant) and the carry-through costs of increasing grant values. By 2017/18, it is expected that 17.5 million beneficiaries will be receiving social grants, the budget for which will be R148.9 billion. Overall, social grant expenditure remains at a stable 3 per cent of GDP.
	Improved efficiencies at the South African Social Security Agency mean that administrative costs will fall from 5.5 per cent of expenditure on social grants in 2013/14 to 5 per cent in 2017/18. This has facilitated a reduction of R354 million in the amount budgeted for the agency’s administrative fee.

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Table 5.7 Social protection expenditure, 2014/15 – 2017/18

	2014/15			2015/16			2016/17			2017/18			Total					Average
	Revised												2015/16 –		% of			annual MTEF
R million	estimate			Medium-term estimates									2017/18		Total			growth
Social protection expenditure		143 926			155 297			165 997			176 523			497 818		100.0	%		7.0	%
of which:
Social grants		120 702			130 093			139 556			148 934			418 584		84.1	%		7.3	%
of which:
Child support		43 428			47 842			51 174			54 117			153 134		30.8	%		7.6	%
Old-age		49 422			53 518			58 110			62 993			174 620		35.1	%		8.4	%
Disability		18 957			20 210			21 333			22 481			64 023		12.9	%		5.8	%
Foster care		5 851			5 535			5 671			5 807			17 012		3.4	%		-0.3	%
Care dependency		2 259			2 461			2 685			2 922			8 067		1.6	%		9.0	%
South African Social Security Agency		6 705			7 088			7 425			7 619			22 132		4.4	%		4.3	%
Provincial social development		15 319			16 714			17 545			18 428			52 687		10.6	%		6.4	%
Total		143 926			155 297			165 997			176 523			497 818		100.0	%		7.0	%
Social grants as percentage of GDP		3.1	%		3.1	%		3.1	%		3.0	%
Social grants beneficiary
Child support		11 677			11 925			12 131			12 280					70.4	%		1.7	%
Old-age		3 070			3 190			3 311			3 431					19.2	%		3.8	%
Disability		1 133			1 144			1 153			1 161					6.7	%		0.8	%
Foster care		478			478			478			478					2.8	%		0.0	%
Care dependency		138			144			150			156					0.9	%		4.2	%

Source: National Treasury

A nationwide service delivery initiative, Project Mikondzo, will be implemented in 737 wards in 2015/16. This aims to monitor service delivery at community level, facilitating the development of plans for improving performance. Government continues to roll out community nutrition and development centres. By 2017, 72 centres will feed 900 000 people, up from 600 000 in 2015/16. A programme office, to be established by 2015, will support faster rollout of early childhood development.
Social grant increases for 2015/16
The proposed social grant values for 2015/16 are presented in Table 5.8. There is an unusually high degree of uncertainty about grant beneficiary numbers in the coming year associated with a recent re-registration of grantees, and some uncertainty about the impact of the oil price on short-term inflation. Given these considerations, government proposes moderate increases in social grants in line with inflation projections for the first half of the fiscal year (4.1 per cent) and will review these values during the October 2015 MTBPS.	Value of social grants to be reviewed in October 2015

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Table 5.8 Social grants values,¹ 2014/15 – 2015/16

Rand	2014/15		2015/16		Percentage increase
State old age		1 350		1 410		4.4	%
State old age, over 75s		1 370		1 430		4.4	%
War veterans		1 370		1 430		4.4	%
Disability		1 350		1 410		4.4	%
Foster care		830		860		3.6	%
Care dependency		1 350		1 410		4.4	%
Child support		315		330		4.8	%

1.      Average monthly grant value

Source: National Treasury

Health

This function group supports MTSF outcome, a long and healthy life for all South Africans. Considerable progress has been made in this area in recent years, with declining infant mortality rates and rising life expectancy at birth.

Table 5.9 Health expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average annual
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			MTEF growth
Health expenditure		144 558		157 294		167 485		177 525		502 303		100.0	%		7.1	%
of which:
Central hospital services		24 410		25 852		27 057		28 356		81 265		16.2	%		5.1	%
Provincial hospital services		28 396		30 189		32 056		33 711		95 955		19.1	%		5.9	%
District health services		62 022		66 747		72 665		77 696		217 108		43.2	%		7.8	%
Emergency medical services		5 579		6 208		6 513		6 845		19 566		3.9	%		7.1	%
Facilities management and		7 408		8 123		8 734		9 361		26 217		5.2	%		8.1	%
Health science and training		4 417		4 499		4 736		4 953		14 188		2.8	%		3.9	%
National Health Laboratory Service		4 834		5 466		5 742		6 047		17 256		3.4	%		7.8	%
National Department of Health 1		2 269		3 200		3 113		3 370		9 683		1.9	%		14.1	%
Total		144 558		157 294		167 485		177 525		502 303		100.0	%		7.1	%
of which:
Compensation of employees		92 962		99 312		105 721		111 681		316 714		63.1	%		6.3	%
Goods and services		38 939		43 207		45 356		47 902		136 464		27.2	%		7.1	%
Transfers and subsidies		5 170		4 716		4 904		5 140		14 760		2.9	%		-0.2	%
Buildings and other fixed structures		5 091		6 264		7 306		7 791		21 361		4.3	%		15.2	%
Machinery and equipment		2 360		3 784		4 187		4 997		12 969		2.6	%		28.4	%

1. Excludes grants and transfers reflected as expenditure in appropriate sub-functional areas

Source: National Treasury

The consolidated health budget is projected to grow by 7.1 per cent over the MTEF period, reaching nearly R178 billion by 2017/18. This is despite reductions in projected budgets for 2015/16 and 2016/17 totalling about R2.4 billion. These have been targeted at slow-spending and under-performing components of the infrastructure budget. Of the total budget reductions, R1.4 billion has come from direct conditional grants to provincial departments of health, R239 million has come from the goods and services budget of the national department and R767 million has come from the national health grant: NHI component.

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In the 2014 Budget, government allocated R200 million per year for the human papilloma virus vaccination programme. Targets in this programme, which aims to reduce the incidence of cervical cancer, have been exceeded: 82 per cent of eligible Grade 4 schoolgirls were vaccinated against a first-year target of 80 per cent.	Human papilloma virus vaccination programme has met targets ahead of plan
A sum of R1.2 billion has been added to the HIV and AIDS conditional grant in 2017/18 to expand access to the antiretroviral medication programme. Efforts to prevent mother-to-child transmission of HIV continue to yield success, with the transmission rate having declined to only 2 per cent in 2013/14 from 20 per cent in 2003.
In 2015/16, the Office of Health Standards Compliance will be listed as a public entity responsible for inspecting and accrediting all public and private health facilities. An amount of R85.2 million has been reprioritised from the national health grant: health facility revitalisation component, to strengthen the capacity of the office, which conducted inspections at 583 public establishments, 15 per cent of the total number, in 2013/14.
In line with the National Health Amendment Act (2013), government is shifting R380.4 million from provinces to the national Department of Health to centralise management of disease control at South African ports.
A new funding model for National Health Laboratory Service will be instituted in 2015/16. The National Institute of Communicable Diseases, the National Institute for Occupational Health, and the teaching and research functions will henceforth be funded directly through a transfer from the national department. Currently they are cross-subsidised by the laboratory test fees paid by provinces to the National Health Laboratory Service. Streamlining of operations will reduce forensic testing backlogs.
National health insurance (NHI) programme spending has been lower than anticipated over the past two years, partly due to difficulties in contracting general practitioners. Over the three-year spending period, the focus of the indirect national health grant: NHI component will expand to include piloting the contracting of allied and other health care professionals.	Focus of NHI grant will be to pilot contracting of health care professionals
Defence, public order and safety
This function group supports MTSF outcomes, all people in South Africa are and feel safe; and create a better South Africa, and contribute to a better Africa and a better world. The main focus over the MTEF period is to improve the effectiveness of the criminal justice system, and to reduce corruption in the public and private sectors. To support these objectives, the budget, which accounts for 14 per cent of consolidated spending, will grow by an annual average of 5.7 per cent, reaching R192.7 billion in 2017/18.
To cover a funding shortfall created by higher-than-anticipated remuneration costs, the Departments of Defence and Police have reprioritised R2.4 billion and R1.1 billion respectively from their goods and services budgets. This brings the total compensation budget for the function to R106.1 billion in 2014/15, a figure that is projected to reach R128.4 billion in 2017/18, accounting for 66.7 per cent of the budget.	Defence and Police have reprioritised goods and services budgets to cover higher-than-expected remuneration costs

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2015 BUDGET REVIEW

Table 5.10 Defence, public order and safety expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Defence and state security		47 445		49 364		52 303		55 450		157 117		28.8	%		5.3	%
Police services		78 237		82 724		87 305		93 235		263 264		48.3	%		6.0	%
Law courts and prisons		37 336		39 063		41 639		44 034		124 737		22.9	%		5.7	%
Total		163 018		171 150		181 248		192 719		545 117		100.0	%		5.7	%
of which:
Compensation of employees		106 118		113 822		121 143		128 350		363 315		66.6	%		6.5	%
Goods and services		38 752		38 655		40 531		42 806		121 992		22.4	%		3.4	%
Transfers and subsidies		12 143		12 369		13 016		13 852		39 237		7.2	%		4.5	%
Buildings and other fixed structures		2 639		2 912		3 123		3 259		9 294		1.7	%		7.3	%
Machinery and equipment		3 282		3 337		3 390		4 415		11 142		2.0	%		10.4	%

Source: National Treasury

	The Department of Defence plans to spend R2.8 billion on safeguarding South Africa’s borders and R4.5 billion on regional security initiatives over the medium term.
Reprioritised funds support Legal Aid South Africa, National Prosecuting Authority and Public Protector	To improve the effectiveness of the criminal justice system, a total of R492 million over the MTEF period has been reprioritised to several institutions. Legal Aid South Africa will receive R126.8 million to increase the number of legal practitioners by 167, helping to clear a backlog in the courts. The National Prosecuting Authority will receive R81 million to appoint 41 additional prosecutors.
	Government will also strengthen institutions involved in fighting corruption. Over the medium term, R60 million has been reprioritised to the Public Protector of South Africa to increase its investigative capacity and to retain 70 trainee investigators. An additional R60 million is allocated to the Financial Intelligence Centre to employ additional permanent staff with investigative and analytical skills.
	The Independent Police Investigative Directorate has reprioritised R93.9 million over the medium term to establish a national specialised investigative team that will focus on priority investigations.
	General public services
	This function supports two MTSF outcomes – create a better South Africa, a better Africa and a better world, and an efficient, effective and development-oriented public service.
Projected expenditure on foreign missions and property management reduced over medium term	The MTEF allocation to this function totals R201 billion, and grows at an annual average of 2.6 per cent, reaching nearly R70 billion in 2017/18. Over half the amount is allocated to compensation of employees, and 31 per cent to goods and services. Modest growth is partly a result of R1 billion in medium-term budget reductions effected to this function. These reflect reductions in projected spending on foreign missions and property management. Government expects to save a further R700 million in the 2016 MTEF period by reviewing the legislative framework guiding the work of the Department of International Relations and Cooperation.

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Table 5.11 General public services expenditure, 2014/15 – 2017/18

	2014/15		2015/16		2016/17		2017/18		Total					Average
R million	Revised estimate		Medium-term estimates						2015/16 – 2017/18		% of Total			annual MTEF growth
Executive and legislative organs		12 375		12 335		12 827		13 507		38 668		19.2	%		3.0	%
External affairs and foreign aid		7 513		7 078		7 528		7 905		22 511		11.2	%		1.7	%
General public administration and fiscal affairs		37 077		38 622		38 912		41 132		118 667		59.1	%		3.5	%
Home affairs		7 778		6 349		7 483		7 281		21 113		10.5	%		-2.2	%
Total		64 743		64 385		66 750		69 824		200 959		100.0	%		2.6	%
of which:
Compensation of employees		29 236		31 909		33 993		36 012		101 914		50.7	%		7.2	%
Goods and services		19 802		18 406		20 982		21 228		60 615		30.2	%		2.3	%
Transfers and subsidies		7 235		6 852		7 271		7 647		21 770		10.8	%		1.9	%
Buildings and other fixed structures		2 284		2 061		2 211		2 460		6 732		3.4	%		2.5	%
Machinery and equipment		1 851		1 195		1 109		1 265		3 570		1.8	%		-11.9	%

Source: National Treasury

An amount of R509 million has been set aside for Statistics South Africa to conduct a large-scale community survey in 2016 that will support improved planning, while R215 million is set aside for the Public Service Sector Education and Training Authority to upgrade public-sector skills.

Over the medium term, the Department of Home Affairs will spend an additional R148 million to hire 111 immigration inspectors, increasing the number to 762 by 2017/18. The Property Management Trading Entity, operating separately from the Department of Public Works, will be responsible for acquiring, managing and disposing of immovable assets owned by the state. It will also manage on a cost-recovery basis the leases of privately owned properties accommodating national departments.

Property Management Trading Entity to acquire, manage and dispose of immovable assets

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6

Provincial and municipal expenditure

In brief

• Over the next three years, after providing for debt-service costs and the contingency reserve, 47.9 per cent of nationally raised funds are allocated to national government, 43.1 per cent to provincial government and 9 per cent to local government.

• Allocations to provinces and municipalities will grow more slowly than in the past.

• Provinces have to focus on finding efficiencies and cost savings in goods and services, personnel costs, and allocations to provincial entities.

• Funding for free basic services through the local government equitable share has been protected.

• A larger proportion of funding for infrastructure in cities should come from their own resources and expanded partnerships with the private sector.

¢    Division of revenue

Fiscal constraints mean that transfers to provinces and municipalities will grow more slowly in the period ahead than they have in the past. Accordingly, provincial and local governments must renew their focus on core service delivery functions and reduce costs without adversely affecting basic services. The National Treasury is working with provinces and municipalities to improve the performance of conditional grants. Similar work is being done to help cities mobilise their own revenues and borrowing to finance the infrastructure investments needed to accelerate economic growth and build a more inclusive economy.

Provinces and municipalities must reduce costs while improving delivery of basic services

The Constitution requires a division of nationally raised resources between national, provincial and local government. The division takes into account the powers and functions assigned to each level of government. Provincial governments are responsible for implementing national policies for education, health, social development, agriculture, roads and human

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	settlements. They are also responsible for their own governance and administration, including being answerable to the legislature and coordinating service delivery with local government.
	Local governments are responsible for providing basic services such as water and sanitation, electricity reticulation, refuse removal, storm water management, municipal transport and roads, community services (such as parks, sport and recreation) and street lighting. They also provide free or subsidised basic services to poor households.
43.1 per cent of funds go to provincial government and 9 per cent to local government	Table 6.1 summarises the division of revenue for the 2015 Budget. These allocations are made through the Division of Revenue Bill, which is tabled with the national budget. The share of revenue allocated to each sphere remains stable over the period ahead. Over the next three years, of the funds available after providing for debt costs and the contingency reserve, 47.9 per cent are allocated to national government, 43.1 per cent to provincial government and 9 per cent to local government.

Table 6.1 Division of nationally raised revenue, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
R million	Outcome									Revised estimate			Medium-term estimates
Division of available funds
National departments		389 376			420 015			453 171			491 368			522 992			553 778			586 087
of which:
Indirect transfers to provinces		700			2 315			2 693			4 116			3 458			3 596			3 967
Indirect transfers to local government		2 660			4 548			5 523			8 536			10 395			10 634			10 916
Provinces		355 824			380 929			410 572			439 661			468 159			496 259			526 382
Equitable share		289 628			310 741			336 495			359 922			382 673			405 265			428 893
Conditional grants		66 197			70 188			74 077			79 739			85 485			90 994			97 490
Local government		68 251			76 430			82 836			89 076			99 753			103 936			110 017
Equitable share		33 173			37 139			38 964			43 290			50 208			52 869			55 512
Conditional grants		26 505			30 251			34 258			35 595			38 887			39 844			42 720
General fuel levy sharing with metropolitan municipalities		8 573			9 040			9 613			10 190			10 659			11 224			11 785
Non-interest allocations		813 451			877 374			946 579			1 020 105			1 090 904			1 153 973			1 222 486
Percentage increase		10.0	%		7.9	%		7.9	%		7.8	%		6.9	%		5.8	%		5.9	%
Debt-service costs		76 460			88 121			101 185			115 016			126 440			140 971			153 376
Contingency reserve		—			—			—			—			5 000			15 000			45 000
Main budget expenditure		889 911			965 496			1 047 764			1 135 122			1 222 345			1 309 944			1 420 862
Percentage increase		11.7	%		8.5	%		8.5	%		8.3	%		7.7	%		7.2	%		8.5	%
Percentage shares
National departments		47.9	%		47.9	%		47.9	%		48.2	%		47.9	%		48.0	%		47.9	%
Provinces		43.7	%		43.4	%		43.4	%		43.1	%		42.9	%		43.0	%		43.1	%
Local government		8.4	%		8.7	%		8.8	%		8.7	%		9.1	%		9.0	%		9.0	%

Source: National Treasury

Transfers to provinces and local government are made through the equitable share and conditional grants. The equitable shares are determined by formulas that take into account demographic and developmental factors. Conditional grants are designed to achieve specific objectives, and provinces and municipalities must meet certain criteria to receive grants and fulfil conditions when spending them.

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Spending has improved across national, provincial and local government. In 2013/14, national expenditure amounted to R582.6 billion (excluding direct charges) out of a total adjusted appropriation of R589 billion. This represents underspending of 1.1 per cent. Provincial government underspent its adjusted budget of R430.9 billion for 2013/14 by R6.2 billion (1.4 per cent), compared with underspending of R7.8 billion (1.9 per cent) in the previous year. Municipalities spent R19.9 billion (90.6 per cent) of their infrastructure grants in the 2013/14 municipal financial year, up from 82.2 per cent in 2012/13.	Spending patterns show improvement across national, provincial and local government
The Explanatory Memorandum to the Division of Revenue sets out the provincial and municipal allocations, details the equitable share formula, and explains how the division takes into account the recommendations of the Financial and Fiscal Commission. The memorandum is available as Annexure W1 of the Budget Review on the National Treasury website (www.treasury.gov.za).
¢    Funding provinces
Transfers to provinces are made up of the provincial equitable share and conditional grants. The provincial equitable share forms the largest component of transfers to provinces, accounting for 81.8 per cent of the total medium-term allocation. Compared with the 2014 Budget projections, aggregate national spending has been reduced by a total of R25 billion over the next two years. As a result, provincial transfers will grow at a slower annual average of 6.2 per cent between 2015/16 and 2017/18 compared with 7.3 per cent between 2011/12 and 2014/15.	Total spending reduced by R25 billion over next two years

Table 6.2 Provincial equitable share, 2015/16 – 2017/18

R million	2015/16		2016/17		2017/18
Eastern Cape		54 312		57 368		60 069
Free State		21 757		22 775		23 979
Gauteng		73 413		78 237		83 602
KwaZulu-Natal		82 254		86 885		91 430
Limpopo		45 377		48 121		50 502
Mpumalanga		31 030		32 971		35 113
Northern Cape		10 138		10 730		11 397
North West		26 151		27 676		29 493
Western Cape		38 242		40 501		43 308
Total		382 673		405 265		428 893

Source: National Treasury

The provincial equitable share will grow at an average annual rate of 6 per cent over the medium-term expenditure framework (MTEF) period. The rate of growth varies across provinces, however, because the equitable share formula factors in differences in demand for services. Gauteng, for example, which has experienced significant in-migration, has the fastest-growing equitable share, increasing by an average of 7.1 per cent each year over the MTEF period. The slowest-growing equitable share is that of Free State, which grows at an average annual rate of 5.1 per cent because its population is growing more slowly. Growth rate of equitable share depends on population growth and demand for services

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Over half of revenue generated by provinces is from motor vehicle licences	Provinces also generate their own revenue, which in 2014/15 made up 3 per cent of provincial budgets and grew at an average annual rate of 12 per cent between 2010/11 and 2013/14. Over half of the revenue generated by provinces is from motor vehicle licences.
	Over the past four years, growth in government spending has slowed. This trend has affected the composition of provincial budgets. Cost-saving measures put in place resulted in goods and services declining from 19.2 per cent of provincial budgets in 2010/11 to 18.7 per cent in 2013/14, and unauthorised expenditure decreasing by 65 per cent between 2009/10 and 2013/14. Additional ways to reduce costs will include, for example, requiring textbooks to be returned at the end of the school year so that only unusable textbooks are replaced in the following year.
Above-inflation wage increases mitigated by reductions in provincial headcount	Between 2010/11 and 2013/14, the share of provincial budgets taken up by compensation of employees increased from 58.4 per cent to 59.9 per cent. This was because wages in the public sector grew faster than inflation. The effect of above-inflation wage increases was particularly pronounced in health and education, which require a large number of employees to provide services. Provinces have managed this cost escalation by reducing, to the extent that it does not inhibit service delivery, the number of public servants employed. The total number of staff employed by provinces peaked at 920 826 in 2012 and declined to 915 569 in 2014.
In 1999 there were 101 provincial entities; today there are 52	Provincial entities, which deliver a range of services such as roads and economic development on behalf of provinces, were allocated a total of R8.4 billion in 2014/15. The number of entities has been reduced from 101 in 1999 to 52 at present. This has in turn reduced administration costs as functions were shifted to established departments and entities, or were consolidated to improve efficiency. Further cost-saving measures being explored include introducing a new framework to govern remuneration within these agencies.
	These and other trends in provincial budgets are discussed in greater detail in the Provincial Budgets and Expenditure Review, available on the National Treasury’s website (www.treasury.gov.za).
Grants for education infrastructure, HIV/AIDS and libraries grow rapidly over medium term	Table 6.3 summarises conditional grants to provinces. Over the medium term these grants, which are administered and transferred by national departments to their provincial counterparts, total R274 billion. Taking into account the reductions to the baseline announced in the 2014 MTBPS, direct conditional grants to provinces still grow at a robust annual average rate of 6.9 per cent in the period ahead. Growth in some priority grants such as the education infrastructure grant, comprehensive HIV and Aids grant and community library services grant exceeds 12 per cent per year.
	Changes to conditional grants in the 2015 Budget include the creation of a maths, science and technology grant to replace the Dinaledi schools grant and the technical secondary schools recapitalisation grant. The new grant will allow the Department of Basic Education to provide a more comprehensive programme of support to schools to improve teaching and learning outcomes in maths, science and technology.
	The 2015 Budget also ring-fences funds within three conditional grants to provide for repairs to damage caused by the earthquake centred in the City of Matlosana in the North West in August 2014.

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Provinces have continued to spend a greater proportion of their infrastructure budgets each year. In 2013/14, provincial government departments spent 92.9 per cent of their infrastructure budgets, up from 84.7 per cent in 2010/11. Provinces spent 92.9 per cent of their infrastructure budgets in 2013/14

Table 6.3 Conditional grants to provinces, 2014/15 – 2017/18

R million	2014/15		2015/16		2016/17		2017/18		MTEF total
Direct conditional grants
Comprehensive agricultural support programme		1 861		1 651		1 702		1 809		5 162
Ilima/Letsema projects		461		471		491		522		1 484
Community library services		1 016		1 311		1 367		1 453		4 131
Education infrastructure		7 327		9 518		9 774		10 331		29 622
HIV and AIDS (life skills education)		212		221		231		245		697
Maths, science and technology		319		347		362		385		1 095
National school nutrition programme		5 462		5 704		6 006		6 306		18 016
Provincial disaster		197		103		112		123		338
Comprehensive HIV and AIDS		12 102		13 737		15 467		17 440		46 644
Health facility revitalisation		5 502		5 276		5 473		5 817		16 565
Health professions training and development		2 322		2 375		2 477		2 632		7 483
National tertiary services		10 168		10 398		10 847		11 526		32 771
National health insurance		70		72		75		80		228
Human settlements development		17 084		18 203		19 884		21 060		59 147
Expanded public works programme integrated grant for provinces		349		351		402		424		1 176
Social sector expanded public works programme incentive for provinces		258		241		360		386		986
Mass participation and sport development		526		537		561		596		1 694
Provincial roads maintenance		9 361		9 851		10 138		10 808		30 797
Public transport operations		4 833		4 939		5 150		5 473		15 563
Other direct grants		310		181		117		74		372
Total direct conditional grants		79 739		85 485		90 994		97 490		273 970
Indirect transfers		4 116		3 458		3 596		3 967		11 021
School infrastructure backlogs		2 541		2 047		2 375		2 620		7 042
National health		1 575		1 411		1 221		1 347		3 979

Source: National Treasury

Changes in transfers to provinces due to function and funding shifts

The provincial equitable share is calculated using a formula that estimates the relative demand for services across provinces. The formula, which is explained in detail in Annexure W1 on the National Treasury website, has six weighted components. The data used are updated annually to ensure that changes in demographics and the use of public services are reflected in allocations. Conditional grant allocations are determined by national departments based on the needs of each sector.

Funding for provinces is based on the functions they perform. Changes in responsibility for functions are reflected in allocations. In 2015/16, the port health and further education and training (FET) colleges functions are moved from provinces to the national Departments of Health and Higher Education and Training respectively. As a result, R7.4 billion of the provincial equitable share and the full value of the FET colleges grant are reallocated to the relevant national departments. All those affected were fully consulted on these matters and, with advice from the Financial and Fiscal Commission, agreed with the amounts moved.

Responsibility for the Moloto Road is expected to be transferred to the South African National Roads Agency Limited (SANRAL) in 2015 to form part of its non-toll portfolio of roads. SANRAL will begin upgrading and improving safety on this notoriously dangerous road. As a result, over the MTEF period, R149 million has been reprioritised from the provincial roads maintenance grant to SANRAL.

A change in funding arrangements for the National Health Laboratory Services (NHLS) will also affect transfers to provinces. The NHLS functions for training and research, previously funded through fees charged to provinces, will be funded directly by the national Department of Health from 2015/16. To ensure this change does not affect provincial budgets, the fees charged for NHLS services will be reduced over the medium term to offset R1.7 billion taken out of provincial transfers. An audit will be conducted after the first year to ensure that the change is cost neutral to provinces.

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	To spur further improvements in performance, national government has introduced an incentive-based approach to allocating health and education infrastructure grants. The approach provides additional funds to provinces that exceed minimum standards for planning. As the planning process takes two years, 2015/16 will be the first time incentive funds are awarded, though provinces began submitting plans for these projects in 2013/14.
	¢    Funding local government
Poor and rural municipalities receive higher per capita transfers from national government	Local government raises revenue mainly from user charges, rates and taxes. Only a quarter of its overall spending is financed from the National Revenue Fund through the division of revenue. However, poor and rural municipalities rely heavily on national transfers because they have much lower tax bases than large cities. Consequently, government directs higher per capita transfers to poor and rural municipalities, while working with urban municipalities to leverage their own resources to increase investment in infrastructure.
	Over the next three years, slower growth in conditional grants and above-inflation increases in bulk water and electricity costs mean that municipalities will have to reduce spending on non-core items and renew their focus on delivering basic services. To this end, the Minister of Cooperative Governance and Traditional Affairs has announced Back to Basics, an approach to improve the performance of local government. The approach guides municipalities in prioritising accountable and efficient service delivery to residents.
	Transfers to local government
	Transfers to local government make up 9 per cent of the total division of revenue over the medium term. The transfers have two components: the local government equitable share and local government conditional grants.
No reductions made to baseline of local government equitable share	The 2015 Budget maintains the baseline allocation for the local government equitable share. Improving access to basic services is a central policy priority, and the local government equitable share formula is structured to ensure that the cost of providing free basic services to indigent households is updated to account for above-inflation increases to electricity and bulk water charges. Municipalities should set tariffs at a level that will ensure that they can provide services to better-off households without incurring deficits.
Allocations to slow-spending and non-infrastructure grants have been reduced	The baseline allocation for local government conditional grants, however, has been reduced in the 2015 Budget as part of the fiscal adjustment announced in the 2014 Medium Term Budget Policy Statement. The reductions in 2015/16 range between 0.9 per cent and 5.5 per cent of the allocation for each grant, with larger reductions on slow-spending and non-infrastructure grants. To maintain planned outputs, grant administrators and municipalities need to spend funds efficiently.
	Despite the overall reductions, the allocations for priority grants such as the integrated national electrification programme grant and the municipal water infrastructure grant grow significantly. Over the MTEF period, the former grows at an average annual rate of 14.9 per cent and the latter at an average annual rate of 52.2 per cent, including both direct and indirect grant allocations.

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A new grant has also been introduced to subsidise the costs of municipalities that will be merged before the 2016 local government elections. This grant is allocated R139 million over the period ahead for municipalities that are being combined in KwaZulu-Natal and Gauteng. The Municipal Demarcation Board is considering further boundary changes proposed by the Minister of Cooperative Governance and Traditional Affairs. The effect of these potential changes will be considered as part of the 2016 budget process.
Review of local government infrastructure grants
Together with the Department of Cooperative Governance, Department of Planning, Monitoring and Evaluation, the South African Local Government Association, and the Financial and Fiscal Commission, the National Treasury is conducting a review of the local government infrastructure grant system. The first phase of the review, completed in 2014, identified two necessary reforms that will be made in 2015/16:	Number of conditional grants will be reduced to ease reporting burden
•        The rules in the municipal infrastructure grant will be amended to allow funds to be used to refurbish and replace infrastructure, but only if municipalities demonstrate that assets have been maintained on a regular basis. Maintenance must be budgeted for as part of the normal business of municipalities. While the grant continues to provide for new infrastructure, there is also a need to make major improvements on systems and equipment nearing the end of their lifespan.
•        The number of conditional grants will be reduced to ease the burden of grant reporting. Two public transport grants will merge in 2015/16 into a single public transport network grant. The number of water and sanitation grants is also likely to be reduced from 2016/17.
The next phase of the review, in 2015, will take the principles and broad outline of the grant system already agreed to in the first phase and use these to implement detailed changes to individual grants. It is likely that there will be additional consolidation of infrastructure grants to municipalities, and that these grants will be restructured to respond to the challenges facing different types of municipalities – from poor rural areas to major cities.
Municipal standard chart of accounts
Implementing a standard classification of municipal expenditure will improve transparency in local government accounting and enable greater comparability between budgets, enhancing the ability of national and provincial treasuries to monitor municipal spending. The National Treasury is currently piloting the standard chart of accounts in 18 areas and plans to roll out the chart to all municipalities in 2016/17.	Standard chart of accounts to roll out to all municipalities in 2016/17

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Table 6.4 Transfers to local government, 2011/12 – 2017/18

	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
R million	Outcome						Revised estimate		Medium-term estimates
Equitable share and related		33 173		37 139		38 964		43 290		50 208		52 869		55 512
General fuel levy sharing with metros		8 573		9 040		9 613		10 190		10 659		11 224		11 785
Direct conditional grants		26 505		30 251		34 258		35 595		38 887		39 844		42 720
Municipal infrastructure		11 443		13 879		14 224		14 429		14 956		15 548		16 435
Municipal water infrastructure		—		—		602		536		1 804		1 186		1 773
Urban settlements development		6 267		7 392		9 077		10 285		10 554		11 076		11 708
Integrated national electrification programme		1 097		1 151		1 635		1 105		1 980		2 036		2 197
Public transport network infrastructure		4 612		4 884		5 550		5 871		5 953		6 163		6 610
Neighbourhood development partnership		738		578		586		591		607		624		663
Integrated city development		—		—		40		255		251		267		292
Water services operating subsidy		542		562		421		450		453		466		502
Expanded public works programme integrated grant for municipalities		364		662		611		595		588		664		716
Municipal demarcation transition		—		—		—		—		39		50		50
Local government financial management		385		403		425		449		452		465		502
Other direct grants		1 057		739		1 088		1 031		1 249		1 300		1 270
Total direct transfers		68 251		76 430		82 836		89 076		99 753		103 936		110 017
Indirect transfers		2 660		4 548		5 523		8 536		10 395		10 634		10 916
Integrated national electrification programme		1 165		1 879		2 141		2 948		3 613		3 776		3 946
Regional bulk infrastructure		1 260		2 523		3 261		4 005		4 922		5 324		4 855
Municipal water infrastructure		—		—		—		559		792		1 512		2 087
Other indirect grants		234		145		120		1 023		1 069		22		28

Source: National Treasury

	Shaping urban development to support growth in cities
A greater share of funding for infrastructure to come from resources generated by cities themselves	The 2015 Budget begins a process of realigning public expenditure to support spatial restructuring in urban areas. South Africa’s cities continue to reflect the spatial legacy of apartheid, which impedes economic growth.
	Presently, 53.7 per cent of capital financing for cities comes from national government, which has over the past decade rapidly increased its transfers of infrastructure grants. In some cities these grants have displaced locally generated sources of infrastructure funding. Given fiscal constraints, the 2015 Budget does not significantly increase infrastructure grants to cities over the medium term.
	In these circumstances, a greater share of the capital investment needed to transform cities needs to come from revenues generated by metropolitan municipalities themselves, in partnership with the private sector. Over the period ahead, government will use the fiscal framework and other tools at its disposal to encourage cities to use more of their own resources to expand and accelerate their investment programmes, drawing in private capital to complement these efforts.

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Supporting cities to accelerate growth and integrated development

Working with the Cities Support Programme, metropolitan municipalities have identified and sequenced investments to build more integrated cities. Projects being prepared or implemented include actions to release strategically located land; provide, rehabilitate or upgrade bulk infrastructure; and develop affordable housing and public transport that will support the development of mixed-use precincts. Projects under way include:

• A “corridor of freedom” along Louis Botha Avenue in Johannesburg, where investments of R531 million will expand the Rea Vaya bus rapid transit system, develop the Watt Street transport interchange and pedestrian infrastructure, build inclusive social housing, expand and refurbish bulk infrastructure networks, improve public spaces in the Patterson Park and Balfour Park precincts, and refurbish the Orchards and Thoko Ngoma clinics.

• The Metro South East Corridor in Cape Town, where the MyCiti bus service complements the commuter rail modernisation programme. Integrated land, infrastructure and precinct development projects in Athlone, Langa, Philippi, Khayelitsha and Mitchells Plain are being prepared. These projects are being supported by upgrades to sewerage and electricity infrastructure, along with community facilities such as libraries. Alongside extensive investments to upgrade informal settlements are plans to develop 6 000 high-density social housing units in Manenberg, Hanover Park, Heideveld, Marble Flats and Langa.

• Cornubia, a mixed-income commercial and residential development in eThekwini, is under construction. A total of 28 500 housing units, 18 clusters of community facilities and 2.3 million square metres of commercial floor space are planned. The city has also developed a densification plan to complement commuter rail modernisation between Umlazi and Bridge City. Private-sector contributions will amount to R15.4 billion of the total development cost of R25.8 billion. To date, 2 668 subsidised houses have been completed and 80 hectares of serviced industrial and commercial land successfully launched, with two transport interchanges under construction. It is estimated that 387 000 construction jobs will be created and 43 000 permanent jobs sustained over 15-20 years, while the city will benefit from R240 million in additional property tax contributions annually.

The National Treasury will introduce a new fiscal package to help large cities mobilise the resources necessary to implement strategic investment projects. All participating metros will be expected to make measurable commitments to good governance, and effective revenue and expenditure management. The National Treasury will continue to work closely with these municipalities to address specific obstacles to project implementation as they arise. The new package includes:		Flexible grant system and performance-based infrastructure allocations
•	Modifying the infrastructure grant system to support the development of mixed-use, mixed-income precincts. Reforms will include reducing the number of grants, introducing more flexible grant conditions and increasing the certainty of transfers over a longer time period. As a result, cities will be able to vary their long-term infrastructure-funding and borrowing strategies to scale up investment levels through a mix of grants, own revenues and private resources. These modifications will be coupled with performance-based allocations to reward cities that demonstrate progressive changes in their urban form, improve access to basic services, reduce barriers to social and economic opportunity, and improve mobility for urban residents.
•	Refocusing the Neighbourhood Development Partnership Programme to support the development of economic hubs in large urban townships.
•	Reforming the system of development charges to improve fairness and transparency, and reduce delays in infrastructure provision for private land developments.
•	Expanding opportunities for private investment in municipal infrastructure through the Development Bank of Southern Africa increasing its origination of longer-term loans, packaging pooled finance instruments and, where appropriate, supporting the introduction of new lending instruments such as revenue bonds.

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	•	Reviewing the sustainability of existing own-revenue sources for metropolitan municipalities, particularly in light of their expanding responsibilities in public transport and human settlements.
Infrastructure delivery management system is being expanded	The infrastructure delivery management system used by national and provincial governments is also currently being expanded to cities to help them manage the implementation of these projects.

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Financing government’s borrowing requirement

In brief

• Government’s net borrowing requirement is expected to be R173.1 billion in 2015/16, decreasing to R155.5 billion in 2017/18.

• South Africa’s deep and liquid domestic capital markets, and its access to international borrowing, continue to provide resources for government’s financing needs.

• During 2015, three new bonds will be issued. These instruments will broaden funding options, help to smooth the maturity profile of government debt and reduce short-term refinancing risk.

• Net debt, provisions and contingent liabilities are expected to amount to 58.1 per cent of GDP in 2015/16, decreasing to 57.3 per cent in 2017/18.

¢    Overview
Over the past five years, government has expanded its borrowing programme in response to difficult economic circumstances. Revenue collection has continued to underperform due to weak economic growth, leading to increased debt accumulation to support the fiscal stance. As a percentage of GDP, net debt has grown from 21.8 per cent at the start of the financial crisis in 2008/09 to 40.8 per cent in 2014/15.
The 2014 Medium Term Budget Policy Statement initiated several adjustments to fiscal policy. These measures are intended, in part, to arrest the pace of debt growth. Unsustainable debt levels would threaten South Africa’s investment-grade credit rating and jeopardise the country’s ability to finance the budget deficit without a substantial increase in debt-service costs. Moreover, a failure to stabilise debt would compromise government’s ability to respond to future economic shocks.	Fiscal adjustments aim to ensure that debt remains at sustainable levels

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Net debt to stabilise at 43.7 per cent of GDP in 2017/18	Government’s borrowing plans over the next three years reflect a prudent approach to accumulating and managing debt. The medium-term fiscal framework will result in net debt stabilising at 43.7 per cent of GDP in 2017/18.
	The net borrowing requirement of R180.9 billion in 2014/15 is R1.1 billion higher than projected in the 2014 Budget, and is expected to decrease to R173.1 billion in 2015/16. Domestic capital markets will remain the main source of financing. To continue smoothing the maturity profile of government debt – ensuring that repayments of the principal amounts are spread out over time – three new bonds will be issued. Two of these instruments will be set at fixed rates and one will be linked to inflation. Government intends to gradually reduce the weight of inflation-linked bonds in its portfolio in line with strategic benchmarks underpinning its borrowing programme (see Table 7.8). These benchmarks ensure that the debt portfolio is maintained within manageable parameters.
	Borrowing in global capital markets in 2015/16 will finance part of government’s foreign-currency commitments, with any remaining shortfall financed from surplus cash. Net debt, provisions and contingent liabilities will decline to 57.3 per cent of GDP in 2017/18. Details appear in Table 11 of the statistical tables at the back of the Budget Review.
	¢    South African debt markets
Credible fiscal and monetary policy support decline in bond yields	Since April 2014, government bond yields have decreased by an average of 138 basis points, despite expectations of higher yields globally on conclusion of the US quantitative easing programme. The decline in yields and lower borrowing rates in the rest of the economy can be attributed to credible management of fiscal and monetary policy, supported by lower oil prices and lower inflation expectations. Given the generally favourable movement in yields over the past year, local-currency government bond auctions were well supported by both domestic and international investors.
	Figure 7.1 Fixed-rate bond yield curve movement

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Short-term interest rates are largely anchored by the Reserve Bank’s repurchase (repo) rate – the rate at which private banks borrow from the central bank. The Reserve Bank hiked the repo rate in July 2014 from 5.5 per cent to 5.75 per cent on concerns about higher inflation. Since then the Bank has kept the repo rate unchanged, anchoring short-term rates.

Growing participation by international investors in the local government bond market has helped to reduce domestic interest rates. Despite anxiety over emerging-market risks, global investors continue to see value in South Africa. Non-residents purchased a net R47 billion of local currency government bonds during 2014, increasing their total holdings to R448.9 billion. As a share of total government domestic bonds, non-residents’ holdings declined marginally from 36.4 per cent in December 2013 to 36 per cent in December 2014, owing to growth in total debt.

Holdings in domestic bonds by global investors increase to R448.9 billion

Table 7.1 Ownership of domestic government bonds, 2009 – 2014

Percentage of total	2009		2010		2011		2012		2013		2014
Non-residents		13.8		21.8		29.1		35.9		36.4		36.0
Residents		86.2		78.2		70.9		64.1		63.6		64.0
Pension funds		39.9		36.5		33.0		29.8		29.1		31.7
Monetary institutions		18.3		17.7		16.3		17.0		14.6		14.7
Insurers		12.4		14.1		11.6		9.4		8.6		8.2
Other financial institutions		13.2		8.1		8.0		5.8		8.2		8.7
Other		2.4		1.8		2.0		2.1		3.1		0.7

Source: Share Transactions Totally Electronic (STRATE)

Figure 7.2 Non-resident domestic government bond holdings,

  2009 – 2014

In partnership with the Johannesburg Stock Exchange, the Financial Services Board and other market participants, the National Treasury is preparing to introduce an electronic trading platform for government bonds. The platform is expected to improve transparency and liquidity, and increase activity in the local-currency government bond market. New electronic trading platform for government bonds to promote transparency and liquidity

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	¢    Medium-term borrowing strategy
	Government’s medium-term borrowing strategy describes how the state will finance the debt it will incur for the current year and over the next three years. The strategy takes into account debt levels, the main budget balance, funding instruments, cash-flow requirements, investor needs, development of the domestic market, and the risks and costs of alternative strategies.
Strategy aims to mitigate sharp increase in loan repayments from 2017/18	The strategy will focus on mitigating the risks presented by the sharp increase in loan repayments in 2017/18 and beyond. To meet these high loan repayments, cash will be generated from higher long-term borrowing in 2014/15. Over the medium term, the cash will be used to pay down short-term borrowing. In addition, government will continue to exchange short-dated bonds for longer-term bonds as market conditions permit.
	Figure 7.3 Domestic government bond maturities, 2011/12 – 2020/21
	Financing the borrowing requirement
In 2014/15, net borrowing requirement will be R1.1 billion higher than projected in 2014 Budget	In 2014/15, government’s net borrowing requirement will be R180.9 billion, R1.1 billion higher than projected in the 2014 Budget. The borrowing requirement will decrease to R144 billion in 2016/17 before increasing to R155.5 billion in 2017/18. In addition, government will borrow R191.9 billion over the medium term to finance debt due (loan redemptions).

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Table 7.2 Financing of national government borrowing requirement,¹ 2013/14 – 2017/18

	2013/14		2014/15				2015/16		2016/17		2017/18
R million	Outcome		Budget		Revised		Medium-term estimates
Main budget balance2		-160 499		-179 781		-180 853		-173 054		-143 957		-155 453
Financing
Domestic short-term loans (net)		23 048		23 000		10 000		13 000		20 000		40 000
Treasury bills		20 221		23 000		10 000		13 000		20 000		40 000
Corporation for Public Deposits		2 827		—		—		—		—		—
Domestic long-term loans (net)		149 414		132 098		156 449		144 809		115 638		97 718
Market loans (gross)		172 112		167 103		189 856		172 500		172 500		185 000
Loans issued for switches3		-1 135		—		247		—		—		—
Redemptions		-21 563		-35 005		-33 654		-27 691		-56 862		-87 282
Foreign loans (net)		378		1 288		8 356		7 797		4 209		13 373
Market loans (gross)		19 619		16 290		22 952		11 530		16 816		17 115
Redemptions (including revaluation of loans)		-19 241		-15 002		-14 596		-3 733		-12 607		-3 742
Change in cash and other balances4		-12 341		23 395		6 048		7 448		4 110		4 362
Cash balances		-16 292		18 895		1 847		3 662		-100		503
Other balances5		3 951		4 500		4 201		3 786		4 210		3 859
Total		160 499		179 781		180 853		173 054		143 957		155 453

1. A longer time series is presented in Table 1 of the statistical tables at the back of the Budget Review

2. A negative number reflects a deficit

3. Net of loans issued and redeemed in switch transactions

4. A negative change indicates an increase in cash balances

5. Net movement in national departments’ bank balances due to differences between funds requested and actual cash flows

Source: National Treasury

Domestic short-term borrowing

Short-term borrowing consists of Treasury bill issuance and borrowing from the public sector through the Corporation for Public Deposits. The corporation is an institution into which provinces and state-owned companies are required to invest their surplus cash.

Table 7.3 Domestic short-term borrowing, 2014/15 – 2015/16

			2014/15				2015/16				2014/15			2015/16
	Opening				Closing				Closing		Weekly auction
R million	balance		Net change		balance		Net change		balance		estimates
Corporation for		21 812		—		21 812		—		21 812
Public Deposits
Treasury bills		192 206		10 000		202 206		13 000		215 206		7 215			7 370
91-day		42 891		-9 696		33 195		—		33 195		2 685	1		2 555
182-day		42 358		3 732		46 090		1 880		47 970		1 780			1 845
273-day		49 253		7 077		56 330		4 510		60 840		1 450			1 560
364-day		57 704		8 887		66 591		6 610		73 201		1 300			1 410
Total		214 018		10 000		224 018		13 000		237 018

1. On 7 November 2014 auction levels were increased from R3.7 billion to R4.7 billion and reduced to R2.7 billion from 24 December 2014

Source: National Treasury

In 2014/15, the net increase in short-term loans will be R10 billion, increasing to R13 billion in 2015/16. In the two subsequent years, short-term loans increase by a net R60 billion to finance a sharp increase in loan redemptions. Borrowing from the Corporation for Public Deposit will be used to manage cash shortfalls during the year.

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	Domestic long-term borrowing
	Domestic long-term loans consist of fixed-rate, inflation-linked and retail bonds. At R189.9 billion, domestic long-term loan issuance will be R23 billion more in 2014/15 than projected in the 2014 Budget due to higher-than-anticipated take-up of non-competitive fixed-rate bond auctions. Fixed-rate bonds accounted for 77.2 per cent of total bond issuance, with inflation-linked instruments making up the remainder.
Recent bond issuance has concentrated in longer maturities to minimise refinancing risk	Issuances were concentrated in the longer-maturity bonds in line with government’s goal of minimising refinancing risk. The R2032 and R2044 fixed-rate bonds, issued for the first time in 2014, were well supported, accounting for 35.9 per cent of total fixed-rate bond issuance. These bonds were recently included in the All Bond Index – a composite index containing the top 20 fixed-rate bonds ranked according to liquidity (turnover) and average market capitalisation (outstanding amount). The index is tracked by fund managers, and the inclusion of these bonds improves their tradability.
	Table 7.4 Domestic long-term borrowing, 2014/15

As of 31 January 2015 R million	Cash value		Average yield %		Outstanding value
Fixed-rate1		124 656		8.74
R2023 (7.75%; 2023)		3 045		8.3		55 851
R186 (10.5%; 2025/26/27)		2 783		8.4		140 821
R2030 (8%; 2030)		22 289		8.6		39 111
R213 (7%; 2031)		4 993		8.5		83 138
R2032 (8.25%; 2032)		28 218		8.7		29 189
R209 (6.25%; 2036)		4 101		8.8		83 271
R2037 (8.5%; 2037)		15 864		8.9		36 045
R214 (6.5%; 2041)		6 358		8.9		78 399
R2044 (8.75; 2043/44/45)		16 508		8.9		16 619
R2048 (8.75%; 2047/48/49)		18 214		8.9		61 909
Retail		2 282		7.8		8 794
Inflation-linked2		36 831		1.8
R212 (2.75%; 2022)		3 199		1.6		38 418
I2025 (2.0%; 2025)		10 211		1.6		28 200
I2038 (2.25%; 2038)		10 307		1.9		31 680
I2046 (2.5%; 2046)		6 271		1.9		14 843
I2050 (2.5%; 2049/50/51)		6 797		1.9		25 787
Retail		47		1.3		179
Total		161 487

1.      Includes non-competitive auction allocations of R30.8 billion

2.      Outstanding value is revalued using the relevant reference consumer price index Source: National Treasury

Domestic bonds are sold in weekly auctions. Both fixed-rate and inflation-linked bond auctions start with competitive bidding, where bidders propose a buying yield or rate. The highest bid offered is accepted for all successful bidders. In the case of fixed-rate bonds, competitive bidding is followed by a non-competitive bid auction, which gives successful bidders a 48-hour option to take up an additional 50 per cent of their competitive bid auction allocations at the yield at which the auction cleared.

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To ensure that new bonds gain tradability within a short space of time, non-competitive auctions for bonds with an outstanding value of less than R10 billion were increased from 50 to 100 per cent of the primary auctioned amount; for bonds above R10 billion, the amount remained at 50 per cent. This strategy will be adopted for all new bond issuances. In 2014/15, it is expected that R37 billion, or about 20 per cent of total issuance in bonds, will be raised through non-competitive auctions.	About 20 per cent of bond issuance in 2014/15 expected to be raised in non-competitive auctions
In 2015/16, issuance of domestic long-term loans will decrease to R172.5 billion, before increasing to R185 billion in 2017/18 due to higher bond redemptions. While the weekly nominal fixed-rate competitive bond auction level will be maintained in 2015/16, the inflation-linked bond auctions will be decreased, depending on the level of take-up of non-competitive bond auctions. To broaden the funding options available, two new fixed-rate bonds and one inflation-linked bond will be introduced in 2015/16.	To broaden funding options, three new bonds will be introduced in 2015/16
Table 7.5 New domestic government bonds, 2015/16

Fixed-rate		Inflation-linked
Bond code	Maturity date	Bond code	Maturity date
R2035	28 February 2035	I2033	28 February 2033
R2040	31 January 2040

Source: National Treasury

Loan redemptions will increase sharply from an average of R26 billion over the past four years to R56.9 billion in 2016/17, averaging R88.5 billion per year in the four years thereafter.
The bond-switch programme will be used to partly mitigate refinancing risk – the risk that government will not be able to raise money to repay debt at any scheduled point, or will have to do so at a high cost. The programme eases pressure on targeted areas of the redemption profile by exchanging short-term for longer-term debt.	Domestic bond switch auctions to continue mitigating refinancing risk
During 2014/15, investments in RSA retail bonds amounted to R2.3 billion, of which R1 billion were reinvestments of maturing bonds and capitalised interest. A total of R9 billion is currently invested in these bonds. Government will consider introducing additional retail bond products to help improve the country’s saving culture. The interest rates on RSA retail bonds are shown in Table 7.6.

Table 7.6 Interest rates on RSA retail bonds, February 2015

Percentage	Bond maturity
Fixed-rate	2-year		3-year		5-year
		7.25		7.75		8.00
Inflation-linked	3-year		5-year		10-year
		1.25		1.75		2.00

Source: National Treasury

International borrowing

Despite volatile market conditions, emerging-market debt issuers raised US$480 billion in 2014, slightly higher than in 2013. The announcement of a shift in US monetary policy led to a higher pricing of risk in emerging markets, reflected in the widening of the JP Morgan EMBI+ sovereign spread index from 331 basis points at the start of the year to 404 basis points on 31 December 2014.

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	South Africa’s prudent management of fiscal and monetary policy has anchored its credibility as an international borrower.
Foreign-currency bond issuances during 2014 were oversubscribed	Foreign-currency bond issuances during 2014 were significant milestones for South Africa’s borrowing programme. The first dual-tranche international bond issue was well received in the dollar and euro capital markets. A dual-tranche bond issue combines various currencies and/or maturities in a single transaction, allowing an issuer to reach a broader range of investors. The 30-year US$1 billion note with a coupon rate of 5.375 per cent was priced at 220 basis points above the US Treasury benchmark bond. The 12-year €500 million note with a coupon of 3.75 per cent was priced at 225 basis points above the 12-year euro mid-swap rate. Both tranches were more than three times oversubscribed.
US$500 million raised through debut Sukuk	As announced in the 2014 Budget, South Africa entered the Sukuk market and raised US$500 million. The transaction was four times oversubscribed, with orders of US$2.2 billion, marking continued progress in efforts to broaden South Africa’s investor base.

Structure of South Africa’s debut Sukuk

Sukuk, the plural of the term “Sukk”, is the Arabic name for a financial certificate, or a bond, which represents or evidences a proportionate interest in an underlying tangible asset and revenue. Sukuk holders are entitled to a periodic profit generated by the investment in the underlying assets.

South Africa’s debut Sukuk are based on the most commonly used structure known as Al-Ijara, which represents securities with a usufruct interest over well-defined existing assets tied to a lease contract.

The Department of Water and Sanitation transferred three dams and one water tunnel, the Sukuk assets, to a trust whose trustees were appointed by the Minister of Finance. The trust holds the rights of use in the Sukuk assets during the 5.75-year bond period for the benefit of the Sukuk holders.

The trust has no rights to dispose of the Sukuk assets or of the rights of use in these assets other than by transferring the rights back to the Department of Water and Sanitation at the end of the transaction. The trust has entered into a lease agreement over the assets with National Treasury as the issuer of the Sukuk. The National Treasury pays rent on the assets for the tenor of the Sukuk and the rent is then distributed by the trust in the form of periodic payments to the Sukuk holders. At maturity, the capital is repaid, the underlying assets are transferred back to the Department of Water and Sanitation and the lease agreement ends.

US$4 billion will be borrowed from global markets over medium-term	Over the medium-term, government intends to borrow about US$4 billion in global markets to maintain benchmarks in major currencies and to meet part of its foreign-currency commitments of US$5.7 billion. The balance of these commitments will be met from drawdowns on cash balances and from foreign-currency purchases in the domestic market.
	Cash balances
	Government’s total cash holdings, which consist of deposits in rands and US dollars held with commercial banks and the Reserve Bank respectively, will total R182 billion by the end of 2014/15, decreasing to R178.4 billion in 2015/16. Of government’s total cash balances in 2014/15, R137 billion are deposits made with the Reserve Bank to increase the level of official foreign-exchange reserves and are only available for use by government as bridging finance.

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Table 7.7 Change in cash balances, 2013/14 – 2017/18

	2013/14		2014/15				2015/16		2016/17		2017/18
R million	Outcome		Budget		Revised		Medium-term estimates
Rand currency
Opening balance		103 774		123 157		120 807		112 157		112 157		110 157
Closing balance		120 807		107 157		112 157		112 157		110 157		107 157
of which:
Tax and loan accounts		53 650		40 000		45 000		45 000		43 000		40 000
Change in rand cash balance1		-17 033		16 000		8 650		—		2 000		3 000
(opening less closing balance)
Foreign currency2
Opening balance		63 828		63 254		63 087		69 890		66 228		68 328
Closing balance		63 087		60 359		69 890		66 228		68 328		70 825
US$ equivalent		7 990		7 522		8 271		7 779		7 524		7 524
Change in foreign currency cash balance1		741		2 895		-6 803		3 662		-2 100		-2 497
(opening less closing balance)
Total change in cash balances1		-16 292		18 895		1 847		3 662		-100		503
Total closing cash balance		183 894		167 516		182 047		178 385		178 485		177 982

1. A negative value indicates an increase in cash balances and a positive value indicates that cash is used to finance part of the borrowing requirement

2. Rand values at which foreign currency was purchased or borrowed Source: National Treasury

The losses and profits on the foreign-exchange activities of the Reserve Bank are accounted for on the Gold and Foreign Exchange Contingency Reserve Account. The balance on this government account is split into transactions with a cash-flow and non-cash-flow valuation impact. Due to the depreciation of the rand, unrealised valuation gains are expected to increase to R195.9 billion by end March 2015, R18.4 billion higher than a year earlier, with R121 million in realised losses to be settled by government.	Due to rand depreciation, unrealised valuation gains related to foreign exchange are projected to increase
¢    Risk considerations
The borrowing strategy takes into account benchmarks designed to manage refinancing, inflation and currency risks. The benchmarks – which establish either a limit or a target range for a given category of debt – appear in Table 7.8, along with the actual position at the end of January 2015.

Table 7.8 Performance against strategic portfolio risk benchmarks

	Range or limits
Benchmark description	Benchmark			January 2015
Share of short-term debt maturing in 12 months (Treasury bills)		15	%		13.85	%
Share of long-term debt maturing in 5 years		25	%		24.22	%
Share of inflation-linked bonds as a percentage of total domestic debt		20-25	%		22.18	%
Share of foreign debt as a percentage of total government debt		15	%		9.15	%
Average term-to-maturity (fixed-rate bonds + Treasury bills in years)		10-14			10.72
Average term-to-maturity (inflation-linked bonds in years)		14-17			14.91

Source: National Treasury

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	The main risks to government’s borrowing programme are South Africa’s credit ratings, global volatility in capital flows and a higher borrowing requirement:
	•	Standard & Poor’s (BBB-, stable outlook) rates South Africa at one notch above investment grade, while Fitch (BBB, negative outlook) and Moody’s (Baa2, stable outlook) are each one notch higher. Any deterioration in economic growth, the budget balance, or government’s debt metrics could trigger rating downgrades, which would make government borrowing more expensive.
	•	Capital flows to emerging markets are expected to decline in 2015 due to the prospects of higher US interest rates. A sudden and sharp reversal of capital inflows could lead to a depreciation of the exchange rate and the repricing of government debt.
	•	A higher-than-anticipated wage bill, a deterioration in economic growth or funding difficulties at state-owned companies could increase the borrowing requirement, raising yields and borrowing costs.
Debt management will continue to support investment and improve the debt trajectory	Government’s prudent fiscal policy and debt-management strategies, in combination with deep and liquid domestic capital markets, will continue to support investment, ensure that government can finance its borrowing requirement and improve the debt trajectory.

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8

Financial position of public-sector institutions

In brief

• State-owned companies are expected to invest R362 billion in infrastructure over the medium term, contributing significantly to gross capital formation.

• Development finance institutions will lend a projected R44 billion over the next two years, with a focus on energy and green-economy projects.

• The surplus and deficit positions of the social security funds reflect the build-up of fiscal imbalances that will be addressed over the medium term.

• Government intends to exercise greater oversight over public institutions, and will over time optimise its portfolio of institutions to strengthen national development.

¢    Overview

This chapter reviews the financial position of South Africa’s major public-sector institutions. State-owned companies are large contributors to economic activity, accounting for 20 per cent of gross capital formation. Development finance institutions have rapidly expanded their lending in recent years. The social security funds provide compensation or income support for workers and road users who are out of work or injured, and the Government Employees Pension Fund provides income security to more than 1 million state workers.	State-owned companies account for 20 per cent of capital formation
Most of these institutions operate independently of the budget; fiscal allocations are not their primary source of revenue. However, their operations and financial positions must be taken into account in government’s budget planning, since they have important consequences for the public finances over the long term.
Well-managed public-sector assets can promote economic growth and social development. Where these assets are not performing well, however, they can materially affect the broader public finances and become a drag on economic progress.

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	¢    Financial health and national development
State-owned companies and development finance institutions have seen large asset growth in recent years	Table 8.1 shows the consolidated financial position of selected categories of public-sector institutions. Despite subdued GDP growth over the past five years, all major categories of these institutions have experienced significant asset growth since 2010/11. Two factors account for most of this growth: infrastructure investments by state-owned companies and the expanded loan books of development finance institutions.
	Table 8.1     Combined financial position of selected categories of public institutions, 2010/11 – 2013/14

R billion	2010/11		2011/12		2012/13		2013/14
State-owned companies
Total assets		639.4		708.1		793.9		903.6
Total liabilities		422.9		470.6		541.7		628.9
Net asset value		216.5		237.5		252.2		274.7
Development finance institutions
Total assets		181.7		199.6		221.5		249.5
Total liabilities		57.8		76.1		93.5		106.7
Net asset value		123.8		123.5		128.0		142.9
Social security funds
Total assets		88.5		107.2		132.4		145.6
Total liabilities		43.5		64.1		95.0		109.9
Net asset value		45.0		43.1		37.4		35.7
Other public entities1
Total assets		525.6		655.8		720.7		807.5
Total liabilities		152.0		194.3		237.7		259.4
Net asset value		373.5		461.5		483.0		548.1

1.      State-owned institutions without a commercial mandate and listed in either schedule 1 or 3 of the Public Finance Management Act (1999) such as National Library of South Africa

Source: National Treasury

While many institutions are in a strong financial position, several face serious shortfalls Many public institutions are in a strong financial position, contributing simultaneously to fiscal sustainability and public welfare. In recent years, however, the financial and operational performance of several state-owned companies and development finance institutions has weakened. And although the overall financial position of the social security funds is strong, liabilities continue to mount at the Road Accident Fund (RAF).   Inadequate policy frameworks, regulatory uncertainty, poor operational performance and governance failures often lie behind the deterioration in financial positions. Weak financial performance is also frequently associated with a failure to define clear strategic goals. Where an unsustainable financial position is not addressed, public institutions often turn to government to provide a lifeline using public funds. Unless underlying imbalances are resolved, however, such interventions are at odds with sustainable public finances.

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Given current fiscal constraints, government will address the funding needs of public institutions in a manner that does not increase the budget deficit. The sources of such funds can include the disposal of non-strategic assets such as property, direct and indirect shareholdings in listed firms, non-strategic shareholdings in state-owned companies and surplus cash balances in public entities. Such asset sales will take place only as funding is required or where there is clear strategic benefit to the state. In some cases, such as the RAF, additional funding could be provided from increased taxes or levies.	Where government support is required, it will not be provided in a way that increases the budget deficit
Where government support is provided in the form of funding or guarantees, public entities will be required to demonstrate sound business plans, strengthen internal governance and improve operational performance. Close monitoring will take place to promote efficient delivery on government priorities, simultaneously improving commercial performance and ensuring that government can meet its fiscal targets. Over the longer term, reforms to governance and policy frameworks are required.
In 2011 the Presidency commissioned a review to assess how well state-owned entities executed their mandates. The 2015 Cabinet Lekgotla considered the review and its recommendations to improve the contribution of these entities to national development. Key interventions under consideration include:	Government is considering overarching legislation for state-owned entities
•        Establishing an inter-ministerial committee to improve alignment and coordination between entities.
•        Identifying those state-owned companies that are integral to national development, and setting out an approach to acquiring and disposing of public assets based on strategic requirements.
•        Introducing overarching legislation to govern these entities.
•        Costing developmental mandates more explicitly, with the financial implications set out more clearly in shareholder compacts.
•        Exploring options for private investment to strengthen balance sheets, and creating opportunities for private investment in sectors dominated by state-owned companies. An example of this approach is the successful Renewable Energy Independent Power Producers Procurement Programme.
¢    State-owned companies
Since 2008/09, state-owned companies have made large capital investments in energy, transport and logistics to expand the productive capacity of the economy. Over the next three years, investment in these sectors will continue to dominate capital formation by the public sector.
Over the medium-term expenditure framework (MTEF) period, state- owned companies project capital expenditure of R362.2 billion, with Eskom, Transnet and the South African National Roads Agency Limited (SANRAL), accounting for most of this expenditure. Details on infrastructure spending appear in Annexure B. Table 8.2 shows the capital expenditure of state-owned companies with the largest investment programmes.	Over the next three years, state-owned companies project capital expenditure of R362.2 billion

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The major state-owned companies improved their capital spending over the past two financial years, spending 98 per cent of their 2013/14 budgets, compared with 80 per cent in 2012/13.

Table 8.2 Selected state-owned companies’ capital expenditure programmes, 2013/14 – 2017/18

	2013/14		2014/15		2015/16		2016/17		2017/18
R billion	Outcome		Budget		Medium-term estimate
Eskom		57.8		59.5		61.8		46.2		30.0
Transnet		32.5		41.3		36.3		44.7		46.8
SANRAL1		11.6		15.6		15.6		13.8		14.3
Trans-Caledon Tunnel Authority		1.8		4.8		3.1		3.1		4.4

1. The figures include capital payments and finance costs, and may differ from capital expenditure reported in other budget documents

Source: National Treasury

Expanded infrastructure investments have led to a steady increase in the asset base of state-owned companies, from R517.8 billion in 2009/10 to R903.6 billion at the end of 2013/14. Over the same period, combined net asset value rose from R176.1 billion to R274.7 billion, and interest-bearing debt levels from R203.4 billion to R523 billion. Eskom and Transnet account for 79 per cent of state-owned companies’ net asset value.

Table 8.3     Combined balance sheets of state-owned companies,¹ 2009/10 – 2013/14

R billion	2009/10			2010/11			2011/12			2012/13			2013/14
Total assets		517.8			639.4			708.1			793.9			903.6
% growth		15.0	%		23.5	%		10.7	%		12.1	%		13.8	%
Total liabilities		341.6			422.9			470.6			541.7			628.9
% growth		17.6	%		23.8	%		11.1	%		15.1	%		16.1	%
Net asset value		176.1			216.5			237.5			252.2			274.7
% growth		10.5	%		22.9	%		9.7	%		6.2	%		8.9	%
Return on equity (average)		3.8	%		6.7	%		7.6	%		4.1	%		3.1	%

1.      Major state-owned companies listed in Schedule 2 of the Public Finance Management Act (1999) excluding development finance institutions

Source: National Treasury

Capital expenditure plans will add R78.9 billion to debt of state-owned companies in 2015/16

Capital expenditure plans will add R78.9 billion to the debt of state-owned companies in 2015/16. Table 8.4 shows the outcome of the borrowing activities of the 10 largest entities for 2013/14, along with medium-term projections.

Revisions to budgeted borrowing for 2014/15 are due to an additional R21 billion borrowed by the Development Bank of Southern Africa and the Industrial Development Corporation to meet their lending targets, and an additional R12.6 billion borrowed by Eskom and SANRAL to close revenue shortfalls in the current financial year. While most of the debt will be raised in the domestic market, the proportion of foreign debt is significant, averaging 36 per cent over the medium term.

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Table 8.4 Combined borrowing requirement of selected public-sector institutions,¹ 2013/14 – 2017/18

	2013/14			2014/15						2015/16			2016/17			2017/18
R billion	Outcome			Budget			Revised			Medium-term estimates
Domestic loans (gross)		64.8			51.6			69.5			71.1			81.9			75.4
Short-term		26.0			32.9			29.8			26.8			26.5			29.1
Long-term		38.8			18.7			39.7			44.3			55.4			46.3
Foreign loans (gross)		37.4			25.1			43.8			51.0			39.6			38.7
Long-term		37.4			25.1			43.8			51.0			39.6			38.7
of which:
Export credit agency		8.7			3.8			8.5			5.0			5.5			5.2
Multilateral institutions		10.3			7.2			17.4			15.7			26.9			25.0
Total		102.2			76.7			113.3			122.1			121.5			114.1
Percentage of total:
Domestic loans		63.4	%		67.3	%		61.3	%		58.2	%		67.4	%		66.1	%
Foreign loans		36.6	%		32.7	%		38.7	%		41.8	%		32.6	%		33.9	%

1. Airports Company of South Africa, Eskom, Rand Water, Trans-Caledon Tunnel Authority, Umgeni Water, SANRAL, Transnet, Development Bank of Southern Africa, Industrial Development Corporation and the Land Bank

Source: National Treasury

The major state-owned companies benefiting from government guarantees are shown in Table 8.5. A guarantee is a commitment to take responsibility for a loan in the event of default; it enables the beneficiary to access funding that would otherwise be unavailable or to borrow at rates that reflect lower risk premiums. High levels of contingent liabilities can lead to an increase in the risk premium on sovereign debt. As a result, government seeks to maintain these liabilities within prudent limits.

Table 8.5     Guarantee exposure to major state-owned companies and development finance institutions,1 2013/14 – 2014/15

	2013/14				2014/15
R billion	Guarantee		Exposure2		Guarantee		Exposure2
Total		469.3		209.6		461.1		224.9
of which:
Eskom		350.0		125.1		350.0		144.5
SANRAL		38.7		23.9		38.9		30.2
Denel		1.9		1.9		1.9		1.9
Development Bank of		29.6		25.6		14.4		10.1
Southern Africa
Industrial Development		2.1		0.5		1.8		0.4
Corporation
Trans-Caledon Tunnel		25.7		20.5		25.7		20.7
Authority
South African Airways		7.9		5.0		14.4		8.3
Transnet		3.5		3.8		3.5		3.8
Land and Agricultural		3.5		1.1		2.6		2.1
Bank of South Africa
South African Post Office		—		—		1.9		0.1
South African Express		0.5		0.5		1.1		1.1
Airways
Other		5.9		1.7		4.9		1.6

1. A full list of guarantees is given in statistical table 11

2. Total amount of borrowing and accrued interest for the period made against the guarantee

Source: National Treasury

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	During 2014/15 government issued additional guarantees to South African Airways (SAA), South African Express Airways (SAX) and the South African Post Office (SAPO).
	Eskom
Eskom needs to improve operational efficiency and requires cost-reflective electricity pricing	Eskom faces several technical and financial difficulties. These stem in large measure from its ageing plant and inadequate maintenance of existing generating capacity. The utility also confronts the consequences of delayed policy decisions in the 2000s on building new generating capacity. Eskom’s long-term financial position depends in large measure on improving the efficiency of its operations and ensuring that electricity tariffs reflect the cost of production.
	Eskom reported a net profit of R7.1 billion in 2013/14, up from R5.2 billion in 2012/13, owing largely to an 8 per cent increase in tariffs granted by the regulator, as well as R2.1 billion realised on cost- containment measures and fair-value gains.
Support for Eskom includes medium-term funding allocation of R23 billion	To stabilise the business, Eskom is working to improve productivity and reduce costs. It also plans to apply to the regulator for tariff increases that will move the price of electricity closer to the costs of its production. Government’s support for Eskom includes a medium-term funding allocation of R23 billion. Appropriations will be made to Eskom as funds from the disposal of non-core assets are realised, ensuring that there is no increase in government debt and no effect on the fiscal position. Government could also consider other interventions, such as converting its subordinated loan to equity to support Eskom’s balance sheet.
	Transnet
Transnet’s profits were up strongly owing to higher mineral volumes and container traffic	Transnet reported a profit of R5.2 billion in 2013/14, an increase of 24.9 per cent from the prior year. Revenue increased by 12.8 per cent to R56.6 billion, mainly as a result of higher mineral volumes and strong growth in container traffic. Cost-reduction initiatives kept operating costs below budget, resulting in savings of R2.1 billion. The gearing ratio increased marginally to 45.9 per cent in 2013/14 from 44.6 per cent in the previous year – well below the group’s target range of 50 per cent.
	Capital investment for 2013/14 amounted to R32.5 billion, or a 17.9 per cent increase from the prior year. Of the total amount, R10.5 billion was invested to expand infrastructure and equipment, and R22 billion was to maintain capacity. Transnet has lowered its capital spending estimates over the next three years in light of slowing global growth, reduced demand and lower commodity prices.
	South African Airways
	SAA reported a net loss of R2.6 billion in 2013/14 as a result of high operating costs, losses on routes to several international destinations, asset impairments and higher finance costs. The airline is technically insolvent.
SAA has used R8.3 billion of R14.4 billion in government guarantees	Government has made guarantees of R14.4 billion available to SAA, of which the airline has used R8.3 billion. Government also stepped in to stabilise the carrier. SAA has developed a 90-day action plan to contain its

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losses. To date, the plan has produced several results. Loss-making routes to Beijing and Mumbai have been cancelled. To offset the impact of these measures on travel, trade and tourism with India and China, SAA has concluded a partnership agreement with Etihad Airways. The agreement connects SAA to Abu Dhabi International Airport, expanding its connections to four Chinese and nine Indian cities. In addition three of the eight A340-600 wide-body aircraft leases have been extended at reduced monthly rates.
The Minister of Finance, who became SAA’s executive authority with effect from December 2014, is working with the carrier to refine the long-term plan for financial sustainability.
South African Post Office
SAPO recorded a net loss of R358.9 million in 2013/14 after a net loss of R337.1 million a year earlier. The losses stem from declining revenues due to lower mail volumes, a high cost base, and a poorly performing mail and courier business as customers migrate to digital communications. SAPO’s universal service obligations, which include rolling out new postal services across the country, have added to its financial pressures, as have strike- related disruptions in 2014.	Continued losses at Post Office stem from declining revenues and universal service obligations
During 2014/15, a R1.7 billion going-concern guarantee and a R270 million guarantee to secure and extend its overdraft facility were issued with conditions linked to SAPO’s turnaround strategy.
The National Treasury is working with the Department of Telecommunications and Postal Services, as well as the Independent Communications Authority of South Africa, to help SAPO meet its universal service obligations at lower cost. This involves setting more realistic delivery targets and relaxing delivery standards. The communications authority has allowed SAPO to relax its targets for 2014/15 and a broader policy review is being conducted. An administrator has been appointed to lead SAPO.
South African National Roads Agency Limited
SANRAL’s revenue from non-toll operations, by way of a government transfer, amounted to R5.1 billion in 2013/14. Revenue from toll operations amounted to R3.5 billion in 2013/14, a 65.7 per cent increase from R2.1 billion in the previous year. The increase was the result of higher traffic on existing toll roads, the opening of new toll plazas on the R30 and N17 national roads, and the rollout of the Gauteng Freeway Improvement Project (GFIP) in December 2013. The latter contributed R1.2 billion to revenue.	SANRAL received R5.1 billion in transfers and R3.5 billion from tolls in 2013/14
Government transfers to SANRAL are projected to grow by an annual average of 5.9 per cent over the MTEF period. Income from fees is expected to grow at an average annual rate of 12.2 per cent over the same period in line with increased traffic volumes on the toll road network. In 2012/13, government approved an extraordinary grant to reduce SANRAL’s overall debt. This was done to support the agency’s financial viability after tariffs on the GFIP routes were reduced.

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	During 2013/14, SANRAL’s capital expenditure totalled R11.6 billion. This was a decline of R575 million compared with 2012/13. Significant infrastructure projects over the medium term include the expansion of the N3 at Mariannhill, and the addition of lanes to the N2 North Coast and N2 Winelands routes.
Uncertainty about revenue to finance the GFIP affects SANRAL’s ability to fund the rest of its toll  portfolio	Over the MTEF period, capital expenditure is expected to decline owing to uncertainty about sources of revenue to finance the GFIP, which affects SANRAL’s ability to raise funding for the rest of its toll road portfolio.
	Passenger Rail Agency of South Africa
	Revenue for the Passenger Rail Agency of South Africa (PRASA), which operates South Africa’s commuter rail network, grew by 21.1 per cent, from R8.4 billion in 2012/13 to R10.2 billion in 2013/14. The increase was the result of government’s R4.3 billion subsidy to the agency to provide affordable commuter services. Fare revenue is expected to increase at an average annual rate of 7.8 per cent over the medium term as the number of Metrorail passenger trips increases.
PRASA’s 10-year rolling stock fleet renewal programme began in 2014	PRASA’s capital expenditure is financed from government grants and external borrowings. The agency spent R6.2 billion on capital investment during 2013/14 after spending R6.3 billion in the prior year. The 10-year rolling stock fleet renewal programme, which began in 2014, will contribute to modernising passenger rail services. PRASA is complementing this programme with investments in its rail system.
	Trans-Caledon Tunnel Authority
Trans-Caledon Tunnel Authority expects to finish several water-supply projects over medium term	The Trans-Caledon Tunnel Authority raises debt to finance water infrastructure projects, including the Lesotho Highlands Water Project. The value of projects under construction in 2013/14 increased by 12 per cent and amounted to R1.8 billion. This represented 60 per cent of planned expenditure. Over the medium term, the entity has committed to spend R10.6 billion on several water infrastructure projects. These include financing and supporting the implementation of increased water supply to municipalities in KwaZulu-Natal, and developing water supply systems for the Medupi Power Station.
	¢    Development finance institutions
	South Africa’s development finance institutions have rapidly expanded their balance sheets to support implementation of the National Development Plan. Loan books have increased from R40.5 billion in 2008/09 to R108.7 billion in 2013/14.
Development finance institutions  project 33 per cent growth in loan  portfolios over short term	The growth of development finance followed a 2008 review that sought to realign these institutions to efficiently support policy priorities in areas such as job creation and land reform. Over the next two years, these institutions project 33 per cent growth in their loan portfolios, reaching a combined R178 billion by 2016/17.

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While these initiatives form an important part of government’s development objectives, the agencies concerned will need to ensure that risks associated with new exposures are managed in a sustainable and prudent manner. A review of provincial development finance institutions, approved by Cabinet, will commence in 2015. This review will align their mandates to the National Development Plan and underline the need for effective and sustainable operations.	As agencies expand loans, risks associated with new exposures need to be managed in a sustainable and prudent manner
The largest development finance institutions are the Industrial Development Corporation (IDC), the Land Bank and the Development Bank of Southern Africa (DBSA). These institutions reported a combined asset value of R239.2 billion and a combined loan book value of R104.9 billion for 2013/14. The asset base is projected to increase to R295.2 billion in 2016/17, with the IDC holding just over half of the estimated total (R151.3 billion) in 2016/17.
Several smaller development finance institutions play an important role in giving effect to government policy. These include the National Empowerment Fund (NEF), the National Housing Finance Corporation (NHFC) and the National Urban Reconstruction and Housing Agency. These bodies had a combined asset value of R9.9 billion and combined loan book of R3.8 billion at the close of 2013/14.	Empowerment, housing and urban reconstruction institutions have combined loan book of R3.8 billion
The NHFC has begun to reorganise its business to improve organisational efficiency. The NEF is reviewing its business model and, with the merger of the fund and the IDC under way, government expects a stronger, more streamlined business to support industrial development and black economic empowerment.
Table 8.6     Consolidated balance sheets of development finance institutions,1 2013/14 – 2016/17

	2013/14		2014/15		2015/16		2016/17
R billion	Outcome		Estimates		Forecast
Total assets		249.1		244.7		267.9		306.4
of which:
Loan book		108.7		134.4		156.1		178.3
Equity investments		86.7		101.5		104.4		120.2
Total liabilities		106.6		112.6		131.4		153.4
Net asset value		142.5		132.1		136.5		153.0

1.      Government lending agencies listed in both schedule 2 and 3 of the Public Finance Manangement Act (1999) such as Development Bank of Southern Africa, Industrial Development Corporation and the Land Bank

Source: National Treasury

Development Bank of Southern Africa
The DBSA’s developmental lending is concentrated in energy, roads and drainage, water and sanitation, and information and communication technology, with a special focus on municipalities.
In 2013/14 the DBSA reported a profit of R787 million, a major turnaround from losses of R825.9 million in 2012/13 and R370.8 million in 2011/12. It also reduced its non-performing loan book by 6.9 per cent to R3 billion. Total assets grew by 18.3 per cent from R53.9 billion in 2012/13 to R63.8 billion in 2013/14. Loan disbursements reached a high of R12.7 billion, of which just over half (R6.7 billion) financed energy infrastructure, including independent power producers (R3.75 billion).	DBSA reported profits of R787 million after two years of losses

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DBSA’s medium-term loan disbursements total R17.8 billion	In 2013, the DBSA completed a successful restructuring. Over the medium term, government expects the DBSA to help develop South Africa’s municipal debt market as part of broader efforts to reshape the urban landscape. New initiatives will leverage private-sector investment to complement the DBSA’s own loan disbursements, which total R17.8 billion over the next three years.
	Land Bank
	Cost-containment and continued government support contributed to positive financial results at the Land Bank in 2013/14. Net profit increased by 29.5 per cent to R394 million, up from R305 million in 2012/13. The asset base grew by 19.6 per cent to R36.8 billion and the loan book increased by 23.4 per cent to R33.3 billion. Non-performing loans declined by 30 per cent, from R652 million in 2012/13 to R455 million in 2013/14. Loans to emerging farmers grew from R247.3 million in 2012/13 to R390.8 million in 2013/14.
Review aims to restructure Land Bank for greater operational efficiency	A review of the Land Bank, approved by the Minister of Finance, is scheduled for 2015. The aim of the review is to restructure the Bank for greater operational efficiency. Over the medium term, the Land Bank will work with public and private institutions to strengthen the viability of emerging farmers, and support the growth of commercial agriculture.
	Industrial Development Corporation
	The IDC promotes industrial development and job creation. Profits decreased from R1.9 billion in 2012/13 to R1.6 billion in 2013/14, mainly as a result of poor performance of equity investments. The asset base increased from R126.8 billion to R138.6 billion over the same period, and the loan book rose moderately, from R18.7 billion to R20.8 billion.
IDC has diversified its portfolio, with a strong focus on renewable energy projects	The IDC has diversified its portfolio. The share of mining industry investments narrowed from 30 per cent in 2012/13 to 23 per cent in 2013/14. The IDC has significantly increased its “green economy” investments and investments in small, black-owned businesses. It provided equity and debt funding for 22 projects under the Renewable Energy Independent Power Producers Procurement Programme.
	Over the next five years, the IDC plans to mobilise R100 billion to support economic development, targeting renewable energy, manufacturing, industrial infrastructure and beneficiation of locally produced minerals and agricultural products.
	National Housing Finance Corporation
	The NHFC’s mandate is to broaden access to affordable housing finance and housing structures. It targets households with monthly incomes between R1 500 and R15 000, which struggle to obtain bank loans.
NHFC disbursed R675 million in loans for affordable housing development	The NHFC’s net profit rose from R8.9 million in 2012/13 to R16.1 million in 2013/14. Total assets decreased from R3.6 billion to R3.1 billion over the same period following the reprioritisation of the poverty relief fund to support social housing projects. The loan book grew to R2.1 billion in

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2013/14 from R1.9 billion in 2012/13. The NHFC disbursed R675 million in loans for affordable housing development, and leveraged R2.2 billion in co-financing from the private sector to support these projects.
During 2014 the corporation conducted a strategic reorganisation. Over the medium term, the NHFC will expand housing finance activities, providing its target market with the options of renting, owning or building incrementally. It will also encourage an increase in sustainable lending by financial institutions.
¢    Social security funds
The social security funds provide compensation or income support for workers and road users who are out of work or injured. The funds collectively held R145.6 billion in assets and R109.9 billion in liabilities in 2013/14. The Unemployment Insurance Fund (UIF) held R94.3 billion, or 65 per cent of the assets, and the RAF R98.5 billion, or 90 per cent of the liabilities.	In 2013/14, social security funds held R145.5 billion in assets and R109.9 billion in liabilities
The overall financial position of these funds is relatively strong, even after taking into account the large deficit of the RAF. The UIF and the Compensation Fund – which provides medical care or income benefits to injured workers – have experienced strong asset growth, while growth of their liabilities has remained contained, largely due to a slowdown in retrenchments and improvements in occupational safety.

Table 8.7 Combined balance sheet of social security funds, 2013/14 – 2017/18

	2013/14		2014/15		2015/16		2016/17		2017/18
R billion	Outcome		Estimates		Forecasts
Total assets		145.6		161.9		181.8		203.5		227.7
Unemployment Insurance Fund		94.3		110.1		127.7		147.0		168.2
Road Accident Fund		7.7		6.0		6.4		7.0		7.5
Compensation Fund		43.6		45.8		47.6		49.5		52.0
Total liabilities		109.9		129.7		142.7		157.0		173.2
Unemployment Insurance Fund		3.9		4.3		4.6		5.0		5.4
Road Accident Fund		98.5		107.3		119.3		132.5		147.3
Compensation Fund		7.5		18.1		18.8		19.5		20.5
Net asset value		35.7		32.3		39.1		46.5		54.5
Unemployment Insurance Fund		90.4		105.9		123.1		142.0		162.8
Road Accident Fund		-90.8		-101.3		-112.8		-125.5		-139.8
Compensation Fund		36.1		27.7		28.8		30.0		31.5

Source: National Treasury

Unemployment Insurance Fund
The UIF is in good financial health. It operates on a pay-as-you-go model, with insurance benefits paid directly from contributions. In 2013/14 it had 8.5 million registered contributors, 9 per cent of whom received benefits. During 2013/14, the UIF paid out R5.6 billion in unemployment benefits and an additional R1.4 billion to cover illness, maternity and adoption benefits. In the same year it received R15.1 billion in contributions.	UIF is in good financial health and continues to accumulate a surplus
By 2013/14, the UIF had an accumulated surplus of R72.3 billion and a net asset position of R90.4 billion. Despite the more generous benefits payments mandated by the Unemployment Insurance Amendment Bill (2012), the Fund estimates that it will add R51.8 billion to its accumulated surplus over the medium term.

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Imbalance between UIF contributions and benefits needs to be addressed	This imbalance between contributions and benefit payments has grown over the past five years despite high unemployment. The rising surplus is marginally offset by the Fund’s support for government’s job creation efforts. This includes programmes to support companies in distress and the training layoff scheme, which aims to prevent retrenchments. The fund has spent R190 million on these programmes and has committed to spending a further R2.2 billion over the medium term.
Once-off reduction in UIF contributions will return R15 billion to workers and employers in 2015/16	Government will table legislative amendments to improve UIF benefits in the current session of Parliament. Government also intends to cover public servants with UIF benefits. Such coverage will be extended in a manner that does not add to government’s wage bill or contribute to further surplus accumulation by the Fund. As a temporary measure, UIF contributions by employers and workers will be reduced by an estimated R15 billion in 2015/16 through a reduction in the contributions income threshold. This will have no effect on benefits.
	Road Accident Fund
RAF is inequitable and unaffordable, and will be replaced in the near future with a no-fault scheme	The current RAF model is inequitable and unaffordable. The Fund’s long- term liabilities are estimated at R98.5 billion and projected to grow at 15 per cent each year. The deterioration in the RAF’s financial position has been exacerbated by an improvement in the processing of claims lodged, which has reduced the number of open claims from 253 111 in 2011/12 to 198 407 in 2013/14. As the claims backlog has been processed, the average value of claims concluded has increased substantially. The result has been a substantial cash shortfall as reserves are exhausted.
	While the proposed 50 c/litre increase in the fuel levy will reduce pressure on the RAF, it is insufficient to resolve the liquidity shortfall in 2015/16. Further increases in fuel taxes, however, are not proposed at this time.
	In 2002, the Road Accident Fund Commission recommended moving to a no-fault system that would provide equitable, sustainable and affordable support to accident victims. This system would replace the current fund and its compensation system with the Road Accident Benefit Scheme. During 2015, government will table legislation to replace the RAF with the new scheme. From 2016/17, fuel levies will be reserved to finance the new arrangement. The National Treasury is considering options to address the RAF’s accumulated liability. The intention is to pay down outstanding claims over a reasonable period of time.
	Compensation Fund
Employer compliance, equity investments contribute to strong financial performance of Compensation Fund	Despite receiving disclaimer audit opinions over the past two years, the Compensation Fund has had a robust financial performance, largely as a result of increased employer compliance. The fund’s asset base has grown from R32.6 billion in 2011/12 to R43.6 billion in 2013/14, supported by the performance of its investments, which reached R41.4 billion in 2013/14. Between 2010/11 and 2013/14 the Fund registered 1.9 million new employers.

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The Compensation Fund has invested in an information technology system to process claims faster and reduce turnaround times. As a result, the Fund expects the number of claims processed to grow from 196 000 at present to 552 000 in 2017/18. To cater for this growth in claims the Fund will increase its prudent provisions, which will see total liabilities grow from R17.2 billion in 2013/14 to R20.5 billion by 2017/18.
¢    Government Employees Pension Fund
The Government Employees Pension Fund provides retirement security to 1.2 million public employees and pays retirement benefits for 300 000 current pensioners. Pensions were increased at the full rate of consumer price inflation in 2015, as has been the practice over the past decade. The 2014 valuation report by the fund’s actuaries showed the fund held R1.425 trillion in assets, which were sufficient to cover 121.5 per cent of its liabilities on a best-estimate basis. On a stricter solvency-based liability measure, the assets cover 83.1 per cent of liabilities, which is a significant improvement on the 2012 valuation. The main factor leading to the improvement was the high returns enjoyed by the Fund’s investments.	Valuations show that GEPF is in good financial health

Table 8.8 Government Employees Pension Fund actuarial valuation, 2008 – 2014

R billion	2008			2010			2012			2014
Assets at market value		707.0			801.0			1 038.9			1 425.7
Best estimate liabilities		613.6			736.7			1 011.6			1 173.5
Solvency liabilities		828.5			1 081.6			1 475.8			1 714.9
Funding position
on best estimate liabilities		115.2	%		108.7	%		102.7	%		121.5	%
on solvency liabilities		85.3	%		74.1	%		70.4	%		83.1	%

Source: Government Employees Pension Fund

The funding position deteriorated between 2008 and 2012, largely as a consequence of higher-than-anticipated salary increases in the public sector. In 2015, each percentage point increase in public-sector salaries will increase the Fund’s liabilities by about R9 billion, without having any effect on its assets. The National Treasury is working closely with the Fund to ensure that current funding levels can be maintained over the long term.	Higher-than-anticipated public-sector wage increases grow GEPF liabilities
¢    Summary
In aggregate, South Africa’s public-sector institutions are solvent and many are performing well. However, poor-performing and inefficient entities are significant risks to public finances. Government is working with these institutions to develop sustainable financial frameworks supported by turnaround plans. In the short term, many of these interventions focus on stabilising the finances of these entities – in particular bolstering liquidity. Over the longer term, in line with the recommendations of the Presidential Review Committee, government will better align its portfolio of institutions and mandates with national development requirements and develop complementary financing models.	Government will align its portfolio of institutions and mandates, and develop complementary financing models

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ANNEXURES

Two annexures are available on the National Treasury website (www.treasury.gov.za):

• Annexure W1: Explanatory memorandum to the division of revenue

• Annexure W2: Structure of the government accounts

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A

Report of the Minister of Finance to Parliament

¢ Introduction

Section 7(4) of the Money Bills Amendment Procedure and Related Matters Act (2009, the act) prescribes that the Minister of Finance (the Minister) must submit a report to Parliament at the time of the budget explaining how the Division of Revenue Bill and the national budget give effect to, or the reasons for not taking into account, the recommendations contained in:

• Budgetary review and recommendation reports submitted by committees of the National Assembly in terms of section 5 of the act.

• Reports on the fiscal framework proposed in the Medium Term Budget Policy Statement (MTBPS) submitted by the finance committees in terms of section 6 of the act.

• Reports on the proposed division of revenue and the conditional grant allocation to provinces and local governments set out in the MTBPS submitted by the appropriations committees in terms of section 6 of the act.

¢ Budgetary review and recommendation reports

Section 5 of the act sets out a procedure to be followed by the National Assembly, through its committees, for assessing the performance of each national department before it introduces the national budget. This procedure provides for committees to prepare budgetary review and recommendation reports, which:

• Must provide an assessment of the department’s service delivery performance given available resources.

• Must provide an assessment of the effectiveness and efficiency of the department’s use and allocation of available resources.

• May include recommendations on the use of resources.

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The budgetary review and recommendation reports were tabled by the relevant portfolio committees in October and November 2014. In many instances, the different committees made similar recommendations to a number of departments. These common concerns are summarised below.

General issues

• Additional funding is needed to improve human resource capacity.

• Vacant posts should be urgently filled, especially at senior management level and in critical or priority positions.

• Departments should review their annual performance plans to ensure that predetermined objectives, performance indicators and targets are SMART – specific, measurable, achievable, realistic and time-bound.

• Ring-fenced budgets are needed for various initiatives.

• Stricter compliance with the Public Finance Management Act (1999) and National Treasury Regulations.

• Institutions should establish controls and processes for their procurement systems.

• Institutions need to address issues raised by the Auditor-General.

• Formula or criteria used to allocate grants to institutions should not work against previously disadvantaged institutions.

• Internal audit functions and governance structures should be adequately capacitated.

• Funding arrangements for government entities need to be reviewed.

• Financial management must be improved and unqualified audits ensured.

• Information and communications technology modernisation programmes should be implemented.

• Issues raised in previous budgetary review and recommendation reports must be addressed.

A number of committees also recommended that additional budget allocations be made available for certain programmes, sub-programmes or other budget items. Due to the constrained economic outlook, the scope to provide additional funding has been limited. As a result, departments, public entities and constitutional institutions were asked to reprioritise funds within their existing baselines to fund emerging priorities. Should the fiscal outlook improve, recommendations for additional funding may be considered in future budget processes. Due to the large number of budgetary review and recommendation reports, a separate document will be tabled in Parliament with detailed responses to the portfolio committees’ recommendations.

The following section consists of the Minister of Finance’s response to other committee reports. In cases where different reports make the same recommendations, these are not repeated.

¢ Recommendations of the Standing Committee on Appropriations on the 2014 MTBPS

Budget alignment with the National Development Plan and the Medium Term Strategic Framework

The National Treasury, in conjunction with the Department of Planning, Monitoring and Evaluation, should develop systems and mechanisms targeted specifically at the seamless alignment of budget functional groups and the Medium Term Strategic Framework’s 14 outcomes.

The National Treasury agrees that alignment between budgeting and planning is crucial. The 2015 medium-term expenditure framework budget process continued to focus on linking budgeting at a function-group level with the 14 outcomes. Institutions were asked to ensure that their spending priorities are aligned with the National Development Plan and the Medium Term Strategic Framework, and the 2015 Estimates of National Expenditure guidelines required departments to demonstrate this link.

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In the 2014 MTBPS, most of the five-year Medium Term Strategic Framework’s priorities are financed within the three-year medium-term expenditure framework. Where funds are needed to expand or introduce new programmes, savings have been sourced from baseline budgets, or implementation will be phased in gradually. In addition, significant resources were left unallocated in the third year of the framework to serve as a buffer against fiscal and economic shocks. A portion of this may also be used to finance high-impact programmes aligned with core Medium Term Strategic Framework objectives.

Scaling up best practice in the public service

The National Treasury, in conjunction with the Department of Planning, Monitoring and Evaluation, should consider the establishment of an innovation unit that will identify and assess mechanisms for scaling up best practice across the public service in the areas of cost-containment efficiencies, medium-term expenditure framework planning and target formulation, job-creation initiatives, utilising shared services and the development of innovative solutions for the delivery of public services. Active efforts should be made to ensure that best practice on efficiencies is disseminated to all parts of the public service.

The National Treasury agrees with the committee. A number of initiatives, including guidelines on cost-containment measures and the framework for strategic plans and annual performance plans, are already being implemented. The Department of Public Service and Administration will play a significant role in improving best practice in the public service – it already has a specific unit that focuses on innovation in the public sector, and develops policies and creative solutions to enhance service delivery.

Setting efficiency targets

The National Treasury, in conjunction with the Department of Planning, Monitoring and Evaluation, should consider the inclusion of efficiency targets as a planning requirement in the frameworks guiding the compilation of strategic plans and annual performance plans.

The Department of Planning, Monitoring and Evaluation is now responsible for overseeing the compilation of strategic plans and annual performance plans. The National Treasury supports the committee’s recommendation that institutions should include efficiency targets as part of their planning process.

Leveraging funding streams for higher education

The National Treasury, in partnership with the Department of Higher Education and Training, should consider mechanisms for leveraging funding streams within the Sector Education and Training Authorities (SETAs) and the National Skills Fund towards student funding in higher education, especially increased funding for the National Student Financial Aid Scheme.

The Minister of Higher Education and Training gazetted the SETA Grant Regulations on 3 December 2012. The regulations provide for a large proportion of the skills development levy to be directed to professional, vocational, technical and academic learning programmes that result in full or part qualifications through the National Qualifications Framework, including those in higher education.

The National Skills Fund provided R3.1 billion between 2011/12 and 2013/14 towards funding higher-education students through the National Student Financial Aid Scheme, with a focus on scarce and critical skills. Over the medium term, R2.4 billion has been set aside for funding through the scheme.

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Grant for scholar transport

The National Treasury, in consultation with the Department of Basic Education and with the assistance of the Financial and Fiscal Commission, should consider the formulation and development of a conditional grant for the provision of scholar transport.

The National Treasury takes note of the recommendation and will engage with all the relevant stakeholders to evaluate the feasibility of this proposal.

Effectiveness of the quintile system

The National Treasury, in consultation with the Department of Basic Education, should assess the effectiveness of the quintile system, with particular emphasis on ensuring that qualifying beneficiaries for programmes such as the school nutrition programme are adequately catered for.

The Department of Basic Education is considering proposals to delink school allocations from the quintile ranking system. It envisages two broad categories to determine the structure and level of school allocations: no-fee schools and fee-paying schools.

Ring-fencing funding for learnership and internship programmes

The National Treasury and the Department of Higher Education should consider developing systems for ring-fencing funds earmarked for learnerships and internships in the public service and developing rigorous frameworks to enhance the quality of training entailed in these learnerships/internships.

In line with the SETA Grant Regulations, SETAs ring-fence funding for learnerships and internships, as well as other professional, vocational, technical and academic learning programmes across all sectors, including the public service. The Public Service SETA, in conjunction with the Quality Council for Trades and Occupations and the National School of Government, are responsible for developing frameworks to enhance the quality of training in public-sector learnerships/internships.

Funding for social and behavioural change communication programmes

The National Treasury, together with the Department of Health, should consider ways of leveraging resources within available funds for the provision of social and behavioural change communication programmes to reduce the high HIV infection rate and other health challenges.

The largest proportion of the health HIV/AIDS conditional grant is allocated to the antiretroviral treatment programme, while a relatively small portion is used for prevention efforts in high transmission areas and for social and behavioural change communication programmes. Some of the major programmes, including Johns Hopkins Health and Education South Africa, loveLife and Soul City, are partially funded by development partners such as the President’s Emergency Plan for Aids Relief (PEPFAR) and the Global Fund. The departments of Health, Social Development, and Sport and Recreation provide loveLife with substantial funding. Soul City receives funds from the Global Fund and PEPFAR, with a small contribution from the Department of Health. There are several initiatives under discussion to review the efficiency of HIV/AIDS spending and ensure sufficient focus on prevention.

Labour Market Intelligence Unit

The National Treasury and the Department of Higher Education should develop and implement a capacity enhancement and support initiative specifically aimed at the establishment of a labour market intelligence unit to work on linking economy-wide demand for the supply of required skills.

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The White Paper on Post School Education and Training states the need to establish a skills planning unit to identify and link economy-wide demand for the supply of required skills. Three research and support initiatives are supporting the establishment of the labour market intelligence unit: the Labour Market Intelligence Project (Human Sciences Research Council, R67 million); a project to forecast skills needs using econometric modelling (Wits University, R15 million); and a project on skills planning as part of the European Union dialogue facility (R3 million).

Early childhood programmes

The National Treasury, in partnership with the Department of Basic Education and the Department of Cooperative Governance and Traditional Affairs, should consider developing innovative bottom-up approaches within the current resource envelope for the provision of early childhood development programmes in each district.

The National Integrated Programme of Action for early childhood development, approved by Cabinet in August 2014, mandates the Department of Social Development to develop the related service delivery and funding models. A task team has been investigating different models. The National Treasury is waiting for the submission of the proposed funding models.

¢ Recommendations of the Select Committee on Appropriations on the Division of Revenue Amendment Bill

Project management capacity in municipalities

Weaknesses in project planning, project management and implementation, as well as procurement processes, should be addressed to avoid unnecessary roll-overs.

The National Treasury agrees with the committee’s recommendation. To improve municipal project planning, it has introduced built environment performance plans for metropolitan municipalities. This serves as a strategic planning tool that is aligned with the National Development Plan to achieve grant alignment and spatial transformation. The integrated city development grant, introduced in the 2013 Division of Revenue Act, was allocated to metros in 2013/14 to assist them with project planning. This grant introduces performance incentives to encourage large urban municipalities to develop more compact, efficient and equitable cities, and smaller municipalities to provide basic services and eradicate backlogs.

In response to the varying levels of service delivery demands and municipal capacity, the National Treasury (in conjunction with the Financial and Fiscal Commission, national sector departments, the South African Local Government Association and municipalities) is reviewing local government infrastructure grants. The review aims to build more incentives into these grants to improve performance. Over the next three years, government will roll out a new approach to local government infrastructure financing, which will take account of the need to strengthen capacity and planning.

Planning for maintenance and repairs in municipalities

Organs of state should be encouraged to properly plan for the maintenance and repair of their assets to avoid unnecessary unforeseen and unavoidable expenditure due to poor operations and maintenance.

Since 2011/12, national and provincial treasuries have advised municipalities that at least 8 per cent of the capital budget should be allocated to repairing and maintaining their revenue-generating assets. Municipalities have increased their provision for repairs and maintenance for revenue-generating assets from 2.5 per cent in 2010/11 to 3 per cent in 2013/14. This is expected to increase to 4.5 per cent in 2016/17.

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The National Treasury is developing a costing methodology guideline for local government that will help municipalities identify the costs and cost drivers for rendering a service. Once the full cost of rendering a service is known, proper tariffs can be calculated to recover this cost. This will allow municipalities to generate sufficient funds for their operations and avoid deferred maintenance due to lack of funds.

Collaboration in the provision of infrastructure assistance to municipalities

The National Treasury and the Department of Cooperative Governance and Traditional Affairs should ensure that there is collaboration among entities such as the Development Bank of Southern Africa and the Municipal Infrastructure Support Agency when they provide infrastructure assistance to municipalities. In addition, the South African Local Government Association should be brought on board at all times. This will assist in omitting duplication and strengthening cooperation between departments that seek to achieve similar outputs.

The National Treasury and the Department of Cooperative Governance and Traditional Affairs are implementing various initiatives to promote collaborative municipal support. The two departments are developing a working protocol that will outline areas of collaboration, setting out how it will support the provision of infrastructure in local government.

The National Treasury has also initiated engagements with the Development Bank of Southern Africa to explore options for supporting municipalities in providing infrastructure. A task team will be established to work on these options. The Department of Cooperative Governance and Traditional Affairs and the Municipal Infrastructure Support Agency will be requested to serve on the task team to ensure collaboration.

Strengthening compliance

The National Treasury should consider strengthening compliance with its regulations and ensure that municipalities plan their projects in accordance with government’s multi-year budget approach.

The National Treasury provides regular training to municipalities and provincial treasuries to strengthen compliance with regulations. In addition, the budget and reporting formats introduced by the Municipal Budget and Reporting Regulations facilitate financial planning over a seven-year period covering three historical years, the current year, and the medium term (medium-term revenue and expenditure framework period).

The National Treasury has also institutionalised annual municipal budget benchmark engagements, which provide guidance to the 17 non-delegated municipalities to ensure that municipal integrated development plans and budgets are linked to national priorities, and that they apply a multi-year budget approach. Non-delegated municipalities that have not applied multi-year budgeting have to redo their budgets. The National Treasury, in conjunction with provincial treasuries, is developing province-specific strategies to strengthen provincial treasuries’ capacity to replicate the national benchmarking processes and support the delegated municipalities with multi-year budgeting.

Determining the allocation of grants

Capacity to spend should be a determining factor when grants are designed and introduced to avoid under-spending that might lead to unnecessary conversion of grants at a later stage.

The National Treasury agrees that capacity to spend should be a key factor in allocating funding and designing grant mechanisms. For example, indirect grants allow national departments to temporarily

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implement projects on behalf of provinces or municipalities. Once a province or municipality has demonstrated the ability to implement projects on its own, then funds can be converted (either in-year or in the next budget) to direct grant allocations. In the 2015 Division of Revenue Act, for example, several municipalities will receive direct allocations from the municipal water infrastructure grant, which they had previously benefited from as an indirect grant.

¢ Recommendations of the Select Committee on Appropriations on the proposed Division of Revenue and the conditional grant allocations to provincial and local spheres of government as contained in the 2014 MTBPS

Improving efficiency in grant spending

Reduction of grants and reprioritisation of such funds should be used as an interim measure while efforts are made to improve efficiency in grant spending.

The National Treasury works with national transferring officers and receiving officers in provinces and municipalities to improve the efficiency of grant spending. If it is clear that funds will not be fully spent and can be used productively elsewhere, grants are reduced and funds reprioritised.

To improve provincial and municipal infrastructure project planning, the National Treasury has introduced reforms to a number of provincial and local government infrastructure grants that incentivise best practices, including proper project planning. This includes the education infrastructure grant, the health facility revitalisation grant and the integrated city development grant.

Financial support to state-owned entities

Efforts to minimise financial support to state-owned entities should avoid unintended consequences such as rewarding underperforming entities while constraining performing ones in their attempt to expand their capacity to fulfil economic and developmental mandates.

The National Treasury exercises due diligence when considering the provision of financial support to state-owned entities. Support is based on the entities’ sound business plans and their efforts to strengthen internal governance.

Cost-cutting measures

In addition to central procurement of certain services as a cost-cutting measure, the National Treasury should explore other cost-cutting avenues such as the use of shared services, better land and property utilisation, reducing printing costs, reducing advertising costs, and using video conferencing instead of travel.

The National Treasury agrees with the committee. Some of these recommendations are already in place. For example, the Public Finance Management Act (1999) and the National Treasury Regulations allow for shared services. Additional cost-containment measures, which will further amplify some of the suggestions made, will be announced shortly.

During December 2013, the National Treasury issued a Treasury Instruction on cost-containment measures, which took effect from 1 January 2014. This instruction places limitations on expenditure related to the use of consultants, air travel, car hire, team-building exercises and year-end functions. An expenditure analysis will be conducted to determine the impact of the cost-containment instruction during its first year of implementation. This analysis will also seek to identify other areas where spending could be curtailed, which could include consideration of bulk advertising, the reduction of cellular phone costs, attendance at international conferences and printing costs.

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Matlosana Local Municipality disaster allocation

The National Treasury should expedite its processes so that the request for disaster allocations in the Matlosana Local Municipality can be funded during the 2015/16 Budget.

The National Treasury, in collaboration with the National Disaster Management Centre, has processed the disaster funding for the Matlosana Local Municipality and eligible projects will be funded through the 2015/16 Budget.

Improving municipal multi-year planning

Municipalities should take measures to improve their multi-year planning with regard to the municipal infrastructure grant, as required by the grant framework.

The Municipal Infrastructure Support Agency of the Department of Cooperative Governance and Traditional Affairs provides technical assistance to rural and low-capacity municipalities on multi-year planning for the municipal infrastructure grant. In addition to the technical support and training that national and provincial treasuries are providing to municipalities to assist them with multi-year planning, the Municipal Finance Improvement Programme Phase II provides advisors to qualifying municipalities. The National Treasury and the Department of Cooperative Governance and Traditional Affairs are reviewing the local government infrastructure grant system to improve municipal planning. This work will continue in 2015 and changes to the system may be announced in the 2016 Budget.

¢ Recommendations of the Standing Committee on Finance on the 2014 Revised Fiscal Framework

Differentiate strategic and non-strategic assets

The National Treasury needs to be very clear about the criteria it uses to define non-strategic assets and the terms of any sale of these. The National Treasury also needs to seek to ensure that the sale of these non-strategic assets does not lead to job losses or other unintended consequences that undermine the country’s economic growth and developmental goals.

One of the main criteria used to differentiate strategic assets from non-strategic assets is that the former are critical for driving economic growth and achieving the National Development Plan’s objectives, including job creation. The National Treasury will seek to avoid job losses and other unintended negative consequences for growth and development.

Financial performance of state-owned entities

The sale of non-strategic assets, however defined, could be contested and could take time. However, some state-owned entities need financial assistance more immediately. The National Treasury will have to speedily finalise measures to separate the commercial and developmental aspects of the state-owned entities and other measures to assist the entities in ways that contribute to improving their financial position in the interim.

In addition to differentiating the commercial and developmental activities of state-owned entities, other steps are also being taken to improve their financial performance. Cabinet will consider a range of measures for improving state-owned entity performance. The Deputy President, in collaboration with the relevant ministers, will oversee the turnaround of Eskom, South African Airways, the South African Post Office and SANRAL, and engagements have already begun in this regard.

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Mitigating risks in implementing the 2015/16 Budget

The 2015/16 Budget will have to clearly set out how National Treasury will realise the assumptions of the MTBPS and mitigate the risks to implementing it.

Government aims to lower the spending ceiling in 2015/16 and 2016/17, and realise targets for tax revenue over the MTEF period. Since its introduction in 2012/13, government has adhered to its spending ceiling. To ensure that this continues, budgets for non-essential goods and services have been frozen at 2014/15 levels, funding for longstanding vacant posts has been withdrawn, and adjustments will be made to tax policy and administration. Proposals will be introduced in the 2015 Budget to generate additional revenue of at least R44 billion over the MTEF period.

Rapid economic growth in the context of stable prices would enable government to attain its fiscal objectives earlier. If economic growth and revenue targets are not met, the fiscal package will mitigate some of these risks by helping to reduce the current account deficit. Deterioration in the economic outlook, however, would require additional measures. The proposed fiscal framework allows for R5 billion, R15 billion and R45 billion in unallocated reserves for 2015/16, 2016/17 and 2017/18 respectively. These funds will serve as a fiscal buffer, although a portion could also be used to fund high-impact programmes.

Domestic constraints

The National Treasury needs to be clearer about how government is going to deal with the domestic constraints to growth, including badly managed labour disputes, electricity and transport challenges, skills shortages and some policy uncertainties.

Government recognises that addressing challenges related to labour, infrastructure and policy uncertainty is critical to improving long-term growth and employment prospects. One of its most urgent priorities will be ensuring that maintenance and refurbishment plans are completed on time to secure and sustain electricity supply. Electricity supply is augmented through imports from Namibia and Mozambique, and cogeneration will also relieve pressure on the grid. If necessary, various forms of financial support will be considered, as announced in the 2014 MTBPS.

Unemployment remains the largest constraint to growth. Government supports employment through various initiatives, including the Expanded Public Works Programme, the employment tax incentive, the Jobs Fund and the establishment of special economic zones. The Medium Term Strategic Framework noted that improving dispute-resolution mechanisms in labour relations is a critical intervention. Government is engaging with the National Economic Development and Labour Council to work together to strengthen and improve labour relations in South Africa.

The Medium Term Strategic Framework outlines key transportation projects such as expanding rail capacity for coal exports between Mpumalanga and the Richards Bay Coal Terminal, building a new heavy-haul rail line from the Waterberg region, and increasing port capacity for iron exports via Saldanha and the Northern Cape corridor. Investing in these projects will result in higher productivity over time. The Medium Term Strategic Framework has also prioritised enhancing the performance of sea ports and inland terminals, revising and consolidating port charges, establishing a single transport regulator and reducing cross-subsidisation in transport pricing. A system is being implemented to rationalise the tariffs charged at ports, and the Ports Regulator is analysing the cost of providing various services at ports to help inform future tariff increases.

Implementing cost-containment measures in provinces and municipalities

The National Treasury will have to, through a variety of ways, assist provinces and municipalities to implement cost-containment proposals. The Committee wants to be briefed on this periodically.

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The National Treasury has been implementing cost-containment initiatives in provinces since 2010/11. Since 2012/13, it has focused on containing growth in compensation expenditure, which has led to the reversal of historical overspending in most provinces and reduced staff numbers, as reported in the MTBPS. The Budget Council has also resolved that MECs for Finance must continually emphasise to provincial executive councils the need to contain costs and reduce non-core spending, including items such as consultants, travel and catering. The National Treasury publishes expenditure information per province on a quarterly basis.

The Municipal Finance Management Act (2003) Budget Circulars require municipalities to take cost-containment measures into consideration when preparing their annual budgets. National and provincial treasuries scrutinise the municipalities’ implementation of these measures during the annual municipal budget benchmark and mid-year budget and performance engagements, and comment on the subsequent reports. These recommendations provide guidance on how municipalities should channel funding towards programmes that add value to their operations to ensure continuity. Key observations and concerns are also reported in consolidated reports on these engagements, which are submitted to the Minister of Finance and Parliament. In-year municipal spending reports (section 71 of the Municipal Finance Management Act) are also submitted to Parliament on a quarterly basis.

To improve the monitoring of cost-containment measures and municipal compliance, the National Treasury has recently promulgated the Municipal Regulation on Standard Chart of Accounts, which provides for a unified and consistent classification and reporting framework.

The Jobs Fund

The National Treasury needs to more actively monitor the outcomes of the Jobs Fund allocations, and the Committee will engage with the National Treasury on this in the first quarter of 2015. The Committee is keen to understand the number, nature and quality of the jobs being created and how they link to the country’s economic growth and developmental goals.

The National Treasury took over responsibility for administering the Jobs Fund from the Development Bank of Southern Africa, and it is therefore well placed to monitor the Fund’s performance. The Jobs Fund has established rigorous monitoring and evaluation processes that provide precise and in-depth performance information. The Fund is implementing 59 projects, which have created 30 701 permanent jobs, placed 17 428 people into full-time employment and provided training to 75 163 work seekers to date. It has paid grants worth R1.48 billion to these projects and has leveraged funding of R3.24 billion from its project partners.

Promoting domestic investment

While the Committee recognises the need for foreign direct investment, it believes that there is a need for greater focus on domestic investment, and the right balance needs to be struck between domestic and foreign investment.

Government is working to ensure that local investment is fostered. The Presidential Business Working Group aims to enhance the participation of domestic investors in policy making and improve understanding and dialogue, which is expected to increase investment.

Combating corruption in government

The National Treasury needs to clearly explain how government will more actively combat corruption. The Committee will engage the National Treasury on this in the first quarter of 2015. If government is more effective in reducing corruption, there will be significant savings and the National Treasury will be in a better position to carefully decide on tax increases.

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Proactive systems, processes and interventions need to be put in place to combat corruption. The Chief Procurement Officer released the Public Sector Supply Chain Management Review, which sets out the supply chain management modernisation programme. Government has declared supply chain management a strategic function. Accounting officers are required to build supply chain management capability within their departments and provide performance reports to executive authorities on a quarterly basis. The Chief Procurement Officer needs to accelerate the reform agenda. If properly implemented, this reform should, in addition to reducing corruption, improve and accelerate quality service delivery and reduce costs.

The National Treasury has also established a unit to detect fraud and corruption in government’s procurement processes. The forensic investigations help recover misappropriated state funds and support criminal proceedings.

The National Treasury believes that prevention is better than cure. As a result, it focuses its efforts on improving controls and governance structures to prevent fraud, rather than detecting it after the fact (which is the primary responsibility of other government departments and agencies). Practices are constantly reviewed and regulations and guides are updated to improve service and governance in the public sector.

Advocacy of National Treasury programmes

In view of the lack of investor and public confidence in the prospects of economic growth, the National Treasury needs to actively communicate its programmes and activities through the public media and its own media, and through other ways.

The Ministry of Finance and the National Treasury’s communication engagements include meeting with business, trade union and civil society leaders, giving speeches and conducting media interviews. In addition, the National Treasury manages an active investor relations programme (domestic and international road shows, use of the website, bilateral meetings), which aims to strengthen relationships with investors who buy government bonds.

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B

Public-sector infrastructure update

¢ Introduction

In line with the medium-term strategic framework (MTSF) and the National Development Plan, the 2015 Budget prioritises spending on economic infrastructure such as roads and transport, electricity, and water and sanitation. It also continues funding for programmes to improve the quality of infrastructure spending and the capacity of government to plan and implement infrastructure projects. This annexure provides an update on the status of government’s major infrastructure projects and highlights spending trends. It should be read in conjunction with Chapter 1 and the detailed discussions of the policy priorities that inform public-sector infrastructure spending in Chapters 5, 6 and 8.

¢ Trends in public infrastructure spending

Between 2009/10 and 2013/14, the public sector spent R1.02 trillion on infrastructure. Spending by general government – namely, national government, its agencies and provincial and local government – has increased significantly since 2011. In comparison, the substantial increase in spending by state-owned companies such as Transnet and Eskom beginning in 2007/08 slowed in 2013/14 and 2014/15. In some cases, capital expenditure by public corporations has declined.

Figure B.1 Real capital spending by sphere of government, 1998/99 – 2013/14

As a share of GDP, public-sector spending on economic infrastructure is now at its highest level in 25 years. The major components of economic infrastructure are roads, bridges, dams, electricity and

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water supply. Both general government agencies and public corporations have increased spending substantially. However, spending on social infrastructure, which includes schools, hospitals and sanitation, has not kept pace with GDP growth in recent years.

¢ Public-sector infrastructure spending highlights

Table B.1 summarises public-sector infrastructure plans for the next three years. The data in the table combines infrastructure financed at national, provincial and local government level with the expenditure estimates received from state-owned companies and other public entities. The public-sector infrastructure expenditure and estimates in the table include the cost of new and replacement assets, maintenance and repairs, upgrades and additions, and rehabilitation, renovation and refurbishment of assets. The table reflects the total project cost, including capital payments and interest. These costs may differ from other infrastructure figures in the 2015 Budget Review, or the Estimates of National Expenditure, which may exclude maintenance and financing costs.

Public-sector infrastructure spending estimates over the medium-term expenditure framework (MTEF) period have been revised down by R34.2 billion since they were published in the 2014 Budget Review.

Table B.1 Public-sector infrastructure expenditure and estimates, 2011/12 – 2017/18

	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18		MTEF
R billion	Outcomes						Estimates								Total
Energy		67.1		75.1		69.5		69.2		71.1		56.0		39.2		166.3
Water and sanitation		19.2		22.6		26.2		34.8		37.3		39.8		40.3		117.4
Transport and logistics		70.1		69.5		76.4		93.7		104.3		113.5		121.3		339.2
Other economic services		11.5		8.9		11.8		17.5		15.4		15.5		14.7		45.6
Health		7.7		9.7		10.6		9.7		9.3		9.9		10.3		29.5
Education		7.8		9.8		12.3		13.5		14.5		14.5		14.8		43.7
Other social services		15.7		10.7		10.3		11.5		10.6		11.3		11.6		33.5
Justice and protection services		2.8		4.4		4.0		3.9		4.5		5.2		5.5		15.2
Central government, administration services and financial services		6.5		6.9		5.8		8.6		6.9		7.7		8.2		22.7
Total		208.3		217.7		226.9		262.4		274.0		273.3		265.8		813.1
National departments		6.6		9.6		10.6		11.2		13.8		16.0		15.4		45.3
Provincial departments		43.4		36.4		39.5		44.0		45.0		47.7		47.4		140.1
Local government		33.2		41.7		47.1		58.3		55.9		59.0		62.0		177.0
Public entities1		15.4		14.1		13.0		27.5		26.1		26.0		26.9		79.0
Public private partnerships		10.7		2.6		3.0		3.1		2.9		3.3		3.4		9.7
State-owned companies1		98.9		113.4		113.7		118.3		130.1		121.3		110.7		362.2
Total		208.3		217.7		226.9		262.4		274.0		273.3		265.8		813.1

1. Public entities are financed by capital transfers from the fiscus and state-owned companies are financed from a combination of own revenue, borrowings and private funding

Source: National Treasury

State-owned companies are the largest contributors to public-sector infrastructure expenditure, spending a projected R362.2 billion over the next three years, mostly on economic infrastructure. Spending by provinces is forecast at R140.1 billion over the same period, while municipalities are forecast to spend R177 billion.

By function group, economic services accounts for 82.2 per cent of total public-sector infrastructure spending. This sector will contribute to the expansion of power-generation capacity, the upgrade and expansion of the transport network, and improvements to sanitation and water provision. Spending by social services, education and health accounts for 13.1 per cent, 5.4 per cent and 3.6 per cent respectively of total public-sector infrastructure spending.

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Spending on transport and logistics has been revised down from the estimates published in the 2014 Budget Review by R15.7 billion in 2015/16 and R14 billion in 2016/17. The downward revision is due to Eskom and Transnet trimming their capital spending plans. Eskom has reduced its capital budget mostly because many of the projects in its build programme are nearing completion. Given the subdued medium-term economic forecast, Transnet has curtailed its capital expenditure programme on the expectation of reduced demand for its services.

Energy

The energy subsector will spend a total of R166.3 billion over the next three years, accounting for about 20 per cent of the total public-sector infrastructure budget. Eskom accounts for R138 billion, or 83 per cent, of this amount.

Table B.2 Eskom expenditure over medium-term expenditure framework

R billion	2014/15		2015/16		2016/17		2017/18		MTEF Total
Medupi power station		10.0		10.2		4.6		0.4		15.2
Kusile		14.1		13.1		9.0		6.0		28.0
Ingula pumped storage scheme		3.9		2.6		0.1		—		2.7
Matla refurbishment project		0.6		0.7		0.6		0.1		1.4
Sere wind farm		0.9		—		—		—		—
795kv projects		0.7		0.7		—		0.3		1.0
Northern grid projects1		0.9		5.0		4.1		1.6		10.7
Cape grid projects1		0.8		0.5		—		—		0.5
Central grid projects1		0.7		0.3		0.1		—		0.4
Majuba projects		1.2		1.5		0.6		0.0		2.2
Other		21.3		27.1		27.1		21.5		75.8
Total		55.1		61.8		46.2		30.0		138.0

1. Grid projects involve installation of transmission lines, new transformers and upgrading of substations

Source: Eskom

The first units of Medupi and Kusile are scheduled to become commercially operational in the second half of 2015 and 2016 respectively. Construction at Medupi was delayed again in 2014 as a result of industrial action. The operational date for Kusile’s first unit was also delayed following the detection of boiler-tube welding defects. The first unit of the Ingula pumped storage scheme is due to become operational later in 2015.

Together with municipalities and the Department of Energy, Eskom will spend R18 billion on the Integrated National Electrification Programme between 2015/16 and 2017/18 to provide on-grid electricity access to 810 000 households and non-grid electrification to 65 000 households. The funds will also go towards building 12 substations and upgrading 18 others, and building 330km of medium-voltage power lines and upgrading a further 285km.

By December 2014, the Renewable Energy Independent Power Producer Procurement Programme, which was launched in August 2011, had contracted 66 projects to provide more than 4 100MW of renewable energy-generating capacity to the grid. As a result, generating capacity of 1 522MW, sufficient to power 670 000 average South African households for a year, had been brought online by December 2014. An additional 13 projects will be procured in the latest bid-submission period to increase total renewable energy-generating capacity to about 5 200MW. The cumulative investment for all 79 projects is estimated at R169 billion, of which about 28 per cent, or R47 billion, is foreign direct investment.

In addition, the request for proposals to procure 2 500MW worth of coal projects and 800MW of co-generation projects was issued in December 2014 for submission in June 2015. The gas utilisation master plan, a draft document intended to design the procurement process of gas and its role in South Africa in future, was also finalised and released for public comment in 2014.

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Water and sanitation

Over the MTEF period, funding is allocated to 229 water and sanitation infrastructure projects. These include 21 projects with a total cost of more than R1 billion.

Financed and implemented by the Trans-Caledon Tunnel Authority (TCTA), the Komati water scheme augmentation project, which supplies water to Eskom’s Duvha and Matla power stations, has been operating since June 2013. Final inspections will take place over the next several months and the project is expected to be complete in October 2015. The project budget included contingencies for risks that did not materialise, resulting in total expenditure of about R1.2 billion compared with a budgeted R1.7 billion.

The TCTA is also implementing components of phase 2 of the Olifants River water resource development project, which is at the detailed design and construction phase. Water delivery from phase 2C, connecting to the De Hoop water treatment works, is to be completed in November 2015. The Department of Water and Sanitation is exploring mechanisms to fund the remainder of this project.

The Lesotho Highlands Development Agency (LHDA) and the TCTA are developing the funding strategy and project implementation arrangements for phase 2 of the Lesotho highlands water project. In 2012, the Minister of Finance approved a R25 billion guarantee for this project. The LHDA and the TCTA anticipate that initial implementation contracts will be awarded by the end of 2015.

There are 60 large projects and 148 small projects funded mainly through the regional bulk infrastructure grant, which has been allocated R15.1 billion over the MTEF period. This funding will also finance the construction of 76 regional bulk schemes to be completed over the next three years. The water boards undertake some of the regional bulk projects. During 2014, as part of its institutional reform project, the Department of Water and Sanitation disestablished the Bushbuckridge and Botshelo water boards and expanded the service areas of the Rand and Sedibeng water boards.

Transport and logistics

Over the medium term, government and state-owned enterprises have budgeted R339.2 billion for transport and logistics. This accounts for 42 per cent of the total public-sector infrastructure budget over the period. These investments will improve the national transport infrastructure network, facilitate better mobility of people and services, and facilitate regional trade. Revenues from services provided by state-owned enterprises will help fund infrastructure investment, complemented by national and provincial allocations for road construction and maintenance.

Transnet continues to expand its freight rail network and upgrade capacity on the iron ore and coal export lines by modernising the rolling stock and refurbishing existing infrastructure. Planned investments in major capital projects – including buying rolling stock for locomotive freight rail, and expanding the manganese rail and terminal, the iron ore line and the coal line – will total more than R50 billion over the next three years. The increased capacity will facilitate the transport of freight and mining exports. Over the next seven years, an estimated R45.5 billion in capital investment will be spent on the coal and mineral system programme.

The diesel service of the new multi-product pipeline is now operating, and the pipeline will begin to operate at its full multi-product capacity once construction of the coastal and inland terminals is complete. Construction of these terminals is under way, and once completed the trunkline will enable delivery of products through the pipeline.

Over the MTEF period and beyond, major investments in roads, rail and ports include the following:

• Transfers to the South African National Roads Agency Limited of R39.1 billion over the medium term to fund maintenance and improvement of the national non-toll and coal-haulage road network.

• Moloto Road upgrades totalling R1.1 billion.

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• Road infrastructure construction and maintenance of nearly R70 billion will be financed through the provincial equitable share and maintenance grants.

• The Passenger Rail Agency of South Africa has been allocated R11.2 billion for its rolling stock fleet-renewal programme. Under this 10-year initiative, the agency is expected to receive the first 44 train sets over the medium term.

• 578 Metrorail and mainline passenger services coaches will be refurbished in each of the next three years. Part of the transfer funding is earmarked to upgrade signalling systems and refurbish coaches.

• Infrastructure improvements at the major international airports will total R11.9 billion over the next three years.

Human settlements

The MTSF projects that, by 2019, government will provide 563 000 fully subsidised housing units, 750 000 upgraded sites in informal settlements and 27 000 social housing units. Over the medium term, R59.2 billion is allocated to provincial human settlements departments for low-income subsidy housing programmes, and R33.7 billion to metropolitan municipalities for bulk infrastructure, land and basic services, particularly to upgrade informal settlements. Government has also allocated R3 billion for social housing through the capital restructuring grant.

Health

Through conditional grants, national and provincial departments play an important role in funding the construction of hospitals and other healthcare facilities. Over the medium term, R16.6 billion is allocated for the construction, upgrade and maintenance of health facilities. Given the size of the public health-infrastructure portfolio, government has formed a health facilities infrastructure management unit to improve planning, oversight and delivery.

Education

The Department of Basic Education will replace ageing, unsafe and other inappropriate infrastructure, and provide water, sanitation and electricity to schools across South Africa over the medium term. Funding of R7.4 billion has been allocated for this purpose over the medium term through the school infrastructure backlogs conditional grant. The department expects to use these funds to replace 510 inappropriate and unsafe school structures, and provide water to 1 120 schools, sanitation to 741 schools and electricity to 916 schools by 2017/18. With funding of R29.6 billion allocated to the education infrastructure grant over the medium term, provincial education departments will ensure that schools are built and maintained according to the minimum norms and standards for school infrastructure.

An amount of R3.2 billion has been allocated over the medium term to the Department of Higher Education and Training to continue construction that has already begun at two new universities – the University of Mpumalanga and Sol Plaatje University in the Northern Cape. Other infrastructure projects for new buildings and equipment, and refurbishments and upgrades to existing facilities at tertiary institutions, will amount to R7.4 billion over the MTEF period.

¢ Infrastructure spending in the Estimates of National Expenditure

The Estimates of National Expenditure provides details of infrastructure spending on the budgets of national departments, agencies and entities. This information, detailed in Table B.3, reflects capital and maintenance spending from appropriated funds. It excludes infrastructure spending not financed from the National Revenue Fund, such as projects financed from the balance sheets of state-owned companies. Capital infrastructure refers to new infrastructure, and infrastructure replacements in terms of upgrades, rehabilitation, renovations and refurbishments. Current infrastructure refers to maintenance and repairs of existing infrastructure assets.

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Table B.3 Infrastructure nature of investment, 2011/12 – 2017/18

Nature of investment	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
R million	Audited outcome				Preliminary outcome		Estimates
Departmental infrastructure		6 451.0		9 314.8		9 005.7		11 213.9		13 817.2		16 003.8		15 447.2
New infrastructure assets		2 752.7		4 212.2		4 641.2		6 377.7		7 500.4		8 920.5		8 511.6
Maintenance and repairs		328.3		191.0		437.4		648.1		620.5		578.5		805.5
Upgrading and additions		2 964.3		3 640.5		3 266.2		3 562.7		4 414.7		4 892.9		4 378.1
Rehabilitation and refurbishment		405.7		1 271.0		660.9		625.5		1 281.6		1 612.0		1 752.0
Infrastructure transfers		83 463.6		84 268.0		90 508.1		107 762.6		113 764.2		119 955.5		126 536.4
Current		189.4		398.2		384.6		555.8		318.4		318.1		338.1
Capital		83 274.2		83 869.8		90 123.5		107 206.9		113 445.8		119 637.4		126 198.3
Total		89 914.6		93 582.7		99 513.8		118 976.6		127 581.4		135 959.3		141 983.6

Source: National Treasury

Capital transfers form the bulk of the expenditure. A total of R451 billion is budgeted for infrastructure projects at general government level. Of this, 83 per cent of the projects are special infrastructure projects coordinated by the Presidential Infrastructure Coordinating Commission, which coordinates the development and planning of long-term strategic infrastructure projects across all sectors of the economy.

Improving performance

Government has been working to improve infrastructure planning and delivery at national, provincial and local government level for several years. Figure B.1, which appears earlier in this annexure, shows the improvement in capital spending based on audited outcomes. Municipal and provincial real spending has improved consistently over the last decade and remains high, despite an easing off after the 2010 World Cup. Budget planning has also improved.

Government continues to improve its capability to plan and implement capital projects, with a focus on enhancing institutional capacity and individual skills. These efforts towards improving capacity include the following:

• A performance-based infrastructure grant system that rewards provincial departments of health and education with additional incentive allocations for building capacity and demonstrating improved infrastructure planning.

• The Infrastructure Delivery Improvement Programme provides technical assistance, and training in planning, procurement and management systems for the provincial and national departments of health, education and public works, along with management oversight functions in provincial treasuries.

• The infrastructure skills development grant, which funds built-environment graduates to increase the pool of experienced practitioners. In the long term, these graduates will form a pipeline of qualified professionals. There are currently 432 graduates in various stages of training, with 64 expected to meet registration requirements in 2015/16.

• The City Support Programme, which works with metropolitan municipalities to promote growth and support urban spatial transformation. The programme has established a project preparation facility to help municipalities prepare projects that support urban transformation and economic growth.

• The Infrastructure Investment Programme for South Africa, a €100 million financing agreement supported by the European Union, which is designed to strengthen project planning and implementation. The Development Bank of Southern Africa is conducting due diligence on shortlisted projects and initial allocations will be made in April 2015.

Updated National Treasury regulations will establish requirements for infrastructure procurement and delivery to standardise requirements across the public sector.

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¢ Status of major infrastructure projects

Major infrastructure projects under way

Table B.4 summarises major economic and social infrastructure projects where funds have been committed and work is under way. The projects’ total estimated cost and status are provided. Most of the projects are publicly funded, while a small proportion, such as the Renewable Energy Independent Power Producer Procurement Programme and the Cornubia integrated human settlement project, are funded by the private sector. Where the implementing agent is a public enterprise, these projects are financed from its own balance sheet, backed by government guarantees when necessary. Sources of information include the corporate plans of state-owned companies and National Treasury estimates of national expenditure.

Table B.4 Major infrastructure projects under way

Project name	Implementing agent	Project cost (R billion)	Project description	Current status
Energy
Renewable energy	Independent power producers	105	Comprises photovoltaic, concentrated solar power and wind projects	Phase 2 reached financial close. Phase 3 bidding complete. First bidding process completed in October 2011 and 3 725 MW will be constructed by 2017 by independent power producers
Sere wind farm	Eskom	2.4	Construction of 100MW of wind power in Ceres	Main turbine contractor awarded and site establishment commenced
Medupi power station	Eskom	105	Construction of 4 800MW coal plant in the Waterberg region	Unit 6 scheduled for commercial operation in second half of 2015.
Kusile power station	Eskom	118.5	Construction of 4 764MW coal plant in Mpumalanga	Unit 1 commercial operation scheduled for second half 2016
Ingula pumped-storage scheme	Eskom	25.9	Construction of 1 332MW pumped-storage scheme	Commercial operation of first unit expected second half of 2015
Education
University of Mpumalanga	Department of Higher Education and Training	7	University with various campuses across the province and at least one centre in each of the three municipal districts by 2025	First phase upgrade of existing facilities completed in 2014, major construction work will begin in 2015/16
Sol Plaatje University (Northern Cape)	Department of Higher Education and Training	5.4	University with campuses in Kimberley, Upington and Kuruman by 2025	First phase upgrade of the existing facilities completed in 2014, major construction work will begin in 2015/16
Construction of 12 new TVET college campuses	Department of Higher Education and Training	25.4	Construction of new TVET colleges, refurbishment of old ones by 2017	Construction commenced at three sites: Thabazimbi, Nkandla A and Bambanani
Tertiary institutions infrastructure	Department of Higher Education and Training	33.1	New buildings and equipment, refurbishment and upgrade of facilities	Work in progress
School infrastructure backlogs in-kind allocation	Department of Basic Education	13.9	Replacing 510 inappropriate and unsafe school structures, and providing water to 1 120 schools, sanitation to 741 and electricity to 916	Work in progress
Education infrastructure allocation	Department of Basic Education	95.8	Construction, maintenance, upgrading and rehabilitation of new and existing infrastructure in schools	Work in progress
Health
Upgrade and rebuild of hospitals (national hospital revitalisation)	Provincial departments	31	Provide funding for upgrade and rebuild of hospitals	Work in progress
Health facility revitalisation grant	Provincial departments	15	Help accelerate construction, maintenance, upgrading and rehabilitation of new and existing infrastructure in health	Work in progress
KwaZulu-Natal: Ngwelezane hospital and Lower Umfolozi war memorial hospital complex	Provincial departments	1.5	Construction of hospital complex	Under construction
Eastern Cape: Cecilia Makiwane hospital	Provincial departments	1.3	Construction of main hospital (phase 4)	Under construction
North West: Bophelong hospital	Provincial departments	1	Construction of new hospital	Under construction

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Table B.4 Major infrastructure projects under way (continued)

Project name	Implementing agent	Project cost (R billion)	Project description	Current status
Health
KwaZulu-Natal: King George V	Provincial departments	1.2	Upgrading and additions to existing hospital	Under construction
Northern Cape: Upington hospital	Provincial departments	0.9	Construction of new hospital	Under construction
Free State: Boitumelo hospital	Provincial departments	0.8	Revitalisation of existing hospital	Under construction
Gauteng: Chris Hani Baragwanath	Provincial departments	0.8	Construction of pharmacy, outpatient and x-ray departments completed	Under construction
Mpumalanga: Rob Ferreira hospital	Provincial departments	0.9	Upgrading of existing hospital	Under construction
Eastern Cape: St Elizabeth’s hospital	Provincial departments	0.7	Upgrading of existing facility	Under construction
North West: Brits hospital	Provincial departments	0.8	Construction of new hospital	Under construction
National health grant (health facility revitalisation component)	National Department of Health	3.8	Accelerate construction, maintenance, upgrading and rehabilitation of new and existing infrastructure in health	Work in progress
Telecommunications
Digital terrestrial television	Sentech	2.7	Finalise digital terrestrial network by 2015	83.5% population coverage achieved against overall target of 84%. All digital terrestrial television migration sites to be completed by 31 March 2015
Square Kilometre Array	National Research Foundation	16	Hosting the most powerful radio telescope in the world	Tender
South Africa connect: phase 1 of digital development plan	Provincial departments	6.7	Schools and government institutions connected to broadband	Under construction
Water
Mokolo river and West Crocodile river water augmentation project (phase 1)	Trans-Caledon Tunnel Authority	2.1	Construction of pump station and 43 km pipeline to augment domestic and industrial water supply to new power stations, associated mining activities and growing population	Under construction
OR Tambo, Mthatha and King Sabata Dalindyebo district municipality bulk water supply and sanitation	Municipal project	2.7	Augmentation of existing bulk water scheme	Under construction
Olifants River water resources development project: De Hoop dam (phase 2A)	Trans-Caledon Tunnel Authority	3.1	Supplying water to new mining developments, augmentation of domestic water supplies to urban and rural users in the middle Olifants river catchment area and to various communities on Nebo Plateau and Sekhukhune	Under construction
Olifants River water resources development project (phase 2C)	Trans-Caledon Tunnel Authority	3.4	Bulk distribution works from Flag Boshielo to Mokopane, De Hoop to Steelpoort, Steelpoort to Mooihoek, Mooihoek to Olifantspoort and Nebo Plateau to Roossenekal	Under construction
Vaal Gamagara scheme	Department of Water and Sanitation	2	Upgrading existing bulk water scheme	Under construction

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Table B.4 Major infrastructure projects under way (continued)

Project name	Implementing agent	Project cost (R billion)	Project description	Current status
Water
Mogalakwena bulk water supply	Department of Water and Sanitation	1.5	Upgrading boreholes and construction of new bulk water scheme	Under construction
Greytown regional bulk scheme	Department of Water and Sanitation	1	Construction of new bulk water scheme and upgrading existing bulk water scheme	Under construction
Umgeni Water Board: Lower Thukela bulk water supply scheme	Umgeni Water Board	1	Construction of new bulk water scheme	Under construction
Olifants River water resources development project (phases 2B and 2G)	Trans-Caledon Tunnel Authority	13.1	Construction of Flag Boshielo to Mokopane pipeline and second pipeline between Flag Boshielo and Mokopane	Feasibility
Sedibeng bulk regional sewerage scheme remainder	Departmental agencies	2.4	Construction of new wastewater treatment works	Design
De Hoop: Greater Sekhukhune district municipality regional bulk water and wastewater infrastructure	Provinces and municipalities	2.1	Construction of new bulk water infrastructure linking communities with De Hoop dam	Feasibility
Magalies water to Waterberg	Departmental agencies	1.9	Construction of new bulk water scheme	Feasibility
Lusikisiki regional water supply scheme: Zalu dam on Xura river	Departmental agencies	5	Developing bulk water and wastewater infrastructure that will enable connection of municipal reticulation infrastructure	Feasibility
Rehabilitation of 28 water conveyances (bulk transfer scheme)	Department of Water and Sanitation	5	Rehabilitation of canals and pipelines	Under construction
Transport
Rolling stock for passenger rail	Passenger Rail Agency of South Africa	53	Rolling stock fleet renewal programme over 10 years commencing 2012, delivery commencing in 2014/15	Procurement under way
Locomotives for freight rail	Transnet	38.6	Acquisition of 1 064 locomotives for general freight rail	Procurement under way
Rolling stock and locomotives for freight rail	Transnet	19	Acquire rolling stock and locomotives for general freight rail	Procurement under way
Manganese rail and terminal	Transnet	26.7	Grow manganese exports from 7.0mt to 14.0mt by 2020 thereafter to 16.0mt	Under construction
Iron ore line	Department of Transport	13	Expand Sishen-Saldanha iron ore railway	Under construction
Coal line expansion	Department of Transport	45.5	Upgrade coal line from Mpumalanga to 81.0mt in near future, thereafter to 97.0mt	Under construction
Human Settlements
Cornubia integrated human settlement	Housing Development Agency / municipalities	25.8	Construction of 50 000 mixed-income, mixed-density houses by 2026	Under construction

Source: National Treasury

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Major projects in preparation

Table B.5 lists major projects in planning phase, which form part of the pipeline of infrastructure projects over the medium term. The table excludes projects at the concept and pre-feasibility stages because it is not yet possible to reliably estimate their costs. While some projects are still undergoing feasibility studies, others have advanced to the design and tender stage. As the scope of the project is firmed up during this preparatory phase, the estimated project costs are likely to change.

Table B.5 Major infrastructure projects in planning

Project name	Implementing agent	Project cost (R billion)	Project description	Current status
Energy
Coal 3 (Eskom)	Eskom	111.1	Build third coal-fired power plant	Feasibility
Solar park	Central Energy Fund	200	Establishment of 1GW solar park near Upington region and further 4GW elsewhere in Northern Cape	Feasibility
Eskom solar concentrated solar power	Eskom	9.8	Construction of 100MW of concentrated solar power technology with storage	Feasibility
Closed cycle gas turbine	Independent power producers	17	Construction of 2 652MW of installed capacity of gas turbines	Tender
Photovoltaic	Independent power producers	154	Another 7 000MW over and above 1 450MW in the current 3 725MW renewable energy independent power producers	Tender
Concentrated Solar Power	Independent power producers	60	Another 1 000MW over and above 200MW in the current 3 725MW renewable energy independent power producers	Tender
Wind	Independent power producers	111	Another 6 550MW over and above 1 850MW in the renewable energy independent power producers, and 800MW in committed builds elsewhere	Tender
Health
KwaZulu-Natal: Dr Pixley ka Seme Memorial hospital	Provincial department	1.5	Construction of new hospital	Tender
Limpopo: Siloam hospital	Provincial department	1.2	Replacement of hospital (main hospital and staff accommodation)	Design
Limpopo: Tshilidzini hospital	Provincial department	1.4	Replacement of hospital	Feasibility
Western Cape: Valkenberg hospital	Provincial department	1.2	Rehabilitation of hospital	Feasibility
Eastern Cape: Zithulele hospital	Provincial department	1	Replacement of hospital	Feasibility
Gauteng: Soshanguve hospital	Provincial department	1.4	Building of new hospital	Feasibility
Telecommunications
Sentech: digitisation of terrestrial television network	Public corporations and private enterprises	1.5	Efficient use of spectrum, broadcast digital dividend, multiple channel possibilities and new content generation	Design

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Table B.5 Major infrastructure projects in planning (continued)

Project name	Implementing agent	Project cost (R billion)	Project description	Current status
Transport
Moloto corridor	Department of Transport	10	Safe and reliable commuter transportation between Siyabuswa and Tshwane	Feasibility
Waterberg rail	Transnet	5.1	Develop Waterberg as coal hub, increasing coal tonnage to 23mtpa (seven-year programme)	Feasibility
Coal line expansion	Transnet	8.9	Upgrade Mpumalanga-Richards Bay coal line to 97mt over 10 years	Concept
Swaziland rail link	Transnet	19	Construction of new rail link, reconstruction and upgrade of existing rail links from Lothair through Swaziland to Sidvokodvo, upgrading of adjacent network	Concept
Durban port expansion	Transnet	8.2	Deepening of berths at Durban container terminal, expansion of Durban container terminal pier 1 phase 2 and infilling of Z shape	Design
Iron-ore line (Sishen to Saldanha Bay)	Transnet	16.3	Expand Sishen-Saldanha iron ore railway line to 82.5 mtpa	Feasibility
Manganese rail and terminal	Transnet	18.7	Upgrade rail, port and terminal capacity for manganese export	Feasibility
Water
Olifants River water resources development project (phases 2B and 2G)	Departmental agencies	13.1	Construction of Flag Boshielo to Mokopane pipeline and second pipeline between Flag Boshielo to Mokopane	Feasibility
Sedibeng bulk regional sewerage scheme remainder	Departmental agencies	2.4	Construction of new wastewater treatment works	Design
De Hoop: Greater Sekhukhune district municipality regional bulk water and wastewater infrastructure	Municipal Project	2.1	Construction of new bulk water infrastructure linking the communities with De Hoop Dam	Feasibility
Magalies water to Waterberg	Departmental agencies	1.9	Construction of new bulk water scheme	Feasibility
Lusikisiki regional water supply scheme: Zalu dam on Xura river	Departmental agencies	5	Developing bulk water and wastewater infrastructure of municipal reticulation infrastructure	Feasibility
Liquid Fuels
Mthombo	PetroSA	200	Construction of 3 000kbbl/d oil refinery at Coega with supporting infrastructure of R100 bn	Feasibility
Oil and gas exploration on the West Coast	PetroSA	8.5	F-O field exploration for deepwater oil and gas reserves in support of the gas-to-liquid refinery	Feasibility
Biofuels	Department of Energy	2	Construction of 90 million l/a plant at Cradock using sugar, beet and sorghum	Design

Source: National Treasury

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132

C

Additional tax amendments

This annexure should be read with Chapter 4 of the Budget Review. It elaborates on some of the proposals contained in that chapter, clarifies certain matters and presents additional technical proposals.

¢ Tax expenditure statement: February 2015

Tax expenditures are legislative provisions that reduce the amount of tax revenue that could otherwise have been realised. Such expenditures can be defined as deviations from the benchmark of a standard tax legislative framework.

As shown in Table C.2, total tax expenditure in 2012/13 was about R119.8 billion or 14.7 per cent of total gross tax revenue. Tax expenditure estimates reported in the previous statements may have changed due to availability of updated data, assumptions and other corrections.

Major changes to tax expenditure

This report now includes tax expenditure on medical credits, which were introduced in 2012/13 to replace income tax deductions for medical scheme contributions. In addition, the 2014 tax expenditure estimates for small business corporation tax savings were misaligned by one year (for example, estimates for 2008/09 should have been for 2009/10, and so on). This has been rectified. Diesel refunds previously offset against domestic VAT have been reversed out of domestic VAT and added to diesel refunds, increasing the level of refunds previously reflected in the report.

With the exception of the changes mentioned above, all other adjustments are the result of improved data availability due to increased levels of assessment. For 2012/13, some amounts are lower than for 2011/12 due to a lower level of assessment at the time the data was extracted for this exercise.

VAT relief on fuel sales

Because petrol, diesel and illuminating paraffin are zero-rated for VAT purposes, the resulting difference from a standard rating, when used by final consumers, is regarded as tax expenditure. It was assumed that 20 per cent of petrol sales was used for business purposes (by VAT vendors) and would have qualified for input VAT. For diesel, it was assumed that 90 per cent of sales was used for business purposes and would have qualified for input VAT.

Average national diesel, petrol and paraffin prices are shown below.

Table C.1 National average price and quantity of fuel sold (million litres)

	2009/10				2010/11				2011/12				2012/13
Fuel type	Price (Rand/l)		Quantity		Price (Rand/l)		Quantity		Price (Rand/l)		Quantity		Price (Rand/l)		Quantity
Petrol		8.6		11 055		7.6		11 319		8.4		11 541		10.3		11 972
Diesel		9.0		9 914		6.7		9 570		7.7		10 333		9.7		11 291
Paraffin		7.1		506		4.8		776		5.4		482		7.3		576

Source: National Treasury

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Estimates of tax expenditure

The following table summarises tax expenditure in terms of the Income Tax Act (1962), the VAT Act (1991) and the Customs and Excise Act (1964).

Table C.2 Tax expenditure estimates (R million)

	2009/10			2010/11			2011/12			2012/13
Personal income tax
Pension and retirement annuity contributions1		17 966			20 380			22 277			24 393
Pension contributions – employees		6 765			7 647			8 344			9 083
Pension contributions – employers		7 608			8 600			9 384			10 215
Retirement annuity		3 593			4 133			4 549			5 094
Medical		12 237			14 808			16 413			19 782
Medical contributions & deductions – employees		6 917			14 808			16 413			3 901
Medical contributions – employers 2		5 320			—			—			—
Medical credits 3		—			—			—			15 881
Interest exemptions		1 730			2 960			1 468			2 202
Secondary rebate (65 years and older)		1 061			1 151			1 252			1 330
Tertiary rebate (75 years and older)		—			0			107			111
Donations		115			134			167			195
Capital gains tax (annual exclusion)		88			111			143			292
Total personal income tax		33 196			39 545			41 828			48 305
Corporate income tax
Small business corporation tax savings		1 300			1 361			1 455			1 467
Reduced headline rate		1 280			1 343			1 434			1 450
Section 12E depreciation allowance		20			18			21			17
Research and development		966			1 153			964			343
Learnership allowances		740			1 144			1 004			689
Strategic industrial policy4		352			740			38			3
Film incentive		283			185			288			1
Urban development zones		207			285			390			208
Total corporate income tax		3 848			4 868			4 139			2 710
Value-added tax Zero-rated supplies
19 basic food items5		14 258			15 497			17 106			18 628
Petrol6		9 660			10 845			13 797			15 343
Diesel6		903			1 107			1 532			1 759
Paraffin6		519			367			585			611
Municipal property rates		3 973			6 032			7 568			9 598
Reduced inclusion rate for commercial accommodation		127			142			153			175
Subtotal zero-rated supplies		29 440			33 989			40 742			46 115
Exempt supplies (public transport and education)		905			999			1 088			1 175
Customs duties and excise
Motor vehicles (MIDP/APDP, including IRCCs)7		12 089			12 673			16 306			15 823
Textile and clothing (duty credits – DCCs)7		2 024			2 230			860			652
Furniture and fixtures		128			153			150			163
Other customs8		1 230			787			847			678
Diesel refund		1 993			2 184			2 668			4 137
Total customs and excise		17 464			18 027			20 831			21 453
Total tax expenditure		84 853			97 429			108 627			119 758
Tax expenditure as % of total gross tax revenue		14.2	%		14.5	%		14.6	%		14.7	%
Total gross tax revenue		598 705			674 183			742 650			813 826
Tax expenditure as % of GDP		3.3	%		3.4	%		3.5	%		3.6	%

1. Some of this tax expenditure is recouped when amounts are withdrawn as either a lump sum or an annuity

2. Prior to their abolishment on 1 March 2010, employer contributions were assumed to be equivalent to employee deductions

3. Medical credits were introduced in 2012/13 to replace income tax deductions for medical scheme contributions

4. Tax expenditure for all years is attributable to allowances under the s12I Strategic Industrial Policy

5. VAT relief in respect of basic food items based on National Treasury research of 2010/11 income and expenditure survey data

6. Based on fuel volumes and average retail selling prices

7. Motor Industry Development Programme (MIDP), replaced in 2013 by the Automative Production Development Programme (APDP); import rebate credit certificate (IRCC), duty credit certificates (DCC)

8. Goods manufactured exclusively for exports, television monitors and agricultural goods exempted

Source: National Treasury

134

ANNEXURE C: ADDITIONAL TAX AMENDMENTS

¢ Personal income tax tables and graphs

The marginal rate of tax for all individuals from the second tax bracket onwards has been increased by one percentage point. The primary rebate has been increased to R13 257 per year for all individuals. The secondary rebate, which applies to individuals aged 65 years and over, is increased to R7 407 per year. The third rebate, which applies to individuals aged 75 years and over, is increased to R2 466 per year. The threshold below which individuals are not subject to personal income tax is increased to R73 650 of taxable income per year for those below the age of 65, R114 800 per year for those aged 65 to 74, and R128 500 for individuals aged 75 and over. The rates for the 2014/15 tax year and the proposed rates for 2015/16 are set out in Table C.3.

Table C.3 Personal income tax rate and bracket adjustments, 2014/15 – 2015/16

2014/15		2015/16
Taxable income (R)	Rates of tax	Taxable income (R)	Rates of tax
R0 - R174 550	18% of each R1	R0 - R181 900	18% of each R1
R174 551 - R272 700	R31 419 + 25% of the	R181 901 - R284 100	R32 742 + 26% of the
	amount above R174 550		amount above R181 900
R272 701 - R377 450	R55 957 + 30% of the	R284 101 - R393 200	R59 314 + 31% of the
	amount above R272 700		amount above R284 100
R377 451 - R528 000	R87 382 + 35% of the	R393 201 - R550 100	R93 135 + 36% of the
	amount above R377 450		amount above R393 200
R528 001 - R673 100	R140 074 + 38% of the	R550 101 - R701 300	R149 619 + 39% of the
	amount above R528 000		amount above R550 100
R673 101 and above	R195 212 + 40% of the	R701 301 and above	R208 587 + 41% of the
	amount above R673 100		amount above R701 300
Rebates		Rebates
Primary	R12 726	Primary	R13 257
Secondary	R7 110	Secondary	R7 407
Tertiary	R2 367	Tertiary	R2 466
Tax threshold		Tax threshold
Below age 65	R70 700	Below age 65	R73 650
Age 65 and over	R110 200	Age 65 and over	R114 800
Age 75 and over	R123 350	Age 75 and over	R128 500

Source: National Treasury

The proposed tax schedule in Table C.3 compensates individuals for the effect of inflation on income tax liabilities and increases the marginal rate of tax. This reduces the tax liability for taxpayers with taxable income below R350 000. The impacts of these proposals are set out in tables C.4, C.5 and C.6. The average tax rates (tax as a percentage of taxable income) for individuals are illustrated in figures C.1, C.2 and C.3.

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Table C.4 Annual income tax payable, 2015/16 (taxpayers below age 65)

Taxable income (R)	2014/15 rates (R)		Proposed 2015/16  rates (R)		Tax change (R)		% change
85 000		2 574		2 043		-531		-20.6	%
90 000		3 474		2 943		-531		-15.3	%
100 000		5 274		4 743		-531		-10.1	%
120 000		8 874		8 343		-531		-6.0	%
150 000		14 274		13 743		-531		-3.7	%
200 000		25 056		24 191		-865		-3.5	%
250 000		37 556		37 191		-365		-1.0	%
300 000		51 421		50 986		-435		-0.8	%
400 000		82 549		82 326		-223		-0.3	%
500 000		117 549		118 326		778		0.7	%
750 000		213 247		215 297		2 050		1.0	%
1 000 000		313 247		317 797		4 550		1.5	%

Source: National Treasury

Figure C.1 Average tax rates for taxpayers below age 65

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ANNEXURE C: ADDITIONAL TAX AMENDMENTS

Table C.5 Annual income tax payable, 2015/16 (taxpayers aged 65 to 74)

Taxable income (R)	2014/15  rates (R)		Proposed 2015/16  rates (R)		Tax  change (R)		% change
120 000		1 764		936		-828		-46.9	%
150 000		7 164		6 336		-828		-11.6	%
200 000		17 946		16 784		-1 162		-6.5	%
250 000		30 446		29 784		-662		-2.2	%
300 000		44 311		43 579		-732		-1.7	%
400 000		75 439		74 919		-520		-0.7	%
500 000		110 439		110 919		481		0.4	%
750 000		206 137		207 890		1 753		0.9	%
1 000 000		306 137		310 390		4 253		1.4	%

Source: National Treasury

Figure C.2 Average tax rates for taxpayers aged 65 to 74

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Table C.6 Annual income tax payable, 2015/16 (taxpayers aged 75 and over)

Taxable income (R)	2014/15  rates (R)		Proposed 2015/16  rates (R)		Tax  change (R)		% change
150 000		4 797		3 870		-927		-19.3	%
200 000		15 579		14 318		-1 261		-8.1	%
250 000		28 079		27 318		-761		-2.7	%
300 000		41 944		41 113		-831		-2.0	%
400 000		73 072		72 453		-619		-0.8	%
500 000		108 072		108 453		382		0.4	%
750 000		203 770		205 424		1 654		0.8	%
1 000 000		303 770		307 924		4 154		1.4	%

Source: National Treasury

Figure C.3 Average tax rates for taxpayers aged 75 and over

138

ANNEXURE C: ADDITIONAL TAX AMENDMENTS

¢ Excise duty tables

Government proposes that the customs and excise duties in the Customs and Excise Act (part 1 and section A of part 2 of schedule 1) be amended with effect from 25 February 2015 to the extent shown in Table C.7.

Table C.7 Specific excise duties, 2014/15 – 2015/16

Tariff item	Tariff subheading	Article description	2014/15 Rate of excise duty	2015/16 Rate of excise duty
104.00		PREPARED FOODSTUFFS; BEVERAGES, SPIRITS AND VINEGAR; TOBACCO
104.01	19.01	Malt extract; food preparations of flour, groats, meal, starch or malt extract, not containing cocoa or containing less than 40 per cent by mass of cocoa calculated on a totally defatted basis, not elsewhere specified or included; food preparations of goods of headings 04.01 to 04.04, not containing cocoa or containing less than 5 per cent by mass of cocoa calculated on a totally defatted basis not elsewhere specified or included:
104.01.10	1901.90.20	Traditional African beer powder as defined in Additional Note 1 to Chapter 19	34.7c/kg	34.7c/kg
104.10	22.03	Beer made from malt:
104.10.10	2203.00.05	Traditional African beer as defined in Additional Note 1 to Chapter 22	7.82c/li	7.82c/li
104.10.20	2203.00.90	Other	R68.92/li aa	R73.05/li aa
104.15	22.04	Wine of fresh grapes, including fortified wines; grape must (excluding that of heading 20.09):
104.15.01	2204.10	Sparkling wine	R9.11/li	R9.75/li
104.15	2204.21	In containers holding 2 li or less:
104.15	2204.21.4	Unfortified wine:
104.15.03	2204.21.41	With an alcoholic strength of at least 4.5 per cent by volume but not exceeding 16.5 per cent by vol.	R2.87/li	R3.07/li
104.15.04	2204.21.42	Other	R137.54/li aa	R149.23/li aa
104.15	2204.21.5	Fortified wine:
104.15.05	2204.21.51	With an alcoholic strength of at least 15 per cent by volume but not exceeding 22 per cent by vol.	R5.21/li	R5.46/li
104.15.06	2204.21.52	Other	R137.54/li aa	R149.23/li aa
104.15	2204.29	Other:
104.15	2204.29.4	Unfortified wine:
104.15.07	2204.29.41	With an alcoholic strength of at least 4.5 per cent by volume but not exceeding 16.5 per cent by vol.	R2.87/li	R3.07/li
104.15.08	2204.29.42	Other	R137.54/li aa	R149.23/li aa
104.15	2204.29.5	Fortified wine:
104.15.09	2204.29.51	With an alcoholic strength of at least 15 per cent by volume but not exceeding 22 per cent by vol.	R5.21/li	R5.46/li
104.15.10	2204.29.52	Other	R137.54/li aa	R149.23/li aa
104.16	22.05	Vermouth and other wine of fresh grapes flavoured with plants or aromatic substances:
104.16	2205.10	In containers holding 2 li or less:
104.16.01	2205.10.10	Sparkling	R9.11/li	R9.75/li
104.16	2205.10.2	Unfortified:
104.16.03	2205.10.21	With an alcoholic strength of at least 4.5 per cent by volume but not exceeding 15 per cent by vol.	R2.87/li	R3.07/li
104.16.04	2205.10.22	Other	R137.54/li aa	R149.23/li aa
104.16	2205.10.3	Fortified:
104.16.05	2205.10.31	With an alcoholic strength of at least 15 per cent by volume but not exceeding 22 per cent by vol.	R5.21/li	R5.46/li
104.16.06	2205.10.32	Other	R137.54/li aa	R149.23/li aa
104.16	2205.90	Other:
104.16	2205.90.2	Unfortified:
104.16.09	2205.90.21	With an alcoholic strength of at least 4.5 per cent by volume but not exceeding 15 per cent by vol.	R2.87/li	R3.07/li
104.16.10	2205.90.22	Other	R137.54/li aa	R149.23/li aa

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Table C.7 Specific excise duties, 2014/15 – 2015/16 (continued)

Tariff item	Tariff subheading	Article description	2014/15 Rate of excise duty	2015/16 Rate of excise duty
104.16	2205.90.3	Fortified:
104.16.11	2205.90.31	With an alcoholic strength of at least 15 per cent by volume but not exceeding 22 per cent by vol.	R5.21/li	R5.46/li
104.16.12	2205.90.32	Other	R137.54/li aa	R149.23/li aa
104.17	22.06	Other fermented beverages (for example, cider, perry and mead); mixtures of fermented beverages and mixtures of fermented beverages and non-alcoholic beverages, not elsewhere specified or included:
104.17.03	2206.00.05	Sparkling fruit beverages and sparkling mead	R9.11/li	R9.75/li
104.17.05	2206.00.15	Traditional African beer as defined in Additional Note 1 to Chapter 22	7.82c/li	7.82c/li
104.17.07	2206.00.17	Other fermented beverages, unfortified, with an alcoholic strength less than 2.5 per cent by volume	R68.92/li aa	R73.05/li aa
104.17.09	2206.00.19	Other fermented beverages of non-malted cereal grains, unfortified, with an alcoholic strength by volume of 2.5 per cent or more by vol. but not exceeding 9 per cent by vol.	R68.92/li aa	R73.05/li aa
104.17.15	2206.00.81	Other fermented apple or pear beverages, unfortified, with an alcoholic strength of at least 2.5 per cent by volume but not exceeding 15 per cent by vol.	R3.45/li	R3.65/li
104.17.16	2206.00.82	Other fermented fruit beverages and mead beverages, including mixtures of fermented beverages derived from the fermentation of fruit or honey, unfortified, with an alcoholic strength of at least 2.5 per cent by volume but not exceeding 15 per cent by vol.	R3.45/li	R3.65/li
104.17.17	2206.00.83	Other fermented apple or pear beverages, fortified, with an alcoholic strength of at least 15 per cent by volume but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.17.21	2206.00.84	Other fermented fruit beverages and mead beverages including mixtures of fermented beverages derived from the fermentation of fruit or honey, fortified, with an alcoholic strength of at least 15 per cent by volume but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.17.22	2206.00.85	Other mixtures of fermented fruit or mead beverages and non-alcoholic beverages, unfortified, with an alcoholic strength of at least 2.5 per cent by volume but not exceeding 15 per cent by vol.	R3.45/li	R3.65/li
104.17.25	2206.00.87	Other mixtures of fermented fruit or mead beverages and non- alcoholic beverages, fortified , with an alcoholic strength of at least 15 per cent by volume but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.17.90	2206.00.90	Other	R68.92/li aa	R73.05/li aa
104.21	22.07	Undenatured ethyl alcohol of an alcoholic strength by volume of 80 per cent vol. or higher; ethyl alcohol and other spirits, denatured, of any strength:
104.21.01	2207.10	Undenatured ethyl alcohol of an alcoholic strength by volume of 80 per cent vol. or higher	R137.54/li aa	R149.23/li aa
104.21.03	2207.20	Ethyl alcohol and other spirits, denatured, of any strength	R137.54/li aa	R149.23/li aa
104.23	22.08	Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80 per cent vol.; spirits, liqueurs and other spirituous beverages:
104.23	2208.20	Spirits obtained by distilling grape wine or grape marc:
104.23.01	2208.20.10	In containers holding 2 li or less	R137.54/li aa	R149.23/li aa
104.23.03	2208.20.90	Other	R137.54/li aa	R149.23/li aa
104.23	2208.30	Whiskies:
104.23.05	2208.30.10	In containers holding 2 li or less	R137.54/li aa	R149.23/li aa
104.23.07	2208.30.90	Other	R137.54/li aa	R149.23/li aa
104.23	2208.40	Rum and other spirits obtained by distilling fermented sugarcane products:
104.23.09	2208.40.10	In containers holding 2 li or less	R137.54/li aa	R149.23/li aa

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Table C.7 Specific excise duties, 2014/15 – 2015/16 (continued)

Tariff item	Tariff subheading	Article description	2014/15 Rate of excise duty	2015/16 Rate of excise duty
104.23.11	2208.40.90	Other	R137.54/li aa	R149.23/li aa
104.23	2208.50	Gin and Geneva:
104.23.13	2208.50.10	In containers holding 2 li or less	R137.54/li aa	R149.23/li aa
104.23.15	2208.50.90	Other	R137.54/li aa	R149.23/li aa
104.23	2208.60	Vodka:
104.23.17	2208.60.10	In containers holding 2 li or less	R137.54/li aa	R149.23/li aa
104.23.19	2208.60.90	Other	R137.54/li aa	R149.23/li aa
104.23	2208.70	Liqueurs and cordials:
104.23	2208.70.2	In containers holding 2 li or less:
104.23.21	2208.70.21	With an alcoholic strength by volume exceeding 15 per cent by vol. but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.23.22	2208.70.22	Other	R137.54/li aa	R149.23/li aa
104.23	2208.70.9	Other:
104.23.23	2208.70.91	With an alcoholic strength by volume exceeding 15 per cent by vol. but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.23.24	2208.70.92	Other	R137.54/li aa	R149.23/li aa
104.23	2208.90	Other:
104.23	2208.90.2	In containers holding 2 li or less:
104.23.25	2208.90.21	With an alcoholic strength by volume exceeding 15 per cent by vol. but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.23.26	2208.90.22	Other	R137.54/li aa	R149.23/li aa
104.23	2208.90.9	Other:
104.23.27	2208.90.91	With an alcoholic strength by volume exceeding 15 per cent by vol. but not exceeding 23 per cent by vol.	R56.19/li aa	R60.97/li aa
104.23.28	2208.90.92	Other	R137.54/li aa	R149.23/li aa
104.30	24.02	Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes:
104.30	2402.10	Cigars, cheroots and cigarillos containing tobacco:
104.30.01	2402.10.10	Imported from Switzerland	R2 690.00/kg net	R2 824.35/kg net
104.30.03	2402.10.90	Other	R2 690.00/kg net	R2 824.35/kg net
104.30	2402.20	Cigarettes containing tobacco:
104.30.05	2402.20.10	Imported from Switzerland	R5.80/10 cigarettes	R6.21/10 cigarettes
104.30.07	2402.20.90	Other	R5.80/10 cigarettes	R6.21/10 cigarettes
104.30	2402.90.1	Cigars, cheroots and cigarillos of tobacco substitutes:
104.30.09	2402.90.12	Imported from Switzerland	R2 690.00/kg net	R2 824.35/kg net
104.30.11	2402.90.14	Other	R2 690.00/kg net	R2 824.35/kg net
104.30	2402.90.2	Cigarettes of tobacco substitutes:
104.30.13	2402.90.22	Imported from Switzerland	R5.80/10 cigarettes	R6.21/10 cigarettes
104.30.15	2402.90.24	Other	R5.80/10 cigarettes	R6.21/10 cigarettes
104.35	24.03	Other manufactured tobacco and manufactured tobacco substitutes; “homogenised” or “reconstituted” tobacco; tobacco extracts and essences:
104.35	2403.1	Smoking tobacco, whether or not containing tobacco substitutes in any proportion:

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Table C.7 Specific excise duties, 2014/15 – 2015/16 (continued)

Tariff item	Tariff subheading	Article description	2014/15 Rate of excise duty	2015/16 Rate of excise duty
104.35.01	2403.11	Water pipe tobacco specified in Subheading Note 1 to Chapter 24	R145.20/kg net	R155.60/kg net
104.35	2403.19	Other:
104.35.02	2403.19.10	Pipe tobacco in immediate packings of a content of less than 5 kg	R145.20/kg net	R155.60/kg net
104.35.03	2403.19.20	Other pipe tobacco	R145.20/kg net	R155.60/kg net
104.35.05	2403.19.30	Cigarette tobacco	R260.60/kg	R278.80/kg
104.35	2403.99	Other:
104.35.07	2403.99.30	Other cigarette tobacco substitutes	R260.60/kg	R278.80/kg
104.35.09	2403.99.40	Other pipe tobacco substitutes	R145.20/kg net	R155.60/kg net

Source: National Treasury

Table C.8 Amendment of schedule 1 part 1

By the insertion of the following additional note(s) after note 5(c)(4) in chapter 22 of section 4 to part 1 of schedule 1:

6. Subheading 2206.00.19 is limited to beverages that are the end products of fermentation of a liquor (wort) of non-malted cereal grains classifiable in chapter 10 of schedule 1 part 1, whether or not flavoured but not mixed with any other beverages, provided the fermentable sugars are derived solely from the liquor (wort) without the addition of any other sugars during or prior to fermentation.

By the insertion of the following:

Subheading	Check digit	Article description	Statistical	Rate of duty
			unit	General			EU	EFTA			SADC
2206.00.19	6	Other fermented beverages of non- malted cereal grains, unfortified, with an alcoholic strength by volume of 2.5 per cent or more by vol. but not exceeding 9 per cent by vol.	li		25	%	free		25	%	free

Source: National Treasury

¢ Additional tax amendments

Additional tax amendments proposed for the upcoming legislative cycle are set out below.

Individuals, employment and savings

Medical tax credits as part of PAYE: over 65 years

Employees over 65 are experiencing a decrease in their take-home pay as a result of the move to medical tax credits, although they may claim back some of these amounts on assessment after the end of the tax year. To alleviate this burden, it is proposed that medical tax credits related to medical scheme contributions be taken into account for both PAYE and provisional tax purposes.

Bus rapid transit payments to affected taxi operators

In 2010, government introduced the bus rapid transit system, which resulted in the compensation of affected taxi operators for the loss of potential earnings. It is proposed that the tax treatment of such payments to affected taxi operators be reviewed.

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Employee share schemes

The interrelationships in the application of section 8C of the Income Tax Act, including the taxation of directors and employees on vesting of equity instruments; the attribution of capital gains to beneficiaries; the income tax exemption of dividends; and the employees’ tax provision related to the return of capital, will be reviewed to remove anomalies.

Income and disposal to and from deceased estates

Section 25 of the Income Tax Act provides that no income or disposal is triggered in the deceased’s hands upon death, but that income may be recognised in the hands of the deceased estate, heir or legatee. Paragraph 40 of schedule 8, however, recognises capital gains and losses upon death. To address the anomalies created when the two regimes interact, the provisions will be examined and amendments may be proposed.

Withdrawal from retirement annuity funds by non-residents

Non-residents who move to South Africa for a fixed term of employment often contribute to a retirement annuity fund to continue saving for retirement in a tax-efficient manner. The current definition of “retirement annuity fund” does not allow these individuals to withdraw the amounts they have saved over this fixed term if they return to their home countries. In contrast, if South Africans emigrate, they are allowed to withdraw their retirement annuity interest. The mismatch in treatment will be reviewed.

Harmonisation of the treatment of retirement funds

The taxation of contributions and the rules on compulsory annuitisation for pension funds, provident funds and retirement annuity funds will change from 1 March 2016. The level of deductible contributions will be limited to 27.5 per cent of the greater of taxable income or remuneration per year. An additional amendment will be investigated to correct an omission in 2013 that inadvertently excludes some retirement funds that enjoy the benefit of higher deductions without being subject to the uniform annuitisation rules.

A maximum age for the preservation of retirement assets

From 1 March 2015, a retirement fund member may defer the drawing of their retirement income until after their retirement date (if the retirement fund allows). This will provide greater flexibility for retirement fund members and encourage the preservation of retirement assets. However, to limit tax planning opportunities, it is proposed that a maximum age at which withdrawals must be taken be introduced. This is in line with other countries that have similar retirement funding arrangements.

Estate duty and retirement funds

Amendments in 2008 removed the upper age limit at which an individual was required to purchase an annuity if they had an interest in a retirement annuity fund, and excluded retirement fund benefits from the dutiable estate when a member passed away. These two amendments have made it possible for some individuals to avoid estate duty by transferring their assets into a retirement annuity fund before their death. In the deceased’s tax calculation, lump sums paid to the estate are subject to the lump sum retirement taxable. However, lump sums equal to amounts above the allowable deduction (non-deductible contributions) are not subject to the lump sum tax table or estate duty.

To eliminate the potential to avoid estate duty, government proposes that an amount equal to the non-deductible contributions to retirement funds be included in the dutiable estate when a retirement fund member passes away.

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Business (general)

Corporate reorganisation rules

Township developer allowance: Section 45 of the Income Tax Act makes provision for allowances on capital assets to be transferred. However, the definition of a capital asset in section 41 excludes trading stock. The township developer allowance covers assets that qualify as trading stock, so it cannot be transferred in terms of this section. Government proposes to amend the wording of the section to include the allowance.

Asset for share transaction: The current anti-avoidance measure in section 42(5) of the Income Tax Act is creating anomalies and needs to be clarified.

Cross-border intra-group transactions: In 2012, section 45(3A) of the Income Tax Act was amended to clarify that the section also applies to cross-border intra-group transactions. However, subparagraph (c) of this section was inadvertently not amended, which creates anomalies. It is proposed that this subparagraph be amended to clarify that the provisions of this section refer to the same group of companies as defined in section 1 of the act.

Distribution and issue of shares for no consideration

The current wording in section 40C of the Income Tax Act creates anomalies when a company distributes shares internally. It is proposed that changes be made to clarify that the section’s provisions only apply to the issue of shares, not their distribution.

Amounts from disposal of shares

Government will consider the provisions of section 9C of the Income Tax Act to address the problem of return of capital after a taxpayer has held a share for a period of three years, as well as the meaning of the term “disposal” for the purpose of this section.

Cancellation of contracts

If a contract is cancelled, it is expected that the parties will be restored to the status quo before the transaction. However, it is argued that the cancellation of contracts results in the rebasing of the asset’s base cost, leading to zero capital gain or capital loss. This is prevalent between connected persons. It is proposed that this potential anomaly be removed.

Third-party-backed shares

In 2014, changes were made in the Income Tax Act regarding the refinancing of third-party-backed shares for qualifying transactions and limited pledges. Further refinements are needed to clarify the requirements or meaning of “qualifying purpose” to further the provisions’ objectives.

Sharia-compliant financing arrangements

In 2010, government enacted legislation that recognises certain forms of Islamic finance as equivalent to traditional finance entailing interest. In 2014, changes were made in the Income Tax Act to include public entities in the Islamic finance arrangements and to extend the definition of sukuk to include other entities. To create a more enabling environment for Islamic finance, it is proposed that the murabaha and sukuk financing arrangements be extended to listed entities and that section 8A of the Securities Transfer Tax Act (2007) be amended to cater for murabaha transactions.

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Business (financial sector)

REITS

In 2012, a special tax dispensation for listed REITS was introduced in the Income Tax Act. The provisions of section 25BB will be refined to remove anomalies.

Unlisted property-owning companies

Unlisted property-owning companies marketed to the general public or held by institutional investors do not qualify for the same special tax dispensation as listed real estate investment trusts. Government proposes that unlisted property-owning companies should qualify for the same tax treatment if they become regulated. A regulatory framework for unlisted property-owning companies will be developed.

Hedge funds

Government proposes that hedge funds be declared as collective investment schemes, subjecting them to similar rules as other collective investment schemes in terms of the Collective Investment Schemes Control Act (2002). Tax amendments will be considered to minimise any inadvertent tax consequences that may arise from the restructuring of regulated hedge funds.

Securities lending arrangements

The transfer of collateral in a securities lending arrangement provides the lender with confidence that they will not lose the underlying value of the securities lent, which increases liquidity in this market. However, the transfer of collateral currently results in securities transfer tax and capital gains tax. The taxation consequences of the collateral transfer may negatively affect liquidity and South Africa’s attractiveness as an investment destination.

Government proposes to review the tax treatment of the transfer in beneficial ownership of collateral to reduce any negative effects on acceptable business practices and limit the use of collateral in possible tax avoidance arrangements. In addition, the current tax treatment of securities lending arrangements will be reviewed to account for corporate actions during the term of such arrangements.

Introduction of the SAM basis of regulating long-term insurers

In 2016, the Financial Services Board intends to implement Solvency Assessment and Management (SAM), a risk-based supervisory regime for long- and short-term insurers. The SAM basis of valuing policyholder liabilities is not in line with the current tax treatment. To take account of SAM, government proposes a new valuation method for the policyholder liabilities of long-term insurers. The new approach will be based on an adjusted International Financial Reporting Standards method of valuation.

Business (incentives)

Industrial policy projects

The industrial policy project tax incentive supports the National Industrial Policy Framework’s objectives to diversify South Africa’s industrial output, develop the knowledge-based economy and create higher levels of employment. To allow for more projects to be included, it is proposed that the window period for the incentive be extended from 31 December 2015 to 31 December 2017.

Depreciation deductions for hydropower generation

Investments in renewable energy to generate electricity are incentivised through accelerated depreciation deductions. However, a capacity limit of 30 megawatts is in place for hydropower generation because of concerns about possible environmental impact.

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This limit may be overly restrictive because installed capacity alone may not be the best indication of a project’s environmental impact. Consideration will be given to including hydropower generators of more than 30 megawatts if other environmental concerns are addressed. A broader incentive could increase electricity supply and support the transition to a low-carbon economy.

Urban development zone incentive

Current legislation allows municipalities with a population of more than 2 million people to demarcate two areas as urban development zones (UDZs). With the amalgamation of various municipalities, the need for the demarcation of more than one UDZ has become apparent. Consideration will be given to allowing for the demarcation of two or more UDZs per municipality, within an overall limit of the area of the UDZs.

Research and development incentive

The research and development (R&D) tax incentive was introduced to boost R&D as a percentage of gross domestic product, and to encourage knowledge transfer and skills development. For expenditure to qualify for the tax incentive in terms of the Income Tax Act, the taxpayer must submit an application for approval to the adjudication committee. However, the backlog in the approval process is creating difficulties, especially for smaller businesses, which have to wait months for approval. Measures will be considered to ensure that taxpayers are not disadvantaged by undue delays by the adjudication committee. The issue of third-party funding for R&D activities will also be considered.

Government grants

Government will review the tax treatment of government grants to remove unintended anomalies arising before and after the introduction of section 12P of the Income Tax Act, as well as the regulatory mechanism relating to these grants. Government aims to address anomalies related to grants that were not previously listed, the claiming of deductions on tax-exempt grants, and grant relationships with public-private partnerships.

Indefeasible right of use of transmitting electronic communications outside South African territorial waters

In 2009, government introduced a deduction for premiums or consideration paid for the “right of use” of transmission lines or cables used to transmit electronic communications outside South African territorial waters, where the term of the right of use is 20 years or more. Due to the change in business models and international best practices, it is necessary to review the term set as a condition of this deduction.

Revision of manufacturing assets deduction

Section 12C of the Income Tax Act makes provision for an accelerated depreciation deduction for manufacturing assets, provided that the assets are directly used by the taxpayer for the purposes of his or her trade. Due to changes in the business models of some manufacturing activities, government will review the conditions of the granting of this allowance without undermining the current limitation provisions in section 23D of the Income Tax Act.

Film incentives

Government will refine film incentives in section 12O of the Income Tax Act to remove anomalies arising as a result of the interaction of its provisions with other provisions in the Income Tax Act.

Special economic zones: definition of qualifying company

In order for a company to qualify for the 15 per cent special economic zone income tax benefit, at least 90 per cent of its income must be derived from conducting business or providing services within approved special economic zones. However, there is a risk that profits may be artificially shifted from fully taxable connected persons to the qualifying company. Government therefore proposes that a company be disqualified from the tax benefit if more than 20 per cent of its expenditure or gross income arises from transactions with connected persons.

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International tax

Withdrawal of special foreign tax credits for service fees sourced in South Africa

In 2011, government introduced a special foreign tax credit for withholding taxes imposed on South African residents by foreign countries for services rendered in South Africa for clients who were residents in those countries. However, taxes imposed in these circumstances were not in accordance with the provisions of tax treaties between South Africa and these countries. The concession aims to alleviate the compliance burden on South African taxpayers to apply for a refund of the tax that was incorrectly imposed. While the introduction of relief was well intended, it has resulted in a significant compliance burden to both taxpayers and SARS. Some taxpayers are also exploiting this relief. As a result, it is proposed that the special foreign tax credits for services be withdrawn.

Capital gains tax implications on cross-issue of shares

In 2013, government amended the Income Tax Act to counter base erosion and profit shifting. If a South African resident company issues shares as a consideration for an acquisition of shares in a foreign company, it will result in a capital gain for the resident company. Although the concerns that led to the changes in tax legislation are understood, these changes may affect legitimate commercial transactions, curtailing the growth and expansion of South African multinationals. Government will consider relaxing the provision’s requirements, without losing sight of the initial policy intent, which is to counter untaxed corporate migration out of South Africa.

Controlled foreign company rules

Before 2011, the controlled foreign company (CFC) legislation had diversionary rules to prevent the shifting of income offshore through the sale of goods by a CFC to a connected resident. In 2011, these rules were removed because transfer pricing rules could be applied as an alternative. However, CFC rules have proven less effective in immediately addressing profit shifting by South African resident companies. Although transfer pricing rules can be applied in these circumstances, the CFC diversionary rules are more effective in taxing profits from these transactions. It is proposed that diversionary rules applicable to the sale of goods by a CFC to a connected resident be reinstated. In addition, consideration will be given to allowing CFCs held by interposed trusts to be subject to tax in South Africa.

Sale of immovable property by non-residents

Withholding on disposal of immovable property by non-residents: Section 35A of the Income Tax Act states that a purchaser does not need to withhold tax from a deposit “until the agreement for that disposal has been entered into”. It is proposed that the wording should be amended to clarify the timing of the withholding.

Definition of immovable property: To remove any anomalies, it is proposed that the definition of immovable property in paragraph 2(2) of schedule 8 be aligned with the definition in the Organisation for Economic Cooperation and Development’s model tax treaty, specifically the definition related to the right to work mineral deposits.

Withholding tax on interest

Definition of interest: It is proposed that interest for withholding tax purposes be defined. This will ensure that there is no confusion with other definitions related to interest in the Income Tax Act.

Alignment of section 50B(1) with section 9(2)(b) of the Income Tax Act: The provisions of these sections should be aligned to provide for exemption for interest paid to a non-resident for debt owed by another non-resident, unless the other non-resident was present in South Africa for a period exceeding 183 days or the debt claim is effectively connected to a permanent establishment in South Africa.

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Withholding tax on services

It is proposed that the section be reviewed to clarify definitions and remove any anomalies.

Value-added tax

Educational services

Educational services are currently exempt from VAT, but there are uncertainties around the exact definition of “educational services” and the VAT treatment of certain expenditures, such as accommodation and the provision of meals. The Davis Tax Committee is reviewing the VAT implications for educational institutions, and its conclusions will guide potential changes.

Thresholds for payment basis

To help with cash flow, some vendors with annual taxable supplies below R2.5 million are allowed to account for VAT on a payment basis rather than an accrual basis. These vendors must be natural persons or unincorporated bodies of which all members are natural persons. The Davis Tax Committee is reviewing this provision. There may be scope to increase the threshold and/or broaden the application to include incorporated businesses under this regime. However, the abuses previously experienced when businesses on the accrual basis transact with businesses on the payment basis will have to be addressed.

VAT on SABC TV licences

The South African Broadcasting Corporation Limited (SABC) is a Public Finance Management Act (1999) schedule 2 public entity. Under the Broadcasting Act (1999), anyone who possesses or uses a television set or any device capable of receiving a broadcast television signal must pay an annual television licence fee. The SABC issues notices of renewal two months before the TV licence expires. Under VAT rules, the SABC should account for output tax on the earlier of an issued invoice or payment received. However, the SABC is experiencing a high level of licence non-payment. This is compounded by the VAT requirement to account for output tax on an invoice basis for revenue it might not be able to collect. Government proposes that the SABC be allowed to account for VAT on a payment basis on its entire operations, including that of its subsidiaries.

Regulation prescribing foreign electronic services

To address base erosion and profit shifting, several legislative amendments were made to the VAT Act, including the introduction of a framework for VAT on foreign electronic services. The regulations prescribing electronic services will be updated to include software and other electronic services and to remove some uncertainties.

Adjusted cost

To remove unintended anomalies, it is proposed that the definition of “adjusted cost” in section 1 of the VAT Act be amended to deem VAT at the standard rate to be included where the acquisition was subject to VAT at the zero-rate.

Commercial accommodation

The definition of “commercial accommodation” in section 1 of the VAT Act states that an establishment is a commercial accommodation if it regularly or systematically supplies the listed supplies and where the total annual receipts from such supplies exceed (or are expected to exceed) R60 000 in a period of 12 months. It is proposed that the registration and threshold requirements of a commercial accommodation be reviewed to limit potential abuse.

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Fixed property

The supply of a share by a share block company that confers the right to or an interest in the use of immovable property is subject to VAT at the standard rate in terms of section 7(1)(a) of the VAT Act because it is specifically included in the definition of fixed property in section 1 of the act. Similar rights or interests in the use of immovable property supplied by a cooperative, however, do not fall within the ambit of the definition of “fixed property”. To address this anomaly, it is proposed that the definition of “fixed property” in section 1 be amended to include a right or interest in the use of immovable property supplied by cooperatives or other entities entering into similar arrangements.

Resident of the republic

It is proposed that the definition of “resident of the republic” in section 1 of the VAT Act be clarified to remove anomalies.

Deemed supply: corporate reorganisation rules

To qualify for corporate relief in terms of section 8(25) of the VAT Act, a vendor must comply with the requirements of the provisions of section 42, 44, 45 or 47 of the Income Tax Act. These provisions only apply to groups of companies that are incorporated, and do not apply to unincorporated entities such as joint ventures and partnerships. The VAT Act, however, recognises unincorporated persons as vendors. It is proposed that the VAT Act be amended to remove the unintended anomalies and allow for reorganisation relief for all vendors.

Time of supply: connected persons (undetermined amounts)

It is proposed that sections 9(2) and 10(4) of the VAT Act be amended to clarify the time and value of supplies between connected persons where the value of the supply cannot be determined until a future date.

Zero-rating: goods delivered by a cartage contractor

The supply of movable goods in terms of a sale or instalment sale agreement to a customs-controlled enterprise or an industrial development zone operator is subject to zero-rated VAT, provided that the goods are delivered by a registered cartage contractor whose “main activity” is transporting goods. In terms of SARS Interpretation Note 30 (issue 3), the term “cartage contractor” is defined as a person whose “activities include” the transportation of goods. This has a wider scope than the VAT Act’s current requirement. It is proposed that the term cartage contractor in section 11(1)(m)(ii) of the VAT Act be broadened to align it with the term’s definition in Interpretation Note 30 (issue 3).

Zero-rating of services: loop transactions

Section 11(1)(q) of the VAT Act provides for the zero-rating of goods supplied to a non-resident recipient that are delivered to the recipient’s customer in South Africa. Section 11(2)(l)(ii)(bb) of the VAT Act, however, allows for the zero-rating of services supplied to a non-resident recipient if the services are in relation to goods situated in South Africa and form part of the recipient’s supply of goods to a vendor in the country. The VAT Act does not provide a comparable zero-rating provision for services supplied to a non-resident recipient but that are actually provided to the recipient’s customer in South Africa where such services do not form part of the supply referred to in section 11(2)(l)(ii)(bb) of the VAT Act. It is proposed that a comparable provision be included in the VAT Act to cater for such loop transactions where the supply is of services only and they do not relate to any goods situated in South Africa.

Zero-rating of services: vocational training

In terms of section 11(2)(r) of the VAT Act, the words “for an employer who is not a resident” implies that for zero-rating to apply, a contractual relationship must exist between the person supplying the

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vocational services and the employer. It does not cater for situations where the employees’ training is subcontracted by a non-resident supplier to a third-party vendor in South Africa. It is proposed that the section be amended to refer to vocational training provided “for the benefit” of a non-resident employer.

National housing programme

In terms of section 11(2)(s) and section 8(23) of the VAT Act, a person is deemed to have supplied services to a public authority or municipality to the extent of any payment made to or on behalf of that vendor in terms of the national housing programme contemplated in the Housing Act (1997), which is approved by the Minister of Finance after consultation with the Minister of Human Settlements. These services may be zero-rated. There has been confusion among taxpayers and municipalities regarding the scope of the services that qualify for zero-rating. It is proposed that the provisions of the sections dealing with this issue be reviewed to remove anomalies.

Ad valorem excise duties

Digital cinema projectors are subject to a 7 per cent ad valorem excise duty, regardless of whether they are used for household, commercial or industrial use. This excise duty negatively affects the movie industry as it moves towards digital technologies and is not in line with the abolition of ad valorem excise duties on cinematographic cameras and projectors in 2007. It is proposed that the excise duty on digital cinema projectors above R250 000 per unit be abolished on 1 April 2015. This monetary limit will ensure that the relief is limited to commercial use only.

Environmental taxation

Tyre levy

South Africa generates an estimated 108 million tonnes of waste each year, of which only 10 per cent is recycled. Government has designed additional environmental levies on a range of waste streams to help divert waste away from landfills towards reuse, recycling and recovery. Government proposes a tyre levy, with effect from the last quarter of 2015, to be implemented through the Customs and Excise Act and collected by SARS. The existing levy arrangements for tyres as per the Department of Environmental Affairs’ regulations will be replaced with the proposed tyre levy. Revenues from the levy will be deposited into the National Revenue Fund, and an on-budget allocation will be made available through the budget of the Department of Environmental Affairs for the recycling of waste tyres and other waste streams.

Carbon tax

Two discussion documents were published in 2013 and 2014 and the proposed carbon tax has been further refined after a review of the comments received. The potential use of carbon offsets was well received as a cost-effective mechanism to reduce greenhouse gas emissions and taxpayers’ carbon tax liabilities. The tax design seeks to minimise potential adverse effects on low-income households and industry competitiveness. The publication of the draft Carbon Tax Bill later in 2015 will allow for a further period of consultation. This will also allow for the tax to be aligned with the proposed carbon budgets. Amendments to the Customs and Excise Act will be effected to provide for the administration of the carbon tax.

Diesel refund system

The diesel refund system’s implementation has experienced technical and administrative challenges. As noted in Chapter 4, the system’s administration will be comprehensively reviewed. While the review is under way, steps will be undertaken to deal with some of the immediate challenges. This includes, among others, disputes over refunds for subcontracting in the mining sector through cession mining licences in terms of the Mineral and Petroleum Resources Development Act (2002). In the farming sector, attention will be given to rules for sugarcane contract farming and issues related to small-scale sugarcane growers. The review also aims to clarify the record-keeping requirements that apply to diesel deliveries to claimants’ premises and the approval of diesel tanks on these premises.

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Transfer Duty Act

The definitions of “date of acquisition” and “property” in the Transfer Duty Act (1949) need to be reviewed to align the terms with other legislative provisions.

National gambling tax bill

The national gambling tax bill will be processed in 2015.

Tax administration

Self-assessment system for income tax: Amendments to the Income Tax Act are proposed to provide for the move to an income tax self-assessment system.

Appeal and dispute resolution procedures for customs and excise: Uniform appeal and dispute resolution procedures for taxes administered by SARS are proposed by aligning the procedures under the Customs Control Act (2014), the Customs Duty Act (2013) and the Customs and Excise Act (1964) with dispute resolution procedures under the Tax Administration Act (2011).

Technical corrections

In addition to the amendments described above, the 2015 tax legislation will effect various technical corrections, which mainly cover inconsequential items – typing errors, grammar, punctuation, numbering, incorrect cross-references, updating and removing obsolete provisions, removing superfluous text, and incorporating regulations and commonly accepted interpretations into formal law. Technical corrections also include changes to effective dates and the proper coordination of transitional tax changes.

A final set of technical corrections relate to modifications that account for practical implementation of the tax law. Although tax amendments go through an intensive comment and review process, new issues arise once the law is applied (including obvious omissions and ambiguities). These issues typically arise when tax returns are prepared for the first time after the tax legislation is applied. Technical corrections of this nature are almost exclusively limited to recent legislative changes.

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D

Financial sector regulatory reforms

¢ Introduction

An inclusive, efficient financial sector that treats customers fairly can support accelerated economic growth and development. The National Treasury’s long-term programme of regulatory reform for the financial sector aims to help achieve these goals, as set out in the 2011 publication, A safer financial sector to serve South Africa better. This report1 outlines four major areas for reform:

• Strengthening financial stability

• Improving how financial services firms conduct their business and treat customers (market conduct)

• Expanding the reach of financial services to all (financial inclusion)

• Combating financial crime and enhancing financial integrity.

In addition to domestic initiatives, South Africa continues to be an active participant in the development of new global standards for the financial sector. Members of the Group of 20 (G20), including South Africa, have made significant progress in reforming the regulatory fault lines that contributed to the 2008 global financial crisis.

In line with international best practice, in 2014 the International Monetary Fund (IMF) conducted a five-yearly evaluation of South Africa’s regulatory system. The Financial Sector Assessment Programme2 concluded that South Africa has a generally well-regulated and well-capitalised financial sector. Nevertheless, it recommended enhancing regulator coordination, including group-wide supervision; conducting system-wide stress tests; introducing deposit insurance; improving collective investment scheme regulation, particularly for money market funds; and increasing supervision of over-the-counter derivatives. Government is considering these recommendations and will respond later in 2015 after consulting interested parties.

¹  See www.treasury.gov.za/twinpeaks.

²  See http://www.imf.org/external/country/zaf/index.htm.

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¢ Update on “twin peaks” implementation

Flowing from A safer financial sector to serve South Africa better, the National Treasury is undertaking a comprehensive regulatory overhaul of the financial sector, centred on the “twin peaks” model. This approach makes the financial sector safer by empowering the Reserve Bank to oversee financial stability, entrenching a culture of coordination among regulatory authorities and strengthening the protection of financial customers. Supervision of financial institutions will be more intensive and intrusive, in keeping with the understanding that the financial sector is highly innovative, with attendant risks to both proper market conduct and financial system stability. The twin peaks approach establishes two complementary regulators: the Prudential Authority, responsible for the safety and soundness of financial institutions, and the Financial Sector Conduct Authority, covering market conduct and securities regulation.

These reforms are contained in a second draft of the Financial Sector Regulation Bill, published in December 2014 for consultation. An amended bill will be tabled for Parliamentary consideration before June 2015.³

¢ Prudential framework

A robust prudential framework will be applied consistently across the financial sector, including capital, liquidity and leverage requirements where appropriate.

The Insurance Bill, which will be introduced in 2015, will apply prudential standards to insurance companies from January 2016. This will align South Africa with international prudential standards by providing for group supervision, governance and risk management, and promoting financial access to insurance products. It will also promote consistency with Basel III, the prudential framework for banks. In line with its more intensive approach to regulation, government is strengthening the supervision of all investment funds, starting with hedge funds. From 1 April 2015, hedge funds will be treated as collective investment schemes with appropriate governance and tax implications. The regulatory framework will also be updated to reflect future globally agreed standards. An appropriate treatment of unlisted property schemes will be introduced in 2015/16.

Annexure C contains further proposals on the tax treatment of certain financial instruments such as hedge funds, real estate investment trusts, securities lending and insurance.

¢ Improving market conduct

Financial products often fail to live up to customer expectations. They can be complex, with opaque fee structures that make it difficult to assess real value or ultimate cost. As a result, customers may purchase incomprehensible or inappropriate products. A draft market conduct policy framework and a retail distribution review,⁴ published in late 2014, set out proposals to improve the regulatory environment, including streamlining fragmented and inconsistent legislation.

Market conduct measures to reduce over-indebtedness

One of the biggest challenges facing households is their high level of indebtedness, with the associated financial harm and wider negative effects that bring great hardship to many working families. This has been exacerbated by poor market conduct by credit providers and debt collectors. Based on the December 2013 Cabinet decision, steps will be taken to enable customers to confirm debit orders before they take effect; deal with unlawful emolument attachment (“garnishee”) orders; introduce affordability assessment criteria; harmonise the treatment of debt collectors, particularly legal firms; and finalise holistic measures to deal with problems in consumer credit insurance.

³  Further information is available at www.treasury.gov.za/twinpeaks.

⁴  Available at www.treasury.gov.za/twinpeaks and www.fsb.co.za respectively.

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Government welcomes employer initiatives to help over-indebted employees, including taking steps to review and, where possible, stop emolument attachment orders that apply to their employees. Government also supports steps taken by major banks to restructure payment terms for over-indebted consumers, and will consider proposals to expand voluntary debt mediation measures to non-bank lenders.

Improving market conduct for the retirement industry

Government will continue to build on its retirement reform initiative, which aims to facilitate an environment in which all employees can retire comfortably and not face poverty in their old age.⁵ It will:

• Encourage preservation before retirement and annuitising at retirement

• Improve governance and disclosure of retirement funds

• Reduce costs including enabling greater use of passive funds

• Harmonise regulation and supervision between private and public retirement funds

• Design a uniform tax and contribution system.

Many of these reforms are urgent, and delays will be at the cost of pensioners. As noted in the 2014 Budget, government is committed to engaging with key stakeholders (trade unions, trustees, employers and industry) directly and through the National Economic Development and Labour Council (NEDLAC), to finalise the legislative framework for retirement reform.

The policy measures outlined here seek to address critical shortcomings in the current system. Over the past three years, government released several technical papers on retirement reforms, and various policy reforms have been legislated. These reforms are expected to be largely consistent with further progress on social security reform, which is expected to take longer given its complexity. The social security reform process will be initiated after Cabinet has approved a framework for consultation with key stakeholders.

Progress has also been made on non-retirement savings, which will be supported by the introduction of the tax-free savings account from 1 March 2015.

Harmonisation and annuitisation

The Taxation Laws Amendment Act (2013) outlined a system that harmonises the taxation of retirement contributions and benefits in retirement. As a result of consultations with the labour constituency in NEDLAC, government postponed the effective date of the act to 1 March 2016 to enable further public communication and discussion with affected parties.

In addition, annexure C in the Budget Review contains a proposed amendment to correct an omission in the Tax Law Amendment Act (2013) that inadvertently excludes some retirement funds which enjoy the benefit of higher deductions without being subject to the uniform annutisation rules.

Default regulations

The 2014 Budget announced that draft regulations on default preservation, investment strategy and annuities would be released for public comment in 2014. Drafting the regulations has taken longer than expected due to their complexity, and they are now projected to be released early in 2015.

Mandatory system under consideration

The 2014 Budget announced that government would consider a mandatory contribution system and a retirement system to help vulnerable workers save for their retirement. It will discuss these initiatives with key stakeholders to ensure that a cost-effective and suitable retirement system is designed for this group of workers – or, at a minimum, that a cost-effective default fund is established.

⁵  See 2014 Budget update on retirement reforms, released 14 March 2014.

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Demarcation between medical schemes and health insurance

The National Treasury and the Department of Health aim to publish final regulations before June 2015 to demarcate medical schemes and health insurance products. Parameters are proposed for health insurance products to preserve the principles of social solidarity and cross-subsidisation embedded in medical schemes, while affordable medical schemes for low-income individuals are also being considered. A roadmap for implementing consumer credit insurance proposals will also be released. Annexure C contains further proposals on the tax treatment of certain financial instruments.

¢ Financial inclusion

Extending access to poorer households and communities is an important developmental objective. More than 80 per cent of adults now use a financial service or product, with 75 per cent using formal banking and more than 50 per cent accessing credit. But more work is needed to expand transactional services, lower fees, reduce over-reliance on credit and expand small enterprises’ access to financial services. New, viable financial service providers need to be encouraged, particularly in the low-income segment. The cooperative banking sector is growing and forthcoming legislation will facilitate the entry of dedicated banks. The corporatisation of Postbank will expand its provision of financial services to poorer communities. Government is supporting the extension of mobile payments and remittances to enable affordable and convenient services. It also seeks to improve the availability of credit for small enterprises.

To facilitate these reforms, in 2015 the National Treasury plans to publish a more comprehensive financial inclusion policy framework and establish a national financial inclusion forum.

¢ Combating financial crime and enhancing financial integrity

Illicit financial flows and transactions have gained international prominence, with fines levied on international and domestic institutions. The Financial Intelligence Centre Act (2001) is being reviewed to align it with international practices to reduce illicit financial flows. Legislation to this effect will be introduced in 2015.

¢ Modernising capital flow management

Rules and conditions continue to be modernised to attract investment and enable South African firms to expand internationally, particularly into Africa. The exchange control manual is being simplified and this process will be completed in 2015. The following threshold changes will take effect from 1 April 2015:

• Authorised dealers may process corporate investment up to R1 billion per year, from R500 million previously, as well as the carrying forward of any unused allowance.

• South African residents’ foreign capital allowance will increase from R4 million to R10 million per calendar year or upon emigration, or R20 million per family unit.

• The subcategories under the individual single discretionary allowance are removed and the annual R1 million allowances may be used for any legal purpose abroad.

• The dispensation for credit card usage, currently limited to individuals, will be extended to corporates.

These dispensations are subject to the statutory requirements of the Reserve Bank and the South African Revenue Service. Further administrative details will be communicated by the Reserve Bank.

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E

Summary of Budget

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Summary of the national budget

	2014/15				2015/16			2016/17			2017/18
R million	Budget estimate		Revised estimate		Budget estimate			Medium-term estimates
REVENUE
Estimate of revenue before tax proposals						1 041 015
Budget 2015/16 proposals:
Tax proposals after fiscal drag 2015/16 (Net):						8 275
Personal income tax						—
Fiscal drag relief						-8 500
Rate increase in income tax						9 420
Medical credits						-920
Business income tax						-150
Energy-efficiency savings tax incentive						-150
Taxes on property						100
Adjustment in transfer duty						100
Indirect taxes						8 325
Increase in general fuel levy						6 490
Increase in excise duties on tobacco products						602
Increase in alcoholic beverages						1 234
Estimate of revenue after tax proposals		962 782		954 269		1 049 291			1 165 988			1 265 409
Percentage change from previous year						10.0	%		11.1	%		8.5	%
EXPENDITURE
Direct charges against the National Revenue Fund		501 667		501 606		537 847			577 095			615 123
Debt-service costs		114 901		115 016		126 440			140 971			153 376
Provincial equitable share		359 922		359 922		382 673			405 265			428 893
General fuel levy sharing with metropolitan municipalities		10 190		10 190		10 659			11 224			11 785
Skills levy and sector education and training authorities		13 440		13 200		14 690			16 140			17 400
Other 1)		3 214		3 278		3 384			3 496			3 669
Appropriated by vote		637 896		633 516		679 498			717 849			760 740
Current payments		187 903		187 717		194 475			207 091			218 985
Transfers and subsidies		428 913		426 944		464 956			493 017			522 068
Payments for capital assets		17 509		15 466		16 696			17 395			19 322
Payments for financial assets		3 571		3 389		3 371			345			365
Plus:
Unallocated reserves		3 000		—		5 000			15 000			45 000
Estimate of national expenditure		1 142 562		1 135 122		1 222 345			1 309 944			1 420 862
Percentage change from previous year						7.7	%		7.2	%		8.5	%
2014 Budget estimate of expenditure				1 142 562		1 232 590			1 323 624
Increase / decrease (-)				-7 441		-10 246			-13 680
Gross domestic product		3 789 630		3 879 920		4 191 752			4 538 780			4 926 134

1) Includes direct appropriations in respect of the salaries of the President, Deputy President, judges, magistrates, members of Parliament, and National Revenue Fund payments (previously classified as extraordinary payments)

Source: National Treasury

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ANNEXURE E: SUMMARY OF BUDGET

Summary of the consolidated budget

	2014/15						2015/16			2016/17			2017/18
R million	Budget estimate			Revised estimate			Budget estimate			Medium-term estimates
National budget revenue 1)		962 782			954 269			1 049 291			1 165 988			1 265 409
Revenue of provinces, social security funds and public entities		136 466			136 722			139 564			165 526			174 122
Consolidated budget revenue 2)		1 099 248			1 090 991			1 188 855			1 331 514			1 439 531
National budget expenditure 1)		1 142 562			1 135 122			1 222 345			1 309 944			1 420 862
Expenditure of provinces, social security funds and public entities		109 752			108 248			128 662			138 859			140 878
Consolidated budget expenditure 2)		1 252 314			1 243 370			1 351 007			1 448 804			1 561 740
Consolidated budget balance		-153 066			-152 379			-162 152			-117 290			-122 209
Percentage of GDP		-4.0	%		-3.9	%		-3.9	%		-2.6	%		-2.5	%
FINANCING
Domestic loans (net)		156 786			167 544			158 926			134 927			133 570
Foreign loans (net)		3 423			10 330			10 360			-374			12 220
Change in cash and other balances		-7 143			-25 494			-7 134			-17 262			-23 581
Total financing (net)		153 066			152 379			162 152			117 290			122 209

1) Transfers to provinces, social security funds and public entities presented as part of the national budget

2) Flows between national, provincial, social security funds and public entities are netted out

Source: National Treasury

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159

Glossary

Accounting officer	The public servant in a department who is accountable to Parliament for financial management, usually the director-general or head of the department.
Accrual	An accounting convention by which payments and receipts are recorded as they occur, even if no cash flow takes place.
Acquisition debt	Debt used to purchase shares or assets.
Ad valorem duties	Duties levied on commodities as a certain percentage of their value.
Adjustments estimate	Presentation to Parliament of the amendments to be made to the appropriations voted in the main budget for the year.
Administered prices	Prices set outside ordinary market processes through administrative decisions by government, a public entity or a regulator.
Allocated expenditure	The part of the national budget that can be divided between the national, provincial and local spheres of government, after interest and the contingency reserve have been taken into account.
Amortisation	The repayment of a loan by instalments over the duration of the loan.
Appropriation	The approval by Parliament of spending from the National Revenue Fund, or by a provincial legislature from a provincial revenue fund.
Artificial debt	A “loan” that is presented as debt but is in effect equity. Often used in tax avoidance or evasion.
Asset price bubble	A condition occurring when prices for a category of assets rise above the level justified by economic fundamentals.
Asset swap	An arrangement in which financial institutions exchange a portfolio of South African shares and securities for a portfolio of foreign shares and securities.
Balance of payments	A summary statement of all the international transactions of the residents of a country with the rest of the world over a particular period of time.
Basel III	Reforms developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision and risk management of the banking sector.
Baseline	The initial allocations used during the budget process, derived from the previous year’s forward estimates.
Basis point	One hundredth of one per cent.
Bond	A certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date.

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Bond premium	Amount by which the purchase price of a bond is greater than its par value.
Bond spread	The difference in yield between two bonds.
Bond-switch programme	An auction that aims to ease pressure on targeted areas of the redemption profile by exchanging shorter-dated debt for longer-term debt.
Budget balance	The difference between budgeted expenditure and budgeted revenue. If expenditure exceeds revenue, the budget is in deficit. If the reverse is true, it is in surplus.
Capital adequacy	A measure of a financial institution’s capital, expressed as a percentage of its credit exposure.
Capital asset	Property of any kind, including assets that are movable or immovable, tangible or intangible, fixed or circulating, but excluding trading stock held for the purpose of realising a financial or economic return.
Capital expenditure	Spending on assets such as buildings, land, infrastructure and equipment.
Capital flow	A flow of investments in or out of the country.
Capital formation	A measure of the net increase in the country’s total stock of capital goods, after allowing for depreciation.
Capital gains tax	Tax levied on the income realised from the disposal of a capital asset by a taxpayer. A capital gain is the excess of the selling price over the purchase price of the capital asset.
Capital goods	Durable goods used over a period of time for the production of other goods. See also intermediate goods.
Capital-output ratio	The amount of capital employed to produce a certain level of output.
Carbon tax	An environmental tax on emissions of carbon dioxide (CO2).
Category A, B and C municipalities	Municipal categories established by the Constitution: Category A, or metropolitan municipalities; Category B, or local municipalities; and Category C, or district municipalities.
Clean development mechanism	An initiative developed under the Kyoto Protocol that allows emission-reduction projects in developing countries to earn certified emission-reduction credits, each equivalent to one tonne of CO2. These credits can be traded and sold, and used to meet emission-reduction targets.
Collective bargaining	Negotiations between employees and employers on procedures and rules to cover conditions of work and rates of pay.
Conditional grants	Allocations of money from one sphere of government to another, conditional on certain services being delivered or on compliance with specified requirements.
Connected person debt/credit	Debt or credit granted by a person/entity to a connected person/entity. In the case of a holding company, for example, a subsidiary company would be a connected person.

161

GLOSSARY

Consolidated general government	National, provincial and local government, as well as extra-budgetary government institutions and social security funds.
Consolidated government expenditure	Total expenditure by national and provincial government, social security funds and selected public entities, including transfers and subsidies to municipalities, businesses and other entities.
Consumer price index (CPI)	The measure of inflation based on prices in a basket of goods and services.
Consumption expenditure	Expenditure on goods and services, including salaries, which are used up within a short period of time, usually a year.
Contingency reserve	An amount set aside, but not allocated in advance, to accommodate changes to the economic environment and to meet unforeseeable spending pressures.
Contingent liability	A government obligation, such as a guarantee, that will only result in expenditure upon the occurrence of a specific event.
Controlled foreign entity	A foreign business in which South Africans hold a greater than 50 per cent interest, usually of the share capital of a company.
Corporatisation	The transformation of state-owned enterprises into commercial entities, subject to commercial legal requirements and governance structures, while retaining state ownership.
Cost-push inflation	Inflation that is caused by an increase in production costs, such as wages or oil prices.
Countercyclical fiscal policy	Policy that has the opposite effect on economic activity to that caused by the business cycle, such as slowing spending growth in a boom period and accelerating spending in a recession.
Coupon (bond)	The periodic interest payment made to bondholders during the life of the bond. The interest is usually paid twice a year.
Credit rating	An indicator of the risk of default by a borrower or the riskiness of a financial instrument. Grades such as AAA, Baa2 and D are given, signifying the extent of the borrower’s capacity to meet its financial obligations or the probability that the value of the financial instrument will be realised.
Crowding-in	An increase in private investment through the income-raising effect of government spending financed by deficits.
Crowding-out	A fall in private investment or consumption as a result of increased government expenditure financed through borrowing, thereby competing for loanable funds and raising the interest rate, which curtails private investment and consumption spending.
Currency risk	The potential for a change in the price of a currency that would affect investors with assets, liabilities or operations denominated in other currencies.
Current account (of the balance of payments)	The difference between total imports and total exports, taking into account service payments and receipts, interest, dividends and transfers. The current account can be in deficit or surplus. See also trade balance.

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Current balance	The difference between revenue and current expenditure, which consists of compensation of employees, goods and services, and interest and rent on land.
Current expenditure	Government expenditure on salaries and goods and services, such as rent, maintenance and interest payments. See also consumption expenditure.
Customs duties	Tax levied on imported goods.
Debenture	An unsecured loan backed by general credit rather than by specified assets.
Debt-service costs	The cost of interest on government debt and other costs directly associated with borrowing.
Debt switching	The exchange of bonds to manage refinancing risk or improve tradability.
Deleveraging	The reduction of debt previously used to increase the potential return of an investment.
Depreciation (capital)	A reduction in the value of fixed capital as a result of wear and tear or redundancy.
Depreciation (exchange rate)	A reduction in the external value of a currency.
Derivative financial instrument	A financial asset that derives its value from an underlying asset, which may be a physical asset such as gold, or a financial asset such as a government bond.
Designated countries	Foreign countries from which income may be exempt from South African tax under certain circumstances. See also double tax agreement.
Development finance institutions	State agencies that aim to meet the credit needs of riskier but socially and economically desirable projects that are beyond the acceptance limits of commercial banks.
Direct taxes	Taxes charged on taxable income or capital of individuals and legal entities.
Disposable income	Total income by households less all taxes and employee contributions.
Dissaving	An excess of current expenditure, including the depreciation of fixed capital, over current income.
Dividend	The distribution of a portion of a company’s earnings to a class of its shareholders.
Dividend withholding tax	A tax on dividends that is subtracted and withheld by a company or intermediary before the net dividend is paid to the shareholder.
Division of revenue	The allocation of funds between spheres of government, as required by the Constitution. See also equitable share.
Domestic demand	The total level of spending in an economy, including imports but excluding exports.

163

GLOSSARY

Double tax agreement	An agreement between two countries to prevent income that is taxed in one country from being taxed in the other as well. See also designated countries.
Economically active population	The part of the population that is of working age and is either employed or seeking work.
Economic cost	The cost of an alternative that must be forgone to pursue a certain action. In other words, the benefits that could have been received by taking an alternative action.
Economic growth	An increase in the total amount of output, income and spending in the economy.
Economic rent	The difference between the return made by a factor of production (capital or labour) and the return necessary to keep the factor in its current occupation. For example, a firm making excess profits is earning economic rent.
Effective tax rate	Actual tax liability (or a reasonable estimate thereof) expressed as a percentage of a pre-tax income base rather than as a percentage of taxable income. In other words, tax rates that take into account not only the statutory or nominal tax rate, but also other aspects of the tax system (for example, allowable deductions), which determine the tax liability.
Embedded derivative	A provision in a contract modifying its cash flows by making them dependent on an underlying measure – such as interest or exchange rates, or commodity prices – the value of which changes independently.
Emerging economies	A name given by international investors to middle-income economies.
Employment coefficient	The ratio of employment growth to economic growth.
Equalisation Fund levy	A dedicated fuel levy used to subsidise the local synthetic fuel industry. It is also used to smooth the impact of fluctuations in the international oil price (and exchange rate) on the domestic fuel price.
Equitable share	The allocation of revenue to the national, provincial and local spheres of government as required by the Constitution. See also division of revenue.
Equity finance	Raising money by selling shares of stock to investors, who receive an ownership interest in return.
Exchange control	Rules that regulate the flow of currency out of South Africa, or restrict the amount of foreign assets held by South African individuals and companies.
Exchange-traded funds	Funds that track indexes, commodities or baskets of assets, and trade like stocks.
Excise duties	Taxes on the manufacture or sale of certain domestic or imported products. Excise duties are usually charged on products such as alcoholic beverages, tobacco and petroleum.

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Extra-budgetary institutions	Public entities not directly funded from the fiscus.
Fair-value adjustment	A change in the value of an asset or liability resulting from the periodic reassessment of its expected future economic in- or outflows.
Financial account	A statement of all financial transactions between the nation and the rest of the world, including portfolio and fixed investment flows and movements in foreign reserves.
Financial and Fiscal Commission (FFC)	An independent body established by the Constitution to make recommendations to Parliament and provincial legislatures about financial issues affecting the three spheres of government.
Financial Services Board	An independent institution established by statute that regulates insurers, intermediaries, retirement funds, friendly societies, unit trust schemes, management companies and financial markets.
Financial Stability Board	An international body made up of representatives of financial authorities and institutions, and central banks. It proposes regulatory, supervisory and other policies in the interest of financial stability.
Financial year	The 12 months according to which companies and organisations budget and account. See also fiscal year.
Fiscal consolidation	Policy aimed at reducing government deficits and debt accumulation.
Fiscal incidence	The combined overall economic impact that fiscal policy has on the economy.
Fiscal policy	Policy on taxation, public spending and borrowing by the government.
Fiscal space	The ability of government’s budget to provide additional resources for a desired programme without jeopardising fiscal or debt sustainability.
Fiscal year	The 12 months on which government budgets are based, beginning 1 April and ending 31 March of the subsequent calendar year.
Fixed-income bond	A bond that pays a specific interest rate.
Fixed investment/capital formation	Spending on buildings, machinery and equipment contributing to production capacity in the economy. See also gross fixed capital formation.
Floating rate notes	A bond on which the interest rate is reset periodically in line with a money market reference rate.
Flow-through vehicles	A vehicle, such as a trust, where income earned is treated as income of the vehicle’s beneficiaries.
Foreign currency swaps	The exchange of principal and/or interest payments in one currency for those in another.
Foreign direct investment (FDI)	The acquisition of a controlling interest by governments, institutions or individuals of a business in another country.

165

GLOSSARY

Forward book	The total amount of contracts for the future exchange of foreign currency entered into by the Reserve Bank at any given point in time.
Forward cover	Transactions involving an agreed exchange rate at which foreign currency will be purchased or sold at a future date.
Forward markets	Markets in which currencies, commodities or securities are bought and sold at agreed prices for delivery at specified future dates.
Fringe benefit	A benefit supplementing an employee’s wages or salary, such as medical insurance, company cars, housing allowances and pension schemes.
Fuel levy	An excise tax on liquid fuels.
Function shift	The movement of a function from one departmental vote or sphere of government to another.
Funded pension arrangements	A pension scheme in which expected future benefits are funded in advance and as entitlement accrues.
Gold and foreign exchange reserves	Reserves held by the Reserve Bank to meet foreign exchange obligations and to maintain liquidity in the presence of external shocks.
Government debt	The total amount of money owed by the government as a consequence of its past borrowing.
Government guarantee	An assurance made by government to a lender that a financial obligation will be honoured, even if the borrowing government institution is unable to repay the debt.
Green paper	A policy document intended for public discussion.
Gross borrowing requirement	The sum of the main budget balance, extraordinary receipts and payments (referred to as National Revenue Fund receipts and payments), and maturing debt. The amount is funded through domestic short- and long-term loans, foreign loans and changes in cash balances.
Gross domestic product (GDP)	A measure of the total national output, income and expenditure in the economy. GDP per head is the simplest overall measure of welfare, although it does not take account of the distribution of income, nor of goods and services that are produced outside the market economy, such as work within the household.
Gross domestic product inflation	A measure of the total increase in prices in the whole economy. Unlike CPI inflation, GDP inflation includes price increases in goods that are exported and intermediate goods such as machines, but excludes imported goods.
Gross fixed capital formation	The addition to a country’s fixed capital stock during a specific period, before provision for depreciation.
Gross value added	The value of output less intermediate consumption. It is also a measure of the contribution to the economy made by an industry or sector.

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Hedging	An action taken by a buyer or seller to protect income against changes in prices, interest rates or exchange rates.
Horizontal equity	A principle in taxation that holds that similarly situated taxpayers should face a similar tax treatment or tax burden. In other words, taxpayers with the same amount of income or capital should be accorded equal treatment.
Impaired advances	Loans or advances that may not be collected in full.
Impairment	A reduction in the recorded value of a long-lived asset arising from circumstances that prevent the asset from generating the future economic benefits previously expected and recorded.
Import parity pricing	When a firm sells goods locally at the price customers would pay if they were to import the same goods from another country.
Inclusion rate	The portion of the net capital gain derived from the disposal of an asset that will be taxed at the applicable rate.
Independent Power Producers Initiative	A programme to establish and support electricity generation from the private sector.
Industrial development zone	Designated sites linked to an international air or sea port, supported by incentives to encourage investment in export-orientated manufacturing and job creation.
Inflation	An increase in the overall price level of goods and services in an economy over a specific period of time.
Inflation targeting	A monetary policy framework intended to achieve price stability over a certain period of time.
Intermediate goods	Goods produced to be used as inputs in the production of final goods.
Inventories	Stocks of goods held by firms. An increase in inventories reflects an excess of output relative to spending over a period of time.
Labour intensity	The relative amount of labour used to produce a unit of output.
Liquidity	The ease with which assets can be bought and sold.
Liquidity requirements	The amount of liquid or freely convertible assets that banks are required to hold relative to their liabilities, for prudential and regulatory purposes.
Liquidity risk	The risk that an asset might not easily and quickly be converted into cash through sale, or the risk to a debtor that it cannot meet its current debt obligations.
Lump-sum benefit	A one-time payment for the total or partial value of an asset, usually received in place of recurring smaller payments.
M3	The broadest definition of money supply in South Africa, including notes and coins, demand and fixed deposits, and credit.

167

GLOSSARY

Macroeconomics	The branch of economics that deals with the whole economy – including issues such as growth, inflation, unemployment and the balance of payments.
Marginal income tax rate	The rate of tax on an incremental unit of income.
Marginal lending rate	A penalty rate of interest charged by the Reserve Bank for lending to financial institutions in the money market in excess of the daily liquidity provided to the money market at the repurchase rate. See also repurchase agreements.
Marketable securities	Tradable financial securities listed with a securities exchange.
Means test	A method for determining whether someone qualifies for state assistance.
Medium Term Expenditure Committee (MTEC)	The technical committee responsible for evaluating the medium-term expenditure framework budget submissions of national departments and making recommendations to the Minister of Finance regarding allocations to national departments.
Medium-term expenditure framework (MTEF)	The three-year spending plans of national and provincial governments, published at the time of the Budget.
Microeconomics	The branch of economics that deals with the behaviour of individual firms, consumers and sectors.
Ministers’ Committee on the Budget	The political committee that considers key policy and budgetary issues that pertain to the budget process before they are tabled in Cabinet.
Monetary policy	Policy concerning total money supply, exchange rates and the general level of interest rates.
Money supply	The total stock of money in an economy.
National budget	The projected revenue and expenditures that flow through the National Revenue Fund. It does not include spending by provinces or local government from their own revenues.
National Development Plan	A planning framework prepared by the National Planning Commission that aims to eliminate poverty and reduce inequality by 2030.
National Revenue Fund	The consolidated account of the national government into which all taxes, fees and charges collected by SARS and departmental revenue must be paid.
Negotiable certificate of deposit	Short-term deposit instruments issued by banks, at a variable interest rate, for a fixed period.
Net borrowing requirement	The sum of the main budget balance, extraordinary receipts and extraordinary payments (referred to as National Revenue Fund receipts and payments). Deficits increase the borrowing requirement; surpluses reduce the requirement.
Net exports	Exports less imports.

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Net open foreign currency position	Gold and foreign exchange reserves minus the oversold forward book. The figure is expressed in dollars.
Net trade	The difference between the value of exports and the value of imports.
Nominal exchange rates	The current rate of exchange between the rand and foreign currencies. The “effective” exchange rate is a trade-weighted average of the rates of exchange with other currencies.
Nominal wage	The return, or wage, to employees at the current price level.
Non-competitive bid auction	An auction in which an investor agrees to purchase a certain number of securities such as bonds at the average price of all competitive bids over a given period of time.
Non-financial public enterprises	Government-owned or controlled organisations that deliver goods and non-financial services, trading as business enterprises, such as Eskom or Transnet.
Non-interest expenditure	Total expenditure by government less debt-service costs.
Non-tax revenue	Income received by government as a result of administrative charges, licences, fees, sales of goods and services, and so on.
Occupation-specific salary dispensation	Revised salary structures unique to identified occupations in the public service, including doctors, nurses and teachers.
Opportunity cost	The value of that which must be given up to achieve or acquire something. It is represented by the next highest valued alternative use of a resource.
Organisation for Economic Cooperation and Development (OECD)	An organisation of 34 mainly industrialised member countries. South Africa is not a member.
PAYE	The pay-as-you-earn (PAYE) system of income tax withholding requires employers to deduct income tax, and in some cases, the employees’ portion of social benefit taxes, from each paycheque delivered to employees.
Payroll tax	Tax an employer withholds and/or pays on behalf of employees based on employee wages or salaries.
Policy reserve	Additional money in the fiscus to fund new and crucial priorities.
Portfolio investment	Investment in financial assets such as stocks and bonds.
Potential growth	The fastest growth an economy can sustain without increasing inflation.
Presidential Infrastructure Coordinating Commission (PICC)	A commission established by Cabinet to develop, review and coordinate a 20-year infrastructure plan.

169

GLOSSARY

Price discovery	The process of determining the price level of a commodity or asset based on supply and demand factors.
Primary deficit/surplus	The difference between total revenue and non-interest expenditure. When revenue exceeds non-interest expenditure there is a surplus.
Primary sector	The agricultural and mining sectors of the economy.
Private-sector credit extension	Credit provided to the private sector. This includes all loans, credit cards and leases.
Privatisation	The full or partial sale of state-owned enterprises to private individuals or companies.
Producer price inflation (PPI)	Price increases measured by the producer price index – a measure of the prices paid based mainly on producers’ published price lists.
Productivity	A measure of the amount of output generated from every unit of input. Typically used to measure changes in labour efficiency.
Profit shifting	The allocation of income and expenses between related corporations or branches of the same legal entity to reduce overall tax liability.
Public-benefit organisations (PBOs)	Organisations that are mainly funded by donations from the public and other institutions, which engage in social activities to meet the needs of the general public.
Public entities	Companies, agencies, funds and accounts that are fully or partly owned by government or public authorities and are regulated by law.
Public Finance Management Act (PFMA)	The act regulating financial management of national and provincial government, including the efficiency and effectiveness of public expenditure and the responsibilities of those engaging with government financial management.
Public goods	Goods and services that would not be fully provided in a pure free-market system and are largely provided by government.
Public Investment Corporation (PIC)	A government-owned investment management company that invests funds on behalf of public-sector entities. Its largest client is the Government Employees Pension Fund.
Public-private partnerships (PPPs)	A contractual arrangement whereby a private party performs part of a government function and assumes the associated risks. In return, the private party receives a fee according to predefined performance criteria.
Public sector	National government, provincial government, local government, extra-budgetary governmental institutions, social security funds and non-financial public enterprises.
Public-sector borrowing requirement	The consolidated cash borrowing requirement of general government and non-financial public enterprises.

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Purchasing managers’ index (PMI)	A composite index measuring the change in manufacturing activity compared with the previous month. An index value of 50 indicates no change in activity, a value above 50 indicates increased activity and a value below 50 indicates decreased activity.
Quantitative easing	A measure used by central banks to stimulate economic growth when interest rates are near zero by increasing money supply.
Quarterly Employment Survey	An establishment-based survey conducted by Statistics South Africa to obtain information about the number of employees and gross salaries paid.
Quarterly Labour Force Survey	A household-based survey conducted by Statistics South Africa to measure the dynamics of the labour market, producing indicators such as employment, unemployment and inactivity.
Rating agency	A company that evaluates the ability of countries or other borrowers to honour their debt obligations. Credit ratings are used by international investors as indications of sovereign risk. See also credit rating.
Real effective exchange rate	A measure of the rate of exchange of the rand relative to a trade-weighted average of South Africa’s trading partners’ currencies, adjusted for price trends in South Africa and the countries included.
Real exchange rate	The level of the exchange rate taking account of inflation differences.
Real expenditure	Expenditure measured in constant prices after taking account of inflation.
Real interest rate	The level of interest after taking account of inflation.
Real wage	The return, or wage, to employees, measured at a constant price level.
Recapitalisation	Injection of funds into a company or entity to aid liquidity, either as a loan or in return for equity.
Recession	A period in which national output and income decline. A recession is usually defined as two consecutive quarters of negative growth.
Redemption	The return of an investor’s principal in a fixed-income security, such as a preferred stock or bond.
Refinancing	The repayment of debt at a scheduled time with the proceeds of new loans.
Refinancing risk	The risk that government will not be able to raise money to repay debt at any scheduled point, or that it will have to do so at a high cost.
Regional integration	An economic policy intended to boost economic activity in a geographical area extending beyond one country.
Remuneration	The costs of personnel, including salaries, housing allowances, car allowances and other benefits received by personnel.
Repurchase agreements	Short-term contracts between the Reserve Bank and private banks in the money market to sell specified amounts of money at an interest rate determined by daily auction.

171

GLOSSARY

Repurchase (repo) rate	The rate at which the Reserve Bank lends to commercial banks.
Reserves (foreign exchange)	Holdings of foreign exchange, either by the Reserve Bank only or by the Reserve Bank and domestic banking institutions.
Residence-based income tax system	A tax system in which the worldwide income accruing to a resident of a country is subject to the taxes of that country.
Revaluation gain/loss	The difference between the value of a foreign currency deposit from the original (historical) rate to execution of a trade based on the spot rate.
Risk premium	A return that compensates for uncertainty.
Saving	The difference between income and spending.
Seasonally adjusted and annualised	Removal of seasonal volatility (monthly or quarterly) from a time series. This provides a measure of the underlying trend in the data.
Secondary rebate	A rebate from income tax, in addition to the primary rebate, that is available to taxpayers aged 65 years and older.
Secondary sector	The part of the economy concerned with the manufacture of goods.
Secondary tax on companies (STC)	Tax on dividends declared by a company, calculated at the rate of 10 per cent of the net amount of dividends declared. This was discontinued in 2012 and replaced with a 15 per cent dividend withholding tax.
Section 21 company	Non-profit entities registered in terms of Section 21 of the Companies Act.
Sector education and training authorities	Institutions funded through employer training levies, responsible for learnership programmes and implementing strategic sector skills plans.
Secured debt instruments	Debt backed or secured by collateral to reduce the risk of lending.
Service and transfer payments	Services involve transactions of non-tangible commodities, while transfers are unrequited transactions that do not generate a counter-economic value (for example, gifts and grants).
Skills development levy	A payroll tax designed to finance training initiatives in terms of the skills development strategy.
Social infrastructure	Infrastructure that supports social services.
Social wage	Social benefits available to all individuals, funded wholly or partly by the state.
Source-based income tax system	A system in which income is taxed in the country where the income originates.
Southern African Customs Union (SACU) agreement	An agreement between South Africa, Botswana, Namibia, Lesotho and Swaziland that allows for the unrestricted flow of goods and services, and the sharing of customs and excise revenue.

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Southern African Development Community (SADC)	A regional intergovernmental organisation that promotes collaboration, economic integration and technical cooperation throughout southern Africa.
Sovereign debt	Debt issued by a government.
Sovereign debt rating	An assessment of the likelihood that a government will default on its debt obligations.
Spatial planning	Planning to influence the geographic distribution of people and economic activity.
Special economic zones	A designated zone where business and trade laws incentivise trade, investment and employment.
Specific excise duty	A tax on each unit of output or sale of a good, unrelated to the value of a good.
Standing appropriations	Government’s expenditure obligations that do not require a vote or statutory provision, including contractual guarantee commitments and international agreements.
Statutory appropriations	Amounts appropriated to be spent in terms of statutes and not requiring appropriation by vote.
Sterilisation	Action taken by the Reserve Bank to neutralise excess cash created in the money market when purchasing foreign currency.
Structural budget balance	A representation of what government revenue and expenditure would be if output were at its potential level, with cyclical variations stripped out.
Structural constraints	Imbalances in the structure of the economy that hinder growth and development.
Switch auction	An auction to exchange bonds to manage refinancing risk or improve tradability.
Syndicated loan	A large loan in which a group of banks work together to provide funds, which they solicit from their clients for the borrower.
Tax amnesty	A period allowed by tax authorities during which taxpayers who are outside the tax net, but should be registered for tax purposes, can register for tax without incurring penalties.
Tax avoidance	When individuals or businesses legitimately use provisions in the tax law to reduce their tax liability.
Tax base	The aggregate value of income, sales or transactions on which particular taxes are levied.
Tax evasion	When individuals or businesses illegally reduce their tax liability.

173

GLOSSARY

Tax gap	A measure of tax evasion that emerges from comparing the tax liability or tax base declared to the tax authorities with the tax liability or tax base calculated from other sources.
Tax incentives	Specific provisions in the tax code that provide favourable tax treatment to individuals and businesses to encourage specific behaviour or activities.
Tax incidence	The final distribution of the burden of tax. Statutory incidence defines where the law requires a tax to be levied. Economic incidence refers to those who experience a decrease in real income as a result of the imposition of a tax.
Tax loopholes	Unintended weaknesses in the legal provisions of the tax system used by taxpayers to avoid paying tax liability.
Tax-to-GDP ratio	For public finance comparison purposes, a country’s tax burden, or tax-to- GDP ratio, is computed by taking the total tax payments for a particular fiscal year as a fraction or percentage of the GDP for that year.
Term-to-maturity	The time between issuance and expiry.
Terms of trade	An index measuring the ratio of a country’s export prices relative to its import prices.
Tertiary sector	The part of the economy concerned with the provision of services.
Total factor productivity	An index used to measure the efficiency of all inputs that contribute to the production process.
Trade balance	The monetary record of a country’s net imports and exports of physical merchandise. See also current account.
Trade regime	The system of tariffs, quotas and quantitative restrictions applied to protect domestic industries, together with subsidies and incentives used to promote international trade.
Trademark	A legal right pointing distinctly to the origin or ownership of merchandise to which it is applied and legally reserved for the exclusive use of the owner as maker or seller.
Trade-weighted rand	The value of the rand pegged to or expressed relative to a market basket of selected foreign currencies.
Treasury committee	The Cabinet committee that evaluates all requests for additional funds for unavoidable and unforeseen expenditure during a financial year.
Trend GDP growth	The theoretical level of GDP growth determined by the full utilisation of all factors of production (land, labour and capital). Growth above the trend rate results in macroeconomic imbalances such as rising inflation or a weakening of the current account. Increases in trend GDP growth are achieved through capital formation, growth in employment and/or technological development.

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Unallocated reserves	Potential expenditure provision not allocated to a particular use. It mainly consists of the contingency reserve and amounts of money left unallocated by provinces.
Unemployment (broad definition)	All those of working age who are unemployed, including those actively seeking employment and discouraged work seekers.
Unemployment (official definition)	Those of working age, who are unemployed and actively seeking work (excludes discouraged work seekers).
Unit labour cost	The cost of labour per unit of output, calculated by dividing average wages by productivity (output per worker per hour).
Unsecured debt instruments	Debt not backed or secured by collateral to reduce the risk of lending.
Unsecured lending	A loan that is not backed or secured by any type of collateral to reduce the lender’s risk.
User charge	Payments made in exchange for direct benefits accrued, for example, road toll fees.
Vertical equity	A doctrine in taxation that holds that differently situated taxpayers should be treated differently in terms of income tax provisions. In other words, taxpayers with more income and/or capital should pay more tax.
Virement	The transfer of resources from one programme to another within the same department during a financial year.
Vote	An appropriation voted by Parliament.
Water trading account	A departmental account that ring-fences revenue from the sale of bulk water and related services to secure funding to manage the sustainability of water resources and infrastructure.
Weighted average cost of capital	The average rate of return an organisation expects to pay to investors in its securities, such as bonds, debt and shares. Each category of security is accorded a proportionate weight in the calculation.
Withholding tax	Tax on income deducted at source. Withholding taxes are widely used for dividends, interest and royalties.
Yield	A financial return or interest paid to buyers of government bonds. The yield/rate of return on bonds takes into account the total annual interest payments, the purchase price, the redemption value and the amount of time remaining until maturity.
Yield curve	A graph showing the relationship between the yield on bonds of the same credit quality but different maturity at a given point in time.

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177

Statistical tables

1 Main budget: revenue, expenditure, budget balance and financing, 2008/09 to 2017/18

2 Main budget: estimates of national revenue – summary of revenue, 1997/98 to 2017/18

3 Main budget: estimates of national revenue – detailed classification of revenue, 2011/12 to 2017/18

4 Main budget: expenditure defrayed from the National Revenue Fund by vote, 2011/12 to 2017/18

5 Consolidated national, provincial and social security funds expenditure: economic classification, 2011/12 to 2017/18

6 Consolidated national, provincial and social security funds expenditure: functional classification, 2011/12 to 2017/18

7 Consolidated government revenue and expenditure: economic classification, 2011/12 to 2017/18

8 Consolidated government expenditure: functional classification, 2011/12 to 2017/18

9 Consolidated government revenue, expenditure and financing, 2011/12 to 2017/18

10 Total debt of government, 1990/91 to 2017/18

11 Net loan debt, provisions and contingent liabilities, 2004/05 to 2017/18

¢ Explanatory notes

The statistical tables present details of the main budget, consolidated national and provincial expenditure, consolidated government expenditure, the borrowing requirement and financing of government debt, total government debt, and provisions and contingent liabilities.

The tables are categorised according to government levels, from the main budget to the consolidated government account. The main budget consists of National Revenue Fund receipts, expenditure either voted by Parliament or allocated by statutory appropriation, and the financing of the deficit. It is the national budget, including transfers to other spheres of government as appropriated.

The consolidated national, provincial and social security funds expenditure consists of the main (national) budget, and the provincial and the social security funds’ budgets or expenditure. These budgets are aggregated and transfers between the three spheres of government are netted out to arrive at a total consolidated expenditure figure. The consolidated government revenue, expenditure and financing budget includes national, provincial and social security funds, the Reconstruction and Development Programme (RDP) Fund and national public entities. This is referred to as the consolidated budget.

While government revenues are concentrated at national level, a large proportion of expenditure has shifted to the provinces since 1994. Equitable share transfers to the nine provinces are included as a government statutory commitment on the National Treasury vote, while the local government equitable share is appropriated on the vote of the Department of Cooperative Governance and Traditional Affairs. The consolidated government account consists of all the activities of national and provincial government, and includes most of the listed public entities. The consolidation also includes several national government business enterprises.

More than 70 per cent of total national expenditure on the 2015/16 main budget consists of transfer payments to other levels of general government, which means that economic and functional classifications of national budget expenditure are not comprehensive. For analysis purposes, it would be preferable to present economic and functional classifications of general government expenditure, but this would require information on expenditure at all levels of general government and on its financing through revenue, balances brought forward and transfer payments (mainly from the national budget). This information is not readily available for local government. Historical data on general government finances are, however, published by the Reserve Bank in its Quarterly Bulletin and by Statistics South Africa.

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Change in recording of extraordinary receipts and payments in the budget tables

Since 2014, the consolidated government accounts have been presented in a more transparent format in line with the International Monetary Fund’s Government Finance Statistics manual (2001). This format provides details of operating activities, capital and infrastructure investment, as well as transactions in financial assets and liabilities. It includes all government transactions in the calculation of the budget balance. Previously, extraordinary receipts and payments were added to the budget deficit to calculate government’s net borrowing requirement. In the new format, there is no longer a difference between the budget balance and the net borrowing requirement. These transactions are now referred to as National Revenue Fund receipts and payments.

Treatment of foreign grants to the RDP Fund

Before 1999/00, foreign grants were paid to the National Revenue Fund and expenditure was included in departmental appropriations. Since 1999/00, no foreign grants for RDP-related purposes have been included in national appropriations. All international technical assistance and other RDP-related grants are paid to the RDP Fund account, which is separated from government accounts. Departments incur expenditure on RDP-related projects by direct requisitions from this account. However, disbursements of foreign grants and technical assistance are included in the consolidated national and provincial expenditure estimates in Tables 5 and 6, and in the consolidated government expenditure in Table 7.

Adjustments due to transactions in government debt

As part of the state’s active management of its debt portfolio, government bonds are repurchased or switched into new bonds. In the process, government may make a capital profit, which is a book entry change in the bond discount. As such, capital profit does not represent actual cash flow and is regarded as a “book profit”, lowering the outstanding debt.

A premium may also be accrued, or payable, in managing the debt portfolio or when entering into new loans. Under the new format, premiums paid and/or received are included as National Revenue Fund receipts and payments, and no longer as extraordinary payments and/or extraordinary receipts.

Sources of information

The information in Tables 1 to 11 on national and provincial government and public entity finances is obtained from the following sources:

• Reports of the Auditor-General on the Appropriation and Miscellaneous Accounts

• Printed estimates of revenue and expenditure for the national and provincial budgets

• The Reserve Bank

• The Development Bank of Southern Africa (DBSA)

• The South African Revenue Service (SARS)

• Monthly press releases of the National Treasury, published in terms of section 32 of the Public Finance Management Act (1999).

Main budget: revenue, expenditure, budget balance and financing (Table 1)

Table 1 summarises the main budget balances since 2008/09 and medium-term estimates to 2017/18. In line with the economic reporting format introduced in 2004/05, the revenue classification has been amended to show departmental sales of capital assets separately.

Repayments of loans and advances, which were previously shown as negative expenditure, have been reclassified as revenue. Given that revenue increased and expenditure decreased by the same amount, the national budget deficit is unaffected.

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Appropriations by vote are divided into current payments, transfers and subsidies, payments for capital assets and payments for financial assets. Both current and capital transfers are included in transfers and subsidies, in line with the economic reporting format’s requirements.

The deficit figures presented in this table differ from those presented in budgets before 1995/96 because a number of items that were previously regarded as “below-the-line” expenditure have been included in total expenditure. In addition, revaluations of foreign loan obligations are now excluded from expenditure, in keeping with international practice.

Under the “financing” item, domestic short-term loans include net transactions in Treasury bills and borrowing from the Corporation for Public Deposits. Long-term loans include all transactions in government bonds and foreign loans (new loan issues, repayments on maturity, buy-backs, switches and reverse purchase transactions).

Main budget: estimates of national revenue (Tables 2 and 3)

Table 2 presents a summary of revenue and the details are set out in Table 3. Main budget revenue collections are recorded on an adjusted cash basis as the revenue is recorded in the SARS ledgers. Tax revenue is classified according to standard international categories and departmental receipts according to the economic reporting format’s requirements.

In Table 3, a large amount of data cannot be reclassified to align with the economic reporting format because departments capture these transactions within their ledgers as miscellaneous receipts.

Main budget: expenditure defrayed from the National Revenue Fund by vote (Table 4)

Table 4 contains estimates of expenditure on national budget votes for the period 2011/12 to 2017/18. In 2014/15, amounts included in the budget estimate, the adjusted appropriation and the revised estimate on each vote are shown. Following the 2014 elections, new departments were created, some functions were shifted between departments and some existing departments were renamed. Historical data has been adjusted to account for function shifts between departments. As a result, the figures presented for some departments may differ from their financial statements. Total expenditure, however, is not influenced by these changes.

Consolidated national, provincial and social security funds expenditure (Tables 5 and 6)

Tables 5 and 6 show the economic and functional classification of payments for consolidated national and provincial government and social security funds, including the Unemployment Insurance Fund, the Road Accident Fund and the Compensation Funds. Provincial expenditure estimates are preliminary because their budgets are tabled after the national budget. These estimates are based on preliminary information provided by the provinces and are subject to change before being tabled in provincial legislatures.

The functional classification

The functional classification in this annexure is aligned with the classification of government functions set out in the Government Finance Statistics manual. Before 2009, the functions were classified at a higher, less detailed level. Since then, classification has been presented at a more detailed level, which means that departmental programmes that were allocated to one function can be disaggregated to more due to the availability of detailed information. The historical data published in these tables has been reclassified accordingly. Chapter 5 of the Budget Review, which sets out the medium-term expenditure framework, outlines the budget allocations across these function groups.

To support this approach, data at programme and entity level is aggregated into spending categories, which provides for a higher level of aggregation than in the functional classification. For example, functional classification tables include local development and social infrastructure as distinct functions. The fiscal statistics are an outcome of the budget process and can only be used as a guide to categorise expenditure for budgeting purposes. They are not used as a framework for presenting budget allocations.

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Some of the most important differences between the key spending categories presented in Chapter 5 and the more detailed functional classification presented in the statistical tables are as follows:

• Basic education and post-school education and training: These two categories are grouped together as part of the education function in the statistical tables. This includes expenditure related to maintaining and supporting the South African school system, and assisting the higher and vocational education sector.

• Defence, public order and safety: This includes expenditure related to military health, which is classified as part of the health function in the statistical tables.

• Economic affairs: This function group includes spending on environmental protection, which is a separate category in the statistical tables.

• General public services: In the key spending categories, transfers made to international organisations are classified within the category of the paying department. In the statistical tables, they are classified under general public services.

Consolidated government revenue and expenditure (Tables 7 and 8)

Tables 7 and 8 show the economic and functional classification of payments for the consolidated government budget. This consists of the consolidated national, provincial and social security figures presented in Tables 5 and 6, combined with general government entities, as well as some government business enterprises.

The government budget consolidation includes all entities controlled and mainly financed by government revenue, where such revenue is defined as either taxes, levies and administrative or service fees prescribed by government, or direct budgetary support in the form of transfer payments. This consolidation also includes a number of government business enterprises, based on the principle that they either sell most of their goods and services to government institutions or departments at regulated prices, and are therefore not businesses in the true sense of the word, or they are directly involved in infrastructure financing and development.

Accordingly, state-owned entities are broadly identified as one of the following:

• Enterprises that sell mainly to government departments or institutions, have no clear competitors and whose prices are therefore not clearly market related.

• Science councils that conduct research or fulfil a regulatory or advisory function, where regulatory or administration fees are determined by government.

• Government-regulated businesses that are primarily financed by a dedicated tax, administration fee or levy, the level of which is dictated by government, or that are directly involved in the maintenance or extension of critical infrastructure.

To present consolidated accounts, all units must adopt the same accounting standards and policies. The format of the accounts, terminology used, classification, transaction coverage and accounting base (cash or accrual) must be the same. In this respect, the consolidated government budget is prepared on the adjusted cash basis of accounting. This is not strictly comparable to the financial information published in the consolidated financial statements, which has two components – a consolidation of departments using the modified cash basis of accounting and a separate consolidation of public entities that apply the accrual basis of accounting.

All transactions that occur between units being consolidated are eliminated. A transaction of one unit is matched with the same transaction as recorded for the second unit and both transactions are eliminated from the consolidation. For example, if a public entity sells a service to a government department and data for the two units is being consolidated, neither the sale nor the purchase of the service is reported. In this way, only transactions between government and non-government entities are recorded, without inflating total government revenue as a result of internal transactions.

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Not all intra-entity transactions are eliminated, however, because in the accounting systems of government and many of its agencies, not all such transactions are identifiable. Only those that can be identified have been eliminated. These broadly include:

• Transactions involving transfers from one government unit to another, including transfers made by national departments to public entities and transfers between public entities (such as water trading entity transfers to water boards).

• Purchases of goods and services from other government units included in the consolidation (such as transactions between the Trans-Caledon Tunnel Authority, water boards and the water trading entity).

This process is not yet comprehensive. As data collection and recording procedures for transactions improve, additional intra-entity transactions will be identified and removed from the consolidated government budget.

A total of 163 national and provincial departments and 197 entities are included in the 2015 consolidated government budget. The National Treasury is committed to presenting a full consolidation of the whole of general government over time. This means that the consolidated account presented in this budget must still be extended to include local government accounts. A process has been initiated and initial data sets for local government have been published in the Local Government Budgets and Expenditure Review. However, considerable work remains to align this data with the consolidated account, after which it will be included in the consolidation.

A discussion on the consolidation procedures, as well as a detailed list of all entities included in the consolidation, is available in Annexure W2 of the Budget Review on the National Treasury website: www.treasury.gov.za.

Consolidated government revenue, expenditure and financing (Table 9)

Table 9 presents the new format of the government account, which distinguishes between government’s operating activities and its plans to invest in capital and infrastructure.

The balance on the operating account shows the outcome of government’s operating activities, which is a measure of the cost of ongoing operations. It is calculated as the difference between current revenue and current expenditure, and the resulting balance shows how much government must borrow to run its operations. The current balance demonstrates the sustainability of government operations.

Capital investment activities are presented in the capital account. Government’s capital financing requirement is the outcome of this account, which is calculated as the difference between capital revenue and capital expenditure. This account will mainly be in deficit due to continuous investment in infrastructure and substantial capital outlays.

Total debt of government (Table 10)

Table 10 shows the major components of government debt. Net total loan debt consists of total domestic and foreign debt less the cash balances of the National Revenue Fund. Realised and unrealised profits and losses on the gold and foreign exchange contingency reserve account are also disclosed. The projections for 2014/15 to 2017/18 are based on national budget data.

Net loan debt, provisions and contingent liabilities (Table 11)

Provisions are liabilities with uncertain payment dates or amounts. The provisions for the multilateral institutions are the unpaid portion of government’s subscriptions to these institutions, which are payable on request. Contingent liabilities are obligations, such as guarantees, that only result in expenditure when a specific event occurs. Amounts drawn in respect of guarantees and interest on these amounts, if guaranteed, are disclosed. The National Treasury published detailed information on provisions and contingent liabilities in the annual consolidated financial statements of national departments.

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Table 1 Main budget: Revenue, expenditure, budget balance and financing 1)
		2008/09			2009/10			2010/11			2011/12			2012/13			2013/14
R million		Actual outcome												Preliminary outcome
Main budget revenue
Current revenue			607 867.5			578 691.1			668 489.7			735 418.4			786 079.8			872 465.3
Tax revenue (gross)	2)		625 100.2			598 705.4			674 183.1			742 649.7			813 825.8			900 013.5
Less: SACU payments			-28 920.6			-27 915.4			-14 991.3			-21 760.0			-42 151.3			-43 374.4
Other adjustment	3)		—			—			-2 914.4			—			—			—
Non-tax revenue (departmental receipts)	4)		11 687.9			7 901.1			12 212.3			14 528.6			14 405.3			15 826.2
Financial transactions in assets and liabilities	5)		9 000.5			7 385.7			4 226.3			9 758.2			13 968.1			14 762.9
Sales of capital assets			131.2			36.3			35.4			114.7			94.3			37.0
Total revenue			616 999.2			586 113.1			672 751.5			745 291.3			800 142.2			887 265.1
Main budget expenditure
Direct charges against the National Revenue Fund			269 616.9			311 484.4			350 386.7			390 580.9			426 909.6			462 603.0
Debt-service costs	6)		54 393.7			57 129.2			66 226.8			76 460.0			88 121.1			101 184.7
Provincial equitable share			201 795.6			236 890.8			265 139.4			291 735.5			313 015.8			336 495.3
General fuel levy sharing with metropolitan municipalities			—			6 800.1			7 542.4			8 573.1			9 039.7			9 613.4
Skills levy and SETAs			7 234.1			7 815.6			8 379.3			10 025.3			11 694.5			12 090.2
Other	7)		6 193.4			2 848.7			3 098.8			3 787.0			5 038.5			3 219.4
Appropriated by vote			370 620.6			436 383.5			455 592.4			499 330.6			538 586.0			585 160.9
Current payments	8)		101 323.1			114 745.6			128 898.6			142 697.4			153 960.4			176 508.1
Transfers and subsidies	9)		249 672.6			279 020.7			294 049.0			343 175.4			368 592.2			391 260.3
Payments for capital assets	10)		8 652.1			9 453.9			11 406.9			12 043.4			13 996.0			14 008.5
Payments for financial assets	11)		10 972.6			33 163.3			21 237.9			1 414.4			2 037.4			3 383.9
Unallocated reserves			—			—			—			—			—			—
Total expenditure			640 237.4			747 868.0			805 979.1			889 911.5			965 495.6			1 047 763.8
Main budget balance			-23 238.3			-161 754.9			-133 227.7			-144 620.2			-165 353.3			-160 498.7
Percentage of GDP			-1.0	%		-6.3	%		-4.7	%		-4.7	%		-5.0	%		-4.4	%
Financing
Change in loan liabilities
Domestic short-term loans (net)			12 225.1			49 770.3			34 893.0			18 724.6			22 555.0			23 048.0
Domestic long-term loans (net)			23 059.0			118 855.8			136 849.8			138 500.8			125 767.8			149 414.1
Market loans			44 301.4			132 794.3			150 292.0			154 860.9			161 557.7			172 112.2
Loans issued for switches			-1 947.1			-399.4			93.4			-753.0			-3 851.8			-1 135.3
Redemptions			-19 295.3			-13 539.1			-13 535.6			-15 607.1			-31 938.1			-21 562.8
Foreign loans (net)			-3 954.4			23 257.5			2 839.6			9 135.3			-11 622.0			377.8
Market loans			—			30 872.4			5 151.1			12 025.2			—			19 619.1
Arms procurement loan agreements			3 057.3			800.0			470.4			569.4			60.6			—
World Bank loans			1.4			—			—			—			—			—
Redemptions (including revaluation of loans)	12)		-7 013.1			-8 414.9			-2 781.9			-3 459.3			-11 682.6			-19 241.3
Change in cash and other balances (- increase)			-8 091.4			-30 128.7			-41 354.7			-21 740.5			28 652.5			-12 341.2
Total financing (net)			23 238.3			161 754.9			133 227.7			144 620.2			165 353.3			160 498.7
GDP			2 408 662			2 551 316			2 826 071			3 080 887			3 327 630			3 609 844
National Revenue Fund transactions	13)
National Revenue Fund receipts			8 203.4			6 428.6			3 013.9			5 209.2			12 302.8			11 709.3
National Revenue Fund payments			-4 284.1			-671.2			-838.6			-1 388.3			-2 587.2			-516.3
Net			3 919.3			5 757.4			2 175.3			3 820.9			9 715.6			11 193.0

1) This table summarises revenue, expenditure and the main budget balance since 2008/09. As available data is incomplete, the estimates are not fully consistent with other sources, such as the government finance statistics series of the Reserve Bank.

2) Mining leases and ownership has been reclassified as non-tax revenue (rent on land). Historical numbers have been adjusted for comparative purposes.

3) Payment to Southern African Customs Union partners in respect of a previous error in calculation of the 1969 agreement.

4) Excludes sales of capital assets, discount and revaluation of foreign loan repayments.

5) Includes National Revenue Fund receipts (previously classified as extraordinary receipts).

6) Includes interest, cost of raising loans and management cost but excludes discount on the issue of new government debt instruments and the revaluation of foreign loan repayments.

7) Includes direct appropriations in respect of the salaries of the President, Deputy President, judges, magistrates, members of Parliament, and National Revenue Fund payments (previously classified as extraordinary payments).

Source: National Treasury

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																		Table 1 Main budget: Revenue, expenditure, budget balance and financing 1)
2014/15								2015/16			2016/17			2017/18
Budget estimate		Revised estimate			Deviation			Medium-term estimates										R million
																		Main budget revenue
	958 143.5		943 313.1			-14 830.4			1 045 288.1			1 165 903.3			1 265 321.9			Current revenue
	993 650.0		979 000.0			-14 650.0			1 081 275.0			1 179 199.4			1 289 711.0		2)	Tax revenue (gross)
	-51 737.7		-51 737.7			-0.0			-51 021.9			-36 513.3			-45 444.3			Less: SACU payments
	—		—			—			—			—			—		3)	Other adjustment
	16 231.1		16 050.8			-180.3			15 035.0			23 217.2			21 055.3		4)	Non-tax revenue (departmental receipts)
	4 571.3		10 871.5			6 300.1			3 922.0			—			—		5)	Financial transactions in assets and liabilities
	66.9		84.2			17.3			80.5			84.6			87.5			Sales of capital assets
	962 781.8		954 268.8			-8 513.0			1 049 290.6			1 165 987.9			1 265 409.4			Total revenue
																		Main budget expenditure
	501 666.7		501 605.7			-61.0			537 847.2			577 095.4			615 122.8			Direct charges against the National Revenue Fund
	114 900.5		115 016.2			115.7			126 440.4			140 970.9			153 376.0		6)	Debt-service costs
	359 921.8		359 921.8			—			382 673.5			405 264.6			428 892.5			Provincial equitable share
	10 190.2		10 190.2			—			10 658.9			11 223.8			11 785.0			General fuel levy sharing with metropolitan municipalities
	13 440.0		13 200.0			-240.0			14 690.0			16 140.0			17 400.0			Skills levy and SETAs
	3 214.2		3 277.6			63.3			3 384.4			3 496.1			3 669.2		7)	Other
	637 895.7		633 515.9			-4 379.8			679 497.5			717 849.0			760 739.6			Appropriated by vote
	187 903.2		187 717.2			-186.1			194 475.2			207 091.3			218 985.0		8)	Current payments
	428 913.4		426 943.5			-1 969.8			464 955.6			493 016.9			522 067.8		9)	Transfers and subsidies
	17 508.6		15 466.0			-2 042.6			16 696.1			17 395.4			19 321.7		10)	Payments for capital assets
	3 570.5		3 389.1			-181.4			3 370.7			345.5			365.1		11)	Payments for financial assets
	3 000.0		—			-3 000.0			5 000.0			15 000.0			45 000.0			Unallocated reserves
	1 142 562.4		1 135 121.6			-7 440.8			1 222 344.7			1 309 944.4			1 420 862.4			Total expenditure
	-179 780.6		-180 852.8			-1 072.2			-173 054.1			-143 956.5			-155 453.0			Main budget balance
	-4.7%		-4.7	%		0.1	%		-4.1	%		-3.2	%		-3.2	%		Percentage of GDP
																		Financing
																		Change in loan liabilities
	23 000.0		10 000.0			-13 000.0			13 000.0			20 000.0			40 000.0			Domestic short-term loans (net)
	132 097.6		156 448.5			24 350.9			144 809.0			115 638.0			97 718.0			Domestic long-term loans (net)
	167 102.5		189 856.0			22 753.5			172 500.0			172 500.0			185 000.0			Market loans
	—		246.5			246.5			—			—			—			Loans issued for switches
	-35 004.9		-33 654.0			1 350.9			-27 691.0			-56 862.0			-87 282.0			Redemptions
	1 288.0		8 356.0			7 068.0			7 797.0			4 208.5			13 373.0			Foreign loans (net)
	16 290.0		22 952.0			6 662.0			11 530.0			16 815.5			17 115.0			Market loans
	—		—			—			—			—			—			Arms procurement loan agreements
	—		—			—			—			—			—			World Bank loans
	-15 002.0		-14 596.0			406.0			-3 733.0			-12 607.0			-3 742.0		12)	Redemptions (including revaluation of loans)
	23 395.0		6 048.3			-17 346.7			7 448.1			4 110.0			4 362.0			Change in cash and other balances (- increase)
	179 780.6		180 852.8			1 072.2			173 054.1			143 956.5			155 453.0			Total financing (net)
	3 789 630		3 879 920			90 290			4 191 752			4 538 780			4 926 134			GDP
																	13)	National Revenue Fund transactions
	2 850.0		8 942.1			6 092.1			2 000.0			5 400.0			2 500.0			National Revenue Fund receipts
	—		-310.9			-310.9			-121.0			—			—			National Revenue Fund payments
	2 850.0		8 631.2			5 781.2			1 879.0			5 400.0			2 500.0			Net

8) Includes compensation of employees, payments for goods and services, interest and rent on land. Payment for medical benefits to former employees has been moved to transfers.

9) Includes current and capital transfers and subsidies to business, households, foreign countries and other levels and funds of general government.

10) Includes acquisition and own account construction of new assets and the cost of upgrading, improving and extending to existing capital assets.

11) Consists mainly of lending to public corporations or making equity investments in them for policy purposes. Previously included in transfers and subsidies.

12) Revaluation estimates are based on National Treasury’s projection of exchange rates.

13) National Revenue Fund payments include premiums paid on loan transactions and revaluation adjustments when utilising foreign exchange deposits.

National Revenue Fund receipts include proceeds from the sale of state assets, premiums received on loan transactions and revaluation adjustments when utilising foreign exchange deposits.

184

2015 BUDGET REVIEW

Table 2

Main budget: estimates of national revenue

Summary of revenue 1)

R million		1997/98		1998/99		1999/00		2000/01		2001/02		2002/03		2003/04
Taxes on income and profits			95 003.6		108 021.5		116 148.9		126 145.2		147 310.4		164 565.9		171 962.8
Persons and individuals			68 342.4		77 733.9		85 883.8		86 478.0		90 389.5		94 336.7		98 495.1
Gold mines			332.5		188.6		—		—		—		—		—
Other mines			1 349.4		1 946.1		—		—		—		—		—
Companies			19 696.4		20 388.0		20 971.6		29 491.8		42 354.5		55 745.1		60 880.8
Secondary tax on companies/Dividend tax			1 446.4		1 930.8		3 149.9		4 031.3		7 162.7		6 325.6		6 132.9
Tax on retirement funds			3 229.7		5 098.8		5 330.4		5 219.8		6 190.6		6 989.7		4 897.7
Other	1)		606.8		735.3		813.1		924.3		1 213.1		1 169.0		1 556.3
Taxes on payroll and workforce			—		—		0.1		1 257.4		2 717.3		3 352.1		3 896.4
Skills development levy	2)		—		—		0.1		1 257.4		2 717.3		3 352.1		3 896.4
Taxes on property			2 618.4		2 830.4		3 808.4		3 978.8		4 628.3		5 084.6		6 707.5
Donations tax			17.7		9.1		15.2		32.1		20.6		17.7		17.1
Estate duty			302.6		256.4		304.2		442.7		481.9		432.7		417.1
Securities transfer tax	3)		442.3		721.1		1 090.4		1 102.1		1 212.8		1 205.2		1 101.1
Transfer duties			1 855.8		1 565.4		1 821.6		2 401.9		2 913.0		3 429.0		5 172.1
Demutualisation charge			—		278.5		577.0		—		—		—		—
Domestic taxes on goods and services			60 619.0		66 213.2		72 184.7		78 877.5		86 885.1		97 311.5		110 108.6
Value-added tax	4)		40 095.6		43 985.4		48 376.8		54 455.2		61 056.6		70 149.9		80 681.8
Specific excise duties			7 425.8		8 052.8		8 886.1		9 126.6		9 797.2		10 422.6		11 364.6
Ad valorem excise duties			581.6		518.9		584.3		693.9		776.1		1 050.2		1 016.2
General fuel levy			12 091.2		13 640.0		14 289.8		14 495.3		14 923.2		15 333.8		16 652.4
Air departure tax			—		—		—		85.8		296.4		324.8		367.2
Other	5)		424.8		16.0		47.6		20.7		35.5		30.3		26.5
Taxes on international trade and transactions			5 638.6		6 052.5		6 778.1		8 226.6		8 680.1		9 619.8		8 414.3
Customs duties			6 055.7		5 985.7		6 517.8		7 853.6		8 632.2		9 330.7		8 479.4
Import surcharges			-1.4		1.6		0.4		0.0		0.5		0.0		—
Other	6)		-415.7		65.2		259.9		372.9		47.5		289.1		-65.1
Stamp duties and fees			1 483.8		1 489.0		1 618.9		1 561.6		1 767.2		1 572.4		1 360.1
State miscellaneous revenue	7)		-36.0		179.3		727.0		72.0		306.7		433.0		-7.1
TOTAL TAX REVENUE (gross)			165 327.4		184 785.9		201 265.9		220 119.1		252 295.0		281 939.3		302 442.6
Non-tax revenue	8)		6 246.7		7 553.8		11 332.1		6 852.4		8 331.4		12 995.7		8 309.5
Less: SACU payments	9)		-5 237.2		-5 576.7		-7 197.3		-8 396.1		-8 204.8		-8 259.4		-9 722.7
TOTAL MAIN BUDGET REVENUE			166 337.0		186 763.0		205 400.7		218 575.4		252 421.5		286 675.6		301 029.4
Current revenue			166 318.5		186 736.2		205 359.0		218 531.9		252 417.4		286 617.8		301 012.9
Direct taxes			95 323.9		108 565.5		117 045.3		127 877.4		150 530.1		168 368.4		176 293.5
Indirect taxes			70 039.5		76 041.1		83 493.7		92 169.7		101 458.2		113 137.9		126 156.1
State miscellaneous revenue			-36.0		179.3		727.0		72.0		306.7		433.0		-7.1
Non-tax revenue (excluding sales of capital assets)	11)		6 228.3		7 526.9		11 290.4		6 808.9		8 327.2		12 937.9		8 293.0
Less: SACU payments			-5 237.2		-5 576.7		-7 197.3		-8 396.1		-8 204.8		-8 259.4		-9 722.7
Sales of capital assets			18.4		26.9		41.7		43.5		4.2		57.8		16.5
National Revenue Fund receipts	12)		2 947.4		2 757.6		7 238.3		2 983.5		4 159.1		8 167.9		1 598.2

1) Includes interest on overdue income tax, non-resident shareholders’ tax (prior to 1999/00), non-residents’ tax on interest (prior to 1999/00), undistributed profits tax (prior to 1999/00) and small business tax amnesty (in 2006/07, 2007/08 and 2008/09).

2) Levy on payroll dedicated to skills development.

3) The securities transfer tax replaced the uncertificated securities tax from 1 July 2008. The uncertificated securities tax replaced the marketable securities tax from 1 June 1999.

4) The value-added tax (VAT) replaced the general sales tax in September 1991.

5) Includes plastic bag levy (from 2004/05), Universal Service Fund (from 1998/99), Human Resources Fund and Universal Service Agency (in 1998/99 and 1999/00), levies on financial services (up to 2004/05) and carbon dioxidemotor vehicle emissions tax (from 2010/11). Mining leases and ownership has been reclassified as non-tax revenue. The historical years from 1998/99 have been adjusted for comparative purposes.

Source: National Treasury

185

STATISTICAL TABLES

															Table 2 Main budget: estimates of national revenue Summary of revenue 1)
2004/05		2005/06		2006/07		2007/08		2008/09		2009/10		2010/11
Actual collections															R million
	195 219.1		230 803.6		279 990.5		332 058.3		383 482.7		359 044.8		379 941.2		Taxes on income and profits
	110 981.9		125 645.3		140 578.3		168 774.4		195 145.7		205 145.0		226 925.0		Persons and individuals
	—		—		—		—		—		—		—		Gold mines
	—		—		—		—		—		—		—		Other mines
	70 781.9		86 160.8		118 998.6		140 119.8		165 539.0		134 883.4		132 901.7		Companies
	7 487.1		12 277.6		15 291.4		20 585.4		20 017.6		15 467.8		17 178.2		Secondary tax on companies/Dividend tax
	4 406.1		4 783.1		3 190.5		285.4		143.3		42.7		2.8		Tax on retirement funds
	1 562.2		1 936.7		1 931.7		2 293.3		2 637.2		3 505.9		2 933.6	1)	Other
	4 443.3		4 872.0		5 597.4		6 330.9		7 327.5		7 804.8		8 652.3		Taxes on payroll and workforce
	4 443.3		4 872.0		5 597.4		6 330.9		7 327.5		7 804.8		8 652.3	2)	Skills development levy
	9 012.6		11 137.5		10 332.3		11 883.9		9 477.1		8 826.4		9 102.3		Taxes on property
	25.2		29.5		47.0		27.6		125.0		60.1		64.6		Donations tax
	506.9		624.7		747.4		691.0		756.7		759.3		782.3		Estate duty
	1 365.9		1 973.4		2 763.9		3 757.1		3 664.5		3 324.0		2 932.9	3)	Securities transfer tax
	7 114.6		8 510.0		6 774.0		7 408.2		4 930.9		4 683.0		5 322.5		Transfer duties
	—		—		—		—		—		—		—		Demutualisation charge
	131 980.6		151 223.7		174 671.4		194 690.3		201 416.0		203 666.8		249 490.4		Domestic taxes on goods and services
	98 157.9		114 351.6		134 462.6		150 442.8		154 343.1		147 941.3		183 571.4	4)	Value-added tax
	13 066.7		14 546.5		16 369.5		18 218.4		20 184.5		21 289.3		22 967.6		Specific excise duties
	1 015.2		1 157.3		1 282.7		1 480.5		1 169.5		1 275.9		1 596.2		Ad valorem excise duties
	19 190.4		20 506.7		21 844.6		23 740.5		24 883.8		28 832.5		34 417.6		General fuel levy
	412.2		458.2		484.8		540.6		549.4		580.3		647.8		Air departure tax
	138.3		203.4		227.2		267.5		285.7		405.7		1 293.3	5)	Other
	13 286.5		18 201.9		24 002.2		27 081.9		22 852.4		19 318.9		26 977.1		Taxes on international trade and transactions
	12 888.4		18 303.5		23 697.0		26 469.9		22 751.0		19 577.1		26 637.4		Customs duties
	—		—		—		—		—		—		—		Import surcharges
	398.1		-101.6		305.2		612.0		101.4		-258.3		339.7	6)	Other
	1 167.7		792.8		615.7		557.1		571.8		49.5		3.1		Stamp duties and fees
	-130.9		164.2		339.2		212.2		-27.4		-5.7		16.7	7)	State miscellaneous revenue
	354 978.8		417 195.7		495 548.6		572 814.6		625 100.2		598 705.4		674 183.1		TOTAL TAX REVENUE (gross)
	8 695.4		15 602.3		14 281.4		14 542.4		20 819.6		15 323.1		16 474.0	8)	Non-tax revenue
	-13 327.8		-14 144.9		-25 194.9		-24 712.6		-28 920.6		-27 915.4		-14 991.3	9)	Less: SACU payments
	350 346.5		418 653.1		484 635.1		562 644.4		616 999.2		586 113.1		672 751.5		TOTAL MAIN BUDGET REVENUE
	350 316.3		418 573.8		484 596.3		562 414.2		616 868.0		586 076.8		672 716.0		Current revenue
	200 194.5		236 329.7		286 382.4		339 107.8		391 691.9		367 669.0		389 440.5		Direct taxes
	154 915.3		180 701.8		208 827.1		233 494.6		233 435.6		231 042.1		284 726.0		Indirect taxes
	-130.9		164.2		339.2		212.2		-27.4		-5.7		16.7		State miscellaneous revenue
	8 665.2		15 523.0		14 242.6		14 312.2		20 688.4		15 286.8		16 438.5	11)	Non-tax revenue (excluding sales of capital assets)
	-13 327.8		-14 144.9		-25 194.9		-24 712.6		-28 920.6		-27 915.4		-17 905.7		Less: SACU payments
	30.2		79.3		38.8		230.2		131.2		36.3		35.4		Sales of capital assets
	2 492.0		6 905.2		3 438.1		1 849.8		8 203.4		6 428.6		3 013.9	12)	National Revenue Fund receipts

6) Includes miscellaneous customs and excise receipts, ordinary levy (up to 2004/05) and diamond export duties.

7) Includes revenue received by SARS that could not be allocated to a specific revenue type.

8) Includes sales of goods and services, fines, penalties and forfeits, interest, dividends and rent on land (including mineral and petroleum royalties), sales of capital assets as well as transactions in financial assets and liabilities.

9) Payments in terms of SACU agreements.

10) Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement.

11) Excludes sales of capital assets.

12) Previously classified as extraordinary revenue, includes sales of strategic fuel stocks, proceeds from sales of state assets and certain other receipts are, by law, paid into the National Revenue Fund.

186

2015 BUDGET REVIEW

Table 2

Main budget: estimates of national revenue

Summary of revenue 1)

		2011/12		2012/13		2013/14		2014/15					2015/16
		Actual collections						Revised estimates		% change on actual 2013/14			Budget estimates
													Before		After
R million													tax proposals
Taxes on income and profits			426 583.7		457 313.8		507 759.2		556 700.0		9.6	%		621 040.3		620 890.3
Persons and individuals			250 399.6		275 821.6		309 834.1		350 000.0		13.0	%		393 889.6		393 889.6
Companies			151 626.7		159 259.2		177 324.3		183 000.0		3.2	%		202 182.1		202 032.1
Secondary tax on companies/Dividend tax			21 965.4		19 738.7		17 308.8		21 400.0		23.6	%		22 483.8		22 483.8
Tax on retirement funds			6.7		0.2		—		—		—			—		—
Other	1)		2 585.3		2 494.1		3 292.0		2 300.0		-30.1	%		2 484.7		2 484.7
Taxes on payroll and workforce			10 173.1		11 378.5		12 475.6		13 200.0		5.8	%		14 690.0		14 690.0
Skills development levy	2)		10 173.1		11 378.5		12 475.6		13 200.0		5.8	%		14 690.0		14 690.0
Taxes on property			7 817.5		8 645.2		10 487.1		12 602.7		20.2	%		13 591.7		13 691.7
Donations tax			52.7		82.1		112.8		172.4		52.9	%		186.2		186.2
Estate duty			1 045.2		1 013.0		1 101.5		1 430.3		29.9	%		1 545.2		1 545.2
Securities transfer tax	3)		2 886.1		3 271.9		3 784.3		4 300.0		13.6	%		4 645.4		4 645.4
Transfer duties			3 833.6		4 278.3		5 488.5		6 700.0		22.1	%		7 214.9		7 314.9
Domestic taxes on goods and services			263 949.9		296 921.5		324 548.2		355 717.9		9.6	%		381 101.9		389 427.3
Value-added tax	4)		191 020.2		215 023.0		237 666.6		260 600.0		9.6	%		283 793.6		283 793.6
Specific excise duties			25 411.1		28 377.7		29 039.5		32 000.0		10.2	%		32 647.9		34 483.3
Ad valorem excise duties			1 828.3		2 231.9		2 363.3		3 231.7		36.7	%		3 491.2		3 491.2
General fuel levy			36 602.3		40 410.4		43 684.7		48 200.0		10.3	%		49 176.0		55 666.0
Air departure tax			762.4		873.1		878.7		966.3		10.0	%		1 043.9		1 043.9
Electricity levy			6 429.7		7 983.9		8 818.9		8 600.0		-2.5	%		8 774.1		8 774.1
Other	5)		1 895.8		2 021.4		2 096.5		2 119.9		1.1	%		2 175.1		2 175.1
Taxes on international trade and transactions			34 121.0		39 549.1		44 732.2		40 779.4		-8.8	%		42 575.8		42 575.8
Customs duties			34 197.9		38 997.9		44 178.7		39 900.0		-9.7	%		41 660.0		41 660.0
Other	6)		-76.9		551.2		553.4		879.4		58.9	%		915.8		915.8
Stamp duties and fees			-2.9		0.5		31.7		—		-100.0	%		—		—
State miscellaneous revenue	7)		7.4		17.2		-20.3		—		—			—		—
TOTAL TAX REVENUE (gross)			742 649.7		813 825.8		900 013.5		979 000.0		8.8	%		1 072 999.7		1 081 275.0
Non-tax revenue	8)		24 401.5		28 467.7		30 626.1		27 006.5		-11.8	%		19 037.5		19 037.5
Less: SACU payments	9)		-21 760.0		-42 151.3		-43 374.4		-51 737.7		19.3	%		-51 021.9		-51 021.9
Other adjustment	10)		—		—		—		—		—			—		—
TOTAL MAIN BUDGET REVENUE			745 291.3		800 142.2		887 265.1		954 268.8		7.6	%		1 041 015.3		1 049 290.6
Current revenue			745 176.5		800 047.9		887 228.1		954 184.6		7.5	%		1 040 934.8		1 049 210.1
Direct taxes			437 854.7		469 787.4		521 449.0		571 502.7		9.6	%		637 461.7		637 311.7
Indirect taxes			304 787.6		344 021.2		378 584.8		407 497.3		7.6	%		435 538.0		443 963.3
State miscellaneous revenue			7.4		17.2		-20.3		—		-100.0	%		—		—
Non-tax revenue (excluding sales of capital assets)	11)		24 286.8		28 373.4		30 589.1		26 922.3		-12.0	%		18 957.1		18 957.1
Less: SACU payments			-21 760.0		-42 151.3		-43 374.4		-51 737.7		19.3	%		-51 021.9		-51 021.9
Sales of capital assets			114.7		94.3		37.0		84.2		127.5	%		80.5		80.5
National Revenue Fund receipts	12)		5 209.2		12 302.8		11 709.3		8 942.0		-23.6	%		2 000.0		2 000.0

1) Includes interest on overdue income tax, non-resident shareholders’ tax (prior to 1999/00), non-residents’ tax on interest (prior to 1999/00), undistributed profits tax (prior to 1999/00) and small business tax amnesty (in 2006/07, 2007/08 and 2008/09).

2) Levy on payroll dedicated to skills development.

3) The securities transfer tax replaced the uncertificated securities tax from 1 July 2008. The uncertificated securities tax replaced the marketable securities tax from 1 June 1999.

4) The value-added tax (VAT) replaced the general sales tax in September 1991.

5) Includes plastic bag levy (from 2004/05), Universal Service Fund (from 1998/99), Human Resources Fund and Universal Service Agency (in 1998/99 and 1999/00), levies on financial services (up to 2004/05) and carbon dioxidemotor vehicle emissions tax (from 2010/11). Mining leases and ownership has been reclassified as non-tax revenue. The historical years from 1998/99 have been adjusted for comparative purposes.

Source: National Treasury

187

STATISTICAL TABLES

																Table 2 Main budget: estimates of national revenue Summary of revenue 1)
2015/16					2016/17					2017/18
% change on revised 2014/15		% of total budget revenue			Estimates		% change after tax proposals 2015/16			Estimates		% change on 2016/17				R million
	11.5%		59.2	%		678 651.9		9.3	%		744 472.9		9.7	%		Taxes on income and profits
	12.5%		37.5	%		433 842.2		10.1	%		479 189.3		10.5	%		Persons and individuals
	10.4%		19.3	%		218 211.4		8.0	%		236 690.7		8.5	%		Companies
	5.1%		2.1	%		23 910.7		6.3	%		25 677.1		7.4	%		Secondary tax on companies/Dividend tax
	—		—			—		—			—		—			Tax on retirement funds
	8.0%		0.2	%		2 687.5		8.2	%		2 915.8		8.5	%	1)	Other
	11.3%		1.4	%		16 140.0		9.9	%		17 800.0		10.3	%		Taxes on payroll and workforce
	11.3%		1.4	%		16 140.0		9.9	%		17 800.0		10.3	%	2)	Skills development levy
	8.6%		1.3	%		14 822.6		8.3	%		16 088.8		8.5	%		Taxes on property
	8.0%		0.0	%		199.6		7.2	%		213.7		7.0	%		Donations tax
	8.0%		0.1	%		1 670.2		8.1	%		1 811.7		8.5	%		Estate duty
	8.0%		0.4	%		5 027.1		8.2	%		5 456.0		8.5	%	3)	Securities transfer tax
	9.2%		0.7	%		7 925.7		8.4	%		8 607.4		8.6	%		Transfer duties
	9.5%		37.1	%		422 378.1		8.5	%		458 883.3		8.6	%		Domestic taxes on goods and services
	8.9%		27.0	%		313 689.5		10.5	%		346 711.0		10.5	%	4)	Value-added tax
	7.8%		3.3	%		35 390.8		2.6	%		36 428.2		2.9	%		Specific excise duties
	8.0%		0.3	%		3 782.3		8.3	%		4 101.1		8.4	%		Ad valorem excise duties
	15.5%		5.3	%		57 130.7		2.6	%		58 807.4		2.9	%		General fuel levy
	8.0%		0.1	%		1 130.4		8.3	%		1 226.8		8.5	%		Air departure tax
	2.0%		0.8	%		9 004.5		2.6	%		9 268.5		2.9	%		Electricity levy
	2.6%		0.2	%		2 249.9		3.4	%		2 340.3		4.0	%	5)	Other
	4.4%		4.1	%		47 206.8		10.9	%		52 466.0		11.1	%		Taxes on international trade and transactions
	4.4%		4.0	%		46 191.9		10.9	%		51 338.1		11.1	%		Customs duties
	4.1%		0.1	%		1 014.9		10.8	%		1 128.0		11.1	%	6)	Other
	—		—			—		—			—		—			Stamp duties and fees
	—		—			—		—			—		—		7)	State miscellaneous revenue
	10.4%		103.0	%		1 179 199.4		9.1	%		1 289 711.0		9.4	%		TOTAL TAX REVENUE (gross)
	-29.5%		1.8	%		23 301.7		22.4	%		21 142.7		-9.3	%	8)	Non-tax revenue
	-1.4%		-4.9	%		-36 513.3		-28.4	%		-45 444.3		24.5	%	9)	Less: SACU payments
	—		—			—		—			—		—		10)	Other adjustment
	10.0%		100.0	%		1 165 987.9		11.1	%		1 265 409.4		8.5	%		TOTAL MAIN BUDGET REVENUE
	10.0%		100.0	%		1 165 903.3		11.1	%		1 265 321.9		8.5	%		Current revenue
	11.5%		60.7	%		696 661.8		9.3	%		764 298.3		9.7	%		Direct taxes
	8.9%		42.3	%		482 537.7		8.7	%		525 412.7		8.9	%		Indirect taxes
	—		—			—		—			—		—			State miscellaneous revenue
	-29.6%		1.8	%		23 217.2		22.5	%		21 055.3		-9.3	%	11)	Non-tax revenue (excluding sales of capital assets)
	-1.4%		-4.9	%		-36 513.3		-28.4	%		-45 444.3		24.5	%		Less: SACU payments
	-4.4%		0.0	%		84.6		5.1	%		87.5		3.4	%		Sales of capital assets
	—		0.2	%		5 400.0		170.0	%		2 500.0		-53.7	%	12)	National Revenue Fund receipts

6) Includes miscellaneous customs and excise receipts, ordinary levy (up to 2004/05) and diamond export duties.

7) Includes revenue received by SARS that could not be allocated to a specific revenue type.

8) Includes sales of goods and services, fines, penalties and forfeits, interest, dividends and rent on land (including mineral and petroleum royalties), sales of capital assets as well as transactions in financial assets and liabilities.

9) Payments in terms of SACU agreements.

10) Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement.

11) Excludes sales of capital assets.

12) Previously classified as extraordinary revenue, includes sales of strategic fuel stocks, proceeds from sales of state assets and certain other receipts are, by law, paid into the National Revenue Fund.

188

2015 BUDGET REVIEW

Table 3

Main budget: estimates of national revenue

Detailed classification of revenue

		2011/12		2012/13		2013/14
R thousands		Actual collections				Before tax proposals		After tax proposals		Revised estimate		Actual collection
Taxes on income and profits			426 583 730		457 313 835		509 595 117		501 353 117		505 474 658		507 759 154
Income tax on persons and individuals			250 399 638		275 821 599		313 570 000		306 188 000		308 929 567		309 834 087
Tax on corporate income
Companies			151 626 676		159 259 228		170 690 004		169 830 004		176 965 091		177 324 273
Secondary tax on companies/dividend tax			21 965 409		19 738 709		22 930 000		22 930 000		17 000 000		17 308 790
Tax on retirement funds			6 665		159		—		—		—		—
Other
Interest on overdue income tax			2 585 012		2 493 543		2 405 113		2 405 113		2 580 000		3 290 755
Small business tax amnesty			330		597		—		—		—		1 250
Taxes on payroll and workforce			10 173 133		11 378 478		12 403 000		12 403 000		12 299 914		12 475 597
Skills development levy			10 173 133		11 378 478		12 403 000		12 403 000		12 299 914		12 475 597
Taxes on property			7 817 499		8 645 211		9 070 000		9 070 000		10 375 309		10 487 061
Estate, inheritance and gift taxes
Donations tax			52 657		82 101		90 000		90 000		112 057		112 752
Estate duty			1 045 163		1 012 978		900 000		900 000		1 130 930		1 101 505
Taxes on financial and capital transactions
Securities transfer tax	1)		2 886 114		3 271 855		3 490 000		3 490 000		3 653 314		3 784 262
Transfer duties			3 833 565		4 278 277		4 590 000		4 590 000		5 479 008		5 488 542
Domestic taxes on goods and services			263 949 858		296 921 469		327 513 673		333 344 041		326 044 162		324 548 175
Value-added tax
Domestic VAT			220 215 115		242 416 471		272 104 000		272 104 000		262 804 129		263 460 913
Import VAT			101 812 696		111 426 923		125 414 000		125 414 000		129 530 167		131 084 644
Refunds			-131 007 613		-138 820 359		-154 528 000		-154 528 000		-153 048 071		-156 878 978
Specific excise duties
Beer			7 602 586		8 444 749		8 496 662		9 172 709		9 272 899		9 177 266
Sorghum beer and sorghum flour			33 743		26 363		36 809		36 809		10 443		8 945
Wine and other fermented beverages			1 875 112		2 053 458		1 986 422		2 150 010		2 297 308		2 263 439
Spirits			3 399 456		4 257 562		3 923 030		4 333 663		3 406 992		4 007 480
Cigarettes and cigarette tobacco			10 172 151		10 978 223		11 799 507		12 538 090		11 460 871		10 910 866
Pipe tobacco and cigars			628 820		637 863		731 705		807 854		488 311		546 048
Petroleum products	2)		924 433		929 222		1 073 461		1 073 461		932 330		945 323
Revenue from neighbouring countries	3)		774 847		1 050 271		1 152 403		1 152 403		1 073 521		1 180 103
Ad valorem excise duties			1 828 347		2 231 941		2 400 000		2 400 000		2 401 519		2 363 310
General fuel levy			36 602 263		40 410 389		41 700 000		44 970 000		43 300 000		43 684 654
Taxes on use of goods or permission to use goods or to perform activities
Air passenger tax			762 416		873 060		950 000		950 000		890 069		878 697
Plastic bags levy			53 832		150 817		170 000		260 000		209 234		169 243
Electricity levy			6 429 721		7 983 940		8 130 000		8 130 000		9 125 545		8 818 930
Incandescent light bulb levy			143 787		136 792		133 673		183 673		108 938		71 802
CO2 tax - motor vehicle emissions			1 617 353		1 567 382		1 620 000		1 975 368		1 636 848		1 711 179
Turnover tax for micro businesses			5 703		11 319		10 000		10 000		16 038		17 461
Other
Universal Service Fund			75 089		155 084		210 000		210 000		127 070		126 852
Taxes on international trade and transactions			34 120 983		39 549 121		41 833 712		41 833 712		44 774 576		44 732 170
Import duties
Customs duties			34 197 901		38 997 933		41 340 000		41 340 000		44 500 067		44 178 728
Other
Miscellaneous customs and excise receipts			-141 146		495 813		438 162		438 162		206 353		460 036
Diamond export levy			64 229		55 375		55 550		55 550		68 156		93 406
Other taxes			-2 894		494		—		—		31 381		31 659
Stamp duties and fees			-2 894		494		—		—		31 381		31 659
State miscellaneous revenue	4)		7 403		17 206		—		—		—		-20 347
TOTAL TAX REVENUE (gross)			742 649 713		813 825 815		900 415 502		898 003 870		899 000 000		900 013 471
Less: SACU payments	5)		-21 759 964		-42 151 276		-43 374 338		-43 374 338		-43 374 384		-43 374 384
Payments in terms of Customs Union agreements (sec. 51(2) of Act 91 of 1964)			-21 759 964		-42 151 276		-43 374 338		-43 374 338		-43 374 384		-43 374 384
Other adjustment	6)		—		—		—		—		—		—
TOTAL TAX REVENUE (net of SACU payments)			720 889 749		771 674 539		857 041 164		854 629 532		855 625 616		856 639 087

1) The securities transfer tax replaced the uncertificated securities tax from 1 July 2008.

2) Specific excise duties on petrol, distillate fuel, residual fuel and base oil.

Source: National Treasury

189

STATISTICAL TABLES

														Table 3 Main budget: estimates of national revenue Detailed classification of revenue
2014/15									2015/16
Budget estimates						% change on
Before		After		Revised		2013/14			Before		After
tax proposals				estimate		actual			tax proposals					R thousands
	567 200 678		556 950 678		556 700 000		9.6	%		621 040 257		620 890 257		Taxes on income and profits
	346 193 993		335 943 993		350 000 000		13.0	%		393 889 606		393 889 606		Income tax on persons and individuals
														Tax on corporate income
	198 935 012		198 935 012		183 000 000		3.2	%		202 182 091		202 032 091		Companies
	19 249 861		19 249 861		21 400 000		23.6	%		22 483 828		22 483 828		Secondary tax on companies/dividend tax
	—		—		—		—			—		—		Tax on retirement funds
														Other
	2 821 812		2 821 812		2 300 000		-30.1	%		2 484 732		2 484 732		Interest on overdue income tax
	—		—		—		-100.0	%		—		—		Small business tax amnesty
	13 440 000		13 440 000		13 200 000		5.8	%		14 690 000		14 690 000		Taxes on payroll and workforce
	13 440 000		13 440 000		13 200 000		5.8	%		14 690 000		14 690 000		Skills development levy
	11 476 740		11 476 740		12 602 722		20.2	%		13 591 679		13 691 679		Taxes on property
														Estate, inheritance and gift taxes
	122 559		122 559		172 381		52.9	%		186 226		186 226		Donations tax
	1 236 927		1 236 927		1 430 341		29.9	%		1 545 223		1 545 223		Estate duty
														Taxes on financial and capital transactions
	4 065 723		4 065 723		4 300 000		13.6	%		4 645 368		4 645 368	1)	Securities transfer tax
	6 051 530		6 051 530		6 700 000		22.1	%		7 214 862		7 314 862		Transfer duties
	356 644 595		361 319 595		355 717 884		9.6	%		381 101 935		389 427 250		Domestic taxes on goods and services
														Value-added tax
	290 899 006		290 899 006		287 000 000		8.9	%		313 961 475		313 961 475		Domestic VAT
	151 659 162		151 659 162		135 000 000		3.0	%		139 995 862		139 995 862		Import VAT
	-175 398 124		-175 398 124		-161 400 000		2.9	%		-170 163 710		-170 163 710		Refunds
														Specific excise duties
	9 260 423		10 032 556		10 169 000		10.8	%		10 374 903		11 002 546		Beer
	8 554		8 554		5 000		-44.1	%		3 800		3 800		Sorghum beer and sorghum flour
	2 329 294		2 507 571		2 421 000		7.0	%		2 522 595		2 678 054		Wine and other fermented beverages
	3 269 473		3 734 063		4 882 000		21.8	%		4 980 000		5 430 493		Spirits
	11 573 227		12 223 953		12 187 000		11.7	%		12 365 701		12 931 042		Cigarettes and cigarette tobacco
	448 919		493 194		561 000		2.7	%		590 000		626 379		Pipe tobacco and cigars
	941 653		941 653		866 000		-8.4	%		883 535		883 535	2)	Petroleum products
	1 138 247		1 138 247		909 000		-23.0	%		927 405		927 405	3)	Revenue from neighbouring countries
	2 622 603		2 622 603		3 231 651		36.7	%		3 491 211		3 491 211		Ad valorem excise duties
	44 951 564		47 516 564		48 200 000		—			49 175 957		55 665 957		General fuel levy
														Taxes on use of goods or permission to use goods or to perform activities
	973 491		973 491		966 311		10.0	%		1 043 923		1 043 923		Air passenger tax
	233 258		233 258		173 258		2.4	%		188 409		188 409		Plastic bags levy
	9 789 314		9 789 314		8 600 000		-2.5	%		8 774 133		8 774 133		Electricity levy
	112 087		112 087		112 087		56.1	%		114 357		114 357		Incandescent light bulb levy
	1 684 160		1 684 160		1 600 000		-6.5	%		1 632 397		1 632 397		CO2 tax - motor vehicle emissions
	17 541		17 541		10 915		-37.5	%		11 791		11 791		Turnover tax for micro businesses
														Other
	130 742		130 742		223 663		76.3	%		228 191		228 191		Universal Service Fund
	50 463 020		50 463 020		40 779 394		-8.8	%		42 575 814		42 575 814		Taxes on international trade and transactions
														Import duties
	50 300 410		50 300 410		39 900 000		-9.7	%		41 660 017		41 660 017		Customs duties
														Other
	81 845		81 845		791 946		72.1	%		824 380		824 380		Miscellaneous customs and excise receipts
	80 765		80 765		87 448		-6.4	%		91 417		91 417		Diamond export levy
	—		—		—		-100.0	%		—		—		Other taxes
	—		—		—		-100.0	%		—		—		Stamp duties and fees
	—		—		—		-100.0	%		—		—	4)	State miscellaneous revenue
	999 225 032		993 650 032		979 000 000		8.8	%		1 072 999 685		1 081 275 000		TOTAL TAX REVENUE (gross)
	-51 737 656		-51 737 656		-51 737 656		19.3	%		-51 021 909		-51 021 909	5)	Less: SACU payments
														Payments in terms of Customs Union agreements
	-51 737 656		-51 737 656		-51 737 656		19.3	%		-51 021 909		-51 021 909		(sec. 51(2) of Act 91 of 1964)
	—		—		—		—			—		—	6)	Other adjustment
	947 487 375		941 912 375		927 262 344		8.2	%		1 021 977 775		1 030 253 091		TOTAL TAX REVENUE (net of SACU payments)

3) Excise duties that are collected by Botswana, Lesotho, Namibia and Swaziland.

4) Revenue received by SARS in respect of taxation that could not be allocated to specific revenue types.

5) Payments in terms of SACU agreements.

190

2015 BUDGET REVIEW

Table 3

Main budget: estimates of national revenue

Detailed classification of revenue

		2011/12		2012/13		2013/14
R thousands		Actual collections				Before tax proposals		After tax proposals		Revised estimate		Actual collection
TOTAL TAX REVENUE (net of SACU payments)			720 889 749		771 674 539		857 041 164		854 629 532		855 625 616		856 639 087
Sales of goods and services other than capital assets			2 893 829		2 620 125		2 071 628		2 071 628		3 124 638		2 865 573
Sales of goods and services produced by departments
Sales by market establishments	7)		54 466		53 196		44 767		44 767		50 505		52 978
Administrative fees			2 194 707		1 877 019		1 338 706		1 338 706		2 389 336		2 096 951
Other sales			626 487		674 280		657 666		657 666		652 316		698 605
Sales of scrap, waste, arms and other used current goods			18 169		15 630		30 489		30 489		32 481		17 039
Transfers received			360 296		571 490		171 207		171 207		171 939		422 477
Fines, penalties and forfeits			934 175		992 518		1 103 517		1 103 517		2 348 314		1 466 192
Interest, dividends and rent on land			10 340 305		10 221 159		10 606 858		10 606 858		10 950 894		11 071 954
Interest
Cash and cash equivalents			233 598		94 521		78 877		78 877		1 725 554		414 874
Interest on loan			—		—		681 000		681 000		320 000		—
Exchequer investments			2 725 257		3 130 059		1 700 000		1 700 000		100 000		2 169 778
Dividends
Airports Company South Africa			—		—		—		—		—		73 933
South African Special Risks Insurance Association			—		—		142 639		142 639		119 694		—
Vodacom			1 118 057		—		1 666 721		1 666 721		1 708 130		1 708 130
Industrial Development Corporation			50 000		1 666 721		50 000		50 000		—		50 000
Reserve Bank (National Treasury)			126 656		—		—		—		86 909		107 287
Telkom			300 219		—						—		—
Public Investment Corporation			—		—		330 991		330 991		—		—
Other			—		156 900						51 948		—
Rent on land
Mineral and petroleum royalties	8)		5 611 539		5 015 037		5 900 000		5 900 000		6 500 000		6 439 251
Mining leases and ownership	9)		79 732		11 107		—		—		—		99 777
Royalties, prospecting fees and surface rental	10)		89 193		87 001		—		—		46 078		—
Land rent			6 054		9 707		56 630		56 630		12 581		8 924
Sales of capital assets			114 745		94 294		65 695		65 695		66 765		37 002
Financial transactions in assets and liabilities	11)		9 758 163		13 968 106		9 309 487		9 309 487		13 878 456		14 762 855
TOTAL NON-TAX REVENUE	12)		24 401 513		28 467 692		23 328 392		23 328 392		30 541 006		30 626 053
TOTAL MAIN BUDGET REVENUE			745 291 262		800 142 231		880 369 556		877 957 924		886 166 622		887 265 140
National Revenue Fund receipts			5 209 227		12 302 788		4 992 000		4 992 000		11 789 675		11 709 339
Revaluation profits on foreign currency transactions			640 938		939 005		252 000		252 000		5 664 542		5 670 623
Premiums on loan transactions			3 483 031		10 541 967		4 740 000		4 740 000		3 994 000		5 510 307
Liquidation of South African Special Risks Insurance Association investment			227 987		50 000						75 000		75 000
Saambou Bank curatorship			30 000		—						—		—
Profits on the gold and foreign exchange contingency reserve account			794 283		—						—		—
Equalisation Fund account transfer			—		—						—		—
Other			24 712		2 638						7 743		8 346
Proceeds from foreign exchange amnesty			—		—						—		399 268
Special dividends from Telkom			—		—						—		—
Surplus cash from Independent Communications Authority of South Africa			8 276		—						8 795		8 795
2010 FIFA close-up project			—		381 560						381 560		—
Electricity Distribution Industry Holding Company			—		387 618						37 000		37 000

6) Payment to SACU partners in respect of a previous error in calculation of the 1969 agreement.

7) New item introduced on the standard chart of accounts from 2008/09.

8) Mineral royalties imposed on the transfer of mineral resources in terms of the Mineral and Petroleum Resources Royalty Act (2008), which came into operation on 1 May 2009.

9) Mining leases and ownership has been reclassified as non-tax revenue. The historical years from 1998/99 have been adjusted for comparative purposes.

10) Royalties, prospecting fees and surface rental collected by the Department of Minerals and Energy.

Source: National Treasury

191

STATISTICAL TABLES

														Table 3 Main budget: estimates of national revenue Detailed classification of revenue
2014/15									2015/16
Budget estimates						% change on
Before		After		Revised		2013/14			Before		After
tax proposals				estimate		actual			tax proposals					R thousands
	947 487 375		941 912 375		927 262 344		8.2	%		1 021 977 775		1 030 253 091		TOTAL TAX REVENUE (net of SACU payments)
	2 721 087		2 721 087		2 501 334		-12.7	%		2 558 962		2 558 962		Sales of goods and services other than capital assets
														Sales of goods and services produced by departments
	52 859		52 859		53 433		0.9	%		55 259		55 259	7)	Sales by market establishments
	1 981 629		1 981 629		1 792 453		-14.5	%		1 932 092		1 932 092		Administrative fees
	655 436		655 436		610 964		-12.5	%		538 091		538 091		Other sales
	31 163		31 163		44 484		161.1	%		33 520		33 520		Sales of scrap, waste, arms and other used current goods
	174 635		174 635		174 879		-58.6	%		185 288		185 288		Transfers received
	1 257 552		1 257 552		1 145 296		-21.9	%		1 199 002		1 199 002		Fines, penalties and forfeits
	12 077 856		12 077 856		12 229 284		10.5	%		11 091 779		11 091 779		Interest, dividends and rent on land
														Interest
	1 473 621		1 473 621		2 022 678		387.5	%		1 077 444		1 077 444		Cash and cash equivalents
	711 000		711 000		711 037		—			613 169		613 169		Interest on loan
	110 000		110 000		513 000		-76.4	%		500 000		500 000		Exchequer investments
														Dividends
	—		—		223 797		202.7	%		—		—		Airports Company South Africa
	119 777		119 777		205 777		—			134 350		134 350		South African Special Risks Insurance Association
	1 666 721		1 666 721		1 666 721		-2.4	%		1 666 721		1 666 721		Vodacom
	—		—		50 000		—			50 000		50 000		Industrial Development Corporation
	70 000		70 000		—		-100.0	%		10 000		10 000		Reserve Bank (National Treasury)
	347 541		347 541		—		—			—		—		Telkom
	—		—		—		—			—		—		Public Investment Corporation
	52 046		52 046		4					—		—		Other
														Rent on land
	7 166 790		7 166 790		5 635 959		-12.5	%		6 220 717		6 220 717	8)	Mineral and petroleum royalties
	—		—		—		—			—		—	9)	Mining leases and ownership
	49 303		49 303		46 554		-53.3	%		112 236		112 236	10)	Royalties, prospecting fees and surface rental
	11 057		11 057		6 757		-24.3	%		7 142		7 142		Land rent
	66 905		66 905		84 174		127.5	%		80 471		80 471		Sales of capital assets
	4 571 347		4 571 347		10 871 486		-26.4	%		3 922 026		3 922 026	11)	Financial transactions in assets and liabilities
	20 869 382		20 869 382		27 006 453		-11.8	%		19 037 528		19 037 528		TOTAL NON-TAX REVENUE
	968 356 757		962 781 757		954 268 797		7.6	%		1 041 015 303		1 049 290 619		TOTAL MAIN BUDGET REVENUE
	2 850 000		2 850 000		8 942 000					2 000 000		2 000 000		National Revenue Fund receipts
	2 850 000		2 850 000		4 250 000					2 000 000		2 000 000		Revaluation profits on foreign currency transactions
	—		—		4 650 000					—		—		Premiums on loan transactions
	—		—		40 000					—		—		Liquidation of South African Special Risks Insurance Association investment
	—		—		—					—		—		Saambou Bank curatorship
	—		—		—					—		—		Profits on the gold and foreign exchange contingency reserve account
	—		—		—					—		—		Equalisation Fund account transfer
	—		—		2 000					—		—		Other
	—		—		—					—		—		Proceeds from foreign exchange amnesty
	—		—		—					—		—		Special dividends from Telkom
	—		—		—					—		—		Surplus cash from Independent Communications Authority of South Africa
	—		—		—					—		—		2010 FIFA close-up project
	—		—		—					—		—		Electricity Distribution Industry Holding Company

11) Includes recoveries of loans and advances.

12) Includes National Revenue Fund receipts previously accounted for separately.

192

2015 BUDGET REVIEW

Table 4

Main budget: expenditure defrayed from the

National Revenue Fund by vote

			2011/12						2012/13
			Expenditure		of which				Expenditure		of which
R million			on budget vote outcome		transfers to provinces  1)		transfers to local government 2)		on budget vote outcome		transfers to provinces  1)
1 The Presidency				387.3		—		—		365.3		—
2 Parliament				1 214.8		—		—		1 297.9		—
3 Communications				1 018.1		—		—		1 257.9		—
4 Cooperative Governance and Traditional Affairs				46 221.6		15.1		44 869.1		53 434.4		0.9
of which: local government equitable share				—		—		33 173.2		—		—
5 Home Affairs				5 687.0		—		—		5 443.6		—
6 International Relations and Cooperation				5 021.8		—		—		5 185.1		—
7 National Treasury				20 272.4		—		1 162.0		21 019.0		—
8 Planning, Monitoring and Evaluation				547.3		—		—		622.2		—
9 Public Enterprises				343.7		—		—		1 364.3		—
10 Public Service and Administration				645.5		—		—		703.7		—
11 Public Works				7 061.4		2 229.0		363.9		7 203.9		2 308.4
12 Statistics South Africa				3 674.4		—		—		1 761.7		—
13 Women				138.2		—		—		150.7		—
14 Basic Education				13 346.2		10 803.0		—		14 885.9		11 205.9
15 Higher Education and Training				30 024.9		—		—		33 473.9		—
16 Health				26 212.7		23 989.3		—		28 282.5		25 882.0
17 Social Development				103 166.8		—		—		111 144.8		—
18 Correctional Services				16 276.8		—		—		17 313.6		—
19 Defence and Military Veterans				34 331.4		—		—		37 702.2		—
20 Independent Police Investigative Directorate				153.5		—		—		171.4		—
21 Justice and Constitutional Development				10 963.2		—		—		12 320.5		—
22 Office of the Chief Justice and Judicial Administration				507.2		—		—		587.9		—
23 Police				57 933.1		—		—		63 156.6		—
24 Agriculture, Forestry and Fisheries				4 920.2		1 666.6		—		5 813.2		2 062.4
25 Economic Development				577.6		—		—		673.5		—
26 Energy				6 174.3		—		1 376.6		6 659.0		—
27 Environmental Affairs				4 131.5		—		—		4 942.7		—
28 Labour				2 007.1		—		—		2 034.6		—
29 Mineral Resources				1 029.4		—		—		1 173.6		—
30 Science and Technology				4 403.5		—		—		4 973.3		—
31 Small Business Development				735.5		—		—		841.6		—
32 Telecommunications and Postal Services				1 325.4		—		—		1 017.9		—
33 Tourism				1 250.2		—		—		1 372.0		—
34 Trade and Industry				6 065.5		—		—		7 444.8		—
35 Transport				41 690.9		11 350.3		4 647.1		39 328.2		12 299.1
36 Water and Sanitation				8 450.9		—		992.3		8 907.9		—
37 Arts and Culture				2 405.8		569.9		—		2 659.3		564.6
38 Human Settlements				22 312.9		15 121.5		6 267.0		24 196.9		15 395.0
39 Rural Development and Land Reform				7 997.7		—		—		8 919.6		—
40 Sport and Recreation South Africa				810.6		452.0		—		1 054.1		469.6
Total appropriation by vote				501 438.5		66 196.8		59 678.1		540 861.0		70 187.9
Plus:
Direct charges against the National Revenue Fund
President and Deputy President salaries (The Presidency)				4.0		—		—		2.6		—
Members’ remuneration (Parliament)				357.6		—		—		389.1		—
Debt-service costs (National Treasury)				76 460.0		—		—		88 121.1		—
Provincial equitable share (National Treasury)	4	)		289 627.6		289 627.6		—		310 740.7		310 740.7
General fuel levy sharing with metropolitan municipalities (National Treasury)				8 573.1		—		8 573.1		9 039.7		—
National Revenue Fund payments (National Treasury)				1 388.3		—		—		2 587.2		—
of which:
Defrayal of the gold and foreign exchange contingency reserve account losses				940.1		—		—		152.5		—
Revaluation losses on foreign currency transactions				448.2		—		—		263.1		—
Premiums on loan transactions				0.0		—		—		2 171.6		—
Saambou Bank				—		—		—		—		—
Skills levy and sector education and training authorities (Higher Education and Training)				10 025.3		—		—		11 694.5		—
Magistrates’ salaries (Justice and Constitutional Development)				1 326.2		—		—		1 314.8		—
Judges’ salaries (Office of the Chief Justice and Judicial Administration)				710.9		—		—		744.8		—
Total direct charges against the National Revenue Fund				388 472.9		289 627.6		8 573.1		424 634.5		310 740.7
Unallocated reserves				—		—		—		—		—
National government projected underspending				—		—		—		—		—
Local government repayment to the National Revenue Fund				—		—		—		—		—
Main budget expenditure				889 911.5		355 824.4		68 251.2		965 495.6		380 928.6

1) Includes provincial equitable share and conditional grants allocated to provinces.

2) Includes local government equitable share and conditional grants allocated to local government as well as general fuel levy sharing with metropolitan municipalities.

Source: National Treasury

193

STATISTICAL TABLES

													Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote
2012/13		2013/14						2014/15
of which		Expenditure		of which
transfers to local government 2)		on budget vote outcome		transfers to provinces  1)		transfers to local government 2)		Budget estimate 3)		Adjusted appro- priation			R million
	—		415.2		—		—		1 010.2		484.5		1 The Presidency
	—		1 535.5		—		—		1 508.2		1 508.2		2 Parliament
	—		1 348.4		—		—		1 283.3		1 295.3		3 Communications
	51 321.9		56 401.6		93.6		53 718.1		63 212.7		63 453.9		4 Cooperative Governance and Traditional Affairs
	37 139.5		—		—		38 964.3		—		—		of which: local government equitable share
	—		6 909.9		—		—		6 544.8		7 144.8		5 Home Affairs
	—		5 871.3		—		—		5 754.3		6 104.3		6 International Relations and Cooperation
	1 056.3		25 107.1		—		1 149.2		27 265.0		26 703.9		7 National Treasury
	—		646.6		—		—		208.2		733.8		8 Planning, Monitoring and Evaluation
	—		269.4		—		—		256.4		319.5		9 Public Enterprises
	—		809.1		—		—		875.1		875.1		10 Public Service and Administration
	661.5		6 022.7		610.2		611.3		6 121.3		6 121.3		11 Public Works
	—		1 728.4		—		—		2 242.5		2 242.5		12 Statistics South Africa
	—		161.6		—		—		218.5		180.8		13 Women
	—		17 011.1		12 326.3		—		19 680.1		19 689.9		14 Basic Education
	—		36 370.0		—		—		38 988.5		38 988.5		15 Higher Education and Training
	—		30 228.5		27 487.2		—		34 380.0		34 325.1		16 Health
	—		117 110.8		—		—		128 799.4		128 597.7		17 Social Development
	—		18 700.0		—		—		19 721.1		19 721.8		18 Correctional Services
	—		40 447.5		—		—		42 831.2		42 856.9		19 Defence and Military Veterans
	—		193.1		—		—		234.7		234.7		20 Independent Police Investigative Directorate
	—		13 058.4		—		—		14 593.8		14 584.8		21 Justice and Constitutional Development
	—		669.3		—		—		565.1		574.0		22 Office of the Chief Justice and Judicial Administration
	—		68 791.4		—		—		72 507.2		72 507.2		23 Police
	—		6 111.3		2 148.6		—		6 692.4		6 692.4		24 Agriculture, Forestry and Fisheries
	—		771.4		—		—		696.9		696.9		25 Economic Development
	1 351.4		6 477.1		—		1 815.5		7 415.6		7 437.8		26 Energy
	—		5 200.3		—		—		5 668.4		5 680.4		27 Environmental Affairs
	—		2 371.4		—		—		2 527.3		2 546.3		28 Labour
	—		1 387.2		—		—		1 471.3		1 475.5		29 Mineral Resources
	—		6 169.5		—		—		6 470.2		6 479.9		30 Science and Technology
	—		1 039.5		—		—		1 148.1		1 084.6		31 Small Business Development
	—		1 701.5		—		—		973.2		1 616.4		32 Telecommunications and Postal Services
	—		1 512.7		—		—		1 662.1		1 583.3		33 Tourism
	—		8 340.7		—		—		8 686.9		8 834.2		34 Trade and Industry
	4 921.7		43 036.8		13 290.3		5 602.2		48 726.5		48 770.7		35 Transport
	562.4		10 505.9		—		1 129.2		12 480.3		13 647.4		36 Water and Sanitation
	—		2 758.2		594.8		—		3 527.7		3 527.7		37 Arts and Culture
	7 392.2		27 443.3		17 028.3		9 076.9		30 521.4		29 417.6		38 Human Settlements
	—		9 454.1		—		—		9 455.3		9 455.3		39 Rural Development and Land Reform
	123.1		1 073.0		497.6		120.0		970.4		970.4		40 Sport and Recreation South Africa
	67 390.7		585 160.9		74 076.9		73 222.3		637 895.7		639 165.2		Total appropriation by vote
													Plus:
													Direct charges against the National Revenue Fund
	—		2.6		—		—		3.0		5.5		President and Deputy President salaries (The Presidency)
	—		401.9		—		—		481.0		481.0		Members’ remuneration (Parliament)
	—		101 184.7		—		—		114 900.5		114 485.0		Debt-service costs (National Treasury)
	—		336 495.3		336 495.3		—		359 921.8		359 921.8	4)	Provincial equitable share (National Treasury)
	9 039.7		9 613.4		—		9 613.4		10 190.2		10 190.2		General fuel levy sharing with metropolitan municipalities (National Treasury)
	—		516.3		—		—		—		310.9		National Revenue Fund payments (National Treasury)
													of which:
	—		28.1		—		—		—		67.9		Defrayal of the gold and foreign exchange contingency reserve account losses
	—		—		—		—		—		—		Revaluation losses on foreign currency transactions
	—		457.2		—		—		—		243.0		Premiums on loan transactions
	—		31.0		—		—		—		—		Saambou Bank
	—		12 090.2		—		—		13 440.0		13 200.0		Skills levy and sector education and training authorities (Higher Education and Training)
	—		1 510.0		—		—		1 901.3		1 874.3		Magistrates’ salaries (Justice and Constitutional Development)
	—		788.7		—		—		829.0		856.0		Judges’ salaries (Office of the Chief Justice and Judicial Administration)
	9 039.7		462 603.0		336 495.3		9 613.4		501 666.7		501 324.6		Total direct charges against the National Revenue Fund
	—		—		—		—		3 000.0		—		Unallocated reserves
	—		—		—		—		—		-3 650.0		National government projected underspending
	—		—		—		—		—		-500.0		Local government repayment to the National Revenue Fund
	76 430.4		1 047 763.8		410 572.2		82 835.7		1 142 562.4		1 136 339.8		Main budget expenditure

3) Budget estimate adjusted for function shifts.

4) Provincial equitable share excluding conditional grants to provinces.

194

2015 BUDGET REVIEW

Table 4

Main budget: expenditure defrayed from the

National Revenue Fund by vote

		2014/15						2015/16
				of which						of which
R million		Revised Estimate		transfers to provinces  1)		transfers to local government 2)		Budget Estimate		transfers to provinces  1)		transfers to local government 2)
1 The Presidency			456.5		—		—		510.3		—		—
2 Parliament			1 508.2		—		—		1 566.9		—		—
3 Communications			1 295.3		—		—		1 280.9		—		—
4 Cooperative Governance and Traditional Affairs			61 418.9		197.4		58 229.2		69 314.2		103.2		65 904.0
of which: local government equitable share			—		—		43 290.1		—		—		50 207.7
5 Home Affairs			7 144.8		—		—		6 450.8		—		—
6 International Relations and Cooperation			6 104.3		—		—		5 698.6		—		—
7 National Treasury			25 997.8		—		1 399.7		26 957.3		—		1 435.3
8 Planning, Monitoring and Evaluation			733.8		—		—		717.7		—		—
9 Public Enterprises			319.5		—		—		267.5		—		—
10 Public Service and Administration			853.1		—		—		930.9		—		—
11 Public Works			6 031.3		606.9		594.6		6 411.1		591.2		587.7
12 Statistics South Africa			2 085.2		—		—		2 245.2		—		—
13 Women			180.8		—		—		187.0		—		—
14 Basic Education			19 580.5		13 532.6		—		21 511.1		15 856.5		—
15 Higher Education and Training			38 987.3		—		—		41 844.0		—		—
16 Health			33 624.3		30 164.1		—		36 468.0		31 857.9		—
17 Social Development			128 397.7		29.0		—		138 168.6		47.5		—
18 Correctional Services			19 721.8		—		—		20 617.6		—		—
19 Defence and Military Veterans			42 856.9		—		—		44 579.4		—		—
20 Independent Police Investigative Directorate			234.7		—		—		234.8		—		—
21 Justice and Constitutional Development			14 584.8		—		—		14 984.0		—		—
22 Office of the Chief Justice and Judicial Administration			574.0		—		—		742.4		—		—
23 Police			72 507.2		—		—		76 377.1		—		—
24 Agriculture, Forestry and Fisheries			6 692.4		2 389.1		—		6 383.0		2 188.1		—
25 Economic Development			696.9		—		—		885.8		—		—
26 Energy			7 393.0		—		1 241.6		7 482.1		—		2 158.2
27 Environmental Affairs			5 680.4		—		—		5 948.0		—		—
28 Labour			2 509.3		—		—		2 686.9		—		—
29 Mineral Resources			1 475.5		—		—		1 618.5		—		—
30 Science and Technology			6 479.9		—		—		7 482.1		—		—
31 Small Business Development			1 084.6		—		—		1 103.2		—		—
32 Telecommunications and Postal Services			1 535.4		—		—		1 413.3		—		—
33 Tourism			1 583.3		—		—		1 800.2		—		—
34 Trade and Industry			8 616.3		—		—		9 593.7		—		—
35 Transport			48 770.7		14 194.2		5 946.1		53 357.3		14 790.1		6 049.9
36 Water and Sanitation			12 939.7		—		989.8		16 446.5		—		2 305.0
37 Arts and Culture			3 425.6		1 016.2		—		3 919.9		1 311.0		—
38 Human Settlements			29 117.6		17 084.4		10 484.7		30 943.4		18 202.7		10 654.3
39 Rural Development and Land Reform			9 355.3		—		—		9 379.7		—		—
40 Sport and Recreation South Africa			961.4		525.6		—		988.5		537.3		—
Total appropriation by vote			633 515.9		79 739.5		78 885.6		679 497.5		85 485.4		89 094.4
Plus:
Direct charges against the National Revenue Fund
President and Deputy President salaries (The Presidency)			5.5		—		—		5.7		—		—
Members’ remuneration (Parliament)			481.0		—		—		503.1		—		—
Debt-service costs (National Treasury)			115 016.2		—		—		126 440.4		—		—
Provincial equitable share (National Treasury)	4)		359 921.8		359 921.8		—		382 673.5		382 673.5		—
General fuel levy sharing with metropolitan municipalities (National Treasury)			10 190.2		—		10 190.2		10 658.9		—		10 658.9
National Revenue Fund payments (National Treasury)			310.9		—		—		121.0		—		—
of which:
Defrayal of the gold and foreign exchange contingency reserve account losses			67.9		—		—		121.0		—		—
Revaluation losses on foreign currency transactions			—		—		—		—		—		—
Premiums on loan transactions			243.0		—		—		—		—		—
Saambou Bank			—		—		—		—		—		—
Skills levy and sector education and training authorities (Higher Education and Training)			13 200.0		—		—		14 690.0		—		—
Magistrates’ salaries (Justice and Constitutional Development)			1 624.3		—		—		1 880.8		—		—
Judges’ salaries (Office of the Chief Justice and Judicial Administration)			856.0		—		—		873.7		—		—
Total direct charges against the National Revenue Fund			501 605.7		359 921.8		10 190.2		537 847.2		382 673.5		10 658.9
Unallocated reserves			—		—		—		5 000.0		—		—
National government projected underspending			—		—		—		—		—		—
Local government repayment to the National Revenue Fund			—		—		—		—		—		—
Main budget expenditure			1 135 121.6		439 661.3		89 075.8		1 222 344.7		468 158.9		99 753.3

1) Includes provincial equitable share and conditional grants allocated to provinces.

2) Includes local government equitable share and conditional grants allocated to local government as well as general fuel levy sharing with metropolitan municipalities.

Source: National Treasury

195

STATISTICAL TABLES

													Table 4 Main budget: expenditure defrayed from the National Revenue Fund by vote
2016/17						2017/18
		of which						of which
Budget Estimates		transfers to provinces  1)		transfers to local government 2)		Budget Estimate		transfers to provinces  1)		transfers to local government 2)			R million
	524.7		—		—		552.4		—		—		1 The Presidency
	1 655.4		—		—		1 746.5		—		—		2 Parliament
	1 344.7		—		—		1 418.9		—		—		3 Communications
	73 460.7		111.5		69 135.0		77 758.7		123.4		72 576.8		4 Cooperative Governance and Traditional Affairs
	—		—		52 868.7		—		—		55 512.1		of which: local government equitable share
	7 196.2		—		—		7 049.6		—		—		5 Home Affairs
	5 943.6		—		—		6 543.3		—		—		6 International Relations and Cooperation
	25 713.8		—		1 486.5		27 378.2		—		1 598.3		7 National Treasury
	738.6		—		—		784.6		—		—		8 Planning, Monitoring and Evaluation
	274.3		—		—		289.8		—		—		9 Public Enterprises
	978.4		—		—		1 040.2		—		—		10 Public Service and Administration
	6 935.2		761.7		664.0		7 367.7		809.4		716.4		11 Public Works
	2 498.9		—		—		2 278.0		—		—		12 Statistics South Africa
	196.3		—		—		211.9		—		—		13 Women
	22 528.6		16 373.0		—		23 860.4		17 267.3		—		14 Basic Education
	44 094.2		—		—		46 317.0		—		—		15 Higher Education and Training
	38 923.5		34 338.2		—		42 337.2		37 495.5		—		16 Health
	148 106.3		47.5		—		157 917.4		—		—		17 Social Development
	21 858.3		—		—		23 135.3		—		—		18 Correctional Services
	47 118.7		—		—		50 113.5		—		—		19 Defence and Military Veterans
	246.1		—		—		259.9		—		—		20 Independent Police Investigative Directorate
	15 997.8		—		—		16 997.0		—		—		21 Justice and Constitutional Development
	804.3		—		—		849.9		—		—		22 Office of the Chief Justice and Judicial Administration
	80 815.6		—		—		86 372.7		—		—		23 Police
	6 342.5		2 262.5		—		6 777.5		2 404.5		—		24 Agriculture, Forestry and Fisheries
	685.7		—		—		727.9		—		—		25 Economic Development
	7 695.0		—		2 221.9		8 334.3		—		2 400.3		26 Energy
	6 467.5		—		—		6 537.9		—		—		27 Environmental Affairs
	2 998.2		—		—		3 162.7		—		—		28 Labour
	1 684.9		—		—		1 732.6		—		—		29 Mineral Resources
	7 562.2		—		—		7 608.6		—		—		30 Science and Technology
	1 125.2		—		—		1 257.4		—		—		31 Small Business Development
	1 545.7		—		—		1 275.3		—		—		32 Telecommunications and Postal Services
	2 053.3		—		—		2 127.6		—		—		33 Tourism
	10 505.3		—		—		9 509.2		—		—		34 Trade and Industry
	56 132.2		15 288.3		6 264.2		59 327.8		16 280.9		6 717.2		35 Transport
	16 361.5		—		1 765.0		18 204.8		—		2 399.9		36 Water and Sanitation
	4 103.4		1 367.1		—		4 347.0		1 452.8		—		37 Arts and Culture
	33 206.0		19 884.0		11 175.9		35 246.6		21 060.3		11 823.1		38 Human Settlements
	10 392.0		—		—		10 888.7		—		—		39 Rural Development and Land Reform
	1 034.4		560.7		—		1 093.6		595.8		—		40 Sport and Recreation South Africa
	717 849.0		90 994.5		92 712.5		760 739.6		97 490.0		98 231.9		Total appropriation by vote
													Plus:
													Direct charges against the National Revenue Fund
	6.0		—		—		6.4		—		—		President and Deputy President salaries (The Presidency)
	529.8		—		—		556.3		—		—		Members’ remuneration (Parliament)
	140 970.9		—		—		153 376.0		—		—		Debt-service costs (National Treasury)
	405 264.6		405 264.6		—		428 892.5		428 892.5		—	4)	Provincial equitable share (National Treasury)
	11 223.8		—		11 223.8		11 785.0		—		11 785.0		General fuel levy sharing with metropolitan municipalities (National Treasury)
	—		—		—		—		—		—		National Revenue Fund payments (National Treasury)
													of which:
	—		—		—		—		—		—		Defrayal of the gold and foreign exchange contingency reserve account losses
	—		—		—		—		—		—		Revaluation losses on foreign currency transactions
	—		—		—		—		—		—		Premiums on loan transactions
	—		—		—		—		—		—		Saambou Bank
	16 140.0		—		—		17 400.0		—		—		Skills levy and sector education and training authorities (Higher Education and Training)
	2 040.2		—		—		2 140.5		—		—		Magistrates’ salaries (Justice and Constitutional Development)
	920.1		—		—		966.1		—		—		Judges’ salaries (Office of the Chief Justice and Judicial Administration)
	577 095.4		405 264.6		11 223.8		615 122.8		428 892.5		11 785.0		Total direct charges against the National Revenue Fund
	15 000.0		—		—		45 000.0		—		—		Unallocated reserves
	—		—		—		—		—		—		National government projected underspending
	—		—		—		—		—		—		Local government repayment to the National Revenue Fund
	1 309 944.4		496 259.1		103 936.3		1 420 862.4		526 382.5		110 017.0		Main budget expenditure

3) Budget estimate adjusted for function shifts.

4) Provincial equitable share excluding conditional grants to provinces.

196

2015 BUDGET REVIEW

Table 5

Consolidated national, provincial and social security

funds expenditure: economic classification 1)

		2011/12					2012/13					2013/14					2014/15
R million		Outcome		% of total			Outcome		% of total			Outcome		% of total			Revised estimate
Current payments			512 143.6		55.5	%		558 188.9		55.7	%		612 394.0		55.8	%		666 700.2
Compensation of employees			315 088.2		34.2	%		341 708.8		34.1	%		371 268.1		33.8	%		402 614.6
Goods and services			120 405.4		13.1	%		128 215.0		12.8	%		139 827.8		12.7	%		148 990.8
Interest and rent on land			76 650.0		8.3	%		88 265.2		8.8	%		101 298.2		9.2	%		115 094.8
Transfers and subsidies			366 845.5		39.8	%		395 188.3		39.4	%		435 502.6		39.7	%		471 511.6
Provinces and municipalities			72 225.3		7.8	%		81 180.4		8.1	%		87 636.7		8.0	%		94 215.3
of which: local government share	2)		59 678.1		6.5	%		67 390.7		6.7	%		73 222.3		6.7	%		78 885.6
Departmental agencies and accounts			83 600.8		9.1	%		84 961.9		8.5	%		90 653.2		8.3	%		98 024.9
Higher education institutions			19 729.1		2.1	%		21 275.8		2.1	%		22 718.3		2.1	%		24 402.9
Foreign governments and international organisations			1 310.1		0.1	%		1 396.7		0.1	%		1 930.6		0.2	%		1 721.1
Public corporations and private enterprises			28 340.4		3.1	%		31 330.5		3.1	%		34 832.1		3.2	%		40 073.7
Public corporations			22 495.3		2.4	%		24 686.4		2.5	%		26 673.9		2.4	%		31 455.7
Subsidies on products and production			9 307.0		1.0	%		10 541.6		1.1	%		10 703.1		1.0	%		11 906.5
Other transfers			13 188.3		1.4	%		14 144.8		1.4	%		15 970.8		1.5	%		19 549.3
Private enterprises			5 845.0		0.6	%		6 644.2		0.7	%		8 158.2		0.7	%		8 618.0
Subsidies on products and production			2 335.1		0.3	%		3 218.1		0.3	%		4 120.7		0.4	%		4 453.3
Other transfers			3 509.9		0.4	%		3 426.0		0.3	%		4 037.5		0.4	%		4 164.7
Non-profit institutions			19 216.0		2.1	%		19 896.2		2.0	%		23 518.0		2.1	%		24 411.5
Households			142 423.8		15.4	%		155 146.8		15.5	%		174 213.7		15.9	%		188 662.1
Social benefits			120 757.4		13.1	%		131 635.4		13.1	%		149 187.8		13.6	%		160 008.1
Other transfers to households			21 666.4		2.3	%		23 511.3		2.3	%		25 025.9		2.3	%		28 654.1
Payments for capital assets			39 967.8		4.3	%		43 530.4		4.3	%		44 928.5		4.1	%		46 653.3
Buildings and other fixed structures			30 324.7		3.3	%		34 228.8		3.4	%		35 410.7		3.2	%		38 612.0
Buildings			20 645.5		2.2	%		21 915.5		2.2	%		22 074.1		2.0	%		23 866.3
Other fixed structures			9 679.2		1.0	%		12 313.3		1.2	%		13 336.6		1.2	%		14 745.7
Machinery and equipment			8 870.9		1.0	%		8 835.1		0.9	%		9 044.8		0.8	%		7 573.4
Transport equipment			3 193.6		0.3	%		3 047.9		0.3	%		3 159.0		0.3	%		2 275.9
Other machinery and equipment			5 677.3		0.6	%		5 787.2		0.6	%		5 885.8		0.5	%		5 297.4
Land and sub-soil assets			195.6		0.0	%		173.1		0.0	%		137.0		0.0	%		138.8
Software and other intangible assets			545.4		0.1	%		239.1		0.0	%		296.4		0.0	%		264.9
Other assets	3)		31.1		0.0	%		54.3		0.0	%		39.5		0.0	%		64.3
Payments for financial assets	4)		3 044.3		0.3	%		4 934.5		0.5	%		4 135.9		0.4	%		3 746.2
Subtotal: votes and direct charges			922 001.2		100.0	%		1 001 842.2		100.0	%		1 096 961.1		100.0	%		1 188 611.3
Plus:
Unallocated reserves			—		—			—		—			—		—			—
Total consolidated expenditure			922 001.2		100.0	%		1 001 842.2		100.0	%		1 096 961.1		100.0	%		1 188 611.3

1) These figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank. The numbers in this table are not strictly comparable to those published in previous years due to the reclassification of expenditure items for previous years. Data for the previous years has been adjusted accordingly.

2) Includes equitable share and conditional grants to local government.

Source: National Treasury

197

STATISTICAL TABLES

																		Table 5 Consolidated national, provincial and social security funds expenditure: economic classification 1)
		2015/16					2016/17					2017/18
% of total		Budget estimate		% of total			Budget estimate		% of total			Budget estimate		% of total				R million
	56.1%		712 682.9		55.4	%		762 653.5		55.3	%		809 750.2		54.3	%		Current payments
	33.9%		432 757.6		33.6	%		459 842.2		33.3	%		486 541.5		32.6	%		Compensation of employees
	12.5%		153 407.3		11.9	%		161 763.8		11.7	%		169 752.2		11.4	%		Goods and services
	9.7%		126 518.0		9.8	%		141 047.5		10.2	%		153 456.5		10.3	%		Interest and rent on land
	39.7%		512 750.4		39.8	%		544 728.5		39.5	%		574 021.6		38.5	%		Transfers and subsidies
	7.9%		105 194.7		8.2	%		109 152.0		7.9	%		115 511.1		7.7	%		Provinces and municipalities
	6.6%		89 094.4		6.9	%		92 712.5		6.7	%		98 231.9		6.6	%	2)	of which: local government share
	8.2%		103 734.4		8.1	%		110 931.1		8.0	%		117 698.7		7.9	%		Departmental agencies and accounts
	2.1%		26 451.6		2.1	%		27 849.6		2.0	%		29 227.4		2.0	%		Higher education institutions
	0.1%		1 739.2		0.1	%		1 840.1		0.1	%		1 885.6		0.1	%		Foreign governments and international organisations
	3.4%		43 306.1		3.4	%		44 828.9		3.2	%		45 429.5		3.0	%		Public corporations and private enterprises
	2.6%		33 792.3		2.6	%		34 413.2		2.5	%		35 999.2		2.4	%		Public corporations
	1.0%		11 452.9		0.9	%		11 878.5		0.9	%		12 569.5		0.8	%		Subsidies on products and production
	1.6%		22 339.3		1.7	%		22 534.7		1.6	%		23 429.8		1.6	%		Other transfers
	0.7%		9 513.8		0.7	%		10 415.7		0.8	%		9 430.3		0.6	%		Private enterprises
	0.4%		5 304.9		0.4	%		6 080.2		0.4	%		4 878.5		0.3	%		Subsidies on products and production
	0.4%		4 208.9		0.3	%		4 335.6		0.3	%		4 551.7		0.3	%		Other transfers
	2.1%		26 173.7		2.0	%		27 305.6		2.0	%		28 722.3		1.9	%		Non-profit institutions
	15.9%		206 150.6		16.0	%		222 821.2		16.2	%		235 547.1		15.8	%		Households
	13.5%		176 669.8		13.7	%		189 918.9		13.8	%		200 685.9		13.5	%		Social benefits
	2.4%		29 480.9		2.3	%		32 902.3		2.4	%		34 861.2		2.3	%		Other transfers to households
	3.9%		53 528.6		4.2	%		56 907.1		4.1	%		62 323.0		4.2	%		Payments for capital assets
	3.2%		44 007.6		3.4	%		46 919.6		3.4	%		50 338.5		3.4	%		Buildings and other fixed structures
	2.0%		26 536.5		2.1	%		28 755.7		2.1	%		30 520.2		2.0	%		Buildings
	1.2%		17 471.1		1.4	%		18 163.9		1.3	%		19 818.3		1.3	%		Other fixed structures
	0.6%		9 126.8		0.7	%		9 735.2		0.7	%		11 718.3		0.8	%		Machinery and equipment
	0.2%		2 921.2		0.2	%		3 080.4		0.2	%		4 212.0		0.3	%		Transport equipment
	0.4%		6 205.6		0.5	%		6 654.8		0.5	%		7 506.4		0.5	%		Other machinery and equipment
	0.0%		115.1		0.0	%		114.1		0.0	%		148.1		0.0	%		Land and sub-soil assets
	0.0%		235.8		0.0	%		99.8		0.0	%		84.6		0.0	%		Software and other intangible assets
	0.0%		43.2		0.0	%		38.5		0.0	%		33.5		0.0	%	3)	Other assets
	0.3%		3 491.7		0.3	%		345.5		0.0	%		365.1		0.0	%	4)	Payments for financial assets
	100.0%		1 282 453.5		99.6	%		1 364 634.6		98.9	%		1 446 459.9		96.98	%		Subtotal: votes and direct charges
																		Plus:
	—		5 000.0		0.4	%		15 000.0		1.1	%		45 000.0		3.0	%		Unallocated reserves
	100.0%		1 287 453.5		100.0	%		1 379 634.6		100.0	%		1 491 459.9		100.0	%		Total consolidated expenditure

3) Includes biological, heritage and specialised military assets.

4) Includes National Revenue Fund payments previously accounted for separately.

198

2015 BUDGET REVIEW

Table 6

Consolidated national, provincial and social security

funds expenditure: functional classification 1)

		2011/12					2012/13					2013/14					2014/15
R million		Estimated outcome		% of total			Estimated outcome		% of total			Estimated outcome		% of total			Revised estimate
General public services	2)		136 386.8		14.8	%		151 941.26		15.2	%		170 972.2		15.6	%		188 589.2
of which: debt-service costs			76 460.0		8.3	%		88 121.1		8.8	%		101 184.7		9.2	%		115 016.2
Defence			34 549.9		3.7	%		38 027.1		3.8	%		40 647.5		3.7	%		43 176.0
Public order and safety			91 675.0		9.9	%		100 121.9		10.0	%		108 817.1		9.9	%		115 173.4
Police services			62 199.4		6.7	%		68 204.2		6.8	%		74 506.2		6.8	%		78 257.2
Law courts			13 716.7		1.5	%		15 187.5		1.5	%		16 237.8		1.5	%		17 885.3
Prisons			15 758.9		1.7	%		16 730.2		1.7	%		18 073.0		1.6	%		19 030.9
Economic affairs			102 490.9		11.1	%		105 348.8		10.5	%		115 224.0		10.5	%		124 293.6
General economic, commercial, and labour affairs			15 106.6		1.6	%		16 504.6		1.6	%		17 687.6		1.6	%		18 150.9
Agriculture, forestry, fishing and hunting			15 911.6		1.7	%		17 495.4		1.7	%		18 017.3		1.6	%		17 745.7
Fuel and energy			5 282.1		0.6	%		5 143.2		0.5	%		9 157.3		0.8	%		10 157.3
Mining, manufacturing and construction			1 187.9		0.1	%		2 435.4		0.2	%		1 669.8		0.2	%		1 785.1
Transport			58 249.7		6.3	%		56 109.3		5.6	%		59 816.6		5.5	%		67 139.3
Communication			2 198.4		0.2	%		2 058.5		0.2	%		2 785.0		0.3	%		2 602.2
Other industries			1 824.7		0.2	%		2 121.7		0.2	%		2 359.2		0.2	%		2 482.7
Economic affairs not elsewhere classified			2 729.9		0.3	%		3 480.6		0.3	%		3 731.2		0.3	%		4 230.4
Environmental protection			4 575.5		0.5	%		5 161.6		0.5	%		5 392.0		0.5	%		5 677.0
Housing and community amenities			92 992.7		10.1	%		103 419.2		10.3	%		112 249.5		10.2	%		123 970.0
Housing development			23 771.4		2.6	%		26 270.4		2.6	%		29 354.8		2.7	%		32 061.9
Community development			60 213.8		6.5	%		67 697.4		6.8	%		71 942.8		6.6	%		78 539.3
Water supply			9 007.5		1.0	%		9 451.4		0.9	%		10 951.9		1.0	%		13 368.8
Housing and community amenities not elsewhere classified			—		—			—		—			—		—			—
Health			115 086.3		12.5	%		126 147.7		12.6	%		134 737.7		12.3	%		146 054.3
Recreation and culture			6 391.2		0.7	%		6 939.7		0.7	%		7 866.3		0.7	%		8 760.6
Education			197 437.8		21.4	%		212 783.2		21.2	%		229 619.7		20.9	%		246 275.5
Social protection			140 415.3		15.2	%		151 951.8		15.2	%		171 435.2		15.6	%		186 641.8
Subtotal: votes and direct charges			922 001.2		100.0	%		1 001 842.2		100.0	%		1 096 961.1		100.0	%		1 188 611.3
Plus:
Unallocated reserves			—					—					—					—
Total consolidated expenditure			922 001.2		100.0	%		1 001 842.2		100.0	%		1 096 961.1		100.0	%		1 188 611.3

1) These figures were estimated by the National Treasury and may differ from data published by Statistics South Africa. The numbers in this table are not strictly comparable to those published in previous years due to the allocation of some of the unallocable expenditure for previous years. Data for the previous years has been adjusted accordingly.

Source: National Treasury

199

STATISTICAL TABLES

																				Table 6 Consolidated national, provincial and social security funds expenditure: functional classification 1)
			2015/16					2016/17					2017/18
% of total			Budget estimate		% of total			Budget estimate		% of total			Budget estimate		% of total					R million
	15.9	%		202 279.3		15.8	%		221 196.1		16.2	%		236 796.8		16.4	%	2	)	General public services
	9.7	%		126 440.4		9.9	%		140 970.9		10.3	%		153 376.0		10.6	%			of which: debt-service costs
	3.6	%		44 954.8		3.5	%		47 476.3		3.5	%		50 341.3		3.5	%			Defence
	9.7	%		120 404.5		9.4	%		127 465.9		9.3	%		135 776.7		9.4	%			Public order and safety
	6.6	%		81 779.2		6.4	%		86 328.3		6.3	%		92 219.9		6.4	%			Police services
	1.5	%		18 741.3		1.5	%		20 037.6		1.5	%		21 245.7		1.5	%			Law courts
	1.6	%		19 884.1		1.6	%		21 100.0		1.5	%		22 311.1		1.5	%			Prisons
	10.5	%		134 270.8		10.5	%		138 714.8		10.2	%		145 789.4		10.1	%			Economic affairs
	1.5	%		19 091.9		1.5	%		19 779.7		1.4	%		20 892.8		1.4	%			General economic, commercial, and labour affairs
	1.5	%		17 939.7		1.4	%		18 912.6		1.4	%		19 831.9		1.4	%			Agriculture, forestry, fishing and hunting
	0.9	%		10 282.2		0.8	%		7 468.7		0.5	%		8 095.0		0.6	%			Fuel and energy
	0.2	%		2 314.0		0.2	%		2 971.6		0.2	%		2 287.7		0.2	%			Mining, manufacturing and construction
	5.6	%		75 310.0		5.9	%		79 517.9		5.8	%		84 433.8		5.8	%			Transport
	0.2	%		2 515.4		0.2	%		2 702.3		0.2	%		2 497.0		0.2	%			Communication
	0.2	%		2 702.1		0.2	%		2 961.0		0.2	%		3 071.0		0.2	%			Other industries
	0.4	%		4 115.5		0.3	%		4 401.0		0.3	%		4 680.1		0.3	%			Economic affairs not elsewhere classified
	0.5	%		6 058.3		0.5	%		6 356.4		0.5	%		6 462.6		0.4	%			Environmental protection
	10.4	%		137 166.6		10.7	%		144 636.3		10.6	%		154 140.6		10.7	%			Housing and community amenities
	2.7	%		33 561.3		2.6	%		36 080.0		2.6	%		38 302.5		2.6	%			Housing development
	6.6	%		86 610.4		6.8	%		91 588.3		6.7	%		97 057.6		6.7	%			Community development
	1.1	%		16 994.9		1.3	%		16 968.0		1.2	%		18 780.5		1.3	%			Water supply
	—			—		—			—		—			—		—				Housing and community amenities not elsewhere classif
	12.3	%		157 480.3		12.3	%		167 686.2		12.3	%		177 802.4		12.3	%			Health
	0.7	%		9 417.2		0.7	%		9 593.1		0.7	%		10 123.1		0.7	%			Recreation and culture
	20.7	%		264 507.0		20.6	%		280 960.9		20.6	%		296 521.0		20.5	%			Education
	15.7	%		205 914.7		16.1	%		220 548.6		16.2	%		232 706.1		16.1	%			Social protection
	100.0	%		1 282 453.5		99.6	%		1 364 634.6		98.9	%		1 446 459.9		96.98	%			Subtotal: votes and direct charges
																				Plus:
				5 000.0					15 000.0					45 000.0						Unallocated reserves
	100.0	%		1 287 453.5		100.0	%		1 379 634.6		100.0	%		1 491 459.9		100.0	%			Total consolidated expenditure

2) Mainly general administration, cost of raising loans and unallocable capital expenditure as well as National Revenue Fund payments previously accounted for separately.

200

2015 BUDGET REVIEW

Table 7

Consolidated government revenue and expenditure:

Economic classification 1)

		2011/12						2012/13						2013/14						2014/15
R million		Outcome			% of total			Outcome			% of total			Outcome			% of total			Revised estimate
Revenue
Current revenue			841 916.4			100.0	%		908 387.6			100.0	%		1 007 847.4			100.0	%		1 090 541.3
Tax revenue (net of SACU)			761 349.0			90.4	%		818 142.7			90.0	%		908 093.3			90.1	%		982 987.7
Non-tax revenue	2)		80 567.5			9.6	%		90 244.8			9.9	%		99 754.2			9.9	%		107 553.6
Sales of capital assets			248.4			0.0	%		349.1			0.0	%		255.3			0.0	%		449.8
Total revenue			842 164.8			100.0	%		908 736.6			100.0	%		1 008 102.7			100.0	%		1 090 991.1
Expenditure
Economic classification
Current payments			579 924.9			60.9	%		632 600.6			60.6	%		693 390.2			60.5	%		746 374.8
Compensation of employees			347 424.0			36.5	%		376 576.1			36.1	%		409 543.1			35.8	%		445 289.3
Goods and services			150 788.5			15.8	%		162 737.9			15.6	%		174 581.5			15.2	%		180 297.3
Interest and rent on land			81 712.4			8.6	%		93 286.6			8.9	%		109 265.6			9.5	%		120 788.2
Transfers and subsidies			307 010.2			32.2	%		340 755.5			32.6	%		373 297.9			32.6	%		406 947.3
Provinces and municipalities			74 527.3			7.8	%		83 257.0			8.0	%		89 580.0			7.8	%		96 563.6
Departmental agencies and accounts			19 935.4			2.1	%		22 367.1			2.1	%		21 500.0			1.9	%		26 587.1
Higher education institutions			19 749.0			2.1	%		22 084.8			2.1	%		23 952.2			2.1	%		26 047.4
Foreign governments and international organisations			1 560.6			0.2	%		2 200.7			0.2	%		2 159.7			0.2	%		2 214.8
Public corporations and private enterprises			19 790.5			2.1	%		24 358.7			2.3	%		24 626.0			2.2	%		28 508.9
Non-profit institutions			21 328.7			2.2	%		21 738.6			2.1	%		25 848.4			2.3	%		26 749.5
Households			150 118.7			15.8	%		164 748.5			15.8	%		185 631.6			16.2	%		200 275.9
Payments for capital assets			62 329.9			6.5	%		66 279.5			6.3	%		74 506.2			6.5	%		86 301.8
Buildings and other fixed structures			45 749.5			4.8	%		49 891.9			4.8	%		55 417.8			4.8	%		64 316.2
Machinery and equipment			12 912.7			1.4	%		13 518.0			1.3	%		16 464.7			1.4	%		19 224.1
Land and sub-soil assets			2 532.5			0.3	%		1 453.9			0.1	%		1 086.0			0.1	%		1 297.3
Software and other intangible assets			1 102.8			0.1	%		1 357.1			0.1	%		1 492.2			0.1	%		1 385.8
Other assets	3)		32.4			0.0	%		58.5			0.0	%		45.5			0.0	%		78.4
Payments for financial assets	4)		3 044.3			0.3	%		4 934.5			0.5	%		4 135.9			0.4	%		3 746.2
Subtotal: economic classification			952 309.3			100	%		1 044 570.0			100.0	%		1 145 330.2			100.0	%		1 243 370.1
Unallocated reserves			—						—						—						—
Total consolidated expenditure			952 309.3						1 044 570.0						1 145 330.2						1 243 370.1
Budget balance			-110 144.5						-135 833.4						-137 227.5						-152 379.0
Percentage of GDP			-3.6	%					-4.1	%					-3.8	%					-3.9	%
Financing
Change in loan liabilities
Domestic short- and long-term loans (net)			156 555.1						143 567.1						172 167.1						167 543.8
Foreign loans (net)			11 472.3						-10 558.2						610.0						10 329.7
Change in cash and other balances (- increase)			-57 882.9						2 824.5						-35 549.5						-25 494.4
Borrowing requirement (net)			110 144.5						135 833.4						137 227.5						152 379.1
GDP			3 080 887.0						3 327 630.0						3 609 844.0						3 879 920.1

1) Consisting of national and provincial government, social security funds and public entities. Refer to Annexure W2 for a detailed list of entities included. In some cases figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank.

2) Includes National Revenue Fund receipts previously accounted for separately.

Source: National Treasury

201

STATISTICAL TABLES

																				Table 7 Consolidated government revenue and expenditure: Economic classification 1)
2014/15	2015/16						2016/17						2017/18
% of total	Budget estimate			% of total			Budget estimate			% of total			Budget estimate			% of total				R million
																				Revenue
100.0%		1 188 398.8			100.0	%		1 331 044.3			100.0	%		1 439 036.6			100.0	%		Current revenue
90.1%		1 085 872.1			91.3	%		1 218 147.8			91.5	%		1 322 173.9			91.8	%		Tax revenue (net of SACU)
9.9%		102 526.7			8.6	%		112 896.5			8.5	%		116 862.7			8.1	%	2)	Non-tax revenue
0.0%		455.9			0.0	%		469.4			0.0	%		494.9			0.0	%		Sales of capital assets
100.0%		1 188 854.7			100.0	%		1 331 513.7			100.0	%		1 439 531.5			100.0	%		Total revenue
																				Expenditure
																				Economic classification
60.0%		799 601.6			59.4	%		856 695.4			59.7	%		907 252.1			59.8	%		Current payments
35.8%		479 511.4			35.6	%		509 638.1			35.5	%		539 563.5			35.6	%		Compensation of employees
14.5%		187 677.3			13.9	%		200 296.6			14.0	%		209 437.1			13.8	%		Goods and services
9.7%		132 412.9			9.8	%		146 760.7			10.2	%		158 251.5			10.4	%		Interest and rent on land
32.7%		445 415.1			33.1	%		473 058.7			33.0	%		497 762.2			32.8	%		Transfers and subsidies
7.8%		107 235.3			8.0	%		111 464.4			7.8	%		118 037.0			7.8	%		Provinces and municipalities
2.1%		30 289.4			2.3	%		31 332.8			2.2	%		33 369.1			2.2	%		Departmental agencies and accounts
2.1%		27 020.6			2.0	%		28 000.7			2.0	%		29 342.4			1.9	%		Higher education institutions
0.2%		2 016.7			0.1	%		2 198.5			0.2	%		2 289.3			0.2	%		Foreign governments and international organisations
2.3%		31 460.0			2.3	%		33 110.4			2.3	%		33 255.7			2.2	%		Public corporations and private enterprises
2.2%		27 884.3			2.1	%		29 065.6			2.0	%		30 491.8			2.0	%		Non-profit institutions
16.1%		219 508.9			16.3	%		237 886.4			16.6	%		250 977.0			16.5	%		Households
6.9%		97 498.4			7.2	%		103 704.3			7.2	%		111 360.7			7.3	%		Payments for capital assets
5.2%		74 554.7			5.5	%		79 086.1			5.5	%		83 624.3			5.5	%		Buildings and other fixed structures
1.5%		20 279.1			1.5	%		21 750.9			1.5	%		24 899.8			1.6	%		Machinery and equipment
0.1%		1 326.1			0.1	%		1 410.9			0.1	%		1 374.4			0.1	%		Land and sub-soil assets
0.1%		1 278.9			0.1	%		1 410.6			0.1	%		1 420.8			0.1	%		Software and other intangible assets
0.0%		59.6			0.0	%		45.8			0.0	%		41.4			0.0	%	3)	Other assets
0.3%		3 491.7			0.3	%		345.5			0.0	%		365.1			0.0	%	4)	Payments for financial assets
100.0%		1 346 006.8			100.0	%		1 433 803.8			100.0	%		1 516 740.0			100.0	%		Subtotal: economic classification
		5 000.0						15 000.0						45 000.0						Unallocated reserves
		1 351 006.8						1 448 803.8						1 561 740.0						Total consolidated expenditure
		-162 152.1						-117 290.2						-122 208.5						Budget balance
		-3.9	%					-2.6	%					-2.5	%					Percentage of GDP
																				Financing
																				Change in loan liabilities
		158 926.0						134 927.1						133 569.7						Domestic short- and long-term loans (net)
		10 359.8						-374.4						12 219.8						Foreign loans (net)
		-7 133.7						-17 262.4						-23 581.0						Change in cash and other balances (- increase)
		162 152.1						117 290.2						122 208.5						Borrowing requirement (net)
		4 191 752.4						4 538 780.0						4 926 133.5						GDP

3) Includes biological, heritage and specialised military assets.

4) Includes extraordinary payments previously accounted for separately.

202

2015 BUDGET REVIEW

Table 8 Consolidated government expenditure: functional classification 1)
			2011/12					2012/13					2013/14					2014/15
R million			Outcome		% of total			Outcome		% of total			Outcome		% of total			Revised estimate
General public services	2	)		142 413.7		15.0	%		159 413.9		15.3	%		177 238.7		15.5	%		198 088.5
of which: debt-service costs				76 460.0		8.0	%		88 121.1		8.4	%		101 184.7		8.8	%		115 016.2
Defence				34 476.4		3.6	%		38 014.7		3.6	%		40 851.0		3.6	%		43 357.4
Public order and safety				91 769.3		9.6	%		100 223.7		9.6	%		108 975.8		9.5	%		115 335.4
Police services				62 217.4		6.5	%		68 233.4		6.5	%		74 511.9		6.5	%		78 290.8
Law courts				13 682.1		1.4	%		15 143.0		1.4	%		16 256.0		1.4	%		17 845.2
Prisons				15 758.9		1.7	%		16 730.2		1.6	%		18 073.0		1.6	%		19 030.9
Public order and safety not elsewhere classified				111.0		0.0	%		117.1		0.0	%		134.9		0.0	%		168.5
Economic affairs				113 729.2		11.9	%		124 316.3		11.9	%		138 755.3		12.1	%		148 171.6
General economic, commercial, and labour affairs				19 100.9		2.0	%		20 580.3		2.0	%		22 454.6		2.0	%		24 091.6
Agriculture, forestry, fishing and hunting				16 637.4		1.7	%		17 747.7		1.7	%		18 763.7		1.6	%		18 507.1
Fuel and energy				6 048.6		0.6	%		6 203.2		0.6	%		10 243.5		0.9	%		11 223.7
Mining, manufacturing and construction				1 763.9		0.2	%		2 986.9		0.3	%		2 407.2		0.2	%		2 582.6
Transport				62 630.1		6.6	%		67 896.9		6.5	%		75 060.1		6.6	%		81 127.5
Communication				2 462.7		0.3	%		2 895.7		0.3	%		3 248.6		0.3	%		2 962.0
Other industries				2 059.6		0.2	%		2 095.1		0.2	%		2 460.1		0.2	%		2 677.8
Economic affairs not elsewhere classified				3 026.2		0.3	%		3 910.6		0.4	%		4 117.6		0.4	%		4 999.3
Environmental protection				6 433.0		0.7	%		6 464.1		0.6	%		6 973.2		0.6	%		7 039.8
Housing and community amenities				104 476.5		11.0	%		116 145.7		11.1	%		127 709.3		11.2	%		138 941.0
Housing development				20 549.6		2.2	%		27 837.1		2.7	%		30 645.0		2.7	%		33 616.2
Community development				65 145.4		6.8	%		68 477.4		6.6	%		72 647.7		6.3	%		79 714.6
Water supply				18 781.4		2.0	%		19 831.3		1.9	%		24 416.5		2.1	%		25 610.3
Housing and community amenities not elsewhere classified				—		—			—		—			—		—			—
Health				115 164.7		12.1	%		126 485.6		12.1	%		135 562.2		11.8	%		146 166.0
Recreation and culture				6 502.7		0.7	%		7 192.3		0.7	%		8 273.0		0.7	%		9 195.3
Education				197 679.7		20.8	%		214 821.5		20.6	%		229 503.4		20.0	%		250 228.0
Social protection				139 664.2		14.7	%		151 492.2		14.5	%		171 488.3		15.0	%		186 846.9
Subtotal: functional classification				952 309.3		100	%		1 044 570.0		100	%		1 145 330.2		100	%		1 243 370.1
Plus:
Unallocated reserves				—					—					—					—
Unallocated
Total consolidated expenditure				952 309.3					1 044 570.0					1 145 330.2					1 243 370.1

1) Consisting of national and provincial government, social security funds and public entities. Refer to Annexure W2 for a detailed list of entities included. In some cases figures were estimated by the National Treasury and may differ from data published by Statistics South Africa and the Reserve Bank.

Source: National Treasury

203

STATISTICAL TABLES

																			Table 8 Consolidated government expenditure: functional classification 1)
2014/15		2015/16					2016/17					2017/18
% of total		Budget estimate		% of total			Budget estimate		% of total			Budget estimate		% of total					R million
	15.9%		213 913.4		15.9	%		234 956.2		16.4	%		250 839.1		16.5	%	2	)	General public services
	9.3%		126 440.4		9.4	%		140 970.9		9.8	%		153 376.0		10.1	%			of which: debt-service costs
	3.5%		45 152.4		3.4	%		47 824.6		3.3	%		50 603.0		3.3	%			Defence
	9.3%		120 581.1		9.0	%		127 680.3		8.9	%		135 926.3		9.0	%			Public order and safety
	6.3%		81 815.4		6.1	%		86 362.8		6.0	%		92 252.9		6.1	%			Police services
	1.4%		18 675.3		1.4	%		20 021.5		1.4	%		21 159.8		1.4	%			Law courts
	1.5%		19 884.1		1.5	%		21 100.0		1.5	%		22 311.1		1.5	%			Prisons
	0.0%		206.2		0.0	%		196.1		0.0	%		202.4		0.0	%			Public order and safety not elsewhere classified
	11.9%		159 975.8		11.9	%		163 348.4		11.4	%		170 995.5		11.3	%			Economic affairs
	1.9%		23 614.1		1.8	%		24 963.4		1.7	%		25 960.0		1.7	%			General economic, commercial, and labour affairs
	1.5%		18 592.9		1.4	%		19 607.8		1.4	%		20 559.7		1.4	%			Agriculture, forestry, fishing and hunting
	0.9%		11 952.4		0.9	%		9 379.1		0.7	%		10 361.2		0.7	%			Fuel and energy
	0.2%		3 151.4		0.2	%		3 882.9		0.3	%		3 185.4		0.2	%			Mining, manufacturing and construction
	6.5%		91 627.7		6.8	%		93 503.2		6.5	%		98 409.6		6.5	%			Transport
	0.2%		3 149.5		0.2	%		3 706.6		0.3	%		3 883.7		0.3	%			Communication
	0.2%		2 877.8		0.2	%		3 140.2		0.2	%		3 254.0		0.2	%			Other industries
	0.4%		5 010.2		0.4	%		5 165.2		0.4	%		5 381.9		0.4	%			Economic affairs not elsewhere classified
	0.6%		7 612.2		0.6	%		7 988.5		0.6	%		8 266.0		0.5	%			Environmental protection
	11.2%		153 360.9		11.4	%		165 597.4		11.5	%		174 725.5		11.5	%			Housing and community amenities
	2.7%		34 666.3		2.6	%		37 336.3		2.6	%		39 543.3		2.6	%			Housing development
	6.4%		87 967.4		6.5	%		92 940.0		6.5	%		98 543.4		6.5	%			Community development
	2.1%		30 727.2		2.3	%		35 321.1		2.5	%		36 638.8		2.4	%			Water supply
	—		—		—			—		—			—		—				Housing and community amenities not elsewhere classified
	11.8%		158 702.7		11.8	%		169 039.7		11.8	%		179 353.2		11.8	%			Health
	0.7%		10 032.1		0.7	%		10 035.8		0.7	%		10 628.5		0.7	%			Recreation and culture
	20.1%		270 278.8		20.1	%		286 366.3		20.0	%		302 492.3		19.9	%			Education
	15.0%		206 397.4		15.3	%		220 966.6		15.4	%		232 910.8		15.4	%			Social protection
	100%		1 346 006.8		100	%		1 433 803.8		100	%		1 516 740.0		100	%			Subtotal: functional classification
																			Plus:
			5 000.0					15 000.0					45 000.0						Unallocated reserves
																			Unallocated
			1 351 006.8					1 448 803.8					1 561 740.0						Total consolidated expenditure

2) Mainly general administration, cost of raising loans and unallocable capital expenditure as well as National Revenue Fund payments previously accounted for separately.

204

2015 BUDGET REVIEW

Table 9

Consolidated government revenue, expenditure and financing

	2011/12			2012/13			2013/14			2014/15
	Outcome			Outcome			Outcome			Revised estimate
R million
Operating account
Current receipts		830 721.2			893 378.9			993 126.0			1 079 254.6
Tax receipts (net of SACU transfers)		761 349.0			818 142.7			908 093.3			982 987.7
Non-tax receipts (including departmental receipts)		62 863.0			69 107.9			78 027.5			88 491.8
Transfers received		6 509.2			6 128.2			7 005.3			7 775.2
Current payments		838 550.7			921 058.0			1 010 887.3			1 095 575.0
Compensation of employees		347 424.0			376 576.1			409 543.1			445 289.3
Goods and services		150 788.5			162 737.9			174 581.5			180 297.3
Interest and rent on land		81 712.4			93 286.6			109 265.6			120 788.2
Transfers and subsidies		258 625.8			288 457.4			317 497.1			349 200.2
Current balance		-7 829.5			-27 679.1			-17 761.3			-16 320.4
Percentage of GDP		-0.3	%		-0.8	%		-0.5	%		-0.4	%
Capital account
Capital receipts		248.4			349.1			255.3			449.8
Transfers and subsidies		48 384.4			52 298.1			55 800.8			57 747.1
Payments for capital assets		62 329.9			66 279.5			74 506.2			86 301.8
Capital financing requirement		-110 465.9			-118 228.5			-130 051.7			-143 599.1
Percentage of GDP		-3.6	%		-3.6	%		-3.6	%		-3.7	%
Transactions in financial assets and liabilities		8 151.0			10 074.2			10 585.5			7 540.4
Unallocated reserves		—			—			—			—
Budget balance		-110 144.5			-135 833.4			-137 227.5			-152 379.1
Percentage of GDP		-3.6	%		-4.1	%		-3.8	%		-3.9	%
Primary balance		-28 432.1			-42 546.8			-27 961.9			-31 590.8
Percentage of GDP		-0.9	%		-1.3	%		-0.8	%		-0.8	%
Financing
Change in loan liabilities
Domestic short- and long-term loans (net)		156 555.1			143 567.1			172 167.1			167 543.8
Foreign loans (net)		11 472.3			-10 558.2			610.0			10 329.7
Change in cash and other balances (- increase)		-57 882.9			2 824.5			-35 549.5			-25 494.4
Borrowing requirement (net)		110 144.5			135 833.4			137 227.5			152 379.1
GDP		3 080 887.0			3 327 630.0			3 609 844.0			3 879 920.1

Source: National Treasury

205

STATISTICAL TABLES

								Table 9 Consolidated government revenue, expenditure and financing
2015/16		2016/17			2017/18
Budget estimate		Budget estimate			Budget estimate			R million
								Operating account
	1 184 490.1		1 323 670.2			1 434 479.5		Current receipts
	1 085 872.1		1 218 147.8			1 322 173.9		Tax receipts (net of SACU transfers)
	91 632.1		98 589.0			105 410.8		Non-tax receipts (including departmental receipts)
	6 985.9		6 933.4			6 894.8		Transfers received
	1 181 449.0		1 261 883.5			1 334 128.0		Current payments
	479 511.4		509 638.1			539 563.5		Compensation of employees
	187 677.3		200 296.6			209 437.1		Goods and services
	132 412.9		146 760.7			158 251.5		Interest and rent on land
	381 847.3		405 188.2			426 875.9		Transfers and subsidies
	3 041.1		61 786.6			100 351.5		Current balance
	0.1%		1.4	%		2.0	%	Percentage of GDP
								Capital account
	455.9		469.4			494.9		Capital receipts
	63 567.8		67 870.5			70 886.3		Transfers and subsidies
	97 498.4		103 704.3			111 360.7		Payments for capital assets
	-160 610.3		-171 105.4			-181 752.1		Capital financing requirement
	-3.8%		-3.8	%		-3.7	%	Percentage of GDP
	417.0		7 028.7			4 192.1		Transactions in financial assets and liabilities
	5 000.0		15 000.0			45 000.0		Unallocated reserves
	-162 152.1		-117 290.2			-122 208.5		Budget balance
	-3.9%		-2.6	%		-2.5	%	Percentage of GDP
	-29 739.2		29 470.6			36 042.9		Primary balance
	-0.7%		0.6	%		0.7	%	Percentage of GDP
								Financing
								Change in loan liabilities
	158 926.0		134 927.1			133 569.7		Domestic short- and long-term loans (net)
	10 359.8		-374.4			12 219.8		Foreign loans (net)
	-7 133.7		-17 262.4			-23 581.0		Change in cash and other balances (- increase)
	162 152.1		117 290.2			122 208.5		Borrowing requirement (net)
	4 191 752.4		4 538 780.0			4 926 133.5		GDP

206

2015 BUDGET REVIEW

Table 10

Total debt of government 1)

		1990/91			1991/92			1992/93			1993/94			1994/95			1995/96			1996/97
R million
Domestic debt
Marketable			85 546			104 646			138 681			181 460			225 662			263 844			290 424
Government bonds			82 824			100 662			132 853			174 892			210 191			248 877			276 124
Treasury bills			2 722			3 984			5 828			6 568			7 018			10 700			14 300
Bridging bonds			—			—			—			—			8 453			4 267			—
Non-marketable	3)		7 989			6 520			4 703			3 310			5 705			4 700			6 421
Gross loan debt			93 535			111 166			143 384			184 770			231 367			268 544			296 845
Cash balances	4)		-8 524			-9 762			-4 750			-4 591			-6 665			-8 630			-2 757
Net loan debt			85 011			101 404			138 634			180 179			224 702			259 914			294 088
Foreign debt
Gross loan debt	5)		1 770			2 940			2 348			5 201			8 784			10 944			11 394
Cash balances	4)		—			—			—			—			—			—			—
Net loan debt			1 770			2 940			2 348			5 201			8 784			10 944			11 394
Gross loan debt			95 305			114 106			145 732			189 971			240 151			279 488			308 239
Net loan debt			86 781			104 344			140 982			185 380			233 486			270 858			305 482
Gold and foreign exchange contingency reserve account	6)		10 351			12 508			8 934			2 190			4 147			—			2 169
Composition of gross debt (excluding deduction of cash balances)
Marketable domestic debt			89.8	%		91.7	%		95.2	%		95.5	%		94.0	%		94.4	%		94.2	%
Government bonds			86.9	%		88.2	%		91.2	%		92.1	%		87.5	%		89.0	%		89.6	%
Treasury bills			2.9	%		3.5	%		4.0	%		3.5	%		2.9	%		3.8	%		4.6	%
Bridging bonds			0.0	%		0.0	%		0.0	%		0.0	%		3.5	%		1.5	%		0.0	%
Non-marketable domestic debt	3)		8.4	%		5.7	%		3.2	%		1.7	%		2.4	%		1.7	%		2.1	%
Domestic debt			98.1	%		97.4	%		98.4	%		97.3	%		96.3	%		96.1	%		96.3	%
Foreign debt	5)		1.9	%		2.6	%		1.6	%		2.7	%		3.7	%		3.9	%		3.7	%
Total as percentage of GDP
Gross domestic debt			31.2	%		32.3	%		37.5	%		41.8	%		46.5	%		47.6	%		45.5	%
Net domestic debt			28.4	%		29.5	%		36.2	%		40.8	%		45.2	%		46.1	%		45.1	%
Gross foreign debt			0.6	%		0.9	%		0.6	%		1.2	%		1.8	%		1.9	%		1.7	%
Net foreign debt			0.6	%		0.9	%		0.6	%		1.2	%		1.8	%		1.9	%		1.7	%
Gross loan debt			31.8	%		33.2	%		38.1	%		43.0	%		48.3	%		49.5	%		47.3	%
Net loan debt			29.0	%		30.3	%		36.8	%		41.9	%		47.0	%		48.0	%		46.8	%

1) Debt of the central government, excluding extra-budgetary institutions and social security funds

2) As projected at the end of January 2015

3) Includes non-marketable Treasury bills, retail bonds, loan levies, former regional authorities and Namibian loans

4) Bank balances of the National Revenue Fund (balances of government’s accounts with the Reserve Bank and commercial banks) Bank balances in foreign currencies are revaluated using forward estimates of exchange rates

Source: National Treasury and South African Reserve Bank.

207

STATISTICAL TABLES

																						Table 10 Total debt of government 1)
1997/98			1998/99			1999/00			2000/01			2001/02			2002/03			2003/04
																						R million
																						Domestic debt
	318 773			344 938			354 706			365 231			349 415			350 870			388 300			Marketable
	301 488			325 938			332 706			339 731			331 505			328 820			359 700			Government bonds
	17 285			19 000			22 000			25 500			17 910			22 050			28 600			Treasury bills
	—			—			—			—			—			—			—			Bridging bonds
	2 778			2 013			998			2 382			2 030			1 910			1 999		3)	Non-marketable
	321 551			346 951			355 704			367 613			351 445			352 780			390 299			Gross loan debt
	-4 798			-5 166			-7 285			-2 650			-6 549			-9 730			-12 669		4)	Cash balances
	316 753			341 785			348 419			364 963			344 896			343 050			377 630			Net loan debt
																						Foreign debt
	14 560			16 276			25 799			31 938			82 009			74 286			64 670		5)	Gross loan debt
	—			—			—			—			—			—			—		4)	Cash balances
	14 560			16 276			25 799			31 938			82 009			74 286			64 670			Net loan debt
	336 111			363 227			381 503			399 551			433 454			427 066			454 969			Gross loan debt
	331 313			358 061			374 218			396 901			426 905			417 336			442 300			Net loan debt
	73			14 431			9 200			18 170			28 024			36 577			18 036		6)	Gold and foreign exchange contingency reserve account
																						Composition of gross debt (excluding deduction of cash balances)
	94.8	%		95.0	%		93.0	%		91.4	%		80.6	%		82.2	%		85.3	%		Marketable domestic debt
	89.7	%		89.7	%		87.2	%		85.0	%		76.5	%		77.0	%		79.1	%		Government bonds
	5.1	%		5.2	%		5.8	%		6.4	%		4.1	%		5.2	%		6.3	%		Treasury bills
	0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		Bridging bonds
	0.8	%		0.6	%		0.3	%		0.6	%		0.5	%		0.4	%		0.4	%	3)	Non-marketable domestic debt
	95.7	%		95.5	%		93.2	%		92.0	%		81.1	%		82.6	%		85.8	%		Domestic debt
	4.3	%		4.5	%		6.8	%		8.0	%		18.9	%		17.4	%		14.2	%	5)	Foreign debt
																						Total as percentage of GDP
	44.8	%		44.7	%		41.4	%		37.6	%		32.6	%		28.2	%		28.7	%		Gross domestic debt
	44.1	%		44.0	%		40.6	%		37.4	%		31.9	%		27.4	%		27.8	%		Net domestic debt
	2.0	%		2.1	%		3.0	%		3.3	%		7.6	%		5.9	%		4.8	%		Gross foreign debt
	2.0	%		2.1	%		3.0	%		3.3	%		7.6	%		5.9	%		4.8	%		Net foreign debt
	46.8	%		46.8	%		44.4	%		40.9	%		40.1	%		34.1	%		33.5	%		Gross loan debt
	46.2	%		46.1	%		43.6	%		40.6	%		39.5	%		33.4	%		32.6	%		Net loan debt

5) Valued at appropriate foreign exchange rates up to 31 March 2014 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2015, projected to depreciate in line with inflation differentials

6) The balance on the gold and foreign exchange contingency reserve account on 31 March 2015 represents an estimated balance on the account No provision for any profits or losses on this account has been made for subsequent years. A negative balance indicates a profit and a positive balance a loss

208

2015 BUDGET REVIEW

Table 10

Total debt of government 1)

		2004/05			2005/06			2006/07			2007/08			2008/09			2009/10			2010/11
R million
Domestic debt
Marketable			428 593			457 780			467 864			478 265			527 751			700 532			869 588
Government bonds			394 143			417 380			422 064			426 415			462 751			585 992			733 438
Treasury bills			34 450			40 400			45 800			51 850			65 000			114 540			136 150
Bridging bonds			—			—			—			—			—			—			—
Non-marketable	3)		3 498			3 699			3 238			2 555			1 956			4 943			23 133
Gross loan debt			432 091			461 479			471 102			480 821			529 707			705 475			892 721
Cash balances	4)		-30 870			-58 187			-75 315			-93 809			-101 349			-106 550			-111 413
Net loan debt			401 221			403 292			395 787			387 012			428 358			598 925			781 308
Foreign debt
Gross loan debt	5)		69 405			66 846			82 581			96 218			97 268			99 454			97 851
Cash balances	4)		—			—			—			—			—			-25 339			-58 750
Net loan debt			69 405			66 846			82 581			96 218			97 268			74 115			39 101
Gross loan debt			501 496			528 325			553 683			577 039			626 975			804 929			990 572
Net loan debt			470 626			470 138			478 368			483 230			525 626			673 040			820 409
Gold and foreign exchange contingency reserve account	6)		5 292			-1 751			-28 514			-72 189			-101 585			-35 618			-28 283
Composition of gross debt (excluding deduction of cash balances)
Marketable domestic debt			85.5	%		86.6	%		84.5	%		82.9	%		84.2	%		87.0	%		87.8	%
Government bonds			78.6	%		79.0	%		76.2	%		73.9	%		73.8	%		72.8	%		74.0	%
Treasury bills			6.9	%		7.6	%		8.3	%		9.0	%		10.4	%		14.2	%		13.7	%
Bridging bonds			0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%
Non-marketable domestic debt	3)		0.7	%		0.7	%		0.6	%		0.4	%		0.3	%		0.6	%		2.3	%
Domestic debt			86.2	%		87.3	%		85.1	%		83.3	%		84.5	%		87.6	%		90.1	%
Foreign debt	5)		13.8	%		12.7	%		14.9	%		16.7	%		15.5	%		12.4	%		9.9	%
Total as percentage of GDP
Gross domestic debt			28.6	%		27.4	%		24.7	%		22.1	%		22.0	%		27.7	%		31.6	%
Net domestic debt			26.6	%		24.0	%		20.7	%		17.8	%		17.8	%		23.5	%		27.6	%
Gross foreign debt			4.6	%		4.0	%		4.3	%		4.4	%		4.0	%		3.9	%		3.5	%
Net foreign debt			4.6	%		4.0	%		4.3	%		4.4	%		4.0	%		2.9	%		1.4	%
Gross loan debt			33.2	%		31.4	%		29.0	%		26.6	%		26.0	%		31.5	%		35.1	%
Net loan debt			31.2	%		27.9	%		25.0	%		22.3	%		21.8	%		26.4	%		29.0	%

1) Debt of the central government, excluding extra-budgetary institutions and social security funds

2) As projected at the end of January 2015

3) Includes non-marketable Treasury bills, retail bonds, loan levies, former regional authorities and Namibian loans

4) Bank balances of the National Revenue Fund (balances of government’s accounts with the Reserve Bank and commercial banks) Bank balances in foreign currencies are revaluated using forward estimates of exchange rates

Source: National Treasury and South African Reserve Bank.

209

STATISTICAL TABLES

																						Table 10 Total debt of government 1)
2011/12			2012/13			2013/14			2014/15 2)			2015/16			2016/17			2017/18
																						R million
																						Domestic debt
	1 045 415			1 210 834			1 409 718			1 598 837			1 782 320			1 953 207			2 126 096			Marketable
	890 256			1 038 849			1 217 512			1 396 631			1 567 114			1 718 001			1 850 890			Government bonds
	155 159			171 985			192 206			202 206			215 206			235 206			275 206			Treasury bills
	—			—			—			—			—			—						Bridging bonds
	25 524			30 300			31 381			31 666			32 208			32 580			33 570		3)	Non-marketable
	1 070 939			1 241 134			1 441 099			1 630 503			1 814 528			1 985 787			2 159 666			Gross loan debt
	-130 450			-103 774			-120 807			-112 157			-112 157			-110 157			-107 157		4)	Cash balances
	940 489			1 137 360			1 320 292			1 518 346			1 702 371			1 875 630			2 052 509			Net loan debt
																						Foreign debt
	116 851			124 555			143 659			160 978			168 644			168 092			185 033		5)	Gross loan debt
	-67 609			-80 308			-84 497			-95 279			-89 696			-85 618			-85 844		4)	Cash balances
	49 242			44 247			59 162			65 699			78 948			82 474			99 189			Net loan debt
	1 187 790			1 365 689			1 584 758			1 791 481			1 983 172			2 153 879			2 344 699			Gross loan debt
	989 731			1 181 607			1 379 454			1 584 045			1 781 319			1 958 104			2 151 698			Net loan debt
	-67 655			-125 552			-177 913			-195 716			-195 716			-195 716			-195 716		6)	Gold and foreign exchange contingency reserve account
																						Composition of gross debt (excluding deduction of cash balances)
	88.0	%		88.7	%		89.0	%		89.2	%		89.9	%		90.7	%		90.7	%		Marketable domestic debt
	75.0	%		76.1	%		76.8	%		78.0	%		79.0	%		79.8	%		78.9	%		Government bonds
	13.1	%		12.6	%		12.1	%		11.3	%		10.9	%		10.9	%		11.7	%		Treasury bills
	0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		0.0	%		Bridging bonds
	2.1	%		2.2	%		2.0	%		1.8	%		1.6	%		1.5	%		1.4	%	3)	Non-marketable domestic debt
	90.2	%		90.9	%		90.9	%		91.0	%		91.5	%		92.2	%		92.1	%		Domestic debt
	9.8	%		9.1	%		9.1	%		9.0	%		8.5	%		7.8	%		7.9	%	5)	Foreign debt
																						Total as percentage of GDP
	34.8	%		37.3	%		39.9	%		42.0	%		43.3	%		43.8	%		43.8	%		Gross domestic debt
	30.5	%		34.2	%		36.6	%		39.1	%		40.6	%		41.3	%		41.7	%		Net domestic debt
	3.8	%		3.7	%		4.0	%		4.1	%		4.0	%		3.7	%		3.8	%		Gross foreign debt
	1.6	%		1.3	%		1.6	%		1.7	%		1.9	%		1.8	%		2.0	%		Net foreign debt
	38.6	%		41.0	%		43.9	%		46.2	%		47.3	%		47.5	%		47.6	%		Gross loan debt
	32.1	%		35.5	%		38.2	%		40.8	%		42.5	%		43.1	%		43.7	%		Net loan debt

5) Valued at appropriate foreign exchange rates up to 31 March 2014 as at the end of each period. Forward estimates are based on exchange rates prevailing at 31 January 2015, projected to depreciate in line with inflation differentials

6) The balance on the gold and foreign exchange contingency reserve account on 31 March 2015 represents an estimated balance on the account No provision for any profits or losses on this account has been made for subsequent years. A negative balance indicates a profit and a positive balance a loss

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2015 BUDGET REVIEW

Table 11

Net loan debt, provisions and contingent liabilities 1)

		2004/05			2005/06			2006/07			2007/08			2008/09			2009/10			2010/11
R million
Net loan debt	2)		470 626			470 138			478 368			483 230			525 626			673 040			820 409
Provisions	3)		48 447			46 303			49 071			55 263			61 869			81 051			73 693
African Development Bank			6 742			6 541			7 670			8 641			10 186			8 091			7 492
Development Bank of Southern Africa Limited			4 800			4 800			4 800			4 800			4 800			4 800			4 800
Government employee leave credits			7 242			7 480			7 861			8 503			8 503			9 762			10 815
International Bank for Reconstruction and Development			10 225			9 464			11 096			12 354			14 482			11 187			10 360
International Monetary Fund			19 326			18 018			17 538			20 847			23 760			47 104			40 127
Multilateral Investment Guarantee Agency			112			—			106			118			138			107			99
Contingent liabilities			155 940			159 997			185 493			177 160			195 386			268 841			294 661
Guarantees	4)		74 072			67 880			67 783			64 485			63 038			129 099			149 600
Agricultural cooperatives			100			100			95			95			94			94			94
Central Energy Fund			587			445			360			243			130			19			—
Denel			—			—			—			—			880			1 850			1 850
Development Bank of Southern Africa			11 447			11 568			12 178			12 414			12 348			26 370			25 713
Eskom			156			143			133			—			—			46 678			67 057
Foreign Central Banks and Governments			361			155			145			91			58			25			—
Former regional authorities			322			262			248			212			206			190			154
Guarantee scheme for housing loans to employees			638			586			446			374			255			154			104
Guarantee scheme for motor vehicles - senior officials			18			14			14			10			8			3			3
Industrial Development Corporation of South Africa			1 437			1 172			1 220			1 194			1 446			952			740
Irrigation boards			65			67			44			43			43			46			44
Kalahari East Water Board			16			17			16			16			16			16			16
Komati Basin Water Authority			1 687			1 746			1 548			1 514			1 453			1 406			1 340
Land Bank			—			—			1 500			1 500			1 500			2 500			1 750
Lesotho Highlands Development Authority			723			614			618			613			524			401			227
Nuclear Energy Corporation of South Africa			20			20			20			20			20			20			20
Passenger Rail Agency of South Africa			—			—			—			—			—			1 217			468
Servcon Housing Solutions			205			20			—			—			—			—			—
South African Airways			—			—			1 300			4 460			4 460			1 351			1 916
South African Broadcasting Corporation															—			1 000			1 000
South African Express			—			—			—			—			—			—			—
South African National Roads Agency Limited			6 655			6 199			5 885			6 441			6 708			12 287			18 605
South African Post Office			—			—			—			—			—			—			—
South African Reserve Bank			4 558			4 356			763			842			142			—			—
Telkom South Africa			4 749			4 769			4 785			140			138			108			90
Trans-Caledon Tunnel Authority			19 235			16 940			17 690			19 271			19 588			20 721			18 489
Transnet			20 397			18 256			18 420			14 716			12 895			11 620			9 887
Universities and technikons			696			431			355			276			126			71			33
Other contingent liabilities	5)		81 868			92 117			117 710			112 675			132 348			139 742			145 061
Claims against government departments			7 518			9 148			11 807			10 933			17 737			24 064			31 310
Export Credit Insurance Corporation of SA Limited			7 473			7 243			10 858			12 662			13 351			9 191			9 614
Government Employees Pension Fund			3 032			12 775			12 775			—			—			—			—
Post-retirement medical assistance			37 000			37 000			56 000			56 000			56 000			56 000			65 348
Road Accident Fund			23 084			21 351			23 935			30 339			42 500			45 366			33 547
Unemployment Insurance Fund			2 484			2 300			2 035			2 341			2 401			3 728			3 315
SASRIA reinsurance cover			1 000			1 000			—			—			—			—			—
Other			277			1 300			300			400			359			1 393			1 927
Total			675 013			676 438			712 932			715 653			782 881			1 022 932			1 188 763
Percentage of GDP			44.7	%		40.2	%		37.3	%		33.0	%		32.5	%		40.1	%		42.1	%
Percentage of total
Net loan debt			69.7	%		69.5	%		67.1	%		67.5	%		67.1	%		65.8	%		69.0	%
Provisions			7.2	%		6.8	%		6.9	%		7.7	%		7.9	%		7.9	%		6.2	%
Guarantees			11.0	%		10.0	%		9.5	%		9.0	%		8.1	%		12.6	%		12.6	%
Other contingent liabilities			12.1	%		13.6	%		16.5	%		15.7	%		16.9	%		13.7	%		12.2	%

1) Medium-term forecasts of some figues are not available and are kept constant

2) Debt of the central government, excluding extra-budgetary institutions and socal security funds

3) Provisions are liabilities for which the payment date or amount is uncertain. The provisions for multilateral institutions are the unpaid portion of government’s subscription to these institutions, payable on request

Source: National Treasury

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STATISTICAL TABLES

																						Table 11 Net loan debt, provisions and contingent liabilities 1)
2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
																						R million
	989 731			1 181 607			1 379 454			1 584 045			1 781 319			1 958 104			2 151 698		2)	Net loan debt
	98 593			116 231			134 024			148 702			170 627			167 551			170 663		3)	Pro visions
	27 300			32 725			38 063			39 613			41 484			40 332			41 052			African Development Bank
	4 800			4 800			4 800			20 000			20 000			20 000			20 000			Development Bank of Southern Africa Limited
	11 266			12 316			12 903			13 548			14 226			14 937			15 684			Government employee leave credits
	11 703			15 935			19 407			20 197			21 151			20 564			20 931			International Bank for Reconstruction and Development
	43 412			50 321			58 697			55 184			73 598			71 555			72 830			International Monetary Fund
	112			134			154			160			168			163			166			Multilateral Investment Guarantee Agency
	335 451			391 760			440 126			465 678			485 474			506 529			497 915			Contingent liabilities
	153 924			180 240			209 569			224 932			240 983			265 337			274 301		4)	Guarantees
	94			93			93			93			93			93			93			Agricultural cooperatives
	—			—			—			—			—			—			—			Central Energy Fund
	1 850			1 850			1 850			1 850			1 758			1 723			1 598			Denel
	25 554			25 497			25 635			10 125			10 451			10 390			10 453			Development Bank of Southern Africa
	77 230			103 523			125 125			144 546			151 949			173 401			182 944			Eskom
	—			—			—			—			—			—			—			Foreign Central Banks and Governments
	138			124			112			112			112			112			112			Former regional authorities
	64			46			26			20			20			20			20			Guarantee scheme for housing loans to employees
	2			1			1			1			1			1			1			Guarantee scheme for motor vehicles - senior officials
	646			575			504			423			513			499			514			Industrial Development Corporation of South Africa
	48			46			44			44			44			44			44			Irrigation boards
	15			6			—			—			—			—			—			Kalahari East Water Board
	1 247			1 190			1 148			1 148			1 148			1 148			1 148			Komati Basin Water Authority
	1 000			800			1 004			2 000			2 500			2 500			2 500			Land Bank
	171			132			113			99			111			109			112			Lesotho Highlands Development Authority
	20			20			20			20			20			20			20			Nuclear Energy Corporation of South Africa
	264			133			92			92			92			—			—			Passenger Rail Agency of South Africa
	—			—			—			—			—			—			—			Servcon Housing Solutions
	1 300			2 238			5 010			8 345			11 345			11 345			11 345			South African Airways
	889			167			—			—			—			—			—			South African Broadcasting Corporation
	—			—			539			1 106			1 106			1 106			1 106			South African Express
	19 426			19 482			23 866			30 174			35 071			38 180			37 910			South African National Roads Agency Limited
	—			—			—			120			270			270			—			South African Post Office
	—			—			—			—			—			—			—			South African Reserve Bank
	85			90			111			107			104			101			106			Telkom South Africa
	19 886			20 460			20 516			20 747			20 515			20 515			20 515			Trans-Caledon Tunnel Authority
	3 975			3 757			3 757			3 757			3 757			3 757			3 757			Transnet
	20			10			3			3			3			3			3			Universities and technikons
	181 527			211 520			230 557			240 746			244 491			241 192			223 614		5)	Other contingent liabilities
	42 969			43 628			46 346			46 346			46 346			46 346			46 346			Claims against government departments
	10 025			12 482			13 780			22 684			30 531			36 158			33 622			Export Credit Insurance Corporation of SA Limited
	—			—			—			—			—			—			—			Government Employees Pension Fund
	65 348			65 348			65 348			65 348			65 348			65 348			65 348			Post-retirement medical assistance
	53 919			82 838			97 000			97 915			93 443			84 147			68 734			Road Accident Fund
	3 381			3 241			3 611			3 981			4 351			4 721			5 092			Unemployment Insurance Fund
	—			—			—			—			—			—			—			SASRIA reinsurance cover
	5 885			3 983			4 472			4 472			4 472			4 472			4 472			Other
	1 423 775			1 689 598			1 953 604			2 198 425			2 437 420			2 632 184			2 820 276			Total
	46.2	%		50.8	%		54.1	%		56.7	%		58.1	%		58.0	%		57.3	%		Percentage of GDP
																						Percentage of total
	69.5	%		69.9	%		70.6	%		72.1	%		73.1	%		74.4	%		76.3	%		Net loan debt
	6.9	%		6.9	%		6.9	%		6.8	%		7.0	%		6.4	%		6.1	%		Provisions
	10.8	%		10.7	%		10.7	%		10.2	%		9.9	%		10.1	%		9.7	%		Guarantees
	12.7	%		12.5	%		11.8	%		11.0	%		10.0	%		9.2	%		7.9	%		Other contingent liabilities

4) Amounts drawn against financial guarantees, inclusive of accrued interest

5) Other contingent liabilities as disclosed in the consolidated financial statements of departments published annually by the National Treasury

212

W1

Website annexure to the 2015 Budget Review

Explanatory memorandum to the division of revenue

¢ Background

Section 214(1) of the Constitution requires that every year a Division of Revenue Act determine the equitable division of nationally raised revenue between national government, the nine provinces and 278 municipalities. This process takes into account the powers and functions assigned to each sphere of government. The division of revenue process fosters transparency and is at the heart of constitutional cooperative governance.

The Intergovernmental Fiscal Relations Act (1997) prescribes the process for determining the equitable sharing and allocation of nationally raised revenue. Sections 9 and 10(4) of the act set out the consultation process to be followed with the Financial and Fiscal Commission (FFC), including considering recommendations made regarding the division of revenue.

This explanatory memorandum to the 2015 Division of Revenue Bill fulfils the requirement set out in section 10(5) of the Intergovernmental Fiscal Relations Act that the bill be accompanied by an explanatory memorandum detailing how it takes account of the matters listed in sections 214(2)(a) to (j) of the Constitution, government’s response to the FFC’s recommendations, and any assumptions and formulas used in arriving at the respective divisions among provinces and municipalities. This explanatory memorandum has six sections:

• Part 1 lists the factors that inform the division of resources between national, provincial and local government.

• Part 2 describes the 2015 division of revenue.

• Part 3 sets out how the FFC’s recommendations on the 2015 division of revenue have been taken into account.

• Part 4 explains the formula and criteria for the division of the provincial equitable share and conditional grants among provinces.

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2015 BUDGET REVIEW

• Part 5 sets out the formula and criteria for the division of the local government equitable share and conditional grants among municipalities.

• Part 6 summarises issues that will form part of subsequent reviews of provincial and local government fiscal frameworks.

The Division of Revenue Bill and its underlying allocations are the result of extensive consultation between national, provincial and local government. The Budget Council deliberated on the matters discussed in this memorandum at several meetings during the year. The approach to local government allocations was discussed with organised local government at technical meetings with the South African Local Government Association (SALGA), culminating in meetings of the Budget Forum (the Budget Council and SALGA). An extended Cabinet meeting involving ministers, provincial premiers and the SALGA chairperson was held in October 2014. The division of revenue, and the government priorities that underpin it, was agreed for the next three years.

¢ Part 1: Constitutional considerations

Section 214 of the Constitution requires that the annual Division of Revenue Act be enacted after factors in sub-sections (2)(a) to (j) of the Constitution are taken into account. These include national interest, debt provision, the needs of national government, flexibility in responding to emergencies, resource allocation for basic services and developmental needs, the fiscal capacity and efficiency of provincial and local government, reduction of economic disparities, and promotion of stability and predictability. The constitutional principles taken into account in deciding on the division of revenue are briefly noted below.

National interest and the division of resources

The national interest is encapsulated by governance goals that benefit the nation as a whole. The National Development Plan, endorsed by Cabinet in November 2012, sets out a long-term vision for the country’s development. This is complemented by the strategic integrated projects overseen by the Presidential Infrastructure Coordinating Council and the 14 priority outcomes adopted by Cabinet in 2014 for the 2014–2019 Medium Term Strategic Framework. In the 2014 Medium Term Budget Policy Statement, the Minister of Finance outlined how the resources available to government over the 2015 medium-term expenditure framework (MTEF) would be allocated to help achieve these goals. Chapter 4 of the 2014 Medium Term Budget Policy Statement and Chapters 5 and 6 of the 2015 Budget Review discuss how funds have been allocated across the three spheres of government based on these priorities. The frameworks for each conditional grant allocated as part of the division of revenue also note how the grant is linked to the 14 priority outcomes.

Provision for debt costs

The resources shared between national, provincial and local government include proceeds from national government borrowing used to fund public spending. National government provides for the resulting debt costs to protect the country’s integrity and credit reputation. A more detailed discussion can be found in Chapter 7 of the 2015 Budget Review.

National government’s needs and interests

The Constitution assigns exclusive and concurrent powers and functions to each sphere of government. National government is exclusively responsible for functions that serve the national interest and are best centralised. National and provincial government have concurrent responsibility for a range of functions. Provincial and local government receive equitable shares and conditional grants to enable them to provide basic services and perform their functions. Functions may shift between spheres of government to better meet government’s needs. The division of revenue responds to this by modifying the funding arrangements. For example, in 2015/16 the port health and further education and training functions will shift from provincial to national government, so the funds for these functions will move from the provincial equitable share and conditional grants to the budgets of the national departments of Health and

2

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Higher Education and Training. Changes continue to be made to various national transfers to provincial and local government to improve their efficiency, effectiveness and alignment with national strategic objectives.

Provincial and local government basic services

Provinces and municipalities are assigned service delivery functions such as education, health, social development, housing, roads, and provision of electricity, water and municipal infrastructure. They have significant autonomy to allocate resources to meet basic needs and respond to provincial and local priorities, while also giving effect to national objectives. The division of revenue provides equitable shares to provinces and local government, together with conditional grants for basic service delivery.

Baseline reductions to the provincial and local fiscal frameworks in this year’s division of revenue have been structured to minimise the effect on basic service delivery. For example, the comprehensive HIV and AIDS grant to provinces and the local government equitable share have not been reduced. Transfers to local government have grown significantly in recent years, providing municipalities with greater resources to deliver basic services. This is in addition to local government’s substantial own-revenue-raising powers.

The 2015 division of revenue has made additional resources available to accelerate the rollout of water and sanitation infrastructure, and a new grant to municipalities affected by the 2016 boundary changes will help minimise any negative effects that the transition may have on service delivery.

Fiscal capacity and efficiency

National government has primary revenue-raising powers. Provinces have limited revenue-raising capacity and the resources required to deliver provincial functions do not lend themselves to self-funding or cost recovery. Municipalities finance most of their expenditure through property rates, user charges and fees. However, rural municipalities raise significantly less revenue than larger urban and metropolitan municipalities. Due to their limited revenue-raising potential and their responsibility to implement government priorities, provinces receive a larger share of nationally raised revenue than local government.

Local government’s share of revenue has increased from 3 per cent in 2000/01 to 9 per cent over the 2015 MTEF period. A review of the local government equitable share was completed in 2012 and a new formula is being phased in from 2013/14 to 2017/18. The new formula incorporates a revenue adjustment factor that considers the fiscal capacity of the recipient municipality (full details of the formula are provided in part 5 of this annexure). The mechanisms for allocating funds to provinces and municipalities are continuously reviewed to improve their efficiency. A new approach to the funding of provincial infrastructure is being implemented to promote better planning and implementation, and to improve efficiency in the delivery of health and education infrastructure. To maximise the effect of allocations, many provincial and local government conditional grants use criteria that consider the efficiency with which the recipient has used previous allocations.

Developmental needs

Developmental needs are accounted for at two levels. First, in the determination of the division of revenue, which explains the continued commitment to grow the provincial and local government shares of nationally raised revenue, and second, in the determination of the division within each sphere through the formulas used to divide national transfers among municipalities and provinces. Developmental needs are encapsulated in the equitable share formulas for provincial and local government and in specific conditional grants, such as the municipal infrastructure grant, which allocates funds according to the number of households in a municipality without access to basic services. Various infrastructure grants and growing capital budgets aim to boost the economic and social development of provinces and municipalities.

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2015 BUDGET REVIEW

Economic disparities

The equitable share and infrastructure grant formulas are redistributive towards poorer provinces and municipalities. Through the division of revenue, government continues to invest in economic infrastructure (such as roads) and social infrastructure (such as schools, hospitals and clinics) to stimulate economic development, create jobs, and address economic and social disparities.

Obligations in terms of national legislation

The Constitution confers autonomy on provincial governments and municipalities to determine priorities and allocate budgets. National government is responsible for policy development, national mandates, setting national norms and standards for provincial and municipal functions, and monitoring implementation for concurrent functions. The 2015 MTEF and division of revenue provide additional funding for municipalities affected by significant boundary changes due to take effect after the 2016 local government elections. National government will also ensure that baseline reductions do not affect important obligations that are already funded through existing provincial and local government allocations.

Predictability and stability

Provincial and local government equitable share allocations are based on estimates of nationally raised revenue. If this revenue falls short of the estimates within a given year, the equitable shares of provinces and local government will not be adjusted downwards. Allocations are assured (voted, legislated and guaranteed) for the first year and are transferred according to a payment schedule. To contribute to longer-term predictability and stability, estimates for a further two years are published with the annual proposal for appropriations. Adjusted estimates as a result of changes to data underpinning the equitable share formulas and revisions to the formulas are phased in to ensure minimal disruption.

Flexibility in responding to emergencies

Government has a contingency reserve that provides a cushion for emergencies and unforeseeable events. In addition, two conditional grants for disasters allow for the swift allocation and transfer of funds to affected provinces and municipalities in the immediate aftermath of a declared disaster. Sections 16 and 25 of the Public Finance Management Act (1999) make specific provision for the allocation of funds to deal with emergency situations. Section 30(2) deals with adjustment allocations for unforeseeable and unavoidable expenditure. Section 29 of the Municipal Finance Management Act (2003) allows a municipal mayor to authorise unforeseeable and unavoidable expenditure in an emergency.

¢ Part 2: The 2015 division of revenue

As announced in the 2014 Medium Term Budget Policy Statement, government has lowered its expenditure ceiling to reduce the budget deficit and stabilise public debt (see Chapters 1, 3 and 5 of the Budget Review). However, the most important public spending programmes that help poor South Africans, contribute to growth and generate employment have been protected from major reductions. The 2015 division of revenue reprioritises existing funds to ensure these objectives are met despite a lower expenditure ceiling. The lower spending ceiling has been applied proportionately across the three spheres of government. Parts 4 and 5 of this annexure set out in more detail how the baseline reductions have been effected on provincial and local government transfers.

Excluding debt-service costs and the contingency reserve, allocated expenditure shared between the three spheres amounts to R1.1 trillion, R1.2 trillion and R1.2 trillion over each of the MTEF years. These allocations take into account government’s spending priorities, each sphere’s revenue-raising capacity and responsibilities, and input from various intergovernmental forums and the FFC. The provincial and local equitable share formulas are designed to ensure fair, stable and predictable revenue shares, and to address economic and fiscal disparities.

4

ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Government’s policy priorities for the 2015 MTEF period

Following the reductions to the baseline, existing budgets need to be reprioritised to meet government’s policy priorities outlined in the Medium Term Strategic Framework. Priorities over the 2015 MTEF period that are funded through reprioritisations in the division of revenue include:

• The repair of provincial and municipal infrastructure damaged by disasters during 2013 and 2014

• The upgrade of the R573 Moloto Road by the South African National Roads Agency Limited

• The accelerated provision of bulk water and sanitation and the extension of basic infrastructure to areas without water supply

• A new grant to assist municipalities with the costs associated with major boundary changes.

Table W1.1 shows how major reprioritisations are distributed to priority areas across national, provincial and local government over the MTEF period.

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2015 BUDGET REVIEW

Table W1.1 Top increases and major rescheduling, 2015/16 – 2017/18

R million	2015/16		2016/17		2017/18		Total
National departments
Compensation of employees cost pressures		1 334		1 212		952		3 498
Water and Sanitation
Water infrastructure grants: Shift from the water trading entity		700		700		1 000		2 400
Regional water programme: Housing development and social infrastructure		—		—		550		550
Rural Development and Land Reform
Settlement of land restitution claims: Administration, research and payment of		461		489		163		1 113
Implementation of Spatial Planning Land Use Management Act, 2013		27		139		—		165
Establishment of the office of the valuer-general		33		35		76		144
National Treasury
Military pensions and other benefits: Inclusion of non-statutory forces		266		271		273		810
South African Revenue Service: Adequacy of accumulated surplus		-464		-75		381		-158
Defence and Military Veterans
Spares for military machinery and equipment, and acquisition of transport aircraft to transport troops and equipment to deployment area		84		262		457		803
Telecommunications and Postal Services
Funding of pilot for SA Connect: Broadband policy		200		268		272		740
Transport
South African National Roads Agency: Moloto Road upgrade		45		331		329		705
Repair to transport infrastructure damaged by disasters		163		215		270		648
Human Settlements
Repair of housing infrastructure damaged by disasters		232		195		134		561
National Housing Finance Corporation: Affordable housing finance		100		100		100		300
Housing Development Agency: Project management and informal settlement upgrading support		72		57		100		229
Statistics SA
Large sample community survey		89		381		39		509
Cooperative Governance and Traditional Affairs
Repair to municipal infrastructure damaged by disasters		167		140		—		307
Municipal demarcation transition conditional allocation: Gauteng and KwaZulu-Natal		39		50		50		139
Justice and Constitutional Development
Capacitation of courts in rural areas: Employment of 67 court administrators		74		79		83		236
Legal Aid South Africa: Employment of public defenders to complement the increase in magistrates’ capacity to reduce case backlogs		39		42		45		127
Public Service and Administration
Public Service Sector Education and Training Authority: Skills development project plans		68		72		75		215
Basic education
National Education Collaboration Trust: Piloting of interventions to improve the		20		30		150		200
Trade and Industry
Export Credit Insurance Corporation interest make-up scheme: Support to exporters to access new export markets and diversify South African exports		50		50		50		150
Small Business Development
2014 national macro organisation of the state: Establishment of department, and interventions to assist small, medium and micro businesses and cooperatives		44		46		49		139
Home Affairs
Implementation of new immigration regulations: Employment of 111 immigration inspectors		36		37		45		118
Mineral Resources
Shale gas exploration: Consultations, advocacy and research		28		36		44		108
Police
Transport equipment: Extending the replacement cycle of vehicles		—		-494		400		-94

Source: National Treasury

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The fiscal framework

Table W1.2 presents the medium-term macroeconomic forecasts for the 2015 Budget. It sets out the growth assumptions and fiscal policy targets on which the fiscal framework is based.

Table W1.2 Medium-term macroeconomic assumptions, 2014/15 – 2017/18

	2014/15						2015/16						2016/17						2017/18
	2014			2015			2014			2015			2014			2015			2015
R billion/percentage of GDP	Budget			Budget			Budget			Budget			Budget			Budget			Budget
Gross domestic product		3 789.6			3 879.9			4 150.5			4 191.8			4 552.9			4 538.8			4 926.1
Real GDP growth		2.9	%		1.4	%		3.3	%		2.0	%		3.5	%		2.6	%		3.0	%
GDP inflation		6.3	%		6.0	%		6.0	%		5.9	%		5.9	%		5.5	%		5.4	%
National budget framework
Revenue		962.8			954.3			1 058.1			1 049.3			1 172.6			1 166.0			1 265.4
Percentage of GDP		25.4	%		24.6	%		25.5	%		25.0	%		25.8	%		25.7	%		25.7	%
Expenditure		1 142.6			1 135.1			1 232.6			1 222.3			1 323.6			1 309.9			1 420.9
Percentage of GDP		30.1	%		29.3	%		29.7	%		29.2	%		29.1	%		28.9	%		28.8	%
Main budget balance1		-179.8			-180.9			-174.5			-173.1			-151.0			-144.0			-155.5
Percentage of GDP		-4.7	%		-4.7	%		-4.2	%		-4.1	%		-3.3	%		-3.2	%		-3.2	%

1. A positive number reflects a surplus and a negative number a deficit

Source: National Treasury

Table W1.3 sets out the division of revenue for the 2015 MTEF period after accounting for new policy priorities.

Table W1.3 Division of nationally raised revenue, 2011/12 – 2017/18

	2011/12			2012/13			2013/14			2014/15			2015/16			2016/17			2017/18
										Revised
R million	Outcome									estimate			Medium-term estimates
Division of available funds
National departments		389 376			420 015			453 171			491 368			522 992			553 778			586 087
of which:
Indirect transfers to provinces		700			2 315			2 693			4 116			3 458			3 596			3 967
Indirect transfers to local government		2 660			4 548			5 523			8 536			10 395			10 634			10 916
Provinces		355 824			380 929			410 572			439 661			468 159			496 259			526 382
Equitable share		289 628			310 741			336 495			359 922			382 673			405 265			428 893
Conditional grants		66 197			70 188			74 077			79 739			85 485			90 994			97 490
Local government		68 251			76 430			82 836			89 076			99 753			103 936			110 017
Equitable share		33 173			37 139			38 964			43 290			50 208			52 869			55 512
Conditional grants		26 505			30 251			34 258			35 595			38 887			39 844			42 720
General fuel levy sharing with metropolitan municipalities		8 573			9 040			9 613			10 190			10 659			11 224			11 785
Non-interest allocations		813 451			877 374			946 579			1 020 105			1 090 904			1 153 973			1 222 486
Percentage increase		10.0	%		7.9	%		7.9	%		7.8	%		6.9	%		5.8	%		5.9	%
Debt-service costs		76 460			88 121			101 185			115 016			126 440			140 971			153 376
Unallocated reserves		—			—			—			—			5 000			15 000			45 000
Main budget expenditure		889 911			965 496			1 047 764			1 135 122			1 222 345			1 309 944			1 420 862
Percentage increase		10.4	%		8.5	%		8.5	%		8.3	%		7.7	%		7.2	%		8.5	%
Percentage shares
National departments		47.9	%		47.9	%		47.9	%		48.2	%		47.9	%		48.0	%		47.9	%
Provinces		43.7	%		43.4	%		43.4	%		43.1	%		42.9	%		43.0	%		43.1	%
Local government		8.4	%		8.7	%		8.8	%		8.7	%		9.1	%		9.0	%		9.0	%

Source: National Treasury

Table W1.4 shows how additional resources are divided. The new focus areas and additional allocations are accommodated by shifting savings towards priorities.

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2015 BUDGET REVIEW

Table W1.4 Changes over baseline, 2015/16 – 2016/17

R thousand	2015/16		2016/17
National departments		-4 966		-5 224
Provinces		-3 779		-5 976
Local government		-294		-1 250
Allocated expenditure		-9 039		-12 450

Source: National Treasury

Table W1.5 sets out schedule 1 of the Division of Revenue Bill, which reflects the legal division of revenue between national, provincial and local government. In this division, the national share includes all conditional grants to provinces and local government in line with section 214(1) of the Constitution, and the allocations for each sphere reflect equitable shares only.

Table W1.5 Schedule 1 of the Division of Revenue Bill, 2015/16 – 2017/18

	2015/16		2016/17		2017/18
	Column A		Column B
R million	Allocation		Forward estimates
National1, 2		789 464		851 811		936 458
Provincial		382 673		405 265		428 893
Local		50 208		52 869		55 512
Total		1 222 345		1 309 944		1 420 862

1. National share includes conditional grants to provinces and local government, general fuel levy sharing with metropolitan municipalities, debt-service costs and the contingency reserve

2. Direct charges for the provincial equitable share are netted out

Source: National Treasury

The 2015 Budget Review sets out in detail how constitutional issues and government’s priorities are taken into account in the 2015 division of revenue. It describes economic and fiscal policy considerations, revenue issues, debt and financing considerations, and expenditure plans. Chapter 6 focuses on provincial and local government financing.

¢ Part 3: Response to the FFC’s recommendations

Section 9 of the Intergovernmental Fiscal Relations Act requires the FFC to make recommendations regarding:

a) “An equitable division of revenue raised nationally, among the national, provincial and local spheres of government;

b) the determination of each province’s equitable share in the provincial share of that revenue; and

c) any other allocations to provinces, local government or municipalities from the national government’s share of that revenue, and any conditions on which those allocations should be made.”

The act requires that the FFC table these recommendations at least 10 months before the start of each financial year. The FFC tabled its Submission for the Division of Revenue 2015/16 to Parliament in May 2014. These recommendations are divided into 11 chapters, which cover four main areas: macroeconomic and fiscal frameworks for inclusive growth; improving investments in education and health; investment in infrastructure; and the implications of municipal demarcations.

Section 214 of the Constitution requires that the FFC’s recommendations be considered before tabling the division of revenue. Section 10 of the Intergovernmental Fiscal Relations Act requires that the Minister of Finance table a Division of Revenue Bill with the annual budget in the National Assembly. The bill must be accompanied by an explanatory memorandum setting out how government has taken into account the FFC’s recommendations when determining the division of revenue. This part of the explanatory memorandum complies with this requirement.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The FFC’s recommendations can be divided into three categories:

• Recommendations that apply directly to the division of revenue

• Recommendations that indirectly apply to issues related to the division of revenue

• Recommendations that do not relate to the division of revenue.

Government responses to the first and second categories are provided below. The relevant national departments are considering the recommendations that do not relate to the division of revenue, and they will respond directly to the FFC.

Recommendations that apply directly and indirectly to the division of revenue

Chapter 2: Public debt challenges and the need for fiscal reforms

Use cost-cutting as an opportunity for reform

The FFC recommends that, “Government does not resort simply to cutting costs to reduce public debt. The need to restrain spending should be an opportunity to reform programmes and service delivery. Simple cost cutting may be effective in achieving deficit reduction targets but does not encourage longer-run fiscal stability or allow for reforms that will generate more value for money spent.”

Government response

Government agrees with the recommendation. The National Treasury has undertaken a careful review of current expenditure trends to identify areas where spending on non-essential items can be reduced. Government’s major programmes to reduce poverty and create jobs have been protected. This includes expenditure on social grants, public employment programmes and economic incentives. Major cuts have focused on non-essential goods and services, including catering, entertainment and travel budgets.

Avoid expenditure ceilings as a means of debt control

The FFC recommends that, “Government avoids across-the-board cuts or expenditure ceilings as a means of debt control. Such blunt tools treat valuable, efficiently run programmes and outdated, poorly managed programmes in the same way. Spending should be aligned with government priorities, to ensure adequate funding of high-priority initiatives and elimination or substantial reduction of lower-priority programmes.”

Government response

The expenditure ceiling announced in the 2012 Budget is an important policy tool for ensuring that government closes its structural budget deficit over the medium term. Government agrees that maintaining this ceiling should not be done using across-the-board cuts. Government has carefully analysed current expenditure trends to ensure that spending in priority areas is maintained, including the large poverty-reduction and job-creation programmes. In national departmental budgets, major cuts have been limited to non-essential goods and services, and provinces and municipalities have been encouraged to follow the same approach in their budgets. In the event of a shortfall in revenue in 2015/16, further fiscal consolidation will focus on poorly managed programmes.

Chapter 4: Equitable resourcing of schools for better outcomes

Education infrastructure grants

The FFC recommends that, “The allocation framework for education infrastructure conditional grants sets out clear expenditure targets for quintile 1 to 3 schools and timelines for addressing priority infrastructure backlogs in each quintile. The school infrastructure backlogs grant must also make provision for the transitional asset handover process to school governing boards and provincial education departments on newly built schools. This would address alignment between funding for non-physical inputs and physical inputs, as well as curb the decay of newly constructed infrastructure.”

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2015 BUDGET REVIEW

Government response

The aim of the school infrastructure backlogs grant is to replace unsafe school structures with appropriately built ones. While government appreciates the FFC’s research into the appropriate frameworks for such grants, a project list has already been established and projects are at various stages of implementation. As a result, it is not feasible to shift schools on this project list on the basis of the quintiles in which they fall without delaying the overall backlog reduction.

Government agrees on the importance of timelines for addressing infrastructure backlogs and ensuring that schools have access to water, sanitation and electricity, and are built with appropriate and safe materials. In 2013, government published minimum norms and standards for school infrastructure, and provinces have been given until 2016 for all schools to meet these standards.

Government’s focus on replacing, upgrading or rehabilitating existing schools to meet safety or basic service standards, rather than building new schools, means the problem of poorly planned handovers is largely avoided. However, government does acknowledge the risk, which is why the provincial education department must be notified before a school is transferred onto its asset register. This ensures that there is a current budget (for employees, learner materials and maintenance) so that the school is functional before the start of the school year.

Chapter 5: Adequacy and efficiency in primary healthcare financing

Increase primary healthcare allocation levels in line with norms and standards

The FFC recommends that, “Provincial governments increase their allocation levels to primary healthcare funding, to be in line with the minimum norms and standards for the primary healthcare package set by the national Department of Health, in particular on clinic services such as integrated management of childhood illnesses, reproductive health and HIV/AIDS.”

Further engagements with the FFC led to the clarification that this recommendation should be read as: “The provincial equitable share or health conditional grants may need to increase or be re-allocated to take account of provincial primary healthcare requirements set out by the national Department of Health. An absence of such increased funding or revising the allocation method of current funding may result in norms and standards, set by the national department, not being met adequately by the provincial departments with service delivery suffering as a result.”

Government response

Government welcomes the suggestion that further work is needed to ensure primary healthcare funding is sufficient and equitably allocated. However, the norms and standards referenced in the study were published in 2000, so updated norms and standards are needed before increased funding or reallocation can be considered. Government has recently taken steps to improve the functioning of primary healthcare clinics through the ideal clinic initiative. The conditional health grants – together with departmental budgets – are being aligned with this initiative. A reengineering of primary healthcare is also envisaged as part of the national health insurance reforms, with emphasis shifting from a curative to a preventative approach. Government continues to commit funds in this regard. For example, indirect national health grant (national health insurance component) funds will be used to test contracting with health professionals in the 10 national health insurance pilot districts.

Chapter 6: Impact of fiscal expenditure on food security

Better enforcement of agricultural grant conditions

The FFC recommends that, “The Department of Agriculture, Forestry and Fisheries strengthens its ability to enforce the conditions in the grant framework to ensure better oversight of provinces, so that spending and performance of the agricultural conditional grants can be improved. The Commission suggests that norms and standards be developed to assess the performance of provinces and five-year evaluations of conditional grants be institutionalised.”

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Government response

Government agrees that norms and standards should be developed to assess provincial performance. Regarding the institutionalisation of the evaluation of agricultural conditional grants, government (via the Department of Planning, Monitoring and Evaluation) is reviewing the comprehensive agricultural support programme grant’s performance. The review report will be used as a basis to institutionalise evaluation processes.

Review agricultural grants

The FFC recommends that, “The terms of reference for the committee to review the agricultural conditional grants are finalised without unnecessary delays. The review should be comprehensive in scope and should include assessing the value chain of conditional grants and unlocking operational constraints, especially in relation to planning, procurement, comprehensive smallholder support, cash-flow and monitoring and evaluation. Stakeholders such as the Department of Rural Development and Land Reform should be invited to be part of the committee, and ways to streamline the funding overlap between the Ilima/Letsema projects grant and the recapitalisation and development programme should be examined.”

Government response

Government agrees with the recommendation that this work is a priority and that overlaps between grants are to be avoided. The Department of Agriculture, Forestry and Fisheries, the National Treasury and the Department of Rural Development and Land Reform are discussing ways to streamline existing overlaps in provincial grants.

Chapter 8: Improving public transport for better mobility

Develop a transport subsidy framework

The FFC recommends that, “The Department of Transport (the custodian of national transport policy) formulates and implements a transport subsidy framework, which explicitly incorporates social welfare, service productivity and environmental management, which are the three aspects endorsed by national transport policy.”

Further discussions with the FFC led to the clarification that this recommendation should be read as: “The development of a transport subsidy framework is crucial to effectively guiding the allocation of transport conditional grants. The FFC study found that the existing public transport grants perpetuate the fragmented transport planning processes and are not effective in achieving the goal of integrated public transport. Therefore the consolidation of transport funding, allocated via the Division of Revenue Act, is required and should be driven by a new transport subsidy framework.”

Government response

Government agrees that a more integrated approach to funding public transport and a transport subsidy framework is required. It has begun taking steps in this regard – in the 2015 division of revenue, two of the municipal public transport grants have been consolidated into a single grant and the framework for this new public transport network grant includes a commitment for the national Department of Transport to develop a draft public transport subsidy framework. The City Support Programme in the National Treasury has undertaken to assist the Department of Transport in this regard.

Chapter 11: The impact of demarcations on municipal finances

Demarcation grant to affected municipalities

The FFC recommends that, “For every vertically decided demarcation process, government bears the transitional costs of the restructuring. A transitional demarcation grant should be awarded to the amalgamated municipality. This grant should be temporary and be awarded over at least three years (at least a year before, the year of and the year after demarcation takes place). The purpose of the grant will be to facilitate the restructuring process. This includes the following:

a. Planning and preparing an amalgamated municipality’s delivery model, e.g. combining the delivery models of individual municipalities.

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2015 BUDGET REVIEW

b. Rationalising and harmonising policy regimes, integrated development plans and bylaws of different municipalities.

c. Rationalising tariffs.

d. Rationalising employment policies and other human resources systems (grading of workers and job evaluation processes).

e. Rationalising and harmonising evaluation rolls and asset registers.

f. Building capacity to deal with change management.

g. Facilitating communication about the demarcation.”

Government response

Government agrees that major boundary changes can be costly for affected municipalities. The Select Committee on Appropriations has also recommended in its report on the 2014 Division of Revenue Bill that funding be allocated to provide for these costs. As such, government is proposing a municipal demarcation transition grant for the demarcation changes that will come into effect after the 2016 local government elections. Rather than unconditionally funding every cost associated with changed demarcations, government proposes that the following principles should be applied:

a. Only major re-demarcations should be eligible for funding (for example, amalgamations).

b. Only administrative costs directly related to the change in demarcations can be funded (for example, upgrading service levels should not qualify).

c. A differentiated approach should be applied, so that municipalities with larger own-revenue capacity are expected to fund more of the re-demarcation costs themselves.

d. Benefits and efficiencies that can be gained as a result of the new demarcations should also be taken into account in determining allocations for support.

e. Funds should be allocated for a maximum of one year before the boundary change (for planning and preparation costs only) and for two years following the change.

Government has consulted relevant stakeholders and used research by the FFC and SALGA to assist in the costing of such a grant. Based on this research and the above principles, government has introduced a grant worth R139 million over the MTEF period, with R39 million transferred in 2015/16 to 21 municipalities for preparatory costs. In 2016/17 and 2017/18, R50 million per year will be transferred to the 10 new municipalities.

¢ Part 4: Provincial allocations

Sections 214 and 227 of the Constitution require that an equitable share of nationally raised revenue be allocated to provincial government to enable it to provide basic services and perform its allocated functions.

National transfers to provinces increase from R439.7 billion in 2014/15 to R468.2 billion in 2015/16. Over the MTEF period, provincial transfers will grow at an average annual rate of 6.2 per cent to R526.4 billion in 2017/18. Table W1.6 sets out the total transfers to provinces for 2015/16. A total of R382.7 billion is allocated to the provincial equitable share and R85.5 billion to conditional grants, which includes an unallocated R100 million for the provincial disaster grant, but excludes indirect transfers of R3.5 billion.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Table W1.6 Total transfers to provinces, 2015/16

	Equitable		Conditional		Total
R million	share		grants		transfers
Eastern Cape		54 312		10 060		64 372
Free State		21 757		6 609		28 367
Gauteng		73 413		17 123		90 537
KwaZulu-Natal		82 254		16 881		99 135
Limpopo		45 377		6 742		52 120
Mpumalanga		31 030		6 851		37 881
Northern Cape		10 138		3 665		13 803
North West		26 151		6 942		33 093
Western Cape		38 242		10 507		48 749
Unallocated		—		103		103
Total		382 673		85 485		468 159

Source: National Treasury

Changes to provincial allocations

The baseline reductions discussed in Chapter 5 of the Budget Review were shared across the three spheres of government in proportion to the division of revenue. In 2015/16, provincial baselines are reduced by R4.4 billion compared to indicative figures published in the 2014 Budget. To protect basic services funded by the provincial equitable share, such as health and education, only 60 per cent (R2.6 billion) of this reduction was taken from the equitable share, despite its accounting for over 80 per cent of transfers to provinces. The remaining 40 per cent (R1.8 billion) of this reduction came from provincial conditional grants, although two grants that fund essential services (the national school nutrition programme grant and the comprehensive HIV and Aids grant) and two small grants (the occupational-specific dispensation for education sector therapists and the substance abuse treatment grant) were not reduced. The reduction that would have been made on these grants was offset by reprioritising funds from the indirect school infrastructure backlogs grant and the national health grant. As a result of these baseline reductions, the provincial equitable share baseline was reduced by 0.7 per cent and most conditional grants were reduced by 2.1 per cent in 2015/16. Many of the grants with reduced baselines have a history of underspending, so the impact on service delivery should be minimised if spending patterns improve. The amount reduced on each grant is detailed in Table W1.7.

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2015 BUDGET REVIEW

Table W1.7 Baseline reductions to provincial allocations, as announced in the 2014 MTBPS

R million	2015/16		2016/17
Provincial equitable share		-2 631		-3 960
Direct conditional grants		-1 496		-2 248
Agriculture, Forestry and Fisheries		-50		-74
Comprehensive agricultural support programme		-37		-55
Ilima/Letsema projects		-11		-16
Land care programme: poverty relief and infrastructure development		-2		-2
Arts and Culture		-30		-44
Community library services		-30		-44
Basic Education		-228		-339
Education infrastructure		-214		-319
HIV and AIDS (life skills education)		-5		-8
Maths, science and technology		-8		-12
National school nutrition programme		—		—
Occupational-specific dispensation for education sector therapists		—		—
Cooperative Governance and Traditional Affairs		-3		-4
Provincial disaster		-3		-4
Health		-417		-616
Comprehensive HIV and AIDS		—		—
Health facility revitalisation		-123		-180
Health professions training and development		-54		-81
National tertiary services		-238		-353
National health insurance		-2		-2
Higher Education and Training		—		—
Further education and training colleges		—		—
Human Settlements		-411		-641
Human settlements development		-411		-641
Public Works		-14		-25
Expanded public works programme integrated grant for provinces		-6		-10
Social sector expanded public works programme incentive for provinces		-8		-15
Social Development		—		—
Substance abuse treatment		—		—
Sport and Recreation South Africa		-13		-18
Mass participation and sport development		-13		-18
Transport		-332		-488
Provincial roads maintenance		-219		-320
Public transport operations		-113		-168
Indirect transfers		-257		-392
Basic Education		-121		-176
School infrastructure backlogs		-121		-176
Health		-137		-216
National health		-137		-216
Total		-4 385		-6 600

Source: National Treasury

In addition to these baseline reductions, there were also several other reprioritisations and technical changes to conditional grants during the budget process that will be implemented over the 2015 MTEF period. These are shown in Table W1.8.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Table W1.8 Revisions to baseline provincial allocations, 2015/16 – 2017/18

R million	2015/16		2016/17		2017/18		2015 MTEF
Technical revisions		-5 723		-6 044		-6 356		-18 123
Provincial equitable share		-2 663		-2 814		-2 957		-8 435
Function shifts to the national Department of Higher Education		-2 215		-2 343		-2 460		-7 018
Function shift to the national Department of Health (Port Health Services)		-118		-127		-136		-380
Funding shift to the national Department of Health (National Health Laboratory Services)		-330		-345		-362		-1 037
Direct conditional grants		-2 776		-3 149		-3 364		-9 289
Education Infrastructure		262		55		—		317
Comprehensive HIV and AIDS (NHLS funding shift)		-220		-230		-241		-691
Further education and training colleges (function shift)		-2 819		-2 974		-3 123		-8 915
Indirect transfers		-284		-80		-35		-399
National health		-22		-25		-35		-82
Schools infrastructure backlog		-262		-55		—		-317
Additions to baseline		334		410		404		1 148
Direct transfers		334		410		404		1 148
Health facility revitalisation		10		—		—		10
Human settlements development		161		195		134		491
Provincial roads maintenance		163		215		270		648
Reductions to baseline		-4 444		-6 500		-316		-11 259
Provincial equitable share		-2 631		-3 960		—		-6 591
Impact of reductions to provincial equitable share baseline announced in 2014 MTBPS		-2 631		-3 960		—		-6 591
Direct transfers		-1 744		-2 481		-241		-573
Impact of reductions to conditional grant baseline announced in 2014 MTBPS (see detail in Table W1.7)		-1 496		-2 248		—		-3 744
Maths, science and technology		-5		-5		-6		-16
Provincial disaster grant		-99		-100		-100		-299
Human settlements development		-80		-80		-80		-240
Social sector expanded public works programme incentive grant for provinces		-19		—		—		-19
Provincial roads maintenance		-46		-49		-55		-149
Indirect transfers		-69		-59		-75		-203
Impact of reductions to conditional grant baseline announced in 2014 MTBPS (see detail in Table W1.7)		-257		-392		—		-650
National health		-65		-54		-71		-190
School infrastructure backlogs		-4		-4		-5		-13
Total changes to provincial allocations
Changes to provincial equitable share		-5 294		-6 774		-2 957		-15 026
Changes to direct conditional grants		-4 186		-5 221		-3 200		-12 607
Changes to indirect conditional gramts		-353		-139		-110		-602
Net change to provincial allocations		-9 833		-12 133		-6 268		-28 234

Source: National Treasury

Two function shifts and a change to the National Health Laboratory Service (NHLS) funding arrangements will also be effected over the 2015 MTEF period. The further education and training colleges and adult basic education function is shifted from provinces to the national Department of Higher Education and Training. As a result, the full value of the further education and training colleges grant (R8.9 billion over the MTEF period) and R7 billion from the provincial equitable share are shifted to the national department’s budget. The port health function is transferred from provinces to the national Department of Health, resulting in a total of R380.4 million shifting from the provincial equitable share to the national department’s budget over the MTEF period. The FFC has assessed these function shifts and the accompanying changes to provincial transfers, and the Budget Council and sector MinMECs have given their approval.

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The NHLS funding arrangements are being amended so that national functions for training and research are funded directly by the national Department of Health from 2015/16, and no longer paid for through fees charged to provinces for NHLS services. To ensure this change does not affect provincial budgets, the fees charged for NHLS services will be reduced to offset the funds taken out of the provincial equitable share and the comprehensive HIV and Aids grant. Over the 2015 MTEF period, the provincial equitable share will be reduced by R1 billion. The comprehensive HIV and AIDS grant will be reduced by R691.2 million. These funds will be allocated to the national department for the NHLS’s national functions. The Budget Council has agreed to this arrangement and an audit will be conducted after the first year to ensure that the change is revenue-neutral for provinces.

After accounting for the reductions and function shifts, net revisions to the provincial direct and indirect allocations amount to a reduction of R10.1 billion in 2015/16 and R12.5 billion in 2016/17.

The provincial equitable share

The equitable share is the main source of revenue for meeting provincial expenditure responsibilities. To ensure that allocations are fair, the equitable share is allocated through a formula using objective data on the context and demand for services in each of the nine provinces. The revisions due to function shifts in health and higher education and the change in NHLS funding arrangements reduce the provincial equitable share by R5.3 billion in 2015/16, R6.8 billion in 2016/17 and R3 billion in 2017/18. This brings the equitable share allocations to R382.7 billion, R405.3 billion and R428.9 billion respectively for each year of the 2015 MTEF period. These revisions result in the provincial equitable share increasing by 6.3 per cent between 2014/15 and 2015/16, and growing at an average annual rate of 6 per cent over the MTEF period.

Allocations calculated outside the equitable share formula

The equitable share includes an amount of R2.3 billion in 2015/16 that was previously part of the devolution of property rate funds grant. This grant, which funded provinces to pay municipal charges on provincial properties that were previously administered by national government, has been transferred as part of the provincial equitable share since 2013/14. These funds are still allocated to provinces in the same proportions as the former grant, but from 2016/17 they will be allocated using the provincial equitable share formula.

Over the 2015 MTEF period, the amounts taken out of the provincial equitable share to implement the change in the NHLS’s funding arrangements will be subtracted from each province’s allocation in proportion to their share of the formula’s health component.

The equitable share formula

The provincial equitable share formula is reviewed and updated with new data annually. For the 2015 MTEF, the formula has been updated with data from the 2014 mid-year population estimates published by Statistics South Africa; the 2014 preliminary data published by the Department of Basic Education on school enrolment; data from the 2013 General Household Survey for medical aid coverage; and data from the health sector and the Risk Equalisation Fund for the risk-adjusted capitation index. Because the formula is largely population-driven, the allocations capture shifts in population across provinces, which results in changes in the relative demand for public services across these areas. The effect of these updates on the provincial equitable share is phased in over three years (2015/16 to 2017/18).

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Full impact of data updates on the provincial equitable share

Table W1.9 shows the full impact of the data updates on the provincial equitable share per province. It compares the target shares for the 2014 and 2015 MTEF periods. The details of how the data updates affect each component of the formula are described in detail in the subsections below.

Table W1.9 Full impact of data updates on the equitable share

	2014  MTEF weighted average			2015  MTEF weighted average			Difference
Eastern Cape		14.0	%		14.0	%		-0.01	%
Free State		5.6	%		5.6	%		-0.00	%
Gauteng		19.5	%		19.5	%		0.04	%
KwaZulu-Natal		21.3	%		21.3	%		-0.06	%
Limpopo		11.8	%		11.8	%		-0.04	%
Mpumalanga		8.2	%		8.2	%		0.01	%
Northern Cape		2.7	%		2.7	%		-0.00	%
North West		6.9	%		6.9	%		0.00	%
Western Cape		10.0	%		10.1	%		0.06	%
Total		100.0	%		100.0	%		—

Source: National Treasury

Phasing in the formula

To mitigate the effect of annual data updates on provincial equitable shares, the new shares are phased in over the three-year MTEF period. An amended phase-in mechanism was introduced for the 2014 MTEF to ensure that the weighted share of the provincial equitable share allocated to each province over the medium term closely follows the indicative shares for each year published in the previous MTEF.

The equitable share formula data is updated every year and a new target share for each province is calculated, which is shown in Table W1.10. The phase-in mechanism provides a smooth path to achieving these weighted shares by the third year of the MTEF period. It takes the difference between the target weighted share for each province at the end of the MTEF period and the indicative allocation for 2015/16 that was published in the 2014 MTEF, and closes the gap between these shares by a third in each year of the 2015 MTEF period. As a result, one-third of the impact of the data updates is implemented in 2015/16, two-thirds in the indicative allocations for 2016/17, and the updates are fully implemented in the indicative allocations for 2017/18.

Table W1.10 Implementation of the equitable share weights, 2015/16 – 2017/18

	2015/16			2015/16			2016/17			2017/18
	Indicative
	weighted
	shares from			2015 MTEF weighted shares
Percentage	2014 MTEF			3-year phasing
Eastern Cape		14.2	%		14.1	%		14.1	%		14.0	%
Free State		5.7	%		5.7	%		5.6	%		5.6	%
Gauteng		19.3	%		19.3	%		19.4	%		19.5	%
KwaZulu-Natal		21.4	%		21.4	%		21.3	%		21.3	%
Limpopo		11.9	%		11.8	%		11.8	%		11.8	%
Mpumalanga		8.2	%		8.2	%		8.2	%		8.2	%
Northern Cape		2.7	%		2.7	%		2.7	%		2.7	%
North West		6.9	%		6.9	%		6.9	%		6.9	%
Western Cape		9.9	%		10.0	%		10.0	%		10.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%

Source: National Treasury

Provision for cushioning the impact of 2011 Census data updates and baseline reductions

The provincial equitable share formula was updated with 2011 Census data in 2013/14. The incorporation of new Census data for the first time in a decade resulted in significant changes to certain components of

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the formula. To give provinces time to adjust to their new allocations, the Census updates were phased in over three years and R4.2 billion was added as a “top-up” for provinces with declining shares over the 2013 MTEF period. This cushioning was due to come to an end in 2015/16, but it has been extended for another year to reduce the impact of the baseline reductions discussed above. The same provinces that required support for the Census reductions will experience the slowest growth in their allocations due to the baseline reductions. To prevent this, provinces agreed that R2.1 billion should be taken out of the equitable share as a whole (from all nine provinces) and allocated as cushioning to the four affected provinces for another year (2016/17). Table W1.11 shows how these funds are allocated to the Eastern Cape, the Free State, KwaZulu-Natal and Limpopo in 2015/16 and 2016/17.

Further work will be undertaken during 2015 to examine the long-term implications of the current approach to updating and phasing in the data used in the equitable share formula for the financial sustainability of provinces. The Technical Committee on Finance and the Budget Council will be consulted as part of this work.

Table W1.11 Cushioning for 2011 Census impact on provinces with declining shares in the 2015 MTEF

	2015/16		2016/17		2017/18
R thousand	Medium-term estimates
Eastern Cape		685 628		685 628		—
Free State		171 261		171 261		—
Gauteng		—		—		—
KwaZulu-Natal		773 075		773 075		—
Limpopo		487 036		487 036		—
Mpumalanga		—		—		—
Northern Cape		—		—		—
North West		—		—		—
Western Cape		—		—		—
Total		2 117 000		2 117 000		—

Source: National Treasury

Provincial equitable share allocations

The final equitable share allocations per province for the 2015 MTEF are detailed in Table W1.12. These allocations include the full impact of the data updates, phased in over three years, as well as the cushioning and amounts determined outside of the formula, as described above.

Table W1.12 Provincial equitable share, 2015/16 – 2017/18

	2015/16		2016/17		2017/18
R million
Eastern Cape		54 312		57 368		60 069
Free State		21 757		22 775		23 979
Gauteng		73 413		78 237		83 602
KwaZulu-Natal		82 254		86 885		91 430
Limpopo		45 377		48 121		50 502
Mpumalanga		31 030		32 971		35 113
Northern Cape		10 138		10 730		11 397
North West		26 151		27 676		29 493
Western Cape		38 242		40 501		43 308
Total		382 673		405 265		428 893

Source: National Treasury

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Summary of the formula’s structure

The formula, shown in Table W1.13 below, consists of six components that capture the relative demand for services between provinces and take into account specific provincial circumstances. The formula’s components are neither indicative budgets nor guidelines as to how much should be spent on functions in each province or by provinces collectively. Rather, the education and health components are weighted broadly in line with historical expenditure patterns to indicate relative need. Provincial executive councils have discretion regarding the determination of departmental allocations for each function, taking into account the priorities that underpin the division of revenue.

For the 2015 Budget, the formula components are set out as follows:

• An education component (48 per cent), based on the size of the school-age population (ages 5 to 17) and the number of learners (Grades R to 12) enrolled in public ordinary schools.

• A health component (27 per cent), based on each province’s risk profile and health system case load.

• A basic component (16 per cent), derived from each province’s share of the national population.

• An institutional component (5 per cent), divided equally between the provinces.

• A poverty component (3 per cent), based on income data. This component reinforces the redistributive bias of the formula.

• An economic output component (1 per cent), based on regional gross domestic product (GDP-R, measured by Statistics South Africa).

Table W1.13 Distributing the equitable shares by province, 2015 MTEF

	Education 48%			Health 27%			Basic share 16%			Poverty 3%			Economic activity 1%			Institu- tional 5%			Weighted average 100%
Eastern Cape		15.1	%		13.5	%		12.6	%		16.2	%		7.5	%		11.1	%		14.0	%
Free State		5.3	%		5.4	%		5.2	%		5.3	%		5.2	%		11.1	%		5.6	%
Gauteng		17.7	%		21.4	%		23.9	%		17.1	%		34.7	%		11.1	%		19.5	%
KwaZulu-Natal		22.5	%		21.8	%		19.8	%		22.2	%		15.8	%		11.1	%		21.3	%
Limpopo		13.0	%		10.4	%		10.4	%		13.6	%		7.1	%		11.1	%		11.8	%
Mpumalanga		8.5	%		7.3	%		7.8	%		9.2	%		7.1	%		11.1	%		8.2	%
Northern Cape		2.3	%		2.1	%		2.2	%		2.2	%		2.2	%		11.1	%		2.7	%
North West		6.5	%		6.7	%		6.8	%		8.1	%		6.4	%		11.1	%		6.9	%
Western Cape		9.0	%		11.3	%		11.3	%		6.1	%		14.0	%		11.1	%		10.1	%
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Source: National Treasury

Education component (48 per cent)

The education component uses the school-age population (5 to 17 years), based on the 2011 Census, and enrolment data drawn from the Department of Basic Education’s 2014 School Realities Survey. Each of these elements is assigned a weight of 50 per cent.

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2015 BUDGET REVIEW

Table W1.14 shows the effect of updating the education component with new enrolment data on the education component shares.

Table W1.14 Impact of changes in school enrolment on the education component share

			School enrolment				Changes in		Weighted average						Difference in
	Age cohort 5 –17		2013		2014		enrolment		2014 MTEF			2015 MTEF			weighted average
Eastern Cape		1 856 317		1 927 081		1 916 285		-10 796		15.2	%		15.1	%		-0.12	%
Free State		657 489		663 312		671 139		7 827		5.3	%		5.3	%		0.01	%
Gauteng		2 231 793		2 116 391		2 178 282		61 891		17.5	%		17.7	%		0.16	%
KwaZulu-Natal		2 758 594		2 857 959		2 865 984		8 025		22.6	%		22.5	%		-0.08	%
Limpopo		1 536 294		1 713 696		1 719 134		5 438		13.1	%		13.0	%		-0.04	%
Mpumalanga		1 053 846		1 049 995		1 055 243		5 248		8.5	%		8.5	%		-0.02	%
Northern Cape		288 839		281 500		287 904		6 404		2.3	%		2.3	%		0.01	%
North West		824 724		787 470		798 894		11 424		6.5	%		6.5	%		0.02	%
Western Cape		1 174 625		1 048 883		1 074 161		25 278		9.0	%		9.0	%		0.06	%
Total		12 382 521		12 446 287		12 567 026		120 739		100.0	%		100.0	%		—

Source: National Treasury

Health component (27 per cent)

The health component uses a risk-adjusted capitation index and output data from public hospitals to estimate each province’s share of the health component. These methods work together to balance needs (risk-adjusted capitation) and demands (output component).

The health component is presented in three parts below. Table W1.15 shows the shares of the risk-adjusted component, which accounts for 75 per cent of the health component.

Table W1.15 Risk-adjusted sub-component shares

	Mid-year population estimates		Insured population			Risk- adjusted			Weighted		Risk-adjusted shares
Thousand	2014		2013			index			population		2014			2015			Change
Eastern Cape		6 787		10.5	%		96.9	%		5 883		13.1	%		13.4	%		0.22	%
Free State		2 787		17.1	%		103.3	%		2 385		5.4	%		5.4	%		0.06	%
Gauteng		12 915		29.3	%		105.4	%		9 626		21.9	%		21.9	%		-0.05	%
KwaZulu-Natal		10 694		13.3	%		98.9	%		9 170		20.9	%		20.8	%		-0.03	%
Limpopo		5 631		9.0	%		91.6	%		4 695		10.7	%		10.7	%		-0.04	%
Mpumalanga		4 229		15.6	%		95.7	%		3 416		7.8	%		7.8	%		-0.01	%
Northern Cape		1 167		20.2	%		100.7	%		937		2.2	%		2.1	%		-0.06	%
North West		3 676		15.6	%		102.2	%		3 172		7.3	%		7.2	%		-0.06	%
Western Cape		6 116		25.7	%		104.0	%		4 728		10.8	%		10.7	%		-0.03	%
Total		54 002								44 013		100.0	%		100.0	%		—

Source: National Treasury

The risk-adjusted sub-component estimates a weighted population in each province using the risk-adjusted capitation index, which is calculated using data from the Council for Medical Schemes’ Risk Equalisation Fund. The percentage of the population with medical aid insurance, based on the 2013 General Household Survey, is deducted from the 2014 mid-year population estimates to estimate the uninsured population per province. The risk-adjusted index, which is an index of each province’s health risk profile, is applied to the uninsured population to estimate the weighted population. Each province’s share of this weighted population is used to estimate their share of the risk-adjusted sub-component. Table W1.15 shows the change in this sub-component between 2014 and 2015.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The output sub-component is shown in Table W1.16 below.

Table W1.16 Output sub-component shares

	Primary healthcare visits									Hospital workload patient-day equivalents
	2012/13		2013/14		Average		Share			2012/13		2013/14		Average		Share
Eastern Cape		17 725		17 379		17 552		13.6	%		4 523		4 572		4 548		14.1	%
Free State		7 488		6 894		7 191		5.6	%		1 824		1 736		1 780		5.5	%
Gauteng		23 084		23 647		23 366		18.1	%		6 611		6 722		6 667		20.7	%
KwaZulu-Natal		31 112		31 885		31 498		24.4	%		8 112		7 995		8 054		25.0	%
Limpopo		14 330		14 256		14 293		11.1	%		2 898		2 922		2 910		9.0	%
Mpumalanga		9 056		9 143		9 100		7.1	%		1 819		1 931		1 875		5.8	%
Northern Cape		3 413		3 398		3 406		2.6	%		514		526		520		1.6	%
North West		7 890		8 047		7 969		6.2	%		1 578		1 674		1 626		5.0	%
Western Cape		14 859		14 308		14 584		11.3	%		4 196		4 283		4 240		13.2	%
Total		128 957		128 957		128 957		100.0	%		32 075		32 363		32 219		100.0	%

Source: National Treasury

The output sub-component uses patient load data from the District Health Information Services. The average number of visits at primary healthcare clinics in 2012/13 and 2013/14 is calculated to estimate each province’s share of this part of the output component, which makes up 5 per cent of the health component. For hospitals, each province’s share of the total patient-day equivalents from public hospitals in 2012/13 and 2013/14 is used to estimate their share of this part of the output sub-component, making up 20 per cent of the health component. In total, the output component is 25 per cent of the health component.

Table W1.17 shows the updated health component shares for the 2015 MTEF period.

Table W1.17 Health component weighted shares

	Risk-			Primary			Hospital
	adjusted			healthcare			component			Weighted shares
Weight	75.0%			5.0%			20.0%			2014			2015			Change
Eastern Cape		13.4	%		13.6	%		14.1	%		13.4	%		13.5	%		0.12	%
Free State		5.4	%		5.6	%		5.5	%		5.4	%		5.4	%		0.01	%
Gauteng		21.9	%		18.1	%		20.7	%		21.5	%		21.4	%		-0.07	%
KwaZulu-Natal		20.8	%		24.4	%		25.0	%		22.0	%		21.8	%		-0.14	%
Limpopo		10.7	%		11.1	%		9.0	%		10.4	%		10.4	%		-0.07	%
Mpumalanga		7.8	%		7.1	%		5.8	%		7.3	%		7.3	%		0.03	%
Northern Cape		2.1	%		2.6	%		1.6	%		2.1	%		2.1	%		-0.01	%
North West		7.2	%		6.2	%		5.0	%		6.8	%		6.7	%		-0.03	%
Western Cape		10.7	%		11.3	%		13.2	%		11.1	%		11.3	%		0.15	%
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		—

Source: National Treasury

Basic component (16 per cent)

The basic component is derived from the proportion of each province’s share of the national population. This component constitutes 16 per cent of the total equitable share. For the 2015 MTEF, population data is drawn from the 2014 Mid-Year Population Estimates produced by Statistics South Africa. Table W1.18 shows the impact on the basic component’s revised weighted shares.

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2015 BUDGET REVIEW

Table W1.18 Impact of the changes in population on the basic component shares

	Mid-year population estimates		Mid-year population estimates		Population		% population			Basic component shares						Change
	2013		2014		change		change			2014 MTEF			2015 MTEF
Eastern Cape		6 620 100		6 786 900		166 800		2.5	%		12.5	%		12.6	%		0.07	%
Free State		2 753 200		2 786 800		33 600		1.2	%		5.2	%		5.2	%		-0.04	%
Gauteng		12 728 400		12 914 800		186 400		1.5	%		24.0	%		23.9	%		-0.11	%
KwaZulu-Natal		10 456 900		10 694 400		237 500		2.3	%		19.7	%		19.8	%		0.07	%
Limpopo		5 518 000		5 630 500		112 500		2.0	%		10.4	%		10.4	%		0.01	%
Mpumalanga		4 128 000		4 229 300		101 300		2.5	%		7.8	%		7.8	%		0.04	%
Northern Cape		1 162 900		1 166 700		3 800		0.3	%		2.2	%		2.2	%		-0.03	%
North West		3 597 600		3 676 300		78 700		2.2	%		6.8	%		6.8	%		0.02	%
Western Cape		6 016 900		6 116 300		99 400		1.7	%		11.4	%		11.3	%		-0.03	%
Total		52 982 000		54 002 000		1 020 000		1.9	%		100.0	%		100.0	%		—

Source: National Treasury

Institutional component (5 per cent)

The institutional component recognises that some costs associated with running a provincial government and providing services are not directly related to the size of a province’s population or the other factors included in other components. It is therefore distributed equally between provinces, constituting 5 per cent of the total equitable share, of which each province receives 11.1 per cent. This component benefits provinces with smaller populations, especially the Northern Cape, the Free State and the North West, because the allocation per person for these provinces is much higher in this component.

Poverty component (3 per cent)

The poverty component introduces a redistributive element to the formula and is assigned a weight of 3 per cent. The poor population includes people who fall in the lowest 40 per cent of household incomes in the 2010/11 Income and Expenditure Survey. The estimated size of the poor population in each province is calculated by multiplying the proportion in that province that fall into the poorest 40 per cent of South African households by the province’s population figure from the 2014 Mid-Year Population Estimates. Table W1.19 shows the proportion of the poor in each province from the Income and Expenditure Survey, the 2014 Mid-Year Population Estimates and the weighted share of the poverty component per province.

Table W1.19 Comparison of current and new poverty component weighted shares

	Income			Current (2014 MTEF)							New (2015 MTEF)							Difference in  weighted shares
Thousand	and Expenditure Survey 2010/11			Mid-year population Estimates 2013		Poor population		Weighted Shares			Mid-year population estimates 2014		Poor population		Weighted shares
Eastern Cape		52.0	%		6 620		3 445		16.1	%		6 787		3 531		16.2	%		0.08	%
Free State		41.4	%		2 753		1 140		5.3	%		2 787		1 154		5.3	%		-0.04	%
Gauteng		28.9	%		12 728		3 675		17.2	%		12 915		3 728		17.1	%		-0.09	%
KwaZulu-Natal		45.3	%		10 457		4 738		22.2	%		10 694		4 845		22.2	%		0.06	%
Limpopo		52.9	%		5 518		2 917		13.6	%		5 631		2 976		13.6	%		0.00	%
Mpumalanga		47.3	%		4 128		1 951		9.1	%		4 229		1 998		9.2	%		0.04	%
Northern Cape		40.8	%		1 163		474		2.2	%		1 167		476		2.2	%		-0.04	%
North West		47.9	%		3 598		1 723		8.1	%		3 676		1 761		8.1	%		0.01	%
Western Cape		21.9	%		6 017		1 316		6.2	%		6 116		1 337		6.1	%		-0.02	%
Total					52 982		21 377		100.0	%		54 002		21 807		100.0	%		—

Source: National Treasury

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Economic activity component (1 per cent)

The economic activity component is a proxy for provincial tax capacity and expenditure assignments. Given that these assignments are a relatively small proportion of provincial budgets, the component is assigned a weight of 1 per cent. For the 2015 MTEF, 2013 GDP-R data is used. Table W1.20 shows the weighted shares of the economic activity component.

Table W1.20 Current and new economic activity component weighted shares

	Current (2014 MTEF)					New (2015 MTEF)					Difference in
	GDP-R, 2011 (R million)		Weighted shares			GDP-R, 2012 (R million)		Weighted shares			weighted shares
Eastern Cape		219 170		7.5	%		234 536		7.5	%		-0.04	%
Free State		153 284		5.3	%		162 601		5.2	%		-0.07	%
Gauteng		1 005 795		34.5	%		1 089 535		34.7	%		0.24	%
KwaZulu-Natal		458 841		15.7	%		496 431		15.8	%		0.09	%
Limpopo		207 308		7.1	%		223 090		7.1	%		0.00	%
Mpumalanga		205 600		7.0	%		222 149		7.1	%		0.03	%
Northern Cape		65 259		2.2	%		70 203		2.2	%		-0.00	%
North West		189 047		6.5	%		201 736		6.4	%		-0.05	%
Western Cape		413 235		14.2	%		438 700		14.0	%		-0.19	%
Total		2 917 539		100.0	%		3 138 981		100.0	%		—

Source: National Treasury

Conditional grants to provinces

There are four types of provincial conditional grants:

• Schedule 4A sets out general grants that supplement various programmes partly funded by provinces

• Schedule 5A grants fund specific responsibilities and programmes implemented by provinces

• Schedule 6A grants provide in-kind allocations through which a national department implements projects in provinces

• Schedule 7A grants provide for the swift allocation and transfer of funds to a province to help it deal with a disaster.

Changes to conditional grants

Despite the baseline reductions described in Table W1.7, overall growth in direct conditional transfers to provinces is buoyant, averaging 6.9 per cent over the MTEF period. Direct conditional grant baselines total R85.5 billion in 2015/16, R91 billion in 2016/17 and R97.5 billion in 2017/18. Indirect conditional grants amount to R3.5 billion, R3.6 billion and R4 billion respectively for each year of the same period.

Table W1.21 provides a summary of conditional grants by sector for the 2015 MTEF period. More detailed information, including the framework and allocation criteria for each grant, is provided in Annexure W2 of the 2015 Division of Revenue Bill. The frameworks provide the conditions for each grant, the outputs expected, the allocation criteria used for dividing each grant between provinces, and a summary of the grant’s audited outcomes for 2013/14.

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Table W1.21 Conditional grants to provinces, 2014/15 – 2017/18

R million	2014/15		2015/16		2016/17		2017/18		MTEF total
Agriculture, Forestry and Fisheries		2 389		2 188		2 262		2 404		6 855
Comprehensive agricultural support programme		1 861		1 651		1 702		1 809		5 162
Ilima/Letsema projects		461		471		491		522		1 484
Land care programme: poverty relief and infrastructure development		68		66		69		74		209
Arts and Culture		1 016		1 311		1 367		1 453		4 131
Community library services		1 016		1 311		1 367		1 453		4 131
Basic Education		13 532		15 856		16 373		17 267		49 497
Education infrastructure		7 327		9 518		9 774		10 331		29 622
HIV and AIDS (life skills education)		212		221		231		245		697
Maths, science and technology		319		347		362		385		1 095
National school nutrition programme		5 462		5 704		6 006		6 306		18 016
Occupational-specific dispensation for education sector therapists		213		67		—		—		67
Cooperative Governance and Traditional Affairs		197		103		112		123		338
Provincial disaster		197		103		112		123		338
Health		30 164		31 858		34 338		37 495		103 692
Comprehensive HIV and AIDS		12 102		13 737		15 467		17 440		46 644
Health facility revitalisation		5 502		5 276		5 473		5 817		16 565
Health professions training and development		2 322		2 375		2 477		2 632		7 483
National tertiary services		10 168		10 398		10 847		11 526		32 771
National health insurance		70		72		75		80		228
Human Settlements		17 084		18 203		19 884		21 060		59 147
Human settlements development		17 084		18 203		19 884		21 060		59 147
Public Works		607		591		762		809		2 162
Expanded public works programme integrated grant for provinces		349		351		402		424		1 176
Social sector expanded public works programme incentive for provinces		258		241		360		386		986
Social Development		29		48		48		—		95
Substance abuse treatment		29		48		48		—		95
Sport and Recreation South Africa		526		537		561		596		1 694
Mass participation and sport development		526		537		561		596		1 694
Transport		14 194		14 790		15 288		16 281		46 359
Provincial roads maintenance		9 361		9 851		10 138		10 808		30 797
Public transport operations		4 833		4 939		5 150		5 473		15 563
Total direct conditional allocations		79 739		85 485		90 994		97 490		273 970
Indirect transfers		4 116		3 458		3 596		3 967		11 021
Basic Education		2 541		2 047		2 375		2 620		7 042
School infrastructure backlogs		2 541		2 047		2 375		2 620		7 042
Health		1 575		1 411		1 221		1 347		3 979
National health		1 575		1 411		1 221		1 347		3 979

Source: National Treasury

Agriculture grants

The comprehensive agricultural support programme aims to support newly established and emerging farmers, particularly subsistence, smallholder and previously disadvantaged farmers. Of the grant, 70 per cent is allocated to the production of livestock and crops. The grant also aims to expand farm infrastructure and provide support for dipping, fencing and rehabilitating viable irrigation schemes. Allocations over the MTEF period include R195.7 million for the repair of flood damage to agricultural infrastructure. The baseline reduction on this grant in 2015/16 is R37.1 million. The grant is allocated R5.2 billion over the medium term.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The land care programme grant: poverty relief and infrastructure development aims to improve productivity and the sustainable use of natural resources. Provinces are also encouraged to use this grant to create jobs through the Expanded Public Works Programme. The baseline reduction on this grant in 2015/16 is R1.8 million. Over the medium term, R209.2 million is allocated to this grant.

The Ilima/Letsema projects grant aims to boost food production by helping previously disadvantaged farming communities. After the Department of Agriculture, Forestry and Fisheries has tested the new approach, it will make this grant subject to the standard operating procedure for farmer support. The baseline reduction on this grant in 2015/16 is R11 million. It is allocated R1.5 billion over the MTEF period.

Arts and culture grant

The community library services grant, administered by the Department of Arts and Culture, aims to help South Africans access knowledge and information to improve their socioeconomic situation. The grant is allocated to the relevant provincial department and administered by that department or through a service-level agreement with municipalities. In collaboration with provincial departments of basic education, the grant also funds dual service point libraries that serve both schools and the general public. Funds from this grant may also be used to shift the libraries function between provinces and municipalities. The baseline reduction on this grant in 2015/16 is R29.5 million, but average annual growth over the MTEF period remains strong at 12.7 per cent. The grant is allocated R4.1 billion over the next three years.

Basic education grants

Provinces use the education infrastructure grant to construct, maintain and refurbish education infrastructure and schools. The baseline reduction on this grant in 2015/16 is R213.9 million. The grant totals R29.6 billion over the MTEF period, which includes a ring-fenced amount of R322.1 million over the three years to repair school infrastructure damaged by natural disasters.

Infrastructure grant reforms to improve planning were introduced in 2013 after a decade of provincial capacity building through the Infrastructure Delivery Improvement Programme. Under the requirements introduced in the 2013 Division of Revenue Bill, provincial education departments had to go through a two-year planning process to be eligible to receive incentive allocations in 2015/16. The departments had to meet certain prerequisites in 2013/14 and have their infrastructure plans approved in 2014/15. The national Department of Basic Education and the National Treasury assessed the provinces’ infrastructure plans. A moderation process was undertaken between the national departments, provincial treasuries and provincial departments of basic education to agree on the final scores. Provinces needed to obtain a minimum score of 60 per cent to qualify for the incentive. Table W1.22 shows the final score and incentive allocation for each province.

Table W1.22 Education infrastructure grant allocations

	User Asset Management Plan assessment			2015/16						Final allocation for  2015/16
R million				Basic component		Incentive component		Disaster recovery funds
Eastern Cape		71	%		1560		94		50		1 704
Free State		42	%		763		—		—		763
Gauteng		63	%		852		84		—		936
KwaZulu-Natal		64	%		1870		85		24		1 979
Limpopo		43	%		736		—		69		805
Mpumalanga		48	%		848		—		10		857
Northern Cape		66	%		359		88		—		447
North West		69	%		852		92		51		995
Western Cape		81	%		920		108		5		1 032
Total					8 758		550		209		9 518

Source: National Treasury

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2015 BUDGET REVIEW

The national Department of Basic Education is reviewing the education infrastructure grant formula for outer-year allocations, so changes should be expected in the indicative allocations published for 2016/17 and 2017/18. Allocations for the incentive component in the outer years are shown as unallocated.

The national school nutrition programme grant seeks to improve the nutrition of poor school children, enhance active learning capacity and increase school attendance. It provides a free daily meal to pupils in the poorest 60 per cent of schools (quintile 1 to 3). The grant’s purpose has been expanded to include deworming of learners without incurring a change in its 2015 MTEF allocations. This expansion will be funded through the grant’s nutrition and food production component. The grant is allocated R18 billion over the MTEF period. The baseline has not been reduced.

The maths, science and technology grant has been created by merging the Dinaledi schools grant with the technical secondary schools recapitalisation grant. By combining these similar and overlapping programmes, they can be better administered and expanded to reach more schools. The new grant’s baseline is the sum of the baseline allocations for the two previous grants after 1 per cent has been removed to fund improved administration of the grant at national level. The baseline reduction on this grant in 2015/16 is R8.3 million. It is allocated R1.1 billion over the 2015 MTEF period.

The HIV and Aids (life skills education) programme grant provides for life skills training and sexuality and HIV/AIDS education in primary and secondary schools. It is fully integrated into the school system, with learner and teacher support materials provided for Grades 1 to 9. The baseline reduction on this grant in 2015/16 is R5.3 million. It is allocated R697.2 million over the MTEF period.

The school infrastructure backlogs grant is an indirect grant to provinces that was introduced in 2011 as a temporary, high-impact grant. The national Department of Basic Education uses this grant to build and upgrade schools on behalf of provinces to address inappropriate structures and access to basic services. Due to the grant’s lack of spending, R297 million has been reprioritised over the MTEF period to offset the impact of the baseline reductions on the occupational-specific dispensation for education sector therapists grant, the further education and training colleges grant and the national school nutrition programme grant. The grant is allocated R7 billion over the next three years.

The occupational-specific dispensation for education sector therapists grant provides funds for provinces to implement the occupation-specific dispensation agreement for therapists, counsellors and psychologists in the education sector. The grant is allocated for two years (2014/15 and 2015/16) while back-pay is being funded and new remuneration levels are normalised. No baseline reduction has been effected on this grant. From 2016/17, the funds will be allocated as part of the provincial equitable share. The grant has been allocated R67 million for its last year in 2015/16.

Cooperative governance grant

The provincial disaster grant is administered by the National Disaster Management Centre in the Department of Cooperative Governance and is unallocated at the start of the financial year. The grant allows for an immediate (in-year) release of funds to be disbursed by the National Disaster Management Centre after a disaster is declared, without the need for the transfers to be gazetted first. The reconstruction of infrastructure damaged by disasters is funded separately through ring-fenced allocations in sector grants. Due to past underspending on this grant, R298.5 million has been reprioritised out of the grant over the 2015 MTEF period. To ensure that sufficient funds are available in the event of a disaster, section 26 of the 2015 Division of Revenue Bill allows for funds allocated to the municipal disaster grant to be transferred to provinces if funds in the provincial disaster grant have already been exhausted, and vice versa. The bill also allows for more than one transfer to be made to areas affected by disasters so that an initial payment for emergency aid can be made before a full assessment of damages and costs has been completed. The baseline reduction on this grant in 2015/16 is R2.6 million. Over the MTEF period, R338.2 million is available for disbursement through this grant.

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Health grants

The national tertiary services grant provides strategic funding to enable provinces to plan, modernise and transform tertiary hospital service delivery in line with national policy objectives. The grant operates in 33 hospitals across the nine provinces. The urban areas of Gauteng and the Western Cape receive the largest shares of the grant because they provide the largest proportion of high-level, sophisticated services for the benefit of the country’s health sector. The baseline reduction on this grant in 2015/16 is R237.9 million. The grant is allocated R32.8 billion over the MTEF period.

The health facility revitalisation grant funds the construction and maintenance of health infrastructure. It was created in 2013/14 through the merger of three previous grants. The grant funds a wide range of health infrastructure projects, including large projects to modernise hospital infrastructure and equipment, general maintenance and infrastructure projects at smaller hospitals, and the refurbishment and upgrading of nursing colleges and schools. The baseline reduction on this grant in 2015/16 is R122.8 million. The grant totals R16.6 billion over the MTEF period, which includes R17.8 million ring-fenced to repair clinics damaged by natural disasters.

Similar to the reforms to the education infrastructure grant discussed above, a two-year planning process is now required for provinces to access this grant. The national Department of Health and the National Treasury conducted an assessment of the provinces’ infrastructure plans, followed by a moderation process between the national departments, provincial treasuries and provincial departments of health to agree on the final scores. Provinces had to obtain a minimum score of 60 per cent to qualify for the incentive. Table W1.23 sets out the final score and the incentive allocation per province.

Table W1.23 Health facility revitalisation grant allocations

	User Asset Management Plan assessment			2015/16						Final allocation for  2015/16
R million				Basic component		Incentive component		Disaster Recovery funds
Eastern Cape		71	%		451		139		2		592
Free State		52	%		565		—		—		565
Gauteng		59	%		314		—		—		314
KwaZulu-Natal		66	%		1 100		129		—		1 230
Limpopo		58	%		187		—		7		194
Mpumalanga		57	%		287		—		1		288
Northern Cape		70	%		456		137		—		594
North West		61	%		569		120		7		695
Western Cape		76	%		655		149		—		804
Total					4 585		674		17		5 276

Source: National Treasury

The national Department of Health is reviewing the health facility revitalisation grant formula for outer-year allocations, so changes should be expected in the indicative allocations for 2016/17 and 2017/18. Allocations for the incentive component in the outer years are shown as unallocated.

The health professions training and development grant funds the training of health professionals, and the development and recruitment of medical specialists. It enables the shifting of teaching activities from central to regional and district hospitals. The baseline reduction on this grant in 2015/16 is R53.9 million. The grant is allocated R7.5 billion over the medium term.

The comprehensive HIV and Aids grant supports HIV/AIDS prevention programmes and specific interventions, including voluntary counselling and testing, prevention of mother-to-child transmission, post-exposure prophylaxis, antiretroviral treatment and home-based care. In addition to substantial increases to this grant and the provincial equitable share over previous MTEF periods, no baseline reduction has been effected on this grant and R1.2 billion is added in the baseline in 2017/18 to cover the increased antiretroviral treatment take-up rate. Because funds from this grant are used to pay for a significant number of tests conducted by the NHLS, R691.2 million has been taken out of this grant over the MTEF period as part of the change in funding arrangements for the NHLS described above. This brings the baseline to R46.6 billion over the MTEF period, with average annual growth of 12.3 per cent.

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2015 BUDGET REVIEW

The national health insurance grant funds the national health insurance pilots introduced in 2012/13, which aim to strengthen primary healthcare for the implementation of national health insurance. Ten districts have been selected as pilot sites to test interventions that aim to strengthen health systems and improve performance. The baseline reduction on this grant in 2015/16 is R1.9 million. Over the 2015 MTEF period, the grant has been allocated R227.6 million. This grant is complemented by the national health insurance component within the national health grant.

The national health grant is an indirect grant introduced in 2013/14, which is spent by the Department of Health on behalf of provinces. The grant has three components, one to support infrastructure projects, a second to support the national health insurance scheme pilot sites, and a third to support the rollout of the human papillomavirus vaccine. The infrastructure component will be used to accelerate construction, maintenance, upgrades and rehabilitation for new and existing health infrastructure. The second component will be used to contract general practitioners from the private sector for national health insurance sites. It will also support 10 central hospitals to strengthen their patient information systems and develop and pilot alternative hospital reimbursement tools. Funds for exploring the use of diagnostic-related groups to structure health budgets has been shifted from the national health insurance component of the indirect national health grant to the Department of Health’s core budget. The human papillomavirus vaccine component is allocated for two years (2014/15 and 2015/16), and will be used to support provincial health departments with the rollout of the vaccine. Funds for the vaccine have been added to the provincial equitable share in 2016/17. A total of R352.7 million was reprioritised from this grant to offset the baseline reductions that would have been effected on the comprehensive HIV and Aids grant. The national health grant is allocated R4 billion over the MTEF period.

Human settlements grant

The human settlements development grant seeks to establish habitable, stable and sustainable human settlements in which all citizens have access to social and economic amenities. This grant is allocated using a formula with three components:

• The first component shares 70 per cent of the total allocation between provinces in proportion to their share of the total number of households living in inadequate housing. Data from the 2011 Census is used for the number of households in each province living in informal settlements, shacks in backyards and traditional dwellings. Not all traditional dwellings are inadequate, which is why information on the proportion of traditional dwellings per province with damaged roofs and walls from the 2010 General Household Survey is used to adjust these totals so that only traditional dwellings that provide inadequate shelter are counted in the formula.

• The second component determines 20 per cent of the total allocation based on the share of poor households in each province. The number of households with an income of less than R1 500 per month is used to determine 80 per cent of the component and the share of households with an income of between R1 500 and R3 500 per month is used to determine the remaining 20 per cent. Data used in this component comes from the 2011 Census.

• The third component, which determines 10 per cent of the total allocation, is shared in proportion to the number of people in each province, as measured in the 2011 Census.

In addition to the allocations determined through the formula, a total of R3.3 billion is ring-fenced over the 2015 MTEF period to upgrade human settlements in mining towns in six provinces. These allocations respond to areas with significant informal settlement challenges, with a high proportion of economic activity based on the natural resources sector. A total of R740.1 million is also ring-fenced over the MTEF period to repair infrastructure damaged by natural disasters.

The baseline reduction on this grant in 2015/16 is R411.4 million. A further R240 million over the 2015 MTEF period has been reprioritised from the grant to the Housing Development Agency, which is expanding its mandate to include some of the planning and project development work that was previously carried out by provinces. The grant’s allocation totals R59.1 billion over the medium term.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Public works grants

The expanded public works programme integrated grant for provinces incentivises provincial departments to use labour-intensive methods in infrastructure, environmental and other projects. Grant allocations are determined upfront based on the performance of provincial departments in meeting job targets in the preceding financial year. The baseline reduction on this grant in 2015/16 is R5.96 million. It is allocated R1.2 billion over the MTEF period.

The social sector expanded public works programme incentive grant for provinces rewards provinces for creating jobs in the preceding financial year in the areas of home-based care, early childhood development, adult literacy and numeracy, community safety and security, and sports programmes. The grant’s allocation model incentivises provincial departments to participate in the Expanded Public Works Programme and measures the performance of each province relative to its peers, providing additional incentives to those that perform well. The baseline reduction on this grant in 2015/16 is R8 million. The grant is allocated R985.8 million over the MTEF period.

Social development grant

The substance abuse treatment grant aims to build public substance abuse treatment facilities in the four provinces that do not already have such facilities: the Eastern Cape, the Free State, the Northern Cape and the North West. The grant is administered by the Department of Social Development and is expected to run for two more years before it is incorporated into the provincial equitable share in 2017/18. The grant has adopted the processes implemented for the education infrastructure grant and the health facility revitalisation grant to streamline the process of planning and building these facilities, although the allocation criteria for the grant remains unchanged. No baseline reduction has been effected on this grant. It has been allocated R95 million over the 2015 MTEF period.

Sport and recreation South Africa grant

The mass participation and sport development grant aims to increase and sustain mass participation in sport and recreational activities in the provinces, with greater emphasis on provincial and district academies. The baseline reduction on this grant in 2015/16 is R12.5 million. It is allocated R1.7 billion over the MTEF period.

Transport grants

The public transport operations grant subsidises commuter bus services. It supports provinces to ensure that contractual obligations are met and services are efficiently provided. The public transport contracting and regulatory functions may be assigned to certain metropolitan municipalities during 2015/16. If this takes place, funds for this grant will be transferred directly to the assigned municipality. The baseline reduction on this grant in 2015/16 amounted to R113.3 million. The grant is allocated R15.6 billion over the MTEF period.

The provincial roads maintenance grant consists of three components. The largest component enables provinces to expand their maintenance activities. The other components allow provinces to repair roads damaged by floods and rehabilitate roads that are heavily used in support of electricity production. Grant allocations are determined using a formula based on provincial road networks, road traffic and weather conditions. These factors reflect the different costs of maintaining road networks in each province. The grant requires provinces to follow best practices for planning and to use and regularly update road asset management systems.

In future the grant will be allocated based on performance. The model’s indicators – vehicle operating costs and remaining asset lifespan – have been finalised and the performance component will inform future grant allocations. An amount of R149 million has been reprioritised out of this grant over the 2015 MTEF

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2015 BUDGET REVIEW

period in anticipation of the transfer of the R573 Moloto Road from provinces to SANRAL. The agency will perform urgent upgrades to improve the road’s safety as part of its non-tolled network once the provincial governments in Gauteng, Mpumalanga and Limpopo formally transfer the road. The baseline reduction on this grant in 2015/16 is R219.1 million. The total allocation for the MTEF period is R30.8 billion, including ring-fenced allocations of R1 billion for the repair of infrastructure damaged by floods.

¢ Part 5: Local government fiscal framework and allocations

The local government fiscal framework responds to the constitutional assignment of powers and functions to this sphere of government. The framework refers to all resources available to municipalities to meet their expenditure responsibilities. National transfers account for a relatively small proportion of the local government fiscal framework, with the majority of local government revenues being raised by municipalities themselves through their substantial revenue-raising powers, including property rates and service charges. However, the proportion of revenue from transfers and own revenues varies dramatically across municipalities, with poor rural municipalities receiving most of their revenue from transfers, while urban municipalities raise the majority of their own revenues. This differentiation in the way municipalities are funded will continue in the period ahead.

The 2015 MTEF does not significantly alter the structure of transfers to local government. Instead, it makes several small changes as part of the ongoing policy reforms and baseline reductions outlined in the 2014 Medium Term Budget Policy Statement. Despite the reductions, allocations to municipalities continue to grow in real terms, with significant growth in water and sanitation and electricity grants. This emphasis on basic services aligns with the back-to-basics approach to local government announced by the Minister of Cooperative Governance in 2014. The local government fiscal framework as a whole – including all transfers and own revenues – is structured to support the achievement of the National Development Plan’s goals.

The first phase of the review of local government infrastructure grants is complete and its outcomes have begun to be implemented. The recommendation to rationalise grants, for example, has led to the consolidation of two public transport grants to cities. Elsewhere, the emphasis on enhanced life-cycle asset management is reflected in new conditions allowing certain grant funds to be used for refurbishment. Planned changes to individual conditional grants over the 2015 MTEF period are discussed in detail below and more extensive reforms will follow the second phase of the review.

This section outlines the transfers made to local government and how these funds are distributed between municipalities. Funds raised by national government are transferred to municipalities through conditional and unconditional grants. National transfers to municipalities are published to enable them to plan fully for their 2015/16 budgets, and to promote better accountability and transparency by ensuring that all national allocations are included in municipal budgets.

Transfers to local government

Over the 2015 MTEF period, R313.7 billion will be transferred directly to local government and a further R31.9 billion has been allocated to indirect grants. Direct transfers to local government in 2015/16 account for 9.1 per cent of national government’s non-interest expenditure. When indirect transfers are added to this, total spending on local government increases to 10 per cent of national non-interest expenditure.

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Table W1.24 Transfers to local government, 2011/12 – 2017/18

	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
							Revised
R million	Outcome						estimate		Medium-term estimates
Direct transfers		68 251		76 430		82 836		89 076		99 753		103 936		110 017
Equitable share and related		33 173		37 139		38 964		43 290		50 208		52 869		55 512
Equitable share formula1		29 289		32 747		34 268		38 210		45 052		47 419		49 794
RSC levy replacement		3 544		3 733		3 930		4 146		4 337		4 567		4 795
Support for councillor remuneration and ward committees		340		659		766		935		819		883		923
General fuel levy sharing		8 573		9 040		9 613		10 190		10 659		11 224		11 785
Conditional grants		26 505		30 251		34 258		35 595		38 887		39 844		42 720
Infrastructures		24 643		27 923		31 991		33 345		36 440		37 254		39 911
Capacity building and other		1 862		2 329		2 267		2 250		2 447		2 590		2 809
Indirect transfers		2 660		4 548		5 523		8 536		10 395		10 634		10 916
Infrastructure		2 541		4 548		5 523		8 536		10 395		10 634		10 916
Capacity building and other		119		—		—		—		—		—		—
Total		70 911		80 978		88 359		97 612		110 149		114 570		120 933

1. Outcome figures for the equitable share reflect amounts transferred after funds have been withheld to offset underspending by municipalities on conditional grants

Source: National Treasury

Changes to local government allocations

Direct transfers to local government will grow at an annual average rate of 7.3 per cent over the 2015 MTEF period. As discussed in Chapter 5 of the Budget Review, a reduced expenditure ceiling is being applied proportionately across all three spheres of government. No reductions are made to the local government equitable share, which continues to experience substantial growth in real terms in 2015/16. This protects the main source of funding for free basic services in municipalities. All conditional grants have been reduced by between 0.9 per cent and 5.5 per cent of each grant’s baseline allocation in 2015/16, with larger reductions on slow-spending grants and non-infrastructure grants. Grant administrators and municipalities should be able to absorb the impact of these reductions without having to reduce planned outputs. Achieving this will require greater efficiency in spending. Details of each conditional grant’s reductions are provided in Table W1.25.

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2015 BUDGET REVIEW

Table W1.25 Baseline reductions to local government allocations announced in the 2014 MTBPS

	2015/16		2016/17
R million	Medium-term estimates
Infrastructure conditional grants		-623		-1 000
Municipal infrastructure		-142		-219
Municipal water infrastructure		-76		-116
Urban settlements development		-100		-156
Integrated national electrification programme		-76		-129
Public transport network		-188		-304
Neighbourhood development partnership		-22		-38
Integrated city development		-15		-26
Rural roads asset management systems		-1		-1
Rural households infrastructure		-3		-11
Capacity building and other conditional grants		-297		-370
Municipal systems improvement		-10		-16
Local government financial management		-17		-29
Municipal human settlements capacity		-200		-200
Water services operating subsidy		-17		-29
Expanded public works programme		-23		-42
Infrastructure skills development		-5		-8
Energy efficiency and demand-side management		-10		-18
Municipal disaster		-15		-26
Total reduction to baseline		-921		-1 370

Source: National Treasury

In addition to the baseline reductions discussed above, several other reprioritisations and changes to the structure of conditional grants were agreed to during the budget process. These are summarised in Table W1.26.

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Table W1.26 Revisions to direct and indirect transfers to local government, 2015/16 – 2017/18

							2015 MTEF
R million	2015/16		2016/17		2017/18		Total revisions
Technical adjustments		—		—		—		—
Direct transfers		529		30		22		581
Municipal water infrastructure		500		—		—		500
Neighbourhood development partnership		29		30		22		81
Indirect transfers		-529		-30		-22		-581
Municipal water infrastructure		-500		—		—		-500
Neighbourhood development partnership		-29		-30		-22		-81
Additions to baselines		906		890		1 050		2 846
Direct transfers		206		190		550		946
Municipal demarcation transition		39		50		50		139
Municipal disaster recovery		167		140		—		307
Municipal water infrastructure		—		—		500		500
Indirect transfers		700		700		500		1 900
Regional bulk infrastructure		700		700		—		1 400
Municipal water infrastructure		—		—		500		500
Reductions to baseline		-1 096		-1 569		-223		-2 887
Direct transfers		-1 029		-1 470		-100		-2 599
Impact of reductions to baseline announced in 2014 MTBPS (see detail in Table W1.25)		-921		-1 370		—		-2 291
Municipal disaster		-100		-100		-100		-300
Expanded public works programme integrated grant for municipalities		-8		—		—		-8
Indirect transfers		-67		-99		-123		-288
Integrated national electrification programme		-67		-99		-123		-288
Total change to local government allocations
Change to direct transfers		-294		-1 250		472		-1 072
Change to indirect transfers		104		571		355		1 031
Net change to local government allocations		-190		-679		827		-41

Source: National Treasury

An addition of R2.4 billion has been made to the municipal water infrastructure grant and the regional bulk infrastructure grant over the MTEF period to accelerate the provision of basic water supply to all households and improve the state of water services infrastructure nationwide. A new grant of R139 million will subsidise the additional institutional and administrative costs arising from municipal mergers due to come into effect at the time of the 2016 local government elections, as announced by the Municipal Demarcation Board.

Other changes to local government allocations are more technical and reflect the shift of funds between direct and indirect grants, and the impact of the national macro-organisation of the state that followed the 2014 national elections. For example, the sanitation function, including all sanitation-related grants, has shifted from the Department of Human Settlements to the Department of Water and Sanitation.

After accounting for all reductions and additions, direct transfers decrease by a net amount of R1.1 billion over the medium term when compared to the indicative baseline published in the 2014 Budget. Indirect transfers to local government (allocations spent by national departments on behalf of municipalities) increase by R1 billion over the MTEF period, bringing the net decrease in local government allocations to R41 million. Despite this small baseline reduction, total allocations to local government will experience above-inflation growth over the MTEF period, increasing by R12.5 billion in 2015/16 alone.

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The local government equitable share

In terms of section 227 of the Constitution, local government is entitled to an equitable share of nationally raised revenue to enable it to provide basic services and perform its allocated functions. The local government equitable share is an unconditional transfer that supplements the revenue that municipalities can raise themselves (including property rates and service charges). The equitable share provides funding for municipalities to deliver free basic services to poor households and subsidises the cost of administration and other core services for those municipalities that have the least potential to cover these costs from their own revenues.

Over the 2015 MTEF period, the local government equitable share, including the RSC/JSB levies replacement grant and special support for councillor remuneration and ward committees, amounts to R158.6 billion – R50.2 billion in 2015/16, R52.9 billion in 2016/17, and R55.5 billion in 2017/18.

Formula for allocating the local government equitable share

The share of national revenue allocated to local government through the equitable share is determined in the national budget process and endorsed by Cabinet (the vertical division). Local government’s equitable share is divided among the country’s 278 municipalities using a formula (the horizontal division) to ensure objectivity.

A new formula for the local government equitable share was introduced in 2013/14, following a review of the previous formula by the National Treasury, the Department of Cooperative Governance and SALGA, in partnership with the FFC and Statistics South Africa. The new formula is based on data from the 2011 Census, which resulted in major changes to some allocations. As a result, new allocations are being phased in over a five-year period, ending in 2017/18. The local government equitable share formula’s principles and objectives were set out in detail in the Explanatory Memorandum to the 2013 Division of Revenue.

Structure of the local government equitable share formula

The formula uses demographics and other data to determine each municipality’s share of the local government equitable share. It has three parts, made up of five components:

• The first part of the formula consists of the basic services component, which provides for the cost of free basic services for poor households.

• The second part enables municipalities with limited resources to afford basic administrative and governance capacity, and perform core municipal functions. It does this through three components:

• The institutional component provides a subsidy for basic municipal administrative costs.

• The community services component provides funds for other core municipal services not included under basic services.

• The revenue adjustment factor ensures that funds from this part of the formula are only provided to municipalities with limited potential to raise their own revenue. Municipalities that are least able to fund these costs from their own revenues should receive the most funding.

• The third part of the formula provides predictability and stability through the correction and stabilisation factor, which ensures that all of the formula’s guarantees can be met.

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Each of these components is described in detail in the subsections that follow. The formula’s structure is summarised in the box.

Structure of the local government equitable share formula

LGES = BS + (I + CS)xRA ± C

where

LGES is the local government equitable share

BS is the basic services component

I is the institutional component

CS is the community services component

RA is the revenue adjustment factor

C is the correction and stabilisation factor

The basic services component

This component helps municipalities provide free basic water, sanitation, electricity and refuse removal services to households that fall below an affordability threshold. Following municipal consultation, the formula’s affordability measure (used to determine how many households need free basic services) is based on the level of two state old age pensions. When the 2011 Census was conducted, the state old age pension was worth R1 140 per month, which means that two old age pensions were worth R2 280 per month. A monthly household income of R2 300 per month (in 2011) has therefore been used to define the formula’s affordability threshold. Statistics South Africa has calculated that 59 per cent of all households in South Africa fall below this income threshold. The threshold is not an official poverty line or a required level to be used by municipalities in their own indigence policies – if municipalities choose to provide fewer households with free basic services than they are funded for through the local government equitable share, then their budget documentation should clearly set out why they have made this choice and how they have consulted with their community during the budget process.

The number of households per municipality, and the number below the poverty threshold, is updated annually based on the growth experienced in the period between the 2001 and 2011 Censuses. Provincial growth rates are then rebalanced to match the average annual provincial growth reported between 2002 and 2013 in the annual General Household Survey. Statistics South Africa has advised the National Treasury that, in the absence of official municipal household estimates, this is a credible method of estimating the household numbers per municipality needed for the formula. Statistics South Africa is researching methods for producing municipal-level data estimates, which may be used to inform equitable share allocations in future.

The basic services component provides a subsidy of R313.76 per month in 2015/16 for the cost of providing basic services to each of these households. The subsidy includes funding for the provision of free basic water (6 kilolitres per poor household per month), energy (50 kilowatt-hours per month) and sanitation and refuse (based on service levels defined by national policy). The monthly amount provided for each service is detailed in Table W1.27 and includes an allocation of 10 per cent for service maintenance costs.

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Table W1.27 Amounts per basic service allocated through the local government equitable share

	Allocation per household below affordability threshold (Rands per month)						Total allocation per service
	Operations		Maintenance		Total		(R millions)
Energy		59.57		6.62		66.19		7 122
Water		89.77		9.97		99.75		10 732
Sanitation		72.37		8.04		80.41		8 651
Refuse		60.67		6.74		67.41		7 252
Total basic services		282.38		31.38		313.76		33 757

Source: National Treasury

The formula uses the fairest estimates of the average costs of providing each service that could be derived from available information. More details of how the costs were estimated can be found in the discussion paper on the proposed structure of the new local government equitable share formula (available at: http://mfma.treasury.gov.za/Media_Releases/LGESDiscussions/Pages/default.aspx).

The per household allocation for each of the basic services in Table W1.27 is updated annually based on the following:

• The electricity cost estimate is made up of bulk and other costs. Bulk costs are updated based on the multi-year price determination approved by the National Energy Regulator of South Africa (NERSA). In October 2014, NERSA granted Eskom a 12.69 per cent increase in electricity prices in 2015/16, which has been factored into the equitable share’s cost estimate. Bulk electricity prices for 2016/17 and 2017/18 are based on NERSA’s approved multi-year price determination increase of 8 per cent per year. If NERSA approves further increases, the revised amounts will be taken into account in future formula updates. Other electricity costs are updated based on the National Treasury’s inflation projections in the 2014 Medium Term Budget Policy Statement.

• The water cost estimate is also made up of bulk and other costs. Bulk costs are updated based on the weighted average increase in bulk tariffs charged by water boards (although not all municipalities purchase bulk water from water boards, their price increases serve as a proxy for the cost increases for all municipalities). The approved weighted average tariff increase for bulk water from water boards in 2014/15 was 8.3 per cent. Other costs are updated based on the National Treasury’s inflation projections in the 2014 Medium Term Budget Policy Statement.

• The costs for sanitation and refuse are updated based on the National Treasury’s inflation projections in the 2014 Medium Term Budget Policy Statement.

The basic services component allocation to each municipality is calculated by multiplying the monthly subsidy per household by the updated number of households below the affordability threshold in each municipal area.

The basic services component

BS = basic services subsidy x number of poor households

Funding for each basic service is allocated to the municipality (metro, district or local) that is authorised to provide that service. If another municipality provides a service on behalf of the authorised municipality, it must transfer funds to the provider in terms of section 29 of the Division of Revenue Act. The basic services component is worth R33.8 billion in 2015/16 and accounts for 74.9 per cent of the value of the local government equitable share.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The institutional component

To provide basic services to households, municipalities need to be able to run a basic administration. Most municipalities should be able to fund the majority of their administration costs with their own revenue. But, because poor households are not able to contribute in full, the equitable share includes an institutional support component to help meet some of these costs. To ensure that this component supports municipalities with limited own-revenue-raising abilities, a revenue adjustment factor is applied so that a larger proportion of the allocation is received by municipalities with less potential to raise their own revenue. The revenue adjustment factor is described in more detail later in this annexure.

This component consists of a base allocation of R5.6 million, which goes to every municipality, and an additional amount that is based on the number of council seats in each municipality. This reflects the relative size of a municipality’s administration and is not intended to fund the costs of councillors only (the number of seats recognised for the formula is determined by the Minister of Cooperative Governance and Traditional Affairs). The base component acknowledges that there are some fixed costs that all municipalities face.

The institutional component

I = base allocation + [allocation per councillor * number of council seats]

The institutional component accounts for 10 per cent of the equitable share formula and is worth R4.5 billion in 2015/16. This component is also complemented by special support for councillor remuneration in poor municipalities, which is not part of the equitable share formula (described in more detail later).

The community services component

This component funds services that benefit communities rather than individual households (which are provided for in the basic services component). It includes funding for municipal health services, fire services, municipal roads, cemeteries, planning, storm water management, street lighting and parks. To ensure this component assists municipalities with limited own-revenue-raising abilities, a revenue adjustment factor is applied so that these municipalities receive a larger proportion of the allocation.

The allocation for this component is split between district and local municipalities, because both provide community services. In 2015/16, the allocation to district and metropolitan municipalities for municipal health and related services is R7.81 per household per month. The component’s remaining funds are allocated to local and metropolitan municipalities based on the number of households in each municipality.

The community services component

CS = [municipal health and related services allocation x number of households] + [other services allocation x number of households]

The community services component accounts for 15 per cent of the equitable share formula and is worth R6.8 billion in 2015/16.

The revenue adjustment factor

The Constitution gives local government substantial own-revenue-raising powers (particularly through property rates and surcharges on services). Municipalities are expected to fund most of their own administrative costs and cross-subsidise some services for indigent residents. Given the varied levels of poverty across South Africa, the formula does not expect all municipalities to be able to generate similar amounts of own revenue. A revenue adjustment factor is applied to the institutional and community services components of the formula to ensure that these funds assist municipalities that are least likely to be able to fund these functions from their own revenues.

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To account for the varying fiscal capacities of municipalities, this component is based on a per capita index using the following factors from the 2011 Census:

• Total income of all individuals/households in a municipality (as a measure of economic activity and earning)

• Reported property values

• Number of households on traditional land

• Unemployment rate

• Proportion of poor households as a percentage of the total number of households in the municipality.

Based on this index, municipalities were ranked according to their per capita revenue-raising potential. The top 10 per cent of municipalities have a revenue adjustment factor of zero, which means that they do not receive an allocation from the institutional and community services components. The 25 per cent of municipalities with the lowest scores have a revenue adjustment factor of 100 per cent, which means that they receive their full allocation from the institutional and community services components. Municipalities between the bottom 25 per cent and top 10 per cent have a revenue adjustment factor applied on a sliding scale, so that those with higher per capita revenue-raising potential receive a lower revenue adjustment factor and those with less potential receive a larger revenue adjustment factor.

The revenue adjustment factor is not based on the actual revenues municipalities collect. This component therefore does not create any perverse incentive for municipalities to under-collect potential own revenues to receive a higher equitable share.

Because district municipalities do not collect own revenues from property rates, the revenue adjustment factor applied to these municipalities is based on the RSC/JSB levies replacement grant allocations. This grant replaces a source of own revenue previously collected by district municipalities and it is still treated as an own-revenue source in many respects. Similar to the revenue adjustment factor for local and metropolitan municipalities, the factor applied to district municipalities is based on their per capita RSC/JSB levies replacement grant allocations. District municipalities are given revenue adjustment factors on a sliding scale – those with a higher per capita RSC/JSB levies replacement grant allocation receive a lower revenue adjustment factor, while those with lower allocations receive a larger revenue adjustment factor.

Correction and stabilisation factor

Providing municipalities with predictable and stable equitable allocations is one of the principles of the equitable share formula. Indicative allocations are published for the second and third years of the MTEF period to ensure predictability. To provide stability for municipal planning, while giving national government flexibility to account for overall budget constraints and amend the formula, municipalities are guaranteed to receive at least 90 per cent of the indicative allocation for the middle year of the MTEF period.

A new equitable share formula was introduced in 2013/14 using updated 2011 Census data. As a result, some municipalities will experience large changes in their equitable share allocations. To smooth the impact of these changes and give municipalities time to adjust (both for municipalities with increasing and decreasing allocations), the new allocations are being phased in over five years, from 2013/14 to 2017/18. For municipalities with smaller allocations under the new formula, the phase-in mechanism measures the difference between the municipality’s old and new allocations and closes this gap by 20 per cent each year. This means that in the first year a municipality only experienced a change equivalent to 20 per cent of the gap between their allocations under the old and new formulas, in the second year they completed 40 per cent of the change, in the third year (2015/16) they will complete 60 per cent, in 2016/17 they will complete 80 per cent, and in 2017/18 – the final year of the 2015 MTEF period – their allocation will be determined entirely through the new formula.

To provide for this phase-in approach, while staying within the limits of the equitable share, municipalities with larger allocations will also have their increases phased in over five years. The total top-up amount

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needed to fund the phasing in for municipalities with declining allocations is calculated and deducted from those that do not require a top-up in proportion to their “surplus”. This means that municipalities with larger allocations will have some of those gains delayed over the phase-in period.

Ensuring the formula balances

The formula is structured so that all of the available funds are allocated. The basic services component is determined by the number of poor households per municipality and the estimated cost of free basic services, so it cannot be manipulated. This means that the balancing of the formula to the available resources must take place in the second part of the formula, which includes the institutional and community services components. The formula automatically determines the value of the allocation per council seat in the institutional component and the allocation per household for other services in the community services component to ensure that it balances. Significant increases in the cost of basic service provision – due to escalating bulk electricity prices for example – is fully funded by the formula, but this will result in slower growth in the institutional and community services allocations.

Potential future refinements to the formula

Although the local government equitable share formula has been through extensive consultations and technical work, national government continues to work with stakeholders to improve the formula. Areas of work include:

• Exploring the introduction of factors to account for costs related to the size of the land area served and settlement types in municipalities.

• Developing differentiated costing variables to take account of the different costs of services in various circumstances. SALGA and the FFC have completed the first phase of a project that could provide the basis for calculating such variables in future. This work will continue in 2015/16.

• Exploring the creation of separate sub-components for fire services and municipal health services within the community services component. This would enhance transparency in allocations, although funds for the fire services function would need to be allocated to the municipality (district or local) authorised for this function within a specific area. The process can only be completed after the National Disaster Management Centre has completed its consideration of policy and legislative changes for fire services.

Government is committed to considering all proposed refinements to the formula, but another full review is not envisaged until the current formula has been fully phased in and municipalities have had time to adjust to the new allocations.

Details of new allocations

In addition to the three-year formula allocations published in the Division of Revenue Bill, a copy of the formula, including the data used for each municipality and each component, is published online (http://mfma.treasury.gov.za/Media_Releases/LGESDiscussions/Pages/default.aspx).

Other unconditional allocations

RSC/JSB levies replacement grant

Before 2006, district municipalities raised levies on local businesses through an RSC or JSB levy. This source of revenue was replaced in 2006/07 with the RSC/JSB levies replacement grant, which was allocated to all district and metropolitan municipalities based on the amounts they had previously collected through the levies (the RSC/JSB levies replacement grant for metropolitan municipalities has since been replaced by the sharing of the general fuel levy). The grant’s value increases every year. In 2015/16, the grant increases by 7.4 per cent a year for district municipalities authorised for water and sanitation and 2.5 per cent for unauthorised district municipalities. The different rates recognise the various service delivery responsibilities of these district municipalities.

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Special support for councillor remuneration and ward committees

Councillors’ salaries are subsidised in poor municipalities. The total value of the support provided in 2015/16 is R818.9 million, calculated separately to the local government equitable share and in addition to the funding for governance costs provided in the institutional component. The level of support for each municipality is allocated based on a system gazetted by the Minister of Cooperative Governance and Traditional Affairs, which classifies municipal councils into six grades based on their total income and population size. Special support is provided to the lowest three grades of municipal councils (the smallest and poorest municipalities). During 2014, gradings for all municipalities were recalculated using data from the 2011 Census. The revised gradings, approved by Members of the Executive Council for Cooperative Governance and collated by the national Department of Cooperative Governance, have been used to update the allocations for the 2015 MTEF period. The use of 2011 Census data means that a number of municipalities increased their grading levels and are consequently no longer eligible to receive the special support for councillor remuneration. These funds have been returned to the local government equitable share formula to be allocated to all municipalities.

A subsidy of 90 per cent of the gazetted maximum remuneration for a part-time councillor is provided for every councillor in grade 1 municipalities, 80 per cent for grade 2 municipalities and 70 per cent for grade 3 municipalities. Because the new maximum limits for councillor remuneration had not been gazetted when the 2015/16 allocations were determined, the level of subsidies provided for that year are based on the 2014/15 maximums plus inflation. In addition to this support for councillor remuneration, each local municipality in grades 1 to 3 receives an allocation to provide stipends of R500 per month to 10 members of each ward committee in their municipality. Each municipality’s allocation for this special support is published in the appendices to the Division of Revenue Bill.

Conditional grants to local government

National government allocates funds to local government through a variety of conditional grants. These grants fall into two main groups: infrastructure and capacity building. The total value of conditional grants directly transferred to local government increases from R38.9 billion in 2015/16 to R39.8 billion in 2016/17 and R42.7 billion in 2017/18.

Infrastructure conditional grants to local government

National transfers for infrastructure, including indirect or in-kind allocations to entities executing specific projects in municipalities, amount to R145.5 billion over the 2015 MTEF period.

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Table W1.28 Infrastructure grants to local government, 2011/12 – 2017/18

	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
							Revised
R million	Outcome						estimate		Medium-term estimates
Direct transfers		24 643		27 923		31 991		33 345		36 440		37 254		39 911
Municipal infrastructure		11 443		13 879		14 224		14 429		14 956		15 548		16 435
Municipal water infrastructure		—		—		602		536		1 804		1 186		1 773
Urban settlements development		6 267		7 392		9 077		10 285		10 554		11 076		11 708
Integrated national electrification programme		1 097		1 151		1 635		1 105		1 980		2 036		2 197
Public transport network		4 612		4 884		5 550		5 871		5 953		6 163		6 610
Neighbourhood development partnership		738		578		586		591		607		624		663
Integrated city development		—		—		40		255		251		267		292
Rural roads asset management systems		35		37		52		75		97		102		107
Rural households infrastructure		—		—		107		5		48		113		124
Municipal disaster recovery		450		—		118		194		189		140		—
Indirect transfers		2 541		4 548		5 523		8 536		10 395		10 634		10 916
Integrated national electrification programme		1 165		1 879		2 141		2 948		3 613		3 776		3 946
Neighbourhood development partnership		50		80		55		58		26		22		28
Regional bulk infrastructure		1 260		2 523		3 261		4 005		4 922		5 324		4 855
Municipal water infrastructure		—		—		—		559		792		1 512		2 087
Bucket eradication programme		—		—		—		899		975		—		—
Rural households infrastructure		65		65		65		66		67		—		—
Total		27 184		32 471		37 514		41 881		46 835		47 888		50 826

Source: National Treasury

Municipal infrastructure grant

The largest infrastructure transfer is made through the municipal infrastructure grant, which supports government’s aim to expand service delivery and alleviate poverty. The grant funds the provision of infrastructure for basic services, roads and social infrastructure for poor households in all non-metropolitan municipalities. Although the grant’s baseline reduction amounts to R142.3 million in 2015/16, total allocations still increase to R15 billion in the same year, R15.5 billion in 2016/17 and R16.4 billion in 2017/18.

The Department of Cooperative Governance, which administers the municipal infrastructure grant, conducted a policy review of the grant during 2014. This review collaborated with the review of local government infrastructure grants to make proposals on the grant’s future direction. These changes will be introduced in the 2016 Budget, but the 2015 Budget already makes a significant change through a new condition that allows the grant to be used for refurbishment projects, subject to proof of the asset’s proper maintenance. The grant framework also clarifies that funds can be used to upgrade informal settlements. The condition introduced in the 2014 Budget that municipalities with households served by bucket systems must prioritise sanitation upgrades is retained.

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The municipal infrastructure grant is allocated through a formula with a vertical and horizontal division. The vertical division allocates resources between sectors and the horizontal division takes account of poverty, backlogs and municipal powers and functions in allocating funds to municipalities. The five main components of the formula are described in the box.

Municipal infrastructure grant = C + B + P + E + N

C	Constant to ensure increased minimum allocation for small municipalities (this allocation is made to all municipalities)
B	Basic residential infrastructure (proportional allocations for water supply and sanitation, roads and other services such as street lighting and solid waste removal)
P	Public municipal service infrastructure (ring-fenced for municipal sport infrastructure)
E	Allocation for social institutions and micro-enterprises infrastructure
N	Allocation to the 24 priority districts identified by government

For the 2015 MTEF, the municipal infrastructure grant allocation formula uses data from the 2011 Census. Allocations for basic services sub-components are based on the proportion of the national backlog for that service in each municipality. Other components are based on the proportion of the country’s poor households located in each municipality. Table W1.29 sets out the proportion of the grant accounted for by each component of the formula. The C-component provides a R5 million base to all municipalities receiving municipal infrastructure grant allocations.

Table W1.29 Municipal infrastructure grant allocations per sector

				Proportion of municipal infrastructure grant per sector			Value of component 2015/16 (R  millions)
Municipal infrastructure grant (formula)	Component weights
B-component		75.0	%					10 291
Water and sanitation		72.0	%		54.0	%		7 409
Roads		23.0	%		17.3	%		2 367
Other		5.0	%		3.8	%		515
P-component		15.0	%					2 058
Sports		100.0	%		15.0	%		2 058
E-component		5.0	%		5.0	%		686
N-component		5.0	%		5.0	%		686
Constant								1 235
Total								14 956

Source: National Treasury

Since 2011/12, the P-component (15 per cent of the grant) has been ring-fenced for municipal sport and recreation infrastructure. This continues in the 2015 MTEF.

Urban settlements development grant

The urban settlements development grant is an integrated source of funding to provide infrastructure for municipal services and upgrade urban informal settlements in the eight metropolitan municipalities. The grant is allocated as a supplementary grant to cities (schedule 4 of the Division of Revenue Act), which means that municipalities are expected to use a combination of grant funds and their own revenue to develop urban infrastructure and integrated human settlements. Cities report their progress on these projects against the targets set in their service delivery and budget implementation plans. The grant’s baseline is reduced by R100.4 million in 2015/16, and it is allocated a total of R33.3 billion over the 2015 MTEF period.

Metropolitan municipalities are still required to prioritise the eradication of bucket sanitation backlogs. In addition, new conditions in the framework require that at least 50 per cent of grant funds be used to upgrade informal settlements.

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Integrated cities development grant

The grant provides a financial incentive for metropolitan municipalities to focus their use of infrastructure investment and regulatory instruments to achieve more compact and efficient urban spaces. Cities are required to submit built environment performance plans for this grant, including a brief strategic overview of the city’s plans for the built environment, with a focus on the infrastructure grants that form part of the capital budget. The plan should show how the municipality will ensure alignment between its different grant-funded programmes and how it will address related policy and regulatory matters. All projects funded by sector-specific infrastructure grants, including the urban settlements development grant, the public transport infrastructure grant, the neighbourhood development partnership grant and the integrated national electrification programme grant, must form part of a metropolitan municipality’s built environment performance plan. The grant’s baseline reduction amounts to R14.7 million in 2015/16 and it is allocated R810.2 million over the 2015 MTEF period.

Neighbourhood development partnership grant

The neighbourhood development partnership grant supports cities in developing and implementing urban network plans. The aim is to create a platform for third-party public and private investment, which will improve the quality of life in township urban hubs. Projects in towns and rural areas are implemented in conjunction with the Department of Rural Development and Land Reform to support catalytic projects in these areas. The baseline reduction on this grant in 2015/16 is R22.1 million. The grant is allocated R2 billion over the MTEF period, which consists of R1.9 billion for the capital (direct) grant and R75.8 million for the technical assistance (indirect) grant.

Municipal water infrastructure grant

This grant was introduced in 2013/14 to accelerate the delivery of clean water to communities that do not have access to basic water services. The grant, administered by the Department of Water and Sanitation, provides funding for various projects, including the construction of new infrastructure and the refurbishment and extension of existing water schemes. It has both direct and indirect components. In areas where municipalities have the capacity to implement projects themselves, funds will be transferred through a direct grant. In other areas, the Department of Water and Sanitation will implement projects on behalf of municipalities through an indirect grant. As with other indirect grants, the national department is required to transfer skills to the municipalities benefiting from the indirect grant, so that they will be able to implement projects themselves in future. In 2015/16, R500 million is shifted from the indirect to the direct portion of the grant as municipal capacity to deliver improves. Following a reprioritisation within the department, an addition of R1 billion will be made available in 2017/18, which is split equally between the direct and indirect components.

The grant’s baseline is reduced by R76.3 million in 2015/16. It has a total allocation of R9.2 billion over the 2015 MTEF period, consisting of R4.8 billion and R4.4 billion for the direct and indirect components respectively.

Following the outcomes of the first phase of the local government infrastructure grant review, the municipal water infrastructure grant is one of several water and sanitation grants that will be restructured over the 2015 MTEF period. This grant is expected to merge with other water and sanitation grants for a more consolidated water services funding package to municipalities. Further details will be announced in the 2015 Medium Term Budget Policy Statement.

Regional bulk infrastructure grant

This indirect grant supplements the financing of the social component of regional bulk water and sanitation infrastructure. It targets projects that cut across several municipalities or large bulk projects within one municipality. The grant funds the bulk infrastructure needed to provide reticulated water and sanitation services to individual households. It may also be used to appoint service providers to carry out feasibility studies, related planning or management studies for infrastructure projects. A parallel programme on the budget of the Department of Water and Sanitation also funds water boards for the construction of bulk

43

2015 BUDGET REVIEW

infrastructure. Though not part of the division of revenue, these projects still form part of the Department of Water and Sanitation’s larger programme of subsidising the construction of regional bulk infrastructure for water and sanitation.

Following reprioritisation in the department, additions of R700 million in 2015/16 and a further R700 million in 2016/17 have been made to the grant, bringing its total value to R15.1 billion over the 2015 MTEF period.

Rural households infrastructure grant

The rural households infrastructure grant funds the provision of on-site solutions for sanitation services for rural households where piped infrastructure is not feasible. The grant is now managed by the Department of Water and Sanitation, as a result of the shift of the sanitation function from the Department of Human Settlements. The grant has both direct and indirect components. In areas where municipalities have the capacity to implement projects themselves, funds will be transferred through the direct grant. In other areas, the Department of Water and Sanitation will implement projects on behalf of municipalities through an indirect grant. The baseline reduction on this grant in 2015/16 amounts to R2.8 million. It is allocated R353.2 million over the 2015 MTEF period and will be subject to the aforementioned restructuring of water and sanitation grants.

Bucket eradication programme grant

The bucket eradication programme grant – previously the indirect human settlements development grant to provinces under the Department of Human Settlements – is an indirect grant to municipalities administered by the Department of Water and Sanitation. It retains the same purpose of eradicating bucket sanitation systems, but it is now better aligned with functional arrangements, given that sanitation is a municipal function. The bucket eradication programme was established in 2014 for a period of two years, which is why this grant has an allocation of R975.4 million for 2015/16 only. Several other grants also fund the upgrading of sanitation backlogs, including the municipal infrastructure grant, the urban settlements development grant and the rural households infrastructure grant.

Integrated national electrification programme

The national electrification programme has been instrumental in providing 85 per cent of all households with access to electricity, as reported in the 2011 Census. To sustain progress in connecting poor households to electricity, government will spend R17.5 billion over the next three years on the programme, representing average annual growth of 14.9 per cent over the MTEF period. Of this, municipalities are allocated R6.2 billion and Eskom is allocated R11.3 billion to spend on behalf of municipalities through an indirect grant. The baseline reduction on this grant in 2015/16 amounts to R75.7 million.

Public transport network grant

The public transport network grant, administered by the Department of Transport, helps cities create or improve public transport systems in line with the National Land Transport Act (2009) and the Public Transport Strategy. This includes all integrated public transport network infrastructure, such as bus rapid transit systems, conventional bus services and upgrades for pedestrian and cycling infrastructure. It also subsidises the operations of these services. The grant is allocated R18.7 billion over the 2015 MTEF period.

This grant has been created through the merger of two separate grants: the public transport network operations grant and the public transport infrastructure grant, for operational and infrastructure expenditure respectively. This consolidation is the first step towards changing the implicit incentives in the grant structure, so that cities are encouraged to plan for systems that will meet their public transport needs while still being financially sustainable over the long term. The grant will still have separate operational and capital windows but it will be easier to shift funds between these windows. As a result, cities will have to trade-off increased capital funding from the grant against the need to make greater contributions from their own funds to the operating costs of their networks. During 2015, the grant’s allocation method and rules will be further refined as part of the review of local government infrastructure grants.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

Rural roads asset management systems grant

The rural roads asset management systems grant is administered by the Department of Transport to improve rural road infrastructure. The grant funds the collection of data on the condition and usage of rural roads in line with the Road Infrastructure Strategic Framework for South Africa. This data will guide investments to maintain and improve these roads. District municipalities collect this data on all the municipal roads in their area so that the spending of infrastructure funds (from the municipal infrastructure grant and elsewhere) can be properly planned to maximise impact. From 2015/16, the grant is allocated to all district municipalities. As data becomes available for use in planning road maintenance, incentives will be introduced to ensure that municipalities use it to plan maintenance appropriately. The baseline reduction on this grant in 2015/16 amounts to R0.9 million and it is allocated R305.7 million over the MTEF period.

Municipal disaster recovery grant

This grant, administered by the National Disaster Management Centre in the Department of Cooperative Governance, is used to rehabilitate and reconstruct municipal infrastructure damaged by disasters. Over the 2015 MTEF period, R328.9 million is made available to repair infrastructure damaged by natural disasters that took place in 2013 and 2014.

Capacity-building grants and other current transfers

Capacity-building grants help to develop municipalities’ management, planning, technical, budgeting and financial management skills. Other current transfers include the expanded public works programme integrated grant for municipalities, which promotes increased labour intensity in municipalities, and the new municipal demarcation transition grant, which assists municipalities with the additional costs associated with significant boundary changes. A total of R7.8 billion is allocated to capacity-building grants and other current transfers to local government over the 2015 MTEF period.

Table W1.30 Capacity building and other current grants to local government, 2011/12 – 2017/18

	2011/12		2012/13		2013/14		2014/15		2015/16		2016/17		2017/18
							Revised
R million	Outcome						estimate		Medium-term estimates
Direct transfers		1 862		2 329		2 267		2 250		2 447		2 590		2 809
Municipal systems improvement		220		230		240		252		251		259		279
Local government financial management		385		403		425		449		452		465		502
Municipal human settlements capacity		—		—		—		200		100		100		115
2013 African Cup of Nations host city operating		—		123		—		—		—		—		—
2014 African Nations Championship host city operating		—		—		120		—		—		—		—
Water services operating subsidy		542		562		421		450		453		466		502
Expanded public works programme integrated grant for municipalities		364		662		611		595		588		664		716
Infrastructure skills development		39		75		99		104		124		130		141
Energy efficiency and demand-side management		280		200		181		137		178		186		203
Municipal demarcation transition		—		—		—		—		39		50		50
Municipal disaster		32		73		171		64		261		270		300
Indirect transfers		119		—		—		—		—		—		—
Energy efficiency and demand-side management		119		—		—		—		—		—		—
Total		1 981		2 329		2 267		2 250		2 447		2 590		2 809

Source: National Treasury

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2015 BUDGET REVIEW

Municipal human settlements capacity grant

This grant, administered by the Department of Human Settlements, funds capacity building for the development of human settlements in metropolitan municipalities. It was introduced in 2014/15 to fund capacity for the six metropolitan municipalities that were due to be assigned the housing function. The assignment process for this function has been held in abeyance, so the grant will now be extended to all eight metropolitan municipalities to build their capacity to deliver and subsidise the operational costs of administering human settlement programmes. Due to the changed focus of this grant, a larger baseline reduction has been effected on it than on other grants. In 2015/16, the baseline reduction on this grant is R200 million. The grant has allocations of R100 million in 2015/16, R100 million in 2016/17 and R115 million in 2017/18.

Municipal demarcation transition grant

The municipal demarcation transition grant, administered by the Department of Cooperative Governance, assists municipalities with additional costs that may arise during the transition to the new municipal boundaries due to come into effect after the 2016 local government elections. Only municipalities affected by type C boundary changes, involving amalgamations and category changes in terms of the Municipal Demarcation Board classifications, will receive allocations. The grant is therefore only allocated to the municipalities in KwaZulu-Natal and Gauteng that are affected by municipal mergers. This transitional grant has been introduced for a period of three years. It has been allocated R39 million in 2015/16, R50 million in 2016/17 and R50 million in 2017/18.

Local government financial management grant

The local government financial management grant, managed by the National Treasury, funds the placement of financial management interns and the modernisation of financial management systems. This includes building in-house municipal capacity to implement multi-year budgeting, linking integrated development plans to budgets, and producing quality and timely in-year and annual reports. The grant supports municipalities in the implementation of the Municipal Finance Management Act and also provides funds for the implementation of the municipal standard chart of accounts. The grant’s baseline is reduced by R17.3 million in 2015/16. Total allocations amount to R1.4 billion over the 2015 MTEF period.

Infrastructure skills development grant

The infrastructure skills development grant develops capacity within municipalities by creating a sustainable pool of young professionals with technical skills related to municipal services, such as water, electricity and town planning. The grant places interns in municipalities, so they can complete the requirements of the relevant statutory council within their respective built environment fields. The interns can be hired by any municipality at the end of their internship. The grant’s baseline reduction in 2015/16 amounts to R4.8 million and it is allocated R395.7 million over the 2015 MTEF period.

Municipal systems improvement grant

This grant helps municipalities perform their functions and stabilise institutional and governance systems, as required in the Municipal Systems Act (2000) and related legislation. The grant’s baseline is reduced by R9.6 million in 2015/16. It is administered by the Department of Cooperative Governance and is allocated R788.9 million over the 2015 MTEF period.

Expanded public works programme integrated grant for municipalities

This grant promotes the use of labour-intensive methods in delivering municipal infrastructure and services. It is allocated through a formula based on past performance, which creates an incentive for municipalities. The formula has an extra weighting to give bigger allocations to poor, rural municipalities. R8.5 million in 2015/16 was reprioritised out of this grant during the 2015 budget process. The baseline reduction on this grant in 2015/16 amounts to R22.8 million and it is allocated R2 billion over the 2015 MTEF period.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

The energy efficiency and demand-side management grant

The energy efficiency and demand-side management grant funds selected municipalities to implement energy-efficiency projects, with a focus on public lighting and energy-efficient municipal infrastructure. In the 2015 MTEF period, the Department of Energy will monitor and verify grant-funded projects to ensure greater consistency in the procurement of accredited verification services. The grant’s baseline is reduced by R10.4 million in 2015/16 and it is allocated R566.8 million over the 2015 MTEF period.

The water services operating subsidy grant

The water services operating subsidy grant funds the refurbishment of water schemes previously owned and managed by the national Department of Water and Sanitation. The grant used to have an indirect component that funded the costs of staff transfers to municipalities, but this is no longer needed because no further staff transfers are anticipated. Staff remaining with the national department will be paid using the R142.6 million that has been allocated to the department’s budget baseline.

The baseline reduction on the remaining direct portion of the grant is R17.3 million in 2015/16. It is allocated R1.4 billion over the 2015 MTEF period and will be subject to the aforementioned restructuring of water and sanitation grants.

Municipal disaster grant

The municipal disaster grant is administered by the National Disaster Management Centre in the Department of Cooperative Governance as an unallocated grant to local government. The centre is able to disburse disaster-response funds immediately – without the need for the transfers to be gazetted first. Due to past underspending on this grant, R300 million has been reprioritised out of the grant over the 2015 MTEF period. To ensure that sufficient funds are available in the event of disasters, section 26 of the Division of Revenue Bill allows for funds allocated to the provincial disaster grant to be transferred to municipalities if funds in the municipal disaster grant have already been exhausted, and vice versa. The bill also allows for more than one transfer to be made to areas affected by disasters, so that initial emergency aid can be provided before a full assessment of damages and costs is complete. The baseline reduction on this grant in 2015/16 amounts to R15.3 million. Over the MTEF period, R831.4 million is available for disbursement through this grant.

¢ Part 6: Future work on provincial and municipal fiscal frameworks

The fiscal frameworks for provincial and local government encompass all their revenue sources and expenditure responsibilities. As underlying social and economic trends evolve and the assignment of intergovernmental functions change, so must the fiscal frameworks. The National Treasury, together with relevant stakeholders, conducts continuous reviews to ensure that provinces and municipalities have an appropriate balance of available revenues and expenditure responsibilities, while taking account of the resources available and the principles of predictability and stability. This part of the annexure describes the main areas of work to be undertaken during 2015/16 as part of the ongoing review and refinement of the intergovernmental fiscal framework. Provinces and municipalities will be consulted on all proposed changes to the fiscal frameworks.

The role of provinces and local government in promoting economic development

Provinces and municipalities play a crucial role in advancing the economic development of their respective precincts. Fully functional, well-equipped schools will produce a vibrant and employable workforce, which promotes higher employment. Smarter health systems develop and maintain the health of the workforce. Provincial agriculture departments’ support to farmers can stimulate rural development. The provision of provincial and municipal roads and public transport services ensures mobility for goods and workers, while

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2015 BUDGET REVIEW

basic municipal services such as water, electricity and refuse removal, as well as business licencing and environmental health functions, enable businesses to operate and grow. Well-managed procurement can maximise developmental impact without compromising efficiencies.

Government in all three spheres must work with businesses and other relevant stakeholders to provide an enabling environment for the faster and more inclusive economic growth called for in the National Development Plan. From 2015, national and provincial treasuries will work together through a task team of the Technical Committee on Finance to better define the role provinces should play in promoting economic development. This will enable provinces to maximise their impact on provincial economies in future.

Local government infrastructure grants review

The local government infrastructure grant system is being reviewed to improve the efficiency and effectiveness of infrastructure grants to municipalities. The National Treasury is leading the review in collaboration with the Department of Cooperative Governance, the Department of Planning, Monitoring and Evaluation, the FFC and SALGA through a working group and a steering committee. The first phase of the review was completed in September 2014, when the Budget Forum endorsed a set of principles for the grant system and a broad outline of the reforms’ direction. A working paper detailing the draft recommendations is available for comment on the National Treasury’s Municipal Finance Management Act website (http://mfma.treasury.gov.za/Media_Releases/ReviewOfLGInfrastructureGrants/Pages/default_final.aspx).

The second phase of the review continues in 2015 to develop the draft recommendations for reform. Based on the Budget Forum’s endorsement, the reforms will broadly focus on the following areas:

• Rationalising the number of grants that each municipality receives

• Greater differentiation in the types of grants and levels of oversight for different municipalities

• Life-cycle asset management to sustain the functionality of existing infrastructure

• Strengthening administrative oversight to avoid ad-hoc proliferation of grants

• Standardising reporting to increase accountability

• Improving performance monitoring and benchmarking.

Small changes to certain grants have already been implemented to align with the strategic direction of the reforms. Following further analysis and stakeholder engagement, the review’s working group and steering committee will use the draft recommendations to develop final reforms that will be discussed at the Budget Forum. The outcomes will be announced in October 2015, at the time of the Medium Term Budget Policy Statement, to prepare municipalities and other role-players for a phased implementation of reforms over the 2016 MTEF period.

Municipal demarcations

As described in part 5 of this annexure, a new municipal demarcation transition grant was introduced in the 2015 MTEF. In 2015/16, allocations are divided equally across the municipalities affected by amalgamations and category changes to prepare for the demarcations. Funds remain unallocated in the outer years, but work will continue in 2015 to develop appropriate criteria for allocating funds in 2016/17 and 2017/18 to the new municipalities that will come into effect following the 2016 local government elections.

These new municipalities do not yet legally exist, so they do not have indicative allocations for 2016/17 and 2017/18 in the 2015 Division of Revenue Bill. The 2011 Census data will have to be recalculated for the new municipal areas to determine indicative allocations for large formula-driven allocations such as the local government equitable share and the municipal infrastructure grant. Statistics South Africa has already been asked to recalculate this data and the National Treasury will work with transferring officers to develop indicative allocations for the newly formed municipalities. These allocations will be published on the Municipal Finance Management Act website and shared with the relevant municipalities during 2015.

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

This will enable improved planning and budgeting before the demarcations come into effect, which will help ensure that service delivery is not adversely affected by grant allocation uncertainty.

As per its first circular of 2015, the Municipal Demarcation Board is considering the request of the Minister of Cooperative Governance and Traditional Affairs to re-determine the boundaries of a number of additional municipalities. Should further demarcations result from this process, the National Treasury will work with relevant stakeholders and consult the Budget Forum on how the local government fiscal framework should respond. Any changes will be implemented in the 2016 Budget.

Supporting cities to promote urban spatial transformation and economic growth

Cities, through delivery of infrastructure and services, play an important role in creating a conducive environment for inclusive growth, job creation and poverty eradication. To achieve this will require well-managed spatial transformation of cities. Government is exploring changes to the fiscal and regulatory structures for urban municipalities to ensure that they have sufficient and effective instruments to mobilise revenue for financing municipal strategic infrastructure capable of promoting growth.

Potential changes to the structure of the fiscal framework include:

• Consolidating urban grants and enhancing the use of performance incentives with transfers, such as with the integrated cities development grant (this work will form part of the review of local government infrastructure grants).

• Enabling greater flexibility in the use of grants to accelerate the implementation of catalytic investments.

• Enabling cities to leverage grant and own-revenue funds over a longer period for strategic projects.

These measures will be complemented by reviews of, and potential changes to, the regulatory structures for development charges, municipal borrowing and metropolitan municipalities’ own-revenue powers.

Any potential changes to the fiscal and regulatory systems will also be accompanied by additional technical support to further strengthen the capacity of cities to take advantage of these changes. The Cities Support Programme is coordinating initiatives in this area. Cities are already receiving expanded project preparation support to help them build a pipeline of strategic investment projects that can attract private finance. In addition, the Development Bank of Southern Africa is increasing its assistance to give cities better access to funding for strategic projects by enhancing their appraisal and supervision arrangements or extending the average debt maturity.

Regulating development charges

A development charge is a once-off infrastructure access fee imposed on a land owner as a condition of approving a land development that will substantially increase the use of or need for municipal infrastructure engineering services. Development charges are based on the concept that urban growth and expanded land use creates the need for additional infrastructure services, therefore the developer should pay the incidence costs. This prevents the financial burden from being imposed on municipalities or existing communities through higher tariffs and rates.

In 2009, the National Treasury, in conjunction with metropolitan municipalities and other stakeholders, began to develop a national policy framework for municipal development charges. The National Treasury is amending the Municipal Fiscal Powers and Functions Act (2007) to incorporate the regulation of development charges. Consultations with relevant stakeholders on the draft policy framework for development charges will take place in 2015 and a draft bill will be published by mid-2015.

Reforming municipal borrowing

Long-term borrowing can be an effective way for municipalities to finance infrastructure development. However, responsible borrowing requires an appropriate institutional framework and financial controls. The Policy Framework for Municipal Borrowing and Financial Emergencies (1999) and the Municipal

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2015 BUDGET REVIEW

Finance Management Act set a range of measures to facilitate responsible municipal borrowing. These measures deal with issues such as sovereign risk, credit enhancements, maturities, avoidance of direct government assistance, and liquidity through the development of secondary markets.

Despite these measures, there are still some bottlenecks that impede the full participation of municipalities in the debt market to mobilise resources for infrastructure development. In October 2014, the National Treasury started a two-year review of the system of municipal borrowing to expand its scope. During this period, it will analyse the existing policy and regulatory framework, strengthen partnerships with financial institutions, improve monitoring and evaluation, and design municipal capacity-building programmes and strategies for responsible municipal borrowing. To date, the National Treasury has conducted consultation sessions with private lenders, investors and credit rating agencies to better understand the existing challenges. In 2015/16, government will work with the Development Bank of Southern Africa to further expand the scope for private lending to municipalities, including measures to improve liquidity in the municipal bond market and extend bond maturities. These measures include:

• Municipal infrastructure bonds

• Municipal bond underwriting by the Development Bank of Southern Africa

• Innovations in project finance (such as tax increment financing and special district areas).

Reviewing own-revenue sources for metropolitan municipalities

Government is reviewing metropolitan municipalities’ own-revenue sources to assess whether they are adequate to meet service delivery and development mandates. A task team consisting of the National Treasury, the Department of Cooperative Governance, SALGA, the FFC, and metropolitan municipalities was established in 2014. The review seeks to answer the following questions:

• Are metropolitan municipalities’ budgets complying with the principle of matching revenue sources with corresponding expenditure categories?

• To what extent are metropolitan municipalities maximising the full scope of existing own-revenue sources?

• Are existing sources of revenue buoyant, adequate and sustainable for metropolitan municipalities to execute their present expenditure responsibilities, and are they sustainable in the medium to long term?

• What are the challenges that prevent metropolitan municipalities from optimising their use of existing revenue sources?

• Is the sharing of the general fuel levy an appropriate long-term revenue source? Metropolitan municipalities have raised concerns that the long-term effects of sharing a revenue source based on fuel consumption is contrary to their mandate of encouraging the use of public transport.

Based on the review’s outcomes, recommendations will be made to Budget Forum in October 2015 for reforms to the local government fiscal framework that better allow metropolitan municipalities to meet their mandate. Parallel to this process, the National Treasury is developing a local government fiscal decentralisation framework that will outline the different types of own-revenue sources applicable to different types of South African municipalities. These sources will be considered in line with existing legislation.

Municipal Property Rates Amendment Act

The Municipal Property Rates Act (2004), which is administered by the Department of Cooperative Governance, regulates the power of municipalities to impose rates on properties. The act was amended through the Municipal Property Rates Amendment Act (2014), which will come into effect on 1 July 2015. The amendment act improves transparency in the categorisation of property and the determination of rates for each property category, which strengthens oversight. The amendments provide for the property rates liability to be phased out over a five-year period on the following properties: national, provincial and other public roads; water or sewer pipes; railway lines; runways or aprons at national or provincial airports; and

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ANNEXURE W1: EXPLANATORY MEMORANDUM TO THE DIVISION OF REVENUE

breakwaters, sea walls, channels and basins. These exclusions are made because of the importance of these types of infrastructure in enabling economic growth and social change. The act also strengthens its regulatory, monitoring and reporting provisions, which in turn will improve its implementation and minimise legal ambiguities. The Department of Cooperative Governance will implement the regulatory framework that will give effect to the amendment act in due course.

51

EX-99.D

EXHIBIT 99.D

DESCRIPTION OF THE REPUBLIC OF SOUTH AFRICA

DATED December 4, 2015

INCORPORATION OF DOCUMENTS BY REFERENCE

This document is an exhibit to the Republic of South Africa’s Annual Report on Form 18-K under the Exchange Act of 1934 for the fiscal year ended March 31, 2015. All amendments to such Annual Report on Form 18-K/A filed by South Africa following the date hereof shall be incorporated by reference into this document. Any statement contained in a document, all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this document to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modified or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this document.

1

TABLE OF CONTENTS

SUMMARY INFORMATION	3
INTRODUCTION	5
REPUBLIC OF SOUTH AFRICA	7
Area and Population	8
Government and Political Parties	8
Legal System	14
Broad-Based Black Political Empowerment	14
Land Reform	16
Mining Industry Reform	17
Crime Prevention	23
International Relations	27
Development Finance Institutions (DFIs)	30
Public Health	31
THE SOUTH AFRICAN ECONOMY	35
Overview	35
Implementing the National Development Plan 2030: The Medium-Term Strategic Framework	36
GDP	37
GDE	40
Principal Sectors of the Economy	43
Informal Sector of the Economy	64
Employment and Trade Unions	65
Prices and Wages	71
MONETARY AND FINANCIAL SYSTEM	73
The SARB	73
Monetary Policy	74
Financial System Stability	79
Regulation of the Financial Sector	79
Financial Sector Charter	85
Credit Allocation	86
Capital Markets	89
Exchange Controls	92
Gold and Foreign Exchange Contingency Reserve Account (GFECRA)	97
THE EXTERNAL SECTOR OF THE ECONOMY	99
Foreign Trade	99
Balance of Payments	103
Current Account	105
Financial Account	106
Reserves and Exchange Rates	110
Change in Reserves	112
PUBLIC FINANCE	113
Background	119
The Budget Process	120
MTBPS	120
2015-2016 National Budget and Consolidated Budgets	122
Taxation	126
Revenue	131
Financing	132
Public Enterprises	133
NATIONAL GOVERNMENT DEBT	144
General	144
Summary of Internal National Government Debt	145
Summary of External National Government Debt	145
Guaranteed Debt	146
Debt Service Costs	147
Debt Record	148
Tables and Supplementary Information	149

2

In this document, the government of the Republic of South Africa is referred to as the “National Government,” “the Government” or the “South African Government”. The currency of the Republic of South Africa (South Africa) is the South African Rand. In this document, all amounts are expressed in South African Rand (R or Rand) or U.S. Dollars (US$, $ or Dollars), except as otherwise specified. See “The External Sector of the Economy—Reserves and Exchange Rates” for the average rates for the Rand against the Dollar for each of the years 2009 through 2014 and for the 11-month period ended November 30, 2015. On December 3, 2015, the exchange rate, as reported by the South African Reserve Bank (SARB), was R14.3328 per Dollar (or 0.0697 U.S. cents per Rand).

The Republic’s fiscal year begins on April 1 and ends on March 31. For example, the 2015 fiscal year refers to the fiscal year beginning April 1, 2014 and ending March 31, 2015. Economic data presented in this description is presented on a calendar year basis unless reference is made to the relevant fiscal year or the fiscal year is otherwise indicated by the context. For example, economic data referring to the “first quarter” of 2015 refers to data as at, or for the three months ended, June 30, 2015. Economic data referring to the “first three months” of 2015, by contrast, refers to data as at, or for the three months ended, March 31, 2015.

Unless otherwise indicated, references to gross domestic product (GDP) are to real GDP, calculated using constant prices in order to adjust for inflation (with 2010 as a base year), and % changes in GDP refer to changes as compared to the previous year or the same quarter of the previous year, unless otherwise indicated.

Unless otherwise stated herein, references in this description to the 2015-2016 Budget are to the 2015-2016 National Budget as released in February 2015 and not as amended by the Medium-Term Budget Policy Statement (MTBPS) released on October 22, 2015. References to the 2015-2016 Consolidated Budget, which includes the 2015-2016 National Budget as part thereof, shall be construed accordingly.

Some figures included in this document have been subject to rounding adjustments. As a result, sum totals of data presented in this document may not precisely equate to the arithmetic sum of the data being totaled.

SUMMARY INFORMATION

The following summary tables do not purport to be complete and are qualified in their entirety by the more detailed information appearing elsewhere in this document.

The following tables set forth certain summary statistics about the economy of South Africa, public finance and debt of the National Government for the periods indicated.

3

	As of and for the year ended December 31,												As of and for the six months ended June  30,(1)
	2010			2011			2012			2013			2014			2015
	Rand (million) (except percentages)
The Economy
Gross Domestic Product (GDP)
Nominal GDP(2)		2,748,008			3,024,950			3,262,542			3,534,326			3,796,462			3,942,919	(3)
Real GDP(4)		2,748,008			2,836,286			2,899,248			2,963,389			3,008,576			3,045,469	(3)
Real % change from prior year		3.0	%		3.2	%		2.2	%		2.2	%		1.5	%		1.8	%
Change in per capita earnings (%)(5)		3.4	%		2.9	%		0.5	%		(0.4	)%		(0.3	)%		N/A
Total merchandise exports		68,856			794,743			825,025			932,588			1,003,826			502,593	(6)
Unemployment rate (%)		24.9	%		24.80	%		24.9	%		24.7	%		25.1	%		25.5	%(7)
Balance of trade (Rand billion) (13)		59.7			51.0			(31.5	)		(68.3	)		(68.6	)		(14.3	)(6)
Balance of payments
Current account		(41.245	)		(65,287	)		(161,704	)		(203,774	)		(206,644	)		(71,229	)(6)
Financial account		56,128			65,896			173,245			130,403			155,809	(7)		36,695	(6)
Change in gross gold and other foreign reserves		(24,075	)		(107,193	)		33,123			89,247			48,335			2,686	(6)
Rand/Dollar exchange rate (average)		7.32			7.25			8.21			9.65			10.84			12.45	(8)
Consumer prices (2012/12=100)		88.2			92.6			97.8			103.4			109.7			113.6	(9)
Producer prices (2012/12=100))(14)		N/A			N/A			100			106			113.9			116.7	(9)
Average monthly yields for listed National Government debt securities 5-10 yrs		7.41			8.01			6.50			7.73			7.39			7.96
Average monthly yields for listed National Government debt securities > 10 yrs		8.38			8.51			7.37			8.32			7.84			8.33

	As of and for the fiscal year ended March 31,
	2010			2011			2012			2013			2014			2015(11)			2016(12)
Main Government Revenue		586,113.1			672,751.5			745,292.2			799,761.7			887,265.1			963,560.6			1,070,664.5
% of GDP(2)		23.8	%		27.7	%		28.2	%		28.4	%		29.2	%		28.4	%		29.8	%
Main Government Expenditure		747,868			805,979.1			889,911.5			965,495.6			1,047,758.6			1,131,951.8			1,246,929.6
% of GDP(2)		30.5	%		32.0	%		32.0	%		32.7	%		33.2	%		32.0	%		33.6	%
Main Budget Deficit		(161,754.9	)		(133,227.7	)		(144,619.3	)		(165,733.9	)		(160,493	)		(168,391.2	)		(176,266	)
% of GDP(2)		(6.3	)%		(4.7	)%		(4.7	)%		(5.0	)%		(4.4	)%		(4.4	)%		(4.3	)%
Net borrowing requirement		(161,754.9	)		(133,227.7	)		(144,620.2	)		(165,353.3	)		(160,498.7	)		(168,391.2	)		(176,265.2	)
Change in cash and other balances(10)		(30,128.7	)		(41,354.7	)		(21,741.4	)		29,033.1			(12,346.4	)		(6,548.8	)		8,857.2

Notes:—

N/A = not available

(1) First half of 2015, seasonally adjusted and annualized.

(2) At market prices.

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(3) Estimate for first half of 2015, seasonally adjusted and annualized.

(4) At constant 2010 prices.

(5) Real growth rate in per capita earnings, at constant 2010 prices.

(6) Estimates to June 30, 2015.

(7) Quarterly Labour Force Survey (QLFS) as of September 30, 2015.

(8) Rand/Dollar rates are averages for the period through July 2015.

(9) As of July 30, 2015. Calculated based on the average values over the seven months.

(10) The total debt of National Government (net) is calculated with due account of the bank balances of the National Revenue Fund (balances of National Government’s accounts with the SARB and the Tax and Loans Accounts with commercial banks).

(11) Final outcome for fiscal year 2015, as reflected in the MTBPS (October 2015).

(12) Estimates as revised and reflected in the MTBPS (October 2015).

(13) Total Trade figures from 2013 onwards includes trade with Botswana, Lesotho, Namibia and Swaziland (BLNS countries).

(14) Due to a rebasing in 2012, figures prior to 2012 are not available.

Source: South African National Treasury, SARB and Statistics SA (Stats SA).

The estimates included in this Annual Report are based on the 1993 System of National Accounts (SNA) published by the United Nations in cooperation with other international organizations. This means that the methodology, concepts and classifications are in accordance with the latest guidelines of an internationally agreed system of national accounts. The estimates of real GDP are expressed in terms of a 2010 base year. Revision of the estimates for all components of the national accounts is done from time to time based on the availability of data.

Statistics South Africa (Stats SA), who compiles the expenditure side of national accounts, has rebased certain GDP estimates in the Statistical Release, P0441, Gross Domestic Product, Third Quarter 2014 dated November 25, 2014 in terms of a 2010 base year.

INTRODUCTION

South Africa has been an established constitutional democracy since 1994, when it held its first fully democratic national elections. The South African economy is diverse and supported by a well-developed legal system and a sophisticated financial system. The major strengths of the South African economy are its services and manufacturing sectors, its strong physical and economic infrastructure and its abundant natural resources, including gold, platinum metals and coal.

The country’s fifth fully democratic national elections took place in May 2014, and saw the ruling African National Congress (ANC) maintaining its significant majority in Parliament. A number of minority parties make up the balance of the seats presently held in the National Assembly, including the National Freedom Party (NFP, six seats), United Democratic Movement (UDM, four seats), the Freedom Front Plus (VF Plus, four seats), the African Independent Congress (AIC, three seats), the Pan African Congress (PAC, one seat), and the African People’s Convention (APC, one seat). The Azanian People’s Organisation (AZAPO), the United Christian Democratic Party (UCPC) and the Minority Front (MF) all lost their seats in the National Assembly due to their failure to meet the minimum vote threshold. Municipal elections will take place in 2016.

The world economy is experiencing a lengthy period of low growth. Growth in developing economies has moderated in response to lower commodity prices, subdued domestic demand and reduced capital inflows. Growth in some developed economies has offset this slowdown. The South African government has taken two key steps to adapt to this low-growth world. It has identified the broad structural reforms needed to put the economy on a much higher growth path and it has sought to reduce South Africa’s vulnerability by implementing fiscal policy measures to maintain the health of the public finances.

The Government’s economic agenda is based on the principle that prudent macroeconomic policies provide an important anchor for stability in today’s turbulent global environment. Sustainable fiscal policy protects the social gains made since 1994. A resilient, flexible financial system helps the economy adjust to rapid change. The National Development Plan (NDP) lays the basis for much-needed economic and policy reforms to establish a platform for faster growth. Creating work and improving education to eliminate poverty and build a more equitable society are at the heart of long-term reforms set out in the NDP.

Nevertheless, economic conditions remained challenging for South Africa. The 2015 MTBPS estimates that South Africa’s economic performance has deteriorated over the past several years. Electricity constraints, weak business confidence and low household demand have limited growth. GDP is expected to grow by 1.5% in 2015, same as in 2014, rising marginally to 1.7% in 2016 and 2.6% in 2017.

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Electricity supply is expected to constrain growth through 2016 by limiting output and dampening business and consumer confidence. Goverment’s plan to reduce electricity shortages has made progress, with the first unit of Eskom Medupi power station commencing operations, adding 800 MW of energy to the national grid. Government has sought to stabilize Eskom’s financial position with an R23 billion equity investment financed from the sale of Vodacom shares.

Given the weak economic outlook, proposals for additional taxes—which are essential to fund government’s ambition policy agendas—will be approached with caution. Over the medium term, the Government expects to continue to explore reforms that promote an efficient and progressive tax system, taking into account the recommendations of the Davis Tax Committee that was established in July 2013. The committee has published reports on small business taxation, value-added tax (VAT), base erosion and profit shifting, estate duty and mining taxation. A report on the role of the tax system in supporting inclusive growth, employment, equity and fiscal sustainability has also been published.

Despite weak economic growth over the past five years, revenue collection has consistently outpaced economic expansion. While nominal GDP growth has averaged 8.6% over the past five years, tax revenue has averaged 10.5% growth during the same period. Gross tax revenue for 2014/15 came in R7.3 billion above projections in the 2015 budget but has been revised downward by R7.6 billion in 2015/16. The downward revision was attributed to the weak performance of corporate income tax collections due to the steep decline in commodity prices and slowdown in economic activity. In total, lower growth has resulted in a downward revision of R35 billion to gross tax revenue projections between 2015/16 and 2017/18.

Domestic inflation is lower, largely as a result of declining oil prices. The Rand’s depreciation, however, poses some risk to the inflation outlook. Consumer price index (CPI) inflation eased to 4.6% over the first eight months of 2015, from 6.1% in 2014. Core inflation, which represents the long-run trend of the price levels and excludes temporary shocks, was unchanged at 5.7% over the same period.

Government is maintaining the fiscal course that was announced in 2014/15. Spending limits will remain in place to support sustainable public finances that are not overburdened by debt and interest payments. The ratio of government debt to GDP is expected to stabilize. The main budget deficit is projected to stabilize at 3.5% of GDP over the medium term, with the consolidated deficit declining to 3%. The expenditure ceiling set in the 2015 budget remains in place. Spending pressure, including higher wage bill, have been accommodated within the contingency reserves and departmental baselines.

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In the three months ended September 30, 2015, quarterly changes reflected an increase in the number of people employed (by 171,000 to 15,828,000) and an increase in unemployment (by 188,000 to 5,418,000). This resulted in a slight increase in the unemployment rate from 25.0% in the three months ended June 30, 2015 to 25.5% in the three months ended September 30, 2015. Increases in non-agricultural employment were observed in both the formal and informal sectors (10,930,000 and 2,721,000, respectively). Employment increased by 28,000 people in the agricultural sector, while a decrease of 110,000 was observed in private households. The quarterly decrease of 200,000 among the economically inactive population was driven by an increase in discouraged job-seekers (208,000).

MAP OF THE REPUBLIC OF SOUTH AFRICA

REPUBLIC OF SOUTH AFRICA

Area and Population

South Africa is situated on the southern tip of the African continent, with the Atlantic Ocean to the west and the Indian Ocean to the east. The north of the country shares common borders with Namibia, Botswana and Zimbabwe and, to the north east, the country shares a border with Mozambique. South Africa also shares common borders with the kingdoms of Lesotho and Swaziland. The total surface area of South Africa is approximately 1,219,090 square kilometers, with over 3,000 kilometers of coastline.

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South Africa comprises nine provinces, which are the Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Limpopo, Mpumalanga, Northern Cape, North West and Western Cape Provinces.

In the former racial classification that formed the basis for the apartheid system, “Black” referred to persons of original African indigenous origin, “Asian” to persons of Asian origin, “White” to persons of Caucasian ethnic origin and “Colored” to persons of mixed race. While the National Government no longer makes any unfair discrimination based on race, the country’s history of racial division and racial and ethnic differences continues to have social and economic significance. This is because social and economic policies are judged partly by their ability to address disparities and discrimination and to equalize opportunities. Therefore, in this document, reference to such racially classified statistics is made occasionally to illustrate those disparities.

South Africa’s population is approximately 55 million as at June 30, 2015, of which 28.1 million, representing 51% of the population, are female. Approximately 80.5 % are African, 8.8% are Colored, 2.5% are Indian/Asian and 8.3% are White (source: Stats SA Mid-year population estimate 2015). The most densely populated parts of South Africa are the four major industrialized areas: the Pretoria/Witwatersrand/Vereeniging area of Gauteng (which includes Johannesburg), the Durban/Pinetown/Pietermaritzburg area of KwaZulu-Natal, the Cape Peninsula area of the Western Cape (which includes Cape Town) and the Port Elizabeth/Uitenhage area of the Eastern Cape.

Stats SA estimates the average life expectancy in South Africa for females to be 72.7 years, and for males to be 65.2 years. However, it should be noted that life expectation estimates vary, primarily due to differences in assumptions about the rapidity with which the HIV epidemic will spread and the morbidity and mortality of the disease (see “— Public Health — HIV, AIDS and Tuberculosis (TB)”).

South Africa has a diverse population consisting of Afrikaans and English-speaking Whites, Asians (including Indians), Coloreds, Khoi, Nguni, San, Sotho-Tswana, Tsonga, Venda and persons that have immigrated to South Africa from across the globe. By virtue of the country’s diversity, South Africa has 11 official languages, namely Afrikaans, English, isiNdebele, isiXhosa, isiZulu, Sepedi, Sesotho, Setswana, siSwati, Tshivenda and Xitsonga. According to the results of the census conducted in 2011, isiZulu is the mother tongue of 22.6% of the population, followed by isiXhosa at 15.9%, Sepedi at 9.1%, Afrikaans at 7.9%, and English and Setswana at 8.2% each. IsiNdebele is the least spoken language in South Africa, at 1.5% (source: Census 2011).

Government and Political Parties

Constitution

Following the repeal of apartheid legislation, South Africa held its first fully democratic national election in 1994. The final Constitution was adopted in 1996 and phased-in between 1997 and 1999. South Africa’s Constitution is hailed as one of the most progressive in the world and enjoys high acclaim internationally. The Constitution states that South Africa is “founded on a commitment to achieve equality, to promote and protect human dignity and to advance human rights and freedoms”. The Constitution enshrines the principles of supremacy of the rule of law, universal adult suffrage, regular elections and multi-party democracy. The Bill of Rights contained in Chapter 2 of the Constitution is one of the world’s broadest, guaranteeing freedom of speech, movement and political activity, and providing persons accused of crimes with many legal protections including the right to a speedy trial and the right to remain silent. The Bill of Rights also enshrines the right to access to adequate housing, food, water, education and healthcare, and prohibits discrimination on the basis of race, gender, sexual orientation, age, pregnancy or marital status.

The Constitution provides for the separation of powers among the legislative, executive and judicial branches of the National Government. Under the Constitution, the bicameral Parliament, in which the legislative authority of the National Government is vested, is comprised of a National Assembly and a National Council of Provinces.

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The National Assembly consists of no fewer than 350 and no more than 400 members elected on the basis of proportional representation pursuant to which political parties receive seats in proportion to the votes cast for the parties concerned. Of the 400 seats in the National Assembly, approximately 200 seats are selected from provincial lists, with a fixed number allocated to each province. The remaining seats are filled from national lists to ensure proportionality in accordance with the total number of votes cast for each party in the national election.

The National Council of Provinces consists of 90 members (namely 54 permanent members and 36 special delegates). Each of the nine provincial legislatures elects ten representatives.

The Constitution provides for national elections every five years and places all elections and referendums in the country for all three spheres of government (national, provincial and local) under the control of the Independent Electoral Commission (IEC). The most recent national and provincial elections were held in May 2014 and municipal elections will take place in 2016.

Each province has its own executive authority, the premier. The premiers are elected by each Provincial legislature from among its members. The powers of the premier are exercised in consultation with a provincial executive council, which is constituted in a manner similar to the Cabinet in the National Government. The provinces exercise limited power on a national level, principally through their representatives in the National Council of Provinces, and also through their power to block Parliamentary action affecting the constitutional position and status of the provinces.

Political Parties

The ANC, which was founded in 1912 and which led the struggle against apartheid, is the ruling party in eight of the nine South African provinces, and the most influential party in South Africa in terms of the size of its electoral constituency support. Following the May 2014 elections, the ANC occupies 249 of the National Assembly’s 400 seats. Every five years the ANC holds a National Conference, which is its highest decision-making body and which decides the policies of the ANC, adopts proposed constitutional amendments and elects the National Executive Committee. At its 53^rd National Conference, held in Mangaung, Free State Province from December 16-20, 2012, the ANC re-elected the current President of South Africa, Jacob Zuma, as president of the ANC, and Cyril Ramaphosa as his deputy. The 80-member National Executive Committee, which is the party’s highest decision-making body between conferences, was also elected at the National Conference.

The ANC Youth League (ANCYL), under the former leadership of Julius Malema and its principal spokesperson, Floyd Shivambu, made a number of public statements calling for the nationalization of mines and mining assets. The ANCYL also advocated for the nationalization of banks and the expropriation of agricultural land without compensation. Various ANC officials responded by stating that nationalization is neither government nor ANC policy.

Mr. Malema was suspended from the ANC for five years in November 2011 after the disciplinary committee found him guilty of bringing the party into disrepute and sowing division in the party ranks.

Consequently, Mr. Malema launched the Economic Freedom Fighters (EFF) party in 2013 with himself as its leader. The launch of the EFF marked the second launch of a new political party during 2013. In February 2013, former World Bank Managing Director and anti-apartheid activist Dr. Mamphela Ramphele announced the launch of Agang SA. In the May 2014 elections, the EFF won 25 seats in the National Assembly, while Agang SA won two seats.

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The Democratic Alliance (DA), founded in 2000 and currently led by Mmusi Maimane, serves as the official opposition in the National Assembly. In the 2009 elections, the DA won 67 of the 400 seats in the National Assembly, and following the 2014 national and provincial elections, now holds 89 seats.

On August 15, 2010, the DA and the Independent Democrats announced that the two parties had ratified a memorandum of understanding, paving the way for complete integration by 2014. The memorandum of understanding made provision for Independent Democrat members of the National Assembly and Provincial Legislatures to hold dual membership until the next national and provincial elections in 2014. As of the May 2014 elections, all remaining dual members of the Independent Democrats became members of the DA as per the memorandum of understanding.

On November 10, 2008, a faction of the ANC broke away from the party and launched a new political party, called the Congress of the People (COPE), led by former ANC chief whip and Defence Minister Mosiuoa Lekota and former Gauteng Premier Mbhazima Shilowa. COPE won 30 seats in the National Assembly following the April 2009 elections. Since then, there has been a protracted leadership dispute between Mr Lekota and Mr Shilowa. The South Gauteng High Court validated Mr Lekota as the rightful head of COPE in a ruling handed down in October 2013, however, Mr Shilowa has indicated that he is likely to continue to challenge for a position within COPE through the courts. COPE currently holds three seats in the National Assembly.

The Inkatha Freedom Party (IFP) was founded in 1975. In 2009, the IFP won 218 seats in the National Assembly, decreasing to ten seats in May 2014 elections. In the May 2011 municipal elections, the IFP was unable to lodge the required documentation in time to contest the local government election in Umzumbe, an IFP stronghold. This culminated in an urgent application to the Constitutional Court, the result of which was an affirmation by the Constitutional Court of the Electoral Commission’s view that the IFP could not contest the election in Umzumbe. The current leader of the IFP is Chief Mangosuthu Buthelezi.

Following the May 2014 elections, a number of minority parties make up the balance of the seats presently held in the National Assembly, including the National Freedom Party (NFP, six seats), United Democratic Movement (UDM, four seats), the Freedom Front Plus (VF Plus, four seats), the African Independent Congress (AIC, three seats), the Pan African Congress (PAC, one seat), and the African Peoples Convention (APC, one seat). the Azanian People’s Organisation (AZAPO), The United Christian Democratic Party (UCPC) and the Minority Front (MF) all lost their seats in the National Assembly due to their failure to meet the minimum threshold in votes.

Presidential Developments

Following the June 1999 elections, Thabo Mbeki of the ANC succeeded Nelson Mandela as President and continued to serve as President following the 2004 elections. Phumzile Mlambo-Ngcuka, who had been serving in the Cabinet as Minister of Minerals and Energy, was appointed as the first female Deputy President of South Africa in July 2005, replacing Deputy President Jacob Zuma who was released from his duties by the then President Thabo Mbeki following allegations of corruption. On September 20, 2006, the charges of corruption against Jacob Zuma were struck from the court roll because the state was not ready to proceed with its case. The National Prosecuting Authority (NPA) attempted to recharge Jacob Zuma, but the Pietermaritzburg High Court ruled on September 12, 2008 that the decision to prosecute Jacob Zuma on corruption, racketeering and tax evasion charges was procedurally invalid.

In September 2008, the ANC recalled Thabo Mbeki from office before his term expired. The ANC stated that the decision had been made in light of a High Court judgment which suggested executive meddling in the decision to prosecute Jacob Zuma. On September 21, 2008 Thabo Mbeki tendered his resignation, which became effective on September 25, 2008.

Following Thabo Mbeki’s resignation, the National Assembly voted by secret ballot to determine which of two nominees (that of the ANC and that of the DA) would fill the vacant office of president. Kgalema Motlanthe, of the ANC, captured the majority of the votes and was sworn in as South Africa’s President on September 25, 2008, with Baleka Mbete, also of the ANC, appointed as his deputy. On May 9, 2009 Jacob Zuma was inaugurated as President, with Kgalema Motlanthe as his deputy.

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On January 12, 2009, the Supreme Court of Appeal (SCA) held that the Pietermaritzburg High Court had erred in its ruling regarding the declaration that the decision of the NPA to prosecute Jacob Zuma was invalid. The matter was taken on appeal to the Constitutional Court and was set to be heard on May 12, 2009, however, on April 6, 2009, the NPA announced that it had dropped the corruption charges against Jacob Zuma, citing political interference in the legal process. The circumstances surrounding the NPA’s decision to drop the charges have been called into question by the DA and political action groups including Freedom Under the Law, and a court challenge was brought requiring the release by the NPA of records relating to the decision. A review application was filed by the DA, and in 2015, the NPA filed its papers arguing that President Zuma was charged with corruption almost immediately after being elected as ANC leader, in order to stop then President Thabo Mbeki from being recalled. The matter has not proceeded further since then.

During 2013, Public Protector Thuli Madonsela conducted an investigation into a more than R200 million security upgrade of President Zuma’s home in Nkandla, KwaZulu-Natal. The Public Protector released the conclusions of the investigation in a report dated March 19, 2014. Amongst the Public Protector’s findings was that certain of the upgrades installed by the Department of Public Works in the President’s Nkandla home resulted in an unlawful misappropriation of public funds. The report directed the President to submit comments to the report to the National Assembly within 14 days and the President responded on April 2, 2014 that he had directed the Special Investigating Unit to examine the security upgrades and would make a further report to the National Assembly following conclusion of the Special Investigating Unit’s probe. The President has since commented on the Public Protector’s report and the Special Investigating Unit has finalized its report. The National Assembly convened an ad hoc committee to consider the Public Protector’s report as well as all other reports on Nkandla. The ad hoc committee released its findings on November 13, 2014. The report absolved President Zuma from responsibility for the abuse of funds on his Nkandla home and left it to the Cabinet to rule whether refurbishments at Nkandla were legitimate security measures, and to the President to decide who should be held responsible for excesses. The President tasked the Minister of Police, Mr. Nkosinathi Nhleko, with the task of investigating who should be held responsible for repayment of the money spent on President Zuma’s Nkandla home. In May 2015, Minister Nhleko released his report which found that the President did not have to repay money for the upgrades at his home because all the features, including the swimming pool, were for the President’s security. The report was submitted for tabling in Parliament. Parliament set up an ad hoc committee to consider Minister Nhleko’s report. The ad hoc committee endorsed Minister Nhleko’s finding and its report was tabled in Parliament in August 2015 when it was adopted.

On October 8, 2015, the Supreme Court of Appeal (SCA) handed down a significant judgment relating to the powers of the Public Protector. The judgment was in an appeal by the South African Broadcast Corporation (SABC), the Minister of Communications and, the Chief Operating Officer of the SABC, against the decision of the Western Cape High Court to suspend the Chief Operating Officer of the SABC. The main issue addressed in the judgment was whether recommendations by the Public Protector have to be implemented. The court held that, as the primary watchdog of the Government, the recommendations of the Public Protector have to be implemented because if the recommendations are ignored, it strips the office of all power. The SCA held that only a court can review the findings and recommendations of the Public Protector. The same issue will be considered by the Constitutional Court on February 9, 2016, when it will decide on the application by the EFF to force President Jacob Zuma to comply with the recommendation by the Public Protector to repay the public funds spent on his Nkandla homestead.

2014 National and Provincial Elections

In May 2014, approximately 25 million South Africans registered to vote in the national and provincial elections, compared to the approximately 23 million people registered to vote in April 2009.

The IEC approved the candidate lists of 42 political parties that contested the national and provincial elections. Of these parties, 29 political parties were registered to contest the national election for the National Assembly. 13 political parties were registered to contest all nine provincial legislatures, 29 political parties applied to contest only some provinces.

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According to IEC data, a total of 18 million South Africans cast their votes in the elections on May 7, 2014. The May 2014 elections were considered fair, transparent and credible by the IEC. The official general election results were announced on May 10, 2014. The ruling ANC won the elections, receiving 62% of the votes cast in respect of the national elections. The DA remained the official opposition of the ANC, with 22% of the votes, and the EFF came in third with 6% of the votes.

The table below sets out the National and Provincial Assembly seats secured by political parties following the May 2014 general elections.

	Number of seats in National Assembly				Proportional Representation seats
Political Party
ANC		249	62.15	%		118	59.0	%
DA		89	22.23	%		45	22.5	%
EFF		25	6.35	%		11	5.5	%
IFP		10	2.4	%		5	2.5	%
NFP		6	1.57	%		3	1.5	%
UDM		4	1	%		2	1.0	%
VF PLUS		4	0.9	%		3	1.5	%
COPE		3	0.67	%		3	1.5	%
ACDP		3	0.57	%		3	1.5	%
AIC		3	0.53	%		3	1.5	%
AGANG SA		2	0.28	%		2	1.0	%
PAC		1	0.21	%		1	0.5	%
APC		1	0.17	%		1	0.5	%
Total		400	100.0	%		200	100.0	%

Source: IEC.

On May 24, 2014, following the ANC’s victory in the elections, Jacob Zuma was inaugurated as the fourth democratically elected President of the Republic, with Cyril Ramaphosa as his deputy.

2011 Municipal Elections

Municipal elections are held every five years. The 2011 municipal elections were held on May 18, 2011 at which 13.66 million South Africans voted. This was the highest voter turnout since the first municipal elections following the reorganization of municipalities in 2000. Before the 2011 elections, the ANC had control of a majority of municipalities in each province, including the Western Cape Province. In the 2011 elections, the DA won a majority (57.08%) of the votes in the Western Cape Province. In the Nelson Mandela Bay municipality, the ANC also obtained a majority of votes. Although the DA increased its presence in the Northern Cape (to 22.27%), the ANC won control of the province as a whole (at 63.57%).

COPE, the NFP and the IFP also tried to improve their standings but failed to obtain control of any municipalities. Various smaller parties contested the elections, but made no significant impact.

The end results of the 2011 municipal elections were that, of 35,235,914 votes cast, the ANC won 63.65% of the votes, the DA won 21.97%, the IFP won 3.94%, the NFP won 2.58% and COPE won 2.33%. Each of the remaining parties contesting the elections obtained results below 1%.

Zuma Administration

The Constitution provides for a Cabinet consisting predominantly of members of the National Assembly, who retain their seats while in the Cabinet. Cabinet portfolios are allocated by the President. The Cabinet generally operates by consensus rather than by voting.

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On May 25, 2014, President Zuma announced his Cabinet, which consisted of 35 ministers who are members of Parliament, in addition to the President and the Deputy President, as well as some structural changes to the National Government. Some departments were split, others combined and new departments were created. President Zuma also announced that the National Planning Commission (NPC) as well as the Performance Monitoring and Evaluation Ministries in the Presidency had been combined into one Ministry to harmonize the planning and monitoring functions. On March 15, 2015, Mr. Collins Chabane, the Minister of Public Service & Administration, passed away in a motor vehicle collision, and Nathi Mthethwa, the Minister of Arts and Culture, was appointed as the Acting Minister of Public Service & Administration. On September 22, 2015, President Zuma announced a reshuffle of the Cabinet in order to permanently fill the position of Minister of Public Service & Administration. The following replacements were made:

• Public Service and Administration Minister, Mr. Collins Chabane, was replaced by the former Minister of Mineral Resources, Ngoako Ramatlhodi.

• Mineral Resources Minister, Mr. Ramatlhodi was replaced by Mr. Mosebenzi Zwane, former MEC for economic, small business development and environmental affairs of the Free State province.

The NPC released a diagnostic report on June 9, 2011 that aims to identify the main challenges confronting the country and to examine the underlying causes of such problems. The diagnostic report is not a plan; it provides the basis for a plan.

The diagnostic report covers the following topics:

• human conditions;

• material conditions;

• nation building;

• the economy; and

• institutions and governance.

On November 11, 2011, the NPC released its vision statement for 2030 (Vision 2030), as well as a National Development Plan (NDP 2030) for the Cabinet’s consideration. The NDP 2030 focuses on key priority areas and identifies nine primary challenges: high unemployment, poor education outcomes, a high disease burden, divided communities, uneven public service performance, settlement patterns that marginalize the poor, corruption, an overly resource-intensive economy and crumbling infrastructure.

The key areas of focus for the NDP 2030 are:

• enhanced capabilities and an active citizenry;

• growth, investment and employment;

• rising standards of education and a healthy population;

• an effective and capable government;

• collaborations between the private and public sectors; and

• leadership from all sectors of society.

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Legal System

The South African legal system is based upon Roman-Dutch law and incorporates certain elements of English law, subject to the Bill of Rights contained in the Constitution. Judicial authority in South Africa is vested in the courts, which are established pursuant to the Constitution. The Constitution is the supreme law of the land and no other law can supersede the provisions of the Constitution. The Constitutional Court has jurisdiction as the court of final instance over all matters relating to the interpretation, protection and enforcement of the terms of the Constitution and is the court of first instance on matters such as those concerning the constitutionality of an Act of Parliament referred to it by a member of the National Assembly. Decisions of the Constitutional Court are binding upon all persons and upon all legislative, executive and judicial organs of state. Matters not falling within the jurisdiction of the Constitutional Court fall within the jurisdiction of the Supreme Court, which consists of the Supreme Court of Appeal and various High Courts. Judgments of the Supreme Court of Appeal are binding on all courts of a lower order, including the High Courts, and judgments of the High Courts are binding on the lower courts within their respective areas of jurisdiction.

The Chief Justice and the Deputy Chief Justice of the Constitutional Court are appointed by the President in consultation with the Judicial Service Commission (JSC) and the leaders of parties represented in the National Assembly. The Judge President and Deputy President of the Supreme Court of Appeal are appointed by the President after consulting with the JSC only. The remaining judges of the Constitutional Court, the Supreme Court of Appeal and the High Courts are appointed by the President on the advice of the JSC.

Former Chief Justice Sandile Ngcobo retired on August 12, 2011 and was replaced by the new Chief Justice, Mogoeng Mogoeng, on September 8, 2011. Prior to his retirement, President Zuma had extended Chief Justice Ngcobo’s term of office. However, this decision was declared unconstitutional by the Constitutional Court, which held that the section of the Judges’ Remuneration and Conditions of Employment Act, which the President relied on to extend the term of office, was unconstitutional. The appointment of Mogoeng Mogoeng to the position of Chief Justice ahead of Deputy Chief Justice Dikgang Moseneke was controversial and prompted public scrutiny of the JSC and the consultation process. Chief Justice Mogoeng Mogoeng’s appointment was confirmed after an intensive two-day televised interview before the JSC, chaired by Deputy Chief Justice Moseneke.

Broad-Based Black Economic Empowerment

Broad-Based Black Economic Empowerment (BBBEE) is a core tenet of the National Government’s initiative to address the economic exclusion of historically disadvantaged South Africans by encouraging the redistribution of wealth and opportunities to historically disadvantaged persons. As part of this initiative, the National Government enacted the Broad-Based Black Economic Empowerment Act, 2003 (Act No. 53 of 2003) (BBBEE Act), which came into effect in April 2004. For purposes of the BBBEE Act, “black people” is a generic term which means Africans, coloreds and Indians. On June 18, 2008, the High Court of South Africa ordered that South African Chinese persons (who are South African citizens or would have obtained citizenship but for the previously applicable discriminatory laws) be included within the ambit of the BBBEE Act. The BBBEE Act aims to facilitate BBBEE and promote economic transformation by: incentivizing meaningful participation by black people in the economy; changing the racial composition of ownership and management structures in enterprises; promoting investment programmes that lead to BBBEE; enabling access to economic activities, infrastructure and skills for black women and rural and local communities; increasing the extent to which workers, communities and cooperatives own and manage enterprises; and promoting access to finance for black economic empowerment (BEE).

In 2013, amendments to the BBBEE Act were introduced. These, together with the Codes change the current BBBEE framework and are the result of the Government’s intention to promote and implement BBBEE. Government policy has to date been based on the principle that the manner in which a firm applies BBBEE is to be decided by the individual firm having regard to its own business needs with the BBBEE framework providing a methodology for measuring the BBBEE rating of the firm. The new BBBEE framework introduces penalties in certain circumstances, which is an important departure from previous Government policy.

The Department of Trade and Industry (DTI), empowered by the BBBEE Act, has issued the BBBEE Codes of Good Practice on Black Economic Empowerment (the Codes). The Codes, which were promulgated in February 2007, require that every organ of national and local government and every public entity must, as far as is reasonably possible, apply best BEE practices in issuing licenses, implementing procurement policies, determining qualification criteria for the sale of state-owned enterprises and

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developing criteria for entering into public private partnerships. The Codes set out general principles for measuring ownership and management control, preferential procurement, employment equity, skills development, enterprise development and socio-economic development, including special guidance for qualifying small enterprises. The Codes also provide guidance on fronting practices, BEE verification, the recognition of contributions toward BEE of multinationals, and the treatment of public entities and other enterprises wholly-owned by organs of state. The Codes are subject to review by the Minister of Finance in 2017.

Multinational Companies

The Codes have given multinational companies flexibility in the manner in which they can implement the Codes, should they wish to do so. A multinational company trading in South Africa can retain sole ownership of its South African subsidiary, provided that alternative measures to broaden economic participation by black people, in terms of the Codes, are exercised. This retention of ownership by a multinational over its South African subsidiary can be achieved by implementation of “equity equivalent” programs which must be pre-approved by the Minister of the DTI as well as the ministry of the industry in which the relevant multinational enterprise operates. Such equity equivalent programs focus on skills transfer, empowerment of SMME businesses and broader socio-economic empowerment projects.

Public Entities and State Agencies

The BBBEE Act places a legal obligation on state agencies to contribute to BBBEE, including when developing and implementing their preferential procurement policies. The Preferential Procurement Policy Framework Act, 2000 (Act No. 5 of 2000) (PPPFA) was promulgated as a result of Section 217 of the Constitution, which states that all spheres of government must have a mechanism in place that would bring about categories of preference in allocation of contracts when procuring goods and services to advance historically disadvantaged individuals (HDIs). In December 2006, when the Codes were approved for gazetting, Cabinet gave the DTI and the National Treasury a mandate to amend the PPPFA to advance the objectives of the BBBEE Act. The draft amended PPPFA was gazetted for public comment on August 20, 2009. On June 8, 2011, the Minister of Finance gazetted new regulations in terms of the PPPFA which became applicable to all organs of state and public entities as of December 7, 2011, except selected “major public entities” and certain national and provincial government business enterprises set out in the Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA), which are exempted until December 7, 2012. In terms of the new regulations, the BBBEE contributorship level of an enterprise (calculated with reference to the Codes) will account for up to 20% of the scorecard in respect of all tenders valued between R30,000 and R1,000,000 and up to 10% of the scorecard in respect of tenders exceeding R1,000,000.

Private Sector

Although the BBBEE Act and Codes do not impose legal obligations on firms to comply with BBBEE targets, a firm’s BBBEE status is an important factor affecting its ability to successfully tender for Government and public entity tenders and (in certain sectors like mining and gaming) to obtain licenses. The amendments introduced in 2013 impose penalties in certain circumstances. Private sector clients also increasingly require their suppliers to have a minimum BBBEE rating in order to boost their own BBBEE ratings. BBBEE is accordingly an important factor to be taken into account by any firm conducting business in South Africa.

The BBBEE Act provides for the DTI to publish and promote any transformation charter (for later development into industry codes) for a particular sector of the economy, provided that charter (or code) is developed by the major stakeholders in that sector and advances the objectives of the BBBEE Act. These charters/codes set out a blueprint and timeline for the transformation of the relevant economic sectors. Examples include the Agri-BEE Charter, the Marketing, Advertising and Communication Sector Charter, the Integrated Transport Sector Codes, the Forest Sector Code, the Construction Sector Code, the Tourism Sector Code, the Chartered Accountancy Sector Code, the Property Sector Charter and the Information and Communication Technology (ICT) Code. Other charters are being developed and draft versions thereof have been released, including the draft Financial Sector Code.

Some of the biggest challenges facing the National Government in relation to the implementation of BBBEE include educating the South African public on the objectives, opportunities and perceptions relating to BBBEE, providing certainty as to the requirements of BBBEE, ensuring that the objectives of BBBEE are properly adhered to and encouraging investment in South Africa that advances BBBEE and promotes economic and social transformation.

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Land Reform

Land reform in South Africa is a complex issue, due to both the apartheid era legacy of dispossessing black South Africans of their land and to the current development challenges. Through the judicial framework process and the Constitution’s protection of private property rights, the National Government seeks to facilitate the equitable transfer of land to South Africans who were previously dispossessed of their land as a result of the land dispossession policies of the previous regime in South Africa.

The White Paper on Land Affairs of 1997 is a land reform strategy that focuses on restitution, redistribution and land tenure reform. Restitution involves either returning land or providing alternative compensation to persons who have been dispossessed of their land; redistribution encourages the acquisition of land by disadvantaged South Africans (with the aid of government grants); and land tenure reform aims to create a unified and secure system of landholding.

The Department of Rural Development and Land Reform had previously set 2014 as the deadline for achieving land reform in South Africa through the redistribution of 30% of white-owned commercial agricultural land to those previously dispossessed of such land. Section 25 of the Constitution provides that property may only be expropriated subject to compensation that is either agreed by those affected or decided or approved by a court. The National Government has been committed to executing its land reform strategy to uphold this constitutional principle.

In June 2007, the National Policy Conference of the ANC resolved that it was necessary to develop a detailed strategy in order to meet the 30% target. Pursuant to this, the Department of Public Works released a policy document on the expropriation of land and other property in the public interest or for public purposes. The policy document had two main objectives: (1) to enable the state to use expropriation as a means to affect land reform and (2) to align the Expropriation Act of 1975 with the Constitution. To achieve these goals, the Expropriation Bill was presented before Parliament on April 11, 2008, and was published for public comment after certification of the bill. On August 27, 2008, the Portfolio Committee on Public Works withdrew the bill until further notice, stating that more time was needed to ensure consultation with a wide variety of stakeholders. The National Government abandoned the 30% target in 2013. The focus is now on ensuring that all land reform farms are 100% productive. According to the Department of Rural Development and Land Reform, approximately 7.4 million hectares of land have been transferred to disadvantaged South Africans under the restitution and redistribution program; the initial 30% target was 24.6 million hectares.

The implementation of the land restitution and land reform programs are supported through allocations to the Department. Expenditure grew from R8.9 billion in 2012 to R9.5 billion in 2014, mainly due to the increase in land reform and restitution grants, and is expected to increase to R11.5 billion by 2019. The Commission on Restitution of Land Rights has developed a strategic plan to finalize the remaining claims that addresses issues such as price negotiation, untraceable claimants, disputes and jurisdiction. A total of 9,149 claims from the first round of restitution, which ended in 1998, remain unsettled. The Department of Rural Development and Land Reform is in the process of verifying all outstanding claims. The department provided R36 million for 2015/2016, 2016/17 and 2017/18 for the establishment of a Valuer-General office which establishes prices for the farms redistributed as part of the land reform. The Restitution of Land Rights Amendment Act of 2014 extends the lodgment of land claims for five years, from July 1, 2014 to June 30, 2019.

In response to the slow pace of land redistribution, many commercial farmers and farming organizations have elected to drive reform themselves by establishing transformation programs, which aim to preserve and enhance agricultural productivity. A partnership between government, farming organizations, communities, financiers and experts is required as promoted by the 50/50 policy under which farm workers own 50% of the farms.

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The National Government is also currently investigating policy options with regards to foreign ownership of South African land and its effect on the National Government’s ability to meet its Constitutional duties to effectively deliver on land reform. The policy options recommend that where land has been earmarked for reform, restitution or integrated human settlement, National Government approval is required for the sale of that land to foreign nationals.

Significant strides have been made in the area of land reform:

• as at March 31, 2015, 1,459 farms had been recapitalized;

• the Department of Rural Development and Land Reform employed 15,781 youths under the National Rural Youth Services Corps program.

Mining Industry Reform

Mining in South Africa has historically been undertaken largely by the private sector. As of January 2014, there were 1,699 registered mines and quarries in South Africa. The most important mining houses in South Africa include Anglo American plc, De Beers Corporation, African Mineral Limited, BHP Billiton SA, Gold Fields Limited, Impala Platinum Holdings Limited, Lonmin plc, Kumba Iron Ore Limited, Exxaro Limited, Xstrata plc and Harmony Gold Limited. These corporations, together with their affiliates, are responsible for the majority of the gold, diamond, uranium, zinc, lead, platinum, chrome, iron ore, coal and silver production in South Africa.

• Gross fixed capital formation in the mining industry increased significantly under the Mineral and Petroleum Resources Development Act No 28 of 2002 (MPRDA), from R18 billion in 2004 to R79 billion in 2013 (source: South African Reserve Bank).

• Foreign direct investment in the mining industry grew considerably, from R112 billion in 2004 to R429 billion in 2012 (source: South African Reserve Bank).

• Employment in the mining industry grew from 448,909 in 2004 to 495,000 in 2014.

• Mining contribution to GDP decreased from R245 billion in 2004 to R225 billion in 2014.

The Mineral and Petroleum Resources Development Act (MPRDA) and the Mining Charter

The National Government enacted the MPRDA in 2002. The MPRDA, which came into effect on May 1, 2004, together with the implementation of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry published on August 13, 2004 (the Mining Charter), recognizes the state’s sovereignty and custodianship over the country’s mineral resources. The MPRDA also provides for equitable access to mineral resources, expansion of opportunities for HDIs (including women-led entities) and promotes economic growth, employment and socio-economic welfare, and security of tenure. The Department of Mineral Resources (DMR), which is responsible for administering the MPRDA, is currently in the advanced stage of reviewing the MPRDA with a view to streamlining mining regulation in South Africa to optimize the contribution of the sector to national development priorities such as energy security and beneficiation and providing further clarity around such issues as the transfer, amendment, suspension and partitioning of rights. Among other things, the MPRDA Amendments Bill aims “to provide for the regulation of associated minerals, partitioning of rights and enhanced provisions relating to the regulation of the mining industry through beneficiation of minerals or mineral products.” The MPRDA amendments were tabled in Parliament in May 2013. The amendment bill was approved by the Parliamentary Portfolio Committee, the National Assembly and the National Council of Provinces in March 2014 and was sent back to the Parliament for consideration in January 2015. The Department received an additional R42 million over the medium term towards enforcing compliance with the MPRDA.

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The Minister of Mineral Resources (previously the Minister of Minerals and Energy) is the competent authority for granting prospecting and mining licenses. In granting rights to HDIs, the DMR’s objective for fiscal year 2014 was to grant 200 such licenses, 101 of which have been granted as of September 30, 2014.

An online mineral resources administration system, the South African Mineral Resources Administration System (SAMRAD), was launched in April 2011 to process mining license applications, which enables the monitoring of the status and improves overall quality of license applications. The SAMRAD was further strengthened with the upgrading and rollout of software in the 2014 fiscal year, which enables the public to view spatial data and produce shapefiles making the SAMRAD more user friendly, and ensures enhancement of the spatial planning function within government.

The DMR is also responsible for managing environmental impacts from mining-related activities, and by the end of September 2014, had conducted 1,111 environmental inspections out of a target of 1,700 inspections. The Department of Environmental Affairs has transferred some of the functions of the National Environmental Management Act related to mining activities to the DMR, which means the DMR would be the competent authority for environmental impact assessments from the mines and would also be responsible for developing tools and systems for mine environmental management and reporting. The DMR is currently developing measures to streamline the licensing process relating to mining environmental issues to improve turnaround times.

The vision of the Mining Charter is to create a globally competitive mining industry that reflects a non-racial South Africa and draws on the human and financial resources of, and offers real benefits to, all South Africans. The Minister of Mineral Resources, the Chamber of Mines and the National Union of Mineworkers signed the stakeholders’ declaration on strategy for the sustainable growth and meaningful transformation of South Africa’s mining industry on June 30, 2010. The Mining Charter was reviewed after its first five years, as agreed by its signatories. The result of the review was the 2010 amendment to the Mining Charter, which reaffirmed the 2014 targets of the Mining Charter (the Revised Mining Charter).

The requirement under the Mining Charter for mining entities to achieve a 26% ownership by Historically Disadvantaged South Africans (HDSA) of mining assets by the year 2014 was retained. According to the Chamber of Mines, this target has been achieved, but conversations about broader transformations in the mining industry remain ongoing between the DMR and the Chamber. Amendments to the Mining Charter in the Revised Mining Charter include, amongst other things, the requirement by mining companies to: (i) facilitate local beneficiation of mineral commodities; (ii) procure a minimum of 40% of capital goods, 70% of services and 50% of consumer goods from HDSA suppliers by 2014 (these targets are exclusive of non-discretionary procurement expenditure); (iii) ensure that multinational suppliers of capital goods contribute a minimum of 0.5% of annual income generated from South African mining companies towards the socio-economic development of South African communities via a social development fund beginning in 2010; (iv) achieve a minimum of 40% HDSA demographic representation by 2014 at all levels of management; (v) invest up to 5% of annual payroll in essential skills development activities; and (vi) implement measures to improve housing and living standards for mineworkers by converting or upgrading mineworkers’ hostels into family units, attaining an occupancy rate of one person per room and facilitating home ownership options for all mineworkers in consultation with organized labor, all of which must be achieved by 2014. In addition, mining companies are required to monitor and evaluate their compliance to the Revised Mining Charter and must submit annual compliance reports to the DMR.

The Scorecard for the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry attached to the Revised Mining Charter (the Scorecard) makes provision for a phased-in approach for compliance with the above targets over the five-year period ending in 2014. For measurement purposes, the Scorecard allocates various weightings to the different elements of the Revised Mining Charter. Failure to comply with the provisions of the Revised Mining Charter will amount to a breach of the MPRDA and may result in the cancellation or suspension of a mining company’s existing mining and/or prospecting rights.

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The DMR initiated a process of evaluating the progress on the implementation of the Mining Charter during the 2014 fiscal year, the findings of which will constitute a critical input to the review process. The findings of the report were released in May 2015.

In 2008, the Mineral and Petroleum Resources Development Amendment Act was passed to do the following:

• improve the MPRDA;

• transfer environmental regulation of mines to the Minister of Environmental Affairs and Tourism;

• deal with challenges of implementing the MPRDA;

• implement technical improvements to the MPRDA to improve efficiency in the management of the country’s mineral resources;

• improve the handling of residue stockpiles and residue deposits; and

• streamline the process of obtaining ministerial approval for cessions, transfers and encumbrances of rights aimed at promoting and protecting new entrants into the mining industry and of facilitating economic development.

The MPRDA Amendments Bill was referred back to Parliament in January 2015 after the former Mineral Resource Minister, Ngoako Ramatlhodi, requested it, initially on the basis that the preparation of the bill through Parliament had been unconstitutional.

The MPRDA Amendment Act is yet to come into force. The DMR is currently looking at further possible amendments to the MPRDA to reinforce its objectives, to promote investment in the mining sector and to improve the system of granting rights.

A mineral beneficiation strategy was adopted by Cabinet in July 2011, focusing on five strategic value chains: iron and steel, energy commodities, jewelry fabrication, autocatalytic converters and diesel particulate filters, and pigment and titanium metal production. The purpose of the strategy is to outline a framework for the orderly development of the country’s mineral value chains, enabling South Africa to develop its mineral wealth to its full potential and to the benefit of the entire population. Its vision is to advance economic development in South Africa through the optimization of linkages in the mineral value chain, facilitate economic diversification, create jobs and promote industrialization. It aims to expedite South Africa’s move towards a knowledge-based economy and contribute to GDP growth through increased mineral value added per capita. The strategy is designed to align with South Africa’s national industrialization program and aims to create jobs in an economically diverse and environmentally sustainable manner, increase South Africa’s competitiveness and expand its industrial knowledge base.

Following the adoption of the mineral beneficiation strategy, the DMR tabled two of the five pilot value chains (iron and steel and energy) as outlined in the strategy, which were approved by Cabinet in October 2011. The DMR is working on the development of a beneficiation strategy framework which will include the five pilot value chains outlined in the beneficiation strategy. The framework outlines a set of enablers that are intended to bring about the orderly development of mineral value chains domestically and represents an opportunity for South Africa to catalyze industrialisation and contribute towards economic growth.

In 2009, the DMR published the national strategy for the management and rehabilitation of derelict and ownerless mines in South Africa, which aims to guide the management of mining legacies, with the dual purpose of rendering mines productive and environmentally safe. It proposes a course of action for the state to discharge its responsibility regarding constitutional environmental rights as contemplated in section 24 of the Constitution. The implementation of the strategy will continue, with annual updates of the

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estimated state liability for the rehabilitation of derelict and ownerless mines being completed by actuarial scientists commissioned by the DMR. The DMR rehabilitated 28 mine sites in the period ended March 31, 2014, which contributed to the creation of 284 jobs. Job creation is a key requirement for all projects as it addresses some of the priorities of the NDP. The rehabilitation program has a positive impact on communities, resulting in economic growth through locally sourced labor and material, and improved health and wellbeing of communities. Furthermore, it reduces human and animal exposure to asbestos fibres from historical asbestos mine sites. The management and implementation of the rehabilitation of derelict and ownerless mines project received an additional allocation of R5 million in 2014/15 for 11 dangerous mine holdings that required immediate attention, bringing the total investment for this project to R89 million over the medium term. The DMR aims to rehabilitate 150 derelict and ownerless mines in the MTEF period to limit the flow of acid mine water into the environment, keeping abreast with the Government’s 2014-2019 medium-term strategic framework (MTSF) for the period for the protection and enhancement of environmental assets and natural resources.

Other Mining Industry Initiatives and Legislation

The Mineral and Petroleum Resources Royalty Act of 2008 (the Royalty Act) is aimed at ensuring that the country benefits from the exploitation of its mineral resources by imposing a resource rent on holders of rights. It also seeks to stimulate investment in the sector by addressing potential investors’ need for regulatory certainty. The Royalty Act recognizes that mineral resources are non-renewable and are part of the common heritage of all South Africans, and thus imposes a royalty on the extraction and transfer of mineral resources. The Schedules to the Royalty Act set out the classification of the mineral resources and their corresponding royalty rate. The Royalty Act was passed by the National Assembly on August 21, 2008 and the National Council of Provinces on September 23, 2008. The Royalty Act was assented to by the President on November 24, 2008 and came into force in stages between November 1, 2009 and March 1, 2010.

In addition, in 1999, the National Government launched an organization called the South African Women in Mining Association, with a focus on assisting informal mining groups in obtaining mining rights, running mining businesses and promoting female empowerment in the mining sector in accordance with the provisions of the Mining Charter. This initiative was followed by the launch in 2007 of the Youth in Energy and Mining (YEM), a program aimed at young people with an interest in the mining and energy sectors. YEM seeks to promote skills development, procurement, beneficiation enterprise development and small scale mining.

There has been an increase in the number of women participating in the mining sector since 1994. All stakeholders need to ensure that effective interventions are implemented to prevent intimidation of women in mining, whilst more attention should also be given to the health and safety of women in the sector.

The mining industry has also established the Mining Industry Growth, Development and Empowerment Task Team (MIGDETT) to help manage the negative effects of the global economic crisis and to save jobs, as well as to position the industry for growth and transformation in the medium to long term. Membership of MIGDETT includes the mining industry, the National Government, organized labor and other stakeholders.

Health and safety standards within the industry are governed by the Mine Health and Safety Act (Act 29 of 1996) (MHSA). Mining safety continues to be an area of concern as on average there are approximately 125 mine worker fatalities annually. These fatalities are partially attributable to a lack of stringent safety measures. Land slide accidents remain the largest cause of fatalities, followed by transportation and machinery accidents. During 2011, consultations took place to consider amendments to the MHSA. The proposed amendments are designed to strengthen enforcement, simplify the administrative system for the issuing of fines, reinforce offences and penalties, and remove ambiguities in certain definitions and expressions in the MHSA, and promote consistency with other laws, particularly the MPRDA. The MHSA draft amendments were tabled to Cabinet for approval for publication in the government gazette

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and public consultation in November 2013. DMR has engaged in enhanced geoscience research and development, promoted mineral beneficiation and mine health and safety policy development and continued promotion and regulation of the diamond and precious metals industries. As part of a strategy for enhancing state participation in the mining industry, the Cabinet approved the establishment of the African Exploration Mining and Finance Corporation (AEMFC) to serve as the nucleus of a newly established state-owned mining company.

Successful implementation by the DMR of its development strategy for the mining sector requires stakeholder engagement to address current infrastructure, workforce skill development, and regulatory constraints, as well as to encourage exploration and research and development. As discussed in greater detail, below, under “The South African Economy—Mining and Quarrying”, a significant challenge for the DMR and industry stakeholders is the repairing of industrial relations following wildcat strikes initially sparked by the death of 40 mine workers during an August 2012 strike at the Lonmin mine in Marikana which then led to on and off strikes throughout parts of 2012 and 2013. The most significant strike in 2014 was the six-month strike in the platinum sector in the first half of 2014. A draft framework agreement for a sustainable mining industry was entered into by organized labour, organized business and government on June 14, 2013. The aim of the framework agreement was to promote stability in labour relations and ensure the sustainability of the mining sector. In September 2015, another mining pact was entered into between mining companies, unions and the government to limit the extent of adverse operating conditions on potential job losses going forward. In November 2015, a Mining Phakisa brought together business, labour and government to identify priorities to achieve the objectives of increasing mining exploration, investment, production, sustainability and transformation of the industry.

In September 2012, the Cabinet approved the moratorium on the acceptance and processing of applications to explore shale gas, allowing normal exploration (excluding the actual hydraulic fracturing) to proceed under the existing regulatory framework.

The approval was granted with some of the following recommendations:

• Allowing normal exploration (excluding the actual hydraulic fracturing) to proceed under the existing regulatory framework. Licensing should take into consideration the State’s developmental objectives and environmental protection requirements;

• The augmentation of the current regulatory framework. The establishment of the appropriate regulations, controls and co-ordination systems is expected to take six to 12 months;

• Collaboration by the Ministers of Science and Technology and of Mineral Resources in developing mechanisms for the co-existence of the astronomy research projects and the exploration for an possible extraction of shale gas in the Karoo;

• Once all the preceding actions have been completed, the authorization of hydraulic fracturing under strict supervision of the monitoring committee. In the event of any unacceptable outcomes, the process may be halted;

The DMR developed and published the technical regulations for shale gas development in the Government Gazette for public comments which was tabled for Cabinet approval in October 2013. The regulations place particular emphasis on unconventional extractive mechanisms for gas in the Karoo Basin and are also aimed at ensuring the developments are executed in a socially and environmentally safe manner to address concerns of communities as well as other interested and affected stakeholders. The final technical regulations, published in 2014, are intended to establish an orderly exploration of the shale gas potential in a manner that protects the water and environment and coexists with other key program of government, such as the Square Kilometer Array (SKA).

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A Communications Strategy for Shale Gas Development in South Africa was tabled for Cabinet approval in September 2014 to inform and educate the South African populace and stakeholders about the inherent potential of shale gas exploration and exploitation. In addition to enforcement activities such as inspections, the Department will conduct research and advocacy work on hydraulic fracturing in preparation for licensing shale gas exploration and for monitoring compliance with the regulations once the exploration starts. The Department received an additional R108 million over the 2014/15 MTEF period for this work. Shale gas exploration is expected to contribute to economic growth and job creation, and five applications are in the final stages of considerations.

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Crime Prevention

The criminal justice system (CJS) continued to implement the 2014-2019 MTSF objectives for the government to ensure that all people in South Africa are and feel safe. Progress has been made in a number of areas and initiatives are continuously being reviewed with a view to realize full effectiveness.

In order to ensure stability in the country the Justice Crime Prevention and Security (JCPS) Cluster has continued to initiate measures aimed, amongst others, to decrease serious crime and corruption, improve the efficiency of the CJS, enhance border management and protect the integrity of identity documentation. An Inter-Ministerial Committee on Immigration was established following attacks on foreign nationals in April 2015. This was enhanced by the implementation of Operation Fiela which was an interdepartmental and multi-disciplinary initiative that targeted crime hotspots around the country. From April 1, 2015 to June 30, 2015, a total of 9,968 arrests were made primarily for possession of drugs, undocumented immigration, illegal dealing in liquor, and assault. Screening of foreign nationals another key component of Operation Fiela, and out of 6,781 individuals awaiting deportation that were screened from April to July 2015, 1,694 were linked to crimes committed in the Republic of South Africa. In total, 15,396 of foreign nationals who were in South Africa illegally were repatriated to their home countries between April and July 2015.

The implementation of the National Cybersecurity Policy Framework 2012 continues and to date, a number of related policy documents have been developed which include the National Cybersecurity Policy, National Critical Infrastructure Policy and the Cybercrime Policy. Furthermore, as part of the legislative reforms, the Cybercrimes and Cybersecurity Bill 2015 has been submitted for public consultation in 2015. The bill aims to introduce measures which are directed at combating cybercrimes and to establish structures, such as the Cyber Security Centre and the National Cyber Center, that would be dealing with cybersecurity, as envisaged by the NDP. Furthermore, the bill will regulate the identification and declaration of the National Critical Information Infrastructure and measures to protect the Information Infrastructures.

To further enhance border security and management, the Government has made significant progress in establishing a Border Management Agency. The draft Border Management Agency Bill has been published for public comment in 2015.

In support of the establishment of a resilient anti-corruption mechanism, South Africa is in the process of developing a coherent and holistic anti-corruption policy framework. An Inter-Ministerial Committee on Prevention and Combating of Corruption was established in July 2014 to coordinate and oversee the work of institutions responsible for combating corruption. This role was expanded during 2014/15 to operationalize government’s anti-corruption agenda and make corruption a national priority. In order to curb corruption and misconduct within the police service, the Independent Police Investigative Directorate (IPID) is mandated to investigate allegations of police misconduct and make the necessary recommendations to SAPS, for disciplinary action, or to the National Prosecuting Authority, for prosecution. In 2014/15, SAPS implemented 978 out of the 1,000 recommendations submitted to it by IPID.

The current compilation of an interdepartmental implementation plan of the CJS Seven Point Plan first introduced in 2007 is expected to pull together and concisely define all the efforts towards improving the efficiency of the CJS and implementation of the CJS Seven Point Plan. The implementation of the Seven Point Plan across the value chain is an on-going process including short, medium and longer term activities. Achievements since 2007 include the development of protocols to improve count performance, improvement of CSS processes, such as finger printing, improvement of case flow management, and the development of Judicial Standards and Norms.

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After the Prevention and Combating of Trafficking in Persons Act (2013) was passed into law, a Trafficking in Persons Inter-Sectoral Task team was established, a national strategic plan for trafficking in persons was finalized and the legislative provisions relating to trafficking have come into operation in August 2015.

A process to establish an integrated and seamless national CJS information system and implement a programme of modernisation of the CJS is underway across participating departments. A number of new or improved departmental systems have been introduced and valuable information has become available to the CJS for monitoring purposes Such as the 28 Key Performance Indicators dashboard, which is used to measure the performance of the CJS using real production data to inform effective decision-making. The indicators include: incident response time, crime scene response time, initial case investigation time, case acceptance rate, investigator case load, repeat suspect rate, case investigation certification time, adjudication time, rate of alternative sentencing utilization among others. Some of the solutions are at pilot stage and once they have been fully rolled out, the efficiency and effectiveness of the criminal justice system is expected to improve.

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South African Police Service

The NDP vision read together with outcome 3 of the MTSF, on ensuring that all people in South Africa are and feel safe, calls for the demilitarization and professionalization of the police service. In 2014/15, the department’s work was therefore positioned towards the achievement of these objectives.

As part of the SAPS’ ongoing work to professionalize the police service, the following broad interventions were implemented by the department in 2014/15 and are expected to continue over the medium term: establishing relations with research and academic institutions on curriculum development and research areas for the policing sector, including capacitating the department’s research institute; inclusion of the police code of conduct in the department’s disciplinary regulations, performance appraisals and basic training program; conducting marketing campaigns to attract young graduates to the police service; streamlining the process for dealing with disciplinary cases in the department; and launching of the community-based recruitment and selection strategy, which seeks to ensure that communities participate in recruiting police officers from their communities.

Demilitarization of the police service remains one of the department’s key strategic focus areas. With the ever growing number of public protests in South Africa, in 2014/15 the department’s capabilities in ensuring domestic stability amidst the increasing number of violent public protests were strengthened. In this regard, the department provided policing services during public protests within the guidelines that accept the citizens’ right to protest peacefully. Accordingly, of the 14,470 protests in 2014/15, 12,451 were peaceful. In addition to ensuring that all public protests are undertaken peacefully, the department provides policing services during national and international events held in the country as part of its endeavor to ensure domestic stability. Over the last few years, the department has successfully managed and coordinated 83 international, national and local operations, 65 sporting and recreational events, as well as nine Cabinet-approved major events.

Over the medium term, the department will implement the following interventions towards demilitarization of the police service: develop self-discipline and leadership programs for its staff, provide appropriate training and equipment to members to deal with public order policing, re-capacitate the public order policing environment and procure new fit-for-purpose equipment, develop change and transformation programs, and undertake advocacy campaigns regarding the Police Code of Conduct.

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Justice and Constitutional Development

To ensure that confidence is restored in the justice system and judicial administration is improved, the Constitution Seventeenth Amendment Act (2013) and Superior Courts Act (2013) came into effect and provide for institutional judicial reforms. These Acts affirm the Chief Justice as the head of the judiciary, whose responsibilities include developing court administration policy, norms and standards for the exercise of judicial functions of all courts.

In line with the use of technology in order to improve efficiency, the department continued to implement the electronic funds transfer (ETF) system in courts for maintenance payments. So far, this system has been successfully introduced in 392 courts countrywide, resulting in 98% of maintenance payments being made through the EFT system. This saves the beneficiaries time and transportation costs, as well as reducing the risks of theft in courts. Furthermore, the benefit of using technology in courts is evident in the use of the audio-visual remand (AVR) procedure that links magistrates courts to correctional detention centers via CCTV technology. As at the end of the 2014/15 financial year, 10,019 criminal cases were remanded using AVR systems at 47 magistrates courts and 21 correctional facilities. This has resulted in the reduction of costs and the risks associated with detainees being transported from correctional facilities to courts.

During the 2015/16 financial year, the department tabled the Justice Administered Fund Bill (2015) before Parliament. The aim of the bill is to establish a Justice Administered Fund to regulate the management, control, investment and utilization of money on behalf of third parties, including funds received under maintenance orders and money received as bail. Once the bill becomes law, its implementation is expected to enhance the organizational efficiency and transform justice services by creating a legislative framework for Third Party Funds.

As a result of the implementation of the Promotion of Equality and Prevention of Unfair Discrimination Act (2000), the department designated all the magistrates courts as Equality courts. This has improved access to justice, as the public can lodge complaints of unfair discrimination at the magistrates courts nearest to their community. Between 2013/14 and 2014/15, cases filed in these courts increased from 612 to 844. Of these, hate speech, harassment and unfair discrimination were most common.

Other key legislation that has been passed includes the Protection of Information Act (2014). The aim of the Act is to give effect to the constitutional right to privacy by safeguarding personal information when processed by a responsible party. Furthermore, the Act will regulate the manner in which personal information may be processed, by establishing conditions, in harmony with international standards, that prescribe the minimum threshold requirements for the lawful processing of personal information, provide persons with rights and remedies to protect their personal information from processing that is not in accordance with the Act and to establish measures, including the establishment of an Information Regulator to promote, enforce and fulfil the rights protected by the Act.

Correctional Services

During 2014/15, the Department of Correctional Services (DCS) continued to play a crucial role in steering the administration of correctional services on behalf of the country. In particular, DCS contributed to delivery of a key aim of the MTSF by: (a) increasing the number of offenders who participate in rehabilitation programs; (b) reducing the number of escapes; and (c) increasing the percentage of probationers without violations. Furthermore the department remained committed to placing humane and safe detention at the core of service delivery.

The DCS plans to implement initiatives that include: (a) the Policy on the Provision of Palliative Care in order to provide guidelines on the prevention of palliative care in the department by the different internal and external stakeholders; (b) the Policy on Correctional Sentence Plans and programs for offenders incarcerated for 24 months and less (which is driven by offender statistical profiles showing that re-offending is higher among offenders incarcerated for 24 months and less); and (c) the Policy on Electronic Monitoring (EM), to provide a uniform directive on the placement of persons under EM and to enhance common understanding in the interpretation of the supervision and monitoring prescripts by officials. The electronic monitoring system has already been introduced to help in managing population levels in correctional facilities. The system is also used as a measure of affirming the safety of communities, and reducing recidivism. For the period ending March 31, 2015, 604 persons were tagged. Other strategies

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implemented to manage overcrowding included: (a) strengthening of diversion programs for alternative sentencing; (b) creating additional bed spaces; (c) improved management of the parole system; (d) successful reintegration of offenders into society; and most importantly (e) the reduction of re-offending by increasing the success of rehabilitation in a participatory, holistic and integrated manner.

To enhance the rehabilitation of offenders the department has increased the number of Further Education and Training (FET) full-time correctional schools from one in 2009 to 14 in 2014. The proportion of offenders who participate in training and further education programs increased from 22.1% in 2013/14 to 85% in 2014/15. Furthermore, there has been an improvement in the percentage of offenders with correctional sentence plans from 64% in 2013/14 to 68.3% in 2014/15.

Correctional spending over the next five years will be focused towards increasing participation in rehabilitation programs and strengthening the system of community corrections, in order to enhance the social functioning and reintegration of offenders into the community in line with the recommendation of the NDP.

International Relations

Having emerged from the international isolation of the apartheid era, South Africa has become a leading international actor. Its principal foreign policy objective is to promote a better South Africa and contribute to the development of a better and safer Africa in a better world.

United Nations

South Africa is one of 51 founding members of the United Nations (UN) in 1945. South Africa was re-admitted to the UN in 1994 following the country’s expulsion by the UN General Assembly in November 12, 1974 as opposition to apartheid at the time. Twelve years after re-admittance, South Africa was elected to serve as a non-permanent member of the UN Security Council during the period 2007-2008, and South Africa began its second term as a non-permanent member of the UN’s Security Council for the period 2011-2012 on January 1, 2011.

South Africa is amongst 14 new countries that were elected to be part of the UN Human Rights Council from 2014 to 2016 on November 12, 2013. The UN Human Rights Council is responsible for strengthening the promotion and protection of human rights around the world. South Africa previously served as a founding member of the Human Rights Council for two consecutive terms from 2006 to 2010. Other countries represented by the 47-member body are, namely: France, Macedonia, Maldives, Mexico, Morocco, Namibia, Britain, China, Russia, Cuba, Saudi Arabia, Algeria and Vietnam.

South Africa remains a member of the UN General Assembly to the 47-Member Economic and Social Council of the United Nations (ECOSOC). ECOSOC is a premier organ of the United Nations responsible for economic and social development matters of the world.

International Monetary Fund

With the first fully democratic national elections in 1994, South Africa regained the full rights and obligations of membership of the IMF and the World Bank and its affiliated agencies.

South Africa is a founding member of the IMF and has always been in good standing with full access to technical and financial assistance from the institution. As at October 30, 2015, South Africa’s quota in the IMF is SDR1,868.5 million (equivalent to US$2,610.1 million); and its 19,422 votes account for 0.77% of the total number of votes. South Africa’s current financial position in the IMF reflects no borrowing from the IMF.

South Africa has committed US$2 billion to strengthen the IMF’s resources at the G20 Leaders Summit in Los Cabos, Mexico in June 2012. The commitment is in addition to South Africa’s existing contributions to the IMF’s quota resources. Also, South Africa is one of 40 participants that have ratified the IMF’s expanded and amended New Arrangements to Borrow (NAB), to which South Africa committed SDR340 million (US$474.9 million). South Africa transferred net loans totalling SDR36.7 million to the NAB as at September 30, 2015.

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In addition to calls for NAB transfers, South Africa has received separate calls for quota funding from the IMF as a member of the Financial Transactions Plan (FTP) since April 2013. The overall maximum amount of resources that South Africa could be expected to contribute to IMF lending under the FTP is limited to its quota share. South Africa’s quota-based contribution to the IMF consists of Rand resources and promissory notes.

South Africa also contributes funds to the Poverty Reduction and Growth Trust (PGRT), the IMF’s instrument for financial support to low-income countries (LICs). In addition, South Africa contributed its distribution in windfall gold sales profits earmarked by the IMF’s Executive Board for the PGRT, effective October 22, 2013.

World Bank

South Africa is the founding member of the World Bank Group, which comprises the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency.

Following 2010 governance reforms agreed to by World Bank Governors, South Africa’s voting power in the IBRD stands at 0.83%. South Africa contributed a total of US$27.2 million to the IBRD recapitalization through the General Capital Increase to be paid over six years (2011-2016). The recapitalization was to strengthen the balance sheet of the IBRD as part of the World Bank Group’s response to the global financial crisis.

Cooperation between South Africa and the World Bank is based on a Country Partnership Strategy (CPS). A new CPS is now in place for the period 2014-2017. The implementation of the partnership agreement will be guided by three pillars based on the key objectives of the National Development 2030. Thus it will focus on reducing inequality through the urban program, health and financial exclusion; promoting investments through energy, private investments and environment programmes; and strengthening institutions in basic education and asset, debt and risk management programs. A notable achievement under the previous CPS has been the World Bank’s financing for US$3.75 billion loan of the Medupi power station to produce 4,800 megawatts of dry-cooled coal fired energy.

During the fiscal year 2015, the Multilateral Investment Guarantee Agency (MIGA) provided an $800 million guarantee to Eskom to cover for a risk of the non-payment by the government of South Africa. Eskom plans to use this guarantee to access a syndicated loan from the private investors to continue with its current capital expenditure programme. The period of the guarantee is up to 15 years.

Since its inception, South Africa has been the only African country to participate as a donor in the International Development Association (IDA), the World Bank’s concessional lending window. In 2014, IDA 17 replenishment negotiations were concluded and South Africa pledged a total contribution of R272 million for the 2015-17 lending window.

South Africa joined the private investment arm of the World Bank, the International Finance Corporation (IFC) in 1957—one year after the IFC’s foundation. The total Investments committed by IFC in 2014 for South Africa amounted to US$201 million. Furthermore, South Africa partners with the IFC in delivering technical and advisory assistance to organizations in South Africa and the region, with the aim of reducing poverty through private sector growth.

General Agreement on Tariffs and Trade

South Africa is a founding member of the General Agreement on Tariffs and Trade (GATT), participated in the Uruguay Round of Multilateral Trade Negotiations and acceded to the Marrakesh Agreement that established the World Trade Organization (WTO) in 1994. It is also part of the generalised system of preferences of Canada, the European Union (EU), Japan, Norway, Russia, Switzerland, Turkey and the U.S. In October 1999, South Africa signed an Agreement on Trade, Development and Cooperation, known as the European Trade Agreement, with the EU so as to consolidate strategic links between South Africa and its largest trade and investment partner. South Africa’s bilateral trading relationship with the EU was elevated to a higher level following the commencement of full implementation of the South Africa EU Trade and Development and Cooperation Agreement, which took effect in May 2004.

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Organization for Economic Cooperation and Development

South Africa enjoys a strong partnership with the Organization for Economic Cooperation and Development (OECD) and participates in numerous programs and committees. Cooperation is most developed in the areas of competition, tax administration, anti-corruption, science and technology innovation, agriculture, tourism, statistics, public debt management and bond market, and economic assessment. South Africa is a signatory to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and mutual acceptance of data. South Africa plays a leading role in the region in the area of tax administration and has played a key role in the establishment of the African Tax Administrators Forum, an initiative aimed at enhancing the capacity and capability of African tax administrators and domestic resource mobilization in general.

Group of 20 (G20)

South Africa is a member of the Group of 20 which has been meeting regularly since 1999 to discuss and collaborate on global economic policy coordination. The G20 brings together the major advanced and emerging market economies, which together represent around 85.0% of global GDP, 75.0% of global trade and two-thirds of the world’s population. As the only permanent African country member in the G20, South Africa often champions development issues specific to emerging market and developing economies (EMDEs). In addition, South Africa continues to engage with African Representatives, the African Union (AU) and the New Partnership for Africa’s Development (Nepad) in the G20.

South Africa is also a member of the Financial Stability Board (FSB), a structure responsible for setting standards and monitoring the progress of financial regulation globally. South Africa is an early adaptor of FSB recommendations to strengthen domestic and global financial regulation.

BRICS

South Africa became a member of BRICS in December 2010 and has participated in all subsequent summits since. On July 15, 2014, at the Sixth BRICS Summit held in Fortaleza, Brazil, BRICS leaders signed the Treaty Establishing the Contingent Reserve Arrangement (CRA), and the Inter-governmental Agreement and Articles of Agreement establishing the New Development Bank (NDB). The CRA will have an initial size of US$100 billion, and each country’s individual commitments to the CRA will be as follows: China (US$41 billion); Brazil, India, and Russia (US$18 billion each); and South Africa (US$5 billion). The NDB shall have an initial authorized capital of US$100 billion. The initial subscribed capital shall be US$50 billion, equally shared among founding members. The first chair of the Board of Governors will be from Russia, the first chair of the Board of Directors from Brazil, and the first President of the Bank from India. The headquarters of the Bank will be located in Shanghai. The New Development Bank Africa Regional Centre shall be established in South Africa concurrently with the headquarters.

Commonwealth

In 1994, South Africa re-joined the Commonwealth, from which it had been obliged to withdraw shortly after it became a Republic in 1961. In the Commonwealth, South Africa’s participation is limited to promoting economic, social and cultural cooperation and enhancing democracy through the Commonwealth Heads of States and Ministers’ meetings.

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Development Finance Institutions (DFIs)

South Africa has seven national DFIs which are state-owned and which report to their respective National Government shareholder departments. They do so by providing funds related to a variety of development-associated objectives such as job creation, provision of low-cost housing, agricultural development, small and medium enterprise development and industrial and infrastructure development.

DFIs are funded through a mixture of National Government funds, such as grants, guarantees, borrowings and state income. Currently only two DFIs, the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) are permitted to operate and invest outside the borders of South Africa. The DBSA’s mandate was extended to beyond the South African Development Community (SADC) in 2014 through the amendment of the DBSA Act.

The financial position of the DFIs as of March 31, 2015 is as follows:

• DFIs total assets amounted to R244 billion.

• 99.5% (R 243 billion) of these total assets are held by major DFIs: DBSA, IDC, Land Bank, National Empowerment Fund & National Housing Finance Corporation (NHFC).

• The DFIs total development resources (development loans and equity) amount to R182 billions. Of these resources, 66% (R120 billion) is channeled towards development lending, and 34% (R62 billion) is in equity investments.

• DBSA’s development lending to its total assets is at 80% (R50 billion), Land Bank at 90% (R33.3 billion) and NHFC at 59% (R1.8 billion).

• DBSA and Land Bank constitute the highest development lending of all DFIs, 47% (R57 billion) and 31% (R37 billion) respectively.

• The resources that IDC deployed to development amount to R80 billion which consists of 72% (R57 billion) of equity investments and 28% (R22 billion) development lending.

DFIs are governed by, amongst others, the Public Finance Management Act of 1999 (PFMA) and their own individual legislation and regulations. The National Government has emphasized that DFIs need to operate on a financially stable basis and be guided by the National Development Plan and several sectorial government development policies. Currently the Government is in the process of reviewing South Africa’s development finance system in an effort to develop a coordinated approach for government-wide DFI policy.

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Public Health

South Africa has a well-established health sector and spends approximately 8.5% of its GDP on health care. Private sector facilities are of world class standard while some of the public sector facilities need improvements. There are over 4,000 public health facilities, including approximately 400 hospitals throughout the country. Public sector institutions are expected to be progressively strengthened as the National Health Insurance (NHI) program is implemented. Minister of Health Dr Aaron Motsoaledi, a medical doctor, was appointed in 2009, and subsequently a number of improvements have been achieved in the health sector.

Interventions to strengthen the public sector and improve the quality and the service delivery aspect are underway. The primary health care reengineering program, the tertiary hospitals infrastructure upgrading, the Ideal Clinics initiative and the NHI pilot program are some of these interventions aimed at improving public sector care. The re-engineering strategy rests on four legs: district clinical specialist teams (DCST), the integrated school health program (ISHP), ward-based primary health care outreach teams (WBPHCOT), and contracting and purchasing of services from health professionals (primarily GPs). Other matters under consideration are the alignment of the procurement of medicines by bulk buying to enable cheaper prices and the direct delivery of medicines and medical supplies. Mortality rates have begun to decline— infant mortality has significantly declined from 37 deaths per 1,000 live births in 2010 to 29 in 2013. According to Stats SA’s 2015 mid-year population estimates, life expectancy at birth has now reached 60.6 years for men and 64.3 years for women.

Governance and Oversight

The Department of Health continues to play an active oversight role in the health sector, formulating policies, designing guidelines and monitoring their implementation in both the private and public sectors. Recent policies and guidelines include:

• The establishment of the Office of Health Standards Compliance as a public entity in 2014/15 to accomplish adherence to norms and standards by all health facilities through inspections and certification of public and private health establishments.

• The White Paper on the NHI is at an advanced stage and is expected to be released to the public in the coming months.

• The National Strategic Plan for HIV, STIs and TB 2012-2016 was launched in 2012 and significant progress has been made.

• The HIV/AIDs treatment guidelines published in December 2014 came into effect in January 2015. According to these guidelines, the threshold for initiation of antiretroviral treatment (ART) was raised from 350 cells/mm3 to 500 cells/mm3. This is in an effort to achieve the UNAIDS 90-90-90 targets by 2030: that 90% of people living with HIV know their status, 90% of those that know their status are initiated on ART and that 90% of those receiving treatment have suppressed viral loads.

• In recognition of the emerging non-communicable diseases epidemic in South Africa, the National Department of Health published the Strategic Plan for the Prevention and Control of Non-Communicable Diseases 2013-17.

Service Delivery

The number of people on ART more than doubled from 1,462,527 in March 2011 to 3,103,902 as March 31, 2015, and the Nurse Initiated Management of Antiretroviral Therapy (NIMART) program was launched which has expanded access to antiretroviral drugs (ARVs).

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Human Resources for Health

• The public sector has roughly 309,000 employees and there are over 19,000 employed doctors and over 136,000 nurses.

• Health personnel numbers have increased by 80,578 over the past ten years, but have stabilized over the past five years as a result of cost containment measures and budgetary constraints.

• In order to address the shortage of human resources in the rollout of ART, the Human Resources for Health Strategy incorporates task shifting (the delegation of tasks performed by physicians to staff with lower-level qualifications).

Medical products and technologies

• GeneXpert^®, a new molecular test for TB, was introduced in the public sector, and in 2014/15 the TB treatment success rate was 82.5% as compared to 68% five years earlier

• Introduction of dual and triple therapy has significantly reduced the mother-to-child HIV transmission rate to 1.5% in 2014/15 and continues to decline;

• Pneumococcal and rotavirus vaccines are being offered to all South African children to protect against pneumonia and diarrhea, respectively;

• The human papilloma virus (HPV) vaccine was introduced in 2014/15 to protect Grade 4 girls against cancer of the cervix at a later stage in life. In 2014/15, 91.3% of all Grade 4 girls received the first dose of the vaccine;

• A new fixed dose combination ARV drug (i.e. patients take a single pill per day instead of several different pills) is being offered in the public health sector with the intention to improve treatment compliance.

Health Funding

The public sector is tax funded through a progressive taxation system while the private sector patients mainly use medical health insurance with some out of pocket payments. Public health spending was approximately R162 billion in the 2014/15 fiscal year (including the school nutrition program and training of medical professionals), slightly less than private health spending (R167 billion). Evidence-based resource allocation is being implemented in the area of HIV/AIDs with the Investment Case being utilized to guide budget allocation for HIV/AIDs programs in the MTEF.

HIV, AIDS and TB

The socio-economic impact of the HIV and AIDS epidemic on South Africa is significant and the National Government has made the curtailment and treatment of this disease a high priority. This, along with the treatment and prevention of TB, is part of a multi-pronged strategy to improve public health services which also includes hospital revitalization, increasing the numbers of public health workers and the introduction of new-generation child vaccines as well as improved infectious and non-communicable disease control programs.

Stats SA has estimated that, as of June 30, 2015, 6.19 million or 11.2% of the population was living with HIV in South Africa. According to the Human Sciences Research Council (HSRC), HIV incidence (the number of new infections) in the 15-49 age group declined from 2.2% in the period from 2002 to 2005 to 1.9% in the period from 2008 to 2012. An estimated 16.6% of this population is HIV positive. The highest prevalence rates are found in the public sector pre-natal groups. Pre-natal surveys do suggest, however, that national prevalence rates are leveling off, and the rate was estimated at 29.5% in both the 2011 and 2012 surveys. Prevalence rates among antenatal clients in public facilities vary substantially throughout provinces, with KwaZulu-Natal (37.4%) being the highest and Western Cape (16.9%) the lowest, according to the 2012 National Antenatal Sentinel HIV & Syphilis Prevalence Survey in South Africa. Variations also exist within districts in provinces. The HIV incidence rate is declining due to prevention interventions and an increase in access to treatment, which is primarily attributed to a recent increase in the number of facilities providing ART.

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The primary goal of the HIV/AIDS strategy in South Africa is to meet the 90-90-90 targets, discussed above. Minister Motsoaledi announced the adoption of the UNAIDS 90/90/90 HIV and AIDS targets in 2015. To meet these targets, spending on HIV and AIDS has grown rapidly to approximately R27.4 billion per annum (including foreign donor contributions) in 2014/15, of which R12.3 billion came from the HIV and AIDS conditional grants. By the end of the 2014/15 financial year, approximately 3.1 million people were on ART in South Africa.

HIV/AIDS treatment guidelines were also revised in January 2015. According to the new guidelines all HIV-positive pregnant women can initiate lifetime ART regardless of their CD4 count and all HIV-positive patients are eligible to initiate ART at CD4 count < 500.There is some recent evidence that widespread treatment is beginning to improve national mortality and life expectancy indicators.

Currently all public health facilities offer voluntary counseling and testing services, which is a marked improvement from the 64% rate in 2005. The Health Ministry is also embarking on large scale HIV counseling and testing programme with 9.6 million tests performed in public sector in 2014/15 and over 712 million condoms distributed in 2014/15. In addition, medical male circumcision (MMC) has been proven to reduce risk of infection and more than 1.7 million MMCs have been conducted since the inception of the programme in 2010/11.

The epidemics of TB and HIV are linked, with a 70% co-infection rate in South Africa. The high overall prevalence of HIV in South Africa has thus contributed to an increasing incidence of active TB. South Africa has experienced a steady increase in the number of TB infections. There has also been an increase in Multi Drug Resistant TB (MDR TB) and Extremely Drug Resistant TB (XDR TB), although together these variants constitute less than 1% of TB infections. The recent introduction of GeneXpert^® has significantly improved the diagnosis of MDR and XDR TB cases. To combat TB, more resources have been allocated through the Conditional HIV/TB grant commencing in 2016/17.

Child health

National immunization coverage of the core package of vaccines for under one year–olds was 84% in 2013. Provisions have been made for a mass national vaccination campaign to reduce the incidence of measles and to introduce new generation child vaccines to prevent pneumonia and diarrhea. The Department of Health has also introduced a series of interventions to reduce maternal and child morbidity and mortality. Recent progress in preventing mother-to-child HIV transmission (dual and triple prophylaxis) will assist in reducing child mortality. Child nutrition is improving partly due to the availability of social grants (over 15 million South Africans are monthly recipients, mainly children and elderly). The number of children under five years of age diagnosed with severe malnutrition in public facilities has decreased significantly from 64,718 in 2003 to 22,313 in 2013. School feeding schemes are available to all school children at selected primary and secondary schools.

National Health Insurance (NHI)

NHI is one of the ten key priorities of the health sector’s Program of Action. The objective of NHI is to ensure universal health coverage by putting in place necessary financing and health service delivery mechanisms that would enable the creation of an efficient, equitable and sustainable health care system in South Africa. It is expected to be implemented in phases over a 14-year period starting in 2012. The first phase focuses on strengthening the public health sector, particularly the improvement of primary health care services in rural areas and under-served communities. In addition, an expanded program of hospital construction and revitalization has begun. The department is preparing for the establishment of a National Health Insurance Fund (NHIF), which would purchase healthcare services from a mix of public and private providers. It is envisaged that in the early stages NHIF will purchase primary health care services, including HIV and AIDS services. In preparation for the full implementation of NHI, work in pilot districts has already started with fast tracking infrastructure delivery in the pilot districts, setting up district health teams and improving access to medicines through the Central Chronic Medicine Dispensing and Distribution (CCMDD) program. The CCMDD project has been established through public private partnerships to alleviate the burden of service provision in the public sector while improving service delivery. Further, the National Department of Health has initiated a process of developing and testing Diagnosis Related Groups (DRG) as an alternative reimbursement tool for hospitals.

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In addition, changes have been made to the equitable share formula in order to allow for a more comprehensive health component, including subcomponents for primary health care and hospital utilization. A conditional grant was created in fiscal year 2013/14 to test purchasing reforms in the context of NHI. To date the pilot districts have contracted 256 GPs in the NHI pilot districts. The National Treasury has prepared a discussion document on financing aspects of NHI. The paper will be incorporated into the NHI White Paper that is expected to be released for public comment in the coming months.

Office of Health Standards Compliance (OHSC)

An important reform is the establishment of the OHSC as a public entity in 2014/15. OHSC promotes quality in the health sector by measuring and benchmarking public and private health facilities’ quality and performance against a set of norms and standards. The OHSC will be responsible for ensuring that standards are met in all public and private health facilities in South Africa. The OHSC’s functions include: inspecting and certifying health establishments that comply with prescribed norms and standards, withdrawing certification, investigating complaints relating to the national health system, monitoring indicators of risk as an early warning system relating to serious breaches of norms and standards and reporting any breaches to the Minister, and identifying areas for action by a national or provincial department of health.

HPV vaccine

In response to the growing incidence of cervical cancer in South Africa, the Minister of Health announced that the HPV vaccine (which prevents the virus that causes cervical cancer) would be provided to Grade 4 (9-10 year old) girls in all public and special schools. It is administered in two doses through two campaigns per year. First dose coverage of HPV was 91.3% in the 2014/15 financial year.

South African Health Products Regulatory Authority (SAHPRA)

The Medicines Control Council (MCC) of South Africa is a statutory entity that is responsible for ensuring the medicines on the market are safe, effective and of high quality. It licenses drug manufacturers, assesses new and generic medicine applications and oversees clinical trials. The National Department of Health intends to replace the current MCC with a new public entity called SAHPRA. Plans for this change are already at an advanced stage.

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The proposed SAHPRA is expected to improve health products regulation in the following key ways:

• Strengthened in-house evaluation capacity leading to improved medicine registration turn-around times. Currently there is an over-reliance on outside evaluators which slows down the registration process considerably;

• Electronic submission and evaluation system will replace the paper-based system;

• SAHPRA seeks to utilise harmonization agreements regionally and globally such as agreements with the U.S. FDA and Swissmedic to speed up the registration process; and

• SAHPRA also proposes to add complimentary medicines and medical devices including diagnostics to the list of regulated items.

THE SOUTH AFRICAN ECONOMY

Overview

South Africa has the most developed economy in Sub-Saharan Africa in terms of total GDP, and accounted for almost 21% of the aggregate GDP of Sub-Saharan Africa during 2014 (source: IMF, World Economic Outlook Database, April 2015). Stable economic policies, healthy public finances and resilient financial institutions pursued steadily over the past 20 years have underpinned long-term economic expansion.

South Africa’s economic performance weakened in the first half of 2015 owing to electricity constraints, falling private investment, weak confidence and declining commodity prices. Economic growth is expected to rise gradually over the medium term, reaching 2.8% by 2018. The improving outlook is expected to be supported by easing infrastructure constraints alongside improved confidence and higher demand from major trading partners. To ensure public finances are sustainable whilst still supporting investment and poverty reduction, the Government’s central fiscal objective is to stabilize the growth of debt as a share of GDP, through continued revenue growth and adherence to the planned expenditure ceiling. A long-term fiscal policy guideline has been proposed to link expenditure and GDP growth.

South Africa is resource rich. It is the world’s largest producer of platinum and chromium and holds the world’s largest known reserves of manganese, platinum group metals, chromium, vanadium and alumino-silicates. The economy includes fast growing and sophisticated finance, wholesale and retail trade, catering and accommodation sectors, as well as a developed manufacturing sector. Financial markets are liquid and both equities and government bonds have been actively traded by domestic and international investors. The World Economic Forum Global Competitiveness Report 2015/16 ranks South Africa 12th out of 144 countries for financial market development, whilst the 2015 UNCTAD World Investment Report noted that South Africa was the largest recipient of foreign direct investment in Africa.

South Africa has a robust regulatory environment, openness to trade, a floating exchange rate, a credible inflation targeting regime, developed capital markets and an attractive position as a gateway to Africa. With the most developed industrial and financial capabilities on the African continent, South Africa plays an important role in regional policies, markets, finance and infrastructure. Outwardly oriented South African companies are among the largest sources of foreign direct investment in Africa and the country’s development finance institutions are playing an increasing role in the funding of regional infrastructure investments. According to the UNCTAD’s World Investment Report 2015, South Africa’s outward FDI to the rest of the continent totaled US$6.9 billion in 2014, 4.3% higher than in 2013. In July 2015, BRICS, of which South Africa is a member, launched the New Development Bank (NDB) which will finance infrastructure projects in developing countries. The establishment of this bank will further strengthen economic ties between South Africa, Brazil, Russia, India and China.

The legacy of apartheid era politics and economics is still felt today. The Gini coefficient, which is a measure of economic inequality where 0 indicates no inequality and 1 absolute inequality, was equal to 0.69 for South Africa in 2011, among the highest in the world (South Africa’s 2013 MDG report to UN). The poor are better off in absolute terms under South Africa’s new constitutional dispensation, thanks in large part to government’s social spending. The World Bank’s fiscal incidence study (2014) estimates that South Africa’s fiscal policy reduces the Gini coefficient by almost a quarter. However, income inequality remains high even after progressive fiscal policy, due to high unemployment.

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Unemployment, and youth unemployment in particular, remains a critical challenge. Only 43.8% of the adult population (ages 15 to 64) works either in the formal or informal sector. Although formal sector non-agricultural employment surpassed the levels of employment last seen prior to the global financial crisis of 2008, gains have not kept pace with the growth of the working age population, leaving a structural employment backlog. Youth unemployment is particularly high: currently the unemployment rate for 15-34 year olds is nearly 65%, with young people below the age of 25 accounting for nearly 25% of the unemployed.

Patterns of unemployment reflect the effects of the apartheid system on income, settlements and education: as of September 30, 2015, unemployment among the economically active white population was 5.9%, whereas the unemployment rate among the economically active black population was 28.8%. Unemployment is higher for the less educated, women and individuals from more rural provinces. The impact of slowing economic growth on employment has been felt by these vulnerable groups more: between September 2008 and September 2015, the unemployment rate of black South Africans between the ages of 15 and 64 increased from 27.4% to 28.8%, even as the labor force participation rate fell (59.6% in March 2008 to 58.8% as at September 30, 2015).

South Africa needs to achieve higher levels of inclusive growth that raises employment and reduces inequality. The NDP 2030 outlines a set of structural reforms to eliminate poverty, raise growth and enhance competitiveness over the long term. It was widely canvassed and endorsed by the South African public prior to its adoption by Cabinet in September 2012. The plan aims to reduce the costs of living and of doing business, resulting in improved consumer and business confidence, rising levels of private investment, and higher growth and employment.

Implementing the National Development Plan 2030: the Medium-Term Strategic Framework

The Government’s MTSF provides the first five-year policy framework to bring the 2030 vision of the NDP into reality. The MTSF aims to improve policy coherence, alignment and coordination across government. It identifies employment, education and enhancing the capacity of the state as core policy objectives. It highlights the need for partnerships between a capable developmental state, a thriving business sector and a strong civil society. Importantly, the priorities of the five-year MTSF are financed within the prevailing three-year medium-term expenditure framework.

MTSF priorities for structural reform include:

• Building the capacity of the public sector, particularly at local government level, through the “back-to-basics” approach, focused on improving service delivery, accountability and financial management.

• Reshaping South Africa’s urban environment through integrated spatial planning and an expansion of the municipal debt market.

• Improving the quality of the education system, starting with greater attention to human resources management and annual assessment of learners to benchmark progress.

• Enhancing dispute-resolution mechanisms in industrial relations.

• Strengthening competition policy.

• Enacting immigration reform to enable people with skills to work in South Africa more easily.

As the MTSF points out, achieving a higher developmental trajectory and building a more equitable society will require a strong social compact. Government, business and labor need to work together to improve public services, revive investment and boost growth. Therefore there is a need to encourage greater private sector investment and to improve the state’s capacity to monitor, implement and manage projects.

The continued implementation of the NDP through the MTSF lays out the basis for the much-needed economic and policy reforms to establish a platform for faster growth. Government has prioritized the reduction of constraints to growth by improving electricity supply, reforming the governance of state-owned entities, improving labor relations, and improving policy coordination, certainty and

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implementation. Efforts to boost investment in infrastructure to relieve bottlenecks (particularly in electricity, ports and telecommunication) and encourage greater investment in cities continue, with more than R800 billion (US$60 billion) in investment spending planned over the medium term. The government is promoting regional infrastructure and cooperation, and promoting black ownership of productive industrial assets, as well as reviewing the incentives that government is providing to support business.

Constrained electricity supply remains the single largest drag on economic activity, estimated by the government to cost close to one percentage point of annual GDP growth. For the nine months ended September 30, 2015, progress has been made in stabilising electricity supply, promoting measures to manage demand and contracting additional supply from the private sector. The first unit of the Medupi power station was fully commissioned in August 2015, adding 794 MW to the national grid. Once the Koeberg power station returns from planned maintenance in December 2015, there will be an expected additional 900 MW available to the grid. The Sere wind farm added 100 MW of capacity in February 2015. The Majuba plant has been returned to service and work to repair the damaged boiler at the Duvha plant is in progress. Eskom has been taking steps to improve the efficiency of its maintenance program.

The Government encourages private sector investment through the active promotion of private-public partnerships, particularly to bolster energy supply through the Renewable Energy program. Other reforms include the establishment of investment agencies, continued relaxation of exchange controls, and the Presidential Business Working Group, which creates a platform for engagement to tackle practical obstacles to investment. South Africa has undertaken a number of reforms to position itself as a hub for investments into the rest of Africa, including the introduction of the Holding Company Regime, which provides flexibility to South African companies seeking to expand and grow into the rest of Africa, and the International Headquarter Company regime, which enables offshore firms to leverage South Africa’s infrastructure to invest in the rest of the continent. Foreign currency reforms encourage African listings and investments into Africa, to reduce the cost of doing business and promote intra-Africa investment.

To support investment by state–owned entities (SOEs), a new funding framework to distinguish between commercial and developmental mandates and more regular financial reporting to government has been proposed. Funding in the medium term will be contingent on restructuring and strong government oversight. Capital investment will have to be financed through sale of non-strategic state assets.

Public service delivery outcomes are expected to be bolstered by efforts to tackle corruption. Financial accounting and control systems are being strengthened. The National Treasury, working with the Department of Planning, Monitoring and Evaluation in the Presidency, intends to make greater use of expenditure reviews and evaluations in the allocation of resources. Procurement reforms have already begun to make tender awards more transparent and less susceptible to corruption, and are expected to achieve savings. The Office of the Chief Procurement Officer has been established to centralise oversight of public procurement. Local service delivery is being supported by reforming the local grant system, as well as providing national government support to municipalities through project preparation facilities to help municipalities prepare plans that are ready for implementation and the infrastructure delivery management system from provinces to large cities.

GDP

Following the financial crisis (which induced a 1.5% contraction in real GDP growth in 2009), GDP growth rebounded to over 3% in 2010 and 2011. However, growth subsequently decelerated to 2.2% in 2012 and 2013, and softened further to 1.5% in 2014. Real GDP growth averaged 3.3% between 1994 and 2011, and 5.2% between 2004 and 2007.

The economy grew 1.8% in the first half of 2015 as drought conditions stifled agricultural output and electricity supply constraints weighed on mining and manufacturing output. These factors outweighed a recovery in demand from advanced economy trading partners. Structural rigidities such as electricity supply challenges, skills shortages and transport constraints have limited the upside to growth afforded by improving external demand and a weaker currency.

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After slowing from 4.9% in 2011 to 1.4% in 2014, household consumption growth improved to 1.6% in the first half of 2015 as lower inflation boosted real disposable income growth, countering the impact of elevated debt levels, higher interest rates, and low employment and credit growth.

Private sector investment contracted 3.4% in 2014, its first contraction since the onset of the financial crisis, and has remained subdued in the first half of 2015, contracting by 0.1%. Low growth has reduced business confidence. At the same time, public sector gross fixed-capital formation remains comparatively resilient, growing 3.3% during the first half of 2015, as strong infrastructure spending by general government offset moderating growth in state-owned companies’ investment.

Strong growth in exports buoyed GDP growth in the first half of 2015, with exports growing 9.7% from 2.6% in 2014 on the back of improving export demand from Europe, Japan and Australasia as well as the effects of the Rand depreciation. Combined with relatively slower growth in imports and improving terms of trade, the current account deficit narrowed to 3.9% of GDP in the first half of 2015 from 5.4% in 2014.

The primary and secondary sectors weighed on growth in the first half of 2015. Severe drought conditions impacted field crops and horticultural products markedly. Drought conditions are expected to continue into 2016. Growth in the mining sector improved to 5.8% in the first half of 2015, as platinum group metal production rebounded from the impact of crippling strikes in 2014.

Electricity supply constraints continued to dampen the manufacturing sector, which grew 0.1% in 2015 following stagnation in 2014. Lower production output of petrochemicals and iron and steel products offset an improvement in the automotive sector. Growth in the construction sector bore the brunt of declining sentiment and worsening building activity, moderating to 1.9% in the first half of 2015 following a five-year high growth rate of 2.9% in 2014. Growth in the tertiary industries continued to slow, despite improved growth in the financial, real estate and business services sector.

In its 2015 MTBPS, the National Treasury forecasts real GDP to grow by 1.5% in 2015—the same rate recorded for 2014—and 1.7% in 2016. Electricity supply is expected to remain a binding constraint through 2016, limiting output and dampening business and consumer confidence. Easing electricity, transport and telecommunications infrastructure constraints, alongside improved confidence and higher demand from major trading partners, are expected to boost GDP growth to 2.8% in 2018.

External risks to this forecast include a further slowdown in the global economy (especially among South Africa’s main trading partners), higher oil prices, lower export commodity prices and increased financial market volatility resulting in capital outflows. Electricity supply shortages pose the largest domestic risk to growth. South Africa’s longer-term economic prospects will hinge how successful interventions to boost growth are coordinated and implemented as per the MTSF.

The 2015 MTBPS communicates the Government’s central fiscal objective over the medium term of stabilising the growth of public debt as a share of GDP, so as not to hamper expenditure towards key economic and social objectives. It further proposes a long-term fiscal policy guideline linking public expenditure and GDP growth. Public expenditure on non-essential goods and services will continue to decline in real terms.

Interventions to alleviate the constraints to growth include:

• Augmenting energy supply capacity via private sector investment, as well as public and private partnerships in renewable energy.

• Policy certainty and coordination is expected to be bolstered by the work of the Department of Planning Monitoring and Evaluation in The Presidency. In addition, to promote greater policy coordination and curb implementation risks or unintended consequences, all future legislation and regulations as from September 1, 2015 will be subject to a socio-economic impact assessment prior to being passed.

• The Government has prioritised stability in labor relations. In 2014, labor-related work stoppages reduced growth by at least 0.6%. The Commission for Conciliation, Mediation and Arbitration is taking an active role in settling disputes, and has cut the duration of arbitration proceedings by more than 75% since 2003. A National Economic Development and Labour Council task team is working to address the disruption of the economy caused by large, protracted strikes, and discussing a minimum wage. In September 2015, parties to the mining framework agreement declared their intention to limit job losses.

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These efforts will be complemented by critical longer-term structural reforms, which include:

• Continued investment in water, electricity, rail and telecommunications infrastructure to increase electricity generation capacity, lower logistics costs and improve competitiveness.

• Reforms of state-owned companies.

• Promotion of greater regional integration, particularly in Southern Africa as well as the rest of the African continent, so as to remove impediments to regional growth and bolster trade in goods and services.

• Supporting business through varying business support incentives offered by government, while also committing to review these incentives to adequately assess their impacts on economic growth, productivity, competitiveness, trade and employment.

The following tables show nominal and real GDP and expenditures for the periods indicated.

GDP Summary

	As of and for the year ended December 31,										As of and for the six-month period ended June 30,
	2010		2011		2012		2013		2014		2015(1)
Nominal GDP (millions of Rand) at market prices		2,748,008		3,024,950		3,262,542		3,534,326		3,796,462		3,942,919
Real GDP (millions of Rand) at 2010 prices		2,748,008		2,836,286		2,899,248		2,963,389		3,008,576		3,045,469
Real GDP Growth (percentages)		3.0		3.2		2.2		2.2		1.5		1.8
Population (million)		50.0		50.6		n/a		53.0		54.0		55.0
Per Capita GDP (nominal)		53,823		58,584		62,463		66,845		70,898		n/a
Per Capita GDP (real)		53,823		54,930		55,508		56,047		56,185		n/a

Note:

(1) First half of 2015, seasonally adjusted and annualized.

Sources: SARB and Stats SA

	As of and for the year ended December 31,										As of and for the six-month period ended June 30,
	2010		2011		2012		2013		2014		2015(3)
Rand (million)
Real GDP at market prices		2,748,008		2,836,286		2,899,248		2,963,389		3,008,576		3,045,469
Add: Imports of goods and services		752,233		831,476		881,760		897,806		893,100		936,702
Total supply of goods and services		3,500,241		3,667,762		3,781,008		3,861,195		3,901,676		3,982,170
Less: Exports of goods and services		786,349		820,508		821,414		859,079		881,504		954,808
Total goods and services available for domestic expenditure		2,713,892		2,847,254		2,959,594		3,002,116		3,020,172		3,027,362
Domestic Expenditure
Final consumption expenditure by households		1,621,836		1,701,007		1,758,568		1,809,592		1,834,136		1,857,394
Final consumption expenditure by general government(1)		555,912		565,451		584,766		603,920		615,567		615,939

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	As of and for the year ended December 31,										As of and for the six-month period ended June 30,
	2010		2011		2012		2013		2014		2015(3)
Total Final consumption expenditure		2,177,748		2,266,458		2,343,334		2,413,512		2,449,703		2,473,333
Gross fixed capital formation		529,431		559,738		579,916		624,127		621,715		627,932
Change in inventories		6,787		26,345		36,623		1,890		396		-15,046
Residual item(2)		-74		-5,287		-279		-37,413		-51,642		-58,855
Total gross domestic expenditure		2,713,892		2,847,254		2,959,594		3,002,116		3,020,172		3,027,364
Real GDP (at 2010 prices)		2,748,008		2,836,286		2,899,248		2,963,389		3,008,576		3,045,469

Notes:—

(1) Consumption expenditure by general government includes current expenditure on salaries and wages and on goods and other services of a non-capital nature of the general departments (not business enterprises) of the National Government authorities, provincial government authorities, local government authorities and extra-budgetary institutions.

(2) Represents the difference between the calculation of GDP according to the expenditure and production method.

(3) First half of 2015, seasonally adjusted and annualized.

Source: SARB and Stats SA.

GDP and Expenditures as Percentage of Real GDP (at constant 2010 prices)

	As of and for the year ended December 31,										As of and for the six-month period ended June 30,
	2010		2011		2012		2013		2014		2015(3)
Real GDP at market prices		100		100		100		100		100		100
Add: Imports of goods and services		27.4		29.3		30.4		30.3		29.7		30.8
Total supply of goods and services		127.4		129.3		130.4		130.3		129.7		130.8
Less: Exports of goods and services		28.6		28.9		28.3		29.0		29.3		31.4
Total goods and services available for domestic expenditure		98.8		100.4		102.1		101.3		100.4		99.4
Domestic Expenditure
Final consumption expenditure by households		59.0		60.0		60.7		61.1		61.0		61.0
Final consumption expenditure by general government(1)		20.2		19.9		20.2		20.4		20.5		20.2
Total Final consumption expenditure		79.2		79.9		80.8		81.4		81.4		81.2
Gross fixed capital formation		19.3		19.7		20.0		21.1		20.7		20.6
Change in inventories		0.2		0.9		1.3		0.1		0.0		-0.5
Residual item(2)		-0.0		-0.2		-0.0		-1.3		-1.7		-1.9
Total gross domestic expenditure		98.8		100.4		102.1		101.3		100.4		99.4

Notes: —

(1) Consumption expenditure by general government includes current expenditure on salaries and wages and on goods and other services of a non-capital nature of the general departments (not business enterprises) of public authorities. Public authorities include National Government authorities, provincial government authorities, local government authorities and extra-budgetary institutions.

(2) Represents the difference between the calculation of GDP according to the expenditure and production methods.

(3) First half of 2015, seasonally adjusted and annualized.

Sources: SARB and Stats SA

Gross Domestic Expenditure (GDE)

Following the global financial crisis, average annual growth in GDE slowed from an average annual rate of 5.4% between 2000 and 2007 to 2.9% between 2010 and 2014. GDE reached just 0.7% in the first half of 2015, weighed by slowing investment and household consumption growth. Slowing disposable income and credit growth, weak consumer confidence and lacklustre employment growth dampened household spending growth. After having provided countercyclical support to the economy during the financial crisis, growth in government consumption slowed to 1.9% in 2014, a third of its peak of 5.8% in 2008, and 0.4% in the first half of 2015. Growth momentum in gross fixed capital formation, after having steadily risen between 2010 and 2013, fell as private sector investment contracted.

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Household expenditure made up 61% of real GDP in the first half of 2015, matching levels of the preceding three years. Seasonally adjusted and annualized growth in real household disposable income averaged 1.9% in the first half of 2015 after growing 1.5% in 2014 as a whole, driven by inflation (in turn driven by weaker oil prices) and steady growth in employee compensation.

The overall recovery in household expenditure in 2015 was not uniform across spending categories. Growth in household spending on durable goods continued to slow down from the very high levels of 16.5% in 2010 (this highly cyclical category of spending coming off a very low base of a 15.1% contraction in 2009), to low single-digit growth of 5.3% in 2014 and 3.1% in the first half of 2015, weighed in particular by falling vehicle sales. New motor vehicle sales are down 4.5% in the year to October 2015, with slowing installment sales credit, the exchange rate related rise in prices and weak consumer confidence contributing to this slowdown. Growth in real expenditure on non-durable goods benefited from lower-than-expected food and fuel inflation, rebounding to 1.2% after having declined to a five-year low of 0.8% in 2014.

Semi-durable goods expenditure grew 3% in the first half of 2015 from 3.2% in 2014, supported by competitive pricing of clothing and footwear. Real expenditure by households on services registered a broad-based improvement to 1.3% in the first half of 2015 following growth slowing to 0.5% in 2014.

Growth in credit extension to households averaged 3.6% over the first nine months of 2015, from an average of 4.3% in 2014, despite improving growth of household mortgages and unsecured personal loans. Growth in unsecured personal loans to households improved to an average 4.5% in the first nine months of 2015 from an average of 3.0% in 2014. Growth remains well below its peak growth rate of 35.5% in 2011, as the market has adjusted to lower growth and employment prospects, as well as regulatory changes. Mortgages extended to households continued to grow albeit slowly, at an average of 2.8% over the first nine months of 2015 from an average of 2.4% in 2014. Installment sales credit growth has continued to soften, retreating to single digit growth of 4.8% over the first nine months of 2015 from 9.8% in 2014. Persistently high debt levels, rising interest rates and moderating real disposable income growth are anticipated to limit household credit growth going forward.

The ratio of household debt to disposable income remains rooted around the 78% mark over the preceding six quarters, but below the record peak of 88.8% in the first quarter of 2008. The household debt ratio improved somewhat to 77.8% in the second quarter of 2015 from 78.3% in 2014. Debt service costs amounted to 9.4% of disposable income in the first half of 2015, up from 9.1% in 2014, in line with rising policy rates beginning in January 2014. They remain lower than the peak of 14.4% in 2008.

The implementation of the published regulations on the Removal of Adverse Consumer Credit Information and Information Relating to Paid Up Judgments resulted in the proportion of credit-active consumers with adverse listings falling from 15.4% in the fourth quarter of 2013 to 0% in the first quarter of 2014. This contributed to the overall share of credit-active consumers with impaired credit records decreasing to 44.2% in the first quarter of 2014 from 48.1% in the final quarter of 2013. However, measures of consumer creditworthiness have subsequently normalized. The share of consumers with impaired credit records reached 45.1% in the second quarter of 2015, slightly above pre-amnesty levels, and the share of consumers with adverse listings reaching 13.5%, slightly below pre-amnesty levels.

The household gross saving ratio has remained at 0.2% of GDP since the third quarter of 2014, with growth of nominal disposable income and household consumption expenditure moving more or less in tandem over the period. On a net basis, taking into account depreciation, household savings were negative at -2.3% of disposable income in the first half of 2015. Households have been dissaving since 2006.

Real gross fixed capital formation comprised 20.4% of GDP in the second half of 2015, with this ratio continuing on a modest upward trajectory after dipping to 18.7% in 2011. It remains below the peak of 23.5% in 2008 but above the average of the 1990s of 17.5%. Growth in gross fixed capital formation has varied notably since the onset of the financial crisis, ranging from as low as -6.7% in 2009 to as high as 7.6% in 2013. Growth has averaged 1% between 2009 and 2015, from an average growth rate of 9.2% per year between 2000 and 2008. The moderation was due to reduced private sector investment growth and a slowdown in public sector growth from rates that were elevated in the build-up to the 2010 World Cup. Private sector investment constitutes around 63% of total investment spending in real terms.

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Following a contraction of 3.4% in 2014, private sector investment contracted 0.1% in the first half of 2015. After having contracted by 0.5% in 2014 in the midst of crippling strike activity, growth in manufacturing investment rebounded to 3.2% in the first half of 2015. Conversely, mining investment contracted 2.0% in the first half of 2015 after rising 1.9% in 2014, against a backdrop of lower global commodity prices and weaker demand from China. Investment in the utilities sector contracted a sharp 7.9% in the first half of 2015 following a 6.1% contraction in 2014, as build delays at Eskom offset the sharp rise in private electricity investment expenditure as part of the Renewable Energy Independent Power Producer Procurement Program.

Public sector investment grew 3.3% in the first half of 2015 from 5.4% in 2014 as spending by general government rose 6.4% in the first half of 2015 from 10.3% in 2014. Investment by state-owned enterprises grew 0.6% in the first half of 2015, after growing by 1.6% in 2014 as a whole. The community, social and personal services sector also saw investment growth ease to 5.5% in the first half of 2015 from 10.9% in 2014, in line with the broader slowing in public sector investment.

Aggregate inventory investment declined notably by R38.9 billion in the second quarter of 2015, subtracting 6.2 percentage points to second quarter GDP. Falling inventories were prominent in the mining (particularly platinum) and manufacturing (reflecting falling crude oil imports) sectors, as stockpiles were drawn down to meet demand. The ratio of industrial and commercial inventories to GDP averaged 13.8% in the first half of 2015, largely unchanged from 2013 and 2014 levels of 14.0%, but well below the recent peak of 15.8% in 2007.

Government expenditure growth moderated to 0.4% in the first half of 2015 from 3.3% and 1.9% in 2013 and 2014, respectively. Slowing government consumption followed resignations en masse by civil servants when the Government announced its intention to introduce regulations to compel the mandatory preservation of pension and provident funds accumulate by state employees. The regulations were misunderstood by the public to be restricting all access for members to retirement savings.

National Treasury anticipates growth in real government expenditure to rise to 1.6% in 2016 before tapering to 1.1% in 2018, in line with the Government’s efforts to curb spending on non-essential goods and services. Real consumption expenditure by general government increased at a strong average annual rate of 4.8% between 2001 and 2009, resulting in public sector spending as a proportion of GDP rising from an average of 22.5% in 2001 to 27.7% in 2009. Public consumption growth in excess of GDP growth saw this ratio once again rise to 27.2% in the first half of 2015, after having moderated to 26.5% in 2012.

Annual growth in total nominal factor income rose from 4.2% in the first quarter of 2015 to 4.8% in the second quarter, as growth in gross operating surpluses improved. Growth in the total compensation of employees decelerated from 7.7% in the first quarter of 2015 to 7.5% in the second quarter, with moderating compensation growth in the trade, finance, real estate and business services sectors offsetting the acceleration in compensation in general government. The share of total remuneration of employees to total factor income rose slightly from 52.8% in the first quarter of 2015 to 53.0% in the second quarter. Compensation growth remains comparatively constrained, off the double-digit average growth rate of 10.5% in the 2000s and the peak of 13.9% in 2007.

Annual growth in aggregate gross operating surplus accelerated to 2.1% in the second quarter of 2015 from 0.5% in the first quarter. This improvement stemmed largely from improving gross operating surpluses in the construction and finance, real estate and business services sectors that offset weak or declining gross operating surpluses in other industries. The share of gross operating surplus to total factor income declined slightly from 47.2% in the first quarter of 2015 to 47.0% in the second quarter. Growth in gross operating surpluses remains under pressure, averaging 7.1% between 2010 and 2014 from averaging 13.1% in the 2000s.

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Principal Sectors of the Economy

The following two tables set forth real gross value added and the percentage increase in gross value added for the periods indicated.

Real Gross Value Added by Sector

(at constant 2010 prices)

	As of and for the year ended December 31,												Percentage contribution
	2010		2011		2012		2013		2014		2015(1)		in 2015(1)
Agriculture, forestry and fishing		65,605		66,464		66,861		67,880		71,659		68,798		2.5
Mining and quarrying		230,350		228,645		221,972		230,908		227,260		237,642		8.6
Manufacturing		358,699		369,261		376,126		378,933		379,089		378,750		13.7
Electricity, gas and water		67,940		68,879		68,801		68,375		67,765		67,565		2.4
Construction		95,453		95,809		97,804		100,468		103,358		104,702		3.8
Wholesale and retail trade, catering and accommodation		370,581		384,768		398,585		405,983		411,083		413,515		15.0
Transport, storage and communication		229,499		236,439		242,233		247,062		252,648		256,076		9.3
Finance, insurance, real estate & business services		523,526		544,997		561,079		578,127		591,019		604,667		21.9
General government services		404,647		422,695		437,734		451,214		464,911		467,719		16.9
Personal services		148,561		152,163		155,295		158,167		160,411		161,703		5.9
Gross value added at basic prices		2,494,860		2,570,121		2,626,489		2,687,117		2,729,203		2,761,137		100.0

Note:—

(1) The seasonally adjusted first half of 2015

Source: Stats SA.

Percentage Growth in Real Gross Value Added by Sector

(at constant 2010 prices)

	For the year ended December 31,										As of and for the six-month period ended June 30,
	2010		2011		2012		2013		2014		2015 (1)
Agriculture, forestry and fishing		-0.3		1.3		0.6		1.5		5.6		-2.1
Mining and quarrying		5.3		-0.7		-2.9		4.0		-1.6		5.8
Manufacturing		5.9		2.9		1.9		0.7		0.0		0.1
Electricity, gas and water		2.4		1.4		-0.1		-0.6		-0.9		-0.4
Construction		0.7		0.4		2.1		2.7		2.9		1.9
Wholesale and retail trade, catering and accommodation		4.4		3.8		3.6		1.9		1.3		1.0
Transport, storage and communication		1.7		3.0		2.5		2.0		2.3		2.1
Finance, insurance, real estate & business services		1.2		4.1		3.0		3.0		2.2		2.9
General government services		2.7		4.5		3.6		3.1		3.0		1.2
Personal services		0.4		2.4		2.1		1.8		1.4		1.1
Gross value added at basic prices		2.9		3.0		2.2		2.3		1.6		1.7

Note:—

(1) The seasonally adjusted first half of 2015 compared to the first half of 2014.

Source: Stats SA.

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Finance, Insurance, Real Estate and Business Services

The finance, insurance, real estate and business services sector includes all monetary, financial and insurance institutions and retirement funds, as well as real estate, law, accounting, auditing, data processing and other business services, such as labor brokers. Also included in this sector are renting and leasing of agricultural, mining, manufacturing, construction, office and other machinery and equipment. This sector is the largest in the South African economy by GVA, accounting for 20% of the total economy.

This sector is the largest in the South African economy by GVA, accounting for 20% of the total economy.

Real value added by the finance, insurance, real estate and business services sector grew 2.9% in the first half of 2015 compared to 2.4% in the first half of 2014 and 2.2% for 2014 as a whole. The sector’s contribution to growth in overall gross domestic production accordingly rose from 0.5% in 2014 to 0.7% in the first half of 2015.

According to the Quarterly Employment Statistics (QES) surveys published by Stats SA, which surveys enterprises registered for income tax, the finance, insurance, real estate and business services sectors employed 1,987,000 persons in the quarter ended December 2014 and 1,985,000 persons in the second quarter of 2015—roughly 22% of the total workforce.

South Africa has a well-developed financial services sector—one of the largest among emerging market economies—with sophisticated banking, bond and insurance markets which have been key strengths in the country’s economic development. The World Economic Forum Global Competitiveness Report 2015 ranks South Africa 12th overall out of 144 countries for financial market development. This high ranking is underpinned by South Africa ranking second in respect of regulation of securities exchanges and legal rights, sixth for the availability of financial services and financing through local equity market and eighth for soundness of the banks.

The financial services sector is highly concentrated, with four banks (Barclays Africa Group Limited, The Standard Bank of South Africa Limited, FirstRand Bank Limited and Nedbank Limited), and three insurance companies (Sanlam Limited, Old Mutual South Africa Limited and Liberty Life Limited), dominating the financial services and insurance industry. See “Monetary and Financial System—Structure of the Banking Industry.”

South African banks are well regulated, have sophisticated liquidity management systems, and limited reliance on funding in foreign currency. South African regulators have tended to be conservative, maintaining capital adequacy ratios in excess of global standards such as Basel 2.5 and Basel III. The banking sector remained adequately capitalized at 14.3% as of September 30, 2015, despite the implementation of the higher capital requirements of the Basel III framework from January 2013. The sector’s common equity Tier 1 (CET1) capital-adequacy ratio was 11.1% (well in excess of Basel III’s 7% requirement) in June 2015 as compared to 11.4% in December 2014.

Total assets of South Africa’s banks amounted to R4.4 trillion as of June 2015, up 10.2% from the preceding year. The four largest banks in South Africa accounted for approximately 83% of total assets. Gross loans and advances, the biggest component of banking assets, rose by 8.9% from R3.2 trillion in June 2013 to R3.4 trillion in June 2015. This growth can be attributed to increases in foreign currency-denominated loans, specialized lending, and lease and installment debtors. As growth in household credit has moderated, total credit extension has been supported by stronger lending to corporates. The banking sector’s profitability ratios have been stable, with the cost-to-income ratio increasing from 53.7% in 2013 to 54.2% in 2014 and the return on equity unchanged from 2013 levels at 14.7% in 2014.

In line with an increase in gross loans and advances, the total value of new credit granted increased by 4.8% in June 2015 and the number of credit agreements rose by 10.3%. The rejection rate fell marginally to 56% in June 2015 from 58.3% in June 2014. Banks have, over the past years, tightened their lending criteria on the back of rising bad debts, high household indebtedness and lower disposable income growth. Growth in credit extended to households has been hovering below 5% in the first half of 2014. Growth in unsecured lending (mainly personal loans), having reached almost 40% year-on-year growth in 2011, has slowed quite significantly especially since the beginning of 2013. Growth in unsecured lending picked up to 6% year-on-year in June 2015 from 2.9% in June 2014 (the lower growth percentage largely reflecting the high base starting point following the 40% increase in 2011).

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In 2014, the Reserve Bank acted to forestall contagion of the broader banking system, and the Minister of Finance placed African Bank under curatorship. Rising consumer default rates during the first half of 2014 disproportionately affected African Bank, which accounted for 2% of banking assets, due to its business model, which included a concentrated set of products and income streams and a lack of transactional banking services. The restructuring, which involves the private sector, is proceeding. The Government has not provided any funds to bail out the bank, but has provided a R7 billion backstop to the Reserve Bank in line with international practice. It is unlikely that the Reserve Bank will draw on this facility, and no costs to the taxpayer are expected. The failure of African Bank saw Moody’s downgrade South Africa’s four big banks, Standard Bank, FirstRand, Nedbank and Absa, by one notch, while Capitec’s credit rating was cut by two notches. African Bank remains under curatorship and has been granted an approval to set up a “Good Bank” with its remaining assets.

Despite the challenging operating environment characterized by high levels of unemployment, low GDP growth rates, energy constraints, continued Rand deterioration and industrial action, short term insurers remain resilient. Net premiums grew by 11% in 2014 from 6% in 2013 while growth in the first half of 2015 came in at 17%, compared to the same period last year. The loss ratio, as a percentage of net earned premiums, improved to 53% in the six months to June 2015 from 60% the same period last year. Management expenses, as a percentage of net written premiums, fell marginally from 24% in the first half of 2013 to 23% in the first half of 2015 mainly due to the implementation of new regulation such as Solvency Assessment and Management, Treating Customers Fairly and Binder Regulation.

Long-term insurers recorded an annual growth of 2% in net premiums in 2014 from 20% in 2013 as the number of new policies issued declined by 6% in 2014. Insurers are not only pursuing new business but are also focusing on quality. The ratio of individual lapse as a percentage of the number of new policies issued jumped to 76% in 2014 from 54% the previous year, thus showing that consumers are under pressure. In 2014, long-term insurers benefited from the strong stock market performance, with the JSE All Share Index 16.5% higher than in 2013.

Government is continuing work to strengthen the financial sector in line with a series of reforms announced in the 2011 paper “A safer financial sector to serve South Africa better.” In 2014, draft regulations for over-the-counter derivatives, credit agreements, hedge funds and insurance were released. Substantial progress has been made with retirement reforms. The final draft of legislation to implement a “twin-peaks” model of financial regulation was tabled in Parliament on October 27, 2015 and will go through the parliamentary processes before the President signs it into law.

The Promotion and Protection of Investment Bill was tabled in Parliament on July 28, 2015, following an extensive public consultation process. The bill seeks to promote investments and clarify the level of protection that an investor may expect in the Republic of South Africa and ensure that South Africa remains open to foreign investment. The bill also aims to confirm the Government’s right to pursue constitutionally-driven national development objectives and recognizes the right of governments to regulate in the public interest. In addition, it seeks to promote a balance between the rights and obligations of investors, and provides clarity for the standards of protection applied to investment.

Manufacturing

Manufacturing is South Africa’s second largest sector, constituting approximately 12.5% of GDP in 2014. Approximately 56% of production is concentrated in upstream sectors such as metal products, wood processing, and petrochemicals. The remainder is focused on consumer-orientated sub-sectors such as food and beverages, motor vehicles, and furniture—a sign of diversification. The sector is a large job creator, providing employment for approximately 1.13 million people or 13% of total employment (Stats SA QES, 2Q2015).

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The importance of the manufacturing sector is reflected in the level of support it receives from government. The government’s support for the manufacturing sector is guided by the National Industrial Policy Framework and the Industrial Policy Action Plan (an annually published action plan focusing on a three-year rolling period). The most recent IPAP (IPAP 2014/15 – 2016/17) focuses on supporting advanced manufacturing (e.g. advanced materials and aerospace) along midstream and downstream processing activities, sector—specific support, exports promotion, the green economy, and local procurement—particularly for black economic empowerment. Producers are able to obtain grants for marketing of exports, tax relief for capital expenditure and R&D, funding for small business development, business incubation, assistance for critical infrastructure, funding for job creation, and funding through sector-specific support programs (for example automobiles and clothing and textiles). Local manufacturers are also supported through preferential procurement policies, and the designation of several sectors for local procurement.

Since the recession, manufacturing gross value added has recovered steadily, growing at approximately 2.7% annually between 2010 and 2012. However, growth slowed to 1.4% in 2013 and the sector contracted by 1.4% in 2014 reflecting supply shocks, labor unrest and weak domestic demand. Growth has made a marginal recovery in 2015 (up 0.3% as at August 2015), although electricity constraints remain a major constraint to growth in the sector. Electricity demand side management initiatives are assisting in limiting the impacts of electricity supply constraints on producers.

Production was volatile in 2014 but has been more stable in 2015. The main driver of growth has been the food and beverage sector, which grew by 2.3% for the year to August 2015. However, in other sub-sectors, the combination of subdued demand, low commodity process and electricity constraints continued to place pressure on growth.

Gross fixed capital formation in manufacturing has grown at an annual average rate of 8.5% from the first half of 2010 to the first half of 2015. Capacity utilization of large manufacturers stands at 80-82%, where it has been since mid-2010, somewhat below the mid-80% utilization rates experienced between 2005 and 2008. According to the most recent survey, capacity utilization in July 2015 was 80.7%, mainly due to insufficient demand (accounting for 11.0% of unused capacity) and a shortage of raw materials (accounting for 2.0% of unused capacity).

The relatively weaker currency, improved demand in Europe, greater export potential into other SADC countries, higher levels of investment into manufacturing and government support through incentives and local procurement targets should help lift production over time.

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Composition of Manufacturing Sector Growth

	Weights			Year-to-date growth*
				2014		2015
Petrochemicals		25.1	%		-3.9		-1.2
Food & beverage		22.1	%		-0.7		2.3
Metals products		20.3	%		-1.4		-1.2
Wood & paper		10.2	%		-8.2		0.0
Motor vehicles & parts		7.9	%		1.0		7.9
Glass & non-metallic		4.9	%		-2.4		-2.5
Clothing & textiles		3.5	%		3.4		0.5
Furniture		3.2	%		0.8		-7.7
Electrical machinery		2.4	%		-6.2		5.3
Radio & TV		1.1	%		-4.5		-9.3
Total		100.0	%		-1.4		0.3

Source: StatsSA

* captures growth from January to August

Manufacturing exports have grown by 6.5% in the first eight months of 2015 compared against the same period in 2014, supported by strong export growth in chemicals, vehicles, wood, textiles and glass. While Europe remains an important destination for manufactured products, SADC and the rest of Africa offer the greatest export growth potential. In recent years there has been particularly strong growth of exports of manufactured products to Southern African Development Community countries.

Petroleum Products, Chemicals, Rubber and Plastic

The petrochemicals sub-sector is the largest in manufacturing, forming approximately 25.1% of manufacturing output according to the most recent StatsSA large sample survey (based on 2010 data). The 2005 survey estimated petrochemicals formed 22.1% of output.

This is one of the few sub-sectors where output is higher than pre-crises levels, supported in particular by large investments in chemicals and pharmaceuticals. The largest export market for the sub-sector is SADC, which makes up 30.9% of exports, followed by the EU, which accounts for 15.3% of total exports.

Production in this sub-sector contracted by 1.2% in the eight months ending August 31, 2015, up from a contraction of 3.9% over the same period in 2014 and substantially lower than the 1.2% achieved in 2013. Electricity shortages in the first half of 2015 had significant negative effects on the sub-sector.

Food, Beverages and Tobacco

The food sub-sector includes processed foods, dairy products, oils, sugar and animal feeds. The beverages sector includes distilleries, wineries and the carbonated drinks industry. This sub-sector accounts for approximately 22.1% of manufacturing production. SADC forms South Africa’s major export market, accounting for 36.7% of exports. The EU represents 26.5% of exports, with the U.S. accounting for 3.8%.

The food and beverages sub-sector has grown by 2.3% in 2015 (year-to-date growth until August) and continues to be the fastest growing manufacturing sub-sector over the period. Strong export growth of 21% year-to-date, mainly to SADC and Asia, has supported the expansion.

Basic Iron and Steel, Non-ferrous Metal Products, Metal Products and Machinery

The metal products sub-sector comprises the working of metal, including structural metal products, engines and turbines, agricultural machinery, and electrical industrial machinery. This sector forms approximately 20% of total manufacturing output, but is a large generator of exports – 27% of total manufacturing exports (23% of all South African exports) in 2014 were base metals and steel products.

The operating environment in 2015 has been difficult. Production fell by 1.8% in the first eight months of 2015 .The sector was hit hard by low commodity prices, rising electricity costs, disruptions in electricity supply and steep import competition coupled with subdued domestic demand.

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Despite the economic slowdown, the European Union remains the sub-sector’s largest export market, accounting for 17% of metal exports in 2012. Asia and Africa also form major trading partners, as the SADC accounted for 21% of exports.

Wood and Paper; Publishing and Printing

This sub-sector’s performance has been volatile in 2015 recording 7.4% quarter-on-quarter growth in the second quarter of 2015 following a sharp contraction of 10.8% in the first quarter. The cumulative effect is that the sub-sector recorded 0% growth for the year to August 30, 2015. This sub-sector contracted by 0.1% in 2014 and 0.2% in 2013.

Wood and paper accounts for 5% of total manufactured exports, delivered primarily to the SADC region (22.4%); China (10.6%) and Japan (10.3%) are also important markets.

Motor Vehicles, Parts and Accessories and Other Transport Equipment

The sector includes the manufacture of motor vehicles, ships and boats, railway locomotives and rolling stock, and transport equipment parts and accessories. Europe and the U.S. are the major export markets, accounting for 28.8% and 27.6% of exports respectively. Exports to the SADC formed 10.8% of export markets in 2012, up from 8% in 2011.

Production for the first eight months of 2015 was 7.9% lower compared to the same period in 2014 despite subdued domestic demand owing to weak income growth, higher petrol prices, and above-inflation increases in the prices of new motor vehicles.

The motor industry accounts for the bulk of support available within the manufacturing industry, with an estimated value of incentives of R22 billion in 2011/2012 in tax and custom incentives. The Automotive Production Development Program (ADPD) replaced the Motor Industry Development Program in 2013 and will extend to 2020. Both these programs are comprehensive, covering investment grants, tariff protection and import rebates. Part of the ADPD, the Automotive Investment Scheme (AIS), has already resulted in increased investment in the sub-sector. Between July 2009 and end-2012, the AIS is estimated to have resulted in planned investments of R13.6 billion – mainly from automotive assemblers, but also by component companies. This strong investment has continued: between April 2013 and December 2013, 22 projects were approved, amounting to an estimated R6.2 billion of investment.

Textiles, Clothing and Leather Goods

This sector comprises the manufacturing of clothing by cutting and sewing fabrics, leather, fur, plastic, rubber and other materials, and textiles production using wool, cotton and synthetic fibers. SADC is the biggest export destination (31.4% in 2012), and is also a fast growing market – SADC share has increased from 24% in 2010. The European market, however, remains crucial to the sector (30.6%).

Production of textiles and clothing grew by 0.5% in the first eight months of 2015. The sub-sector has been struggling to recover after the recession and has been declining in size, but seems to be on-track to register growth for the first time since 2013. However, real Rand depreciation since late 2011 has helped the sector considerably, with exports of textiles and footwear increasing by 11% in the first eight months of 2015. Substantial government support through the Clothing and Textile Competitiveness Program, launched in March 2010, has also had a positive impact. The support program provides grant funding for investment in new machinery and equipment, interest subsidies for working capital, and support for clustering. The program had a budget of R723 million for 2014/15 and replaced the Duty Credit Certificates scheme which was available to the sub-sector.

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Furniture

The furniture sector has contracted by 7.7% over the first eight months of 2015 following growth of 3.3% in 2014. The sub-sector faces strong competition from imports and low domestic demand as over-indebted households rebalance their portfolios. International demand, particularly from the EU, also remains low. The EU is by far the largest importer of these products, accounting for 67% of exports in 2012. There is some potential upside for furniture production given the weaker Rand and the expansion of retailers into SADC countries – which make up the most of the other exports, approximately 22%.

Electrical Machinery and Apparatus

The manufacturing of electric motors and generators, electricity distribution and control systems, insulated wire and cable, and lights and lighting equipment are included in this sector. This sector expanded by 5.3% in the first eight months of 2015, following a contraction of 1.8% in 2014. SADC is the main export destination of electrical machinery products, accounting for 50.9% of exports in 2012. Europe (11.6%) and the U.S. (6.1%) are also important destinations.

Wholesale and Retail Trade, Catering and Accommodation

This sector comprises wholesale and retail trade and allied services, catering and accommodation services and motor trade and repair services. Activities include the resale of new and used goods and the rendering of repair services.

Growth in the real value added by the sector decelerated to 1.3% in 2014 from a post-crisis high of 4.4% in 2011. Preliminary data indicates that growth in 2015 has improved, but remains well below the post-crisis peak. Weak employment and real disposable income growth alongside low levels of consumer confidence and sluggish growth in credit extension continue to depress demand. This is especially evident in the motor trade sub-sector, where growth has contracted: passenger vehicle sales declined by 1.9% year-on-year in the first eight months of 2015 when compared to the same period in 2014.

Despite the adverse trading conditions in the sector, employment in the sector has remained relatively resilient. According to the QES, the wholesale and retail trade, catering and accommodation sector employed 1,845,000 people in the first half of 2015, an increase of 0.7% year-on-year.

Wholesale and Retail Trade

The wholesale and retail trade sector is the third largest sector in South Africa, measured by value added. In the second quarter of 2015, it contributed 13.6% to GDP and accounted for 20% of formal sector employment.

This sector was one of the hardest hit by the economic downturn. In 2009, the value of sales in real terms fell to its lowest level since 2005. Although retail sales recovered to 4.5% in 2012, the recovery was short-lived, decelerating to 2.0% in 2014. Momentum picked up in 2015 with annual growth in the first eight months to August coming in at 3.2%. Much of the gain in momentum has been concentrated in hardware, paint and glass as well as clothing and textiles and general dealers. By contrast, the wholesale sector’s growth is down from a high of 8.3% in 2012 to 2.2% year-on-year for the first eight months of 2015. Consumer confidence remains low and is expected to constrain overall sector growth.

The wholesale and retail trade sub-sectors remain highly concentrated with four dominant retailers in the market. Competition is nevertheless vigorous among the major chain stores, driving rationalization and reduced costs throughout the distribution chain. The traditional role of wholesalers has been undermined by the emergence of large chain stores and retailers with significant financial power and purchasing strength. Despite allegations of market abuse by consumer groups and unions, the Competition Commission has not found evidence of anti-competitive or collusive behavior.

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South African wholesalers and retailers have further expanded their operations by establishing distribution and logistical networks in other African countries, particularly Botswana, Mozambique, Zambia, Nigeria, Angola and Ghana.

Catering and Accommodation Services

When including the linkages of the tourism sector to the rest of the economy, this sub-sector contributed 9.4% to GDP and created over 1.4 million jobs in 2014 (according the Department of Tourism). The sector is expected to play a significant role in employment creation over forecast horizon of the NDP.

Domestic tourists contributed R26.8 billion to the economy in 2014, up from R24.3 billion in 2013. According to the data collected by the Department of Home Affairs (DHA), 4,195,456 travelers (arrivals and departures) passed through South African ports of entry in December 2014. Of the total, 1,263,363 were South African residents and 2,932,093 were foreign travelers. Tourism has recorded strong growth in recent years, with growth of 6.6% year-on-year in 2014, 4.7% year-on-year in 2013, 10.2% year-on-year in 2012 and 3.3% year-on-year in 2011. However, growth in 2015 is expected to be lower given the 2.0% year-on-year decline in tourism activity in the first half of 2015 compared to the first half of 2014. The decline was largely the result of new visa laws which came into effect in 2015; these laws are currently being reviewed by the Cabinet.

Tourists from overseas were from Europe (67.3%); North America (14.7%); Asia (7.7%); Australasia (6.7%); Central and South America (2.4%); and the Middle East (1.2%) in December 2014. Within Africa, 7,668 were from West Africa, 6,664 from East and Central Africa and 999 from North Africa. According to the Department of Tourism, South Africa has a very high repeat visitor rate (e.g. 53% from Europe). There were 481,766 same-day visitors and 934,699 tourists in December 2014. The volume of same-day visitors between November and December 2014 increased by 13.1%. According to StatsSA, the arrival data showed that 89.4% came by air, while 10.1% came by road.

Transport and Storage

South Africa’s modern and extensive transport and logistics system plays an important role in the national regional economy, transporting freight for export and domestic use, as well as enabling the movement of people within and between cities and rural areas. The transport system comprises airports, sea ports, roads, rail and public transport networks.

Transportation in South Africa is coordinated by the Department of Transport, which determines policy and sets guidelines for the industry. The Department of Transport is also responsible for overseeing regulation of the sector through a number of regulatory bodies including the Ports Regulator, the Regulatory Committee (for Aviation), Railway Safety Regulator (RSR) and the South African Civil Aviation Authority (SACAA).

Transnet, the horizontally integrated state-owned company, plays a central role in freight transportation through its rail, port and pipeline operations. Intercity passenger land transportation is provided by PRASA. SANRAL is responsible for the upgrading and expansion of the national road system whilst provincial and municipal governments are responsible for secondary roads.

The road transport industry dominates the freight transport market, mainly due to its flexibility. Approximately 80% of all freight transport, 75% of all commuter transport and 95% of all other passenger travel in South Africa takes place by road. Income from land freight transportation declined by 2.8% in the three months ended July 2015 compared with the three months ended July 2014. The main contributors to this were the declines in primary mining and quarrying products, related to the production constraints in the mining sector.

SANRAL is responsible for planning, designing and constructing national roads. It is also charged with raising the financing required to develop and manage the road network and non-current assets. The national road system connects all the major centers in the country to each other and to neighboring countries. The South African road network comprises approximately 750,000 kilometers of roads. The South African national road network consists of 21,403 kilometers of roads. South Africa has the longest road network of any country in Africa.

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The toll-road network comprises about 19% (3,120 kilometers) of the national road grid. SANRAL manages some 1,832 kilometers of these toll roads. About 1,288 km of the tolled sections of national roads have been concessioned to private companies to develop, operate and maintain. Government has indicated that the roads under SANRAL’s jurisdiction may increase by a further 13,597 kilometers over time. During 2014/15, 1,670km of provincial roads were declared national roads. To continue the expansion and maintenance of the comprehensive national road network, SANRAL will continue the selective expansion of toll roads. New roads will be funded through the user-pay principle with electronic tolling, if feasible. This will relieve congestion and enhance traffic flow around major metropolitan areas. SANRAL spent R7.2 billion in 2014/15 to maintain and improve existing roads, and to develop new road infrastructure.

While air freight may only account for 0.5% of the tonnage of global trade with the rest of the world, in value terms it makes up around 35% of the total. Around 325,000 tonnes of freight travelled to, from and within South Africa by air in 2013. The ten international routes accounted for approximately one-third of this total. In total over 33 million passengers arrive or depart from South African airports each year.

The commercial airport infrastructure in South Africa consists primarily of nine airports which are owned and operated on a commercial basis by the Airports Company of South Africa Limited (ACSA). The Department of Transport is responsible for overseeing the state’s stake in ACSA. South Africa’s three major international airports (Johannesburg’s OR Tambo, Cape Town International and Durban’s King Shaka) are the highest ranked airports in Africa and respectively ranked 24th, 26th, and 28th in the 2015 World Airport Awards. According to ACSA’s 2014 Annual Report, it plans to invest R7.7 billion in capital expenditure between 2015 and 2017.

South African Airways (SAA) is a wholly state-owned company which, due to ongoing financial difficulties, has been supported by government guarantees amounting to R14.4 billion, of which R11.4 billion has been used so far. The airline is implementing its Long-term Turn-around Strategy to reduce costs and become more efficient. SAA’s core business is the movement of people and goods by air. The Group operates a dual-brand airline model, with SAA as its premium brand and the low cost carrier, Mango, targeting price sensitive markets. SAA provides regular services between South Africa and Australia, Europe, the Far East, the Middle East, South America and the United States. SAA became the first airline in Africa to join the Star Alliance Group in April 2006.

Transnet, a public company wholly-owned by the Government, is the custodian of rail, ports and pipelines, responsible for delivering reliable freight transport and handling services. Transnet has five operating divisions: Transnet Freight Rail (transporting bulk and containerized freight), Transnet Rail Engineering (refurbishment, conversion, upgrades and manufacturing of rail related rolling stock), Transnet National Ports Authority (port infrastructure and marine services), Transnet Port Terminals (cargo terminal operations) and Transnet Pipelines (petroleum and gas pipeline business). The company is overseen by the Department of Public Enterprises. Group revenue increased by 8% to R61.1 billion according to the 2015 Annual Report.

The national and local railway network consists of approximately 20,824 kilometers of track and is divided into ten geographical areas under the control of Transnet Freight Rail (TFR). TFR moves heavy haul and bulk commodities over long distances and accounts for 62% of total Transnet revenue. The division also provides the network for long distance passenger rail agency as well as haulage capacity for other private passenger services. The Rail Engineering (RE) division consists of nine businesses, namely wagon, locomotive, coach, rolling stock equipment, rotating machines, wheels, auxiliary foundry and port equipment maintenance.

Transnet National Ports Authority (National Ports Authority) operates as a landlord port authority, managing, controlling and administering the South African port system on behalf of the state. The National Ports Authority owns and manages the eight ports within South Africa and its tariffs are regulated by the National Ports Regulator. Approximately 98% of South Africa’s exports are conveyed by sea. Transnet Pipelines owns and operates South Africa’s 3,800 kilometers of strategic petroleum and gas pipeline infrastructure, with the objective of ensuring security of supply of petroleum products to the inland market.

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The pipeline network is responsible for the transport of more than 85% of refined fuel and gas products. The business is regulated by the National Energy Regulator of South Africa (Nersa).

In 2015, Transnet revised its seven-year rolling capital expenditure program up to R336.6 billion. Half of this expenditure will go towards its freight rail division. In comparison with the original capital expenditure strategy in 2012, emphasis has partially moved away from containers to bulk products and the development of the Liquefied Natural Gas Terminal at Ngqura. This is in line with the requirements of the government’s oceans economy strategy (Operation Phakisa). At the same time, the proportion of the projected investment in rail has increased with the anticipated investment in a manganese line. In 2013, Transnet released a Private Sector Participation (PSP) Policy. Bulk commodities, intermodal, general freight services, multi-purpose terminal development, regional integration, non-core projects and Operation Phakisa initiatives have been identified as PSP projects.

The Government has placed a strong emphasis on increasing public transportation availability, in line with the NDP. According to StatsSA, the use patterns of public transport have changed significantly between 2003 and 2013, with general increases in the percentage of households who used taxis (from 59.0% to 69.0%), buses (16.6% to 20.2%) and trains (5.7% to 9.9%). Bus Rapid Transport (BRT) systems provide a mechanism for implementing public transportation networks that operate on exclusive lanes and incorporate current bus and minibus operators. Large metros are investing heavily in integrated public transport. Cape Town and Johannesburg have begun operating stations, depots, buses and dedicated bus lanes. Tshwane, Mbombela, Nelson Mandela Bay, eThekwini, Rustenburg and George have started constructing similar infrastructure. Government also is seeking to modernize the private provision of transport to increase safety.

The Passenger Rail Agency of South Africa (PRASA) was established in 2009, following the Cabinet’s approval of the consolidation of passenger rail entities, in a bid to provide better mobility and accessibility to transport. PRASA is the parent company of Metrorail (commuter rail services); Shosholoza Meyl (long distance passenger rail services); Autopax (long distance bus services); PRASA Corporate Real Estate Solutions (facilities management); PRASA Technical (rolling stock upgrade, maintenance, depot and fleet management); and Intersite Asset Investments (property portfolio and asset investments). PRASA embarked on a comprehensive program to improve rail safety and revive rail transport as a viable public transport alternative. Prasa is planning to invest R175 billion in new infrastructure over the next ten years and of this, PRASA expects it will spend R51 billion to procure 600 trains. A total of 580 of these trains will be manufactured in South Africa.

To reduce the traffic and speed up commute times between Johannesburg and Pretoria, the National Government co-funded the R32 billion Gautrain Rapid Rail Link. This project has linked Johannesburg, Tshwane and the Oliver Tambo International Airport through high-speed rail services since August 2011. It now ferries between 50,000 and 60,000 passengers per day. Following this success, the Gautrain Management Agency, which operates the rapid rail link, has proposed seven new routes along identified “high-mobility corridors” in South Africa’s busiest province. The feasibility study is due to be completed in 2016.

Communications

The communications sub-sector consists of postal services and telecommunications services.

Fixed line services are dominated by Telkom SA Limited (Telkom)¹, in which the government has a 39.8% stake, although there is also a second national fixed-line operator – Neotel.² There are five licensed mobile operators: Vodacom, MTN, Cell-C, Virgin Mobile and Telkom Mobile. The Government sold its 13.91% stake in Vodacom this year. The telecoms sector has seen quite a few developments in 2015, with many firms attempting to reduce operational costs and increase prices due to a combination of a weak economic climate, increased network investment costs and lower mobile termination rates reducing service revenues. Despite these challenges, investment is ongoing. Cell C plans to invest R8 billion over the next three years to develop a long-term evolution (LTE) network. Meanwhile, Vodacom and MTN plan to outlay R8 billion and R10 billion, respectively, to improve the quality and capacity of their respective 2G and 3G networks and to establish LTE sites. In September 2015, Telkom physically separated its wholesale fixed-line internet access division from its retail and mobile divisions, to form Openserve. Openserve intends to provide one million homes with fiber access by 2018.

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¹  The major shareholders of Telkom are (i) the National Government, with a direct holding of 39.8% and (ii) Public Investment Corporation, with a direct holding of 10.9%. The remaining 47.3% of Telkom’s issued shares are in free float. Telkom is listed on the Johannesburg Stock Exchange (JSE). For the financial year ended March 31, 2015 Telkom’s Group operating revenue was R32.400 billion (R31.905 billion in 2014) and profit after tax was R3.256 billion (3.203 billion in 2014). It is one of the largest companies in South Africa and together with its subsidiaries and joint ventures forms one of the largest communications services providers on the African continent. Telkom provides international direct dial telephone services to approximately 230 international destinations. Direct circuit relationships have been established with approximately 70 administrations worldwide.

²  The Telecommunications Amendment Act of 2004 was introduced to amend the Telecommunications Act of 1996 and to make provision for the introduction of a second national fixed-line operator to compete with the then state monopolist Telkom. In September 2006, Neotel entered the market and competes on most of the services that Telkom provides.

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South African telecommunications companies have been quick to identify growth opportunities in other African countries, supporting regional integration efforts. Locally, cuts in mobile termination rates by the regulator initiated a price war amongst service providers in 2014. Due to delays in spectrum allocation, consolidation has become a way for companies to access additional spectrum to further roll-out LTE. The Competition Tribunal approved MTN’s acquisition of a 51% stake in internet service provider Afrihost and conditionally approved Telkom’s purchase of Business Connexion. Vodacom’s R7 billion acquisition of Neotel has been approved with conditions by the telecommunications regulator and has also received provisional approval from the Competition Commission, which is currently seeking responses from the company’s rivals.

In December 2013, the Minister of Telecommunications and Postal Services published South Africa’s broadband policy and in 2014, it published its ICT Policy Review paper. The broadband policy sets out a framework which aims to help in achieving high quality universal broadband access at affordable prices by 2030. In 2008, the Minister of Communication approved the Broadcasting Digital Migration Policy which created the framework for switch-over from analogue to digital. The digital signal was switched on this year, and the dual-illumination period (where both the digital and analogue signal are transmitted) is expected to last about two years.

Cellular telephony is among the fastest-growing sub-sectors of the South African economy. The Telecommunications Amendment Act of 1997 enabled various telecommunication facilities, including interconnection and roaming, and required two telecommunications providers to share and make available facilities and utilities for one another. Mobile number portability allows customers to switch networks without changing numbers. Call termination rates were reduced by ICASA from R0.89 in 2011 to R0.20 in 2014. The call termination rate reductions are ICASA’s first and only tariff setting intervention completed in terms of the ECA Act.

The South African Post Office Limited (SAPO) is responsible for postal services through the Postal Act and the Postal Services Act 1998. SAPO was established on October 1, 1991 as a public company in terms of the Companies Act, 61 of 1973. The government of South Africa is the sole shareholder and is represented by the Minister of Telecommunications and Postal Services. SAPO has a retail post office infrastructure of 2,486 service points which deliver postal, courier, financial and PostBank services. SAPO was granted a license to operate as South Africa’s postal services provider in 2001. The license is valid for a period of 25 years and is reviewed every three years with the next review in 2014. SAPO has the exclusive mandate to conduct certain postal services under the Postal Services Act of 1998.

Mining and Quarrying

The mining sector made up 7.5% of total GDP in 2014 in real terms. The contraction in employment tapered off into the second quarter of 2015, with 490,000 people employed, representing a 0.2% decline from a year ago. Although the sector’s importance to the South African economy has been declining over the long term, it remains an important earner of export revenues. Mineral export sales (including precious metals, base metals, basic iron and steel and basic non-ferrous metals) accounted for approximately 53% of total export revenues in 2014.

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In the first half of 2015, South Africa’s mining sector was under significant pressure due to a combination of domestic and global factors. However, a rebound in the platinum group metals sector following strike disruptions in 2014 provided support to the sector’s performance in the first half of 2015. Real value added in the mining sector expanded by 5.5% year-on-year in the first half of 2015, following an overall contraction of 1.6% in 2014 compared to 2013. On a seasonally adjusted quarterly basis, the sector contracted 6.8% in the second quarter of 2015, following an expansion of 10.2% in the first quarter.

Low commodity prices, weak global demand, especially in China and Europe (China accounts for about 40% of industrial market demand), and a supply glut in the iron ore and coal sub-sectors have had a major impact on the sector. This is likely to exacerbate the current challenges associated with supply-side constraints, such as the availability of electricity and access to transport infrastructure. By the end of the first half of 2015, iron ore and thermal coal prices had fallen by approximately 64% and 51%, respectively, since the start of 2011. Gold and platinum prices are also down sharply and have been mostly flat since 2013. In the first half of 2015, the average price of gold, platinum, iron ore and coal declined by approximately 7%, 19%, 46% and 20%, respectively, compared to the prior year period. In response to the global mineral supply glut and slowing global demand, particularly from China, producers have started to scale back production, consolidate operations and diversify production in certain instances. In volume terms, total mining production contracted by 1.4% in 2014, following an expansion of 3.7% in 2013, largely as a result of a five-month long strike in the platinum sector during the first half of the year. In the first half of 2015, mining production increased 7.5% compared to the prior year period due to the normalization of platinum operations—platinum group metals production increased by 37.9% in the first half of 2015 compared to the same period a year ago.

Although the importance of the gold sector is declining relative to platinum, coal and iron ore, it remains an important contributor to the South African economy. In 2014, South Africa’s gold sector produced around 5% of global output, contributed R1.6 billion in taxes, employed 119,705 people, paid remuneration to employees of R23.4 billion and was a significant contributor to private sector infrastructure and social investment (the latter in the form of employee housing and accommodation, training and development and local economic development). Production in the gold sector continued to decline in the first half of 2015, falling 7.2% compared to the same period in 2014. The decline in gold output is related to structural factors including decreasing ore quality, deepening mine pits, which have raised the risks of gold mining, and rising costs (mainly labor and electricity). Wage negotiations in the gold sector (with the exception of one producer) concluded in October 2015 following four months of negotiations, with minimal strike action incurred.

South African mineral sales decreased by 0.3% in 2014 to R396 billion following an expansion of 9.2% in 2013. In the first half of 2015, mineral sales continued to decrease by 1.3% compared to the first half of 2015. To a certain extent, the depreciation of the Rand since 2012 has shielded South African mining companies against weaker commodity prices.

South Africa’s coal exports, mostly along a heavy-heal line between Mpumalanga and the Richard’s Bay Coal Terminal (RBCT), contributed R106 billion to total mineral sales in 2014. The RBCT has a design capacity of 91 million tons per annum (mtpa) with plans to expand this to 110mtpa and the current rail capacity is around 72mtpa. Transnet plans to expand this to 81mtpa by the end of 2018, and eventually to 97mtpa. In recent years, Transnet has increased capacity on the rail line from 68.5mtpa in 2012 and 70.8mtpa in 2013. Due to the absence of a heavy-haul line linking the Limpopo coal fields to Mpumalanga, Transnet and Exxaro are planning a public-private partnership to increase line capacity to 23mtpa from 5mtpa.

South Africa’s iron ore exports, mostly along a heavy-haul line between the Northern Cape and the port of Saldanha, contributed R59 billion to total mineral sales in 2014. The current capacity of the port is around 57mtpa and line capacity is around 60mtpa. Transnet plans to increase rail capacity to 82.5mtpa by 2018 (and eventually to 105mtpa). Some iron ore producers believe that line capacity can be further increased by 8 to 10mtpa through gains in operational efficiencies alone.

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South Africa’s manganese exports contributed R16 billion to total mineral sales in 2014. South Africa currently exports 7.5mtpa of manganese (5mtpa on rail and remainder on trucks through the Port Elizabeth and Durban ports). Transnet believes that unconstrained manganese production capacity across current and potential new mines is estimated at 49mtpa. Transnet plans to create capacity of 7 to 14mtpa by 2020 and 16mtpa by 2023 along a new line between the Northern Cape and the port of Ngqura.

Domestic electricity supply constraints and tariff increases are a major challenge for the sector. The mining sector is the most reliant of all the major sectors of the economy on electricity as an input, although there are some exceptions: surface mining activities such as coal and iron ore have relatively low exposure to electricity costs, because they rely more on diesel than electricity.

Mining is the sector most vulnerable to electricity price increases as producers are not able to pass on increased electricity costs. Within the sector, gold mining firms are the most vulnerable to increasing electricity prices because of very electricity intensive deep mining operations. At the beneficiation level, such as steel production, electricity price increases have had severe negative consequences on firms’ competitiveness (with the exception of industries relying essentially on gas, such as catalytic converter producers).

Policy uncertainty, mainly in two areas, is affecting investor confidence in the sector. Firstly, the MPRDA Amendment Bill remains unfinalized. This has significant implications for investment in oil and gas exploration (both offshore and fracking) as well as general investment in the mining sector due to uncertainty related to developmental pricing of minerals to support beneficiation. Secondly, uncertainty remains around specific implications of the Mining Charter and differences between the Department of Mineral Resources (DMR) and the Chamber of Mines on the “once empowered, always empowered principle”. The matter is currently with the courts (brought by the Chamber of Mines) where a determination on whether past empowerment deals (where BEE shareholders have since exited from the deal), will be counted towards the mining sector’s requirement of 26% empowerment.

Following concerns that the mining regulatory framework was inhibiting investment, the Minister of Mineral Resources announced measures to reduce regulatory uncertainty in the mining industry and root out corruption in the awarding of mining licenses. Since September 1, 2010, in an effort to improve transparency in the licensing process, the DMR now places information on the status of exploration and mining licenses on its website. In addition, issuance of prospecting rights, which was previously done at regional offices, is only issued from the head office. This aims to reduce graft and inconsistent application of the law. Senior management has also been deployed to regional offices to strengthen leadership and oversight.

In the NDP 2030, the Government identifies mining as one of the key sectors for the acceleration of domestic industrialization and the acceleration of job creation. A number of binding constraints to growth that require policy intervention have been identified, including rail and port infrastructure, the stability of energy supply, skills constraints, a poor regulatory framework and policy uncertainty.

A review of the Mining Sector Strategy will begin in 2015/16 and the Mining Charter Compliance Review will be completed during 2015. Consultations on this process are still ongoing. Draft regulations for shale gas exploration have been completed and stakeholder consultations will begin once the shale gas communication strategy is finalized.

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The Government set up the Framework Agreement for a Sustainable Mining Industry in July 2013 in an effort to overcome the challenges faced by the mining sector. The action plan aims to ensure the rule of law, peace and stability; strengthen labor relations; improve living and working conditions of mineworkers; and provide short, medium and long-term measures to support growth and stability in the sector. A mining pact entered into between industry, unions and the government to limit the extent of adverse operating conditions on potential job losses going forward was signed in September 2015. A Mining Phakisa in November 2015 has enabled business, labor and government to identify priorities to achieve the objectives of increasing mining exploration, investment, production, and ensuring sustainability and transformation of the industry.

South Africa is endowed with substantial mineral resources, and further downstream and upstream beneficiation has been identified as a major stimulant to drive the country’s industrialization plan. As part of the NDP, the government is working towards creating a suitable environment for downstream minerals beneficiation. In June 2011, the Cabinet approved a ten commodity beneficiation strategy. The ten selected commodities are gold, platinum, diamond, iron-ore, chromium, manganese, vanadium, nickel and titanium, with coal and uranium bracketed together. The Minerals Beneficiation Action Plan (MBAP) has been incorporated into the 2015/16 Industrial Policy Action Plan (IPAP) which seeks to ensure that South Africa adds more value to its mineral wealth. The MBAP seeks to advance local value-addition across five mineral value-chains, namely, iron-ore and steel, PGMs, polymers, titanium and mining inputs. The IDC has approved funding of R247 million to improve downstream processes for iron-ore and steel, diamond, platinum and titanium. The Resources Capital Goods Development Program (RCGDP) interim report was approved in April 2015. This aims to stimulate and expand the mining capital goods sub-sector given the relatively large local and regional market for mining supplies. Platinum Power Fuel Cell, which is a joint project between the DTI and energy specialist Mitochondria, installed the first 100kW base-load platinum fuel cell, which runs on natural gas, at the Chamber of Mines in Johannesburg. Engagements are underway with leading fuel cell original equipment manufacturers to establish manufacturing plants in South Africa to expand the PGM beneficiation.

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The following table sets forth mineral production and sales for the periods indicated.

Mineral Production

Year	Index of Production Volume Including Gold(1)		Index of Production Volume Excluding Gold(1)		Total Value of Mineral Sales Including Gold(2)		Total Value of Mineral Sales Excluding Gold(2)
2004		109.3		99.6		125,057.8		95,728.1
2005		110.6		104.0		142,817.9		118,216.7
2006		109.2		104.1		193,589.5		157,184.9
2007		108.2		104.2		224,437.7		185,401.1
2008		102.1		100.2		300,714.5		254,722.3
2009		95.3		93.7		241,364.6		192,668.9
2010		100		100		300,292.5		247,199.2
2011		99.1		99.9		370,280.7		301,389.3
2012		96		99.6		364,117.3		287,292.7
2013		99.5		103.4		397,677.9		327,691.0
2014		98.1		102.8		396,426.4		333,113.6
2015(3)		100.3		107.7		194,267.4		164,959.9

Notes: —

(1) Base: 2010 = 100

(2) Rand million, through June 30, 2015.

(3) Rand million, through June 30, 2015.

Source: Stats SA.

Agriculture, Forestry and Fishing

Agriculture

South Africa has 12 million hectares of arable land, which represents approximately 10% of the country’s total land area, of which around 22% comprises high-potential arable land. Rainfall is unreliable and the country as a whole is subject to severe periodic droughts, such as in 2015. Yet South Africa remains a net food exporter and is a major exporter to the Southern African region, mainly due to the sector’s relative maturity and global competitiveness. Agricultural exports have increased by approximately 55% since 2007. The Department of Agriculture, Forestry and Fisheries (DAFF) suggests that commercial farmers produce approximately 95% of the country’s formal marketed agricultural produce. The Commercial Agricultural Census estimated that there were 39,966 commercial farming units in operation in 2007, down from 45,818 in 2002. A widely held view is that there are now about 37,000 commercial farmers in South Africa. According to the QLFS, total employment in the agriculture sector increased by 3.2% to 897,000 in the second quarter of 2015 from 869,000 in the first quarter, based on the new Master Sample that is based on the 2011 census data.

There are a number of farming regions that vary by climate, natural vegetation, type of soil and type of farming practiced. Agricultural activities range from intensive crop production and mixed farming in winter rainfall and high summer rainfall areas, to cattle farming in the bushveld and sheep farming in the more arid regions. Production under irrigation takes place on approximately 1.5 million hectares (3.2 million acres), which can be expanded by at least 500,000 hectares through better use of existing water resources and investment in new water schemes according to the NDP. Agricultural companies such as ZZ2, Karsten, Westfalia and AFGRI are well-established in the sector and have existed since the 1960s.

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The agriculture, forestry and fishing sector made up 2.4% of total GDP in 2014 in real terms, having declined from 3.4% in 1994 due to faster growth in manufacturing and services. Real value added in the sector contracted 5.6% in the first half of 2015 compared to the same period in 2014. The contraction was driven by decreased production in summer field crops, sugar cane and wheat, due to drought conditions in the Free State, North West, Kwa-Zulu Natal and Western Cape provinces. The 2014/15 maize harvest is estimated to be 17.4% smaller compared to the record harvest in 2014 which has already increased imports, particularly of yellow maize used in the animal feed industry. Domestic maize prices have risen substantially as a result of the reduced harvest size and expectations of increased maize imports relative to the prior season, which will place upward pressure on domestic food prices going forward, as higher maize input prices pass through the value chain.

Historically, exports of processed agricultural products have outweighed exports of unprocessed agricultural products. However, in recent years, exports of fruit and vegetables have outperformed processed food products despite the latter receiving much greater amounts of government support in the form of incentives to upgrade machinery and equipment. Horticultural exports (such as grapes, citrus and nuts) are becoming increasingly important as a share of total agricultural output, replacing grains such as maize and wheat. South Africa enjoys relatively high shares of the global market for primary agricultural products such as oranges (12%), grapefruit (10%), plums (8%), greasy wool (8%), pears (6%), tree nuts (6%), fresh grapes (6%) and lemons (5%). Agricultural exports (including animal products, vegetable products, fats and oils, and prepared foodstuffs) totaled about R106 billion in 2014, representing a 14.7% increase from the 2013 value of R92.4 billion.

The New Growth Path (NGP) and NDP policy frameworks identify the agriculture sector as a key driver of job creation and will introduce measures to support growth of commercial farming and smallholder schemes with comprehensive support around infrastructure, marketing, extension services and finance. The NDP, in particular, characterizes the sector as having the potential to create job opportunities for 300,000 households in smallholder schemes and 145,000 jobs in agro-processing by 2020. The President’s nine-point action plan includes the revitalization of the agro-processing value chain and outcome 4 of the MTSF has a specific focus on addressing spatial imbalances in economic opportunities through expanded employment in agriculture. Several agro-processing schemes of various sizes are either under construction or development across various provinces. These include the R10 million Taung Agro-Hub currently under construction in the North West and the memorandum of understanding and funding agreement concluded in Kwa-Zulu Natal for 693 hectares of sugar production to expand small scale grower production in communal areas.

Agriculture is a high-risk business, with access to finance remaining a key challenge for farmers, particularly emerging farmers. A number of platforms therefore exist to improve farmers’ access to finance. These include the Land Bank, the Industrial Development Corporation (IDC) and the Micro-Agricultural Financial Institutions of South Africa (MAFISA). Following financial breakdown in 2008, the Land Bank has stabilized its financial position and will increase its developmental lending to emerging farmers over the medium term. At the same time, the IDC is targeting the agricultural sector through its R10-billion Gro-E Scheme, and the number of farmers awarded production loans under MAFISA increased from 5,310 in fiscal year 2011/12 to 4,176 in fiscal year 2012/13. The DAFF targeted 6,000 small-holder and subsistence farmers to be receiving MAFISA loans in fiscal year 2013/14 and 7,000 in fiscal year 2014/15.

The Integrated Growth and Development Plan 2012 (IGDP) has been developed by DAFF to provide a long-term strategy for the agriculture, forestry and fisheries sectors. Its aim is to provide a coordinated implementation framework linking the three sectors. The high-level responses offered in the IGDP have been translated into the Agriculture Policy Action Plan (APAP), which is the implementation arm of the IGDP. The Cabinet approved the five-year Agriculture, Forestry and Fisheries Strategic Framework, a strategic response to the NDP, and APAP in 2015. The framework sets out the key challenges faced by the three sectors and proposes interventions in four areas, namely equity and transformation; equitable growth and competitiveness; environmental sustainability; and governance. The broad objectives of APAP are to promote labor absorption and broaden market participation, and strategic interventions aimed at increasing value-chain efficiencies and competitiveness, focusing on selected sub-sectors and their value chains. The strategy and action plan will be updated on an annual basis.

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Forestry

The forestry sector accounts for approximately 1% of GDP. It employs approximately 165,900 people of which approximately 66,000 are directly involved in forestry operations. There are approximately 534,000 hectares of indigenous or natural forests in the country which occur mainly along the southern and eastern escarpment, the coastal belt and in sheltered kloofs or ravines. There has been an increase in the use of natural forests as sources of medicine, building material, fuel and food. It is estimated that around 80% of South Africa’s population still use medicinal plants, most of which are sourced from natural forests. There are a further 1.3 million hectares of plantation forests occupying approximately 1.1% of the country’s land area.

South Africa now has a detailed inventory of all its natural forests, which are not commercially utilized extensively for forest products, but which are very important in supporting communities in subsistence needs and which also provide unique eco-tourism opportunities. These forests represent 24 broad forest types. The natural forests protected areas system, which was completed for all forests in 2004, will guide the setting aside and re-demarcation of natural forests into protected areas. South Africa also has extensive woodland (deciduous fire-climax wooded areas as opposed to evergreen natural forests) areas throughout about 29 million hectares of the country, of which approximately three quarters is privately owned.

DAFF plans to transfer the management and control of all state-owned indigenous forests, primarily to provincial government departments or national and provincial conservation agencies such as South African National Parks, SANParks, which will manage about 97,000 hectares of state forest land in the southern Cape and Tsitsikamma areas.

The Forestry 2030 Roadmap aims to achieve the effective and sustainable development of all forestry resources in South Africa. It serves as the guiding policy of the forestry sector. The Forestry BBBEE Charter, which was launched at the Forestry Indaba in April 2005, was gazetted in June 2009. The vision of the Charter is that of an inclusive and equitable forestry sector, in which black women and men fully participate and that is characterized by the sustainable use of resources, sustainable growth, international competitiveness and profitability for all its participants and a forestry sector that contributes meaningfully to poverty eradication, job creation, rural development and economic value-adding activities in the country. Under the Charter, the National Government aims to process about 15,000 hectares per year until 2019 to get a net increase in forestry of about 10,000 hectares per year.

Fishing

South Africa’s industrial fisheries are widely regarded as being among the best managed in the world. The commercial fishing industry, which includes fish, molluscs, seaweed and shellfish, contributes approximately 0.1% to GDP and directly employs about 27,000 people while another 81,000 find employment in fish processing, transporting of fish products and boat building. Marine life that is not harvested, such as whales, dolphins and seabirds, is increasingly recognized as a valuable resource for nature-based tourism. The South African fishing industry, which was once concentrated in the hands of a few, largely white-owned companies, has undergone intensive transformation over the past ten years. Transformation has taken place in a very short space of time, without compromising the principle of sustainable utilization that is fundamental to the management of fisheries.

The Integrated Coastal Management Act of 2008 replaced the Seashore Act of 1935 and the Dumping at Sea Control Act of 1980, and introduces a comprehensive national system for planning and managing South Africa’s valuable coastal areas. The Integrated Coastal Management Act declares the seashore, coastal waters (including estuaries) and South Africa’s territorial seas to be coastal public property. It therefore also requires the state to act as the trustee of coastal public property. The primary objective of the national government’s fisheries policy, as outlined in the Marine Living Resources Act of 1998, is the improvement of impoverished coastal communities through increased access to, and sustainable development of marine resources.

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DAFF has also identified the aquaculture sub-sector as having the potential to increase the sector’s value-add and increase its employment potential, particularly for poor coastal communities. The Ocean’s Phakisa, which aims to facilitate the implementation of the NDP, identifies four priority areas to unlock South Africa’s coastal and oceanic economic potential, namely: marine transport and manufacturing; offshore oil and gas; aquaculture; and marine protection services and ocean governance. Several significant developments are taking place to expand the ocean sector’s contribution to economic growth and job creation over the medium to long term. The rehabilitation, upgrade and redevelopment of some small harbors as well as the identification and proclamation of new harbors and their integration with national coastal projects has been initiated. Amendments to the Environmental Impact Assessment and Biodiversity Regulations will reduce the timeframes for the implementation of aquaculture projects, while an Inter-Departmental Authorisations Committee has been established in order to streamline application and authorization processes. To address issues of tenure security, the Department of Public Works has awarded the first five leases to aquaculture companies in the harbors that they will be operating in, with more long-term leases for projects expected to be awarded in the coming months following approvals of applications through DAFF. A draft Oceans Management Bill was finalized in 2015 to provide an overarching, integrated governance framework for the sustainable growth of the ocean economy. Finally, the legal drafting of the regulations and declaration notices for the 21 Offshore Marine Protected Areas has been completed and consultations with relevant stakeholders have been conducted.

Electricity, Gas and Water

South Africa generates two-thirds of Africa’s electricity. More than 85% of South Africa’s electricity is coal-generated. Koeberg, a large nuclear station near Cape Town, provides about 5% of capacity. A further 5% is provided by hydro-electric and pumped storage schemes.

Generation of electricity in South Africa is currently dominated by Eskom, the national wholly state-owned utility, which also owns and operates the national electricity grid. The company supplies about 95% of South Africa’s electricity. It is regulated by the National Energy Regulator of South Africa (NERSA), which is also mandated to regulate electricity departments of local authorities as well as the piped-gas and petroleum pipeline sectors.

During the first half of 2015, supply remained severely constrained, with frequent rotational load curtailment to manage the supply shortfall arising from Eskom’s installed capacity being taken offline for scheduled or unplanned maintenance. Generation capacity and growth of the sector will remain constrained over the medium term given supply challenges, but strategies implemented by the government are expected to help support the sector.

In the short to medium term, South Africa’s increased power needs will be met by two new coal-fired power stations, Medupi and Kusile. The projects have been financed by a mix of higher electricity tariffs, debt issued by Eskom, backed by a government guarantee, and loans from multilateral development banks. Unit 6 of Medupi power station entered full commercial operation in August 2015, adding an additional 794 MW permanent supply to the national grid.

As of October 2015, 92 projects have been selected as part of the Renewable Energy Independent Power Producer Procurement Program (REIPPPP), representing R193 billion in private sector investment and 6,327 MW of additional capacity to the national grid. The Minister of Energy has recently issued a determination to procure another 6,300 MW through the REIPPPP – which is expected to boost electricity capacity by 17,000 MW by 2022. The Government is also expanding the independent power producer programme to include other generation technologies and NERSA has approved 1,350 MW of short-term power-purchase contracts in 2015/16. An additional 2,500 MW of coal, 3,126 MW of gas, 1,800 MW of co-generation and 2,609 MW of imported hydro power generation capacity is expected to be connected to the grid between 2020 and 2025.

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Electricity tariffs have been increasing at levels above inflation since 2008 to reach cost reflectivity. In February 2013, NERSA granted Eskom yearly increases of 8% for the period from 2013/14 to 2017/18. However, Eskom is facing a R225 billion shortfall over the MTEF. In July 2015, the Government sold its 13.91% share of Vodacom, the mobile services provider, to finance a R23 billion allocation to Eskom to address its funding shortfall. In 2015, NERSA rejected Eskom’s bid to increase the 2015/16 electricity tariff to 25.3% for failing to meet various technical requirements. Instead, electricity tariffs increased by 12.7% from July 2015 based on previously approved applications. NERSA however indicated that it remains open to Eskom submitting either an application for adjustments allowed for in the Multi Year Price Determination (MYPD) methodology, or, alternatively, a new application for the period April 1, 2016 to March 31, 2019. The Government has also targeted the recovery of unpaid municipal bills as a way to support Eskom’s financial recovery, compelling defaulting municipalities to enter into repayment arrangements.

Over the longer term, South Africa’s envisaged energy generation and transmission needs and provision are outlined in the Department of Energy’s Integrated Resources Plan (IRP) and Integrated Energy Plan (IEP). The IEP, covering the time between 2010 and 2050, is designed to guide future energy infrastructure investment and policy. The IRP seeks to diversify the energy mix in South Africa to include gas, imports, nuclear, biomass, and renewable, as well as use to the existing coal resources more efficiently and in a more environmentally friendly manner. The IRP aims to create an additional 42.6 GW of total capacity by 2030: 17.8 GW from renewable, 9.6 GW from nuclear, 6.3 GW from coal and the remainder from other generation sources. This mix should help South Africa to meet its commitments to climate change imperatives such as the Copenhagen Accord. As announced in the 2015 MTBPS, the National Treasury has allocated R200 million to the Department of Energy for preparatory work to consider the costs, benefits and risks of building four more nuclear power stations in South Africa.

Oil and Gas

The wholesale and retail markets for petroleum products in South Africa are subject to a set of government controls. The Government regulates wholesale margins and controls the retail price of petrol. The petrol retail price is fixed on a monthly basis, but varies each month with respect to global crude oil prices, the Rand/Dollar exchange rate and taxes. The administration of the pricing regulation is done by the Central Energy Fund on behalf of the DOE.

South Africa has very limited oil reserves. Approximately 60% of its crude oil requirements are met by imports from the Middle East and Africa.

PetroSA is a subsidiary of the Central Energy Fund (CEF) and is the National Oil Company (NOC) of South Africa. CEF is wholly-owned by the State and reports to the Minister of Energy. PetroSA’s flagship operation and main contributor to its revenue is its Gas to Liquid (GTL) plant located in Mossel Bay. The Mossel Bay plant is the third largest out of the five such plants globally and is capable of producing a crude oil equivalent of 45,000 barrels per day.

South Africa continues to support efforts to enhance the exploration of mineral resources, especially energy sources. According to 2015 data from the Department of Energy, South Africa’s recoverable gas resources are approximately 9 Trillion Cubic Feet (TCF) offshore through conventional drilling, 9 TCF in shale in the Karoo Basin, out of a potential 120 TCF resource, and around 1.5 TCF from coal bed methane. The Government aims to procure 3,126MW of power from gas in the period between 2019 and 2025 as a way to diversify its energy mix away from an over-reliance on coal-fired power plants.

The South African government has identified the ocean’s economy as a source of significant potential growth and launched an Ocean’s Economy Phakisa—the first of a series of initiatives adopting the Malaysian government’s “Big Fast Results Methodology” which brings stakeholders together to identify reforms and enable effective strategic planning. The goal of the offshore oil and gas exploration component of the Ocean’s Phakisa is the drilling of 30 exploration wells in ten years, to produce 370,000 barrels of oil and gas per day. Environmental authorization has been given for the Burgan Fuel Storage facility in the port of Cape Town.

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Recently, the Department of Environmental Affairs has issued an environmental authorization for Shell, giving it permission to drill up to two offshore exploration wells in the northern portion of the license area, off South Africa’s west coast. The Department of Energy’s request for information about potential bidders for independent gas-fired power producers, which closed in July 2015, attracted about 200 submissions.

The finalisation of the MRPD Amendment Bill, currently in the Parliamentary process, is designed to assist South Africa to accelerate offshore oil and gas exploration. According to the Department of Energy, because the IRP 2013 policy did not sufficiently take into consideration all fuel sources, such as gas, it will be amended by the second quarter of 2016. In addition, the Department of Energy’s Gas Utilisation Master Plan (GUMP) has been developed, but has yet to be released for public comment. The plan provides a framework for investment in gas infrastructure and sketches the future role of gas in the electricity, transport, domestic, commercial and industrial sectors.

Water

South Africa is largely a semi-arid and water scarce country with a mean annual rainfall of 490mm, half the world average. South Africa’s inland water resources include 22 major rivers, 165 large dams, more than 4,000 medium and small dams on public and private land and hundreds of small rivers.

The Department of Water and Sanitation (DWS) is the government department with the mandate to regulate the water sector nationally, develop national policy, standards and guidelines, and provide targeted support and information management. The DWS also gives strategic direction for water resources management in the National Water Resource Strategy (NWRS), which provides the framework for the protection, use, development, conservation, management and control of water resources for South Africa, as well as the framework within which water must be managed at catchment level, in defined water management areas.

The DWS is in the process of reviewing the raw water pricing strategy, infrastructure funding model and economic regulation of the sector. The 2013 review of the Raw Water Pricing Strategy addressed the issue of water scarcity and how to best use water pricing as a tool for driving more efficient water-use without having a negative effect on small-scale or under-resourced water users.

South Africa has met the Millennium Development Goals of halving the population without access to water and sanitation. In 1994, only about 59% of South Africa’s population had access to water supply infrastructure—as of March 2012, the number rose to 94.7%. Similarly, access to basic sanitation services increased from 49% in 1994 to 79% in 2010. In order to ensure that the needs of the water-stressed Gauteng region, the economic hub of South Africa, continue to be met, Phase Two of the Lesotho Highlands Water project, which will now include a pumped storage scheme, was launched in March 2014. The Lesotho Highlands Water project is developed in partnership between Lesotho and South Africa, under a treaty signed in 1986, and comprises a system of several large dams and tunnels throughout Lesotho and South Africa. The current phase of the project, the second out of four, is expected to increase the annual transfer to South Africa’s Vaal River system from 10 to 15 billion cubic meters by 2024. This phase, which is expected to cost R17 billion, includes the construction of the Polihali Dam, a tunnel and related developments, as well as a pump storage scheme which will generate 1,200 MW.

Over the MTEF, funding has been allocated to 229 water and infrastructure sanitation projects. These include 21 projects with a total cost of more than R1 billion. There are 60 large projects and 148 small projects mainly funded through the regional bulk infrastructure grant, which has allocated R15.1 billlion over the MTEF. This funding will also finance the construction of 76 regional bulk schemes to be completed over the next three years.

While substantial progress has been made in reducing the backlog in the provision of basic water and sanitation services, greater focus is now being placed on regulating the quality of water. In 2008, the DWA introduced a system of incentive-based regulation which is aimed at assessing the quality of water within various municipalities and municipal systems in line with international best practice. The system was defined by two programs: the Blue Drop Certification Program for drinking water quality management regulation and the Green Drop Certification Program for wastewater quality management regulation.

South Africa’s drinking water quality matches best international practice and follows the guidelines set out by the World Health Organization. The latest version of the Green Drop Report (2013) indicated that 41% of the 914 water supply systems assessed require attention. Similarly, 55% (or 821) waste-water treatment works require serious and urgent refurbishment.

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The South African government has launched a wide ranging ten-year program to address water supply and sanitation backlogs affecting under-serviced households. Improvements to bulk water infrastructure has been prioritized and the resources made available to local government to deliver water and improve sanitation (including eliminating bucket toilets) will grow strongly. Initiatives are expected to fast-track the issuing of water licenses, expand the water system capacity, speed up build programs, address backlog projects and rehabilitate and upgrade existing water and sanitation infrastructure across the country.

Construction

The construction sector accounts for 3.8% of total GVA and a similar percentage of total employment. The rebound in the construction sector recorded in the second half of 2014 lost momentum in the first half of 2015. Growth in real value added by the sector had maintained a modest upward trend, improving to 2.9% in 2014, from 2.7% in 2013 and 2.0% in 2012, but decelerated to 1.9% year-on-year in the first half of 2015. These growth rates are well below the peak of 15% observed in 2007. Employment in the construction sector contracted by 4.4% year-on-year in the first half of 2015, following a contraction of 0.4% in 2014.

Adverse economic conditions continue to depress demand in the sector. Composite building plans completed increased by 4.0% year-on-year in the first half of 2015, led by growth in the residential sector, where building plans completed rose by 4.4% year-on-year. The non-residential sector, however, contracted by 13.7% year-on-year and additions and alterations contracted by 2.4% year-on-year in the first half of 2015 as private sector investment decelerated. Although building plans passed—an indication of possible pipeline activity—increased by 11.7% year-on-year in the same period, weak household disposable income growth, and low consumer and building confidence levels are expected to weigh on growth in residential building construction.

Public infrastructure spending is budgeted at R813 billion over the next three years, which should assist stimulating growth in civil construction. Despite the overall slowdown in investment brought about by the weakness in private sector investment, public corporations and general government increased their capital outlays on infrastructure projects relating to road networks, energy, water, transportation and education in the first half of 2015. Continued improvements in the ability of provincial and local government entities to reach their infrastructure spending targets will be critical in this regard, and the Government is taking action to improve its capability to plan and implement infrastructure projects. The Budget Review 2015 allocated 20% of this spend on energy and 42% will be spent on transport and logistics. Other economic services, which include spending on agriculture and environmental infrastructure, will get 5% of the allocated amount. Water and sanitation is allocated 14% of the total budget.

Building Construction

Building construction comprises the activities of general contractors engaged in the building, alteration, repair or demolition of buildings. Subcontractors appointed to perform work such as painting, plumbing, electrical installation, bricklaying and other related work are also included in this sector. Enterprises operating in this sector vary from large building contractors to many smaller contractors and subcontractors. Major inputs to this sector are non-metallic mineral products, electrical machinery and basic iron and steel. Although its contribution to GDP is relatively low, this sector is labor-intensive and utilizes mainly semi-skilled or unskilled labor.

The National Government has implemented a housing subsidy policy, tender procedures and contract procurement policies that are directed towards facilitating the growth of the emerging construction sector.

The Housing Accord in 1994 established procedures to ensure the delivery of 350,000 low-cost houses per year, with a goal of delivering one million houses by 1999. To date, over three million housing units have been delivered since 1994, although there is an estimated backlog of 2.1 million houses remaining. According to the 2015 Estimates of National Expenditure, it is projected that an additional 66,655 houses will be completed in fiscal year 2015, 103,983 houses in fiscal year 2016 and 113,588 houses in fiscal year

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2017. The government will implement the human settlements reforms in the MTEF with the aim of ensuring that poor households have adequate housing in better living environments, to support the development of a functional and equitable residential property market, and to improve institutional capacity and coordination for better spatial targeting.

Civil Engineering

Civil engineering includes contractors primarily engaged in construction work such as airports, dams, electricity networks, harbors, pipelines, railway lines and roads. The demand for labor consists mainly of production workers and artisans (unskilled and semi-skilled workers).

The civil engineering sector provides most of its own raw materials, but also uses non-metallic mineral products, iron and steel.

The civil construction industry is characterized by a high degree of economic concentration. The Construction Charter, which took effect from June 6, 2009, aims to involve historically disadvantaged individuals and smaller businesses in construction activities. The Construction Industry Development Board (CIDB) has developed standards and procedures for government tenders which are intended to help simplify tender procedures, particularly for small construction contractors.

This sector’s share of production is very sensitive to cyclical economic activity, with almost three-quarters of the domestic demand for the sector’s output generated by domestic fixed investment. In the face of weakened private activity, improved investment by the general government and public corporations has proved helpful in keeping the sub-sector afloat. However, delays in projects undertaken by public corporations and capacity issues constraining project implementation at the local and provincial government levels have constrained growth. In response to concerns around capacity issues, the Government has instituted various capacity-building initiatives, such as the Infrastructure Delivery Improvement Program (IDIP), the infrastructure skills development grant and the municipal infrastructure support agency. Over the medium term, R452.7 million in the Infrastructure Development Support subprogram is projected to be spent to deploy 36 long-term technical assistants to train provincial officials on the infrastructure delivery management toolkit. In addition, the Cabinet has established the Presidential Infrastructure Coordinating Commission (PICC) in 2011, which integrates and coordinates long-term infrastructure builds, raising the level of investment spending and contributing to industrial and regional development.

Informal Sector of the Economy

With neither the public or formal private sectors able to create enough jobs for the expanding labor force, the informal sector represents an alternative source of jobs or self-employment for rural areas, newly urbanized or formally unemployed. The informal sector’s share of GDP was estimated at 5.9 % in 2013. This sector employs approximately 2.7 million people (excluding agriculture and domestic service) and, as of September 30, 2015, accounted for 17% of total employment.

Informal enterprises encompass a very wide range of activities, such as the production of marketable products, the distribution of merchandise and the provision of services. Informal enterprises also mobilize capital at a grass-roots level for the provision of dwellings and community-based services. The businesses in this sector typically operate at a low level of organization and on a small scale, with little or no division between labor and capital. Given the informal sector operates outside the legislated labor environment, employment tends to be casual, based on kinship or personal and social relations rather than on contractual arrangements with formal guarantees.

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Employment and Trade Unions

Employment

Employment remains one of the key challenges for the South African economy. Faster growth is required over an extended period of time to significantly increase labor absorption, reduce high unemployment and achieve a more equitable distribution of income.

Employment growth has not been fast enough to absorb the increasing labour force and the structural backlog of unemployment. Since the end of 2010—the trough of the employment downturn—to June 30, 2015⁴ the labor force has grown by 14%. The labour force participation rate increased by 3.1 percentage points to 58.1% over the same period. Over 40% of the population are not economically active. The official (narrow) unemployment rate increased from 23.9% in December 2010 to 25% in June 2015, while the broad unemployment rate (which includes discouraged workers) has hovered around 32%. This has meant an increase in the unemployed by 862,000, and discouraged by 258,000. In comparison, employment has grown by 12%, or 1.8 million employees. Employment growth has been high in agriculture and the informal sectors, growing by 27%⁵ and 15%, respectively, for the same period.

Total employment per sector

Total formal and informal employment per sector	Total employed		As a percentage			Change since December		Average growth per year since
as at June 30, 2015	(thousands)		of total			2010 (thousands)		December 2010
Mining		446		3	%		125		7	%
Manufacturing		1756		11	%		-133		-1	%
Utilities		136		1	%		40		8	%
Construction		1401		9	%		286		5	%
Trade		3119		20	%		-7		0	%
Transport		922		6	%		117		3	%
Financial Services		2164		14	%		464		5	%
Community		3548		23	%		563		3	%
Agriculture		869		6	%		220		6	%
Private households		1292		8	%		80		1	%
Other		4		0	%		3		98	%
Total		15657		100	%		1758		2	%

Source: QLFS, Stats SA

Formal non-agricultural employment has been the main source of employment, with the private sector representing 77% of employment. A quarter of the jobs created since the end of 2010 to June 30, 2015 have been in the government sector. Fiscal constraints are likely to inhibit further growth in government employment. The Government’s fiscal consolidation objectives have been made more challenging by the recently concluded wage settlement in the public sector, which reached 10.1%. In order to meet fiscal targets, the settlement was funded through a combination of drawing down on the contingency reserve, reprioritizing, within existing baselines reducing headcount, withdrawal of funds from vacant positions, amongst other measures. The 2015 MTEF had included significant unallocated resources intended to finance new policy initiatives in the MTSF. However, as a result of the 2015 public-sector wage settlement, the bulk of these resources will be shifted towards public wage increases rather than new initiatives or for other development. Over the MTEF, the budget shortfall associated with the wage settlement is at least R62 billion higher than the originally forecasted compensation budget, assuming that CPI inflation is in line with projections at the time of the 2015 Budget. Departments are now expected to adjust their spending plans, and the budgets for vacant posts will now be required to compensate existing employees. To the extent that these measures to do not suffice in covering the shortfall, the rest will come from contingency reserves.

Mining and manufacturing sectors have reduced their workforces by 3% between 2010 and 2015. Over two-thirds of the country’s total job losses have been in the manufacturing sector, while restructuring in the mining sector has led to recent announcements of possible retrenchments. However, there has been strong employment growth in the

⁴  All figures relating to labor market statistics, such as unemployment, labor force participation, are from the Quarterly Labor Force Survey, which is a household survey. All statistics relating to formal non-agriculture formal employment are from the Quarterly Employment Survey, which is based on a payroll sample from firms, and is deemed more reliable for sector employment figures. Starting in January 2015, the estimates are based on a new master sample affecting comparability with previous periods.

⁵  This change may be overstated due to change in the sampling technique in the Quarterly Labor Force Survey starting in January 2015, which was not retrospectively applied. Thus changes should be interpreted with care.

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wholesale and trade sector, and the financial services sector. The wholesale and trade sector currently employs over 20% of the workforce, and has increased by almost 10% in the last five-and-a-half years. Financial services employment has also increased by 5% since December 2010.

The following table sets forth the change in formal, non-agricultural, formal employment and the percentage of registered unemployed people for the periods indicated.

	For the year ended December 31,
	2008		2009		2010		2011		2012		2013		2014		2015(1)
Employment (% change on prior year)(2)
Public Sector(2)		4.7		3		2		4.7		1.9		2.3		4.2		-4.4
Private Sector(2)		1.2		-4.5		-1.4		1.6		1.1		-0.1		-1		1
Total		1.9		-2.9		-0.6		2.3		1.3		0.5		0.2		-0.4
Official Unemployment(3) (%)		22.5		23.7		24.9		24.8		24.9		24.7		25.1		26.4

Notes: —

(1) Three months ended March 31, 2015.

(2) Employment in the formal non-agricultural sectors

(3) QLFS as at June 30, 2015. Starting in January 2015, the estimates are based on a new master sample, which impacts comparability with previous periods.

Source: Stats SA

The National Government has placed job creation and skills development at the heart of its policies, by promoting an environment that is conducive to private sector growth and investment, with future legislation and regulation being subject to a socioeconomic impact assessment before being passed, and microeconomic reform as well as by directly impacting on employment levels through public sector hiring and targeted job-creation programs.

To support job creation for young people, on January 1, 2014, the National Treasury launched the Employment Tax Incentive which reduces the employers’ costs of hiring young people. Total claims for the employment tax incentive amounted to R3.9 billion since the start of the program until July 31, 2015. According to the monthly returns, over this time the incentive has been claimed by 36,616 unique employers. Initial estimates suggest the bulk of the claims come from the wholesale and retail, financial and business services, manufacturing and agricultural sectors. Evidence-based evaluation of the employment tax incentive will be concluded during 2016, as sufficient data becomes available. For the first year of the incentive, it was estimated to have been claimed for at least 254,000 workers.

The Employment Public Works Program (EPWP) (including the Community Works Program) is designed to provide poverty and income relief and has created over one million jobs in 2014/15. To help meet the target of creating over six million work opportunities, the Government has committed R6.8 billion over the MTEF to EPWP.

The Department of Labor is also developing its Employment Services South Africa system, which placed 15,570 work-seekers in registered vacancies in 2013/14. However, placement is severely hampered by a skills mismatch.

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More broadly, the National Government has strengthened small business financial and advisory support, drawing on both public and private sector capacity, given their importance for job creation and continues to provide significant support for education. In the 2014 State of the Nation Address, President Jacob Zuma established a Department of Small Businesses Development (SBD) to provide extensive support to small business and cooperatives. Areas of focus include support for township economies jointly with Economic Development departments and the implementation of the entrepreneurship programme through centres for entrepreneurship (such as innovation and entrepreneurship hubs) based in all nine provinces.

Education, skills, employment and unemployment

There is a positive correlation between skills levels (as proxied by educational attainment) and employment. Individuals with lower skills levels represent the majority of the unemployed. For the six months to June 30, 2015, narrow unemployment stood at 32.2% for workers with less than complete secondary education, while it falls to 25.6% for workers with completed secondary education and 11.5% for workers with technical or academic qualifications beyond secondary education.

Education

Education is one of the National Government’s priority areas. This prioritization is reflected in the total government expenditure on education—at 19.5% of consolidated government expenditure in fiscal year 2015/16, South Africa’s total expenditure on education lies in the upper part of the 15% to 20% threshold as set by the Education for All initiative in 2008.

The NDP aims to ensure that the education system has clear linkages between schools, FET colleges, universities and other education and training providers. There should also be clear linkages between education and training and the world of work. The Department of Basic Education supports education in schools and the Department of Higher Education and Training (DHET) is dedicated to intermediate and high-level skills development at post-school level, which includes Further Education and Training (FET) Colleges, higher education institutions and the skills development agencies (Sector Education and Training Authorities and the National Skills Fund).

According to Education Statistics 2013, published in March 2015 by the Department of Basic Education, the South African education system had 12.9 million students, 447,149 educators and 30,027 schools, of which 1,584 were independent schools. With enrolment and gender parity virtually achieved, particularly at primary school level where the gross enrolment ratio is 96 for girls and 101 for boys, the focus is on improving the quality of education, rather than access. Improving learner performance in literacy and numeracy is central to the overall improvement in education outcomes at all levels.

There is recognition that performance in mathematics and science needs to be substantially improved. In 2004, the National Government introduced the Dinaledi Schools, which channel additional resources to 500 disadvantaged schools to increase the quality of education and student performance with regards to mathematics and science. Dinaledi Schools are provided with additional learner and teacher support materials as well as teacher development and support. In 2011, 54% of Dinaledi students studying mathematics achieved high level scores and 63% of students studying science achieved high level scores. A dedicated funding stream for Dinaledi Schools in the form of a conditional grant was introduced in fiscal year 2011 with an initial allocation of R70 million, increasing to R116 million in fiscal year 2015, to further strengthen this program. This grant was replaced by a Maths, Science and Technology grant in 2015/16 which expanded the scope to include Technology and it is not limited to Dinaledi schools anymore. The initial allocation of R347 million in 2015/16 increases to R385 million in 2017/18.

To address the impact of poverty on educational opportunities, a “no-fee schools” policy was introduced in 2007 that ensured that the poorest 40% did not have to pay school fees. According to the 2014 Budget Review, 60% of schools do not charge fees, up from 40% five years ago. These “no-fee schools” receive additional resources to provide the necessary learner and teacher support materials. In 2007, five million learners had access to free education, which, by 2014, had risen to 8.8 million.

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Another key poverty–alleviation program is the National School Nutrition Program (NSNP), which provided daily meals to 9.2 million learners (71.8% of total learners) in the 2012/13 financial year. The NSNP is funded by means of a conditional grant, and is allocated R18.0 billion between 2015/16 and 2017/18, with the aim of enhancing the learning capacity of poor students by providing them with a nutritious meal every school day.

A safe and secure learning environment is a critical element to improving the quality of learning and teaching. Schools are expected to meet minimum norms and standards for school infrastructure by 2016. To this end, the school infrastructure backlogs grant and the education infrastructure grant to provinces are allocated R37 billion between 2015/16 and 2017/18. This complements funds already in the baselines of provincial education departments for school infrastructure.

Access to university education has steadily increased, with enrollment up from 837,776 in 2009 to 983,698 in 2013 academic year. One of the key outputs identified under this priority outcome is to specifically increase the number of science, engineering and technology graduates because of the contribution that these graduates can make to the economic growth that the country seeks. Additional grant funding is provided to those universities that are able to increase enrollment and graduation numbers in these key areas.

FET Colleges are also recognized as primary sites for skills development. Quality is also a concern at these colleges and the DHET has committed to implement measures that aim to address poor performance at these FET Colleges. For example, the White Paper on Post-School Education and Training indicated that the Quality Councils and the new South African Institute for Vocational and Continuing Education and Training (SAIVCET) will monitor and evaluate the quality of education in these colleges. The Sector Education and Training Authorities (SETAs) and the National Skills Fund, the key workplace skills development agencies, intend to spend R51.9 billion between 2015/16 and 2017/18 on a range of skills development programs.

Urgent reform of the financing of higher education—and particularly university education—will take place over the medium term, initiated by a freeze on student fee increases recently announced by the President. In order to ensure that the poor are also able to access opportunities at universities and FET Colleges, a total of R33.2 billion will be made available over the MTEF for poor learners to access programs at these institutions through the National Student Financial Aid Scheme.

Trade Unions and Labor Disputes

The Labour Relations Act promotes collective bargaining through, among other things, protecting organizational rights for unions and the right to strike. Trade union representation is an accepted fact of industrial practice in South Africa. Almost all sectors of the economy, including the public service, have representative unions which engage employers over issues affecting their workforce.

Union density serves as an indication of the strength and potential influence of unions in the economy. South Africa’s union density is quite high. Although the number of registered trade unions initially increased from 248 in the mid-1990s to about 500 in calendar year 2004, it has declined over the last few years. As at October, 2015 the number of registered trade unions was 184.

Most trade unions in South Africa are organized in federations, of which there were approximately 23 affiliated to the Department of Labour as at the time of the most recently available information. The largest federation is the Congress of South African Trade Unions (COSATU), which had 20 affiliates and approximately 2.2 million members as of 2012. However, following the official expulsion of the National Union of Metal Workers South Africa (NUMSA), this number has reduced by 350,000. COSATU includes the National Union of Mineworkers, the South African Clothing and Textile Workers Union, the Food and Allied Workers Union and the National Education, Health and Allied Workers Union. Other significant federations include the Federation of Unions of South Africa and the National Council of Trade Unions. Federations are not required by law to register, so it is difficult to accurately estimate the total number of federations, trade unions or the total membership of all of South Africa’s trade unions.

The Labor Relations Act of 1995 (Labour Relations Act) promotes collective bargaining through, among other things, protecting organizational rights for unions and the right to strike. The right to strike is contingent on the exhaustion of dispute procedures and on the condition that the industry does not provide essential services. The Labour Relations Act also establishes a framework for the formation of bargaining councils to determine matters within the public sector and each industrial sector, the criteria for which are to be established by the National Economic Development and Labour Council. When employers and employees cannot agree on the formation of a bargaining council, a statutory council may be formed. In addition, the Labour Relations Act sets out the procedures for instituting legal strikes, introduces special requirements for the use of secondary strikes, picketing, protest action and replacement labor and protects an employer’s right to have recourse to lockout. The Labour Relations Act also introduces workplace forums to promote ongoing dialogue between workers and management and simplifies the procedures for the registration of unions.

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The Labour Relations Act permits the use of privately negotiated dispute resolution procedures and also encourages a centralized dispute resolution mechanism. The Commission for Conciliation, Mediation and Arbitration (CCMA) is responsible for attempting to resolve industrial disputes through conciliation and mediation. If these attempts fail, the CCMA may determine the dispute by arbitration or the parties may refer the dispute to the Labour Court unless it falls into the categories that must be resolved finally by arbitration and may not be referred to the Labour Court. The Labour Court is comprised of both trial and appellate divisions and, together with the High Court of South Africa and Supreme Court of Appeals, has jurisdiction over all matters referred to it under the Labour Relations Act.

Amendments to the Labour Relations Act adopted in 1998 enhanced the institutional functioning of the CCMA by ameliorating the case flow, phasing out the industrial court (the forerunner of the Labour Court) and improving the efficiency of bargaining councils. These amendments also established new levels for minimum conditions of employment in respect of working hours, leave and the employment of minors. Legislation also provides mechanisms to set minimum wages and to provide flexibility in employment circumstances in order to meet the variable needs of individuals and employers. Further amendments to the Labour Relations Act were enacted in August 2002 and provide for, among other things, improved collective bargaining practices, amendments to trade union registration procedures, changes in workday and overtime allocations and due process in the event of dismissals.

The Labour Relations Amendment Act in 2014 gave legal power to the CCMA to approach negotiation parties to assist in resolving issues. It is expected that this will help avoid disruptions to the economy. The CCMA has already demonstrated success in this regard, and has cut the duration of arbitration proceedings by more than 75 per cent since 2003. The CCMA was heavily involved in the private security sector negotiations since violent strikes in 2005/06, which has avoided industrial action in its wage negotiations this year.

The following table shows the number of man-days lost as a result of strikes and work stoppages for the periods indicated.

Man-Days Lost to Strikes and Work Stoppages

Year	Number of Man-Days Lost
2004		1,100,000
2005		2,300,000
2006		2,900,000
2007		12,900,000
2008		991,000
2009		2,900,000
2010		14,600,000
2011		6,200,000
2012		3,500,000
2013		5,200,000
2014		11,600,000
2015(1)		176,000

Note: —

(1) Up to June 30, 2015.

Source: The Wage Settlement Survey Quarterly Report, Andrew Levy Employment Publications.

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Industrial action is well below 2010 levels. The number of working days lost fell to 176,000 for the six months ended June 30, 2015, from 7.5 million for the same period in 2014 and below a historic ten-year average of 6.3 million working days. Most industrial action in 2015 was short-lived or company specific. This comes off the back of the five-month platinum strike in 2014. The major strike trigger was wages, accounting for 49% of working days lost and 46% of the number of strikes in June 2015. Wage negotiations in the gold and coal sector were settled quickly, with minimal strike action. Coal sector workers of one union went on strike for one week, while a sector-wide strike in gold was averted through company-level agreements.

Labor Legislation

Since 1994, significant legislation has been adopted designed to improve labor relations, the quality of employment, skills development and employment equality. South African labor legislation promotes equity in employment and prohibits discrimination in the workplace on the grounds of race, gender, sex, pregnancy, marital status, family responsibility, ethnic or social origin, color, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion, culture, language or birth.

To realize these objectives, legislation requires all employers to take steps to end unfair discriminatory practices and policies. In addition, legislation mandates designated employers to prepare and implement employment equity plans and to report to the Department of Labour on their progress in ending unfair discriminatory practices and in promoting equity.

Post-1994, the following acts were promulgated to govern labor market activity and these include:

• the Compensation for Occupational Injuries and Diseases Act of 1993, which regulates safety and health matters in the workplace;

• the Labour Relations Act of 1995, which applies to all workers and employees and aims to promote economic development, social justice, labor peace and democracy in the workplace. It affords workers protection in line with international standards;

• Basic Conditions of Employment Act of 1997, which applies to all workers and regulates leave, working hours, employment contracts, deductions, pay slips and termination;

• the Employment Equity Act of 1998, which protects workers and job seekers against unfair discrimination and provides a framework for the implementation of affirmative action;

• the Skills Development Act of 1998 and Skills Development Levies Act of 1999, which aims to develop the skills in the South African labor force as well as outlines how employers should contribute to the NSF;

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• the Unemployment Insurance Act of 2001 and Unemployment Insurance Contribution Act of 2002 outlines the security available to workers when they become unemployed as well as how to contribute to the UIF Contribution Fund; and

• The Employment Services Act of 2014 came into effect in August 2015. It provides for the creation of a Public Employment Service, and will provide state assistance to unemployed job seekers. Assistance will take the form of improved matching and placement of work seekers with opportunities, as well as through training. This act repeals the Employment Services provisions contained in the Skills Development Act.

The Department of Labour has enacted amendments to the Basic Conditions of Employment Act, Employment Equity Act and Labour Relations Act to update and improve legislation periodically. The amendments to the Labour Relations Act deal with two main issues. First, offering more protection to non-standard employment (temporary workers, fixed and part-time contract workers). Temporary work is extended to three months to allow for genuine temporary work. For a fixed term contract beyond three months, the worker is entitled to be treated equally to a permanent employee. Both the employment service providers and their clients have joint and several liability for non-compliance. There must also be sufficient justification for fixed contract rather than absorbing workers into the permanent workforce. Part-time workers should also be treated on the whole not less favourably than comparable full-time employees, including access to training and skills development. Second, the amendments seek to enable a better dialogue in difficult wage negotiations and reduce the likelihood of disputes disrupting the economy; the CCMA is given legal power to approach negotiating parties to assist in resolution.

The amendments to the Basic Conditions of Employment Act include: the extension of the scope of the prohibition and regulation of work by children; empowering the Minister of Labour to regulate a broader range of matters in sectoral determinations (minimum wages for sectors where workers are particularly vulnerable); simplifying the Department of Labour’s ability to take enforcement steps against non-compliant employers (and to access the Labour Court for this purpose); and increasing penalties and maximum sentences for non-compliance.

The amendments to the Employment Equity Act clarified who qualifies as a member of the “designated groups”, and reduced the number of factors considered when assessing compliance, as well as increased the penalties for non-compliance. Regulations published under the Act provide good practice for determining equal pay for work of equal value.

Benefits

Although the National Government has not established a comprehensive welfare system of the type found in many industrialized countries, it does maintain a variety of social benefit schemes relating to, among other things, compensation for occupational injuries and diseases, occupational health and safety, unemployment insurance, old age, disability and survivor benefits, child support grants, unemployment, sickness and maternity benefits, worker injury benefits and various health care benefits targeted to certain persons. Other programs provide for a developmental social welfare program to ensure, among other things, delivery of benefits to the poorest South Africans and improved social insurance. These programs are funded largely from budgetary allocations and through improved efficiency of delivery of services, subsidies or payments. South Africa is considering the introduction of a comprehensive social security system.

Prices and Wages

Consumer inflation moderated from 6.6% year-on-year in June 2014 to a trough of 3.9% in February 2015 but has increased to 4.6% in September 2015. The slowdown in inflation was driven by declines in the oil price and food inflation. Since June 2014 the price of Brent crude oil has fallen by more than 50%, leading to transport deflation. Food inflation slowed for ten consecutive months from August 2014 before reaching its lowest point of 4.3% in June 2015. This was driven by lower global food prices, subdued agricultural producer prices and favorable base effects. For the first nine months of 2015, inflation has averaged 4.5%, lower than the 6.1% average of 2014 and 5.8% in 2013. Core inflation, which represents the long-run trend of the price level and excludes temporary shocks, was unchanged at 5.7% over the same period. Most upward pressure in core inflation has been generated by utilities, medical aid and education. In contrast, administered prices continued on their downtrend from double-digit levels in mid-2013, averaging just 0.8% in the first nine months of 2015. This has been led primarily by lower petrol costs.

Upward pressure on food, petrol and electricity inflation is, however, expected to push CPI inflation above the 6% target ceiling in the first half of 2016. The forecast takes into account a 12.7% per year increase in electricity prices. Upside risks to the inflation forecast also revolve around further exchange rate depreciation, the extent to which businesses can continue to absorb higher input costs from the weaker Rand and electricity price increases.

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Producer price inflation for final manufactured goods has decreased from 7.5% in 2014 to 3.3% in the first nine months of 2015 as a result of lower food and petrol pressures.

Growth in average nominal remuneration per worker in the formal non-agricultural sectors of the economy amounted to 7.6% in 2014, and to 7.7% through the first half of 2015.

Increases in average remuneration per worker in the private sector moderated to 6.8% and public sector accelerated to 10.6% through the first half of 2015. The year-on-year rate of increase in the nominal remuneration per worker in the formal non-agricultural sector of the economy accelerated from 6.2% in the first quarter 2015 to 9.2% in the second quarter of 2015. This acceleration resulted from private-sector wage growth, which rose from a moderated 5.7% in the first quarter of 2015 to 8.0% in the second quarter of 2015. Public sector wages grew faster to 13.5% in the second quarter of 2015, from 7.8% in the first quarter of 2015.

Nominal remuneration increases remained above the upper limit of the inflation target range in: the wholesale, retail and trade sector (7.3%), the mining sector (22%), utilities (6.6%), construction (7.4%), transport (6.1%), financial (7.6%), and the community, social and personal services sector (12.3%). Remuneration growth was within the target range in the manufacturing sector (5.1%) year-on-year to the second quarter of 2015.

According to Andrew Levy Employment Publications, the average level of settlement for the six months ending June 30, 2015 was 7.8% compared with 8% at the end of June 2014 and the overall average of 8.1% in 2014.

Productivity growth increased to 3.3% in the second quarter of 2015 on a year-on-year basis. The increase in labor productivity ticked from -0.4% in June 2014 to 1.5% in the last quarter of 2014 and to 2.44% in the first quarter of 2014. Average wage settlements of 7.8% in the first six months to June 2015 were higher than average CPI inflation of 4.6% between January and May 2015. High wage settlements may have reduced the incentive of companies to create new jobs. In the past, employment growth has been associated with strong GDP growth and moderate growth in real earnings (see table below).

Prices and Wages

																						As of
	For the year ended December 31,																					September
	2008(5)			2009(5)			2010(5)			2011(5)			2012			2013			2014			2015 (3)
Consumer Prices(1)		78.9			84.6			88.2			92.6			97.8			103.4			109.7			114.1
Percentage change from prior year		9.90	%		7.10	%		4.30	%		5.00	%		5.70	%		5.80	%		6.10	%		4.50	%
Production Prices(4)														100			107.9			116.7			117.1
Percentage change from prior year																	6.00	%		7.50	%		3.30	%
Remuneration per worker
At current prices		12.80	%		11.80	%		13.50	%		7.20	%		7.60	%		7.20	%		6.50	%		7.1	%(2)
At constant prices		2.50	%		3.20	%		6.40	%		1.00	%		1.80	%		1.50	%		0.90	%		4.1	%(2)

Notes: —

(1) December 2012 = 100.

(2) Year on year change Q1 2015 to Q1 2014.

(3) The average values over the first nine months.

(4) 2012 = 100

(5) Due to a rebasing of the numbers in 2012, certain figures prior to 2012 are not available.

Source: SARB

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MONETARY AND FINANCIAL SYSTEM

The South African financial system consists of banks and non-bank financial institutions such as investment funds, portfolio management companies, securities investment firms, insurance companies, development funding institutions and pension funds.

The South African Reserve Bank (SARB)

The SARB is the central bank of South Africa, with its head office in Pretoria and branches in Bloemfontein, Cape Town, Durban, East London, Johannesburg, Port Elizabeth and Pretoria North. The Constitution established the SARB as an independent central bank, subject only to acts of Parliament and to regular consultation with the Minister of Finance. The principal responsibilities of the SARB include: formulating and implementing monetary policy; issuing banknotes and coins; acting as banker to the National Government; acting as a bank to banks licensed under the Banks Act of 1990; providing facilities for the clearing and settlement of claims between banks; acting as custodian of the country’s gold and other foreign reserves; acting as a lender of last resort; conducting open-market operations; supervising banks; supervising large primary, secondary and tertiary co-operative banks that collect, process and interpret economic statistics and related information; and formulating and implementing exchange rate policies in cooperation with the Minister of Finance and the National Treasury. See “ — Regulation of the Financial Sector” below.

Unlike many other central banks, shares in the SARB are held privately, with no shares held by the National Government. The SARB was listed on the JSE from its inception in 1921 until May 2002, when it was de-listed. Currently, approximately 630 shareholders, including companies, institutions and individuals, hold SARB shares. No single shareholder may hold more than R10,000 in nominal value of the SARB’s shares. Dividends are paid to shareholders out of net profits at a rate of 10% per annum of the nominal value of the shares. After certain provisions, 10% of the SARB’s surplus in any year is paid into a reserve fund, and the balance is paid to the National Government.

The SARB is managed by a 15-member board of directors. The Governor and three Deputy Governors of the SARB are appointed by the President for five-year terms. Of the remaining ten directors, four are appointed by the President, with the remaining six elected by the SARB’s shareholders, two of whom represent the interests of commerce and finance, two of whom represent industry, one of whom represents labor, one of whom represents mining and one of whom represents agriculture. These directors hold office for a period of three years. The Governor has a vote on the board of directors and an additional vote to be used only in the event of a tie. The National Government therefore appoints persons controlling most of the effective votes to the board of directors of the SARB.

President Zuma appointed Mr. Lesetja Kganyago as Governor of the SARB with effect from November 9, 2014. Mr. Kganyago has extensive knowledge of the SARB, having served as a Deputy Governor from 2011 to 2014. In addition, he served as director-general of National Treasury from 2004 to 2011. Mr. Kganyago is well regarded for his knowledge and expertise of the South African and global financial systems.

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The South African Reserve Bank Act was amended in 2010 (through Amendment Act No. 4 of 2010) to provide mechanisms to ensure that shareholders contribute to the functioning of the SARB without adversely influencing the SARB’s decision-making capabilities through group or block formations.

Monetary Policy

The main objective of the SARB’s monetary policy has been the pursuit of price stability. This policy contributes to the broader macroeconomic policies of the National Government by creating a stable financial environment and improving the standard of living of all inhabitants of the country. The SARB does not have fixed exchange rate targets and allows the Rand to float freely against international currencies.

In 2000, an inflation-targeting monetary framework replaced the SARB’s previous approach to monetary policy-making. The previous approach involved the public announcement of guidelines for growth of the money supply in general, supplemented by regular, wide-ranging assessments of economic conditions and reports on the outlook for inflation. The current inflation-targeting framework is a broad-based strategy for achieving price stability, centered on an analysis of price developments, and is characterised by the announcement of a numerical target for the inflation rate that is to be achieved over a specified period of time. In light of the weakening relationship between money growth and nominal income growth, monetary policy decisions are guided by the deviation of the expected rate of increase in headline CPI from a specified target range. An important factor in determining monetary policy is the forecast generated by the SARB’s macroeconomic models, although monetary policy is not decided mechanically according to the forecast of economic developments. In the application of inflation-targeting as a monetary policy framework, allowance is made for the price effects of serious supply shocks, such as changes in the international price of crude oil, higher food prices resulting from unfavorable weather conditions and inordinate changes in the international exchange value of the Rand. The current inflation target is 3-6%.

Having plateaued at 12% from early June to early December 2008, the repurchase rate was reduced by 50 basis points to 11.5% in December 2008, and by a further 450 basis points to 7.0% by August 2009, remaining at that level until February 2010. Although cost-push pressures in the economy continued to pose risks to the inflation outlook, the MPC decided to keep the monetary policy stance unchanged because the risks to inflation outlook appeared to be fairly evenly balanced. The frequency of meetings for most of 2009 changed from bi-monthly to monthly (excluding July 2009) in order to monitor and respond appropriately to the rapidly changing economic environment. However, in the first meeting under the newly appointed Governor Gill Marcus in November 2009, the MPC decided to revert back to its policy of meeting every alternate month, as the global economic environment appeared to have stabilised.

Amid concerns about increased downside risks to the domestic economic outlook emanating from the uncertain global economic environment, the MPC again reduced the repurchase rate by 50 basis points in March and September 2010, bringing the rate to 6%. At the November 2010 MPC meeting, the repurchase rate was reduced further by 50 basis points to 5.5%. The decision to lower the repurchase rate stemmed from relative improvement in the inflation outlook, which continued to be supported by weak, though recovering, domestic demand conditions, the appreciating exchange rate of the Rand and a persistent negative output gap. Administered price developments and the possible impact of high wage settlements continue to be viewed as potential threats to the inflation outlook.

At the July 2012 meeting of the MPC, the repurchase rate was lowered by 50 basis points to 5.0% with effect from July 20, 2012. The decision to cut the repurchase rate was brought about by concerns over continued sluggishness in the domestic economy, aggravated by the protracted problems in the euro area and possible knock-on effects to the domestic economy. The MPC viewed the more accommodative policy stance to be appropriate under prevailing economic conditions, as it was consistent with the Bank’s price stability mandate and conducive to encouraging growth and domestic investment. Due to weak global and domestic growth conditions, the MPC kept the repurchase rate unchanged up to December 2013. In January 2014, the repurchase rate was raised from 5% to 5.5%, the first upward adjustment since June 2008, marking the beginning of an interest rate tightening cycle. The policy change occurred against the backdrop of deterioration in the inflation forecast, which showed an extended breach of the upper target band starting in the second quarter of 2014. The primary cause of the deteriorating outlook was Rand depreciation, lower commodity prices and changing monetary conditions resulting from quantitative easing by the US Federal Reserve. The monetary policy stance remained supportive of domestic economic conditions. Rising inflation and the upside risks to the inflation outlook, furthermore influenced by a possible wage-price spiral resulting from wage settlements and demands prompted the decision to raise interest rates.

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At the July 2014 meeting the MPC decided to raise the repurchase rate by 25 basis points to 5.75%. The urgent need to implement necessary structural reforms, in order to achieve higher and more inclusive growth, as envisaged in the NDP was accentuated. In 2015, the global environment was dominated by heightened uncertainty related to the debt crisis in Greece and the sharp decline in equity prices in China. At the same time, the risks associated with financial market volatility related to the timing of the first increase in the US policy rate persisted. Domestically, the growth outlook remained weak with both the supply and demand sides constrained. As the inflation outlook deteriorated and upside risks posed by a weaker exchange rate increased, the MPC decided to continue on its path of gradual policy normalization and increased the repurchase rate on two occasions in 2015 – by 25 basis points to 6.0% from July 24, 2015 and by a further 25 basis points with effect from November 20, 2015.

Year-on-year CPI inflation slowed from 6.6% in June 2014 to 3.9% in February 2015, before accelerating gradually to 5.0% in July 2015. CPI inflation then moderated somewhat to 4.6% in August and September 2015. However, consumer price inflation is expected to accelerate towards year-end on account of petrol price related base effects and a quickening in food price inflation following severe drought conditions. At the September 2015 MPC meeting, the SARB’s inflation forecast for 2015 was lowered to 4.7%, while the expected average for 2016 was lifted marginally to 6.2%. The forecast for 2017 was for a deceleration in headline CPI inflation to 5.8%.

In its role of implementing monetary policy, the SARB monitors and influences conditions in the South African money and credit markets and affects interest rates, growth in lending and growth of deposits. The SARB uses open market operations to determine the amount of liquidity available to banks on a weekly basis in repurchase transactions. The interest rate for such repurchase transactions is set by the SARB’s MPC and has a significant impact on all short-term interest rates in the economy. The monetary policy stance is decided at the bi-monthly meetings of the MPC. There exists, however, a continuous process of review that takes new information and developments into consideration.

Open market operations entail the buying and selling of securities by the SARB in the open market in order to regulate the conditions in the money market or the level and pattern of interest rates. By injecting or absorbing funds through purchases and sales of securities, the SARB may increase or decrease liquidity in the banking system. Although these transactions are primarily undertaken to achieve long-term monetary objectives, a further objective may be to stabilise temporary money-market fluctuations. Currently, nine primary dealers make markets in government paper, five of which are domestic banks and four of which are international banks. Since its appointment of primary dealers in 1998, the SARB no longer acts as agent for the National Government in buying or selling its securities. The SARB may purchase and sell National Government securities for the SARB’s own account, providing it with an effective means of influencing money market liquidity. Other techniques used by the SARB to influence liquidity include purchasing securities outright, varying the amount of National Government bills offered at tender each week, allocating National Government deposits between the SARB and private banks, issuing SARB debentures and entering into foreign exchange swaps with banks.

During 2004 the SARB conducted a review of its money-markets operations, which were last reviewed in September 2001. As a result, on May 25, 2005, following extensive consultations with market participants, the SARB implemented several changes to its refinancing operations with three aims: to streamline the SARB’s refinancing operations to make them simpler and more transparent; to encourage banks to take more responsibility for managing their own individual liquidity needs in the market; and to promote a more active money market in South Africa. These changes include, among other things, the announcement of an estimate of the average daily market liquidity requirement by the SARB and the estimated range within which the daily requirement is expected to fluctuate in the coming week on the Wednesday morning prior to the main weekly repurchase auction, and the introduction of standing facilities (previously referred to as final clearing or reverse repurchase tenders) at a spread of 50 basis points above or below the prevailing repurchase rate to accommodate banks with short or long liquidity positions.

However, the central feature of the SARB’s operational arrangements—the conduct of repurchase auctions on Wednesdays, with one-week maturity at a repurchase rate fixed at the level announced by the MPC—remains unchanged.

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Before the introduction of the changes to the SARB’s refinancing operations, the accommodation amount provided at the main weekly repurchase auction was stable at around R13 billion, which was also the approximate level of the average daily liquidity requirement of the private sector banks. Thereafter, the amounts on offer at the weekly main refinancing auctions varied, with generally higher levels around month-end and lower levels towards the middle of the month. In order to even out the banks’ end-of-day positions, standing facilities and cash reserve accounts were utilised.

Following the evening-out of the oversold forward foreign exchange book in February 2004, the SARB continued to increase its foreign exchange reserves through the measured buying of foreign exchange from the market, thereby creating Rand liquidity. The banks’ required cash reserve balances with the SARB rose considerably in September 2004, as vault cash was no longer allowed as part of qualifying cash reserves due to the phase-out of vault cash concessions, which started in September 2001.

The outstanding amount and composition of interest-bearing instruments utilised by the SARB were changed to drain liquidity from the money market. Debentures with a 56-day maturity were first issued on December 1, 2004, and 56-day reverse repurchase transactions were first conducted on March 24, 2005.

The outstanding amount of South African Government bonds in the SARB monetary policy portfolio has declined over the years and currently amounts to R7.5 billion as at September 2015. This followed an agreement between the National Treasury and the SARB on October 20, 2003, which allowed the SARB to restructure and shorten the average maturity of interest-bearing government bonds held in its monetary policy portfolio by conducting cash-neutral auctions.

The following table sets forth the rate at which the SARB provided liquidity to banks as of each month-end indicated.

Repurchase Transaction Rate

2014	(%)
January		5.50
February		5.50
March		5.50
April		5.50
May		5.50
June		5.50
July		5.75
August		5.75
September		5.75
October		5.75
November		5.75
December		5.75
2015	(%)
January		5.75
February		5.75
March		5.75
April		5.75
May		5.75
June		5.75
July		6.00
August		6.00
September		6.00
October		6.00
November		6.25

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Source: SARB.

In May 2007, the SARB began to accept certain parastatal bonds in its repurchase auctions, thereby extending the range of securities which may be used as collateral in the refinancing system. This included a selection of bonds included in the All Bond Index, as determined by the Bond Exchange of South Africa Limited (BESA), excluding those issued by commercial banks. The added securities do not qualify as liquid assets in terms of the Banks Act. The table below lists the assets which were added as eligible collateral. However, at the end of August 2010, the SARB implemented certain changes to its monetary policy operational procedures, including the phasing out of parastatal bonds included in the All Bond Index as eligible collateral in the SARB’s refinancing operations. As a result, with effect from March 1, 2011, these bonds were no longer accepted as collateral.

Additional securities accepted in repurchase auctions

Rand denominated

Assets previously and still included as eligible collateral	Assets which were added from May 23, 2007 but which were phased out with effect from March 1, 2010
Government bonds	DBSA (DV07)
Land Bank bills	Eskom Holdings Ltd. (ES09, E170, ES33)
Separate trading of registered interest and principal of securities (STRIPS)	SANRAL (SZ25)
SARB debentures	Transnet Ltd. (T011)
Treasury bills	Trans-Caledon Tunnel Authority (WS03, WS04)

Source: SARB.

In August 2010, further changes to the monetary policy operational procedures of the SARB were made. These included the use of longer-term foreign exchange swaps with maturities of up to 12 months as an instrument to manage money market liquidity more effectively. The consequence of conducting longer-term foreign exchange swap transactions to drain liquidity from the market is that the SARB reflects an overbought forward position on its monthly releases of official gold and foreign exchange reserves. In addition, the estimated ranges of the weekly liquidity requirement were discounted and the spread between the rates for standing facilities and the repurchase rate was widened from 50 basis points to 100 basis points below and above the prevailing repurchase rate.

The following table sets forth the money supply (M1A, M1, M2 and M3) of South Africa during the periods indicated.

Money Supply

	As of December 31,										As of Sep 30, 2015
	2010		2011		2012		2013		2014
	Rand (million)
Coin and banknotes in circulation		65,079		75,396		81,042		87,014		94,193		95,466
Check and transmission deposits		407,536		437,068		495,991		549,323		589,602		631,872
Total: M1A(1)		472,615		512,464		577,033		636,337		683,795		727,338
Other demand deposits(2)		390,260		434,806		458,109		495,702		557,477		626,484

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	As of December 31,										As of Sep 30, 2015
	2010		2011		2012		2013		2014
	Rand (million)
Total: M1(3)		862,876		947,269		1,035,142		1,132,039		1,241,272		1,353,821
Other short- and medium-term deposits(4)		815,542		851,662		833,908		917,655		985,272		1,032,515
Total: M2(5)		1,678,417		1,798,932		1,869,050		2,049,694		2,226,544		2,386,337
Long-term deposits(6)		405,785		457,796		504,390		462,557		467,355		545,132
Total: M3(7)		2,084,202		2,256,727		2,373,439		2,512,251		2,693,899		2,931,469

Notes: —

(1) Notes and coins in circulation plus check and transmission deposits of the domestic private sector with monetary institutions.

(2) Demand deposits (other than check and transmission deposits) of the domestic private sector with monetary institutions.

(3) M1A plus other demand deposits held by the domestic private sector.

(4) Short-term deposits (other than demand deposits) and medium-term deposits (including all savings deposits) of the domestic private sector with monetary institutions, including savings deposits with and savings bank certificates issued by the Postbank (a division of the SAPO).

(5) M1 plus other short-term and medium-term deposits held by the domestic private sector.

(6) Long-term deposits of the domestic private sector with monetary institutions, including national saving certificates issued by the Postbank.

(7) M2 plus long-term deposits held by the domestic private sector.

Source: SARB.

Since the introduction of inflation-targeting monetary framework, growth in the most broadly defined money supply (M3) has not been used as an intermediate target for monetary policy purposes. Nevertheless, money supply and credit may provide useful information about prospective spending plans and inflationary pressures.

The Basel II capital-adequacy framework and the accompanying regulatory reforms were implemented in January 2008. In the time leading up to the implementation date, banks refined their information and technology systems for the classification and reporting of balance sheet items. Improved classification caused some discontinuities in a few subcategories of the monetary and credit aggregates, but these were limited. In line with the requirements of Basel II, the South African banking sector remains well capitalised. The “tier one” capital adequacy ratio stood at 12.1% in August 2011. Total capital adequacy currently stands at 14.3% such that the South African banks meet the minimum capital adequacy requirements. The implementation of the Basel III framework in South Africa is based on a phased-in approach which commenced on January 1, 2013 and will continue up to 2018, in line with the timelines determined by the Basel Committee. The Basel III Liquidity Coverage Ratio has been implemented from January 1, 2015, while the Net Stable Funding Ratio will be effective from January 1, 2018.

Year-on-year growth in M3 accelerated from a record low of 0.1% in February 2010 to 10.0% in April 2013, signaling a turnaround in the decelerating growth that commenced in 2008, and persisted throughout 2009. The growth rate thereafter fluctuated broadly between 5.8% and 10.2% until September 2015, with recent growth rates surpassing 8.0% since April 2015. During the four years to June 2014, year-on-year growth in M3 generally fell below that of nominal GDP, but this trend started to reverse towards the end of 2014 and into 2015 as sluggish activity and lower commodity prices weighed on the level of nominal value added in the economy. The firmer growth in M3 deposits was underpinned by growth in deposits of both the household and corporate sectors and can partly be ascribed to rising interest rates, accelerating inflation and moderately rising real final demand, combined with a build-up in precautionary balances by asset managers in the wake of renewed financial market volatility. The depreciation of the Rand in recent months also resulted in an upward revaluation of foreign-currency deposits included in M3. On a quarterly seasonally adjusted and annualized basis, growth in M3 reached a most recent high of 17.4% in the second quarter of 2015, before slowing to 7.6% in the third quarter. Growth in other short- and medium-term deposits, together with check, transmission and other demand deposits underpinned the bulk of the increase in the growth in M3 during the third quarter of 2015, while long-term deposits also continued to recover alongside the rising interest rate environment.

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Financial System Stability

The SARB regards the achievement and maintenance of price stability as its primary goal. A necessary parallel objective to this is financial system stability, without which monetary policy cannot be effectively implemented. To pursue the maintenance of financially stable conditions and contain systemic risk, the SARB continuously assesses the stability and efficiency of the key components of the financial system and formulates and reviews policies for intervention and crisis resolution. In 1999, the SARB established a Financial Stability Committee with the specific mandate to strive to enhance financial stability by continuously assessing the stability and efficiency of the financial system, formulating and reviewing appropriate policies for intervention and crisis resolution, and strengthening the key components of the financial system. A Financial Stability Department was established within the SARB with effect from August 1, 2001 to help monitor the stability of the financial system as a whole by identifying inherent weaknesses and the build-up of risks that may result in financial system disturbances. Central to the SARB’s increased focus on, and contribution to, the financial stability discourse, a semi-annual Financial Stability Review is published that covers both a quantitative and qualitative assessment of the strength and weakness of the South African financial system.

A cross-sectoral body was created in 2002 to facilitate cooperation in identifying threats to the stability of the South African financial sector and in proposing and obtaining approval for appropriate plans, mechanisms and structures to mitigate such threats. This body creates a coordinated network of contingency planning contacts throughout the financial services industry, and has the capacity to act as a crisis management team to deal with tactical situations affecting one or more firms. It also facilitates cooperation between key financial sector institutions and regulators in times of catastrophic events or disasters through business continuity planning, which serves to better protect staff, facilitate recovery and sustain both a stable financial market and consumer confidence.

Regulation of the Financial Sector

Since 1994, South Africa has made a dedicated effort to deregulate the financial sector. The new market-based approach to regulation relies heavily on the use of strengthened corporate governance and accountability principles, enhanced disclosure systems, and market discipline as an incentive to compliance. Although increased deregulation has encouraged both competition and innovation, it has simultaneously demanded heightened supervision, more explicit market integrity and strengthened consumer protection mechanisms.

The two main regulatory authorities, the Financial Services Board (FSB) and the SARB, apply measures to secure the financial soundness of the financial system of South Africa as a whole. The regulatory instruments that they use include entry and other standard requirements, ownership constraints, fit and proper persons tests, limitations on certain activities, jurisdictional constraints, pricing constraints and operational constraints (such as capital and liquidity requirements and trading capacity requirements). Domestic regulation and supervision requirements also incorporate international standards. South African financial institutions must comply with all relevant Basel capital adequacy and liquidity principles and standards. Basel II (developed by the Basel Committee on Banking Supervision and endorsed by central bank governors and the heads of bank supervisory authorities in the G-10 countries) was implemented in South Africa in January 2008, in accordance with the Basel Committee timeframe. Since the commencement of the sub-prime and financial market crisis, the oversight body of the Basel Committee announced a substantial strengthening of existing capital requirements and the introduction of new global capital and liquidity standards, sometimes referred to as Basel 2.5 and Basel III. The Basel Committee on Banking Supervision required that Basel 2.5 be implemented by January 2012. The Minister of Finance approved the SARB Bank Supervision Department’s amended regulations, which were implemented in accordance with the internationally agreed timelines. The phase-in period for the Basel III requirements began on January 1, 2013 and is anticipated to last through 2019. South Africa is already in compliance with the capital requirements of Basel III and will continue to comply with all the other related requirements within the stipulated timeline. South African financial institutions must also comply with the financial reporting and disclosure standards incorporated in the international accounting standards, adopted by the International Organisation of Securities Commissions. The various financial markets, financial institutions and financial instruments are regulated by a series of general, specific and enabling legislation.

South Africa is as a member of the G-20, the Financial Stability Board, the Basel Committee for Banking Supervision and a number of other international regulatory bodies. In line with this, South Africa is committed to implementing a program of financial services reform in line with other G-20 jurisdictions. As evidenced in recent IMF Financial Stability Assessments and Financial Stability Board peer reviews, South Africa is making steady progress in ensuring that its financial system is appropriately regulated. The two main regulatory authorities, the Financial Services Board (FSB) and the SARB, apply measures to secure the financial soundness of the financial system of South Africa as a whole. The regulatory instruments that they use include entry and other standard requirements, ownership constraints, fit and proper persons tests, limitations on certain activities, jurisdictional constraints, pricing constraints and operational constraints (such as capital and liquidity requirements and trading capacity requirements). Domestic supervision also incorporates international standards. South African financial institutions must comply fully with the majority of the Basel capital adequacy principles and standards.

In banking regulation, the phase-in period for the Basel III requirements began on January 1, 2013 and is anticipated to last through to January 2019. South Africa is already in compliance with the capital requirements of Basel III and aims to meet the other requirements within the stipulated timeline. South African financial institutions must also comply with the financial reporting and disclosure standards incorporated in the international accounting standards, adopted by the International Organisation of Securities Commissions. The various financial markets, financial institutions and financial instruments are regulated by a series of general, specific and enabling legislation.

This follows the implementation of Basel II in January 2008, and “Basel 2.5” in January 2012. The Minister of Finance approved the SARB Bank Supervision Department’s amended regulations, which were implemented before the deadline.

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Legislation enacted in 1998 provides for an independent competition authority, comprising an investigative division and an adjudicative division with broad powers to, among other things, issue compliance orders and interdicts, levy fines, impose structural remedies such as divestitures and prohibit mergers. The legislation also provides for a right of appeal to a specially-constituted judicial authority. In the majority of cases, the adjudicative divisions have sole jurisdiction over competition matters. Amendments to the legislation enacted in 1999 require pre-merger notification in particular cases.

The Companies Act of 1973 was repealed and replaced with the Companies Act of 2008, which became effective on May 1, 2011. The Companies and Intellectual Property Commission is the regulatory organ charged with the administration and enforcement of the Companies Act of 2008. The Office of the Registrar of Banks forms part of the SARB and conducts the supervision of banks. The FSB regulates the financial markets for equity, debt and derivative securities, as well as non-bank financial institutions registered under specific legislation. Advisory committees serve the various offices and boards, and a Policy Board for Financial Services and Regulation coordinates the institutional and functional aspects of regulation. Appeal boards are provided for if and when they are needed, but responsibility for regulation remains with the Minister of Finance.

Recent legislative and regulatory initiatives coming into force since 2000 include the following:

• As of January 2008, South African registered banks were required to comply with Basel II. The Banks Act was thus substantially amended to comply with the principles of Basel II. The Banks Amendment Act of 2007 was assented to by the President of the Republic of South Africa and published in November 2007. Following the sub-prime and financial market crisis, the oversight body of the Basel Committee announced a substantial strengthening of existing capital requirements and the introduction of global capital standards, in the form of Basel 2.5 and Basel III. The phase-in period for these further requirements began on January 1, 2012.

• Since the publication of the South African National Payment System Framework and Strategy document in 1995, major payment system milestones have been achieved and all major domestic risk-reduction objectives have been met. This framework and strategy document contained a ten-year vision up to 2004. The main objective of the new framework and strategy document, known as Vision 2010, is to provide high-level strategic guidance for the payment system up to 2010. By September 2011, most of the strategic objectives contained in Vision 2010 were met. However, the SARB realised that several of the strategies, fundamental principles and critical success factors contained in Vision 2010 continue to be relevant. Although the South African payment system was unaffected by the global financial crisis, the SARB used the many new initiatives in the international regulatory environment that resulted from these events, as well as the recommendations relating to the national payment system (NPS) contained in the Banking Enquiry Report, published in 2008, to review, refine and adjust Vision 2010 for future developments to create a vision and strategy for 2015. The updated framework and strategy document is referred to as Vision 2015.

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• The JSE demutualised in July 2005 and listed in June 2006, allowing it to operate as a company with share capital. This put the JSE on par with its international competitors, the majority of which had already been demutualised and converted to companies. In February 2009, the majority of the shareholders of BESA accepted an offer by the JSE to acquire BESA. In June 2009, the JSE and BESA merged. BESA has now been fully integrated into the JSE and currently forms part of the JSE’s Interest Rate and Currency Market. The JSE published new Debt Listing Requirements in 2011 which apply in relation to the listing of government and corporate bonds on the JSE’s Interest Rate and Currency Market. A new set of rules of conduct has also been published (the Interest Rate and Currency Rules). It is expected that the merger will realise, among other things, benefits of greater liquidity, reduction of costs through economies of scale and better risk management for users of a single exchange.

• The DTI commenced the process of reviewing the corporate laws in South Africa in fiscal year 2006 so as to bring the South African corporate law framework closer to full compliance with international standards and best practices, provide the necessary protection to all corporate stakeholders, maximise the opportunities for companies to attract capital and stimulate economic growth. The Companies Act of 2008 was passed by the national legislature, assented to by the then President of the Republic of South Africa, Kgalema Motlanthe and published on April 9, 2009. The Companies Act of 2008 entered into effect on May 1, 2011. The Companies Act of 2008 replaced the existing Companies Act of 1973 and some of its significant changes include provisions for the facilitation of business rescue proceedings in respect of companies in financial distress and the reduction of the regulatory burdens placed on small and medium enterprises.

• The Competition Amendment Act of 2009 was enacted in August 2009 and amends the Competition Act of 1998, through the introduction of provisions dealing with concurrent jurisdictions of industry regulators, complex monopolies and market inquiries.

• The Consumer Protection Act of 2008 provides for a consumer protection regime designed to promote and advance the social and economic welfare of consumers. The Consumer Protection Act came into effect on March 1, 2011.

• The revised King Code and Report on Corporate Governance for South Africa (King III Code) was launched on September 1, 2009 and came into effect on March 1, 2010, replacing its predecessor, King II Code and Report on Corporate Governance (King II Code). King III Code sets out various corporate governance guidelines and principles applicable to listed companies, financial institutions, and public sector enterprises, agencies and government departments (compliance with King III Code is mandatory for listed companies). The review of King II Code was prompted by changes in international governance trends and the reform of South Africa’s company laws with the promulgation of the New Companies Act.

• In July 2010, the Bank Supervision Department of the SARB released the proposed draft Banks Amendment Bill. The purpose of the proposed bill is to align the provisions of the existing Banks Act of 1990 with the New Companies Act as well as to ensure that the legal framework for the regulation and supervision of banks and bank-controlling companies is based on international standards and best practice. The Banks Amendment Bill was tabled in Parliament during the second half of 2012 and was subjected to debate and interrogation in both the Standing Committee on Finance of the National Assembly and the National Council of Provinces. After being approved by the relevant Parliamentary committees, the President assented to the bill after which it was published as the Banks Amendment Act, 2013 (Act No. 22 of 2013) by Notice No. 992 in Government Gazette No. 37144 on 10 December 2013. Most recently, the Banks Amendment Bill was tabled earlier in 2015, and was published as the Banks Amendment Act, 3 of 2015 in June 2015.

• Regulation 28, issued in terms of section 36 of the Pension Funds Act of 1956, governs the asset-spreading requirements of retirement funds. An amended version of Regulation 28 was approved by the Minister in March 2011. The new Regulation 28 takes into account a significantly changed financial sector and enhances member protection. The effective date of the new Regulation 28 was July 1, 2011, subject to a six month transition period until December 31, 2011 to enable funds to adjust their monitoring and reporting systems, as well as their investments. The new Regulation 28 covers many asset classes (such as hedge funds, private equity investments and derivatives) which were not otherwise covered by previous regulation relating to pension funds.

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• The National Treasury is exploring options to promote entry into the banking sector as South Africa’s highly concentrated banking sector may compromise the level of competition needed to bring about efficiency improvements and greater access to financial services.

• In June 2015, the Banks Amendment Act 2015 was enacted to amend the Banks Act 1990. The Act aims to enhance the curatorship of banks in order to make the financial sector safer and protect depositors. The Act enhances the powers of the curator of a bank while under curatorship by expanding the basis on which a curator of a bank may dispose of all or part of the bank providing for:

• Allowing for the creation of a good bank outside the existing corporate entity;

• facilitation of the transfer of all or part of a bank’s business to a successor entity;

• a disposal pursuant to a transfer under section 54 of the Banks Act; and

• facilitation of the implementation of the above steps by the curator.

• In August 2015, the National Treasury and SARB released a discussion paper intended to solicit public comment and to serve as a basis for further industry discussions in preparation for the drafting of a special resolution bill for systematically important financial institutions. The paper provides key proposals for strengthening South Africa’s resolution framework to manage failures of financial institutions in a manner that will mitigate any negative impact on domestic financial stability and minimize macroeconomic costs.

• In October 2015, the Financial Intelligence Amendment Bill was tabled in parliament. The Bill seeks to strengthen the commitment to combatting financial crimes and address the gaps identified in the Financial Action Task Force and the IMF’s Financial Assessment Programme Technical Note on AML/CFT for South Africa in December 2014.

• On June 25, 2015, the Department of Trade and Industry released a notice titled Draft Review of limitations on fees and interest rates for public comment. The notice proposes new caps on fees and interest rates applicable to credit agreements falling under the National Credit Act 34 of 2005. The biggest change relates to unsecured credit agreements, where the proposed cap is reduced to 24.8% from 32.7%. These proposals affect banks and insurers, which provide credit to the domestic market. The caps aim to protect consumers from unscrupulous lending practices and over-indebtedness. However, the credit providers have warned against the unintended consequences of these proposals, which include credit rationing and an increase in the number of banks introducing credit life insurance policies to circumvent lower interest rate caps.

Financial markets such as the foreign exchange market and the money market are not regulated by specific legislation but are subject to general legislation such as the Currency and Exchanges Act and accompanying regulation by agencies such as the SARB. Institutions currently not required to register under any particular legislation are not subject to specific regulation. However, it is expected that all individuals and firms conducting an investment business will in future be required to comply with certain minimum requirements in respect of disclosure and capital adequacy. These individuals and firms will also be required to adhere to a strict and coherent code of business conduct imposed to strengthen supervision.

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The Minister of Finance released, together with the 2011 Budget, a comprehensive discussion document titled ‘A Safer Financial Sector to serve South Africa better’, which put forward a range of proposals to strengthen the financial regulatory system in South Africa. The Minister of Finance requested a review of any gaps or weaknesses in the current financial regulatory system, as well as recommendations arising from a recent financial sector assessment conducted by the IMF. In October 2015, the Financial Sector Regulation Bill, 2015 (the “twin peak” legislation) was tabled in Parliament. The following proposals are included in the draft bill.

• Move to twin peaks regulatory structure. South Africa is undergoing regulatory and structural changes through Twin Peaks. The Financial Services Regulation (FSR) Bill will establish new authorities under the Twin Peaks model, namely the Prudential Authority (PA) that will be established within the SARB, responsible for financial soundness of financial safety and soundness of financial institutions, and the Financial Sector Conduct Authority (FSCA), replacing the current Financial Services Board, responsible for market conduct and consumer protection. The SARB will continue its role to oversee financial stability within the set policy framework. The second draft of the Financial Services Regulation (FSR) Bill was released in December 2014 for public comments and tabled in Parliament in October 2015. It is anticipated that the Bill will come into effect in 2016. The bill provides for a wider range of powers, in particular giving financial stability powers to SARB and giving the PA and the FSCA the authority to issue standards for financial institutions;

• Macro prudential approach to supervision. The economic crisis demonstrated the need to develop an approach that focuses on the risks in relation to the entire financial sector, rather than only the risks pertaining to individual institutions. The SARB is the lead institution in this regard and will be taking appropriate steps to strengthen financial stability. In addition, the Financial Sector Regulation Bill gives the SARB a formal financial stability mandate and establishes the Financial Stability Oversight Committee. Moreover, the SARB, FSB and the National Treasury have recently published a Resolution Framework policy paper aimed at establishing a framework for the resolution of all banks and systematically important financial institutions. The Resolution Framework also proposes the introduction of a depositor guarantee scheme and assigns to the SARB the responsibility of a Resolution Authority as envisaged by the FSB’s Key Attributes for Effective Resolution Regimes;

• Establishing a Council of Financial Regulators. One of the key proposals to strengthen the financial regulatory system is to create a Council of Financial Regulators, chaired by the National Treasury. All regulatory agencies in the financial sector will form part of the Council. It will promote coordination and the sharing of information between regulators, particularly in the case of diversified financial services conglomerates;

• Prudential regulation of banking and insurance. Basel III has tightened the prudential supervision of banks by imposing stricter capital requirements and introducing liquidity and leverage ratios. Similar requirements will also pertain to insurance–the FSB has introduced draft legislation for a revised prudential regime for insurers, based on Solvency II, to ensure that regulation of the South African insurance sector remains in line with international best practice;

• Improving the domestic regulatory system and entrenching operational independence. Regulators should be operationally independent when licensing and supervising the financial sector. A number of initiatives are planned to improve the accountability and governance of domestic financial regulators. Policy will still be the responsibility of the National Government, which will determine the framework within which domestic regulators will operate;

• Market conduct. The National Government will strengthen market conduct regulation, particularly in retail banking and insurance. The 2008 report of the Banking Enquiry Panel set up by the Competition Commission set out a number of recommendations to lower banking charges and improve transparency in pricing, which the National Treasury and the SARB are currently facilitating. The treating customers fairly initiative from the FSB is an important step in strengthening market conduct objectives in the financial sector—the National Treasury has published a Market Conduct Framework Policy Document, as a pre-cursor to the introduction of the Conduct of Financial Institutions Bill;

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• Expanding the scope of regulation. Many activities, such as over-the-counter derivative trading, hedge funds and credit rating agencies previously fell outside the regulatory framework. In line with South Africa’s international commitments, new legislation has been and will continue to be introduced to regulate such activities in a way that strengthens and promotes the stability of the financial system. This includes the replacement of the Securities Services Act with a Financial Markets Act, which came into operation in June 2013, and the Credit Rating Services Act, which was signed into law in January 2013. The Financial Markets Act provisions addressed clearing, sanctions for market abuse, and conflicts of interest posed by financial market infrastructures. Improvements in governance in other sectors posing systemic risks, such as the payment system, are also being considered;

• Furthermore, in June 2015 the second draft of the Financial Markets Act regulations were released for comment. These regulations cater for the regulatory framework for the over-the-counter derivatives markets in alignment to the G-20 commitments made by South Africa at the Pittsburgh Summit in 2009. It is expected that the regulations will come into effect in 2016; and

• Broadening access to financial services for all. The National Treasury is planning a number of new interventions to ensure the accessibility of financial services to a greater reach of people. This includes taking forward the Financial Sector Charter process, supporting the development of Cooperative Banks and providing mechanisms for increased competition in the formal banking arena through dedicated banks and the introduction of deposit insurance.

Structure of the Banking Industry

At the end of financial year 2014, 16 banks, three mutual banks and 14 local branches of foreign banks were registered with the Office of the Registrar of Banks. In addition, 40 foreign banks had authorised representative offices in South Africa.

The four largest banking groups dominating the South African banking sector are ABSA Bank Limited, the Standard Bank of South Africa Limited, FirstRand Bank Limited and Nedbank Limited, and constituted 82.4% of total banking-sector assets at the end of September 2015. The four largest banks offer a wide range of services to both individual and corporate customers at branches across all nine provinces.

The South African banking system remained profitable and adequately capitalized throughout 2014 and into 2015. The total stock of outstanding loans and advances in the banking sector increased by 10.2% to R3,537 billion as at September 30, 2015 from R3,208 billion as at September 30, 2014. The capital adequacy ratio for the banking sector was 14.3% in September 2015, exceeding the 10% minimum capital adequacy requirement and therefore reflecting adequate systemic capitalization. The banking sector’s capital consists mainly of share capital and reserves (the highest loss-absorbing capital types).

Total banking-sector assets increased from R4,121 billion at the end of September 2014 to R4,617 billion at the end of September 2015, representing a 12% increase. The increase in total banking-sector assets is largely attributable to an increase in loans and advances, investment and trading securities as well as derivative financial instruments.

Impaired advances to gross loans and advances, a key indicator of credit risk, has declined marginally to 3.2% in September 2015 compared to 3.4% in September 2014.

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Financial Sector Charter

In August 2002, the financial sector voluntarily committed itself to developing a charter to address historical sector imbalances, particularly with reference to human resource development, broadening economic participation and access to financial services. Thereafter, key industry stakeholders came together to develop the Financial Sector Charter, which was launched by the industry and the Minister of Finance in October 2003. The Financial Sector Charter was built around a central vision of promoting a transformed, vibrant and globally-competitive financial sector that reflects the socioeconomic demographics of South Africa and contributes to the establishment of an equitable society by effectively providing accessible financial services to black people and directing investment into targeted areas in the economy.

The Financial Sector Charter established sector transformation goals, emphasising targets for human resource development, procurement and enterprise development, access to financial services and ownership transfer. In order to provide access to financial services, the country’s four major retail banks–ABSA, FirstRand, Nedbank and Standard Bank–as well as the Postbank, launched the Mzansi account in October 2004. Mzansi is a low-cost national bank account aimed at ensuring that those falling within the lower socio-economic groups have access to first-order retail banking products that would provide them with entry-level banking services. There have been approximately 6 million Mzansi accounts opened, 4.5 million of which were opened by South Africa’s four major commercial banks. It is estimated that 72% of these were first-time accounts. Major banks have since de-emphasised Mzansi and are promoting their own branded low-income accounts. The percentage of adult South Africans who use banking services has improved from 51% as at June 30, 2006 to 75% as at June 30, 2013.

In addition, the financial sector committed to ensuring that 80% of the population in lower income groups has access to full-service banking points of presence within at least 15 kilometres of every poor South African and cash-withdrawal points of presence such as automatic teller machines within at least 10 kilometres. By December 2010 91.6% of poor households had access to points of presence of banks and Postbank within 10 kilometres of their home. This percentage was 84.7% if only the big four banks are considered.

In addition, a framework has been developed for extending R42 billion in housing finance on favourable terms to households largely excluded from the mortgage market until now. The Financial Sector Charter Council’s (Council) 2008 Annual review (the most recent review that has been completed) indicates that as at December 31, 2008, the financial sector originated over R45.7 billion in low-income housing loans.

One of the principal sector transformation goals of the Financial Sector Charter relates to targets of ownership transfer. The Financial Sector Charter required that each financial institution must transfer 25% ownership to historically disadvantaged South Africans, including 10% through direct ownership transfers, by 2010. As of the end of 2008, the average direct ownership percentage of historically disadvantaged South Africans was 23.3%.

Through the Financial Sector Charter, over R200 billion has been invested in the South African economy since 2005. The financial sector has also invested over R101 billion through B-BBEE financing in other sectors of the economy, including vendor-financed ownership deals in the financial sector itself.

In 2007 a process of alignment of the Charter to the Codes of Good Practice (CoGP) was initiated by the FSC Council. It was widely anticipated that the FSC would be gazetted as a Sector Code in 2008 during the transitional period for aligning existing charters with the CoGP and converting them into sector codes. This conversion did not take place as Financial Sector Charter participants could not reach agreement on certain aspects of the alignment. Agreement was finally reached in 2012 which culminated with the gazetting of the Financial Sector Code (FS Code) under section 9 of the B-BBEE Act in December of that year.

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In the same year that the FSC Code was gazetted, the BEE Advisory Council also developed key recommendations on areas that needed refinement to address the risk of fronting and other loopholes that allowed companies to game the system. These recommendations culminated in the gazetting of the revised CoGP in October 2013 and the B-BBEE Amendment Act in January 2014.

Similar to the alignment process that the sector undertook between 2007 and 2012, the sector is now in the process of realigning the current FS Code with the revised CoGP. The revised FS Code is scheduled to be finalised before the end of the transitional period, namely October 31, 2015. During the period 2009 to 2012, because the Charter had no legal standing in terms of the B-BBEE Act, the sector reverted to reporting under the CoGP scorecard. The FSC Council released a 2013 annual review report which marks the first year that the sector reported under the newly gazetted FSC Code.

The number of banks that reported, foreign and local, hold more than 90% of the R3,843 billion assets held by the South African banking sector as at December 2013. Similarly with long-term assurers, asset and CIS managers, entities that reported contribute about 87% of the R5,305 billion assets held by the combined industries and together they also hold a 92% share of market. These trends apply in the short-term insurance industry as well.

While the industry‘s average ownership score is now at 25.30% and exceeds target, the sector lags behind on black women representation and net value, which measures the extent to which the shareholding is free of debt. These shortcomings resulted in the sector achieving an average score that is 65% of target.

Credit Allocation

Growth in total loans and advances extended to the private sector by the banking sector slowed considerably from the middle of 2007 and reached an annual record low of negative 1.6% in November 2009, as lending and borrowing conditions became unfavorable. The repurchase rate increased by a cumulative 500 basis points from mid-2006 to mid-2008. The tightening in monetary policy increased the debt-service costs for an already-indebted private sector. Lending standards for the household sector were also raised in accordance with the National Credit Act, while recently household balance sheets began to be undermined by stagnant real estate prices and increasingly volatile financial markets. Consumer purchasing power was furthermore eroded by inflation. The deteriorating economic climate was evident in weakening business and consumer confidence. Annual growth in installment sale and leasing finance as well as other loans and advances decelerated and recorded negative rates for the greater part of 2009 and 2010. As indicated below, credit exposure of the public sector is small in comparison to that of the private sector.

Tentative evidence of a recovery in credit extension emerged towards the end of 2009 when year-on-year growth in total loans and advances picked up from a nadir of minus 1.6% in November and gained further momentum thereafter to reach a recent high of 10% in December 2012. During this period the repurchase rate declined by a cumulative 700 basis points from late 2008 to July 2012.

Growth in total loans and advances averaged around 8.3% and 8.4% in 2013 and 2014 respectively, before slowing down to a more subdued 7.5 % in September 2015. Fragile consumer confidence and subdued domestic and global economic conditions, further supported by weak employment prospects, restrained growth in credit extension. However, credit growth remained underpinned by demand from the corporate sector while demand from the household sector gradually weakened. Debt servicing cost also increased as the repurchase rate increased by a cumulative 100 basis points between late 2013 and July 2015. Growth in the category other loans and advances, which consists of general loans, bank overdrafts and credit card advances, recovered from negative rates recorded in 2010 to a recent high of 20.5% in December 2012. Growth in other loans and advances then gradually declined to growth rates close to 10% in the three months up to September 2015 when growth in general unsecured loans to households moderated. However, due to healthy demand from the corporate sector, growth in other loans and advances maintained its role as the dominant driver of credit extension during 2014 and the first nine months of 2015.

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Growth in mortgage advances, which remained positive during the economic downturn, fluctuated between 1.6% and 2.6% between August 2011 and December 2013, consistent with the sluggish levels of activity observed in the residential and commercial property sectors. Mortgage advances made up approximately 54% of total loans and advances in 2010, but this share gradually dwindled to about 43% in 2015 as it lost ground to the high-growth categories of instalment sale credit and general loans. However, growth over 12 months in mortgage advances gradually recovered in 2014 and 2015 to reach 6.0% in September 2015. The recovery in mortgage advances has been skewed towards commercial property, although growth in mortgage advances on residential property also gained pace. The rate of expansion in instalment sale credit and leasing finance, which mainly represents the financing of vehicles, reached a peak of 14.2% towards the end of 2013 but subsequently lost momentum, amounting to 3.8% in September 2015 as vehicle sales declined. The following table sets out the distribution of gross credit exposure per asset class at the end of September 2015.

Percentage distribution of total credit extended (as of September 30, 2015)

	Percentage distribution of total gross credit exposure of banks
	%
Corporate exposure		36.3
Public sector entities		1.7
Local government and municipalities		0.6
Sovereign (including central government and central bank)		7.9
Banks		15.6
Securities firms		2.8
Retail exposure		34.4
Securitisation exposure		0.7

Source: SARB

Total loans and advances to the domestic private sector consist of installment sale credit, leasing finance, mortgage advances, overdrafts, credit card and general advances. The first three categories are referred to as asset-backed credit, while the last three categories together are referred to as other loans and advances.

The National Credit Act was fully implemented on June 1, 2007, with the aim of facilitating access to credit while preventing over-indebtedness and reckless lending in the credit market.

The following table sets out the sectorial distribution of gross credit exposure at the end of September 2015.

Sectorial of bank gross credit exposure as of September 30, 2015

Sectorial distribution of credit	Rand (billion)		As a percentage of total credit
Agriculture, hunting, forestry and fishing		94.5		1.7
Mining and quarrying		210.1		3.8
Manufacturing		261.0		4.7
Electricity		102.1		1.8
Construction		73.7		1.3
Wholesale, retail trade and accommodation		288.1		5.2

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Sectorial distribution of credit	Rand (billion)		As a percentage of total credit
Transport and communication		170.8		3.1
Financial intermediation and insurance		1,456.4		26.3
Real estate		401.8		7.3
Business services		188.2		3.4
Community, social and personal services		369.2		6.7
Private households		1616.6		29.2
Other		301.1		5.4
Total		5,533.6		100.00

The following table sets out the geographical distribution of gross credit exposure as of September 30, 2015.

Geographical distribution of credit	Rand (billion)		As a percentage of total credit
South Africa		4781.8		86.4
Other African countries		135.3		2.4
Europe		437.4		7.9
Asia		65.6		1.2
North America		83.3		1.5
South America		12.5		0.2
Other		17.6		0.3
Total		5,533.6		100.00

Source: SARB

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Capital Markets

The JSE was established in 1887 and is South Africa’s only licensed exchange for all securities. The JSE is governed externally by South African legislation and internally by its own rules and regulations. The JSE listed itself on June 5, 2006. The listing included a proposal regarding the implementation of a B-BBEE initiative. In February 2011, the JSE launched the Black Economic Empowerment (BEE) Board, offering a facility for BEE-compliant parties to list and trade BEE scheme shares. Only one BEE share scheme has thus far been listed.

The introduction of the Johannesburg Equities Trading system (JET), an electronic, automated and central order-driven system, culminated in the closure of the trading floor in 1996. Subsequently, the trading system and real-time information dissemination system (InfoWiz) of the London Stock Exchange (LSE), replaced JET in May 2002. In 2007, the JSE and the LSE both moved onto the LSE’s new trading platform, TradElect^TM. JSE members connected to JSE TradElect^TM and InfoWiz through a hub at the JSE in South Africa. In July 2012, the JSE moved its equity market trading activity onto Millennium Exchange^TM after concluding a licence agreement with technology solutions provider MillenniumIT. Consequently, the JSE’s trading system relocated from London to Johannesburg.

In November 2013, the JSE implemented a trading and information system upgrade by introducing two new trading sessions. The Closing Price Publication (CPP) session facilitates the publication of official closing prices and is applicable to all segments. The Closing Price Cross (CPX) session facilitates the submission and continuous matching of eligible orders at the published closing price in the central order book.

In June 2003, the JSE announced the first alternative “exchange” in Africa that would list small-and medium-sized companies, specifically targeting B-BBEE and junior mining companies. The Alternative Exchange (Alt^X) opened in October 2003 and runs parallel to the main exchange, with separate listings requirements and reduced fees. As of September 30, 2015, 60 companies were listed on Alt^X with a market capitalisation of R33.9 billion.

The South African Futures Exchange (SAFEX) is the forum for trading futures and options contracts. The JSE acquired SAFEX in August 2001 and merged it into the JSE as the Equity Derivatives Market and the Commodity Derivatives Market. Colloquially, the term “SAFEX” is still used to refer to the JSE’s derivatives market. In February 2005, the JSE launched Yield-X, which is the platform for trading of all interest rate-related and currency derivative products. Subsequent to the BESA merger, Yield-X has been collapsed into the JSE’s Interest Rate and Currency Derivatives Markets.

Regulation of insider trading is vested in the FSB, which has extensive surveillance and detection capability and was established in partnership with the JSE. The JSE published a revised booklet on Insider trading and other market abuses in August 2013. The purpose of this booklet is to bring together the various acts, requirements and relevant corporate governance guidelines that have a bearing on preventing market abuse.

Since 1995, the JSE has permitted limited liability corporate memberships and has phased out citizenship requirements for members of the JSE. Several banks, both domestic and international, have acquired or established stock-brokering businesses as members of the JSE. Stockbrokers are required to meet stringent capital adequacy requirements and to keep client funds in trust accounts separate from the stockbroker’s own funds. The Stock Exchange Guarantee Fund was established to protect investors and may be used to discharge certain liabilities of members relating to the buying and selling of securities.

Since 1999, companies have been permitted to buy back their own shares and are required to disclose security interests, directors’ pensions and compensation, and in the case of public companies, to appoint a secretary. Legislation restricts objectionable advertising and canvassing relating to securities.

In 2009, the requirement for auditors of listed companies to register with the JSE was changed to a system of accreditation, and registration for the purpose of providing audit and advisory services is now administered by the IRBA. In June 2010, The JSE introduced an online financial reporting portal called the ‘eXtensible Business Reporting Language’ to enable companies to file their financial reports according to a global electronic reporting standard. In July 2010, the JSE implemented a dark pool block-trading system, Block X, which aims to ensure that large share trades do not have an impact on prices. In the 2011 MTBPS, the Minister of Finance announced that all inward-listed shares on the JSE will henceforth be classified as domestic assets and are eligible for inclusion in the JSE indices.

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The JSE implemented a methodology change to the FTSE/JSE Africa Index Series with effect from March 15, 2013, in line with a global change to index methodology applied by the FTSE Group. The indices are now constructed with individual share prices weighted according to actual free float rounded up to the next 1%, rather than with a banded free float.

Pursuant to the amalgamation of the BESA and the JSE in June 2009, it has been resolved that the trading platforms of the two interest rate markets operated by the JSE, namely the Yield-X market and the BESA market, will be integrated in 2011. As a result, the old BESA BTB system was decommissioned and the reporting of bond transactions migrated onto the JSE Nutron platform on May 9, 2011. The rules and directives covering the integrated markets (Yield-X and BESA) known as the ‘JSE Interest Rate and Currency (IRC) rules and directives’ also came into effect on May 9, 2011, thus repealing the old rules and directives previously applicable to the BESA market.

The JSE closed its Africa Board in May 2012 when the two remaining listings were incorporated into the main board.

On March 25, 2013, the JSE published additional listing requirements which make provision for the listing of a special purpose acquisition company (SPAC). The JSE also published amendments to its listing requirements on December 3, 2013 to introduce Hybrid Financial Instruments, which have characteristics of both debt and equity securities. Various amendments were made to the JSE listing requirements with effect from September 30, 2014. These spanned a wide range, from enhanced responsibility of sponsors in relation to listing applications to extending the period within which directors have to report dealings in securities from 24 hours to three business days and creating a fast-track listing process for international companies wishing to have a secondary listing on the JSE.

The JSE launched its high-technology colocation centre in May 2014. The facility allows for fast trading and market data access for all JSE markets, the deployment of new trading strategies, cost saving for JSE clients and improved risk mitigation.

While Share Transactions Totally Electronic (Strate) has been the only central securities depository since its inception in 1999, the FSB has granted Granite Central Securities Depository a financial market infrastructure licence to operate as such a depository in August 2015. The licence mandate is for bonds and money-market instruments.

The following table sets forth the market capitalisation and number of companies listed on the equity market of the JSE as well as the trading volumes and values for the period indicated.

JSE

	As of December 31,										As of September 30,
	2010		2011		2012		2013		2014		2015
Market capitalisation(1)		6,698.7		6,908.5		8,383.6		10,626.2		11,505.0		11,428.9
Trading volume(2)		71,252		71,464		61,844		63,892		61,735		53,278
Trading values(3)		2,990,123		3,286,828		3,431,584		3,981,618		4,050,044		3,687,795
Listed companies(4)		407		406		402		389		391		388

Notes: —

(1) In billions of Rand at end of period.

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(2) In millions of shares traded.

(3) In millions of Rand.

(4) Actual figures at the end of period.

Source: JSE.

According to the World Federation of Exchanges, the JSE was the 17th largest stock exchange in the world, in terms of market capitalisation, as of August 31, 2015.

The market capitalisation of the JSE at the end of September 2015 was R11,428.9 billion. In the first nine months of 2015, the total value of share capital raised by companies listed on the JSE was R176 billion, an increase of R49.5 billion compared with the first nine months of 2014. Turnover of shares listed on the JSE amounted to R4,050.0 billion in 2014 and R3,687.8 billion in the first nine months of 2015 (32% of market capitalisation as of September 30, 2015). Approximately 58 foreign companies which have their primary listing on other exchanges maintain a secondary listing on the JSE, such as Anglo American Plc and Old Mutual Plc. New listings in recent months include New Frontier Properties Limited, Choppies Enterprises Limited and South32 Limited. Non-residents made net purchases of local shares amounting to R35.6 billion in the first nine months of 2015, as compared with net purchases of R27.1 billion in the corresponding period of 2014. On average, non-resident participation in the secondary share market of the JSE has accounted for 19% of the value of all shares traded in the nine months to September 2015. Annualised liquidity on the JSE increased from 33.7% in September 2014 to 43% in September 2015, while the closing value of the All-Share Price Index on the JSE increased by 1.5% over the same period. In the nine months to September 30, 2015, there were 12 de-listings bringing the total number of de-listings since 1999 to 653 as compared to only 373 new listings, of which nine new listings were registered in the nine months to September 30, 2015.

The main index charting the performance of the JSE is the FTSE/JSE Africa All-Share Price Index. At September 30, 2015, the FTSE/JSE All-Share Price Index included 165 companies and accounted for approximately 59% of the market capitalisation of the JSE. As at September 30, 2015, the ten largest companies by market capitalisation represented approximately 53% of total market capitalisation.

The nominal value of turnover in the bond market in the nine months to September 30, 2015 was approximately R17,079 billion. The turnover in the secondary bond market in 2014 was R19,167 billion, compared with R20,616 billion in 2013 and R22,786 billion in 2012. Non-residents’ net sales of South African bonds amounted to R14.4 billion in the first nine months of 2015, compared with net sales of R43.3 billion in the corresponding period of 2014. The non-resident participation rate in the domestic secondary bond market increased from 10% in 2013 to 11% in 2014, before declining to an average of 9% in the first nine months of 2015.

Derivative instruments are traded either on an over-the-counter basis or on an exchange. The Equity and Commodity Derivatives Markets of the JSE, together with the Interest Rate and Currency Derivatives Markets are responsible for trade in all futures contracts and options on futures. SAFEX Clearing Company (Pty) Limited (Safcom) is the clearing house for SAFEX and also provides compliance, surveillance and other exchange services. SAFEX introduced commodity futures in South Africa in July 1995, Rand-Dollar futures in May 1997, and individual equity futures in February 1999. On June 18, 2007, the JSE began trading in various foreign currency derivatives. The financial market infrastructure was modernised in 2008 through the replacement by the JSE of its 15-year-old derivatives system with a multiple instrument online trading system, Nutron.

Safcom achieved a global standard of risk management by complying with the CPSS-IOSCO principles for financial market infrastructures, which was published by the Bank for International Settlements in December 2012. In March 2013, Safcom announced the promulgation of further rules relating to the establishment of a derivatives market default fund. A phased approach was used by the JSE from the end of January 2014 to introduce a new methodology for determining contract level Initial Margin Requirements

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for equity derivatives. As trading activity in the Equity Derivatives Market increased in the first nine months of 2015, turnover was also higher compared with the corresponding period in 2014. While trade in single-stock contracts (including IDX products) accounted for 3% of total turnover by value in the first nine months of 2015, they accounted for 46% of total number of contracts traded. Turnover in commodity futures and options contracts increased by 41% in the nine months to September 2015, compared with the same period in 2014, along with generally higher domestic grain prices. Turnover in derivatives traded on the JSE for the first nine months of 2015 is indicated in the accompanying table.

Derivatives turnover on the JSE, January to September 2015

	Value		Change over one year
	Rand (billions)		Percentage
Equity derivatives		5,025		15
Warrants		0.4		-12
Commodity derivatives		536		41
Interest rate derivatives		540		11
Currency derivatives		429		12

Source: JSE.

Exchange Controls

South African law provides for exchange controls, which, among other things, restrict the outward flow of capital from South Africa, the Kingdoms of Lesotho and Swaziland and the Republic of Namibia, known as the common monetary area (CMA). The Exchange Control Regulations are applied throughout the CMA and regulate transactions involving South African residents, including companies and institutional investors. The basic purpose of the Exchange Control Regulations is to mitigate the negative effects caused by a decline of foreign capital reserves in South Africa, which could result in the devaluation of the Rand. The National Government has, however, committed itself to gradually relaxing exchange controls. On November 1, 2010 the Exchange Control Voluntary Disclosure Programme was implemented for a period of 12 months. The primary objective was to encourage applicants to disclose their contraventions and to provide them with a window of opportunity to regularise any contraventions of the Exchange Control Regulations.

The SARB, on behalf of the Minister of Finance, administers South Africa’s exchange control regulations. It is assisted by a number of banking institutions that have been appointed by the Minister of Finance as Authorised Dealers in foreign exchange (Authorised Dealers) and/or Authorised Dealers in foreign exchange with limited authority (ADLAs). Such banking institutions undertake foreign exchange transactions for their own account with their clients, subject to conditions established by the SARB. Until 1995, control over non-residents’ capital transactions was based mainly on the Financial Rand System, which was reintroduced in 1985 at the time of the proclamation of the debt standstill. In March 1995, the National Government abolished the Financial Rand System and the resulting dual exchange rate. No capital controls are, therefore, applied to non-residents, who may freely invest in and disinvest from South Africa. This applies to portfolio investment as well as foreign direct investment into South Africa.

Since the abolition of the Financial Rand System in 1995, South Africa has had a unitary exchange rate that applies to both current and capital transactions between residents and non-residents. As discussed below, South African residents still face certain restrictions. However, these restrictions have gradually been eased to foster macroeconomic stability, a stronger balance of payments and financial sector development. The proposed strategy going forward is characterised by a fundamental shift from a system where a substantial fraction of cross-border transactions are subject to restrictions, approvals and administrative requirements to a more open regime where transactions are generally permitted with a narrow set of regulations targeted at specific national interests, macroeconomic and financial risks.

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The broad principles for exchange control reforms are as follows:

• Support the overarching strategy for increasing investment and growth;

• Reflect a fundamental shift in the approach to regulation;

• Recognise the different objectives that are supported by exchange controls (e.g. contributing to systemic stability; supporting prudential regulation of financial institutions; protecting the tax base; and supporting the prevention of financial crime);

• Address the distortions created by exchange controls;

• Holistic approach and taking into account interactions between institutions and individuals, residents and non-residents; and

• Proportionate reporting requirements.

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The present exchange control system in South Africa is used primarily to control movements of capital by South African residents. In order to ensure that capital transfers are not disguised as current payments, controls and limits are placed on transfers of a current nature, such as the single discretionary allowance of up to R1 million per annum that may be apportioned for travel for vacation and business purposes, study allowances, donations to missionaries, maintenance transfers, monetary gifts/loans to non-residents and residents temporary abroad, alimony and child support payments, wedding expenses and special occasions and foreign capital allowance (without the requirement to obtain a Tax Clearance Certificate). In addition, private individuals may invest up to R10 million per calendar year for any purpose outside the CMA, provided that the individual is over the age of 18 years and subject to obtaining a Tax Clearance Certificate, which is issued by the South African Revenue Service.

Furthermore, in order to eliminate the bias against residents, the South African Reserve Bank’s Financial Surveillance Department will consider investments by residents in excess of the R10 million foreign capital allowance, subject to certain conditions, such as tax compliance and annual reporting.

The Minister of Finance also announced the removal of controls on emigrants’ blocked assets. South African emigrants were previously allowed to remit up to R10 million per single person or R20 million per family unit upon emigration. Emigrants can now transfer the allowance per calendar year and emigrants can also apply to the Financial Surveillance Department for the transfer of all their assets without any exit levy applying to free those assets, provided their tax obligations were met.

With effect from October 2004, limits on foreign direct investments by South African corporates were abolished. Dividends declared by offshore subsidiaries of South African companies after October 26, 2004 may be retained offshore. Foreign dividends repatriated to South Africa after October 26, 2004 may be retransferred offshore again at any time for any purpose. Corporates are allowed, on application, to transfer funds from South Africa for each new and approved foreign investment outside the CMA. Authorised Dealers administer the directives and guidelines on foreign direct investments under R500 million. Application to the SARB’s Financial Surveillance Department for prior approval of a foreign investment is still required for foreign direct investments over R500 million. These applications, which permit the SARB to monitor the level of foreign investment, are considered on merit and are granted if South African exchange control authorities believe the investments would be of long-term economic benefit to South Africa and at least 10% of the foreign target entity’s voting rights must be obtained. The SARB reserves the right to stagger capital outflows relating to very large foreign investments to manage any potential impact on the foreign exchange market. In order to reduce the administrative costs and procedures of doing business for corporates, the Minister of Finance, in the 2011 MTBPS, allowed corporates to be able to top up capital in their offshore business from South Africa, provided the additional funding is authorised within the same calendar year in which the original investment was approved and as long as they remain within the annual limit of R500 million. South African corporates are also allowed to make bona fide new outward foreign direct investments outside their current line of business.

South African companies are generally permitted to undertake international expansion and the policy stance is to encourage growth into the rest of Africa. There are no limits on the use of domestic capital for funding investment, although administrative and reporting conditions remain in place and investments above R1 billion per year require approval. The HoldCo regime introduced in 2013 provides local companies with a structure for managing their multinational operations without restrictions. Listed companies may transfer up to R2 billion per year into approved HoldCos; unlisted companies may transfer up to R1 billion, subject to transparency requirements. Listed companies can further apply to the Reserve Bank to transfer additional amounts, subject to demonstrated benefits for South Africa.

In the 2009 MTBPS, reforms to reduce red tape on business transactions were announced. The prohibition on SADC loop structures was abolished and recently, in the 2011 MTBPS, the Minister of Finance announced that transactions which result in ‘loop’ structures not exceeding a threshold of 10% - 20% equity, and/or voting rights, whichever is higher, in the foreign target entity, will be processed by Authorised Dealers without the need for prior approvals.

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In the 2010 MTBPS, the Minister of Finance announced measures to encourage global diversification from a domestic base by using South Africa as a gateway to Africa. In this regard, from January 1, 2010, qualifying internationally headquartered companies are allowed to raise and deploy capital offshore without the need to obtain exchange control approval, subject to reporting requirements. With effect from November 2012, the shares and/or debt of a headquarter company may be listed on the JSE Limited or be held directly or indirectly by a shareholder with shares or debt listed on the JSE Limited.

The 3:1 ratio applicable to local financial assistance in respect of affected persons was withdrawn. The 1:1 ratio remains applicable for the acquisition of residential properties and any other financial transactions (such as portfolio investments, securities lending, hedging and repurchase agreements, among others) by non-residents and affected persons. Local financial assistance made available to emigrants also remains subject to the 1:1 ratio.

Authorised Dealers are allowed to approve the granting of credit terms in respect of exports only for periods not exceeding six months, with an extension of a further six months in certain circumstances without reference to the SARB. In an endeavor to reduce barriers to trade, the Minister allowed corporates to do advance payments for capital goods for up to 100% of ex-factory cost of goods to be imported not exceeding a total value of R10 million. Payments for importation of capital goods in excess of R10 million may only be provided up to 50% of the ex-factory cost of the goods to be imported. Furthermore, corporates are allowed to cover forward (using forward exchange contracts) up to 75% of budgeted import commitments or export accruals in respect of the forthcoming financial year without an application to the SARB. The R250,000 limit on advance payments for permissible imports, other than capital goods, was removed and South African companies are allowed to open foreign bank accounts for permissible purposes without prior approval, subject to reporting obligations.

South African companies involved in international trade are permitted to operate a single customer foreign currency (CFC) account for both the trade and services and use it for a wider variety of permissible transactions. This reduced the transaction costs associated with multi CFC accounts and their restricted use.

Corporates engaged in exportation and importation have been permitted to offset costs of imports against proceeds from exports within a specified period over a CFC account. The requirement that companies must convert foreign exchange credited to a CFC account to Rand within 180 days was removed. South African companies are, however, still required to repatriate export proceeds to South Africa.

Various measures aimed at easing certain of the country’s remaining exchange control regulations became effective in the late 1990s. The measures included abolishing most of the remaining quantitative limits on current account transactions; permitting South African institutions to invest funds abroad; permitting trading of Rand-dollar futures contracts on SAFEX, with participation initially restricted to individuals and institutional investors; and relaxing the application of local borrowings limits to foreign-controlled South African companies.

Retirement funds and underwritten policies of long-term insurers are permitted, without prior SARB approval, to invest up to 25% of their total retail assets under management in foreign assets and an additional 5% in Africa. Collective investment scheme management companies, investment managers registered as institutional investors for exchange control purposes and investment-linked businesses of long-term insurers are permitted to invest up to 35% of their total retail assets under management in foreign assets and an additional 5% in Africa.

The macro-prudential limit for Authorised Dealers was introduced in 2010 and enabled Authorised Dealers to acquire direct and indirect foreign exposure of up to a macro-prudential limit of 25% of their total liabilities excluding total shareholders’ equity.

In the 2013 Budget Speech, the Minister of Finance announced that Authorised Dealers may invest an additional 5% of their total liabilities, excluding total shareholders’ equity, for expansion into Africa, in addition to the current macro-prudential limit of 25%.

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Foreign companies, governments and institutions are permitted to list equity, bond and derivative instruments on South Africa’s securities exchanges. Furthermore, South African private individuals, corporates, trusts and partnerships are permitted to invest without restrictions in approved inward-listed instruments on South African exchanges.

In the 2011 MTBPS, the Minister of Finance announced further significant reforms of inward listings in order to promote the development of the South African capital markets. The Minister announced that all listed shares on the JSE, traded and settled in Rand, will be classified as domestic assets for the purpose of trading on the JSE and inclusion in its indices. This new dispensation does not affect companies currently classified as domestic, which have a primary listing on a foreign exchange (e.g. the ‘London 5’), which will continue to be included in the indices on the current basis. This initiative is meant to improve South Africa’s position as a financial gateway into Africa. However, in order to balance between capital market growth and development and the objective of managing exposure to foreign risk, prudential institutions would still be required to report their foreign exposure to regulatory authorities.

These changes also herald a shift in the regulatory regime from control measures to prudential regulation.

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The restrictions on South African companies and other entities to participate in foreign inward-listed securities on the JSE, including participation in the Rand futures, were removed. These changes enable South African companies, trusts, partnerships and banks to manage their foreign exposure, since they were permitted to participate in Rand futures market on the JSE without restrictions. These changes allow companies to diversify and hedge their currency exposure, which support macroeconomic stability, reduce exchange-rate volatility and deepen domestic financial markets. This dispensation was also extended to investment in inward-listed (foreign) instruments on the JSE and the Bond Market of the JSE.

Furthermore, the Minister of Finance allowed the JSE Limited to offer to non-resident and qualifying South African and other CMA corporate entities directly and actively involved in the agricultural grain industry, Zambian referenced grain derivative contracts for trading and settlement in USD.

To promote SA further as a hub for regional investments, since February 27, 2013 listed entities on the JSE Limited were allowed to establish one subsidiary in South Africa to hold African and offshore operations, which will be granted certain tax and foreign exchange dispensations.

In an effort to promote competition and reduce the cost of remittances to neighboring and other countries, ownership restrictions on international participation in Authorised Dealers in foreign exchange with limited authority (ADLAs) (i.e., foreign exchange bureaus) were removed. In addition to this, the requirement for money remittance agencies to partner with existing Authorised Dealers in order to do remittance work will no longer be obligatory.

Gold and Foreign Exchange Contingency Reserve Account (GFECRA)

GFECRA reflects the Rand currency and gold price valuation profits and losses on all transactions which the SARB had entered into in terms of the SARB Act on behalf of the National Treasury. The GFECRA comprises credit and debit balances on three different accounts: a gold price adjustment account (GPAA); a foreign exchange adjustment account (FEAA); and a forward exchange contracts adjustment account (FECAA).

The GPAA reflects any valuation profit or loss on the gold held by the SARB. The volume of the gold holdings has been fairly static over the past decade at around four million fine ounces. The FEAA account reflects any profit or loss on assets of the SARB denominated in currencies other than the Rand as a result of depreciation or appreciation, as the case may be, of the Rand against the currency of such assets. In terms of the SARB Act, the SARB can calculate an exchange commission on all foreign exchange transactions conducted on behalf of the National Treasury. This commission or exchange margin is also reflected in the FEAA.

The FECAA reflects profits or losses on any forward exchange contract entered into by the SARB, valuation profits and losses on foreign exchange liabilities of the SARB, and any profit or loss due to changes in the value of the Rand against the currency of the United States on certain agreements for the reinsurance of export contracts. Since early 1997, the SARB has terminated the extension of forward cover with respect to future external commitments.

During the 1980s and 1990s, the SARB intervened in the foreign exchange market via the forward book. This policy was abandoned in August 1998. Currently, the SARB purchases foreign exchange from the Authorised Dealers to accumulate reserves when market conditions allow. However, the SARB does not intervene in the foreign exchange market with a view to influence the value of the Rand.

Prior to calendar year 2002, upon the agreement of the Minister of Finance and the Governor of the SARB, the balance of the GFECRA could be reduced through the National Government to the SARB by the issuance of zero-coupon bonds convertible into interest-bearing bonds in situations where the SARB wants to use the bonds in its open market operations. With respect to the GFECRA balance on March 31, 2002, and in accordance with the Gold and Foreign Exchange Contingency Reserve Defrayal Act, the National Treasury settled the negative balance amounting to R28.0 billion in four tranches, partly in cash and partly in bonds, over a four-year period that commenced in 2003. The National Treasury paid the final tranche of the outstanding balance of R28 billion in April 2005.

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In calendar year 2005, a new settlement methodology for the settlement of the GFECRA balances was agreed between the National Treasury and the SARB, whereby the balance on the GFECRA as of March 31 each year is split into transactions with a cash flow (money-market liquidity) impact and a non-cash flow (revaluation) component. Valuation gains and losses are not settled, but reflected either as an asset or liability on the financial statements of the two institutions. Therefore, only transactions with a cash flow impact are settled. The outstanding balance to be settled accumulates interest at the prevailing repurchase rate. The gross gold and foreign exchange reserves decreased to US$46.1 billion at the end of September 2015, down from US$49.1 billion a year earlier. This decline is mainly as a result of a decline in the U.S. dollar gold price, the appreciation of the U.S. dollar against other major currencies and the normal foreign exchange transactions of SARB, mostly on behalf of the National Treasury.

As at March 31, 2014, the GFECRA showed a positive balance of R177.9 billion which represents net valuation gains of R177.8 billion and cash flow losses of R68 million. These cash flow losses were settled on June 6, 2014. As at March 31, 2015, the GFECRA balance had increased to R203.4 billion, mainly due to the depreciation of the Rand over the period. Cash flow losses to be settled by the National Government amounted to R153 million for the year to March 31, 2015. This balance was settled on April 10, 2015.

The negative net open foreign currency position of the SARB amounted to US$23.2 billion in September 1998 which then changed from negative to positive in May 2003. The net open foreign currency position, which is now referred to as the International Liquidity Position, reflected a positive balance of US$43.3 billion at the end of September 2014, declining to US$41.2 billion as at September 30, 2015.

In February 2004, the SARB balanced its previously oversold forward foreign exchange book, eliminating a key source of external vulnerability and pressure on money market operations. With a reduced need for the sterilization of excess liquidity arising from maturing forward contracts, the SARB has normalized its money market activities and has been able to increase the official net international reserves of the country. The SARB currently has an overbought (positive) forward foreign exchange book amounting to US$2.2 billion as at September 30, 2015.

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THE EXTERNAL SECTOR OF THE ECONOMY

Foreign Trade

The following table sets forth South Africa’s balance of trade for the periods indicated.

Balance of Trade

Year	Balance of Trade Rand (billion)
2010		59.7
2011		51.0
2012		-31.5
2013		-68.3
2014		-68.6
2015		-14.3

Note: —

(1) To June 30, 2015.

The following table presents a breakdown of South Africa’s balance of trade by sector for the periods indicated.

Foreign Trade

	Year ended December 31, Rand (billion)
Sector	2010		2011		2012		2013		2014		20151
Exports
Total merchandise exports		654.4		772.5		801.5		906.1		961.8		748.1
Agriculture, forestry & fishing		35.0		40.2		43.0		54.1		62.6		56.2
Total: Mining		139.9		190.8		202.2		234.4		235.7		162.9
Coal mining		40.4		54.6		55.2		56.3		56.0		45.8
Gold & uranium ore mining		0.0		0.0		0.0		0.0		0.0		0.0
Other mining		99.5		136.2		147.0		178.1		179.7		117.1
Total: Manufacturing		435.2		495.6		500.1		558.1		618.1		470.0
Food		14.9		14.9		17.3		21.3		24.9		18.0
Beverages		9.5		9.8		10.5		13.9		15.2		11.3
Tobacco		2.4		2.3		2.8		2.7		2.7		2.0
Textiles		7.9		9.4		10.2		12.1		13.2		10.3
Wearing apparel		2.7		3.2		3.4		4.1		4.6		3.7
Leather & leather products		0.4		0.5		0.5		0.6		0.9		0.8
Footwear		1.5		1.7		1.9		2.3		2.6		1.9
Wood & wood products		3.8		3.9		3.9		4.4		5.6		4.7
Paper & paper products		12.1		13.6		12.2		13.8		16.8		13.2
Printing, publishing & recorded media		1.2		1.2		1.0		1.1		1.2		0.8

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	Year ended December 31, Rand (billion)
Sector	2010		2011		2012		2013		2014		20151
Coke & refined petroleum products		11.8		13.8		18.7		17.5		21.3		17.6
Basic chemicals		24.5		28.9		30.7		33.3		37.0		28.1
Other chemicals		7.9		9.2		10.4		12.6		13.9		10.7
Rubber products		3.7		5.0		5.4		5.6		5.8		4.2
Plastic products		8.8		10.1		12.8		14.0		16.9		11.2
Glass & glass products		1.0		1.0		1.0		1.9		2.0		1.5
Non-metallic minerals		1.8		2.2		2.1		2.4		2.4		1.8
Basic iron & steel		60.2		60.7		56.6		61.3		75.2		54.1
Basic non-ferrous metals		151.3		176.0		154.4		170.0		185.6		120.6
Metal products excluding machinery		8.8		9.3		11.5		11.2		19.2		11.7
Machinery & equipment		32.5		40.9		43.9		48.5		64.6		49.1
Electrical machinery		5.1		6.7		7.5		8.3		23.6		17.4
Television, radio & communication equipment		2.8		3.4		3.4		4.7		3.5		2.3
Professional & scientific equipment		2.9		3.6		4.5		4.3		4.3		2.5
Motor vehicles, parts & accessories		50.5		56.5		63.9		71.5		89.7		70.6
Other transport equipment		2.3		4.6		4.2		5.4		6.8		4.6
Furniture		3.9		3.2		2.8		2.8		5.6		4.0
Other industries		15.7		20.2		23.0		27.2		30.4		28.3
Electricity, gas & steam		1.0		1.5		2.0		2.7		2.7		1.7
Undefined		0.5		1.2		1.2		1.4		2.2		2.7
Imports
Total merchandise imports		607.0		742.7		854.4		991.2		1082.9		807.7
Agriculture, forestry & fishing		8.7		12.4		13.2		13.0		40.5		33.7
Total: Mining		89.3		113.4		139.7		153.3		257.0		134.0
Coal mining		0.4		1.8		1.1		2.6		5.6		3.4
Gold & uranium ore mining		0.0		0.0		0.0		0.0		0.0		0.0
Other mining		88.9		111.6		138.6		150.7		251.4		130.6
Total: Manufacturing		485.9		598.1		678.1		630.6		630.6		403.6
Food		24.5		30.5		38.3		41.4		21.4		16.8
Beverages		3.3		3.9		4.6		5.8		5.9		4.4
Tobacco		0.4		0.3		0.5		0.6		2.1		1.6
Textiles		7.2		8.6		9.3		10.6		34.9		29.5
Wearing apparel		10.2		11.4		13.5		17.1		18.7		15.9
Leather & leather products		2.1		2.4		2.6		3.2		2.9		2.3
Footwear		5.2		6.7		7.8		9.3		11.7		10.0
Wood & wood products		2.2		2.6		2.9		3.3		4.6		3.8
Paper & paper products		7.3		8.0		8.7		10.6		12.6		9.9
Printing, publishing & recorded media		2.2		2.3		2.7		3.1		2.9		1.9
Coke & refined petroleum products		29.6		46.8		53.0		65.3		73.3		60.2
Basic chemicals		28.6		36.1		40.0		45.2		65.2		54.3
Other chemicals		36.6		40.7		47.6		55.6		37.2		17.6
Rubber products		7.0		8.4		10.0		12.0		14.4		10.9
Plastic products		7.0		8.4		9.7		11.8		27.8		22.2
Glass & glass products		1.9		2.1		2.3		2.5		2.9		2.6
Non-metallic minerals		6.2		6.9		7.4		8.8		10.1		8.6
Basic iron & steel		9.8		13.4		14.0		20.2		13.6		12.4
Basic non-ferrous metals		10.7		12.4		13.7		16.3		18.3		13.5
Metal products excluding machinery		11.6		13.9		15.4		19.5		22.8		19.0
Machinery & equipment		88.2		114.6		135.3		150.7		144.4		112.5
Electrical machinery		19.8		21.7		26.9		39.4		41.4		33.7
Television, radio & communication equipment		35.7		37.9		38.6		52.5		57.3		47.8
Professional & scientific equipment		16.6		19.5		21.4		25.8		27.8		17.3

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	Year ended December 31, Rand (billion)
Sector	2010		2011		2012		2013		2014		20151
Motor vehicles, parts & accessories		86.6		104.6		118.0		140.0		88.9		67.0
Other transport equipment		13.3		20.1		16.6		13.5		13.5		9.4
Furniture		3.6		3.9		4.6		5.3		8.3		7.1
Other industries		8.5		9.9		12.8		13.5		14.2		11.7
Electricity, gas & steam		1.6		1.7		1.6		1.5		1.8		1.0
Undefined		0.6		0.7		0.7		0.7		1.1		1.7

Note: —

(1) To June 30, 2015.

Source: Quantec

Exports

South Africa’s exports to developed economies still consists mainly of mineral products, chemical products and base metals while the composition of exports to Africa consists mainly machinery & appliances, vehicles & parts and other manufactured goods. Since 2012, the fastest growing markets for South African exports have been Africa and Asia, with exports to these two continents accounting for almost 60% of total exports.

The value of exports increased by 5.5% in the first nine months of 2015 compared with the same period in 2014, supported by strong growth in exports of vehicles (30.2% year-on-year), precious metals (20.0% year-on-year), stone & glass (13.1% year-on-year) and wood products (14.1% year-on-year). The high export growth in precious metals reflects a recovery in the production of gold and platinum which were adversely affected by strike activity in the first half of 2014. In contrast, exports of mineral products and iron & steel declined by 7.5% and 2.7%, respectively, owing to weak demand from Asia, particularly China.

Improving economic prospects in advanced economies combined with sustained weakness in the Rand underpinned domestic exports, despite declining commodity prices and a slowdown in emerging market economies. Furthermore, trade and financial links with sub-Saharan Africa continue to grow, providing opportunities for South African firms to expand into the continent. The uneven global recovery as well as structural changes across economies meant that South Africa has had to diversify its export basket over time in order to help reduce its external vulnerabilities whilst at the same time taking advantages of the opportunities presented by economies growing at a faster pace.

In the first nine months of 2015, exports to the United States grew by 15.6% and to the EU by 10.0% owing to a pickup in economic activity. Exports to China, Japan and the SADC fell by 4.1%, 1.7% and 1.9%, respectively. Exports to China were weighed down by decreased demand for minerals and metal products, while Japan’s economy was on the brink of recession. Exports to Asia as a whole fell by 2.3% as many of the Asian economies have close trade ties with China, which has inevitably affected their growth.

Asia remains the largest recipient of South Africa’s goods, accounting for 29.2% of total exports in the nine months to September 2015, marginally higher than Africa’s share of 28.8%. Exports to Asia totaled R218 billion while those to Africa totaled R216 billion year to September. Exports to these two regions have over time outpaced exports to the EU, which now account for only 23.7% of South Africa’s total exports as compared to 43% in the mid-1990s. BRIC members also account for a significant share of South Africa’s exports, with 15.5% of exports destined for these economies in the first nine months of 2015. The US accounts for 7.4% of total domestic exports, also reflecting a declining trending.

Imports

In the first nine months of 2015, imports posted modest growth of 0.6% compared to the same period last year, weighed by a sharp contraction in imports of mineral products (-30.1% year-on-year) and precious metals (-34.0% year-on-year). The decline in mineral products imports mainly reflects the 44.6% drop in imports of petroleum and crude products. Import categories that posted strong growth in the nine months to September 2015 relative to the same period in 2013 were live animal products (26.7%), iron & steel (22.6%), equipment components (19.2%) and textiles (13.5%).

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Current Account Deficit

South Africa’ South Africa’s current account deficit improved to 3.9% of GDP in the first half of 2015, lower than the 5.4% recorded in 2014. The improvement mainly reflects the improvement in the trade deficit, itself the result of higher export volumes and a lower oil import bill. Lower net income payments due to higher dividend receipts also reduced the current account deficit.

South Africa’s Commitment to the WTO

South Africa is a founding member of the General Agreement of Trade and Tariffs (GATT) and has been an active participant for decades in the various GATT rounds of multilateral trade negotiations. In line with the need to open up the economy and increase competition in the economy, South Africa has liberalized most sectors of the economy since the 1990s.

South Africa has phased out support measures and subsidies inconsistent with the principles expressed in the GATT. This encourages South African industries to improve their competitiveness in domestic and foreign markets, while at the same time benefiting from cost reductions, supply side support measures and reduced import duties of trading partner countries that were negotiated in the Uruguay Round, as well as from certain market access preferences that have been granted to South Africa by Canada, the EU, Japan, Norway, Russia, Switzerland and the U.S..

South Africa enjoys beneficial trade agreements with a number of countries, both multilateral and bilateral. It enjoys preferential treatment under the African Growth and Opportunity Act when trading with the United States.

In Africa, South Africa has a number of free trade agreements with African countries. These include Botswana, Namibia, Lesotho and Namibia, under the auspices of the Southern African Customs Union. South Africa is also an important member of the SADC, which, amongst other things, allows for preferential trading access to Zimbabwe. It is anticipated that the Tripartite Free Trade Agreement between the SADC, COMESA and EAC will help to facilitate market access and increased trade within the continent.

South Africa also has an agreement with the EU to export most of its goods duty free under the Trade Development and Cooperation Agreement and is in the process of negotiating a new trade agreement and a new economic partnership agreement. China, India and Brazil are also important markets for South Africa. Thus South Africa has strengthened diplomatic ties and trade cooperation with these countries.

Geographic Distribution of Trade

The following table sets forth the distribution of South Africa’s exports and imports of merchandise for the periods indicated.

Distribution of Merchandise Trade

	2010		2011		2012		2013		2014		2015(1)
	(Rand billions)
Exports
China		58.6		85.3		81.1		109.4		94.7		70.3
Not allocated		66.0		79.7		76.8		67.1		54.7		45.9
US		51.5		59.6		61.6		65.3		67.5		55.6
Japan		46.3		55.3		44.3		52.9		52.9		36.6
Germany		42.7		43.2		38.0		42.0		48.7		51.2
India		22.2		24.3		30.1		28.0		40.8		31.0
UK		26.4		28.7		27.1		31.7		36.9		31.6
Netherlands		17.2		21.5		24.7		30.0		31.5		20.0
Zambia		11.4		16.2		20.1		24.6		27.0		20.0
Zimbabwe		15.1		17.1		18.9		22.3		23.7		17.3
Mozambique		13.9		17.2		18.9		26.6		31.0		21.2
Imports
China		84.1		103.1		120.1		154.5		167.6		143.7
Germany		66.1		77.3		84.0		103.2		108.6		93.1
Saudi Arabia		23.7		32.3		64.6		77.4		77.3		25.4
US		41.9		58.4		61.2		63.4		71.4		56.5
Japan		31.0		34.5		37.9		39.3		41.0		30.5
India		20.7		29.2		37.6		51.9		49.4		41.6
Nigeria		16.1		22.7		30.5		35.0		55.7		29.0
UK		22.1		29.1		28.9		32.8		35.4		25.9
Angola		14.6		11.5		23.0		18.9		21.8		12.5
Thailand		13.4		16.5		22.2		26.6		25.8		20.0
Italy		14.7		19.6		21.1		25.9		28.6		20.9

Note:—

(1) Through September 30, 2015.

Source: www.quantec.co.za.

102

Balance of Payments ⁽¹⁾

The following table sets forth the balance of payments for South Africa for the periods indicated.

	For the year ended December 31										For the six months ended
	2010		2011		2012		2013		2014		June 30 2015
	(Rand millions)
Current account
Merchandise exports (f.o.b.)(2)		609,357		719,445		753,975		868,701		941,171		470,453
Net gold exports(3)		59,499		75,298		71,050		63,887		62,655		32,140
Service receipts		117,493		126,185		144,789		162,183		182,814		92,717
Income receipts		34,099		38,118		48,501		64,441		82,235		61,441
Less: Merchandise imports (f.o.b)(2)		609,112		743,756		856,570		1,000,929		1,072,464		516,887
Less: Payments for services		143,121		150,929		155,243		174,162		184,828		96,112
Less: Income payments		92,698		115,449		136,837		157,229		183,779		97,779
Current transfers (net receipts (+))(4)		-16,762		-14,199		-31,369		-30,666		-34,448		-17,202
Balance on current account		-41,245		-65,287		-161,704		-203,774		-206,644		-71,229
Capital transfer account (net receipts (+))		225		241		239		243		236		120

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											For the six months ended June
	2010		2011		2012		2013		2014		2015
Financial account
Net direct investment (Inflow (+)/outflow (-))(4)		27,171		32,673		12,900		15,942		-13,297		-27,411
Net incurrence of liabilities(5)		26,617		30,808		37,428		80,138		61,994		-16,152
Net acquisition of financial assets(6)		554		1,865		-24,528		-64,196		-75,291		-11,259
Net portfolio investment (Inflow (+)/outflow (-))		74,502		32,625		84,098		57,978		49,494		78,707
Net incurrence of liabilities		107,876		86,394		117,706		69,490		73,748		94,022
Equity and investment fund shares		42,213		-26,577		-5,239		8,377		26,826		71,496
Debt securities		65,663		112,971		122,945		61,113		46,922		22,526
Net acquisition of financial assets		-33,374		-53,769		-33,608		-11,512		-24,254		-15,315
Equity and investment fund shares		-22,842		-37,290		-21,015		-10,578		-14,721		-10,530
Debt securities		-10,532		-16,479		-12,593		-934		-9,533		-4,785
Net financial derivatives (Inflow (+)/outflow (-))		0		13,139		14,378		7,478		16,409		-2,803
Net incurrence of liabilities		0		-245,062		-213,869		-188,354		-194,842		-146,944
Net acquisition of financial assets		0		258,201		228,247		195,832		211,251		144,141
Net other investment (Inflow (+)/outflow (-))		-14,238		20,162		70,824		53,663		119,805		-25,472
Liabilities		7,899		34,040		69,735		50,412		146,569		9,249
Assets		-22,137		-13,878		1,089		3,251		-26,764		-34,721
Reserve assets (Increase (-)/decrease (+))(7)		-31,307		-32,703		-8,955		-4,658		-16,602		13,674
Balance on financial account		56,128		65,896		173,245		130,403		155,809		36,695
Memo item: Balance on financial account excluding reserve assets		87,435		98,599		182,200		135,061		172,411		23,021
Unrecorded transactions(8)		-15,108		-850		-11,780		73,128		50,599		34,414
Memo item: Balance on financial account excluding reserve assets including unrecorded transactions		72,327		97,749		170,420		208,189		223,010		57,435

Notes:—

1. Data for the previous four years are preliminary and subject to revision.

2. Published customs figures adjusted for balance-of-payments purposes.

3. Commodity gold. Before 1981 net gold exports comprised net foreign sales of gold plus changes in gold holdings of the South African Reserve Bank and other banking institutions.

4. A net incurrence of liabilities (inflow of capital) is indicated by a positive (+) sign. A net disposal of liabilities (outflow of capital) is indicated by a negative (-) sign. A net acquisition of assets (outflow of capital) is indicated by a negative (-) sign. A net disposal of assets (inflow of capital) is indicated by a positive (+) sign.

5. Investment by foreigners in undertakings in South Africa in which they have individually or collectively in the case of affiliated organisations or persons at least 10 per cent of the voting rights.

6. Investment by South African residents in undertakings abroad in which they have at least 10 per cent of the voting rights.

7. Foreign-currency liabilities of the Reserve Bank with non-resident institutions and loans from the IMF are included in the calculation of reserve assets. An increase in reserve assets is indicated by a negative (-) sign and a decrease is indicated by a positive (+) sign.

8. Transactions on the current, capital transfer and financial accounts.

Source: SARB.

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Current Account

South Africa’s trade patterns and volumes changed notably during the past decade. These changes were brought about by, among other factors, uneven growth performance of the country’s most important trading-partner countries in the aftermath of the most recent recession, substantial infrastructure development projects and a number of trade agreements concluded to promote international trade.

Notwithstanding various policy measures to enhance external competitiveness, to promote trade, and to raise the country’s growth performance, the South African economy has become more dependent on surplus saving from the rest of the world to finance the much-needed increase in gross fixed capital formation. The country’s import penetration ratio (i.e., the extent to which the country relies on merchandise imports to satisfy domestic expenditure) increased sharply between 2003 and 2008 before receding temporarily in 2009. Subsequently, this ratio regained its upward momentum and almost reached the peak of 2008 in the first half of 2015.

Owing to stronger growth in import volumes surpassing that of merchandise exports, the trade balance switched from a surplus in 2003 to a deficit in subsequent years up to 2008. The trade balance temporarily switched back to a surplus from 2009 to 2011 due to lower domestic demand before moving into a deficit in 2012 and the subsequent years. During this period, the relatively slower growth in the volume of merchandise exports was partly countered by favourable terms of trade, which trended upward from 2001 to 2011. Since 2012, however, the terms of trade has been weakening before moving broadly sideways from 2014 to the first half of 2015.

The value of merchandise exports advanced steadily from 2003 up to the first half of 2015 with a brief interruption in 2009. The increase in export proceeds could largely be attributed to higher Rand prices of merchandise exports along with a slower increase in export volumes over the period. Notwithstanding the dwindling volume of net gold exports, domestic gold producers benefited from a surge in the international price of gold since 2006. Further to demand and supply conditions, the price of gold benefited during the past few years from the ongoing uncertainty in global financial markets, as well as geopolitical tensions. The price of gold on the London market, which averaged US$310 per fine ounce in 2002, rose steadily to US$1,668 per fine ounce in 2012, before recording declines in the next two years. In Rand terms, the price of gold advanced for the most part at an even faster pace due to the depreciation in the exchange value of the Rand over the period, declining marginally in 2013 before increasing slightly again in 2014. The upward trend in the US-dollar price of gold, however, lost momentum in late 2012 and recorded declines in the next two years, partly due to the expectations of less buoyant global demand and lower inflation.

105

Owing mainly to strong domestic demand, the value of merchandise imports increased at a steady pace during the period of 2010 to 2014 after having contracted by no less than 24.5% in 2009. Although manufactured goods remained the largest component of merchandise imports in value terms, it declined as a ratio of total merchandise imports, from 73.9% in 2003 to roughly 67% in 2012 and the subsequent two years. The three main subcategories of manufactured imports, which jointly account for roughly 75% of the total import value of manufactured goods, are machinery and electrical equipment, vehicles and transport equipment, and chemical products.

The deficit on the services, income and current transfer account of the balance of payments widened by 1.9% in 2014. Large increments in dividend receipts during 2012 and 2013 cushioned the shortfall from deteriorating further. Dividend receipts displayed sturdy annual growth rates of around 51% in both years which signaled a pick-up in global economic activity alongside a weaker exchange rate of the Rand. Contrary to the benefit of dividend receipts, dividend payments continued to escalate further during 2014—the level in the fourth quarter exceeded an all-time high mark attained in 2007. The rise in gross dividend payments can partly be attributed to liquidity requirements of parent companies residing abroad.

Higher receipts pertaining to financial and insurance services as well as other business and miscellaneous services resulted in a marginal improvement in net payments for “other services”. Moderate net purchases of Rand-denominated government debt contributed to interest payments improving from 27% in 2013 to 16.3% in 2014. Furthermore, travel receipts continued to grow while travel payments remained relatively unchanged.

The absence of the extraordinary large dividend receipts in the second quarter of 2015 together with a decline in travel receipts caused the deficit of the overall account to widen from R117 billion in the first quarter to R138 billion in the second quarter. Net payments for “other services” were contained somewhat as gross payments to non-residents for technical-related services contracted.

Financial Account

Sentiment in global financial markets in 2011 and the first half of 2012 was dominated by uncertainty about the outcome of the sovereign debt crisis in the eurozone. Furthermore, the second half of 2011 was characterised by the downgrading of the sovereign debt of the U.S., Japan and Italy, and negotiations about the bailout of, and adherence to austerity measures by, some peripheral countries in the eurozone. Simultaneously, the banking system in Europe continued to remain fragile, inhibiting liquidity and restricting bank lending to the real economy. As a result, capital flows from advanced economies to emerging-market economies shrank considerably in the second half of 2011. In addition, tension in the Middle East and the subsequent rise in international crude oil prices raised concerns about the prospects for global economic growth. The annual cumulative capital inflows into South Africa were higher in 2011 than those recorded in 2010 as a whole. The total financial flows amounted to R131.2 billion in 2011. In the first half of 2012, the inflows on the financial account including unrecorded transactions amounted to R98.5 billion despite the downgrading of the sovereign debt of six European countries and certain Spanish banks in May.

The South African economy continued to attract foreign capital inflows during the first half of 2013. Including unrecorded transactions, the net inward movement of capital amounted to R94.9 billion in the first half of 2013. This sizeable inflow of foreign capital occurred mainly in the first quarter against the backdrop of interest rate differentials with the mature economies which continued to favour South Africa. When the U.S. Federal Reserve indicated in the second quarter of 2013 that it could start tapering its accommodative monetary policy measures by slowing asset purchases towards the end of the year, it negatively influenced capital flows into emerging-market debt securities. The negative sentiment among foreign investors partly arose from uncertainty regarding the pace at which monetary stimulus measures would be reduced as well as the extent to which these policy actions could weaken growth in emerging-market economies. Net capital inflows into South Africa slowed in the second quarter of 2013 as a result of lower-than-expected first-quarter economic growth data, exchange-rate volatility and a decline in commodity prices.

106

Since the commencement of the tapering of bond purchases by the Federal Reserve in late 2013, a number of emerging-market economies, including South Africa, experienced heightened volatility in financial and foreign-exchange markets as international investors reconsidered their exposure to assets in these markets. In addition, international credit rating agencies downgraded the sovereign credit rating of the long-term foreign currency-denominated debt of some emerging market economies in the first half of 2014. Notwithstanding these developments, the financial account of South Africa’s balance of payments proved to be fairly resilient, recording a net inflow of foreign capital to the value of R43.2 billion in the second quarter of 2014, a magnitude almost similar to that recorded in the first quarter.

Global financial markets continued to be volatile in the second quarter of 2015, affected by various factors and characterised by phases of alternating ‘risk-off’ and ‘risk-on’ trading sprees. Among the factors influencing sentiment were the continued strengthening of the US economy along with expectations of an imminent interest rate increase in the second half of 2015, the intensifying Greek debt crisis, the slump in the Chinese stock market as well as the further weakening of commodity prices. Domestically, relatively sluggish economic growth in the first half of 2015 amid ongoing electricity-supply disruptions and other structural impediments dampened international investors’ sentiment towards acquiring domestic financial assets. After having registered a capital inflow of R33.1 billion in the first quarter of 2015, the financial account of the balance of payments (including reserve assets but excluding unrecorded transactions) recorded a much smaller inflow of R3.6 billion in the second quarter. A significant outflow of capital was evident in the other investment category, despite the continuing injection of liquidity in Europe and Japan. However, on a net basis, direct and especially portfolio investment registered capital inflows in the second quarter of 2015.

The following table sets forth capital movements into and out of South Africa for the periods indicated.

Financial account ⁽¹⁾

Rand (million)											For the six months ended June
	2010		2011		2012		2013		2014		2015
Net incurrence of liabilities2
Direct investment3		26,617		30,808		37,428		80,138		61,994		-16,152
Public corporations		0		0		0		0		0		0
Banking sector		-335		-305		1,970		20,160		1,121		905
Private sector		26,952		31,113		35,458		59,978		60,873		-17,057
Portfolio investment		107,876		86,394		117,706		69,490		73,748		94,022
Monetary authorities		0		0		0		0		0		0
Public authorities		60,239		86,337		118,611		61,489		51,563		6,411
Public corporations		7,790		24,323		8,906		8,320		2,613		15,256
Banking sector		4,070		-2,627		-4,221		2,979		7,309		6,133
Private sector		35,777		-21,639		-5,590		-3,298		12,263		66,222
Financial derivatives		0		-245,062		-213,869		-188,354		-194,842		-146,944
Banking sector		0		-245,062		-213,869		-188,354		-194,842		-146,944
Other investment		7,899		34,040		69,735		50,412		146,569		9,249

107

Monetary authorities4	621	549	1,646	953	4,483	1,594
Public authorities	-2,320	-2,929	-3,646	-1,763	-4,210	-1,890
Public corporations	12,145	16,647	20,004	12,765	16,832	6,090
Banking sector	6,701	1,355	45,060	16,964	122,811	-15,072
Private sector	-9,248	18,418	6,671	21,493	6,653	18,527
Special Drawing Rights	0	0	0	0	0	0
Net acquisition of financial assets5
Direct investment6	554	1,865	-24,528	-64,196	-75,291	-11,259
Public corporations	-1,008	-131	0	-110	0	0
Banking sector	12	-164	-117	28	11	18
Private sector	1,550	2,160	-24,411	-64,114	-75,302	-11,277
Portfolio investment	-33,374	-53,769	-33,608	-11,512	-24,254	-15,315
Public corporations	0	0	0	0	0	0
Banking sector	-5,244	4,294	-245	13,608	4,697	-3,251
Private sector	-28,130	-58,063	-33,363	-25,120	-28,951	-12,064
Financial derivatives	0	258,201	228,247	195,832	211,251	144,141
Banking sector	0	258,201	228,247	195,832	211,251	144,141
Other investment	-22,137	-13,878	1,089	3,251	-26,764	-34,721
Monetary authorities7	-1	6	0	0	0	0
Public authorities	1,786	1,981	1,659	0	0	0
Public corporations	-517	-2,425	-187	-3,895	1,284	-1,254
Banking sector	-29,584	-5,081	9,832	14,216	-14,659	-23,132
Private sector	6,179	-8,359	-10,215	-7,070	-13,389	-10,335
Reserve assets8	-31,307	-32,703	-8,955	-4,658	-16,602	13,674

Notes: —

1. Identified capital movements.

2. A net incurrence of liabilities (inflow of capital) is indicated by a positive (+) sign. A net disposal of liabilities (outflow of capital) is indicated by a negative (-) sign.

3. Investment by foreigners in undertakings in South Africa in which they have individually or collectively in the case of affiliated organisations or persons at least 10 per cent of the voting rights.

4. These transactions comprise the liabilities of the South African Reserve Bank and the Corporation for Public Deposits.

5. A net acquisition of financial assets (outflow of capital) is indicated by a negative (-) sign. A net disposal of financial assets (inflow of capital) is indicated by a positive (+) sign.

6. Investment by South African residents in undertakings abroad in which they individually or collectively in the case of affiliated organisations or persons have at least 10% of the voting rights.

108

7. Including the long-term assets of the South African Reserve Bank and the Corporation for Public Deposits.

8. Foreign-currency liabilities of the Reserve Bank with non-resident institutions and loans from the IMF are included in the calculation of reserve assets. An increase in reserve assets is indicated by a negative (-) sign and a decrease is indicated by a positive (+) sign.

Source: SARB.

The following table sets forth total foreign direct investment by South African entities and total foreign direct investment in South Africa by foreign entities for the periods indicated. Data beyond 2013 is not yet available.

Foreign Direct Investment

	2009		2010		2011		2012		2013
	Rand (million)
South African foreign direct investment
Europe		195,067		229,767		368,858		429,369		495,681
Africa		120,080		126,776		185,518		200,407		232,292
Americas		51,354		48,994		72,082		84,249		103,572
Asia		129,238		122,242		127,313		200,619		478,849
Oceania		22,907		24,153		36,475		35,586		39,359
Other		138		138		27		27		102
Total		518,784		552,070		790,273		950,257		1,349,855
Foreign direct investment in South Africa
Europe		550,652		762,690		929,414		1,085,479		1,252,027
Americas		103,803		121,603		115,807		132,882		135,534
Asia		762,690		929,414		1,015,324		115,919		143,558
Africa		121,603		115,807		129,522		42,670		45,575
Oceania		96,041		99,572		98,119		12,602		18,371
Other		195		202		469		470		695
Total		1,023,982		1,190,799		1,297,901		1,390,022		1,575,760

Source: SARB.

South Africa’s gross external debt decreased marginally from US$145.1 billion at the end of December 2014 to US$144.4 billion at the end of March 2015; this was the first decline to be recorded since June 2013. The country’s outstanding debt decreased mainly due to the repayment of foreign currency-denominated short-term debt obligations by the domestic banking sector and valuation adjustments following the strengthening of the US dollar against most major currencies. Expressed in Rand terms, the country’s external debt advanced from R1,679 billion at the end of December 2014 to R1,762 billion at the end of March 2015.

Foreign currency-denominated debt decreased from US$67.5 billion at the end of the fourth quarter of 2014 to US$67.0 billion at the end of the first quarter of 2015, despite the issuance of a US$1.25 billion bond by a parastatal over the period. South African parastatals have been active in issuing international bonds to raise funding for infrastructural projects.

Relative to the country’s total foreign currency-denominated debt, the ratio of short-term foreign currency-denominated debt (i.e. debt with an original maturity of less than one year and longer-term foreign currency-denominated debt maturing within the next twelve months) deteriorated from 46.7 per cent at the end of December 2014 to 47.0 per cent at the end of March 2015.

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Foreign Currency-Denominated Debt of South Africa⁽¹⁾

	As of December 31,								As of March 31,
	2010		2011		2012		2013		2014		2015
	Rand (million)(2)
Foreign-currency-denominated debt
Public sector		43,310		62,014		76,482		94,584		95,040		88,696
Monetary sector(3)		68,118		80,595		117,323		126,772		212,425		216,316
Non-monetary private sector		114,653		133,916		134,045		191,513		210,377		223,723
Bearer bonds and notes		109,044		169,883		185,330		227,710		262,833		288,320
Long-term loans		—		—		—		—		—		—
Total foreign-currency-denominated debt		335,125		446,408		513,180		640,579		780,675		817,055

Notes: —

(1) Excluding blocked Rand accounts, ordinary and non-redeemable preference shares, quoted domestic debentures and quoted domestic loan stock.

(2) Valued at middle-market exchange rates as of the end of period.

(3) Including lending to other sectors.

Source: SARB.

Reserves and Exchange Rates

Since the abolition of the Financial Rand System and the dual exchange rate in 1995, South Africa has had a unitary market-determined exchange rate that applies to both current and capital transactions between residents and non-residents.

In 2012 and 2013, the currencies of most emerging-market economies were adversely affected by the uncertainty emanating from unresolved economic issues in the eurozone countries, and the unsatisfactory and partial solution to the reduction of the fiscal deficit in the U.S.. Over and above these factors, lower international prices of some key export commodities, concerns about the sustainability of the financing of South Africa’s current-account deficit and ongoing tension in the domestic labor market have put further pressure on the domestic currency which, in the first quarter of 2013, declined, on balance, by 5.7% against a basket of trading-partner currencies.

Investor sentiment towards emerging-market economies and in particular South Africa improved somewhat towards the end of the first quarter of 2014 as some previously pressing issues changed nature and lowered the perceived risks associated with emerging-market assets. A large part of the second quarter of 2014 was marked by a strengthening in the currencies of many emerging-market economies amid apparent more stable global financial markets and indications that the Chinese authorities are committed to boosting economic activity in China. The ongoing efforts to boost the economic recovery in the euro area in the second quarter of 2014 furthermore buoyed the currencies of many emerging-market economies over the period. In July and August 2014, however, the Rand regained some vigour against major currencies supported by a rise in the policy rate, the announcement of the end of the strike in the manufacturing sector and the weaker-than-expected economic data from the US.

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In the second quarter of 2015, the South African Rand, along with other emerging-market and commodity-linked currencies, depreciated against major currencies, including the euro and the British pound. The US dollar started the quarter weaker amid softer US data releases, particularly non-farm payrolls data and GDP data for the first quarter. However, the US dollar regained strength as US economic prospects improved later in the quarter, supporting the case for monetary policy normalisation. Emerging-market and commodity-linked currencies were also stressed by heightened risk aversion associated with the Greek debt crisis and a slowdown in economic growth in China. Following a 0.2% decline in the first quarter of 2015, the nominal effective exchange rate of the Rand declined further by 1.8% in the second quarter. In April 2015, the domestic currency appreciated by 3.5% against the US dollar, mainly due to broad-based US dollar weakness. However, during the months of May and June, the Rand depreciated by 3.0% and 0.7%, respectively, against the US dollar. The Rand’s weakness could be attributed to weak domestic economic fundamentals such as subdued economic growth and the sustained high level of unemployment over the period.

Fears of credit-rating downgrades, as well as Eskom’s continued power rationing, also undermined sentiment towards the Rand. However, decisions by credit-rating agencies Fitch and Standard & Poor’s to affirm South Africa’s credit ratings curbed the Rand’s decline, as did the narrower-than-expected first-quarter current-account deficit as well as the better-than-expected trade balance for the second quarter of 2015. The domestic currency unit weakened further in July and August 2015 amid a sell-off in the Chinese equity market. Concerns abound about the strength of the Chinese economy following the devaluation of the Chinese yuan, adding further downward pressure on commodity-linked currencies.

The following table sets forth, for the periods indicated, the exchange rate of the Rand per U.S. Dollar.

Rand

(against the U.S. Dollar)

Year	Low		High		Average		Period End
2009		7.2439		10.5948		8.4372		7.3721
2010		6.6224		7.9704		7.3222		6.6224
2011		6.5962		8.5423		7.2531		8.1319
2012		7.4777		8.9432		8.2099		8.4838
2013		8.4478		10.4849		9.6502		10.4675
2014		10.2815		11.7415		10.8444		11.5719
January 2015		11.3966		11.7264		11.5658		11.5517
February 2015		11.2955		11.7872		11.5759		11.5039
March 2015		11.7144		12.4175		12.0644		12.2020
April 2015		11.7889		12.2750		12.0111		11.7889
May 2015		11.7938		12.1545		11.9691		12.1545
June 2015		12.1146		12.5740		12.3016		12.2406
July 2015		12.1849		12.7397		12.4515		12.7397
August 2015		12.6402		13.3406		12.9118		13.3406
September 2015		13.1917		14.0139		13.6073		13.8143
October 2015		13.0422		13.9086		13.5002		13.8167
November 2015		13.7823		14.3860		14.1257		14.3856

Source: South African Reserve Bank.

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Change in Reserves

South Africa’s overall balance-of-payments position was in surplus in the amount of R32.7 billion in 2011, following an improvement of R31.3 billion in 2010. In 2012, the country’s net international reserves rose by R9.0 billion and by a further R4.7 billion in 2013. The gross gold and other foreign-exchange reserves, measured in U.S. Dollar, increased from US$48.9 billion at the end of 2011 to US$50.7 billion at the end of 2012, but declined to US$49.6 billion at the end of 2013. The country’s foreign reserves declined further to US$49.1 billion by the end of September 2014. Expressed in Rand terms, gross gold and other foreign exchange reserves increased from R430.9 billion at the end of December 2012 to R520.2 billion at the end of 2013 to R556.8 billion at the end of September 2014, on account of the depreciation of the exchange rate of the Rand. The ratio of imports covered by reserves improved marginally from 19.6 weeks of import cover at the end of December 2012 to 20.7 weeks at the end of December 2013, before decreasing to 19.5 weeks at the end of June 2014.

South Africa’s international reserves decreased further by R1.4 billion in the second quarter of 2015 after having declined by R12.3 billion in the first quarter. Measured in US dollar, the value of South Africa’s gross gold and other foreign reserves (i.e. the international reserves of the Bank before accounting for reserve-related liabilities) increased from US$46.4 billion at the end of March 2015 to US$46.8 billion at the end of June as the impact of a weaker US dollar was partially offset by a decline in the US dollar price of gold. The country’s gross reserves subsequently decreased to US$46.1 billion at the end of August 2015. South Africa’s international liquidity position increased from US$41.3 billion at the end of March 2015 to US$41.6 billion at the end of June before decreasing to US$41.2 billion at the end of August. The level of import cover (i.e. the value of gross international reserves relative to the value of imports of goods and services as well as income payments) increased from 4.6 months at the end of March 2015 to 4.8 months at the end of June 2015.

The following table sets forth the gold and foreign exchange reserves of South Africa in each of the periods indicated.

Foreign Exchange Reserves

	For the year ended December 31,										As of September 30,
	2009		2010		2011		2012		2013		2014		2015
	Rand (million)
SARB gold reserves(1)		32,753		37,492		51,076		56,982		50,621		55,887		62,593
Foreign exchange reserves
SDRs(2)		20,613		18,262		22,284		23,873		29,603		32,119		37,587
Other(3)		239,335		234,872		324,459		350,087		439,965		480,518		539,875
Gross gold and other foreign reserves		292,701		290,626		397,819		430,942		520,189		568,524		640,055

Notes: —

(1) Until March 5, 2005 gold reserves were valued at 90% of the last ten London fixing prices preceding end of period. From March 6, 2005, gold reserves are valued at market price taken at 14:30 on each valuation date.

(2) SDRs.

(3) Non-gold reserves are valued at the middle market exchange rate applicable at end of period.

Source: SARB.

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PUBLIC FINANCE

Background

South Africa’s public finances comprise of all finances in the three spheres of government, namely, national, provincial, and local government. Finances in the national and provincial spheres of government consist of all transfer payments from the national government while those in the local government sphere of government consist of transfer payments from national government as well as own revenue.

The Division of Revenue Act (DoRA) provides for the equitable division of revenue raised nationally among the national, provincial and local spheres of government and the responsibilities of all three spheres pursuant to such division; and to provide for matters connected therewith. The objects of DORA are to: (a) provide for the equitable division of revenue raised nationally among the three spheres of government; (b) promote predictability and certainty in respect of all allocations to provinces and municipalities, in order that provinces and municipalities may plan their budgets over a multi-year period and thereby promote better coordination between policy, planning and budgeting; and (c) promote transparency and accountability in the resource allocation process by ensuring that all allocations are reflected in the budgets of provinces and municipalities and by ensuring that the expenditure of conditional allocations is reported on by the receiving provincial departments and municipalities. Government finances are presented in two ways, each highlighting key aspects of the budget. The main budget determines national government’s borrowing requirement. It consists of two elements. The first, appropriations by Parliament through budget votes, are mainly for national departments and include transfers to provinces, local government and public entities. The second, direct charges against the National Revenue Fund, includes the provincial equitable share and debt service costs, as well as the salaries of judges and public representatives. The consolidated budget provides a fuller picture of government’s contribution to the economy. It takes into account the main budget as well as spending of provinces, social security funds and public entities financed from their own revenue.

Provincial budgets are largely financed by the provincial equitable shares and conditional grants from the main budget. But provinces supplement these funds with their own revenues, such as gambling taxes, hospital fees and sales of goods and services. Also excluded from the consolidation is expenditure by metros and other large municipalities, which is financed from their own revenue, such as property rates and services charges. The consolidated budget includes 187 public entities. These include large entities such as South African National Roads Agency Limited, the Passenger Rail Agency, the South African Revenue Services and agencies that provide bulk water infrastructure. Public entities receive some transfers from the main budget but are also financed from own revenue. State-owned companies that function as standalone operations largely on a commercial basis, such as Eskom and Transnet, are not included in the consolidated accounts. Social security funds include Unemployment Insurance Fund, compensation funds and the Road Accident Fund. They are financed mainly by statutory levies or contributions but receive some transfers from the main budget.

National, provincial and local governments are responsible for delivering public services. Some of these services are the exclusive responsibility of one level of government, while others — known as concurrent functions — are shared. Nationally raised revenue is divided with the aim of providing for appropriate funding at each level of government — for example by taking into account their service delivery responsibilities and other sources of revenue available to them. In the 2016/17 fiscal year, national government departments are to be allocated 47.7% of available funds after debt costs, and the contingency reserve has been provided for. Provincial government is to be allocated 43.1% of available funds, mainly for education, health and social welfare. Local government is to receive 9.2% of the available funds, primarily for the provision of basic services to low income households. Most municipalities fund the majority of their spending through charges and taxes.

Between the 2009/10 and 2016/17 fiscal years, there was an allocation of R6.1 trillion for the three spheres of government. National government accounted for R2.9 trillion (47.79%), provincial government R2.7 trillion (43.56%) and local government R650 billion (8.65%). Equitable share accounted to R313 million (48.60%) of the total local government allocation.

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General government finances in South Africa represent a consolidation of the following: the National Budget; the budgets of the nine provincial governments; extra-budgetary accounts and funds; social security funds; and the budgets of local authorities. The National Government, provincial governments, social security funds, Reconstruction and Development Program (RDP) accounts and extra-budgetary accounts are jointly referred to in this document as the “Consolidated Government Budget.” The Consolidated Government Budget includes transfer payments to local governments but does not constitute a consolidation of local government accounts. Municipalities, universities, polytechnics and various extra-budgetary funds derive substantial shares of their revenue from fees and charges or other sources. The Consolidated Government Budget presents a broader measure of government finances in South Africa. The public sector borrowing requirement shows the budget balance for the entire public sector, including general government and the non-financial public enterprises.

The borrowing powers of provincial and local governments are regulated by law. Provinces and municipalities generally may borrow for capital projects only. Under the Constitution, provinces have their own limited taxing powers and they are responsible for preparing their own budgets and for ensuring prudent financial management at the provincial level. Provinces receive agreed shares of nationally collected revenue and a framework for ensuring an equitable division to local government. The National Treasury introduced generally recognized accounting practices and uniform treasury norms and standards, the prescription of measures to ensure transparency and expenditure control in all spheres of government, and operational procedures for borrowing, guarantees, procurement and oversight over various national and provincial revenue funds.

In terms of Section 230 of the Constitution, provinces are allowed to take out loans for either current expenditure, in the form of a bridging loan that must be repaid within a 12-month period, or capital projects. The Borrowing Powers of Provincial Governments Act of 1996 (Borrowing Powers Act) lists the conditions under which a province may take out loans for capital projects. The Act stipulates that loans must be approved by a loan coordinating committee, which is chaired by the Minister of Finance. Loans may be taken out as direct borrowing from the national government or from private banks and financial institutions. Provinces may not take out loans in foreign currency unless they are specifically authorized to do so by the Minister of Finance. As provinces are accountable in their own right, the National Government does not guarantee loans taken out by provincial governments and will not bail out any province that is unable to repay its loans.

The PFMA regulates the National Government’s financial administration and outlines the various roles of the National Treasury, the Minister of Finance (as head of the National Treasury), the National Revenue Fund, accounting officers, auditors, executive authorities, public entities and other government officials. This legislation also addresses, among other things, regulation of loans, guarantees and other commitments as well as penalties for financial misconduct. Legislation aimed at regulating local government spending, known as the Municipal Finance Management Act of 2003 (MFMA), took effect in July 2004. The legislation seeks to secure sound and sustainable management of the financial affairs of municipalities and other institutions in the local sphere of government, and to establish treasury norms and standards for the local sphere of government.

Municipalities can borrow over the long term to finance capital projects, acquire capital assets or refinance existing debt pursuant to Section 46 of the MFMA. Short-term borrowing (not for more than 12 months) is also possible for operational purposes only. However, the debt needs to be repaid within the financial year in which the debt was incurred pursuant to Section 45 of the MFMA. Furthermore, the Regulatory Framework for Municipal Borrowing (1999) recommends that every municipality should adopt a written debt policy when planning to issue debt. The policy assists in determining borrowing limits that a municipality can cope with. The MFMA further requires that all municipalities seek written comments from the relevant provincial and National Treasury in terms of proposed debt.

As of June 30, 2015, the total balance on borrowing for all municipalities was R48.8 billion. This includes long term loans of R31.8 billion, short term non-marketable bonds of R4.6 billion, and long term marketable bonds of R11.9 billion. The balance represents other short and long term financing instruments. Private sector banks contributed R28.9 billion (59.2%) of the total borrowing, followed by the Development Bank of Southern Africa at R10.7 billion (21.9%), with the remaining R9.2 billion (18.9%) from INCA and other institutions. New borrowing constituted R47.7 billion (97.7%) with the remainder coming from conversion or consolidation of existing borrowing.

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The Constitution provides that the provincial and local governments are entitled to such percentages of nationally raised revenue as may be determined by Parliament (allocated among the provinces on an equitable basis). Allocations through this “local government equitable share” (LGES) formula are primarily based on how many poor households a municipality provides services to. The formula also makes provision for a contribution towards the administration and governance costs of running a municipality. Allocations also take account of the greater ability of some municipalities to cross-subsidize services to their poor households and less funding is allocated to these (relatively wealthy) municipalities. The new LGES formula which was implemented in the 2013/14 financial year, also taking into account the 2011 census figures, provides a subsidy of R275 for every household with a monthly income less than R2,300, which is about 59% of all households. The previous formula for the local government equitable share targeted 47% of households. Revisions are under way that take into account varying local circumstances: some municipalities have difficulty identifying which households are eligible for free services or do not yet maintain accurate records of service provision. While census data indicates steady progress towards universal access to electricity and clean water, achievement of free basic service standards still has some way to go.

The budgets of the provincial governments are financed through such nationally collected revenue, together with other allocations or grants from the National Government, the provinces’ own revenue collections, unspent balances from previous fiscal years and proceeds from loans for capital outlays. The Constitution provides for the assignment of taxation powers to provinces within a national, regulated framework that is intended to ensure that all taxes are consistent with national economic policy. The Provincial Tax Regulation Process Act of 2001 provides a framework through which provinces can introduce and collect certain fees and taxes. These include automobile license and traffic fees, hospital fees, gambling fees and other user charges and levies. The Financial and Fiscal Commission, a constitutionally established body, has the responsibility of monitoring and overseeing intergovernmental fiscal relations. Additionally, the Intergovernmental Fiscal Relations Act of 1997 established the Budget Council and the Budget Forum to consider intergovernmental budget issues.

Progress continues to be made in extending access to electricity, water, sanitation and refuse removal services. The Government’s aim is to ensure that all citizens receive at least a basic level of amenities. Drawing on international benchmarks, minimum standards of 50kWh of free electricity and 6,000 liters of water per month per household have been adopted. However, the level of free services provided to poor households varies, depending on local circumstances and municipal capacity. The national budget contributes to the financing of household amenities through the local government equitable share, which is mainly allocated for provision of free basic services. There has been a significant growth in allocations to the local government equitable share in recent years, from R20 billion in 2009/10 to R52.9 billion in 2016/17.

The new local government equitable share formula which was implemented in the 2013/14 financial year, also taking into account the 2011 census figures, provides a subsidy of R293 in 2014/15 for every household with a monthly income less than R2,300, which is about 59% of all households. The previous formula for the local government equitable share targeted 47% of households. This threshold is not an official poverty line or a required level to be used by municipalities in their own indigence policies. If municipalities choose to provide fewer households with free basic services than they are funded for through the local government equitable share, then their budget documents should clearly state the reasons for that and whether they consulted with the community on that policy. While census data indicates steady progress towards universal access to electricity and clean water, achievement of free basic service standards still has some way to go.

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The 2011 Census shows that there has been considerable population growth and internal migration over the past decade. This new data assists in improving the targeting of municipal funding. To account for the growth in households each year, the number of households per municipality is updated annually based on the growth in households reflected in each province in the General Household Survey conducted by Statistics South Africa. The new equitable share formula reflects these changes and makes allocations for free basic services more transparent. Municipalities need to prioritize funding for the provision and maintenance of these services. The funding and provision of infrastructure are also important requirements for continued improvement in basic service delivery. It is not possible to give households free access to services if the supporting infrastructure – such as water distribution systems – is not in place.

Unemployment Insurance Fund (UIF)

In 2001, the Minister of Labor tabled legislation to strengthen the administration of the UIF, target benefits more effectively to the poor and extend the coverage of the fund. Since the UIF was given an estimated amount of R605 million in 2001 to address its outstanding financial debts, it has been experiencing positive financial performances. The UIF was able to meet its operational expenditure requirement and recorded an operating cash surplus of R11.6 billion in fiscal year 2014. The March 2014 actuarial evaluation indicated that the UIF is in a sound position to meet its cash-flow requirements over the next ten years for a wide range of possible scenarios. The UIF had capital and reserves amounting to R109.4 billion as of March 31, 2014. It is estimated that the UIF’s financial performance surplus prior to reserving over the next three fiscal years will be R15.3 billion in fiscal year 2015, R17 billion in fiscal year 2016 and R19 billion in fiscal year 2017.

The projected increase in the operational surplus is mainly attributable to a revision in the estimates for contributions due to an increase in the earnings threshold or ceiling as well as salary increases of contributors. The Unemployment Insurance Amendment Bill, 2015 is presently going through the South African Parliamentary process and is envisaged to be law by 2016. The key changes introduced by this Bill includes the extension of the period of payment of benefits to the contributor from 8 to 12 months with a flat rate payment after eight months; and allows beneficiaries to claim if they have credits regardless of when they last claimed; extends the period during which dependants may apply for benefits on behalf of a deceased contributor from 6 to 18 months; extends the period in which a contributor can lodge a claim from 6 to 12 months and the date of unemployment is deemed to be the date when the claimant applies for benefits.

The UIF is committed to bringing services closer to its client base in all Provinces and provides services at 125 Department of Labor centers with processing functions and 823 visiting points. A priority for the medium term is the recruitment and re-allocation of appropriate resources to manage the new decentralized business environment. The UIF added 179,689 new employees to its database, raising the total to 8,510,449 registered employees as at fiscal year 2014. A total of 1,526,416 employers are registered with the UIF as at fiscal year 2014, an increase of 61,198 new employers compared to fiscal year 2013. These employers are categorized mainly as commercial, domestic and taxi employers, with the majority in the commercial sector.

In response to the global economic crisis, the UIF (which formed part of the National Government’s Framework for South Africa’s Response to the International Economic Crisis) continues to play a pivotal role in schemes designed to inject funding into job creation and retention. The UIF issued R3.561 billion in placement bonds with the Industrial Development Corporation (IDC) as at the end of fiscal year 2013. The UIF/IDC bond is expected to save and create a combined total of 51,081 UIF paying jobs. In addition to the R1.2 billion committed by the UIF towards the Training Layoff Scheme which is designed to provide support to companies that are in distress due to the economic downturn with training and skills development as important elements of this response. The UIF also earmarked R400 million for the Training of Unemployed UIF beneficiaries to improve their chances of being reintegrated back into the labor market and to Social Plan Funding. During the 2013/14 financial year, three training initiatives were rolled out:

• Training of 3,000 unemployed on End-user computing in collaboration with the Media, Information and Communication Technologies–Sector Education and Training Authority (MICT SETA);

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• Training of 1,000 UIF beneficiaries and unemployed youth on mining-related artisan programs in collaboration with the Mining Qualification Authority; and

• Training 1,500 beneficiaries and unemployed youth in various artisan trades in collaboration with the Manufacturing, Engineering and Related Services SETA (MerSETA).

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Compensation Fund (CF)

The CF supports employees who experience loss of income as a result of injuries, death or disease in the course of employment. Funds are raised through assessed levies on companies.

While the CF remains financially sound with an accumulated surplus of R23 billion as of March 31, 2015, it has experienced administrative inefficiencies and challenges which are being addressed through a turnaround strategy, including the stabilization of the new SAP system for the processing and payment of compensation claims and the upgrading of the Call Centre in order to improve access. The CF registered 225,511 claims and paid benefits to the value of R1.9 billion in fiscal year 2015. The CF recorded a 3% increase in the number of registered employers at the end of fiscal year 2015 with a concomitant increase in revenue. The increase in revenue is attributed to the implementation of the e-Return On Earnings system, a system to help determine employer assessment and premiums based on the number of accidents and claims made so that those with less exposure to diseases and injuries pay less premiums. In response to the dissatisfaction expressed by the public regarding the unjustifiably long turnaround time in processing claims for occupational injuries and diseases, the CF is speeding up the process of restructuring the Fund and upgrading its information technology infrastructure. To ensure equity of access to services and to improve the claims turnaround time, the CF has started the decentralization of its services to all nine provinces in fiscal year 2014. The Compensation Board reviewed existing benefits in fiscal year 2014, increasing the salary ceiling from R312,480 to R332,479 per annum; pension of employees and widow/ers was set at a minimum of R1,350 per month; as well as increases to the monthly compensation pension by 6.4% in addition to 100% purchasing power of the low pension earners.

Road Accident Fund (RAF)

Understanding that there is a need to reform the unlimited liability system of compensation for road accident victims and supported by the reports of the RAF Commission in 2002, the Government set out on a reform path. In 2005, Parliament passed the RAF Amendment Act, which provided for a limited liability scheme to ensure the viability of the Fund. Five years after the promulgation of the RAF Amendment Act, the estimated reduced liability is R12.9 billion. The cabinet approved the strategy for the reform of the RAF in June 2006.

The department of transport is currently working on getting the Road Accident Benefit Scheme Bill to Cabinet for approval to be tabled in Parliament. Whilst the productivity of claims finalised has improved, the RAF continues to receive over 173,000 new claims last year. As a result, outstanding claims fell from 279,912 in 2012/13 to 217,710 in 2014/15. The deficit has increased to R116 billion at the end of 2014/15.

South African Social Security Agency (SASSA)

The South African Social Security Agency derives its mandate from the South African Social Security Agency Act (2004). It became functional in 2006, taking over the mandate of administration and payments of grants from the provincial departments. The core business of the agency is to administer and pay social grants to beneficiaries. Social assistance means assistance or a financial award in the form of grants provided by the National Government to residents who are unable to sustain themselves. The agency is also required to develop and implement policies, programs, standard operating procedures and systems for an efficient and effective social assistance benefits administration system.

Social assistance and welfare services have grown rapidly in recent years. About 16.7 million South Africans receive social grants, up from 2.5 million in 1998. This growth is expected to reach 18.1 million South Africans by 2018/19 due to higher life expectancy and in order to ensure all eligible children younger than two years of age benefit from the grant.

Over the spending period ahead, nearly R13 billion will be added to social assistance budgets to accommodate the increase in beneficiaries and ensure that the value of grants keeps pace with inflation. Social assistance expenditure will remain stable as a percentage of GDP.

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The Budget Process

The National Government’s fiscal year ends on March 31 of each year. The Minister of Finance and National Treasury prepare the Budget with the assistance of the Minister of Finance’s Committee on the Budget and approval of Cabinet. The National Treasury is responsible for the fiscal framework within which the budget is constructed and also coordinates the preparation of expenditure estimates. South Africa ranked third out of 102 countries in the 2015 release of the Open Budget Index by the International Budget Partnership. The survey measures the quality of budget transparency, public participation in the budget processes and institutional oversight. South Africa was one of only four countries that perfomed solidly across all three categories. It was in the top five on measures of transparency and oversight by the legislature and audit institutions, but came out sixth for public participation.

The Minister of Finance presents the National Budget to Parliament in February of each year, with provincial treasuries separately presenting their budgets shortly after the National Budget is proposed. Since the presentation of the 1998-1999 Budget, Parliament has been presented each year with a set of three-year spending plans, but is asked to vote only on the budget for the coming year. Each year’s National Budget is based on certain key economic assumptions regarding, among other things, GDP growth, inflation, employment growth, taxable income, private consumption expenditure, government consumption expenditure, import and export levels and investment.

In addition to presenting expenditure estimates to Parliament, the Minister of Finance is responsible for estimating the revenue that existing taxes and tax rates will raise and for proposing tax amendments, if any. The National Budget then takes the form of an appropriations bill authorising National Government expenditures. The appropriations bill originates in the National Assembly and then goes to the Standing Committee on Appropriations of the National Assembly and the Select Committee on Appropriations of the National Council of Provinces before being debated and finally passed by both houses of Parliament towards the end of the Parliamentary session.

In April 2009, Parliament assented to the Money Bills Amendment Procedure and Related Matters Act of 2009 (the Money Bills Act). The Money Bills Act reconciles Parliament’s legislative and oversight mandate provided for in the Constitution and provides for, amongst others, a procedure to amend money bills before Parliament. In general, the new Money Bills Act is viewed as a legislative milestone that will afford Parliament powers to adjust the National Budget. In exercising its powers Parliament must ensure that: (a) there is an appropriate balance between revenue, expenditure and borrowing; (b) levels of debt and debt interest cost are reasonable; (c) the cost of recurrent spending is not deferred to future generations; and (d) there is adequate provision for spending on infrastructure development, overall capital spending and maintenance. In addition, Parliament must consider the short, medium and long-term implications of the fiscal framework, division of revenue and the long-term growth potential of the economy and the development of the country and must take into account cyclical factors that may impact on the prevailing fiscal position, public revenue and expenditure.

As in the case of the National Budget, the budgets of the provincial governments have been accompanied by three-year expenditure projections since 1999. The MTEF is intended to illustrate forward trends in expenditure priorities and to provide a firmer foundation for fiscal planning and review purposes.

The Minister of Finance is required to indicate each year how the expected deficit between consolidated government expenditure and revenue is to be financed or how any surplus is to be applied. The annual Consolidated Government Budget deficit financing requirement is principally met through the issue of long-term fixed and non-fixed-rate National Government debt in the domestic capital market. The South African bond market is well-developed and highly liquid, and has attracted considerable foreign investor interest. The National Government also borrows from time to time in foreign capital markets, in which case the interest due and final repayment must be repaid in foreign currency.

During the course of each fiscal year, government departments and other spending agencies are held to the spending plans approved in the National Budget by a system of expenditure controls under the direction of the National Treasury. Subsequently, audits of all government accounts provide Parliament and the public with verification of the uses to which public funds have been put. The auditor-general, a constitutionally independent official, supervises this auditing process. Accountability is further promoted by the breakdown of expenditures into “votes” for particular government departments, whose director-generals are the accounting officers responsible for these monies. Further breakdowns into departmental programmes and into so-called economic classification items (for example, employee compensation and payments for capital assets) serve to indicate in more detail the commitment of funds to defined purposes.

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The Treasury Committee, comprising the President, Deputy President, the Minister of Finance, the Deputy Minister of Finance and other Cabinet members who have been assigned the task of assisting the Cabinet in evaluating additional expenditure requests that arise during the course of a budget year, seeks to ensure prudent fiscal management. In order for the Treasury Committee to approve an additional expenditure request, the expenditure must be deemed to be unforeseeable and unavoidable, or to fall within another legally prescribed category to qualify for inclusion in the Adjustments Budget. A contingency reserve is set aside each year of the MTEF to deal with such requests. Such amendments to some elements of the current year’s budget and the Consolidated Budget (in departmental allocations) are made by Parliament in an Adjustments Budget towards the middle of the fiscal year.

Also around the end of October of each year, the Minister of Finance presents the MTBPS. This policy statement outlines the priority policy proposals and the new MTEF that will underpin the next year’s budget.

MTBPS

The 2015 MTBPS sets out the macroeconomic, fiscal and public-expenditure priorities for the medium term. The 2015 MTBPS illustrates a budget framework that seeks to sustain investment, stabilise public debt and maintain funding towards the social priorities of the National Development Plan as expressed in the MTSF. Expenditure growth is expected to outpace inflation by about 1.6%. The framework builds on the commitments made last year to stabilise debt levels, close the primary balance and improve the effectiveness of spending.

In the 2015 MTBPS, the National Treasury projects consolidated budget revenue for fiscal year 2015 to amount to R1,220.8 billion, which is R31.9 billion higher than the Budget 2015 estimate. This is as a result of the upward revisions in non-tax revenue amounting to R28.9 billion (mainly attributed to the R25.4 billion sale of Vodacom shares and higher receipts from other financial transactions) and own revenues for provinces, social security funds and selected public entities by R10.5 billion which offset the R7.6 billion downward revision in gross tax revenue. Taking into account projected underspending, declared unspent money, the 2015 wage settlement agreement with public employees, special appropriations for Eskom and the New Development Bank, and the adjusted state debt cost estimate, the revised estimate of total consolidated expenditure in fiscal year 2015 is R1,378.7 billion. In February 2015, an expenditure of R1,351.0 billion was budgeted for fiscal year 2015. The budget deficit of the consolidated Government for fiscal year 2015 is projected to be 3.8% of GDP, broadly unchanged from the 2015 Budget expectations of 3.9% of GDP. Despite some slippage in the budget deficit projections of 0.7% each in fiscal years 2016 and 2017 compared to the 2015 Budget estimates, the deficit is expected to decline to 3% of GDP in fiscal year 2018.

The audited tax revenue outcome of R986.3 billion for fiscal year 2014 was R7.4 billion lower than the original budget estimate in February 2014 but R7.3 billion higher than the revised 2015 Budget Review estimate. Tax revenue was higher than expected compared to the 2015 Budget target largely as a result of strong growth in personal income tax due to less-than-full fiscal drag relief and fairly high wage growth, particularly for high-income earners as well as large one-off payments arising from the disposal of share options.

In order to maintain the health of the public finances the Government implemented the medium-term fiscal policy package in the 2015 Budget and is focused on following through with its policies. In recent months, two risks identified in the 2015 Budget materialised: a public-sector wage agreement significantly above inflation and a deterioration in economic performance. The increases in the wage bill were funded through a drawdown of the 2015/16 contingency reserve of R5 billion. The projected contingency reserves for the following two years have also been reduced by R12.5 billion and R36 billion, respectively, as a result of the wage agreement. Despite these challenges, the government expects to achieve its targets, although there is limited room for additional unexpected events. The central fiscal objective over the medium term is to stabilise the growth of debt as a share of GDP. Main budget expenditure remained within the limits set out for the 2014 fiscal year and the Government is on track to stay within the spending ceiling in the current year. Debt is stabilising as a share of GDP. Despite some slippage in medium-term budget deficit projections, the deficit is expected to continue to narrow. The 2015 MTBPS proposes a new long-term fiscal guideline to align the spending ceiling explicitly with the long-term path of economic growth. The guideline builds on the Government’s countercyclical approach to sustain development over the long term. This guideline gives expression to the fiscal principles of countercyclicality and debt sustainability and will ensure that spending grows at a stable rate over the business cycle.

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The 2015 MTBPS makes a technical modification to the spending ceiling. Payments that are directly and fully financed by dedicated revenue flows authorised by specific legislation, such as the skills development levy, will be excluded from the spending ceiling, as will payments that arise from technical adjustments to the value of assets and liabilities. As a result, the spending ceiling will differ slightly from non-interest expenditure.

Given the weaker economic outlook and downward revisions to the in-year estimates, tax revenue collections for fiscal years 2016 and 2017 were revised downwards compared to the 2015 Budget estimates. Projected revenues from corporate income tax and value-added tax have underperformed for the first half of the current fiscal year, and have been revised downwards. Personal income tax collection has been stronger, supported by above-inflation wage settlements and higher marginal tax rates. Over the medium term, gross tax revenue collection is projected to continue growing faster than nominal GDP, but by a narrower margin than in the recent past. This is expected to be largely driven by increases in income tax rates and the fuel levy announced in the 2015 Budget. Over the medium term, government will continue to explore reforms that promote an efficient and progressive tax system, taking into account the recommendations of the Davis Tax Committee. Initiatives already under way include measures to combat base erosion, profit shifting and the misuse of transfer pricing. No specific additional taxes have been implemented as of the date hereof.

Consolidated government expenditure of R1,451.7 billion is proposed for fiscal year 2016, 5.3% more than the revised expenditure estimate for fiscal year 2015. The Government plans for a contingency reserve of R15 billion in 2018/19 to serve as a buffer against economic and fiscal shocks. Spending priorities over the medium term focus on education and skills development, health, social protection, social and economic infrastructure, and support for job creation. Government is projected to close the current deficit in 2015/16, meaning that over the medium term, government will be able to finance part of its capital budget from savings rather than borrowing.

There is a resource allocation of R1,123.2 billion across the three spheres of government in fiscal year 2015. This increases to R1,361.5 billion by fiscal year 2018. The local share of nationally raised revenue grows from 9.0% in fiscal year 2015 to 9.4% by fiscal year 2018, and the provincial share also rises from 42.0% in fiscal year 2015 to 43.4% in 2018/19. The faster growth in allocations to provincial and local government reflects the priority placed on front-line services such as health, education and basic services, as well as the rising cost of these services due to higher wages, and bulk electricity and water costs.

Debt-service costs have fallen from 5.5% of GDP in fiscal year 1998 to 3.1% of GDP in fiscal year 2015. Declining deficits and fiscal surpluses prior to the recession resulted in a particularly pronounced drop in debt-service costs. This created significant fiscal space, enabling the government to preserve the real value of previous allocations and make available additional resources to improve the availability and delivery of public services without having to increase taxes. The National Government’s decision to sustain spending in key areas, following the recession, meant additional borrowing was required to cover the slowdown in revenue collections. Over the 2016 MTEF, debt-service costs will average 3.3% of GDP and is the fastest growing area of expenditure. The paying down of debt-service costs will create fiscal space if the economic environment should deteriorate further.

2016 MTEF

The 2015 MTBPS has announced the 2016 MTEF, which sets out the consolidated expenditure framework for fiscal year 2015/16 through to fiscal year 2018/19. The framework consists of revised baseline estimates reflecting the government’s current spending priorities, including education, social protection and health services (which take up the largest of planned expenditure). Strong growth over the future spending period can be seen in basic education, post-school education and training, health, social protection, human settlements and municipal infrastructure, and defence, public order and safety.

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2015-2016 National Budget and Consolidated Government Budgets

2015-2016 National Budget

In February 2015, the South African Minister of Finance submitted the 2015-2016 National Budget to Parliament. The 2015-2016 National Budget and the three-year MTEF estimates supported the long-term health of the public finances with a series of revenue and expenditure measures to narrow the budget deficit and stabilise debt. These measures included increases in the personal income tax rates and the fuel levies, and a R25 billion reduction in the spending ceiling for 2015/16 and 2016/17. Government continues to prioritise infrastructure investment and social programmes that support those citizens most in need as well as contributing to structural changes for sustainable growth in the future which include shifting from a growth path reliant on consumption to one led by investment, making the transition to a less energy-intensive economy, strengthening tradable sectors with significant potential for job creation, and investing in cities to reverse inequitable and inefficient patterns of human settlements.

The 2015-2016 National Budget allocated 52.1% of nationally raised resources to provinces and local government over the medium term. Fiscal constraints meant that transfers to provinces and local government would grow more slowly over the medium term than they have in the past. However, provinces face significant cost pressures due to the above-inflation wage agreement, and municipalities face pressures due to the wage agreement as well as due to the rising costs of bulk water and electricity services that they purchase. Accordingly, provincial and local governments will need to reduce costs and reprioritize in order to improve delivery of basic services.

The 2015-2016 National Budget estimated that total national revenues for fiscal year 2015 will amount to R1,049.3 billion. National budget expenditures for fiscal year 2015 were estimated at R1,222.3 billion. Consequently, a main budget deficit of R173.1 billion, or 4.1% of GDP, was forecast. The inclusion of extraordinary receipts and payments into the new reporting format means that there is no longer a distinction between the main budget deficit and the borrowing requirement.

2015-2016 Consolidated Government Budget

The amounts reflected in the budget votes of the national departments whose functions are partially devolved to the provinces do not illustrate total allocations to such functions. By contrast, the Consolidated Government Budget presents a more relevant measure of trends and priorities in government finances in South Africa, particularly in the socio-economic field, and hence the tables and discussion below focus on this measure of government expenditure. See “Public Finance—Background.”

The 2015-2016 consolidated government expenditure was budgeted at R1,351.0 billion for fiscal year 2015. The deficit on the Consolidated Government Budget is lower than that in the main National Budget due to surpluses in the provinces and the social security funds, primarily the Unemployment Insurance Fund and Compensation Funds.

The estimated 2015-2016 Consolidated Government Budget continues to build on policy priorities established in 2001, with a special emphasis on growth-enhancing spending as well as spending programmes that target the poor and vulnerable groups. Growth in all categories of social services spending reflects the National Government’s commitment in improving the social well-being of South Africans.

Education remained the largest category of expenditure, followed by economic affairs and local development and social infrastructure. Health care expenditure and social protection also remained significant.

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The following table sets forth the Consolidated Government Expenditure as set out in the 2015 MTBPS for the periods indicated.

Consolidated government expenditure, 2012–2014

Fiscal year R billion	2012					2013					2014
	Outcome		% of total			Outcome		% of total			Outcome		% of total
Current payments		632.6		60.6	%		693.6		60.6	%		735.8		59.9	%
Compensation of employees		376.6		36.1	%		409.6		35.8	%		441.1		35.9	%
Goods and services		162.7		15.6	%		174.7		15.3	%		173.9		14.2	%
Interest and rent on land		93.3		8.9	%		109.3		9.5	%		120.8		9.8	%
of which: Debt-service costs		88.1		8.4	%		101.2		8.8	%		114.8		9.3	%
Transfers and subsidies		340.8		32.6	%		371.9		32.5	%		400.0		32.6	%
of which: Capital transfers		52.3		5.0	%		55.8		4.9	%		58.1		4.7	%
Provinces and municipalities		83.3		8.0	%		89.6		7.8	%		96.0		7.8	%
Departmental agencies and accounts		22.4		2.1	%		21.5		1.9	%		24.8		2.0	%
Higher education institutions		22.1		2.1	%		24.0		2.1	%		25.7		2.1	%
Foreign governments and international organisations		2.2		0.2	%		2.2		0.2	%		2.3		0.2	%
Public corporations and private enterprises		24.4		2.3	%		24.6		2.2	%		27.8		2.3	%
Non-profit institutions		21.7		2.1	%		25.8		2.3	%		26.9		2.2	%
Households		164.7		15.8	%		184.3		16.1	%		196.6		16.0	%
Payments for capital assets		66.3		6.3	%		74.5		6.5	%		87.6		7.1	%
Buildings and other capital assets		52.8		5.1	%		58.0		5.1	%		66.8		5.4	%
Machinery and equipment		13.5		1.3	%		16.5		1.4	%		20.8		1.7	%
Payments for financial assets		4.9		0.5	%		4.1		0.4	%		5.4		0.4	%
Consolidated expenditure		1,044.6		100.0	%		1,144.2		100.0	%		1,228.8		100.0	%

Note: —

(1) These figures were estimated by the National Treasury and may differ from data published by Stats SA and the SARB. The numbers in this table are not strictly comparable to those published in previous years due to the reclassification of expenditure items for previous years. Data for the history years have been adjusted accordingly.

Source: South African National Treasury

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The following table sets forth the Consolidated Government Expenditure as set out in the 2015 MTBPS for the periods indicated. Please note that, while the line items may differ from the 2012-2014 Consolidated Government Budget table, the categories remain the same and can be compared.

Consolidated Government Expenditure by functional & economic classification¹, 2012/13 – 2018/19

	2012/13		2013/14		2014/15		2015/16		2016/17		2017/18		2018/19		Average
R billion	Outcome						Revised		Medium-term estimates						annual growth 2015/16 – 2018/19
Functional classification
Basic education		170.9		185.2		197.4		213.9		228.6		249.8		270.0		8.1	%
Basic education		163.9		177.3		189.2		204.5		219.2		239.6		259.3		8.2	%
Arts, sport, recreation and culture		7.0		7.9		8.2		9.4		9.5		10.2		10.7		4.5	%
Health		125.1		134.0		144.6		157.7		169.7		184.7		200.6		8.3	%
Defence, public order and safety		142.9		154.9		162.6		172.0		183.7		198.9		211.8		7.2	%
Defence and state security		41.7		44.9		47.5		50.0		53.0		57.2		60.8		6.7	%
Police services		68.9		75.3		78.3		83.1		88.7		96.0		102.5		7.3	%
Law courts and prisons		32.3		34.7		36.9		38.9		42.0		45.7		48.5		7.6	%
Post-school education and training		47.1		48.3		54.4		63.7		66.2		71.0		76.6		6.3	%
Economic affairs		139.6		164.7		168.8		187.6		202.3		208.5		222.5		5.9	%
Industrial development and trade		26.7		30.3		26.4		30.4		32.2		32.6		34.9		4.7	%
Employment, labour affairs and social security funds		39.4		52.1		52.3		65.7		73.1		75.4		77.8		5.8	%
Economic infrastructure and network regulation		60.1		66.3		71.9		71.1		76.0		78.8		86.0		6.5	%
Science, technology, innovation and the environment		13.4		15.9		18.1		20.5		20.9		21.7		23.8		5.2	%
Human settlements and municipal infrastructure		131.0		142.6		156.4		178.7		189.9		204.2		222.6		7.6	%
Agriculture, rural development and land reform		19.3		21.0		24.2		25.6		26.5		28.3		30.0		5.4	%
General public services		57.8		61.1		62.2		72.5		71.8		75.8		79.8		3.3	%
Executive and legislative organs		9.6		11.1		10.2		12.6		13.1		14.0		14.9		5.7	%
General public administration and fiscal affairs		36.3		36.8		37.5		44.9		44.0		46.5		47.1		1.6	%
Home affairs		5.4		6.6		7.0		7.2		7.2		7.4		9.3		8.8	%
External affairs and foreign aid		6.5		6.7		7.4		7.7		7.5		7.9		8.5		3.5	%
Social protection		122.7		131.0		143.4		154.0		168.0		181.3		195.7		8.3	%
Allocated by functional classification		956.4		1,043.0		1,114.0		1,225.7		1,306.6		1,402.6		1,509.5		7.2	%
Special appropriations: Eskom and New Development Bank		—		—		—		25.0		—		—		—		—
Debt-service costs		88.1		101.2		114.8		127.9		142.6		157.2		174.6		10.9	%
Contingency reserve		—		—		—		—		2.5		9.0		15.0		—
Consolidated expenditure		1,044.6		1,144.2		1,228.8		1,378.7		1,451.7		1,568.8		1,699.1		7.2	%

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Consolidated Government Expenditure by functional & economic classification¹, 2012/13 – 2018/19

(continued)

	2012/13		2013/14		2014/15		2015/16		2016/17		2017/18		2018/19		Average
R billion	Outcome						Revised		Medium-term estimates						annual growth 2015/16 – 2018/19
Economic classification
Current payments		632.6		693.6		735.8		806.3		870.4		944.0		1021.6		8.2	%
Compensation of employees		376.6		409.6		441.1		486.2		524.0		569.4		615.6		8.2	%
Goods and services		162.7		174.7		173.9		186.1		198.1		212.6		226.1		6.7	%
Interest and rent on land		93.3		109.3		120.8		133.9		148.4		162.0		179.9		10.3	%
of which: Debt-service costs		88.1		101.2		114.8		127.9		142.6		157.2		174.6		10.9	%
Transfers and subsidies		340.8		371.9		400.0		445.5		479.9		511.0		551.6		7.4	%
of which: Capital transfers		52.3		55.8		58.1		62.6		70.6		75.3		83.0		9.8	%
Provinces and municipalities		83.3		89.6		96.0		107.2		114.4		123.5		137.3		8.6	%
Departmental agencies and accounts		22.4		21.5		24.8		30.6		31.1		33.9		36.7		6.2	%
Higher education institutions		22.1		24.0		25.7		27.5		29.0		30.8		32.8		6.0	%
Foreign governments and international organisations		24.4		24.6		27.8		30.7		34.3		35.1		39.2		8.4	%
Public corporations and private enterprises		2.2		2.2		2.3		2.1		2.2		2.3		2.5		6.1	%
Non-profit institutions		21.7		25.8		26.9		28.0		29.0		30.2		32.0		4.6	%
Households		164.7		184.3		196.6		219.5		239.9		255.3		271.2		7.3	%
Payments for capital assets		66.3		74.5		87.6		97.2		98.4		104.2		110.4		4.3	%
Buildings and other capital assets		52.8		58.0		66.8		76.3		80.4		84.8		90.4		5.8	%
Machinery and equipment		13.5		16.5		20.8		20.9		18.0		19.4		20.0		-1.5	%
Payments for financial assets		4.9		4.1		5.4		29.6		0.5		0.5		0.5		-73.7	%
Allocated by economic classification		1,044.6		1,144.2		1,228.8		1,378.7		1,449.2		1,559.8		1,684.1		6.9	%
Contingency reserve		—		—		—		—		2.5		9.0		15.0		—
Consolidated expenditure		1,044.6		1,144.2		1,228.8		1,378.7		1,451.7		1,568.8		1,699.1		7.2	%

1. Consisting of national, provincial, social security funds and selected public entities.

Source: South African National Treasury

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During the past decade, growth in consolidated National Government expenditure has exceeded both nominal GDP growth and population growth in South Africa due to the occurrence of various extraordinary items. In fiscal 1993 and fiscal 1994, public-sector borrowing amounted to approximately 10% of GDP. These extraordinary items have included the costs of early retirement offers to former civil servants, losses incurred by the SARB on its foreign exchange forward cover operations and various costs associated with political transition in 1994 and the establishment of a new democratic order. If Consolidated Government expenditure is broadened to include all expenditures by universities and polytechnics (including those in the former TBVC states) and local governments, total government expenditure (technically referred to as general government expenditure) rose from 30% of GDP in fiscal 1983 to 40.9% of GDP in fiscal 1994, of which 3.8% represented settlements of extraordinary liabilities to National Government pension funds and the SARB. Consolidated government expenditure was 29.6% of GDP in fiscal year 2008 and the public-sector borrowing requirement was in deficit at R79.8 billion, or 3.3% of GDP.

Taxation

Taxation in South Africa is administered by SARS, an autonomous body managed by a board of directors and established by legislation to collect revenue and ensure compliance with tax law. SARS’ vision is to be an innovative revenue and customs agency that enhances economic growth and social development and supports South Africa’s integration into the global economy in a way that benefits all South African citizens. Amongst others, SARS collects personal income tax, company tax, value-added tax, customs duties on imports, excise duties on prescribed goods, fuel levies and various other taxes.

While most tax revenues are collected at the national level, municipalities impose and collect property taxes. In addition, the main sources of revenue (although limited in scope) for provinces are motor vehicle licence fees and gambling taxes. Non-tax user charges are levied principally by municipalities and extra-budgetary institutions, such as universities, museums, statutory research councils and public entities.

The National Government aims to maintain and strengthen a tax system that is fair, efficient and internationally competitive, while meeting fiscal policy requirements. Recognising that improving tax administration and collection are essential steps towards achieving meaningful tax reform in the future, the National Government seeks to narrow the tax compliance gap and broaden the tax base. It is the National Government’s policy to keep tax law as simple as possible in order to minimise collection and compliance costs and to monitor the tax system on a continuous basis.

Tax Revenue

Audited results show that tax revenue for fiscal year 2014/15 of R986.3 billion was 9.6% higher than the amount collected in the previous year. The revised tax revenue estimate for fiscal year 2015/16 as per MTBPS 2015 is R1,073.7 billion. Personal income tax (R353.0 billion), value added tax (R261.3 billion) and corporate income tax (R185.0 billion) made the largest contribution to total tax revenue for fiscal year 2014/15.

Continued global uncertainty and lower commodity prices have dampened growth in South Africa resulting in lower than budgeted tax revenue.

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Personal Income Tax

South Africa has a progressive personal income tax system whereby income categories in different brackets are taxed at different rates. As of 2015, for individuals earning between 0 and R181,900, a tax rate of 18% is levied. This is the lowest tax bracket, with four other brackets being applied to higher income earners. The top bracket has a tax rate of 41%, and it applies to individuals earning more than R701,300. The tax system also provides primary rebates for all taxpayers, as well as secondary rebates for people aged 65 years and older, and a tertiary rebate for people 75 years or older. In practice it means that people earning less than R73,650 will not pay any tax, while those aged 65 years and older will not pay tax if they earn less than R114,800. For those older than 75 years, the tax threshold is R128,500.

The National Government has over the past ten years adjusted income tax brackets to take account of the effects of inflation on income tax paid by individuals. In fiscal year 2015/16, budget proposals resulted in net tax gain of R8.2 billion. Personal income tax bracket adjustments amounted to R8.6 billion in revenue loss. This was however offset through tax rate increases (of 1%) in each of the tax brackets, with the exception of the lowest income bracket.

Tax deductions on personal income tax include deductions for pension contributions, while tax credits are provided for individuals belonging to Medical Schemes. In addition, interest income of up to R22,800 is tax exempt for individuals younger than 65 years, and R33,000 for those 65 years and older. Following the 2014 Budget, South Africa introduced tax free savings accounts to encourage household savings. All returns accruing to these investments will be exempt from tax. With the introduction of tax free investments, the above-mentioned tax free interest income thresholds for individuals will be phased out over time.

Company Tax

Over the past few years, South Africa has reduced the headline corporate income tax rate from 40% to 35% in fiscal year 1995/96, 30% in fiscal year 2000/01, 29% in fiscal year 2006/07 and 28% in fiscal year 2009/10. Currently, the rate remains 28%, and the secondary tax on companies (STC) of 10% has been replaced by a 15% tax on dividends withheld from the dividends distributed to the recipient and not paid by the company distributing the dividends.

Small business corporations (SBCs) with an annual turnover less than R20 million have certain special tax provisions. They are taxed on a graduated scale with the first R67,000 being tax free. There are also 7% and 21% brackets, with only earnings in excess of R550,000 taxed at 28%. In addition SBCs may benefit from accelerated depreciation of assets. There is also a turnover tax option for businesses with an annual turnover of less than R1 million, in an attempt to minimise their compliance burden, while investors are encouraged to fund small businesses through a Venture Capital Company regime. Investments in VCCs are tax-deductible, provided that the investments meet the necessary requirements. In order to encourage funding to small business, following the 2014 Budget, entities which provide grant funding to small businesses will not be taxed on their accruals and receipts, while grant funding from the approved entities is also exempt in the hands of small businesses.

South African tax legislation contains certain corporate reorganisation rollover rules. These rules are intended to facilitate the tax-free transfer of assets in specified circumstances. Taxpayers may not generally deduct interest incurred in respect of loan funding used to acquire shares because shares generally only produce exempt income. However, taxpayers can indirectly obtain a deduction for interest when acquiring shares of a target company when the acquisition is associated with certain rollover reorganisation. The rollover rules were never intended to enable interest deductions when those deductions would not otherwise be available. A measure to control interest deductions in respect of debt used to procure, enable, facilitate or fund certain reorganisation transactions has been introduced. To prevent the misuse of acquisition debt, interest deductions associated with this debt are currently subject to discretionary limits as determined by SARS. These limits are designed to target potential base erosion caused by excessive debt. From April 1, 2014 the aggregate deductions for interest paid or incurred in respect of acquisition debt will become subject to an annual limitation pursuant to a defined formula.

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The concept of “headquarter company” was introduced with effect from January 1, 2011. Headquarter companies enjoy certain tax and exchange control relief and the concept is aimed at positioning South Africa as a holding company gateway for foreign multinationals into Africa.

As of January 1, 2011, in order to qualify as a headquarter company, certain requirements must be met, inter alia:

• a headquarter company must be a South African resident company;

• each shareholder of the company (whether alone or together with any other company forming part of the same group of companies as the shareholder) holds 10% or more of the equity shares and voting rights in that company;

• at least 80% of the cost of the total assets of the company is attributable to any interest in equity shares in, any amount loaned or advanced to, or any intellectual property as defined that is licensed by the headquarter company to, any foreign company in which the headquarter company held at least 10% of the equity shares and voting rights;

• where the gross income of the headquarter company exceeds R5 million, at least 50% or more of its gross income consists of rental, dividends, interest, royalty or service fees paid by a foreign company, and/or proceeds from the disposal of equity shares in a foreign company or of any intellectual property which had been licensed by the headquarter company to the foreign company.

Distributions from collective investment schemes (CIS), follow the flow-through principle, meaning that the income (e.g. interest, dividends, etc.) received by the CIS in securities will retain its nature when distributed to the CIS unit holders. Hedge funds are taxed identically, and will need to register as CIS in future.

A withholding tax on interest was introduced during the 2010/11 legislative cycle and took effect on March 1, 2015. As a result all interest paid to non-residents is taxed at a final withholding tax rate of 15% (subject to double tax agreements) and is payable by the last day of the month following the month during which the interest was paid. However, the withholding charge is subject to some exemptions, including debt issued by government and debt listed on an exchange.

The exemption of interest owed by domestic banks does not include back-to-back loan agreements designed to circumvent the 15% withholding tax e.g., if the bank acts as an intermediary to facilitate the unlisted borrowing of funds by a domestic company from a foreign lender. In addition to the exemption for mobile portfolio debt capital, cross-border interest withholding contains three additional exemptions which apply to: (i) certain foreign payors and foreign payees, and (ii) certain forms of debt owed by a headquarter company. South African double tax agreements with low tax jurisdictions that provide for a zero withholding rate are currently under negotiation.

International transactions are currently subject to rules dealing with transfer pricing and controlled foreign companies.

As of January 1, 2011, a controlled foreign company includes a foreign company where more than 50% of the total participation rights in that foreign company is not only directly held, but also indirectly held by one or more persons that are South African residents other than persons that are headquarter companies. If one or more South African residents hold more than 50% of the participation rights in an offshore cell, the cell will be deemed to be a controlled foreign company without regard to ownership in the other cells. As of April 1, 2012, the ownership threshold in respect of the dividend and capital gain participation exemptions in relation to foreign shares was reduced from 20% down to 1%. This lower threshold is consistent with the global economic concept of direct foreign investment and that of the South African exchange control requirements. It is important to note that the foreign dividend participation exemption provision contains so-called anti-cycle scheme rules within the participation exemption so as to prevent the offshore cycling of funds. The participation exemption does not apply if the foreign dividends at issue arose directly or indirectly from a South African deductible payment that is not subject to South African normal tax in the hands of the offshore recipients.

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With effect from January 1, 2012, the domestic corporate restructuring rollover rules were extended to fully include the restructuring of offshore companies that remain under the control of the same South African group companies. The asset-for-share, amalgamation, unbundling and liquidation rules will be revised to cover offshore restructurings.

A new uniform system of source rules was introduced on January 1, 2012. The new uniform system combines the common law, pre-existing rules and tax treaty principles. These source rules will loosely reflect implicit tax treaty principles, with a few added built-in protections, so that the South African system is globally aligned. The new source rules eliminate the concept of deemed source. South African sources of income are now fully defined and items of income falling outside these definitions will be treated as foreign source income, unless a particular category of income is not expressly defined, in which case the common rules will continue to apply.

South Africa has also introduced a new limited foreign tax credit that was effective as of January 1, 2012. This foreign tax credit is limited solely to foreign withholding taxes imposed in respect of services rendered in South Africa. These tax credits are limited solely to South African taxes otherwise imposed on the same service income after taking applicable deductions into account. The foreign tax credit was repealed during the 2015 legislative cycle.

South Africa has introduced specific provisions in the various tax acts (Income Tax Act, Value Added Tax and Securities Transfer Tax) to cater for Islamic finance. In 2014, the legislation was amended to also allow SOEs to issue Sukuk, following the successful issue of a Sukuk by the South African government. The changes were introduced to place the above-mentioned products on an equal footing with conventional finance products. In 2015, the provisions were further extended to include listed entities.

Effective April 1, 2012, transfer pricing rules were modernised to be in line with the OECD guidelines. The new transfer pricing rules are closely aligned with the wording of the OECD and UN Model Tax Conventions and are in line with tax treaties and other international tax principles. These might be refined further following the OECD BEPS process which concluded in 2015, which South Africa participated in and committed to.

The taxpayer is obliged to ensure that all its transactions are done on an arm’s length basis. The transfer pricing rules are henceforth used to deny deductions for interest that would not have existed had a South African entity not been thinly capitalised with excessive debt. In the 2014 legislative cycle, the current form of secondary adjustment has been revised and an amount of secondary adjustment, in the case of a company, will be deemed to be a dividend in specie paid by a South African taxpayer to the non-resident connected person. In the case of a natural person or a trust, the amount of the secondary adjustment will be deemed to be a donation made by the South African natural person or trust to the non-resident connected person.

In the 2013 legislative cycle, South Africa introduced a limitation on the deductibility of interest in respect of related party debt and leveraged mergers and acquisitions. This was aimed at preventing the use of excessive debt to boost the bottom line, based on the overall tax benefit. Whilst debt capital is an important instrument of capitalising companies, the legislation seeks to strike a balance between the need to attract debt capital and the protection of the tax base against erosion. This issue was also addressed in one of the OECD BEPD packages.

Investors in equity funds constituted as partnerships or trusts will be granted tax relief and will be regarded as having a permanent establishment in South Africa merely by virtue of their investment. This tax relief places limited partners of trust beneficiaries in the same position had these investors invested directly in the underlying assets of the partnership or trust. The investors will not be exposed to South African tax merely because of the portfolio management activities carried on in South Africa. However, management fees of the South African manager, general partner or trustee will remain taxable in South Africa. To qualify for this relief the investor must satisfy the following requirements: (i) the partner or trust beneficiary must have limited liability like a shareholder of a company; (ii) the partner or trust beneficiary must not participate in the effective management of the business of the partnership or trust; (iii) the partner or the trust beneficiary must not have the authority to act on behalf of the partnership or trust or on behalf of the members of the partnership or trust and (iv) the partner or trust beneficiary must not render any services to or on behalf of the partnership or trust.

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A new definition of a “foreign partnership” was introduced into the Income Tax Act for tax years commencing after October 1, 2010. The purpose of the new definition is to ensure that entities like limited liability partnerships or limited liability companies and similar hybrid entities are not treated as companies when they are in fact partnerships. The new definition therefore synchronises the South African tax treatment of these entities with foreign tax practice. To qualify as a foreign partnership, an entity must be a partnership, association or body of persons established or formed under foreign law.

In an effort to encourage conservation of South Africa’s rich biodiversity, the Income Tax Act contains tax incentives (introduced in the 2008–2009 Budget) for private landowners that have entered into bilateral agreements to conserve and maintain a particular area of land on behalf of the National Government under the terms of the National Environmental Management: the Biodiversity Act of 2004 and National Environmental Management: the Protected Areas Act of 2003. Landowners are eligible for income tax deductions for environmental maintenance and rehabilitation expenses as well as the loss of the right to use land associated with biodiversity conservation and management under the terms of these agreements. Furthermore, the mineral and petroleum royalty regime came into effect in two phases: Section 1 of the Royalty Act came into effect on November 1, 2009, and the rest of the Royalty Act came into effect on March 1, 2010. Variable royalty rates will apply according to two separate formulae for refined and unrefined minerals. The tax base is gross sales less certain expenses.

During the 2013 legislative cycle, South Africa introduced new VAT rules on digital goods and services. Under these new rules, foreign suppliers of digital goods and services are required to register as VAT vendors as these suppliers provide digital goods and services to South African customers.

Previously, two sets of transaction taxes applied to trading in investment securities: (1) stamp duty, in the case of unlisted shares and (2) un-certificated securities tax, in the case of exchange-traded securities. To simplify administration and to eliminate anomalies created by this dual treatment, with effect from July 1, 2008, all secondary trading in shares (listed or otherwise) are, under the terms of the Securities Transfer Tax Act (replacing the Stamp Duties Act and Un-certificated Securities Tax Act), subject to a single securities transfer tax, at a rate of 0.25%. Amendments to simplify exemptions and clarify the impact on derivative products and partial disposals were also introduced.

Depreciation allowances, including the accelerated depreciation relief for urban development zones, are available to taxpayers that invest in (by erecting or refurbishing) any commercial or residential building within specified urban development zones. The allowance is deductible in the year the erected building or the refurbished part of the building is brought into use by the taxpayer for purposes of trade, and this depreciation relief will benefit owners, users or lessors of such buildings. The amount of the allowance is dependent on whether the taxpayer erects a new commercial or residential building or refurbishes an existing commercial or residential building. Taxpayers that erect a new commercial or residential building within a specified urban development zone will be allowed an 11-year write-off period. In addition, 20% of the cost to the taxpayer of the erection or extension of or addition to that building, which is deductible in the year of assessment during which that building is brought into use by that taxpayer solely for the purposes of that taxpayer’s trade and 8% of that cost in each of the 10 succeeding years of assessment. Depreciation relief has also been afforded to environmental production and post-production assets. Both sets of assets must be ancillary to the manufacturing process, of a permanent nature and utilised to fulfill environmental obligations. Environmental production assets are eligible for a 40:20:20:20 rate of depreciation, while the rate of relief for environmental post-production assets (e.g. dams or disposal facilities) is 5% per annum (i.e., a 20 year straight-line write off period).

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A voluntary disclosure programme was introduced by the SARS from November 2010 to October 2011. This programme allowed taxpayers who had defaulted on their tax payments to make voluntary disclosure to the SARS and avoid additional tax, penalties and interest being levied against them. The taxpayer participating in the voluntary disclosure programme had to meet certain requirements, such as the SARS not having been aware of the default prior to the taxpayer being allowed to participate in the voluntary disclosure programme. Criminal prosecution will not be initiated against the non-compliant taxpayers but the full amount in default will still have to be paid. The relief will apply to those who defaulted on their tax before February 17, 2011.

Revenue

Revenue Outcomes and revised estimates

The revenue outcome for 2014/15, revised estimates for 2015/16 and the estimates for 2016/17 are presented in the table below. Projected revenues from corporate income tax and VAT have underperformed for the first half of the current fiscal year, and have been revised downwards. Personal income tax (PIT) collection has been stronger, supported by above-inflation wage settlements and higher marginal tax rates.

The tax revenue outcome for 2014/15 was R986 billion, a 9.6% increase on collections in 2013/14 and R7.3 billion higher than the 2015 Budget target. Revenue was higher than projected largely due to strong growth in PIT as a result of less-than-full fiscal drag relief and fairly high wage growth, particularly for high-income earners. Large one-off payments arising from the disposal of share options also had a material effect on PIT collection in the year. Overall, gross tax revenue has been revised downwards by R7.6 billion in 2015/16, R14.6 billion in 2016/17 and R12.4 billion in 2017/18 compared with the projections tabled in the 2015 Budget.

Consolidated Government Revenue

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Financing

The following table sets forth the financing of the net borrowing requirement of the National Government for the six fiscal years ended March 31, 2015 and estimated amounts for the fiscal year ending March 31, 2016.

Financing of the Net Borrowing Requirement of the National Government

	2010			2011			2012			2013			2014			2015			Revised estimate 2016(3)
Borrowing
Revenue		586,113.1			672,751.5			745,292.2			799,761.7			887,265.1			963,560.6			1,070,664.5
Expenditure		747,868.0			805,979.1			889,911.5			965,495.6			1,047,758.6			1,131,951.8			1,246,929.6
Main Budget balance(1)		(161,754.9	)		(133,227.7	)		(144,619.3	)		(165,733.9	)		(160,493.5	)		(168,391.2	)		(176,265.2	)
% of GDP		(6.6	)%		(4.8	)%		(4.9	)%		(5.2	)%		(4.7	)%		(4.4	%)		(4.3	%)
Financing
Domestic short-term loans (net)		49,770.3			34,893.0			18,724.6			22,555.0			23,048.0			9,569.0			13,000.0
Domestic long-term loans (net)		118,855.8			136,849.8			138,500.8			125,767.8			149,414.1			157,014.0			144,944.0
Market loans		132,794.3			150,292.0			154,860.9			161,554.2			172,112.2			192,414.0			174,979.0
Loans issues for switches		(399.4	)		93.4			(753.0	)		(3,848.3	)		(1,135.3	)		(1,160.0	)		(2,479.0	)
Redemptions		(13,539.1	)		(13,535.6	)		(15,607.1	)		(31,938.1	)		(21,562.8	)		(34,240.0	)		(27,556.0	)
Foreign loans (net)		23,257.5			2,839.6			9,135.3			(11,622.0	)		377.8			8,357.0			9,464.0
Market loans		30,872.4			5,151.1			12,025.2			—			19,619.1			22,952.0			13,110.0
Arms procurement loan agreements		800.0			470.4			569.4			60.6			—			—
Redemptions (including revaluation of loans)		(8,414.9	)		(2,781.9	)		(3,459.3	)		(11,682.6	)		(19,241.3	)		(14,595.0	)		(2,012.0	)
Change in cash and other balances(2)		(30,128.7	)		(41,354.7	)		(21,741.4	)		29,033.1			(12,346.4	)		(6,548.8	)		8,857.2
Total		161,754.9			133,227.7			144,619.3			165,733.9			160,493.5			168,391.2			176,265.2

Notes: —

(1) A negative number reflects a deficit and a positive number a surplus.

(2) A positive change indicates a reduction in cash balances.

(3) Numbers as published during the October 2015 MTBPS

Source: South African National Treasury.

In addition to transfers received from the National Budget and their own provinces’ revenue collections, Provincial Budgets are financed by means of opening balances and concessionary and non-concessionary funding such as loans by the DBSA. The deficit of the National Budget is financed mainly by domestic and foreign loans. The provinces are barred constitutionally from raising loans for current expenditure. Loans for bridging finance may be advanced, however, provided that the provinces redeem such loans within 12 months following the date on which they are obtained, and any special conditions be specified in an act of Parliament which is required to be recommended by the Financial and Fiscal Commission. In addition, the National Government may not guarantee any provincial or local government loans, unless the guarantee complies with the norms and conditions for such guarantee as set out in an act of Parliament. See “Public Finance — Background.”

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Public Enterprises

The National Government owns a number of public enterprises (otherwise known as state-owned entities). The ministers under whose departments these enterprises fall act as the “Executive Authority” over these entities, taking up the role of shareholder on behalf of government. The ministers that act as the Executive Authority include the Minister of Public Enterprises, the Minister of Communications, the Minister of Energy, the Minister of Transport and various other ministers of the National Government.

The Executive Authority oversees the operations of the public enterprise, including the appointment of board members, the entering into of shareholder compacts with the public enterprise, approving major transactions, and the monitoring of performance. The National Treasury is responsible for financial oversight over all the public enterprises, including the review of major transactions, funding requests and applications for guarantees.

Parliament plays a significant role in the oversight of public enterprises through a number of committees that have been assigned responsibility for oversight over public enterprises. These committees include the Parliamentary Portfolio Committee on Public Enterprises, which is responsible for oversight over the Department of Public Enterprises and the key public enterprises that report to the department, the Parliamentary Portfolio Committees responsible for oversight of the various sectors in which public enterprises operate, and the Select Committee on Public Accounts, which is responsible for financial oversight.

The infrastructure investment program/programs of the public enterprises are aimed at delivering infrastructure to enhance economic growth and alleviate poverty. Public enterprises are expected to invest R313 billion over the next three MTEF year periods ending 2017/18. The main public enterprises responsible for delivering this growth are the electricity utility Eskom, the freight transportation company Transnet, the national oil company the Petroleum, Oil and Gas Corporation of South Africa (Pty) Limited (PetroSA), which is a subsidiary of the Central Energy Fund, and the South African National Roads Agency Limited (SANRAL).

The National Government has issued formal contractual guarantees in respect of certain indebtedness of the public enterprises, inter alia to support the capital investment program/programs of the public enterprises. Such guarantees are issued in accordance with the Public Finance Management Act (PFMA). All guarantees are issued jointly by the Minister of Finance and Executive Authority for the relevant public enterprise in terms of the PFMA. The National Government’s aim is for public enterprises to borrow on the strength of their own balance sheets without explicit recourse from the National Government. However, if a clear need for shareholder support is identified, a guarantee for a public enterprise may be provided on application. In such applications, the public enterprise is required to provide a sound business case, ensuring long-term financial sustainability. In extending guarantees, the National Government remains mindful of the guideline of 60% of GDP that has been set for total debt, provisions and contingent liabilities.

Over and above Eskom, Transnet and SANRAL, who have guarantees from the National Government, the current status of some of the more significant public enterprises over the last four fiscal years is set out below.

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Guarantees of Public Enterprises

	2011/12				2012/13				2013/14				2014/15
	Total guarantee amount		Total exposure amount		Total guarantee amount		Total exposure amount		Total guarantee amount		Total exposure amount		Total guarantee amount		Total exposure amount
	Rand (million)
Eskom		350,000		77,230		350,000		103,523		350,000		125,125		350,000		149,944
SANRAL		39,943		19,426		38,687		19,482		38,957		23,866		38,947		32,436
TCTA		25,461		19,886		25,530		20,460		25,669		20,516		25,590		20,807
DBSA		28,931		25,692		28,589		25,621		29,631		25,747		12,857		4,135
IDC		1,824		647		2,146		575		1,820		504		1,620		344
Land Bank		3,800		1,093		1,893		893		3,500		1,097		6,600		2,098
Denel		1,850		1,850		1,850		1,850		1,850		1,850		1,850		1,850
PRASA		1,400		264		1,400		133		1,220		92		1,217		48
SAA		2,900		1,300		7,906		2,238		7,901		5,010		14,394		8,419
Transnet		3,500		3,975		3,500		3,757		3,500		3,757		3,500		3,757
SABC		1,000		889		1,000		167		1,000		—		—		—
SA Express		—		—		—		—		539		539		1,106		539
SAPO		—		—		—		—		—		—		1,940		270
SARB		—		—		—		—		—		—		7,000		—
Telkom		248		85		284		90		356		110		227		100
Other Entities		3,567		1,587		4,219		1,449		2,535		1,355		2,560		1,147
Total		464,424		153,924		467,004		180,239		468,478		209,568		469,408		225,894

Source: South African National Treasury

Eskom Limited (Eskom)

Eskom is a state-owned company responsible for electricity generation, transmission and distribution in South Africa. Eskom generates approximately 95.0% of electricity used in South Africa and approximately 45.0% of the electricity is used in Africa. Eskom directly provides electricity to about 45.0% of all end-users in South Africa. The other 55.0% is resold by redistributors (including municipalities).

While most of Eskom’s business is within South Africa, the company also buys and sells electricity in the SADC region. Eskom’s involvement in African markets beyond South Africa is currently limited to projects that have a direct impact on securing supply of electricity for South Africa. Eskom is investigating additional opportunities in the SADC region.

Eskom’s capital expenditure (capex) programme is well underway. Eskom has committed to a capital expansion programme of R293 billion for the five-year period to 2019/20 and has consistently spent over R50 billion per annum on capex in the past three years. Key achievements of the programme include the first synchronisation of Medupi unit 6 achieved on March 2, 2015, with commercial operation achieved in August 2015.

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In line with NERSA’s allowed a price increase of 8.0% per annum over the third multi-year price determination (MYPD3) period, which was lower than the 16% that Eskom had applied for, Eskom had to reduce and reprioritize expenditure in some areas. Eskom is targeting to deliver cost savings of R60 billion over the MYPD3, 2013/14 to 2017/18, period through their Business Productivity Programme (BPP).

The Board has approved an updated borrowing programme of R237 billion, covering the period April 1, 2015 to March 31, 2020. Funding raised during the year ending March 31, 2015 amounted to R49.5 billion (2013/14: R43 billion). Over the MYPD3 period, Eskom will continue to be reliant on government support through the R350 billion guarantee facility that the Government has made available, of which Eskom had utilised R165 billion as at September 31, 2015. In line with the Government Support Package announced in September 2014, the Government will be providing R23 billion of funding to Eskom during 2015/16. On July 31, 2015, the first R10 billion tranche was transferred to Eskom, with a further R10 billion to be transferred in December 2015 and the last R3 billion in March 2016. In addition, a R60 billion subordinated loan was approved by the Government in 2008; in 2014, the loan was converted to equity. These measures served to strengthen Eskom’s financial position.

Group revenue for the year increased by 7% to R147.7 billion (2013/14: R138.3 billion), reflecting the impact of the 8% tariff increase partially offset by lost sales due to depressed commodity prices and load-shedding. Primary energy costs continue to escalate, with costs increasing 20% on prior year to R83.4 billion, mainly due to penalties incurred by Eksom under its take-or-pay coal contract for Medupi and heavy reliance on Open Cycle Gas Turbines (OCGTs). Net profits for the year were R3.7 billion (2013/14: R7.0 billion). Cash and cash equivalents as at March 31, 2015 amounted to R8.9 billion.

During 2014/15, electricity supply constraints as a result of poor plant performance and delays in the commissioning of new power stations were experienced that resulted in rolling load-shedding. Eskom is strengthening its maintenance programme with the aim of improving plant performance. Simultaneously, the Government, in partnership with Eskom, has been working to improve demand side management, whilst seeking to augment electricity supply through procuring power from Independent Power Producers (IPPs).

On August 3, 2011, the Department of Energy (DoE) officially launched the Renewable Energy Independent Power Producers Purchase Programme (REIPPPP), in line with government policy (White Paper on Energy of 1998) to introduce up to 30% of new generation capacity from IPPs. Initially, a determination was made that 3,921 megawatts (MW) of renewable energy technologies be brought into commercial operation between mid-2014 and the end of 2018. During 2015, the total determination for renewables has been increased to 13,225MWs to date. There have been three approved bid submission phases termed “bid window” (BW) under the REIPPPP:

• The first bid submission (BW1) date was November 4, 2011, where 28 preferred bidders were selected to provide 1,425MW of contracted capacity.

• The second bid submission (BW2) date was March 5, 2012, where 19 preferred bidders were selected to provide 1,040MW of contracted capacity.

• The third bid submission (BW3) date was August 19, 2013, where 17 preferred bidders were selected to provide 1,456MW of contracted capacity.

Bid windows 3.5 and 4 are currently in the final phases of being concluded. In total 1,860MW has already been commissioned from the first bid windows, supplementing the country’s electricity supply.

Through the IPP programme the DoE is currently in the process of procuring additional renewable energy, coal, gas and cogeneration capacity from the private sector. Requests for proposals to procure 2,500 MW of coal power and 3,126MW of gas power have already been issued.

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In March 2011, the Cabinet approved the Integrated Resource Plan (IRP 2010), which is a 20-year plan for balancing electricity supply and demand. The country aims to double its electricity generation capacity from 40,000MW to 80,000MW by 2025, ensuring that the economy benefits from a reliable supply of electricity. In the plan it is anticipated that the proportion of coal in South Africa’s generation mix will decrease steadily in favor of renewable energy and nuclear power. The IRP 2010 is in the process of being revised by the DoE in consultation with the relevant stakeholders

Transnet SOC Limited (Transnet)

Transnet is a public company, wholly-owned by the South African Government, and is the custodian of rail, ports and pipelines infrastructure in South Africa. Transnet is responsible for enabling the competitiveness, growth and development of the South African economy through delivering reliable freight transport and handling services. Transnet has five operating divisions:

• Freight Rail, the largest of the five operating divisions, operates 20,500 kilometers of rail network across South Africa which transports bulk, break-bulk and containerized freight. The rail network and rail services provides strategic links between the mines, production hubs, distribution centres and ports, and connects with the cross-border railways of the region.

• Transnet Engineering provides refurbishment, maintenance, upgrades and manufacturing services of rolling stock and specialized equipment for the other operating divisions of Transnet as well as external clients. It also houses the company’s research and development unit to capture opportunities for technology innovation.

• Transnet National Ports Authority provides port infrastructure and marine services at the eight commercial seaports in South Africa. The division’s core functions include the planning, provision, maintenance and improvement of port infrastructure.

• Transnet Port Terminals provides cargo-handling services at the ports which is critical in supporting the South African Government’s export-led growth strategy.

In addition, Transnet has operations in Lesotho, Namibia, Swaziland and Mozambique and it plans to expand further into the rest of Africa. The tariffs charged by the National Ports Authority and Pipelines are determined by independent regulators, namely the Port Regulator and the National Energy Regulator of South Africa.

Transnet adopted the Market Demand Strategy (MDS) in 2012 which is currently in its fourth year of implementation. The strategy is aimed at creating capacity ahead of demand with the capital investment programme. The capital investment plan was initially estimated to be R300 billion over the initial seven-year period. However, with the MDS now in its fourth year this has been revised to R336.6 billion over the next seven years. The programme is expected to reduce the cost of doing business in South Africa and facilitate the switch from road transport to rail in order to reduce carbon emissions. The infrastructure upgrades and expansion will improve efficiency and address the current capacity constraints. The majority of the capital expenditure will be dedicated to the rail sector. Transnet’s focus in the rail sector is to increase rail market share by stabilizing and optimizing existing flows and targeting the migration of rail-friendly commodities from road to rail. Transnet Freight Rail maintains a 98% share of the mining bulk exports market, 30% of the intermodal sector and 46% of the general freight bulk.

Transnet’s revenue for fiscal year 2015 increased by 8% to R61.2 billion (2014: R56.6 billion), mainly as a result a 13.5% increase in minerals and chrome; a 10.7% increase in iron ore and manganese; as well as an 8.1% increase in port bulk and break-bulk. Port container volumes increased by 6.3% and petroleum volumes increased by 4.4%.

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In the period under review, Freight Rail contributed 52% of the revenue generated by the group and Transnet Engineering contributed 17%. Pipelines contributed the least to revenue, accounting for only 4% of Transnet’s revenue. Earnings before interest, taxation, depreciation, impairment and amortization (EBITDA) increased by 8.2% to R23.6 billion (2014: R23.6 billion), resulting in the EBITDA margin remaining steady at 41.8% for 2014 and 2015.

A significant component of the investment plan is geared towards infrastructure, sustainability and capacity creation to support Transnet’s strategic objectives. In 2015, Transnet capital expenditure was R33.6 billion, of which R14.5 billion was deployed for expansionary projects and R19.1 billion to maintain operations. The key capital investment highlights are:

• Locomotives – concluded locomotive contracts that will result in the acquisition of 1,064 locomotives. R6.9 billion has been spent on this project, and 147 locomotives have been received.

• Wagons – Transnet built 2,700 wagons through Transnet Engineering in collaboration with Transnet Freight Rail. The group has spent R3 billion on this project.

• Coal line expansion up to 81.0mt – A total of R414 million was invested in the coal line expansion to upgrade yards, lines and electric equipment;

• Port infrastructure, equipment and floating crafts – The group has invested R1.4 billion for the maintenance and acquisition of cranes, dredgers, tugs and straddle carrier;

• New Multi-Product Pipeline (NMPP) – NMPP is a strategic investment aimed at securing supply of petroleum products from coastal terminals in Durban to inland markets. At the end of March 2015, R23.9 billion had been invested in the project.

Transnet’s borrowings increased to R110.4 billion in 2014/2015 year, which was an increase of R19.9 billion from 2013/2014 borrowings. Transnet used domestic funding sources as well as foreign sources. Domestic funding sources were mainly commercial paper, bank loans and domestic bonds. Foreign funding sources included Development Finance Institutions, Export Credit Agencies as well as Eskom’s Global Medium-Term Note (GMTN). The majority of the funds were used for the capital expenditure programme of which Transnet Freight Rail received the majority of the funds which were used for the acquisition of the 1,064 locomotives.

PetroSA

PetroSA is a wholly-owned subsidiary of the Central Energy Fund (CEF), which in turn is wholly-owned by the State. The Department of Energy acts as PetroSA’s executive authority. PetroSA was formed in 2002 upon the merger of Soekor E and P (Pty) Limited, Mossgas (Pty) Limited and parts of the Strategic Fuel Fund. PetroSA plays a role in the development of the energy sector in South Africa in support of the broader CEF mandate of ensuring security of energy supply.

PetroSA’s core activities include:

• Exploration and production of oil and natural gas;

• Participation in and acquisition of local as well as international upstream petroleum ventures;

• Production of synthetic fuels from offshore gas at the Gas-To-Liquids (GTL) refinery in Mossel Bay;

• Development of domestic refining and liquid fuels logistical infrastructure; and

• Marketing and trade of oil petrochemicals.

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Moreover, PetroSA operates the FA-EM, South Coast gas fields as well as the Oribi and Oryx oil fields. The producing gas fields provide feedstock to the Mossel Bay GTL refinery. PetroSA is also exploring alternative feedstock supply given the depletion of its gas reserves in the FA-EM field. Outside South Africa, the company has exploration acreage in Equatorial Guinea and Namibia. PetroSA’s GTL refinery produces ultra-clean, low-sulphur, low-aromatic synthetic fuels and high-value products converted from natural methane-rich gas and condensate using a unique GTL Fischer Tröpsch technology. Key commodities produced include unleaded petrol, kerosene (paraffin), diesel, propane, liquid oxygen and nitrogen, distillates, eco-fuels and alcohols. Its world-class synthetic fuels and petrochemicals are marketed internationally.

PetroSA operates the following main divisions:

• Products and Sales: The Trade, Supply and Logistics (TS&L) division is responsible for marketing and selling products and services to customers in South Africa and abroad.

• Petrochemicals: PetroSA produces several chemicals at its GTL plant in Mossel Bay. These synthetic chemicals fall into two main groups: alcohols and low-aromatic distillates. These products are placed locally and internationally.

• Crude Oil: PetroSA produces crude from its Oribi and Oryx oil fields, located in Block 9, off the coast of SA. It is estimated that the fields produce 1,800 barrels of oil per day.

• Commercial Business: In 2006, PetroSA established its Commercial Business in order to facilitate opportunities for players within the petroleum industry from a previously disadvantaged background. Initially, the unit focused on black economic empowerment wholesalers and later expanded its focus to include liquid petroleum gas (LPG).

Group revenue for the year declined by 21% to R18.5 billion (2013/14: R21.6 billion), mainly due to a reduction in the availability of feedstock for the GTL plant as well as the significant decline in crude oil prices. Lower-than-anticipated yield from the F-O fields has led to the importation of finished product to meet demand, and thus the substitution of a high-margin product with a lower-margin product.

Group results were also affected by the total impairment of R14.4 billion recognized in the year (2013/14: R3.4 billion), relating to the GTL facility (R11.7 billion) as well as the Jubilee and TEN development fields (PetroSA Ghana, R2.7 billion). This was a direct impact of declining oil prices and feedstock challenges plaguing the group.

Despite the recent trend of declining cash balances, reserves remain stable at R10 billion. The group will continue to advance investments in clean energy and explore other avenues such as monetizing tail gas in the near future, amongst other things.

For the 2014/15 financial year the group did not undertake any long term domestic borrowings and has no immediate plans to borrow in the domestic capital market. The group settled the R1.6 billion, in the foreign market, which was raised to partly fund the acquisition of PetroSA-Ghana. The loan was secured by a cash collateral of about R1.7 billion.

ACSA

Airports Company South Africa (ACSA) is a state-owned company (74.6% is owned by the South African Government through the Department of Transport, whilst the Public Investment Corporation SOC Ltd owns 20%, Empowerment Investors hold 4.21%, and Staff through the Employee Share Option Scheme the remaining 1.19%). The company is legally and financially autonomous and operates under commercial law. ACSA is mandated to own and operate South Africa’s nine principal airports, including the three major international airports at Johannesburg, Cape Town and Durban (King Shaka). As a result, ACSA is responsible for processing approximately 90% of all passengers departing on commercial airlines from airports within South Africa. ACSA has a 30-year concession and a 20-year concession to develop, operate and maintain the Mumbai and Guarulhos International Airports respectively. ACSA earns consultancy fees and return on equity from these investments.

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The ACSA Group derives revenue from two streams, aeronautical and non-aeronautical revenue streams accounting for 63% and 37%, respectively, of the Group’s revenue in the 2014/15 financial year. The former is derived from regulated charges, which consists of aircraft landing and parking charges, and passenger service charges. The non-aeronautical income is derived from commercial undertakings including retail operations, car rental concessions, property leases, car parking, hotel operations and advertising. Another component of non-aeronautical revenue is generated from international operations. The company aims to increase its non-aeronautical revenue from the current 37% of total revenue to 50% in the medium term. ACSA, in partnership with the Brazilian company Invepar, was successful in a bid to manage the development, maintenance and operation of Guarulhos International Airport in Sao Paulo, Brazil. The consortium owns 51.0% of the airport concession, with 49.0% being held by Infraero, the current airport operator. ACSA owns 20% of the consortium with Invepar. Recently ACSA and Munich Airport have established a partnership aimed at sharing knowledge and experiences.

ACSA’s revenue increased by 8.9% to R7.8 billion (2014: R7.1 billion), this was driven by double-digit non-aeronautical growth of 10.4% and a solid aeronautical growth of 8.0%. ACSA experienced an increase in departing passenger numbers from 17.4 million to 17.8 million in the current year, despite the moderate economic climate and weak growth rate experienced in South Africa. ACSA’s net profit for the year amounted to R1.6 billion, 8.5% below the prior year profit of R1.7 billion. The decline in profit is as a result of higher taxes. There was a reduction in finance costs due to the early debt redemption strategy (EDR) to settle interest-bearing debt.

The balance sheet of the company remains in good shape with net equity of R14.0 billion (2014: R12.6 billion). ACSA’s liquidity position improved to 1.37 times from 1.04 times in 2015. The interest cover ratio strengthened to 2.8 times from 2.5 times in the prior year, also as a result of the accelerated repayment strategy.

The ACSA Group is not planning to undertake new borrowings in 2015/16 and 2016/17 given its low level of planned investments. ACSA adopted an EDR strategy that aims to negotiate with lenders the possibility of early settlement of outstanding debts given the entity’s favourable cash position, which increased by 20.9% to R1.2 billion (2014: R1.0 billion) against a backdrop of modest investment plans. The entity’s corporate plan indicates that the entity will only require external funding during the 2017/2018 financial year and this is expected to be secured from the domestic capital markets. The entity has interest-bearing debt amounting to R11.2 billion (2013: R13.0 billion) and plans to repay R703 million during the 2015/16 financial year. The entity’s cash surpluses are invested in domestic money markets instruments and bank accounts. The entity redeemed approximately R1.9 billion of outstanding interest-bearing debt in 2014/2015 of which R1.2 billion was part of the EDR strategy and R700 million was settlements of maturing debt.

The 2014/15 capital expenditure amounted to R826 million which represented a decline of 11% from the R928 million in the prior year. ACSA’s current infrastructure programme provides for the continuation of its operation, ensuring efficient refurbishment and replacement of existing infrastructure. There are no major capital investment programs to increase or add new capacity planned until at least 2016/17.

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SANRAL

SANRAL is responsible for the planning, design, construction, rehabilitation and maintenance of South Africa’s national road network to support socio-economic development. The national road system connects all the major centers in the country to each other and to neighboring countries. The South African road network comprises approximately 754,600 kilometers of roads, of which 21,403 kilometers is the national road network. The national highway network currently consists of 16,170 kilometers, which is expected to grow to 35,000 kilometers. South Africa has the longest road network of any country in Africa.

In accordance with the SANRAL Act (1998), the agency is responsible for toll and non-toll roads. These operations are funded separately. Non-toll roads are funded by government allocations, and are not allowed to be cross-subsidized from toll road income, and vice versa. Toll operations can be divided into two types—those funded by SANRAL itself and operated on its behalf, and roads concessioned to private parties under public-private partnerships. Hence SANRAL’s revenue comes from two primary sources: grants from the National Government for all non-toll roads, and the tolling revenue received from toll roads.

During the reporting period, SANRAL awarded 200 contracts worth R14.4 billion for new works, rehabilitation, improvement, professional consulting engineering, maintenance, community development and other activities. A total of R3 billion was spent on contracts with Small, Micro and Medium Enterprises (SMMEs). SANRAL’s skills development programme trained 4,000 people in road construction projects and created 20,000 jobs. SANRAL also awarded 45 contracts worth about R903 million to professional consulting engineering companies to design and supervise road and bridge works.

SANRAL’s creditworthiness is rated and published by Moody’s Investor Service. SANRAL’s international rating was downgraded in September 2013 to Baa3 (long-term) and P-3 (short-term) with a negative outlook. The downgrade was a result of uncertainty and resistance to the implementation of electronic tolling (e-tolling) on the Gauteng network. On June 27, 2014, this outlook improved to “stable”, however this was not sustained. In January 2015, the establishment of the e-toll review panel resulted in the outlook being dropped to negative. Following the outcome of the work of the review panel, the Deputy President has since announced the new e-toll dispensation which is currently being implemented, but this is not yet reflected in the entity’s credit rating.

SANRAL’s debt stock amounted to R47.11 billion (2014: R39.83 billion) as at the end of the 2015 financial year. The increase in the entity’s borrowing requirement was largely driven by a sharp decline in e-toll collections. Funding via the debt capital markets remained the main source of financing for the entity. Capital market debt funding accounted for 95% of total debt funding facilities as at March 31, 2015. SANRAL’s debt level is expected to grow to R66.8 billion, should e-toll collection continue to prove less favourable than projections in the short to medium term.

Trans-Caledon Tunnel Authority (TCTA)

The TCTA was established in 1986. The entity is a specialized liability management entity responsible for bulk raw water infrastructure development. TCTA was originally established to implement a single project, the Lesotho Highlands Water Project (LHWP). In March 2000, TCTA’s notice of establishment was amended to allow for the Minister of Water Affairs (now Minister of Water and Sanitation) to issue directives to TCTA in terms of the National Water Act and the entity has since evolved into being responsible for multiple projects. To date the following directives have been received:

• Lesotho Highlands Water Project – Delivery tunnel and subsequently fulfillment of the Republic’s financial obligations arising from its treaty with Lesotho signed in 1986 (includes both Phase 1 and Phase 2);

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• Advisory services to Umgeni Water, Water Management Institutions, Water Boards and the Department of Water and Sanitation (DWS);

• Berg Water Project (BWP) ;

• Vaal River Eastern Subsystem Project (VRESAP);

• Refurbishment of Mooi-Mgeni Transfer Scheme Phase 1* (MMTS1) and implementation of Phase 2* (MMTS2);

• Olifants River Water Resources Development Project Phase 2C and subsequently, all the remaining phases* (ORWRDP);

• Komati Water Scheme Augmentation Project (KWSAP);

• Mokolo-Crocodile Water Augmentation Project Phase 1 and 2 * (MCWAP 1 and MCWAP 2);

• Metsi Bophelo Borehole Project;

• Short term solution to Acid Mine Drainage* (AMD); and

• Coordination of Strategic Infrastructure Project 3 and 18* (SIP3 and 18)

• Mzimvubu Water Project

• Off-take to the town of Kriel from the Komati Water Supply Augmentation Project

* Implementation of these projects is still ongoing

The LHWP is funded under a R43 billion sovereign guarantee. The initial R25 billion guarantees provided for LHWP Phase 1 was increased to cover the activities of LHWP Phase 2 and the short term solution to Acid Mine Drainage (AMD) in the Vaal River area. Commercial funding for the rest of the projects is secured on the basis of income agreements between TCTA and DWS and these determine how costs may be charged on each project.

The total value of bonds issued increased from R18.6 billion in 2014 to R18.9 billion in 2015. This is primarily due to the increase in the CPI which resulted in an increase of R378 million in the WS05 CPI-linked bond. There was also an increase in funding utilised from commercial banks from R6.9 million in 2014 to R7.8 billion in 2015. Funding from commercial banks has increased by 3% in the current year, primarily related to drawdowns on loans utilised on MMTS 2 and MCWAP 1.

In the year under review, TCTA corrected a prior period error in its financial statements as a result of a change in a technical interpretation of its financial statements by its new auditors. There was also a decrease in the restated Tariff Receivable from R27 billion at March 31, 2014 to R26.5 billion at March 31, 2015 due to the reduction in Construction Revenue and Other Income earned during the current year, as the majority of the projects have reached final stages of completion. Construction costs are only actively being incurred on MCWAP and MMTS-2 which are still in progress.

Phase 2 of the Olifants River Water Resources Development Project (ORWRDP 2) involves the development of additional water resource infrastructure consisting of the De Hoop Dam on the Steelpoort. River and bulk raw water distribution infrastructure in the middle Olifants catchment. TCTA’s directive was initially for sub-phase 2C and this was recently expanded to include all the remaining sub-phases. Phase 2C comprises a 40.0 km pipeline from De Hoop Dam to Steelpoort and is currently under construction with water delivery anticipated for December 2015. Phase 2C has an estimated cost at completion of R2.3 billion and is fully funded through transfers from DWS. The funding is provided annually to TCTA in accordance with the construction programme.

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The MMTS2 project seeks to augment the water supply to municipalities in the KwaZulu Natal province and includes the construction of the Spring Grove dam and associated water transfer systems. The dam was completed and handed over to DWA for operations and maintenance. Tariff billing commenced from July 1, 2012 following consultations with the users and approval by the then Minister of Water Affairs. The approved borrowing limit for the 2015 financial period is R1.988 billion of which R1.590 billion may be utilized at this point. Debt repayment is planned for March 2034. In the year under review, the tariff receivable was R25.5 million higher than expenditure whilst construction expenditure was R3.5 million lower. As a result, debt was R30 million lower than budgeted. Project funding is in place and the approved project budget is R2.066 billion. The cumulative expenditure as at year-end was R1.2 billion and the project remains within budget.

In terms of Acid Mine Drainage (AMD), TCTA’s involvement has been in the implementation of the short-term action plan in the affected basins of Witwatersrand Goldfields where the plan is to prevent the decanting of water and the breaching of the Environmental Critical Level. The Western Basin is operational and the construction of the Central Basin was completed in November 2013. The plant has been treating 72 Ml/day, however this has been reduced to 36 Ml/day to allow for slight modifications. Since the plant was declared operational, the basin has been drawn down by 15 metres. Construction on the Eastern Basin is scheduled to be ready for trial operations in February 2016. The AMD project budget for the short term solution is R2.6 billion while the operating costs budget is estimated at R666 million per annum. The project is being implemented within budget.

TCTA’s aggregate net cash inflows and outflows are expected to balance to nil at the end of each project, once all debt has been extinguished. The cash inflows of R7.1 billion for the year ended March 31, 2015 are marginally higher than the R6.9 billion inflows for 31 March 2014 and are made up of the tariff receivable from DWS, transfers from DWS for DWS-funded projects, drawdowns from loans, interest received and proceeds from the sale of financial assets.

TCTA continues to operate as a financially sound entity that is able to execute its projects in line with its mandate and with the Government’s development agenda.

South African Post Office (SAPO)

The SAPO State Owned Company (SOC) Act of 1958, and 2011 amendment, deals specifically with the establishment of SAPO as a state entity and corporate governance matters. SAPO is wholly-owned by the Government and its executive authority is the Department of Telecommunications and Postal Services.

The Postal Services Act of 1998 sets out the licensing requirements of SAPO as prescribed by the relevant regulatory body, the Independent Communications Authority of South Africa (ICASA). In terms of the licensing framework developed by ICASA, SAPO is the only operator licensed within the reserved market, which covers all mail under 1kg. SAPO’s license was issued in 2008. It is valid for a period of 25 years and is reviewed every three years in relation to SAPO’s performance in rolling out universal service obligations (USO) which include the rollout of postal addresses, points of presence and adherence to delivery targets. In the unreserved market, operators are required to register with ICASA, but there is no licensing framework. SAPO operates in both the reserved and unreserved market.

Lastly, the South African Postbank Limited Act, provides for the corporatisation of the Postbank, which is currently a division of SAPO. The Act allows for the transfer of the Postbank division to the Postbank Company. The Act further provides for the governance and functions of the Postbank once established as a company. In terms of the Act, SAPO will be the Postbank’s bank controlling company (BCC). There is currently a Section 12 application with the Registrar of Banks to enable the establishment of the Postbank as a bank in terms of the Banks Act.

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SAPO’s current operating structure consists of:

• Mail: This consists of all services in the reserved market including philately, bulk mail, envelopes and local and international letters and parcels. Mail remains SAPO’s largest revenue contributor.

• Retail: This includes access to photocopying machines, third party payments and motor vehicle licensing amongst other things.

• Logistics: This includes freight, containers and courier.

SAPO operates an expansive network of 2,487 service points, through which its services are extended to the general public.

SAPO, like most postal operators, has been experiencing a gradual decline in standard mail volumes; this has required that the entity revise its operating structure in line with the changing requirements of the sector. In order to facilitate a turnaround at SAPO, the Minister of Telecommunications appointed an administrator to run SAPO in November 2014. The administrator was also tasked with the development of a turnaround plan for SAPO.

SAPO is currently in the process of implementing its turnaround plan. Its progress is being monitored by the Department of Telecommunications and Postal Services and the National Treasury with the Deputy President also having oversight.

For the year ended March 31, 2015, SAPO recorded a net loss after tax of R1.49 billion (2013/14: net loss R406.7 million). This was as a result of revenues declining by 13% to R5.01 billion due to a protracted strike in 2014. The strike had a severe impact on revenues well beyond the end of the labour unrest as customers found alternative modes of distribution for their mail packages.

SAPO has been experiencing cash constraints but has been engaging several funding institutions to raise debt of R1.25 billion in order to meet its short- and longer-term funding requirements including the costs associated with the implementation of the turnaround plan. Thus far SAPO has secured R1.0 billion of the targeted debt and should be finalising the remaining requirement in the near term. The debt will be backed by an existing R1.67 billion State Guarantee.

The turnaround plan anticipates strong revenue growth by scaling up government business; strengthening non-banking financial services offerings to drive retail volumes; tapping into the fast growing SMME sector; growing e-Business revenue and growing major and large accounts through cross-selling. Thus far some government business has been secured while more business is aggressively being sought after. Some operations within the business have been streamlined, specifically within transport and property.

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NATIONAL GOVERNMENT DEBT

General

The legal authorisation for the incurrence of debt by the National Government is set forth in the PFMA. The National Treasury administers the National Government debt of South Africa. In February of each year the annual budget is tabled in Parliament, including the government’s anticipated borrowing requirements and financing strategy for the current financial year and over the medium-term period (three years). Pursuant to Section 66 of the PFMA, the Minister of Finance needs to approve each issuance of debt. The PFMA also sets out for which purposes the Minister may borrow. There is no statutory cap on the stock of debt.

In addition to its direct indebtedness, the National Government is also a guarantor of certain third-party indebtedness. South Africa has issued formal contractual guarantees of certain indebtedness, primarily on behalf of partially or wholly state-owned entities. In this document, the National Government debt does not include debt that is guaranteed by the National Government. However, the guaranteed debt is summarised in the table entitled “Outstanding National Government Guaranteed Debt”. In addition, the National Government debt does not include debts incurred by the nine Provincial Governments.

In this section, “external debt” means debt initially incurred or issued outside South Africa, regardless of the currency of denomination, and “internal debt” means debt initially incurred or issued in South Africa. “Floating debt” means debt that had a maturity at issuance of less than one year. “Funded debt” means debt that had a maturity at issuance of one year or more.

The following table summarises the National Government debt as of March 31 in each of the years 2011 through 2015 and as of September 30, 2015.

	As of March 31,															As of September 30,
	2011			2012			2013			2014			2015			2015
	Rand (million)
Government bonds		733,438			890,256			1,038,849			1,217,512			1,399,409			1,479,031
Treasury bills		136,150			155,159			171,985			192,206			202,217			204,536
Marketable internal debt		869,588			1,045,415			1,210,834			1,409,718			1,601,626			1,683,567
Non-marketable internal debt		23,133			25,524			30,300			31,381			30,459			59,975
Total internal debt		892,721			1,070,939			1,241,134			1,441,099			1,632,085			1,743,542
Total external debt(1)		97,851			116,851			124,555			143,659			166,831			188,976
Total gross loan debt		990,572			1,187,790			1,365,689			1,584,758			1,798,916			1,932,518
Cash balances(2)		(170,163	)		(198,059	)		(184,082	)		(205,304	)		(214,709	)		(203,574	)
Total net loan debt(3)		820,409			989,730			1,181,607			1,379,454			1,584,207			1,728,944
GFECRA		(28,283	)		(67,655	)		(125,552	)		(177,913	)		(203,396	)		(203,396	)(4)
As percentages of nominal GDP:
Net loan debt		29.0	%		32.1	%		35.5	%		38.2	%		41.2	%		42.1	%
External debt		3.5	%		3.8	%		3.7	%		4.0	%		4.3	%		4.6	%
As percentage of gross loan debt:
External debt		9.9	%		9.8	%		9.1	%		9.1	%		9.3	%		9.8	%

Notes:

(1) Valued using the applicable foreign exchange rates as at the end of each period.

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(2) This represents surplus cash of the National Revenue Fund on deposit at the commercial banks and the SARB. Bank balances in foreign currencies are revaluated using the applicable exchange rates as at the end of each period.

(3) The total net loan debt is calculated with due account of the bank balances of the National Revenue Fund (balances of the National Government’s accounts with the SARB and with commercial banks).

(4) Represents the balance on the GFECRA on March 31, 2015. A negative balance indicates a profit and a positive balance reflects a loss.

Sources: South African National Treasury and the SARB.

Summary of Internal National Government Debt

Total internal National Government debt as of March 31, 2015 was R1,632 billion, an increase of 13.3% over the corresponding amount of R1,441 billion as of March 31, 2014.

The following table sets forth the total internal National Government debt, divided into floating debt and funded debt, for the periods indicated.

Gross National Government Internal Debt

	As of March 31,										As of September 30,
	2011		2012		2013		2014		2015		2015
	Rand (million)
Marketable securities
Floating		136,150		155,159		171,985		192,206		202,217		204,536
Funded		733,438		890,256		1,038,849		1,217,512		1,399,409		1,479,031
Total(1)		869,588		1,045,415		1,210,834		1,409,718		1,601,626		1,683,567
Non-marketable securities
Floating		13,541		13,256		18,985		21,813		21,370		51,177
Funded		9,592		12,268		11,315		9,568		9,089		8,798
Total(2)		23,133		25,524		30,300		31,381		30,459		59,975
Total internal National Government debt		892,721		1,070,939		1,241,134		1,441,099		1,632,085		1,743,542

Notes: —

(1) Treasury bills are classified as floating marketable securities. Government bonds are classified as funded marketable securities.

(2) Borrowings from the Corporation for Public Deposits are classified as floating non-marketable securities. Retail government bonds (since May 2004), together with debt and liabilities of the former TBVC states and the Republic of Namibia that were assumed by the National Government in connection with South Africa’s transition to a constitutional democracy, are classified as funded non-marketable securities.

Sources: South African National Treasury and SARB.

Summary of External National Government Debt

The Government borrows in the global market to partly finance its foreign currency commitments and to maintain a benchmark in major currencies. In 2014/15, the Government implemented a basket of strategic risk benchmarks to monitor the impact of refinancing, inflation and currency risks on its borrowing programme and debt portfolio. As part of these benchmarks, a limit of 15% is placed on the share of foreign currency debt as percentage of total debt. South Africa’s external National Government debt as a percentage of total debt remains low. External debt as a percentage of total gross loan debt decreased from 9.9% as of March 31, 2011 to 9.3% as of March 31, 2015.

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The following table sets forth a breakdown of National Government external debt by currency as of March 31 in each of the years 2011 through 2015 and as of September 30, 2015.

External Debt by Currency

	As of March 31,										As of September 30,
Currency in which debt is held	2011		2012		2013		2014		2015		2015
	(million)
Euro		2,925		2,735		2,544		1,126		1,488		1,428
Pound Sterling		105		100		83		62		44		35
Swedish Kroner		5,959		5,528		4,858		4,164		3,469		3,122
US Dollars		8,396		9,842		8,768		10,696		11,125		11,090
Yen		60,988		60,894		60,800		60,706		60,612		60,564
Total (in Rand)(1)		97,851		116,851		124,555		143,659		166,831		188,976

Note: —

(1) The conversion into Rand is calculated at the exchange rate published by the SARB on the last business day of the fiscal year.

Source: South African National Treasury.

Foreign-currency bond issuances during 2014 were significant milestones for South Africa’s borrowing programme. The first dual-tranche international bond issue in July 2014 was well received in the dollar and euro capital markets. A dual-tranche bond issue combines various currencies and/or maturities in a single transaction, allowing an issuer to reach a broader range of investors. The 30-year US$1 billion note with a coupon rate of 5.375 per cent was priced at 220 basis points above the US Treasury benchmark bond. The 12-year €500 million note with a coupon of 3.75 per cent was priced at 225 basis points above the 12-year euro mid-swap rate. Both tranches were more than three times oversubscribed.

As announced in the 2014 Budget, South Africa entered the Sukuk market and raised US$500 million. The transaction was four times oversubscribed, with orders of US$2.2 billion, marking continued progress in efforts to broaden South Africa’s investor base.

South Africa’s ability to raise foreign debt currency on favorable terms is impacted by its credit ratings, which are subject to change. As discussed above, in 2015, Fitch and Standard & Poor’s reaffirmed South Africa’s credit ratings. Energy supply constraints, labor relations, policy certainty and lack of policy coordination and implementation, the outcome and financing of the government wage bill were the main risks that have evolved in the past 12 months cited by credit rating agencies. As discussed above, the government has made progress in stabilizing the energy supply but supply constraints remain. In 2015, labor relations have improved with work days lost due to strikes in the first half of 2015 significantly lower than in 2014. Future legislation and regulations will be subject to a socioeconomic impact assessment before being passed which is expected to promote better policy coordination, highlight potential risks and unintended consequences and allow for the development of mitigation strategies or alternative solutions before the legislation process begins (such as the visa regulation that resulted in slower tourism into the country). While the government wage bill has had significant impact on the fiscus, it has been financed through a combination of drawing down on the contingency reserve, reprioritizing within existing baselines, reducing headcount, withdrawal of funds from vacant positions, amongst other measures. The Government recognizes that there is a need to radically change the manner in which future negotiations are conducted, and is considering proposals to reform remuneration in the public sector. The Government has also been focused on stabilizing state owned entities and it remains committed to deficit-neutral capital financing of SOEs in the years ahead.

Guaranteed Debt

In addition to its direct indebtedness, the National Government is also a guarantor of certain third-party indebtedness. The National Government has issued formal contractual guarantees in respect of certain indebtedness of wholly or partially state-owned companies.

The following table sets forth the debt guaranteed by the National Government outstanding in each of the years indicated:

Outstanding National Government Guaranteed Debt

	As of March 31,
	2011		2012		2013		2014		2015
	Rand (million)
Internal		127,709		126,901		140,975		160,784		169,211
External		21,891		27,023		39,265		48,784		56,682
Total		149,600		153,924		180,240		209,568		225,893

Source: South African National Treasury.

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The following table sets forth the National Government’s external guaranteed debt outstanding as of March 31, 2015.

Analysis of National Government External Guaranteed Debt

	As of March 31, 2015
Guarantees Issued on Behalf of	ZAR		U.S. Dollars		Euro		Equivalent in Rand(1)
	Amount (million)
Transnet		3,500		—		—		3,500
Land bank		500		—		—		500
Telkom		—		—		8		99
IDC		—		15		12		344
Lesotho Highlands Development Authority		48		—		3		82
DBSA		2,531		52		64		4,013
Trans-Caledon Tunnel Authority		73		—		—		73
ESKOM		34,458		401		579		46,937
Total(2)		41,110		468		666		55,548

Notes: —

(1) Conversion of amounts into Rand have been made at the following rates: U.S. Dollar = R12.18; Euro = R13.12.

(2) Does not include guaranteed interest to the amount of R1.1 billion.

Source: South African National Treasury.

Debt-Service Costs

As a percentage of the National Government expenditure, debt-service costs increased from 8.2% during fiscal year 2010/11 to 10.1% in 2014/15. As a percentage of the National Government revenue, debt-service costs increased from 9.8% during fiscal year 2010/11 to 11.9% in 2014/15. In addition, as a percentage of GDP, debt service costs increased from 2.3% during fiscal year 2010/11 to 3.0% in 2014/15. The following table sets forth such percentages for the periods indicated.

	For the year ended March 31,
	2011			2012			2013			2014			2015
Expenditure		8.2	%		8.6	%		9.1	%		9.7	%		10.1	%
Revenue		9.8	%		10.3	%		11.0	%		11.4	%		11.9	%
GDP		2.3	%		2.5	%		2.6	%		2.8	%		3.0	%

Source: South African National Treasury.

The aggregate amount of scheduled repayments in respect of principal and interest on the funded National Government debt outstanding as of September 30, 2015, is set forth in the table below.

			External Debt
Year(1)	Rand		U.S.$		EURO		YEN		GBP		SEK
	Amount (million)
2016		51,045		353		48		1,194		8		427
2017		154,028		685		867		2,386		8		829
2018		158,969		806		55		2,384		8		792

147

			External Debt
Year(1)	Rand		U.S.$		EURO		YEN		GBP		SEK
	Amount (million)
2019		147,915		656		41		2,381		7		756
2020		159,843		4,571		31		2,379		2		491
2021		150,586		869		24		31,807		1		236
2022		118,238		346		18		30,617		—		—
2023		133,305		1,317		18		—		—		—
2024		147,431		1,788		18		—		—		—
2025		102,334		218		18		—		—		—
2026		121,301		2,159		18		—		—		—
2027		115,744		100		18		—		—		—
2028		158,281		100		518		—		—		—
2029		50,450		100		—		—		—		—
2030		127,655		100		—		—		—		—
2031		132,563		100		—		—		—		—
2032		93,112		100		—		—		—		—
2033		36,534		100		—		—		—		—
2034		104,107		100		—		—		—		—
2035		39,157		100		—		—		—		—
2036		113,614		100		—		—		—		—
2037		95,825		100		—		—		—		—
2038		55,720		100		—		—		—		—
2039		18,308		100		—		—		—		—
2040		19,408		100		—		—		—		—
2041		97,308		850		—		—		—		—
2042		13,067		53		—		—		—		—
2043		26,395		53		—		—		—		—
2044		25,229		53		—		—		—		—
2045		24,063		1,026		—		—		—		—
2046		31,532		—		—		—		—		—
2047		40,289		—		—		—		—		—
2048		37,553		—		—		—		—		—
2049		34,817		—		—		—		—		—
2050		11,633		—		—		—		—		—
2051		11,362		—		—		—		—		—
2052		11,092		—		—		—		—		—
Total		2,969,815		17,203		1,692		73,148		34		3,531
Principal		1,479,030		11,087		1,424		60,564		33		3,120
Interest		1,490,785		61,161		268		12,584		1		411

Note: —

(1) Fiscal years ending March 31.

Source: South African National Treasury.

Debt Record

On September 1, 1985, in response to a foreign currency liquidity crisis, South Africa prohibited repayment of certain foreign indebtedness to foreign creditors, while interest payments were made as they became due. Final settlement of affected indebtedness was agreed in 1993. Other than this isolated situation, South Africa has not defaulted in the payment of principal or interest on any of its internal or external indebtedness since becoming a Republic in 1961.

148

Tables and Supplementary Information

Funded Internal Debt of the Republic of South Africa (Domestic Marketable Bonds—in Rand) As of September 30, 2015

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
Zero Coupon	April 19, 1994	October 19, 2015		77,877,914
13.50%	September 16, 2012	September 15, 2016		23,757,559,949
13.50%	February 28, 2002	September 15, 2016		760,000,000
2.50%	June 9, 2010	January 31, 2017		27,759,675,473	(1)
8.25%	May 7, 2004	September 15, 2017		61,221,933,836
8.00%	August 13, 2004	December 21, 2018		55,219,000,000
Zero Coupon	April 18, 1996	September 30, 2019		150,000,000
7.25%	June 20, 2005	January 15, 2020		71,414,603,937
6.75%	September 1, 2006	March 31, 2021		67,484,709,007
2.75%	June 17, 2010	January 31, 2022		39,692,870,504	(1)
7.75%	June 22, 2012	February 28, 2023		55,851,352,549
5.50%	May 30, 2001	December 7, 2023		74,305,345,851	(1)
2.00%	July 4, 2012	January 31, 2025		33,295,234,247
10.50%	May 22, 1998	December 21, 2025		52,828,405,383
10.50%	October 31, 2002	December 21, 2025		100,000,000
10.50%	May 22, 1998	December 21, 2026		52,828,405,383
10.50%	October 31, 2002	December 21, 2026		100,000,000
10.50%	May 22, 1998	December 21, 2027		52,828,405,383
10.50%	October 31, 2002	December 21, 2027		100,000,000
2.60%	September 27, 2007	March 31, 2028		48,094,306,791
8.00%	October 04, 2013	January 31, 2030		77,205,282,574
7.00%	May 28, 2010	February 28, 2031		88,289,879,862
8.25%	June 13, 2014	March 31, 2032		55,019,000,000
3.45%	August 15, 2003	December 7, 2033		70,608,939,149	(1)
1.88%	July 15, 2015	February 28, 2033		2,979,538,626
8.88%	July 17, 2015	February 28, 2035		8,095,104,507
6.25%	July 21, 2006	March 31, 2036		83,270,552,145
8.50%	July 19, 2013	January 31, 2037		70,685,639,317
2.25%	July 4, 2012	January 31, 2038		36,588,560,750
9.00%	September 11, 2015	January 31, 2040		1,100,000,000

149

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.50%	June 4, 2010	February 28, 2041		79,098,957,597
8.75%	July 18, 2014	January 31, 2043		13,328,000,000
8.75%	July 18, 2014	January 31, 2044		13,328,000,000
8.75%	July 18, 2014	January 31, 2045		13,328,000,000
2.50%	July 17, 2013	March 31, 2046		21,962,926,521
8.75%	June 29, 2012	February 28, 2047		31,269,333,333
8.75%	June 29, 2012	February 28, 2048		31,269,333,333
8.75%	June 29, 2012	February 28, 2049		31,269,333,333
2.50%	July 11, 2012	December 31, 2049		10,821,423,347
2.50%	July 11, 2012	December 31, 2050		10,821,423,347
2.50%	July 11, 2012	December 31, 2051		10,821,423,347
4.50%	December 1, 1986	Perpetual		10,410
5.00%	December 1, 1986	Perpetual		57,935
Total Funded Internal Debt				1,479,030,405,642

Note: —

(1) Inflation-linked bonds have been revalued using the relevant “reference CPI.”

Source: South African National Treasury.

150

Floating Internal Debt of the Republic of South Africa

(Treasury Bills — in Rand)

As of September 30, 2015

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.65%	October 9, 2014	October 8, 2015		1,300,000,000
6.61%	October 16, 2014	October 15, 2015		1,300,000,000
6.54%	October 23, 2014	October 22, 2015		1,300,000,000
6.50%	October 30, 2014	October 29, 2015		1,300,000,000
6.42%	November 6, 2014	November 5, 2015		1,300,000,000
6.37%	November 13, 2014	November 12, 2015		1,300,000,000
6.37%	November 20, 2014	November 19, 2015		1,300,000,000
6.31%	November 27, 2014	November 26, 2015		1,135,000,000
6.34%	December 4, 2014	December 3, 2015		965,000,000
6.46%	December 11, 2014	December 10, 2015		1,300,000,000
6.45%	December 18, 2014	December 17, 2015		1,300,000,000
6.46%	December 25, 2014	December 24, 2015		1,300,000,000
6.65%	December 31, 2014	December 30, 2015		1,300,000,000
6.72%	January 7, 2015	January 6, 2016		971,600,000
6.66%	January 7, 2015	October 7, 2015		1,450,000,000
6.48%	January 14, 2015	January 13, 2016		1,300,000,000
6.46%	January 14, 2015	October 14, 2015		1,450,000,000
6.31%	January 21, 2015	January 20, 2016		1,300,000,000
6.30%	January 21, 2015	October 21, 2015		1,450,000,000
6.17%	January 28, 2015	January 27, 2016		1,300,000,000
6.18%	January 28, 2015	October 28, 2015		1,450,000,000
6.14%	February 4, 2015	February 3, 2016		1,300,000,000
6.16%	February 4, 2015	November 4, 2015		1,450,000,000
6.17%	February 11, 2015	February 10, 2016		1,300,000,000

151

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.21%	February 11, 2015	November 11, 2015		1,450,000,000
6.28%	February 18, 2015	February 17, 2016		1,300,000,000
6.26%	February 18, 2015	November 18, 2015		1,450,000,000
6.33%	February 25, 2015	February 24, 2016		1,300,000,000
6.25%	February 25, 2015	November 25, 2015		1,450,000,000
6.28%	March 4, 2015	March 2, 2016		1,300,000,000
6.23%	March 4, 2015	December 2, 2015		1,450,000,000
6.28%	March 11, 2015	March 9, 2016		1,300,000,000
6.22%	March 11, 2015	December 9, 2015		1,450,000,000
6.30%	March 18, 2015	March 16, 2016		1,300,000,000
6.23%	March 18, 2015	December 16, 2015		1,450,000,000
6.27%	March 25, 2015	March 23, 2016		1,300,000,000
6.19%	March 25, 2015	December 23, 2015		1,450,000,000
6.28%	April 1, 2015	March 30, 2016		1,410,000,000
6.22%	April 1, 2015	December 30, 2015		1,560,000,000
6.20%	April 8, 2015	April 6, 2016		1,410,000,000
6.14%	April 8, 2015	January 6, 2016		1,560,000,000
6.06%	April 8, 2015	October 7, 2015		1,845,000,000
6.19%	April 15, 2015	April 13, 2016		1,410,000,000
6.14%	April 15, 2015	January 13, 2016		1,560,000,000
6.06%	April 15, 2015	October 14, 2015		1,845,000,000
6.18%	April 22, 2015	April 20, 2016		1,410,000,000
6.14%	April 22, 2015	January 20, 2016		1,560,000,000

152

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.02%	April 22, 2015	October 21, 2015		1,845,000,000
6.18%	April 29, 2015	April 27, 2016		1,410,000,000
6.17%	April 29, 2015	January 27, 2016		1,560,000,000
6.06%	April 29, 2015	October 28, 2015		1,845,000,000
6.25%	May 6, 2015	May 4, 2016		1,410,000,000
6.22%	May 6, 2015	February 3, 2016		1,560,000,000
6.07%	May 6, 2015	November 4, 2015		1,845,000,000
6.26%	May 13, 2015	May 11, 2016		1,410,000,000
6.27%	May 13, 2015	February 10, 2016		1,010,000,000
6.06%	May 13, 2015	November 11, 2015		1,845,000,000
6.29%	May 20, 2015	May 18, 2016		1,410,000,000
6.26%	May 20, 2015	February 17, 2016		1,560,000,000
6.04%	May 20, 2015	November 18, 2015		1,845,000,000
6.39%	May 27, 2015	May 25, 2016		1,155,000,000
6.26%	May 27, 2015	February 24, 2016		1,560,000,000
6.03%	May 27, 2015	November 25, 2015		1,845,000,000
6.48%	June 3, 2015	June 1, 2016		990,000,000
6.33%	June 3, 2015	March 2, 2016		1,560,000,000
6.02%	June 3, 2015	December 2, 2015		1,845,000,000
6.51%	June 10, 2015	June 8, 2016		1,410,000,000
6.36%	June 10, 2015	March 9, 2016		1,560,000,000
5.99%	June 10, 2015	December 9, 2015		1,845,000,000
6.59%	June 17, 2015	June 15, 2016		1,410,000,000
6.42%	June 17, 2015	March 16, 2016		1,560,000,000
5.97%	June 17, 2015	December 16, 2015		83,000,000
6.73%	June 24, 2015	June 22, 2016		1,410,000,000
6.49%	June 24, 2015	March 23, 2016		1,560,000,000

153

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.02%	June 24, 2015	December 23, 2015		5,000,000
6.80%	July 1, 2015	June 29, 2016		1,410,000,000
6.62%	July 1, 2015	March 30, 2016		1,560,000,000
6.29%	July 1, 2015	December 30, 2015		1,487,000,000
6.81%	July 8, 2015	July 6, 2016		1,410,000,000
6.64%	July 8, 2015	April 6, 2016		1,560,000,000
6.50%	July 8, 2015	January 6, 2016		1,636,000,000
6.13%	July 8, 2015	October 7, 2015		2,555,000,000
6.72%	July 15, 2015	July 13, 2016		1,410,000,000
6.55%	July 15, 2015	April 13, 2016		1,560,000,000
6.42%	July 15, 2015	January 13, 2016		1,845,000,000
6.15%	July 15, 2015	October 14, 2015		2,038,440,000
6.71%	July 22, 2015	July 20, 2016		1,410,000,000
6.60%	July 22, 2015	April 20, 2016		1,560,000,000
6.41%	July 22, 2015	January 20, 2016		1,845,000,000
6.06%	July 22, 2015	October 21, 2015		2,555,000,000
6.85%	July 29, 2015	July 27, 2016		1,410,000,000
6.73%	July 29, 2015	April 27, 2016		1,560,000,000
6.51%	July 29, 2015	January 27, 2016		1,845,000,000
6.13%	July 29, 2015	October 28, 2015		2,555,000,000
6.87%	August 5, 2015	August 3, 2016		1,410,000,000
6.81%	August 5, 2015	May 4, 2016		1,560,000,000
6.56%	August 5, 2015	February 3, 2016		1,845,000,000
6.26%	August 5, 2015	November 4, 2015		2,555,000,000
6.84%	August 12, 2015	August 10, 2016		1,410,000,000
6.81%	August 12, 2015	May 11, 2016		1,560,000,000
6.63%	August 12, 2015	February 10, 2016		1,845,000,000
6.27%	August 12, 2015	November 11, 2015		2,555,000,000
6.81%	August 19, 2015	August 17, 2016		1,410,000,000

154

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.80%	August 19, 2015	May 18, 2016		1,560,000,000
6.62%	August 19, 2015	February 17, 2016		1,845,000,000
6.26%	August 19, 2015	November 18, 2015		2,555,000,000
6.82%	August 26, 2015	August 24, 2016		1,410,000,000
6.82%	August 26, 2015	My 25, 2016		1,560,000,000
6.65%	August 26, 2015	February 24, 2016		1,845,000,000
6.25%	August 26, 2015	November 25, 2015		2,555,000,000
6.94%	September 2, 2015	August 31, 2016		1,410,000,000
6.82%	September 2, 2015	June 1, 2016		1,560,000,000
6.63%	September 2, 2015	March 2, 2016		1,845,000,000
6.29%	September 2, 2015	December 2, 2015		2,555,000,000
7.08%	September 9, 2015	September 7, 2016		1,410,000,000
6.93%	September 9, 2015	June 8, 2016		1,560,000,000
6.71%	September 9, 2015	March 9, 2016		1,845,000,000
6.36%	September 9, 2015	December 9, 2015		2,555,000,000
7.07%	September 16, 2015	September 14, 2016		1,410,000,000
6.92%	September 16, 2015	June 15, 2016		1,560,000,000
6.73%	September 16, 2015	March 16, 2016		1,845,000,000
6.42%	September 16, 2015	December 16, 2015		2,555,000,000
7.01%	September 23, 2015	September 21, 2016		1,410,000,000
6.87%	September 23, 2015	June 22, 2016		1,560,000,000
6.66%	September 23, 2015	March 23, 2016		1,845,000,000
6.31%	September 23, 2015	December 23, 2015		2,555,000,000
6.96%	September 30, 2015	September 28, 2016		1,410,000,000
6.84%	September 30, 2015	June 29, 2016		1,560,000,000
6.66%	September 30, 2015	March 30, 2016		1,845,000,000
6.29%	September 30, 2015	December 30, 2015		2,555,000,000
Total Floating Internal Debt				204,536,040,000	(1))

Note: —

(1) Excludes borrowing from the Corporation for Public Deposits to the amount of R51,177,571,210.42

Source: South African National Treasury.

155

Funded External Debt of the Republic of South Africa

as of September 30, 2015

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
Capital market loans
8.50%	June 23, 1997	June 23, 2017	$	140,683,000
2.50%	February 2, 1998	May 20, 2021	¥	564,480,000
3.80%	June 1, 2000	June 1, 2020	¥	30,000,000,000
3.80%	June 12, 2001	September 7, 2021	¥	30,000,000,000
4.50%	April 5, 2006	April 5, 2016	€	750,000,000
5.875%	May 30, 2007	May 30, 2022	$	1,000,000,000
6.875%	May 27, 2009	May 27, 2019	$	1,500,000,000
6.875%	September 4, 2009	May 27, 2019	$	500,000,000
5.50%	March 5, 2010	September 3, 2020	$	2,000,000,000
6.25%	March 8, 2011	March 8, 2041	$	750,000,000
4.665%	January 17, 2012	January 17, 2024	$	1,500,000,000
5.875%	September 16, 2013	September 16, 2025	$	2,000,000,000
5.375%	July 24, 2014	July 24, 2044	$	1,000,000,000
3.750%	July 24, 2014	July 24, 2026	€	500,000,000
3.903%	September 24, 2014	June 24, 2020	$	500,000,000
Floating - Non-CIRR	August 21, 2000 - August 29, 2006	January 25, 2007 - July 25, 2016	€	24,079,764.40
Floating - Non-CIRR	August 21, 2000 - August 29, 2006	January 25, 2008 - July 25, 2017	€	45,532,568.30
5.97% Eur-CIRR Fixed	August 21, 2000 - August 29, 2006	January 25, 2007 - July 25, 2016	€	2,777,549.60
5.97% Eur-CIRR Fixed	August 21, 2000 - August 29, 2006	January 25, 2008 - July 25, 2017	€	5,252,085.29
7.32% $-CIRR Fixed	August 21, 2000 - August 29, 2006	January 25, 2007 - July 25, 2016	$	876,555.16

156

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
7.32% $-CIRR Fixed	August 21, 2000 - August 29, 2006	January 25, 2008 - July 25, 2017	$	1,717,785.84
7.14% CIRR Fixed	April 17, 2000 - March 5, 2001	April 15, 2006 - October 15, 2018	$	4,671,006.26
4.70% MC CIRR	July 17, 2000 - July 17, 2001	April 15, 2006 - October 15, 2015	€	5,196,660.04
4.77% Commercial Fixed	April 15, 2001	April 15, 2009 - October 15, 2018	€	3,990,110.72
5.15% Commercial Fixed	April 15, 2002 - May 21, 2003	April 15, 2009 - October 15, 2018	$	9,825,172.77
5.03% Commercial Fixed	July 15, 2002 - July 15, 2003	October 15, 2006 - April 15, 2016	$	10,786,907.53
5.63% CIRR – Fixed	July 15, 2002 - September 28, 2006	April 15, 2006 - October 15, 2015	€	2,119,921.87
5.63% MC CIRR	April 15, 2004 - July 17, 2006	April 15, 2009 - October 15, 2018	€	12,589,256.51
6.485% Commercial Fixed	December 15, 2001 - January 15, 2003	April 17, 2006 - October 15, 2015	£	1,272,458.03
6.545% Sec – CIRR	July 21, 2004 - July 22, 2005	April 15, 2009 - October 15, 2018	£	6,540,241.56
6.545% Sec – CIRR	November 26, 2003 - August 24, 2006	April 15, 2006 - October 15, 2015	£	1,883,413.26
6.545% Sec – CIRR	August 24, 2006	October 15, 2006 - April 15, 2016	£	22,366.38
5.50% Commercial Fixed	July 21, 2004	April 15, 2009 - October 15, 2018	€	9,505,998.80
4.72% Commercial Fixed	April 18, 2006	April 15, 2009 - October 15, 2018	€	16,038.14
3.57% Commercial Fixed	November 26, 2006 - March 5, 2008	April 15, 2008 - October 15, 2015	£	316,395.48
3.59% Commercial Fixed	March 24, 2009 - August 19, 2009	April 15, 2009 - October 15, 2015	£	299,970.19
3.65% Commercial Fixed	March 5, 2008 - October 1, 2008	April 15, 2008 - April 15, 2016	£	86,645.06

157

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
4.23% Commercial Fixed	December 15, 2008	April 15, 2009 - October 15, 2018	£	57,900.37
4.28% Commercial Fixed	December 4, 2008	April 15, 2009 - October 15, 2018	£	5,873,906.46
4.61% Commercial Fixed	July 31, 2008 - April 15, 2010	April 15, 2009 - October 15, 2018	£	3,487,626.57
4.90% Commercial Fixed	December 15, 2009	April 15, 2010 - October 15, 2018	£	1,093,936.16
4.92% Commercial Fixed	April 6, 2010	April 15, 2011 - April 15, 2020	£	1,389,048.91
5.10% Commercial Fixed	December 15, 2009 - October 15, 2010	April 15, 2011 - April 15, 2020	£	2,345,154.10
5.25% Commercial Fixed	March 23, 2011	October 15, 2011 - April 15, 2020	£	2,077,971.00
6.77% MC CIRR	July 22, 2005	April 15, 2009 - October 15, 2018	£	40,141.78
5.79% Commercial Fixed	July 15, 2002 - April 15, 2004	April 15, 2009 - October 15, 2018	$	1,295,349.20
5.97% Commercial Fixed	October 16, 2006	April 15, 2009 - October 15, 2018	$	562,102.39
5.55% Commercial Fixed	October 15, 2003 - April 15, 2004	April 15, 2009 - October 15, 2018	$	12,860,100.79
5.315% Commercial Fixed	April 15, 2009	April 15, 2011 - April 15, 2020	$	91,783.45
5.39% Commercial Fixed	December 15, 2009	April 15, 2010 - October 15, 2018	$	66,031.20
5.40% Commercial Fixed	June 22, 2007 - August 19, 2009	April 15, 2009 - October 15, 2018	$	3,707,507.87

158

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
5.45% Commercial Fixed	October 15, 2001 - July 15, 2002	April 15, 2006 - October 15, 2015	$	1,823,060.41
5.53% Commercial Fixed	November 26, 2003 - April 26, 2004	October 15, 2006 - April 15, 2016	$	5,866,755.02
5.16% Commercial Fixed	June 6, 2008 - August 19, 2009	April 15, 2009 - October 15, 2018	$	5,688,049.73
5.61% Commercial Fixed	December 15, 2009	April 15, 2010 - October 15, 2018	$	43,039.13
5.49% Commercial Fixed	April 17, 2001 - July 15, 2003	April 15, 2009 - October 15, 2018	SEK	153,041,353.61
3.90% Commercial Fixed	April 15, 2005 - July 22, 2005	April 15, 2011 - April 15, 2020	SEK	87,990,409.02
4.30% Commercial Fixed	October 17, 2005 - January 17, 2006	April 15, 2011 - April 15, 2020	SEK	191,699,039.15
3.81% Commercial Fixed	October 26, 2004 - July 22, 2005	April 15, 2009 - October 15, 2018	SEK	115,378,290.93
4.24% Commercial Fixed	October 17, 2005 - January 16, 2006	April 15, 2009 - October 15, 2018	SEK	62,906,291.14
4.57% Commercial Fixed	April 18, 2006 - October 16, 2006	April 15, 2009 - October 15, 2018	SEK	75,974,208.83
5.03% Commercial Fixed	January 15, 2007 - April 16, 2007	April 15, 2009 - October 15, 2018	SEK	20,023,079.13
4.60% Commercial Fixed	April 18, 2006 - October 16, 2006	April 15, 2011 - April 15, 2020	SEK	631,014,027.11
5.05% Commercial Fixed	January 16, 2007	April 15, 2011 - April 15, 2020	SEK	145,508,959.19

159

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
5.60% Commercial Fixed	June 25, 2007	April 15, 2011 - April 15, 2020	SEK	288,424,994.54
5.50% Commercial Fixed	August 24, 2004	October 15, 2006 - April 15, 2016	$	1,036,184.61
4.42% Commercial Fixed	November 29, 2004 - December 23, 2005	October 15, 2006 - April 15, 2016	€	1,502,756.25
5.48% Commercial Fixed	December 23, 2005 - June 29, 2006	October 15, 2006 - April 15, 2016	€	1,149,043.69
4.52% Commercial Fixed	July 21, 2004 - October 17, 2005	April 15, 2009 - October 15, 2018	€	138,655.02
4.57% Commercial Fixed	April 15, 2005 - January 17, 2006	April 15, 2011 - April 15, 2020	€	16,259,148.72
4.76% Commercial Fixed	April 18, 2006 - July 17, 2006	April 15, 2011 - April 15, 2020	€	26,107,471.99
6.315% Commercial Fixed	November 1, 2006 - March 20, 2007	April 15, 2007 - October 15, 2015	£	909,238.51
5.13% Commercial Fixed	October 15, 2006 - March 20, 2007	April 15, 2007 - October 15, 2015	€	8,018.65
5.16% Commercial Fixed	October 15, 2006 - April 16, 2007	April 15, 2009 - October 15, 2018	€	3,373,926.49
5.175% Commercial Fixed	January 15, 2007	April 15, 2011 - April 15, 2020	€	8,125,952.71
6.28% Commercial Fixed	December 21, 2006	April 15, 2007 - April 15, 2016	£	33,049.68
6.28% Commercial Fixed	October 16, 2006 - January 15, 2007	April 15, 2009 - October 15, 2018	£	7,877.01
6.42% Commercial Fixed	December 15, 2008	April 15, 2011 - April 15, 2020	$	7,213,277.27

160

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
6.61% Commercial Fixed	July 15, 2002 - April 15, 2004	April 15, 2009 - October 15, 2018	$	5,890,686.08
6.65% Commercial Fixed	June 22, 2007	October 15, 2010 - April 15, 2020	$	29,275,553.80
5.89% Commercial Fixed	October 23, 2009 - April 15, 2010	April 15, 2010 - October 15, 2018	$	2,975,434.23
5.98% Commercial Fixed	October 16, 2006	October 15, 2010 - April 15, 2020	$	13,811,066.69
5.475% Commercial Fixed	June 27, 2007 - September 27, 2007	October 15, 2007 - October 15, 2015	€	19,104.96
5.515% Commercial Fixed	July 24, 2007	April 15, 2009 - October 15, 2018	€	1,850,824.72
4.93% Commercial Fixed	April 16, 2007	April 15, 2009 - October 15, 2018	€	678,445.22
5.29% Commercial Fixed	June 25, 2007 - July 24, 2007	April 15, 2009 - October 15, 2018	SEK	24,992,544.90
4.64% Commercial Fixed	November 26, 2007 - December 20, 2007	April 15, 2008 - April 15, 2016	$	1,779,477.60
3.26% Commercial Fixed	March 19, 2008 - June 17, 2008	April 15, 2008 - April 15, 2016	$	960,265.43
5.09% Commercial Fixed	April 15, 2009	April 15, 2011 - April 15, 2020	$	140,815.25
5.51% Commercial Fixed	December 15, 2009	April 15, 2011 - April 15, 2020	$	167,901.61
5.70% Commercial Fixed	December 15, 2009 - April 15, 2010	April 15, 2010 - October 15, 2018	$	4,295,902.70

161

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
5.70% Commercial Fixed	September 15, 2009	April 15, 2011 - April 15, 2020	$	109,438.38
6.50% Commercial Fixed	April 16, 2007	April 15, 2009 - October 15, 2018	£	11,777.77
5.35% Commercial Fixed	October 17, 2011	April 15, 2012 - April 15, 2020	£	2,664,319.78
5.18% Commercial Fixed	May 15, 2007 - October 15, 2007	April 15, 2011 - April 15, 2020	€	7,394,797.66
6.66% Commercial Fixed	October 15, 2007	April 15, 2011 - April 15, 2020	$	10,212,881.68
6.75% Commercial Fixed	July 31, 2008	April 15, 2011 - April 15, 2020	$	22,343,085.70
6.50% Commercial Fixed	September 16, 2008	April 15, 2011 - April 15, 2020	$	14,547,916.15
7.89% Commercial Fixed	December 15, 2009	April 15, 2011 - April 15, 2020	$	5,106,441.82
5.34% Commercial Fixed	May 15, 2007 - October 15, 2007	April 15, 2011 - April 15, 2020	SEK	111,627,051.76
5.64% Commercial Fixed	October 15, 2007	April 15, 2011 - April 15, 2020	SEK	104,175,349.00
6.06% Commercial Fixed	July 31, 2008	April 15, 2011 - April 15, 2020	SEK	214,566,063.49
5.79% Commercial Fixed	September 16, 2008	April 15, 2011 - April 15, 2020	SEK	146,878,284.55
5.45% Commercial Fixed	December 15, 2008	April 15, 2011 - April 15, 2020	SEK	77,604,743.55
5.50% Commercial Fixed	July 31, 2008 - August 18, 2009	April 15, 2009 - October 15, 2018	SEK	188,752,255.40

162

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
5.60% Commercial Fixed	December 15, 2009	April 15, 2010 - October 15, 2018	SEK	1,372,754.83
5.62% Commercial Fixed	December 15, 2009	April 15, 2011 - April 15, 2020	SEK	3,490,590.37
5.335% Commercial Fixed	April 15, 2009	April 15, 2011 - April 15, 2020	SEK	2,833,435.63
5.425% Commercial Fixed	October 23, 2009 - April 15, 2010	April 15, 2011 - April 15, 2020	SEK	24,153,961.10
5.80% Commercial Fixed	October 23, 2009 - April 15, 2010	April 15, 2010 - October 15, 2018	SEK	75,810,302.45
6.30% Commercial Fixed	December 15, 2009	April 15, 2011 - April 15, 2020	SEK	52,003,399.89
5.475% Commercial Fixed	May 20, 2010 - October 15, 2010	April 15, 2011 - April 15, 2020	SEK	37,653,082.86
5.525% Commercial Fixed	December 13, 2010 - April 16, 2012	October 15, 2011 - April 15, 2020	SEK	45,871,597.71
5.565% Commercial Fixed	October 17, 2011	April 15, 2012 - April 15, 2020	SEK	59,020,860.18
5.595% Commercial Fixed	December 07, 2011 - March 20, 2012	April 15, 2011 - April 15, 2020	SEK	31,007,020.52
5.575% Commercial Fixed	December 13, 2010 - April 16, 2012	October 15, 2011 - April 15, 2020	$	2,206,479.11
5.355% Commercial Fixed	April 6, 2010	April 15, 2011 - April 15, 2020	$	1,427,358.19
5.47% Commercial Fixed	March 8, 2010 - October 15, 2010	April 15, 2011 - April 15, 2020	$	1,921,318.74

163

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
5.58% Commercial Fixed	April 6, 2010	April 15, 2011 - April 15, 2020	$	930,352.76
5.695% Commercial Fixed	March 8, 2010 - October 15, 2010	April 15, 2011 - April 15, 2020	$	1,252,316.49
5.80% Commercial Fixed	December 13, 2010 - April 16, 2012	October 15, 2011 - April 15, 2020	$	1,438,184.21
5.905% Commercial Fixed	October 17, 2011	April 15, 2012 - April 15, 2020	$	1,850,444.87
5.68% Commercial Fixed	October 17, 2011	April 15, 2012 - April 15, 2020	$	2,838,974.48
5.775% Commercial Fixed	December 07, 2011 - March 20, 2012	April 15, 2011 - April 15, 2020	$	1,491,474.94
6.00% Commercial Fixed	December 07, 2011 - March 20, 2012	April 15, 2011 - April 15, 2020	$	972,182.30
5.43% Commercial Fixed	December 07, 2011 - March 20, 2012	April 15, 2011 - April 15, 2020	£	2,191,588.56
1.750% Commercial Fixed	April 15, 2009 - September 11, 2012	April 15, 2011 - April 15, 2020	$	1,446,961.55
1.158% Commercial Fixed	April 16, 2012	October 15, 2012 - October 15, 2018	€	88,934.82
1.049% Commercial Fixed	October 23, 2009 - March 22, 2011	April 15, 2010 - October 15, 2015	£	105,468.68
1.069% Commercial Fixed	March 4, 2009 - March 22, 2011	April 15, 2009 - April 15, 2016	£	623,058.99
1.671% Commercial Fixed	May 08, 2012 - September 11, 2012	October 15, 2012 - April 15, 2020	£	870,106.71

164

Interest Rate	Date of Issue	Maturity Date	Nominal Amount
1.525% Commercial Fixed	May 08, 2012 - September 11, 2012	April 15, 2011 - April 15, 2020	$	1,751,866.63
2.162% Commercial Fixed	October 23, 2009	April 15, 2010 - October 15, 2018	SEK	374,118.19
2.287% Commercial Fixed	May 08, 2012 - September 11, 2012	October 15, 2012 - April 15, 2020	SEK	25,605,856.58

Note: —

Commercial Interest Reference Rate (CIRR). The CIRR is determined monthly by the OECD and published on the 14th day of each month. Each CIRR is fixed based on the previous 30-day treasury rate of each currency.

Source: South African National Treasury.

Total External Debt by Currency as of September 30, 2015

Euro	€	1,427,757,034
Pound Sterling	£	34,603,661
Swedish Krone	SEK	3,122,181,017
U.S. Dollars	$	11,089,958,450
Yen	¥	60,564,480,000

Source: South African National Treasury.

165

EX-99.E

Exhibit 99.E

^© South African Reserve Bank

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without fully acknowledging the Quarterly Bulletin of the South African Reserve Bank as the source. The contents of this publication are intended for general information only and are not intended to serve as financial or other advice. While every precaution is taken to ensure the accuracy of information, the South African Reserve Bank shall not be liable to any person for inaccurate information or opinions contained in this publication.

Enquiries relating to this Bulletin should be addressed to:
Head: Economic Research and Statistics Department
South African Reserve Bank
P O Box 427
Pretoria 0001
Tel. +27 12 313-3668/3676
http://www.reservebank.co.za	ISSN 0038-2620

  Quarterly Bulletin September 2015

Contents

Quarterly Economic Review

Introduction	1
Domestic economic developments	4
Domestic output	4
Real gross domestic expenditure	8
Final consumption expenditure by households	9
Final consumption expenditure by government	11
Fixed capital formation	11
Inventory investment	13
Factor income	13
Gross saving	14
Employment	15
Labour cost and productivity	20
Prices	21
Foreign trade and payments	30
International economic developments	30
Current account	33
Financial account	41
Foreign debt	43
International reserves and liquidity	46
Exchange rates	47
Turnover in the South African foreign-exchange market	49
Monetary developments, interest rates and financial markets	50
Money supply	50
Credit extension	52
Interest rates and yields	56
Money market	64
Bond market	65
Share market	68
Market for exchange-traded derivatives	69
Real-estate market	70
Non-bank financial intermediaries	72
Flow of funds	73
Public finance	75
Non-financial public-sector borrowing requirement	75
Budget comparable analysis of national government finance	77
Statement issued by Lesetja Kganyago, Governor of the South African Reserve Bank
Statement of the Monetary Policy Committee 23 July 2015	84
Notes to tables	92
Statistical tables
Contents	S–0
Statistical tables	S–2
Key information	S–146

Quarterly Bulletin September 2015  

Quarterly Economic Review

Introduction

The global economy recorded its third consecutive quarter of pedestrian growth in the second quarter of 2015, with considerable divergence in the performance of individual countries. At the same time global inflation remained well contained and monetary policy settings in the major advanced economies strongly expansionary, while it seemed likely that the Federal Reserve in the United States (US) would start increasing its policy interest rate at some point in the final four months of the year.

International commodity prices, on balance, weakened somewhat further in the second quarter of 2015 and beyond. The imminent lifting of sanctions against Iran and the expected normalisation of its oil exports, alongside subdued global economic growth, contributed to lower crude oil prices, while the prices of many other commodities also fluctuated lower. Commodity-exporting countries therefore continued to face downward pressure on export proceeds, income and employment levels, fiscal receipts and exchange rates. These constraints were of particular relevance for countries in sub-Saharan Africa, given the lack of diversification in their economies.

Financial markets were upset by events in China, mostly in the third quarter of the year when share prices fell precipitously from their previously established exuberant levels. This triggered volatility in global financial markets and led to various policy actions on the side of the Chinese authorities in an attempt to stabilise the situation; these actions included the easing of monetary policy and the devaluation of the renminbi exchange rate.

The South African economy contracted in the second quarter of 2015. Real gross domestic product (GDP) fell at an annualised rate of 1,3 per cent, reversing the positive growth of equal magnitude that was recorded in the first quarter of the year. During the second quarter, real output contracted sharply in the agricultural sector, brought about by widespread drought conditions. Real value added also fell back considerably in the mining, manufacturing and electricity sectors of the economy as a combination of disappointing global and domestic demand conditions and supply-side frictions, including electricity load-shedding, weighed on production. The trade and accommodation sector also registered a marginal contraction in the quarter under review, reflecting subdued domestic sales and tourism expenditure.

Lustreless production was reflected in meagre job creation. Over the year to the second quarter of 2015, the bulk of the jobs that were created was in the informal sector rather than in the formal sector of the economy, while roughly one in four workers remained unemployed.

Real gross domestic expenditure declined more forcefully than real production in the second quarter of 2015. Real consumption expenditure by households rose at a much slower pace than in the previous quarter as the beneficial effect on household finances of a reduction in fuel prices was partially reversed. The rebound in fuel prices contributed to a contraction in household spending on petrol and diesel, culminating in lower real expenditure on non-durable goods. Real spending on semi-durables lost some momentum, and growth in real expenditure on durable goods slowed to its weakest rate since the second quarter of 2009, mainly due to a reduction in expenditure on motor vehicles. Only services expenditure picked up somewhat. The generally lacklustre expenditure by households contributed to slow growth in household debt and a decline in the household debt-to-income ratio in the second quarter.

While the general government’s real final consumption expenditure edged higher in the quarter under review, growth in real gross fixed capital formation lost further momentum. This deceleration was concentrated in capital outlays by private business enterprises and was consistent with the sluggish economic growth performance of the country and the poor state of business confidence. The only area of private-sector investment which picked up notably was that of electricity-generation projects. Capital investment by public corporations, which

Quarterly Bulletin September 2015  

contracted in the first quarter of 2015, ticked higher in the second quarter as Eskom again stepped up spending, while real fixed capital formation by general government maintained its growth momentum.

Real inventory levels declined significantly in the second quarter of 2015 as platinum inventories were run down in the mining sector while crude oil import volumes were also reduced, aligned with scheduled maintenance shutdowns at major oil refineries.

The external trade account staged a gratifying reversal into a surplus in the second quarter of the year. Despite a further decline in the international prices of South African export commodities, the quantities exported rose notably, led by platinum, gold, iron ore, chemical products and vehicles. Simultaneously, import volumes edged lower, mainly brought about by a lull in imports of crude oil in the second quarter, but also reflecting the weak domestic expenditure and depreciated real exchange value of the rand. Part of the improvement in the trade account was offset by a larger deficit on the services, income and current transfer account. Large reductions in dividend and travel receipts – some of them probably related to stricter South African visa regulations – contributed to this outcome. Nevertheless, in the second quarter of 2015 the deficit on the current account narrowed further to 3,1 per cent of GDP, thereby contracting for the fourth consecutive quarter.

The financial account continued to benefit from a net inflow of capital in the quarter under review. This consisted mainly of inward portfolio investment, with equity inflows bolstered by non-residents who responded positively to a rights issue by a health insurance company and debt security inflows benefiting from further net bond purchases from abroad. However, ‘other’ investment flows switched from sizeable inflows previously to an outflow in the second quarter of 2015. Non-resident deposits with South African banks declined notably when the proceeds of an earlier disinvestment transaction, temporarily held on deposit with local banks, were withdrawn. The various flows on the current and financial accounts broadly neutralised each other, resulting in an almost unchanged reserve asset position in the second quarter.

The exchange value of the rand, on balance, depreciated further in the second quarter of the year and continued to fluctuate lower in July and August 2015, in line with a more general downward trend in the exchange rates of emerging-market and commodity currencies. Exchange-rate volatility increased in the wake of the turmoil in the Chinese share market and the devaluation of the renminbi, and the trading range of the rand widened significantly, although to a lesser extent in the deep and liquid domestic market for trading rand against foreign currency than in the thinner offshore market outside of normal South African trading hours.

The rate of growth in bank loans and advances remained low in the first seven months of 2015, consistent with the generally subdued economic conditions. Credit extension to households remained particularly weak, whereas lending to companies maintained somewhat firmer momentum, led by loans to the electricity, real-estate development and financial intermediation sectors.

In the housing market, prices continued to rise in the first seven months of 2015 but at a slightly slower pace than before. Share- and bond-market turnover remained brisk over the same period, with share prices on the JSE Limited (JSE) reaching a record high late in April 2015 before running out of steam in the subsequent four months as weaker commodity prices, the subdued economy and the uncertainties introduced by the turmoil in the Chinese share market took their toll.

With economic conditions tough and capacity utilisation low, consumer price inflation outcomes in the middle months of 2015 were generally slightly below market expectations and comfortably within the target range. Average wage settlements declined marginally compared with the previous year, while unit labour cost increases seemed consistent with the inflation target range. At the same time, most measures of underlying inflation also decelerated somewhat as consumer services price inflation slowed. However, inflation was expected to gain momentum in the remainder of the year and in the first half of 2016, propelled by higher food and electricity prices as well as a reversal of the deflationary trend in petrol price inflation.

  Quarterly Bulletin September 2015

Against this background, in July 2015 the Monetary Policy Committee (MPC) decided to raise the repurchase rate by 25 basis points, bringing the cumulative increase in the policy rate since the first upward move in January 2014 to 100 basis points. Other money-market interest rates followed the repurchase rate. Orderly conditions with adequate liquidity continued to characterise the money market.

The national government’s finances progressed broadly as planned during the first four months of the 2015/16 fiscal year. Weaker-than-expected collections of company taxes were offset by strong income tax collections from individuals and by firm collections of value-added tax (VAT). Aggregate expenditure was also kept within the budgeted projections, notwithstanding the awarding of a higher-than-budgeted salary increase to the public service with effect from April 2015.

In the April–June quarter of 2015, the public-sector borrowing requirement was significantly higher than in the corresponding period a year earlier. Part of this increase arose from stepping up the infrastructure expenditure of general government and public corporations. While the infrastructure programmes have encountered numerous delays and frustrations, a significant milestone in the quest to resolve the bottlenecks in the economy was reached at the end of August 2015 when full commercial operation of the first generating unit completed at the Medupi power station, Unit 6, commenced, adding almost 800 MW to the capacity of the electricity grid.

Quarterly Bulletin September 2015  

Domestic economic developments

Domestic output¹

The South African economy contracted in the second quarter of 2015. Following an increase of 1,3 per cent in the first quarter of 2015, real gross domestic production shrank at an annualised rate of 1,3 per cent in the second quarter. This reversal could mainly be attributed to a contraction in the real value added by the goods-producing sectors of the economy, although growth in the real value added by the services sector also moderated over the period. However, measured over a year, the level of real GDP in the second quarter of 2015 was still 1,2 per cent higher than in the corresponding period in 2014.

The real value added by the primary sector contracted in the second quarter of 2015. Following an increase of 3,3 per cent in the first quarter of 2015, real output of the primary sector declined at an annualised rate of 9,3 per cent in the second quarter as production in both the agricultural and the mining sectors declined over the period.

  Quarterly Bulletin September 2015

Real output of the agricultural sector shrank at a rate of 17,4 per cent in the second quarter of 2015 – the second consecutive quarterly decline following an almost equally sharp decrease of 16,6 per cent in the preceding quarter. Dry weather conditions experienced during the planting and growth season adversely affected field crop production in the second quarter of 2015 and stood in contrast to the bumper harvest of 2014.

The real value added by the mining sector declined in the second quarter of 2015 following robust growth in the preceding two quarters. Weighed down by electricity-supply constraints and weak global demand, the real output of the mining sector contracted by 6,8 per cent in the second quarter. Significant declines in coal and iron-ore production primarily contributed to the negative growth, as increases were registered in the production of platinum, diamonds and gold. Coal production was hampered by industrial action, which affected output at some coal mines, and by lower demand from industrial users, while relatively mild winter temperatures and electricity load-shedding also had a bearing on the demand for coal. The production of iron ore was suppressed by muted demand on account of a global oversupply of steel and a further drop in the price of iron ore.

The pace of increase in the real value added by the platinum-mining sector slowed in the second quarter of 2015 as production levels normalised after the five-month strike in the platinum sector in 2014. In the gold-mining industry, the restructuring of certain gold mines contributed to increased operational efficiencies which underpinned higher production levels in the second quarter.

The real value added by the secondary sector declined by 1,4 per cent in the first quarter of 2015 and by a further 4,7 per cent in the second quarter. The real output of the manufacturing as well as electricity, gas and water subsectors contracted, whereas activity in the construction sector remained muted over the period.

Quarterly Bulletin September 2015  

Real gross domestic product

Percentage change at seasonally adjusted annualised rates

	2014										2015
Sector	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Primary sector		-17,2		-1,0		5,2		13,3		0,0		3,3		-9,3
Agriculture		4,8		5,6		9,5		7,5		5,6		-16,6		-17,4
Mining		-22,8		-3,0		3,9		15,2		-1,6		10,2		-6,8
Secondary sector		-3,8		-2,5		-0,4		7,2		0,4		-1,4		-4,7
Manufacturing		-6,4		-4,0		-1,0		9,5		0,0		-2,4		-6,3
Tertiary sector		1,7		1,9		2,4		1,8		2,1		1,5		1,1
Non-primary sector		0,4		0,9		1,8		3,0		1,8		0,8		-0,3
Total		-1,6		0,5		2,1		4,1		1,5		1,3		-1,3
Excluding agriculture, mining and manufacturing		1,7		1,9		2,3		1,8		2,1		1,4		0,9

Real output of the manufacturing sector declined further in the second quarter of 2015. After contracting at a rate of 2,4 per cent in the first quarter of 2015, the real value added by the manufacturing sector shrank at a rate of 6,3 per cent in the second quarter, subtracting 0,8 percentage points from overall growth in gross domestic production. Production declines were relatively broad-based, with more pronounced decreases recorded in the subsectors supplying basic iron and steel, non-ferrous metal products, petroleum and chemical products, and food and beverages. The disappointing performance of the manufacturing sector continued to reflect sluggish domestic and global demand, dwindling commodity prices, ongoing electricity constraints, and higher production costs. As a result, the utilisation of production capacity in the manufacturing sector inched lower from 81,5 per cent in the first quarter of 2015 to 80,7 per cent in the second quarter.

While both the chemical and the basic iron and steel industries – together accounting for roughly 44 per cent of total manufacturing production – were adversely affected by rising energy costs and the irregular supply of electricity, the latter also had to compete with an increasing supply of steel imports from China, much of it at extraordinarily low prices. Lower quarter-to-quarter growth in the motor vehicle manufacturing subsector reflected a moderation in demand fuelled by weak income growth, higher petrol prices, and above-inflation increases in the prices of new motor vehicles.

  Quarterly Bulletin September 2015

Consistent with dwindling activity in the mining and manufacturing sectors, the real value added by the sector supplying electricity, gas and water contracted in the second quarter of 2015. Real output growth in this subsector switched from an annualised rate of 0,7 per cent in the first quarter of 2015 to -2,9 per cent in the second quarter. This reversal could be ascribed to impaired electricity production arising from scheduled maintenance and unplanned outages as undermaintained generation units failed, along with delays in capacity expansion programmes. The effect was further exacerbated by the lower volumes of electricity consumed by households due to the fairly mild winter temperatures experienced in the second quarter alongside higher real electricity prices. Imports of electricity increased in the second quarter of 2015 in order to ensure the consistent supply of power to major industrial users. Load-shedding continued to affect business confidence and productivity growth in the economy.

Real economic activity in the construction sector moderated in the second quarter of 2015 as building activity remained subdued. Growth in the real value added by the construction sector decelerated to an annualised rate of 0,2 per cent in the second quarter, having increased at a rate of 0,8 per cent in the first quarter. Construction activity improved marginally, while residential and non-residential building activity remained lacklustre.

The pace of increase in the real value added by the tertiary sector slowed further from the first to the second quarter of 2015, registering increases at annualised rates of 1,5 per cent and 1,1 per cent respectively over the period. Growth in the real value added by general government accelerated, while activity in the transport and communication as well as finance, insurance, real-estate and business services sectors increased at a slower pace. The real value added by the trade sector contracted over the period.

Consistent with a slower pace of increase in consumer demand, growth in the real output of the commerce sector turned negative in the second quarter of 2015. Having increased at an annualised rate of 1,2 per cent in the first quarter of 2015, the real value added by the trade sector contracted by 0,4 per cent in the second quarter as activity in both the wholesale and the motor-trade subsectors declined, while retail trade activity tapered off. The retail trade sector experienced increased cost pressures and a deterioration in household demand as consumers’ financial position and their appetite to spend were affected by higher taxes, higher administered prices, and a slower pace of increase in credit extension. The underlying trend in activity in the motor-trade subsector continued on its downward trajectory due to, among other factors, subdued income growth, electricity-supply constraints, and new vehicle price increases in excess of headline consumer price inflation adversely affecting business and consumer confidence.

Growth in the real value added by the transport, storage and communication sector moderated from 1,2 per cent in the first quarter of 2015 to 0,2 per cent in the second quarter as activity in both road and railway transport tapered off. The subsector was negatively affected by increased road tariffs, frequent petrol price increases, increasing driver fees, and higher vehicle maintenance costs. Operations were further affected by additional maintenance as Transnet Freight Rail embarked on a project to address maintenance backlogs and replace obsolete infrastructure components. However, real output of the sector benefited from sustained growth in the communication subsector as the number of active mobile subscribers and the usage of mobile data continued to increase.

The real value added by the finance, insurance, real-estate and business services sector increased at an annualised rate of 2,7 per cent in the second quarter of 2015, slower than the rate of 3,8 per cent recorded in the preceding quarter. This mainly reflected a slower rate of increase in the real output of the banking sector due to subdued demand for loans and a decrease in fee income over the period.

Following a decline in the real value added by general government in the first quarter of 2015, real output rose by 0,6 per cent in the second quarter, consistent with a sluggish rate of growth in government expenditure and employment over the period.

Quarterly Bulletin September 2015  

Real gross domestic expenditure

Real gross domestic expenditure declined in the second quarter of 2015 – the first quarterly contraction since the fourth quarter of 2013. Subsequent to an increase of 2,7 per cent in the first quarter of 2015, gross domestic expenditure declined at an annualised rate of 7,2 per cent in the second quarter as real gross domestic final demand increased at a slower pace alongside a reduction in real inventory holdings. At the same time, growth in real final consumption expenditure by households and gross fixed capital formation moderated somewhat, while real final consumption expenditure by general government increased at a lacklustre pace over the period.

Real gross domestic expenditure

Percentage change at seasonally adjusted annualised rates

	2014										2015
Component	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Final consumption expenditure
Households		1,0		1,0		1,1		1,6		1,4		2,4		1,2
General government		1,7		2,4		1,4		1,0		1,9		-1,9		0,4
Gross fixed capital formation		-9,2		-5,4		2,4		2,6		-0,4		1,8		1,0
Domestic final demand		-1,0		0,0		1,5		1,7		1,1		1,4		1,0
Change in inventories (R billions)*		-4,1		-1,0		2,9		3,8		0,4		8,8		-38,9
Gross domestic expenditure		3,8		0,9		3,2		0,3		0,6		2,7		-7,2

* At constant 2010 prices

Real net exports made the largest contribution to growth in real GDP in the second quarter of 2015, adding 6,1 percentage points, whereas the destocking of real inventory holdings subtracted 6,2 percentage points from growth in real GDP over the period.

  Quarterly Bulletin September 2015

Contribution of expenditure components to growth in real gross domestic product

Percentage points

	2014										2015
Component	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Final consumption expenditure
Households		0,6		0,6		0,7		1,0		0,8		1,5		0,7
General government		0,3		0,5		0,3		0,2		0,4		-0,4		0,1
Gross fixed capital formation		-2,0		-1,1		0,5		0,5		-0,1		0,4		0,2
Change in inventories		4,1		0,4		0,5		0,1		-0,1		0,7		-6,2
Net exports		-5,2		-0,4		-1,1		3,9		0,9		-1,4		6,1
Residual		0,6		0,5		1,2		-1,6		-0,4		0,6		-2,2
Gross domestic product		-1,6		0,5		2,1		4,1		1,5		1,3		-1,3

Final consumption expenditure by households

Consistent with a drop in consumer confidence and slower real income growth in the second quarter of 2015, growth in real final consumption expenditure by households tapered off over the period. Having increased at an annualised rate of 2,4 per cent in the first quarter of 2015, real spending by households advanced at a substantially slower pace of 1,2 per cent in the second quarter of 2015. This moderation resulted from a contraction in expenditure on non-durable goods alongside slower growth in spending on durable and semi-durable goods. Expenditure on services, however, accelerated over the period.

Growth in real outlays on durable goods lost further momentum in the second quarter of 2015, slowing from an annualised rate of 1,3 per cent in the first quarter of 2015 to 0,2 per cent in the second quarter – the weakest growth since the second quarter of 2009. This was mainly due to lower household expenditure on personal transport equipment, the largest component in the durable basket. Real spending on all other durable goods components increased at a faster pace in the second quarter of 2015.

Real outlays on semi-durable goods rose at a slightly slower pace in the second quarter of 2015 although still recording an annualised rate of increase of 3,1 per cent. Spending on motor car tyres and accessories and recreational goods slowed in the second quarter while spending on all other semi-durable categories increased at a faster pace. Attractive and competitive prices of clothing and footwear, for instance, probably enticed consumers to step up their spending on these components.

Quarterly Bulletin September 2015  

The notable pickup in households’ real expenditure on non-durable goods in the first quarter of 2015 was not sustained in the second quarter. Having increased at an annualised rate of 3,2 per cent in the first quarter of 2015, real outlays on non-durable goods contracted by 0,7 per cent in the second quarter. Higher petrol and diesel prices contributed to a decline in expenditure on petroleum products, while lower spending on household fuel and power reflected the declining trend in spending on electricity – some of it forced by load-shedding – over the period. Real consumer outlays on food and beverages – the largest component in the non-durable goods category – accelerated further in the second quarter.

Real final consumption expenditure by households

Percentage change at seasonally adjusted annualised rates

	2014										2015
Category	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Durable goods		4,8		3,4		4,0		5,3		5,3		1,3		0,2
Semi-durable goods		1,9		1,8		2,8		3,3		3,2		3,5		3,1
Non-durable goods		0,8		0,9		-0,1		1,5		0,8		3,2		-0,7
Services		0,1		0,4		1,2		0,4		0,5		1,8		2,9
Total		1,0		1,0		1,1		1,6		1,4		2,4		1,2

Real spending on services, constituting the largest part of total consumption expenditure by households, accelerated from 1,8 per cent in the first quarter of 2015 to 2,9 per cent in the second quarter of 2015. Lower expenditure on transport services, recreational services and financial services was fully countered by higher real outlays on rent, medical services and miscellaneous services.

The acceleration in growth in spending on miscellaneous services mainly reflected lower net travel receipts from abroad. A notable decline in spending by foreign tourists visiting South Africa reflected, among other factors, the negative effect of the implementation of more stringent regulations affecting visa permits as well as the spate of xenophobic attacks earlier this year. This was exacerbated by earlier perceptions of unrest following industrial action in 2014 as well as the outbreak of Ebola in that year, albeit in a distant part of the continent. Outlays on financial services decreased due to lower banking fees collected from bank clients.

Growth in real disposable income of households moderated from an annualised rate of 2,2 per cent in the first quarter of 2015 to 1,6 per cent in the second quarter. Consistent with the modest pace of increase in spending by households in the second quarter of 2015, quarter-to-quarter growth in household debt also slowed over the period

  Quarterly Bulletin September 2015

As a percentage of disposable income, household debt declined from 78,7 per cent in the first quarter of 2015 to 77,8 per cent in the second quarter. The cost of servicing household debt as a percentage of disposable income, however, remained unchanged at 9,4 per cent in the first and second quarters of 2015.

Growth in the net wealth of the household sector also moderated in the second quarter of 2015 as the increase in the value of the housing stock slowed somewhat alongside lower share prices which affected the market valuation of households’ portfolio holdings. Despite the slower pace of increase in the household sector’s net wealth, it remains elevated; relative to annualised disposable income, it moderated from 363 per cent in the first quarter of 2015 to 354 per cent in the second quarter.

Final consumption expenditure by government

Real final consumption expenditure by general government increased at an annualised rate of 0,4 per cent in the second quarter of 2015 following a decline of 1,9 per cent in the first quarter. In the second quarter, increases were recorded in the real compensation of employees as well as expenditure on non-wage goods and services. Compared with spending in the first six months of 2014, real final consumption expenditure by general government increased by 0,4 per cent in the corresponding period of 2015. Relative to the country’s nominal GDP, final consumption expenditure by general government advanced from 19,8 per cent in the first quarter of 2015 to 20,0 per cent in the second quarter.

Fixed capital formation

Growth in real gross fixed capital formation lost further momentum, decelerating from an annualised rate of 1,8 per cent in the first quarter of 2015 to 1,0 per cent in the second quarter. Discouragingly, the pace of increase in capital outlays by private business enterprises – comprising roughly 60 per cent of total capital investment – slowed meaningfully over the period, in line with subdued business confidence levels. By contrast, capital investment by public corporations, which contracted in the first quarter of 2015, ticked higher in the second quarter, while growth in real fixed capital spending by general government maintained its growth momentum. As a percentage of nominal GDP, gross fixed capital formation remained unchanged at 20,4 per cent in the second quarter of 2015.

Quarterly Bulletin September 2015  

Real gross fixed capital formation by private business enterprises essentially moved sideways in the second quarter of 2015, in tandem with the sluggish economic growth performance of the country. Capital outlays by most sectors of the economy were subdued, although real capital formation in the private electricity sector was bolstered by a sharp increase in spending on renewable energy projects as Bid Window 3 projects, being part of the Renewable Energy Independent Power Producer Procurement Programme, commenced construction in the second quarter.

Real gross fixed capital formation

Percentage change at seasonally adjusted annualised rates

	2014										2015
Sector	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Private business enterprises		-15,4		-9,6		1,2		1,7		-3,4		1,6		0,1
Public corporations		-0,6		-3,4		2,3		2,5		1,6		-0,6		0,1
General government		8,7		9,8		7,4		5,9		10,3		5,1		5,3
Total		-9,2		-5,4		2,4		2,6		-0,4		1,8		1,0

Following a decline of 0,6 per cent in the first quarter of 2015, real fixed capital spending by public corporations increased marginally at an annualised rate of 0,1 per cent in the second quarter. Real capital outlays by Eskom and the Umgeni Water Board, in particular, increased firmly over the period, neutralising a contraction in such spending by public corporations in the transport, manufacturing and mining subsectors. Eskom stepped up real gross fixed capital formation on construction works and on machinery and equipment related to its Medupi and Kusile power stations as well as on the revamping of the transmission grid and selected substations. Capital spending by the water subsector was reflected in higher investment in construction works as well as machinery and equipment relating to ongoing projects.

Sustained increases in real capital outlays by general government were upheld in the second quarter of 2015, with such outlays rising at annualised rates of 5,1 per cent in the first quarter and 5,3 per cent in the second quarter. The bulk of capital outlays by central and local government centred around energy, water, transport and education. Higher capital spending by provincial government departments was focused on the refurbishment of various road networks across several provinces.

  Quarterly Bulletin September 2015

Inventory investment

Following a modest build-up in inventories in the first quarter of 2015, real inventory levels declined significantly at an annualised pace of R38,9 billion (at 2010 prices) in the second quarter. The rundown of real inventories in the second quarter of 2015 was mainly due to the destocking in the mining and manufacturing sectors, partly reflecting subdued business confidence levels and a decline in import volumes.

In the mining sector, inventory levels at platinum mines in particular contracted during the period on account of a significant increase in the exports of platinum in order to fulfil offshore export obligations. The rundown of inventories in the manufacturing sector partly reflected lower crude oil import volumes due to scheduled maintenance shutdowns at major oil refineries over the period.

Consistent with a slower pace of increase in retail trade sales, the level of real inventories in the commerce sector rose in the second quarter. Industrial and commercial inventories as a percentage of the non-agricultural GDP remained unchanged at 13,8 per cent in the first and second quarters of 2015.

Factor income

Growth in total nominal factor income, measured over four quarters, accelerated from 4,2 per cent in the first quarter of 2015 to 4,8 per cent in the second quarter as the gross operating surpluses of business enterprises represented less of a drag on income growth than before.

Year-on-year growth in total compensation of employees slowed from 7,7 per cent in the first quarter of 2015 to 7,5 per cent in the second quarter. Growth in compensation of employees moderated in the trade, finance, real-estate and business services sectors, but edged higher in the general government sector. By contrast, the ratio of total compensation of employees to total factor income increased marginally from 52,8 per cent in the first quarter of 2015 to 53,0 per cent in the second quarter. The Wage Settlement Survey conducted by Andrew Levy Employment Publications indicated that the average wage settlement rate for the second quarter of 2015 edged lower and amounted to 7,8 per cent compared with the average rate of 8,0 per cent in the corresponding period of 2014.

Measured over a year, growth in the total gross operating surplus accelerated to 2,1 per cent in the second quarter of 2015. While still low, this was a substantially faster pace than the rate of increase of 0,5 per cent registered in the preceding quarter. The pickup was concentrated in

Quarterly Bulletin September 2015  

the construction as well as finance, real-estate and business services sectors, while growth in the gross operating surpluses of all other sectors either declined or remained relatively weak, reflecting low business confidence levels in the economy. Despite the increase in gross operating surpluses of business enterprises, the share of the latter in total factor income decreased from 47,2 per cent in the first quarter of 2015 to 47,0 per cent in the second quarter.

Gross saving

After improving for three consecutive quarters, South Africa’s national saving ratio decreased from 16,4 per cent of GDP in the first quarter of 2015 to 16,0 per cent in the second quarter. The lower saving ratio stemmed largely from a decrease in saving by the corporate sector, which was partly counteracted by an increase in saving by general government. The saving ratio of the household sector remained stable over the period. The ratio of foreign capital needed to finance capital formation decreased from 22,3 per cent in the first quarter of 2015 to 16,4 per cent in the second quarter.

Gross saving by the corporate sector as a percentage of GDP edged lower from 14,8 per cent in the first quarter of 2015 to 14,2 per cent in the second quarter. Subdued growth in gross operating surpluses, together with higher corporate tax and dividend payments, eroded saving levels in the second quarter.

The gross saving of general government advanced from 1,5 per cent of GDP in the first quarter of 2015 to 1,6 per cent in the second quarter. Although higher levels for both current income and expenditure were recorded from the first to the second quarter, the increase in current income outpaced that in current expenditure. Income was mainly underpinned by higher revenue from company taxes, while expenditure was raised by an increase in final consumption expenditure by general government.

The gross saving ratio of the household sector has remained unchanged at 0,2 per cent since the third quarter of 2014 as both nominal disposable income and household’s final consumption expenditure increased at more or less the same pace over the period.

  Quarterly Bulletin September 2015

Employment

Fairly sluggish output growth in recent years has suppressed meaningful employment gains in the South African economy. This was underlined by a marginal decrease in the level of formal non-agricultural employment in the first quarter of 2015. According to the Quarterly Employment Statistics (QES) survey conducted by Statistics South Africa (Stats SA), the number of people formally employed in the non-agricultural sector of the economy decreased by 0,4 per cent on a seasonally adjusted and annualised basis in the first quarter of 2015, representing the loss of around 8 700 job opportunities and lowering the level of formal non-agricultural employment to 8,96 million.²

The marginal decrease in formal non-agricultural employment in the first quarter of 2015 could largely be ascribed to a decline in public-sector employment, at an annualised rate of 4,4 per cent. With the exception of the public transport and communication sector, which increased its staff complement by 4,3 per cent, employment levels decreased across all public-sector tiers in the first quarter of 2015. Extending the time horizon of the analysis, public-sector employment contracted by 0,5 per cent in the year to the first quarter of 2015, partly reflecting government’s commitment to fiscal consolidation.

Conversely, following five successive quarters of job shedding, private-sector employment increased somewhat in the first quarter of 2015. Employment gains were recorded in the trade, catering and accommodation services sector; the private community, social and personal services sector; and the manufacturing sector. However, most sectors continued to shed jobs, as job losses were recorded in the gold-mining sector (registering the highest rate of decline); the private transport, storage and communication sector; the construction sector; the non-gold mining sector; and the finance, insurance, real-estate and business services sector.

Formal private-sector employment decreased by 6,5 per cent (or 460 700 job opportunities) during the 2008–09 recession. However, in the ensuing five years private-sector employment only increased by 2,0 per cent, equating to a mere 135 100 new job opportunities being created up to the first quarter of 2015. The feeble recovery in formal private-sector employment was indicative of enduring weak fundamentals in the domestic economy, including electricity-supply constraints, strained labour relations, political uncertainty, low business and investor confidence, and a lacklustre global economic environment with declining commodity prices.

Quarterly Bulletin September 2015  

Change in enterprise-surveyed formal non-agricultural employment by sector*

	Change over one quarter 1st qr 2015				Change over four quarters to 1st qr 2015				Cumulative job losses (-) gains  (+)
Sector	Number		Per cent annualised		Number		Per cent		4th qr 2008  to 1st qr 2010		2nd qr 2010  to 1st qr 2015
Total mining		-3 100		-2,5		-3 300		-0,7		-40 700		-2 800
Gold mining		-2 600		-8,7		-3 600		-3,1		-9 600		-44 700
Other mining		-500		-0,5		300		0,1		-31 100		42 000
Manufacturing		4 500		1,6		-15 200		-1,3		-113 800		-62 400
Construction		-1 300		-1,1		-14 400		-2,9		-54 500		-8 900
Trade, catering and accommodation services		16 400		3,6		19 800		1,1		-77 500		78 400
Private transport, storage and communication services		-1 300		-1,7		-9 400		-3,0		400		-6 200
Finance, insurance, real-estate and business services		-500		-0,1		-10 400		-0,5		-190 900		110 200
Private community, social and personal services		2 000		1,7		2 300		0,5		16 400		26 800
Total private sector		16 600		1,0		-30 700		-0,5		-460 700		135 100
National departments		-2 300		-2,0		-5 800		-1,3		-2 500		38 200
Provinces		-17 200		-6,0		-12 300		-1,1		51 600		97 300
Local governments		-2 100		-2,7		1 400		0,5		15 200		73 300
Public transport, storage and communication services		1 400		4,3		2 000		1,5		-4 900		28 700
Other public-sector enterprises, including electricity		-5 000		-9,0		4 100		2,0		-5 000		18 000
Total public sector		-25 300		-4,4		-10 600		-0,5		54 400		255 500
Grand total		-8 700		-0,4		-41 300		-0,5		-406 400		390 600

* Seasonally adjusted. Components may not add to totals due to rounding

Source: Statistics South Africa, Quarterly Employment Statistics (QES) survey

The graph on the next page shows that private-sector employment growth has been particularly weak in the goods-producing, energy-intensive sectors of the economy. In fact, formal employment in the combined mining, manufacturing and construction sectors peaked in the second quarter of 2012, after which 97 600 jobs were lost up to the first quarter of 2015. Although private-sector employment growth has occurred primarily in the tertiary sector of the economy following the 2008–09 recession, the slowdown in the pace of job growth in this sector since 2012 and the setback in the first three quarters of 2014 are clearly illustrated in the graph.

Apart from the temporary pickup in employment levels in the third quarter of 2014, labour paring in the mining sector continued unabated from the third quarter of 2012 to the first quarter of 2015; nearly 46 300 employment opportunities were lost over this period. The pace of job shedding accelerated notably in the gold-mining sector in the first quarter of 2015, continuing the industry’s long-term trend of declining output and employment. Employment levels in the non-gold mining sector also decreased further in the first quarter of 2015, albeit at a much slower pace than in the previous quarter.

  Quarterly Bulletin September 2015

Amid tough wage negotiations in the gold- and coal-mining industries, several large mining companies announced restructuring plans in the third quarter of 2015 aimed at reducing costs by, among other things, trimming capital expenditure and employment. The spate of mining-sector restructuring followed the continued decline in international commodity prices, coupled with mounting cost pressures exacerbated by high wage demands and electricity price increases.

Job creation in the manufacturing sector ticked higher in the first quarter of 2015, with 4 500 new job opportunities created in the quarter. However, the Manufacturing Survey of Stellenbosch University’s Bureau for Economic Research (BER) reported that business confidence among manufacturers edged lower from 30 to 29 index points in the second quarter of 2015. In addition, the indicators for domestic sales volumes, export sales and export order volumes declined further. Weaker demand and electricity load-shedding also weighed on production, leading to a further drop in the indicator measuring output growth. With electricity-supply disruptions remaining a key constraint, the percentage of respondents rating the present level of output below capacity also ticked up, indicative of idle capacity. Consequently, for the first time since 2012 a net majority of respondents expected a decline in investment in machinery and equipment over the forthcoming twelve months. Furthermore, respondents indicated a decline in the number of factory workers and in the average number of hours worked per factory worker in the second quarter of 2015.

Quarterly Bulletin September 2015  

Following an increase in the fourth quarter of 2014, employment in the finance, insurance, real-estate and business services sector resumed its recent declining trend in the first quarter of 2015, albeit only marginally. Conversely, following moderate job losses in the second half of 2014, the trade, catering and accommodation services sector gained 16 400 jobs in the first quarter of 2015. However, results from the BER’s Retail Survey for the second quarter of 2015 showed that conditions in the trade sectors deteriorated during the quarter, as business confidence among retailers and new vehicle dealers weakened, with only wholesalers registering a marginal improvement.

Disconcertingly, the First National Bank (FNB)/BER Consumer Confidence Index plunged to a 14-year low of -15 in the second quarter of 2015, suggesting a marked deterioration in consumers’ ability and willingness to spend. In addition, industry experts expressed concern about prospects for the tourism industry following the implementation of stricter visa regulations by the Department of Home Affairs, effective from 1 June 2015.

Employment in the construction sector decreased for a third successive quarter in the first quarter of 2015, although the pace of labour paring moderated somewhat. Still, the construction sector shed a cumulative 16 500 employment opportunities in the three quarters to the first

  Quarterly Bulletin September 2015

quarter of 2015. Consistent with job losses in the construction sector, the FNB/BER Building Confidence Index indicated a further loss of momentum in the building sector in the second quarter of 2015. Building confidence declined further from 55 index points to 53 in the second quarter of 2015 as confidence among the retailers of building materials fell sharply, while the volume of building activity for both residential and non-residential main contractors continued to deteriorate, weighing on confidence. However, the outlook is slightly more positive as respondents reported a marked rise in activity at the start of the building pipeline. The FNB/BER Civil Confidence Index rose from a low 39 index points in the first quarter of 2015 to 44 in the second quarter, owing to a mild improvement in construction activity. Despite the improvement in confidence, the survey revealed that underlying conditions in the sector remained tough. Owing to the limited availability of construction work, tendering competition intensified notably.

According to the Quarterly Labour Force Survey (QLFS) conducted by Stats SA, the number of persons employed in South Africa increased by 198 000 from the first quarter of 2015 to the second quarter, raising the total level of employment to around 15,65 million.³ Total employment increased by 563 000 in the year to the second quarter of 2015, with the year-on-year growth rate accelerating from 2,7 per cent in the first quarter of 2015 to 3,7 per cent in the second quarter. However, job creation occurred primarily in the informal sector and in the agricultural sector in the year to the second quarter of 2015, with only around 80 000 employment opportunities created in the formal sector of the economy over this period. The accompanying graph shows the extent to which formal-sector employment growth has been substituted by informal-sector employment growth over the past year.

The number of unemployed persons increased by 76 000 in the year to the second quarter of 2015, bringing the total number of unemployed South Africans to around 5,23 million. Having increased by 16 000 in the year to the second quarter of 2015, the total number of discouraged job seekers amounted to 2,43 million according to the latest QLFS. On a seasonally adjusted basis, the unemployment rate decreased from 26,2 per cent in the first quarter of 2015 to 24,7 per cent in the second quarter.⁴ The youth unemployment rate remained roughly twice as high as the overall unemployment rate and amounted to 49,9 per cent in the second quarter of 2015.

Quarterly Bulletin September 2015  

Labour cost and productivity

The year-on-year pace of increase in nominal remuneration per worker in the formal non-agricultural sector of the economy decelerated further from 7,3 per cent in the fourth quarter of 2014 to 6,7 per cent in the first quarter of 2015, mainly due to a slowdown in private-sector remuneration growth. Nevertheless, the pace of increase in real salaries and wages per worker in the formal non-agricultural sector of the economy accelerated from 1,8 per cent in the year to the fourth quarter of 2014 to 3,3 per cent in the year to the first quarter of 2015 as consumer price inflation moderated notably over the period.

In the private sector, the tempo of increase in remuneration per worker moderated for a second consecutive quarter, from a year-on-year rate of 7,4 per cent in the fourth quarter of 2014 to 6,2 per cent in the first quarter of 2015. The slowdown occurred despite the marked increase of 22,1 per cent in remuneration in the non-gold mining sector, primarily due to the low base which resulted from the platinum-mining strike in the first half of 2014. In addition, remuneration growth accelerated marginally in the trade, catering and accommodation services sector (to 6,4 per cent) and in the construction sector (to 5,7 per cent) in the second quarter of 2015. Conversely, the pace of remuneration increase slowed to 9,1 per cent in the private transport, storage and communication services sector; to 8,0 per cent in the private community, social and personal services sector; to 6,5 per cent in the manufacturing sector; to 3,3 per cent in the gold-mining sector; and to 3,2 per cent in the finance, insurance, real-estate and business services sector.

By contrast, year-on-year inflation in nominal wages per worker in the public sector quickened from 6,3 per cent in the fourth quarter of 2014 to 7,8 per cent in the first quarter of 2015. Remuneration increases quickened at all public-sector tiers in the first quarter of 2015, with the exception of national departments.

According to Andrew Levy Employment Publications, the average wage settlement rate in collective bargaining agreements moderated to 7,8 per cent in the first half of 2015, marginally below the average settlement rate of 8,0 per cent in the first half of 2014. Encouragingly, the number of working days lost due to strike action fell to 176 000 in the first half of 2015 – the lowest half-year number since 2002 – compared with 7,5 million recorded in the first half of 2014 when the protracted strike in the platinum-mining industry occurred. Thus far in 2015, the protracted wage negotiations underway in the gold- and coal-mining industries have not been accompanied by major strike activity.

  Quarterly Bulletin September 2015

Employment in the formal non-agricultural sector of the economy contracted in the year to the first quarter of 2015, while year-on-year growth in output accelerated, resulting in a quickening in labour productivity growth from 1,4 per cent in the fourth quarter of 2014 to 2,5 per cent in the first quarter of 2015. Conversely, labour productivity growth in the manufacturing sector slowed from 3,0 per cent to 1,9 per cent over the same period, as output growth slowed alongside a smaller year-on-year contraction in the level of employment. With year-on-year wage inflation slowing and output growth accelerating in the first quarter of 2015, nominal unit labour cost inflation in the formal non-agricultural sector of the economy decelerated notably from 5,8 per cent in the fourth quarter of 2014 to 4,1 per cent in the first quarter of 2015 – remaining within the inflation target range for a seventh successive quarter.

Prices

Against the backdrop of lackluster domestic output growth, recent consumer price inflation outcomes were marginally below market expectations. Nevertheless, from its recent petrol-price-induced trough of 3,9 per cent in February 2015, headline consumer price inflation accelerated steadily in recent months to 5,0 per cent in July – remaining within the inflation target range of 3 to 6 per cent for an eleventh successive month.⁵ However, inflationary pressures were expected to intensify somewhat in the remainder of the year, largely due to a pickup in food price inflation, double-digit electricity tariff increases, and a reversal of the deflationary trend in petrol price inflation, as the low base created at the end of 2014 comes into play.

Despite accelerating somewhat in recent months, most measures of producer price inflation remained fairly subdued. Producer price inflation for final manufactured goods accelerated from a recent low of 2,6 per cent in February 2015 to 3,3 per cent in July, largely due to a quickening in price inflation for beverages, motor vehicle parts, coal and petroleum products as well as metal products. Similarly, producer price inflation for agriculture, forestry and fishing products quickened from -1,8 per cent in January 2015 to 6,4 per cent in July, driven largely by movements in agricultural food prices, in particular cereals and other crop prices that increased markedly in the opening months of 2015. In addition, producer price inflation for electricity and water picked up from a recent low of 7,4 per cent in September 2014 to 12,2 per cent in July 2015 as electricity price inflation accelerated, while that for water slowed over the period.

Quarterly Bulletin September 2015  

Conversely, producer price inflation for intermediate manufactured goods moderated further in recent months, amounting to -0,3 per cent in July 2015 as subdued international prices of petroleum and other commodities filtered through to the prices of basic and fabricated metals and chemicals as well as rubber and plastic products. Similarly, producer price inflation for mining products remained subdued throughout the first half of 2015, suppressed by the continued softening in international mining commodity prices.

The recent gradual acceleration in headline consumer price inflation resulted entirely from a quickening in consumer goods price inflation, particularly for non-durable goods. Consumer goods price inflation accelerated from a recent low of 1,9 per cent in February 2015 to 4,1 per cent in July as non-durable goods price inflation – representing 71 per cent of the total consumer goods price basket – accelerated from a mere 0,9 per cent to 4,5 per cent over the same period. The quickening in non-durable goods price inflation resulted largely from petrol price inflation becoming much less negative, despite petrol prices still remaining somewhat lower in July 2015 than a year earlier.

Headline consumer price inflation

Percentage change over twelve months

			2015
	Weights		May		Jun		Jul
Goods		49,86		3,2		3,8		4,1
Non-durable goods		35,52		3,2		4,0		4,5
Food		14,20		4,6		4,3		4,4
Petrol		5,68		-9,8		-5,0		-4,0
Semi-durable goods		6,32		4,2		4,3		4,1
Clothing		2,76		5,6		5,8		5,8
Footwear		1,31		4,9		5,0		5,9
Durable goods		8,02		2,6		2,2		2,4
New vehicles		5,28		5,6		5,5		5,4
Household appliances		0,60		3,9		3,0		2,7
Services		50,14		5,9		5,6		5,7
Total		100,00		4,6		4,7		5,0

  Quarterly Bulletin September 2015

Durable and semi-durable goods price inflation has remained fairly subdued since late 2014, indicative of poor pricing power in the domestic economy related to weak demand. In fact, semi-durable goods price inflation slowed from 5,4 per cent in December 2014 to 4,1 per cent in July 2015. In addition, durable goods price inflation slowed notably from 3,9 per cent in January 2015 to 2,4 per cent in July as price inflation moderated across a broad range of durable goods. In particular, price inflation for new vehicles – with a weight of 66 per cent in the durable goods price basket – decelerated from 7,9 per cent to 5,4 per cent over the same period as the number of new vehicles sold in South Africa contracted in the first half of 2015.

Following a prolonged period of remarkably stable rates of increase around the upper limit of the inflation target range of 6,0 per cent, consumer services price inflation slowed somewhat in June 2015; having remained at 5,9 per cent for four consecutive months up to May 2015, it moderated to 5,6 per cent in June as price inflation decelerated across a broad range of services, including dwelling rent, domestic workers’ wages, transport services, recreational and cultural services, restaurant services and transport insurance services. Subsequently, consumer services price inflation quickened marginally in July 2015, largely on account of higher water prices and assessment rates.

Amid an environment of benign global food price inflation, domestic consumer food price inflation continued to moderate up to the middle of 2015 despite an acceleration in producer food price inflation in recent months.

Quarterly Bulletin September 2015  

Agricultural producer food price inflation, which initially led the slowdown in consumer food price inflation, accelerated gradually from -3,0 per cent in January 2015 to 7,8 per cent in July. This was driven by inflation for cereals and other crops, which quickened markedly from -17,5 per cent to 35,2 per cent over the same period on account of rising domestic maize prices coupled with unfavourable base effects. However, producer food price inflation at the manufactured level remained fairly subdued, amounting to 5,0 per cent in July 2015.

Consumer food price inflation moderated further in the first half of 2015 and amounted to 4,4 per cent in July. The deceleration in consumer food price inflation was fairly broad-based among the various food categories. In July 2015 price inflation decelerated in five of the nine consumer food price categories and accelerated in the remaining four. Notwithstanding recent fairly benign domestic and global food price inflation outcomes, the continuing drought in parts of the country has significantly raised the upside risk to the domestic food price inflation outlook. Domestic maize and wheat prices have increased markedly since the beginning of the year, with the impact expected to pass through to consumer food price inflation in due course (see the accompanying box).

Box 1 The impact of a smaller maize crop on food price inflation

Food prices have often been a key driver of consumer price inflation, not least due to the sensitivity to climate of food production and consequent potentially large swings in the prices of certain food products, along with food’s large weight of 14,20 per cent in the overall consumer price index. Bearing in mind that consumers within the lower expenditure quintiles spend a much larger portion of their income on food, an acceleration in food price inflation has a particularly adverse effect on the purchasing power of lower-income households.

Despite the current generally more favourable international outlook for wheat and maize prices due to bumper crops and high inventory levels, domestic maize prices have rallied in the opening months of 2015 on account of the heat wave and drought conditions in the summer rainfall regions of the country, believed to be the worst in more than 20 years, and the accompanying damage to formerly promising crops. By late August 2015, the Crop Estimates Committee of the Department of Agriculture, Forestry and Fishing estimated a 20,7 per cent lower yellow maize crop and a 39,7 per cent lower white maize crop in its seventh production forecast for summer crops in 2015, compared with the final crop for 2014.

As a result, despite being Africa’s largest maize producer, South Africa is expected to be a net importer of maize for the first time in seven years in 2015, with the National Agricultural Marketing Council at the end of August 2015 projecting imports of 750 000 metric tons of maize for the 2015/16 marketing season, comprising 650 000 tons of yellow maize used mostly for animal feed and 100 000 tons of white maize used mostly as staple food.

  Quarterly Bulletin September 2015

The spot price of white maize has accordingly moved closer to the import parity price since the beginning of 2015, rising from around R1 700 per ton in July 2014 to around R3 170 per ton in July 2015. Given the low base created in the middle of 2014, the year-on-year rate of increase in maize prices accelerated sharply in recent months.

Supported by large global stocks, international wheat prices have receded gradually since the beginning of 2015. Since South Africa does not produce enough wheat to satisfy domestic consumption, the spot price of wheat usually remains fairly close to the import parity price. However, after initially decreasing in line with international wheat prices, the domestic spot price of wheat continued to increase in recent months. Exacerbated by the recent depreciation in the exchange rate of the rand, the domestic spot price of wheat increased from around R3 800 per ton in April 2015 to more than R4 000 per ton in August, with the year-on-year rate of increase accelerating concomitantly. In addition, the international cereal price index of the United Nations Food and Agriculture Organization (FAO) for July 2015 rose for the second consecutive month. Unfavourable weather conditions in North America and Europe caused a surge in the international prices of wheat and major coarse grains during the first half of July, much of which was eroded in the second half of July and in August as weather prospects improved. Subsequently, the year-on-year change in the FAO international cereal price index, expressed in rand terms, accelerated from -10,6 per cent in May 2015 to 2,8 per cent in August.

The bread and cereals category within the consumer food price basket accounts for a quarter of the total food price basket, with a weight of 3,55 per cent in the consumer basket against the total food price basket weight of 14,20 per cent. In turn, within the bread and cereals subcategory, bread products have a fairly large weight of 1,75 per cent, constituting almost half of the subindex, while maize meal products have a weight of 0,68 per cent. Given these weights, the marked rise in domestic maize prices, coupled with the recent pickup in domestic wheat prices, is expected to exert upward pressure on the bread and cereals subcategory of consumer food price inflation in the latter months of 2015.

Bread and cereals prices

Percentage change over twelve months

	Weight in overall consumer basket				May 2015		Jun 2015		Jul 2015
Rice		0,43	(12	%)		0,8		2,4		2,7
Bread		1,75	(49	%)		6,4		4,8		5,5
Pasta		0,09	(3	%)		5,8		5,3		4,4
Cakes		0,12	(3	%)		4,7		6,3		5,2
Other		1,16	(33	%)		0,7		0,5		4,7
Total bread and cereals		3,55	(100	%)		3,8		3,2		4,8

Quarterly Bulletin September 2015  

The sharp rise in domestic maize prices was reflected fairly quickly in year-on-year agricultural producer price inflation, which accelerated from a recent low of -3,0 per cent in January 2015 to 7,8 per cent in July, driven largely by a marked acceleration in price inflation for cereals and other crops from -17,5 per cent to 35,2 per cent over the same period. However, bread and cereals price inflation at the consumer level responded with a slight lag and has hitherto remained fairly subdued, accelerating from 2,4 per cent in April 2015 to 4,8 per cent in July.

While white maize is generally used for the production of maize meal for human consumption, yellow maize is primarily used as animal feed. Meat represents the subcategory with the largest weight in the consumer food price basket (constituting 4,56 percentage points of the total 14,20 per cent food weight in overall consumer prices). With domestic yellow maize prices increasing notably since the middle of 2014 and moving closer to import parity, poultry prices – with the largest weight in the consumer meat price basket and strongest dependency on maize as an intermediary input – have been pushed higher.

Meat prices

Percentage change over twelve months

	Weight in overall consumer basket				May 2015		Jun 2015		Jul 2015
Beef		1,27	(28	%)		2,3		2,8		2,8
Pork		0,17	(4	%)		7,9		8,6		7,7
Lamb		0,42	(9	%)		9,8		9,3		8,5
Poultry		1,70	(37	%)		8,3		8,4		7,9
Dried, salted or smoked meat		0,92	(20	%)		1,8		1,3		2,2
Other preserved or processed meat		0,08	(2	%)		-2,4		-0,7		-1,6
Total meat		4,56	(100	%)		5,3		5,4		5,2

Meat price inflation has been at fairly elevated levels over the past twelve months as farmers have been stocking their herds. Nevertheless, agricultural producer price inflation for live animals moderated marginally from 13,7 per cent in January 2015 to 10,5 per cent in July. Looking ahead, the persistent dry conditions and the concomitant rise in feed cost, coupled with the high base created over the past twelve months, could mitigate against a further acceleration in agricultural producer meat price inflation and might lead to the culling of herds. Meat price inflation at the consumer level has moderated somewhat in recent months, amounting to 5,2 per cent in July 2015.

  Quarterly Bulletin September 2015

The lower domestic maize crop will impact on consumer food price inflation in 2015 and 2016, primarily via the meat as well as the bread and cereals subcategories, together accounting for 57 per cent of the overall consumer food price basket. The confluence of a smaller crop with a period of weakness in the exchange value of the rand is set to amplify the upward pressure on consumer food price inflation.

The international food price index of the United Nations Food and Agriculture Organization (FAO) (denominated in US dollar) was 21,5 per cent lower in August 2015 than a year earlier, registering its lowest level since December 2008. The decline in the index in August 2015 resulted from a sharp drop in the prices of dairy products, vegetable oils, sugar and cereals, while meat prices held steady. Although international cereal prices increased in June and July 2015 on account of rising wheat and maize prices following temporary unfavourable weather conditions in some regions in North America and Europe, abundant global stocks and a reversal in weather conditions resulted in international cereals prices receding notably in August. As such, international cereal prices were 15,1 per cent lower in August 2015 than a year earlier. However, when expressed in rand terms, the year-on-year change in the FAO international cereals price index accelerated from -10,6 per cent in April 2015 to 2,8 per cent in August.

Following a period of fairly stable underlying inflationary pressures just below the upper limit of the inflation target range, most measures of underlying inflation have receded somewhat in recent months, reflecting, inter alia, the slight moderation in consumer services price inflation. Subtracting the impact of the more volatile food and petrol prices from the calculation of targeted headline consumer price inflation, underlying price inflation slowed from 5,9 per cent in February 2015 to 5,7 per cent in July. Similarly, when further excluding the impact of electricity prices from the calculation, the resultant underlying measure of inflation moderated from 5,8 per cent to 5,4 per cent over the same period.

Quarterly Bulletin September 2015  

Recent outcomes of administered price inflation continued to be driven largely by changes in domestic petrol prices. Administered price inflation slowed notably throughout the second half of 2014 and into the opening months of 2015, reaching a recent low of -4,5 per cent in February 2015 as petrol price inflation decelerated markedly to -26,7 per cent in that month. However, petrol price inflation subsequently accelerated to -4,0 per cent in July 2015, and consequently, administered price inflation quickened to 4,5 per cent in the same month. Nevertheless, when excluding the effect of petrol prices from the calculation of administered prices, the rate of increase accelerated from 6,3 per cent in February 2015 to 8,5 per cent in July as price inflation for electricity, water and assessment rates quickened notably.

  Quarterly Bulletin September 2015

The most recent actual inflation outcomes have a significant bearing on inflation expectations. Following a notable decline in the first quarter of 2015, inflation expectations edged higher in the second quarter. Average headline consumer price inflation expectations for 2015 and 2016, as reflected in the Inflation Expectations Survey conducted by the BER, increased by 0,2 percentage points compared to the first quarter, amounting to 5,6 per cent and 6,1 per cent respectively in the second quarter of 2015. While business representatives and especially analysts revised their forecasts upwards, trade union officials scaled their expectations back, albeit only marginally. While all three groups expected inflation to be higher in 2016 than in 2015, only business representatives foresaw a further acceleration in 2017. Longer-term expectations also deteriorated somewhat, with average five-year inflation expectations increasing from 5,8 per cent to 6,0 per cent in the survey for the second quarter of 2015.

Headline consumer price inflation expectations

Per cent, as surveyed in the second quarter of 2015

Average inflation expected for:	Financial analysts		Business representatives		Trade union representatives		All surveyed participants
2015		5,0		6,2		5,6		5,6
2016		6,0		6,4		5,8		6,1
2017		5,4		6,5		5,6		5,8

Source: Bureau for Economic Research, Stellenbosch University

Having risen from 6,3 per cent in the fourth quarter of 2014 to 6,8 per cent in the first quarter of 2015, household inflation expectations for 2015 increased further to 7,1 per cent in the second quarter – the highest in more than two years. Disconcertingly, inflation expectations increased across all income, age and race groups.

Quarterly Bulletin September 2015  

Foreign trade and payments

International economic developments

Global economic growth accelerated marginally to 3,0 per cent in the second quarter of 2015– the third consecutive quarter of sluggish growth. Growth in advanced economies remained unchanged during the quarter amid diverging performances; growth rebounded in the United States (US) and the United Kingdom (UK), but turned negative in Japan. By contrast, economic growth in emerging-market and developing economies accelerated somewhat in the second quarter of 2015, underpinned by moderately stronger performances in emerging Asia.

The International Monetary Fund (IMF) reduced its global growth forecast for 2015 by 0,2 percentage points to 3,3 per cent in its July 2015 World Economic Outlook Update. Growth projections for advanced economies as well as emerging-market and developing economies were pared back by 0,3 and 0,1 percentage points, to 2,1 per cent and 4,2 per cent respectively. The forecast for growth in the US in 2015 was downgraded by a significant 0,6 percentage points to 2,5 per cent due to unexpectedly weak growth in the first quarter. Growth projections for the UK and Japan were also lowered to 2,4 per cent and 0,8 per cent respectively, while the forecast for economic growth in the euro area was left unchanged at 1,5 per cent. Among emerging-market and developing economies, growth forecasts were revised lower for the Middle East and North Africa, Latin America, and sub-saharan Africa, while projections for emerging Asia were left unchanged. Lower growth projections for emerging-market and developing economies largely reflect the negative impact of lower commodity prices, tighter external financial conditions, the ongoing rebalancing of the Chinese economy, structural challenges, and the adverse effect of geopolitical tensions. The IMF kept its global growth forecast for 2016 at 3,8 per cent, reflecting unchanged projections for both advanced as well as emerging-market and developing economies of 2,4 per cent and 4,7 per cent respectively.

Economic growth in the US rebounded significantly to an annualised rate of 3,7 per cent in the second quarter of 2015, up from a revised 0,6 per cent in the first quarter. This improvement was largely driven by robust growth in consumer spending, which contributed 2,1 percentage points to overall economic growth in the second quarter. The US Federal Reserve’s Open Market Committee (FOMC) left its policy rate unchanged at its July 2015 meeting. Its assessment of developments in the economy, however, remained favourable, and markets still expect the first US interest rate increase in almost a decade before the end of 2015. Nevertheless, inflation remained well below the Federal Reserve’s longer-run objective of 2 per cent.

  Quarterly Bulletin September 2015

Real growth in selected advanced economies

Percentage change at seasonally adjusted annualised rates

	2013						2014										2015
Countries	3rd qr		4th qr		Year		1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
United States		3,0		3,8		1,5		-0,9		4,6		4,3		2,1		2,4		0,6		3,7
Japan		2,5		-0,9		1,6		4,5		-7,6		-1,1		1,3		-0,1		4,5		-1,2
Euro area		0,9		0,9		-0,3		0,8		0,3		1,0		1,6		0,9		2,1		1,4
United Kingdom		2,9		1,6		1,7		3,6		3,7		2,9		3,4		3,0		1,5		2,7
Canada		2,7		2,9		2,0		1,0		3,4		3,2		2,2		2,4		-0,8		-0,5
Australia		1,4		3,5		2,0		3,6		2,5		1,5		2,2		2,8		3,6		0,7
New Zealand		4,4		2,1		2,5		4,3		2,8		4,1		2,8		3,3		0,6		n.a.
Advanced economies		2,2		2,4		1,4		1,0		1,6		2,5		1,9		1,8		1,8		1,8

Sources: Bloomberg, national statistical offices and staff calculations

Growth in the euro area moderated to 1,4 per cent in the second quarter of 2015. The slowdown was largely due to weaker activity in some of the larger economies. Economic growth slowed in France, Italy and the Netherlands. Consumer price inflation in the euro area remained unchanged for the third consecutive month at 0,2 per cent in August 2015. The European Central Bank (ECB) left its policy rate unchanged at its September 2015 meeting and maintained its asset purchases at €60 billion per month.

After having increased at a rate of 4,5 per cent in the first quarter of 2015, real gross domestic production in Japan contracted by 1,2 per cent in the second quarter. This was mainly due to a decline in exports, in particular to China, and a moderation in consumer spending. The Bank of Japan (BOJ) left its monetary policy stance unchanged at its August 2015 meeting, maintaining its bond purchase programme at ¥80 trillion (roughly US$660 billion) per annum. Japan’s inflation rate moderated to 0,2 per cent in July 2015. The BOJ expects inflation to remain close to zero, partly due to low energy prices.

Real economic growth in the UK rebounded in the second quarter of 2015, largely driven by exports and consumption expenditure by households. Consumer price inflation remained low, while the Bank of England left its policy rate unchanged at 0,5 per cent at its August 2015 meeting and maintained the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

Real growth in selected emerging-market economies

Percentage change at seasonally adjusted annualised rates

	2013						2014										2015
Country/area	3rd qr		4th qr		Year		1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Russia		0,6		0,9		1,3		-0,8		2,9		0,5		-2,0		0,6		-9,4		-6,7
Turkey		1,9		3,2		4,2		5,3		-0,3		1,5		4,0		2,9		6,0		5,5
Poland		3,6		2,8		1,7		4,5		2,4		3,6		3,2		3,4		4,1		3,6
Emerging Europe		1,6		2,0		2,1		1,6		2,0		1,5		0,6		1,8		-2,4		-1,5
China		9,0		7,1		7,7		6,5		7,5		8,0		7,2		7,3		5,5		7,5
India		7,6		3,7		6,9		6,9		8,6		14,8		-3,4		7,3		11,0		6,7
Indonesia		6,0		4,9		5,6		4,3		4,9		5,5		4,8		5,0		4,3		4,2
Emerging Asia		8,1		5,8		7,1		6,1		7,4		9,1		4,4		6,8		6,5		6,7
Brazil		0,0		-0,6		2,8		2,7		-4,4		0,4		0,2		0,2		-3,0		-7,2
Mexico		5,0		1,3		1,4		2,0		3,2		2,4		2,8		2,1		1,7		2,0
Argentina		2,8		-1,2		2,9		-1,9		3,3		-0,3		1,3		0,4		0,8		n.a.
Latin America		2,2		0,9		2,7		0,4		0,1		1,8		1,3		1,0		-1,8		-1,3
Emerging economies		5,9		4,3		5,4		4,3		5,1		6,5		3,3		4,9		3,7		4,1

Sources: Bloomberg, JPMorgan, national statistical offices and staff calculations

Quarterly Bulletin September 2015  

Economic growth in emerging Asia accelerated in the second quarter of 2015 as growth in China picked up from 5,5 per cent in the first quarter of 2015 to 7,5 per cent (year-on-year growth remained unchanged at 7,0 per cent – the slowest pace of increase in six years). The stronger quarter-to-quarter growth in China was partly due to several stimulus measures adopted by the People’s Bank of China, including lower interest rates and reserve requirement ratios for banks. The Chinese authorities also surprised markets in mid-August when the renminbi was devalued by lowering the central parity rate. Growth in India and Indonesia decelerated in the second quarter of 2015 following a strong performance in the first quarter. Consumer price inflation in China accelerated from 0,8 per cent in January 2015 to 1,6 per cent in July. Inflation in India eased significantly from 8,6 per cent in January 2014 to 3,8 per cent in July 2015, mainly due to lower food and energy prices. The sharp moderation in inflation allowed the central bank to lower interest rates on three occasions in the first half of 2015 to 7,25 per cent.

Real output in emerging Europe continued to decline in the second quarter of 2015. The recession in Russia deepened as real output contracted by 6,7 per cent amid low oil prices, geopolitical tensions and sanctions. Following strong performances in the first quarter of 2015, growth decelerated in both Turkey and Poland. Inflation in Russia remained high due to the sharp depreciation of the rouble in mid-December 2014 and import restrictions. After peaking at 16,9 per cent in March 2015, inflation slowed to 15,3 per cent in June before edging higher to 15,8 per cent in August. The Russian central bank judged that the impact of these temporary factors would dissipate and that the weak growth in domestic demand would lead to downward pressures on inflation. Accordingly, it reduced the policy rate for the fifth time this year, bringing it to a level of 11 per cent in July. Inflation remains high in Turkey, even though it has been decelerating since mid-2014 due to falling commodity prices. The Turkish central bank has kept its policy rate on hold at 7,5 per cent since February 2015. Poland’s central bank lowered its interest rate by 50 basis points to 1,50 per cent in March 2015, the lowest on record, in response to continued deflation despite healthy economic growth.

Preliminary estimates suggest that real output in Latin America declined further in the second quarter of 2015, mainly due to Brazil which has fallen into recession. The Brazilian economy is struggling due to tighter policy settings, political crisis and the collapse in commodity prices, and was recently downgraded from an investment-grade credit rating to the highest sub-investment rating. Economic growth in Mexico accelerated compared to the first quarter. Inflation remained high in the region, particularly in Argentina, Brazil and Venezuela. Persistent inflationary pressures prompted the central bank of Brazil to raise its policy rate by a cumulative 250 basis points from the beginning of 2015 to 14,25 per cent in July 2015, while policy rates in Mexico remained unchanged over the same period.

According to the CPB Netherlands Bureau for Economic Policy Analysis, the volume of world trade (calculated as the three-month average of world exports relative to that of the preceding three months) fell for the fourth consecutive month in June 2015, declining by 0,8 per cent. The contraction was largely due to a 2,7 per cent decrease in the export volumes of emerging economies, especially emerging Europe. Growth in export volumes of advanced economies accelerated to 1,2 per cent in June 2015, following three successive months of negative growth.

Having been fairly stable at around US$110 per barrel for almost four years, the price of Brent crude oil declined from US$115 to US$45 per barrel between mid-2014 and the end of January 2015. This sharp drop in the price of oil was caused by ample supply, weak global demand, the unwinding of some geopolitical risks, and the strong US dollar. Oil prices briefly rebounded to levels of around US$66 per barrel in mid-May 2015 before declining again to below US$41 per barrel in mid-August due to subdued global growth and expectations of a rise in supply when oil from Iran returns to the market. Oil prices remain volatile and jumped towards the end of August by 23 per cent in three days to US$51 per barrel due to technical factors rather than fundamentals. Prices dropped back to US$47 per barrel in early September amid concerns about Chinese growth prospects. Brent crude oil futures contracts for delivery in the fourth quarter of 2015 traded at around US$50 per barrel in early September 2015.

  Quarterly Bulletin September 2015

International financial markets experienced turmoil in August 2015, triggered by a sharp downward correction in Chinese share price, albeit from exceptionally high initial levels, as well as the renminbi devaluation. Share market valuations declined in most parts of the world, while volatility in foreign-currency markets simultaneously increased significantly.

Current account⁶

South Africa’s trade balance with the rest of the world switched from a deficit of R68 billion in the first quarter of 2015 to a surplus of R14 billion in the second quarter, constituting the first trade surplus to be recorded since the fourth quarter of 2011. The positive trade balance in the second quarter of 2015 largely reflected increased global demand alongside the relatively depreciated external value of the rand. Against this background, export proceeds rose notably in the second quarter of 2015, while the value of merchandise imports edged lower in line with the moderation in domestic demand over the period.

Quarterly Bulletin September 2015  

Balance of payments on current account

R billions, seasonally adjusted and annualised
	2014										2015
	1st qr		2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Merchandise exports		966		909		931		959		941		937		1 001
Net gold exports		62		64		63		62		63		62		71
Merchandise imports		-1 099		-1 064		-1 071		-1 056		-1 072		-1 067		-1 059
Trade balance		-72		-90		-77		-35		-69		-68		14
Net service, income and current transfer payments		-101		-142		-145		-163		-138		-117		-138
Balance on current account		-173		-232		-223		-198		-207		-185		-124
As percentage of gross domestic product		-4,6		-6,2		-5,8		-5,1		-5,4		-4,7		-3,1

Components may not add up to totals due to rounding

The shortfall on the services, income and current transfer account with the rest of the world, on the contrary, widened in the second quarter of 2015, but fell short of fully offsetting the improvement in the trade account. Consequently, the deficit on the current account of the balance of payments narrowed further to 3,1 per cent of gross domestic product in the second quarter of 2015, marking the fourth consecutive quarterly improvement in the balance on the current account.

  Quarterly Bulletin September 2015

Increased foreign demand for domestically produced non-gold mining commodities and manufactured products lifted the volume of merchandise exports by 4,9 per cent in the second quarter of 2015, following a 3,4 per cent increase in the first quarter. The physical quantity of non-gold mining exports was primarily boosted by higher exports of platinum-group metals and mineral products – especially iron ore – in the second quarter of 2015. Platinum producers continued to ramp up production in order to recover losses accumulated during the five-month strike from February to June 2014; production was primarily exported to enterprises in the US, Japan and the UK over the period. The rise in the physical quantity of manufactured goods in the second quarter of 2015 largely reflected higher exports of chemical products, and vehicles and transport equipment destined mainly for the US, Germany and Belgium; vehicle manufacturers had previously expanded capacity in order to boost exports.

The average US dollar price of a basket of South African non-gold export commodities receded for the sixth consecutive quarter in the second quarter of 2015, falling by 1,8 per cent. The pace of decline was, however, notably slower than the rate of decline of 5,3 per cent recorded in the first quarter of 2015.

Quarterly Bulletin September 2015  

The international spot prices of iron ore, nickel, coal and platinum decreased noticeably on a quarter-to-quarter basis; iron-ore and platinum prices in particular receded largely in response to global oversupply. Platinum prices dropped to below $1 000 per fine ounce in mid July 2015 – a level last observed in February 2009. By contrast, the price of copper rebounded somewhat in the second quarter of 2015 due to, among other factors, a more stable real-estate market in China.

Box 2 Merchandise trade balances by region and product category

South Africa’s trade balance with all major regions improved notably in the first half of 2015 following mixed performances recently. The improvement in the country’s trade balance in the first half of 2015 could largely be attributed to an increase in export proceeds alongside subdued growth in the value of merchandise imports. The value of merchandise exports destined for Europe and the United States (US) advanced firmly, while exports to countries on the Asian and African continents remained broadly unchanged at levels previously recorded in 2014. The first half of 2015 was also characterised by a decline in the import value of goods produced in Europe, Africa and Asia.

An analysis of developments in the country’s trade balance by product category, as shown in the accompanying table, indicates that the balances for trade in mineral products, precious metals and stones as well as vehicles and transport equipment improved in the first half of 2015 when compared with the corresponding period in 2014. These improved trade balances largely resulted from trade with Asia, Africa and Europe.

  Quarterly Bulletin September 2015

Trade balances for selected product categories

R millions
	Jan–Jun 2014							Jan–Jun 2015
	Exports		Imports		Trade balance			Exports		Imports		Trade balance
Mineral products		235,601		256,599		(20,998	)		207,390		164,044		43,346
Base metals		133,806		48,838		84,968			124,594		60,517		64,078
Precious metals and stones		167,537		11,580		155,957			191,610		7,800		183,810
Chemical products		60,014		100,958		(40,944	)		67,240		106,726		(39,487	)
Machinery and electrical equipment		99,584		245,325		(145,741	)		99,235		266,890		(167,655	)
Vehicles and transport equipment		98,373		170,756		(72,383	)		135,489		189,249		(53,760	)
Vegetable products		45,756		20,949		24,807			47,073		23,240		23,833

Seasonally adjusted and annualised

The weakening of the exchange rate of the rand in the second quarter of 2015 more than offset the drop in the US dollar price of South Africa’s non-gold exports, resulting in a 1,9 per cent increase in the rand price of merchandise exports. Alongside an increase in the physical quantity of exported goods, the value of merchandise exports rose by 6,9 per cent in the second quarter of 2015, having declined by 2,3 per cent in the preceding period.

The fixing price of gold on the London market declined by 2,2 per cent from US$1 220 per fine ounce in the first quarter of 2015 to US$1 193 per fine ounce in the second quarter before decreasing to US$1 131 per fine ounce in July – the lowest level since the beginning of 2010. The dollar price of gold has receded by 7,7 per cent since the first quarter of 2014 amid a steady rebound in economic activity in the US and prospects of higher interest rates in the second half of 2015.

Quarterly Bulletin September 2015  

Owing in part to the depreciation in the external value of the rand, the average realised rand price of gold exports rose by 3,6 per cent in the second quarter of 2015 following a decline of 1,1 per cent in the first quarter. This increase coincided with an increase of 9,9 per cent in the physical quantity of net gold exports, raising the value of gold exports by 13,9 per cent from R62 billion in the first quarter of 2015 to R71 billion in the second quarter. A positive factor in the market for gold has been the relaxation of regulations prohibiting the importation of gold into India (see the accompanying box).

Box 3 Relaxation of control on gold imports into India

In 2012 and 2013 India imposed restrictions on gold imports in order to curb the appetite for gold, which was perceived to have partly caused the growing trade deficits in the country. The following chronology depicts some of the regulations imposed on gold imports by the Indian authorities:

• a gradual increase in import tax on gold from 2 per cent in January 2012 to 10 per cent in August 2013;

• an increase in excise tax from 7 per cent to 9 per cent in August 2013;

• a restriction on bank imports via consignment in May 2013;

• the implementation of a regulation in July 2013 requiring 20 per cent of gold imports to be held at a bonded warehouse for re-exports; and

• the prohibition of the import of gold coins and medallions in August 2013.

Since November 2014, authorities in India have gradually relaxed controls on the importation of gold into India, scrapping, inter alia, the rule requiring that 20 per cent of imported gold should be earmarked for export. Furthermore, in February 2015 the ban on coin and medallion imports was lifted, and nominated banks were allowed to import gold on a consignment basis. The gradual relaxation of import restrictions, while supportive of the gold market, nevertheless coincided with a decline in the international price of gold.

The volume of merchandise imports decreased by 1,4 per cent in the second quarter of 2015 as the contraction in the volume of crude oil imports more than neutralised an increase in the volume of non-crude oil imports over the period. The physical quantity of crude oil imports shrank by almost 31 per cent in the second quarter, owing in part to scheduled maintenance shutdowns at several oil refineries. As a percentage of total merchandise import volumes, the volume of crude oil imports receded from 11,7 per cent in the second quarter of 2014 to 7,3 per cent in the second quarter of 2015. As anticipated, the contribution of imported refined oil products such as petrol and distillate fuel increased from 4,2 per cent to 8,5 per cent of overall merchandise import volumes over the corresponding period. The volume of non-oil imported goods advanced in the second quarter of 2015, mainly on account of higher imports of chemical products, and machinery and electrical equipment. As a result, South Africa’s import penetration ratio increased slightly from 26,3 per cent in the first quarter of 2015 to 26,4 per cent in the second quarter.

Having decreased since the third quarter of 2014, the average rand price of merchandise imports rose by 0,6 per cent in the second quarter of 2015. The increase in the average rand price of imported goods, together with the contraction in the volume of merchandise goods, resulted in a decline of 0,8 per cent in the value of merchandise imports in the second quarter of 2015.

South Africa’s terms of trade improved somewhat in the second quarter of 2015 as the rand price of exports advanced at a somewhat faster pace than that of imports.

The shortfall on the services, income and current transfer account of the balance of payments widened noticeably from R117 billion in the first quarter of 2015 to R138 billion in the second quarter of 2015. This deterioration largely emanated from an increase in net income payments to the rest of the world, as a sharp decline in gross dividend receipts more than outweighed a decline in gross dividend payments to non-resident investors over the period. In addition, gross travel receipts also declined substantially in the second quarter of 2015 (see the accompanying box).

  Quarterly Bulletin September 2015

Box 4 Tourist spending in South Africa

Spending by tourists in South Africa accounts for almost 95 per cent of the ‘travel receipts’ item, the largest revenue component in the services account of South Africa’s balance of payments. During the past four years, South Africa registered a steady increase in the number of tourist arrivals which, together with the continuous weakening in the exchange value of the rand, contributed to the elevated level of travel receipts. Consequently, the ratio of travel receipts to total merchandise exports (including gold) rose from 8,5 per cent in 2011 to 10 per cent in 2014.

Quarterly Bulletin September 2015  

The rate of increase in travel receipts in the first half of 2015 slowed notably when compared with the corresponding period in 2014 amid a decline in the number of tourists visiting South Africa. The decline in tourist numbers could, inter alia, be ascribed to new legislation requiring that visitors travelling with a minor should be in possession of an unabridged birth certificate from 1 June 2015. The capturing of biometric data, including a personal appearance when applying for a visa to visit South Africa, was already introduced at an earlier stage. The new legislation intends to minimise human trafficking, with specific reference to children.

The number of children younger than 18 years constitutes a sizeable portion of tourists in South Africa. The new administrative requirements accordingly have the potential to temporarily affect the number of tourists intending to visit South Africa. Relative to the total number of tourists, the number of children dropped from 7,3 per cent in 2014 to 6,4 per cent in the first five months of 2015 (see the accompanying graph). A further analysis indicates that although the ratio deteriorated for both the overseas and African regions, overseas tourists continued to display a higher concentration of children. This could suggest that overseas tourists are more inclined to travel together as families and, as such, could be more affected by the aforementioned administrative arrangements.

  Quarterly Bulletin September 2015

Owing to its consumption-based nature, spending by tourists is internationally regarded as one of the most challenging economic aggregates to estimate in a macroeconomic statistical framework. However, based on an array of source data and indicators, preliminary estimations suggest that the level of gross travel receipts declined by about 9 per cent in the second quarter of 2015. Given the growing importance and contribution of the tourism sector to overall domestic economic activity, a deterioration in the level of travel receipts could contribute to a further widening of the deficit on the services, income and current transfer account.

Net payments in the category ‘other services’ displayed a smaller deficit in the second quarter of 2015 as gross payments to non-residents for technical-related services rendered to South African parties contracted somewhat. These lower payments were almost fully neutralised by an increase in net current transfer payments to the rest of the world over the same period.

Financial account

Global financial markets continued to be volatile in the second quarter of 2015, affected by various factors and characterised by phases of alternating ‘risk-off’ and ‘risk-on’ trading sprees. Among the factors influencing sentiment were the continued strengthening of the US economy along with expectations of an imminent interest rate increase in the second half of 2015, the intensifying Greek debt crisis, the slump in the Chinese stock market as well as the further weakening of commodity prices. Domestically, relatively sluggish economic growth in the first half of 2015 amid ongoing electricity-supply disruptions and other structural impediments dampened international investors’ sentiment towards acquiring domestic financial assets.

After having registered a capital inflow of R33,1 billion in the first quarter of 2015, the financial account of the balance of payments (including reserve assets but excluding unrecorded transactions) recorded a much smaller inflow of R3,6 billion in the second quarter. A significant outflow of capital was evident in the other investment category, despite the continuing injection of liquidity in Europe and Japan. However, on a net basis, direct and especially portfolio investment registered capital inflows in the second quarter of 2015.

Net financial transactions

R billions

	2014								2015
	2nd qr		3rd qr		4th qr		Year		1st qr		2nd qr
Change in liabilities
Direct investment		27,4		10,2		17,2		62,0		-22,2		6,1
Portfolio investment		27,4		50,8		-16,8		73,7		39,3		54,8
Financial derivatives		-43,7		-39,6		-63,6		-194,8		-72,6		-74,3
Other investment		5,1		49,7		53,8		146,6		32,9		-23,7
Change in assets
Direct investment		-14,4		-43,8		-9,4		-75,3		-5,4		-5,9
Portfolio investment		-11,2		-3,2		-0,9		-24,2		-5,3		-10,0
Financial derivatives		48,4		40,3		68,4		211,3		73,3		70,9
Other investment		2,9		17,2		-17,4		-26,8		-19,1		-15,6
Reserve assets		10,0		-23,4		-7,9		-16,6		12,3		1,4
Total identified financial transactions*		51,8		58,3		23,3		155,8		33,1		3,6
As percentage of gross domestic product		5,5		6,1		2,4		4,1		3,4		0,4

* Including reserve assets but excluding unrecorded transactions

Quarterly Bulletin September 2015  

Foreign-owned assets in South Africa

South Africa’s foreign direct investment liabilities rose in the second quarter of 2015 following an outflow of R22,2 billion in the first quarter. The inflow of foreign direct investment capital to the value of R6,1 billion in the second quarter of 2015 mainly took the form of loans extended by foreign parent companies to their South African subsidiaries.

Despite the volatility in international financial markets, South African portfolio assets⁷ (i.e. domestically issued debt and equity securities) were still sufficiently lucrative to international investors to attract capital to the value of R54,8 billion in the second quarter of 2015, more than the R39,3 billion recorded in the first quarter. The value of debt securities acquired by non-resident investors accounted for roughly 13 per cent of inward portfolio investment flows in the second quarter of 2015. A rights issue by a health insurance company underpinned the acquisition of South African equity securities by non-residents over the period.

Other investment flows into South Africa changed from an inflow of capital of R32,9 billion in the first quarter of 2015 to an outflow of R23,7 billion in the second quarter. The outflow of capital could largely be attributed to marked declines in the deposit and loan liabilities of the banking sector. Contributing to the aforementioned outflow of capital was the withdrawal of a non-resident deposit related to a direct disinvestment transaction concluded in the first quarter of 2015. An outflow of capital in this category was last recorded in the third quarter of 2013.

South African-owned assets abroad

South African entities continued to acquire direct investment assets offshore in the second quarter of 2015, resulting in an outflow of R5,9 billion. Domestic companies in the media and telecommunication sectors mainly expanded their offshore assets in the search for growth over the period.

Portfolio investment abroad by South African investors almost doubled from R5,3 billion in the first quarter of 2015 to R10,0 billion in the second quarter as the domestic investors in the banking and private sectors were equally active in acquiring foreign assets. The outflow of capital in the first half of 2015 was substantially more than the outward movement of capital registered in the second half of 2014.

Other outward investment flows amounted to R15,6 billion in the second quarter of 2015, somewhat less than the capital outflow of R19,1 billion recorded in the first quarter. The domestic banking sector, inter alia, financed offshore activities by extending short-term loans to non-resident parties over the period.

  Quarterly Bulletin September 2015

Foreign debt

South Africa’s gross external debt decreased marginally from US$145,1 billion at the end of December 2014 to US$144,4 billion at the end of March 2015; this was the first decline to be recorded since June 2013. The country’s outstanding debt decreased mainly due to the repayment of foreign currency-denominated short-term debt obligations by the domestic banking sector and valuation adjustments following the strengthening of the US dollar against most major currencies. Expressed in rand terms, the country’s external debt advanced from R1 679 billion at the end of December 2014 to R1 762 billion at the end of March 2015.

Foreign currency-denominated debt decreased from US$67,5 billion at the end of the fourth quarter of 2014 to US$67,0 billion at the end of the first quarter of 2015, despite the issuance of a US$1,25 billion bond by a parastatal over the period. South African parastatals have been active in issuing international bonds to raise funding for infrastructural projects (see the accompanying box).

Box 5 Developments in the external debt of South African parastatals

Government’s undertaking to upgrade South Africa’s road, railway and energy infrastructure exerted upward pressure on the level of foreign debt of the public sector in recent years.

Consequently, the external debt of parastatals increased from US$4,5 billion in March 2009 to no less than US$17,8 billion in March 2015. As a ratio of gross domestic product (GDP), the external debt of parastatals advanced from 1,6 per cent to 5,1 per cent over the period. Against the background of the country’s fairly low savings rate, the parastatals sought funding from local and international capital markets.

Parastatal loan financing increased significantly from US$2,1 billion at the end of September 2008 to US$10,1 billion at the end of September 2014, moving sideways in the subsequent period to the end of March 2015. Parastatal bonds held by non-resident investors displayed a similar trend, increasing from US$1,8 billion at the end of September 2008 to US$7,3 billion at the end of March 2015. These increases coincided with the start of the energy and road infrastructure upgrades following the first major occurrence of domestic power outages and preparations for the hosting of the 2010 FIFA World Cup.

Quarterly Bulletin September 2015  

As shown in the accompanying graph, funding is obtained from a diverse set of sources. South African public corporations have, among others, accessed international financial markets by issuing foreign currency- and rand-denominated bonds, approached international organisations such as the World Bank and the African Development Bank for concessional loans, and negotiated credit facilities with commercial banks and other international entities to diversify their funding.

The graph below outlines the share of parastatals’ external debt by subsector as at the end of December 2005, 2008 and March 2015. In terms of the sectoral classification, parastatals classified as ‘non-financial’ increased their share of total parastatal debt from 61 per cent at the end of 2005 to 66 per cent at the end of 2008 before increasing to 90 per cent in March 2015.

Parastatals’ funding from the international capital markets may become less attractive in future following the recent downgrading of one of the parastatals’ long-term credit rating to below investment grade by one of the credit-rating agencies. Nonetheless, rand-denominated loan funding by parastatals has gradually become larger in relation to total loan financing since March 2002. The rand-denominated foreign loans of parastatals rose from US$0,3 billion at the end of 2002 to US$4,2 billion at the end of March 2015. The increasing portion of rand-denominated loan funding could partly be beneficial in avoiding the negative impact of the fluctuating exchange rate and reducing external vulnerability.

  Quarterly Bulletin September 2015

Relative to the country’s total foreign currency-denominated debt, the ratio of short-term foreign currency-denominated debt (i.e. debt with an original maturity of less than one year and longer-term foreign currency-denominated debt maturing within the next twelve months) deteriorated from 46,7 per cent at the end of December 2014 to 47,0 per cent at the end of March 2015.

The country’s rand-denominated debt, expressed in US dollar, remained broadly unchanged at US$77,6 billion from the end of the fourth quarter of 2014 to the end of the first quarter of 2015, as a further build-up of parastatals’ long-term commitments and increases in other liabilities of the domestic banking sector were offset by the decrease in the value of rand-denominated bonds held by non-residents. Relative to the country’s total external debt, rand-denominated debt remained unchanged at 53,6 per cent.

Foreign debt of South Africa

US$ billions at end of period

	2013				2014				2015
	4th qr		1st qr		2nd qr		3rd qr		4th qr		1st qr
Foreign currency-denominated debt		61,2		62,9		62,2		64,7		67,5		67,0
Debt securities		21,8		22,0		20,1		21,9		22,7		23,6
Other		39,4		40,9		42,2		42,8		44,7		43,3
Public sector		9,1		9,1		9,1		8,8		8,2		7,3
Deposit-taking institutions		12,1		13,5		13,9		14,5		18,4		17,7
Non-monetary private sector		18,3		18,3		19,1		19,5		18,2		18,3
Rand-denominated debt		75,3		75,6		79,6		77,6		77,6		77,4
Debt securities		41,1		40,1		44,1		41,6		41,1		39,4
Other		34,2		35,5		35,5		36,0		36,4		38,0
Total foreign debt		136,5		138,5		141,8		142,3		145,1		144,4
As percentage of gross domestic product		37,3		38,9		40,2		40,3		41,4		41,6
As percentage of total export earnings		113,6		116,2		120,3		121,2		124,0		124,9

Quarterly Bulletin September 2015  

The moderation in the growth rate of South Africa’s GDP and export earnings expressed in US dollar led to a mild deterioration in the country’s external debt ratios. As a percentage of GDP, external debt increased from 41,4 per cent at the end of December 2014 to 41,6 per cent at the end of March 2015, while the ratio of external debt to export proceeds advanced from 124,0 per cent to 124,9 per cent over the same period.

International reserves and liquidity

South Africa’s international reserves receded further by R1,4 billion in the second quarter of 2015 after having declined by R12,3 billion in the first quarter. Measured in US dollar, the value of South Africa’s gross gold and other foreign reserves (i.e. the international reserves of the Bank before accounting for reserve-related liabilities) increased from US$46,4 billion at the end of March 2015 to US$46,8 billion at the end of June as the impact of a weaker US dollar was partially offset by a decline in the US dollar price of gold. The country’s gross reserves subsequently decreased to US$46,1 billion at the end of August 2015. South Africa’s international liquidity position increased from US$41,3 billion at the end of March 2015 to US$41,6 billion at the end of June before decreasing to US$41,2 billion at the end of August.

  Quarterly Bulletin September 2015

The level of import cover (i.e. the value of gross international reserves relative to the value of imports of goods and services as well as income payments) increased from 4,6 months at the end of March 2015 to 4,8 months at the end of June 2015. As reflected in the accompanying graph, the import-cover ratio has generally been in excess of four months since 2009 – significantly more robust than in the preceding 25 years.

Exchange rates

In the second quarter of 2015, the South African rand, along with other emerging-market and commodity-linked currencies, depreciated against major currencies, including the euro and the British pound. The US dollar started the quarter weaker amid softer US data releases, particularly non-farm payrolls data and GDP data for the first quarter. However, the US dollar regained strength as US economic prospects brightened later in the quarter, supporting the case for monetary policy normalisation. Emerging-market and commodity-linked currencies were also stressed by heightened risk aversion associated with the Greek debt crisis and a slowdown in economic growth in China.

Following a 0,2 per cent decline in the first quarter of 2015, the nominal effective exchange rate of the rand declined further by 1,8 per cent in the second quarter. In April 2015 the domestic currency appreciated by 3,5 per cent against the US dollar, mainly due to broad-based US dollar weakness. However, during the months of May and June, the rand depreciated by 3,0 per cent and 0,7 per cent respectively against the US dollar. The rand’s weakness could be attributed to weak domestic economic fundamentals such as subdued economic growth and the sustained high level of unemployment over the period. Fears of credit-rating downgrades, as well as Eskom’s continued power rationing, also undermined sentiment towards the rand. However, decisions by credit-rating agencies Fitch and Standard & Poor’s to affirm South Africa’s credit ratings curbed the rand’s decline, as did the narrower-than-expected first-quarter current-account deficit as well as the better-than-expected trade balance for the second quarter of 2015. The domestic currency unit weakened further in July and August 2015 amid a sell-off in the Chinese equity market. Concerns abound about the strength of the Chinese economy following the devaluation of the Chinese yuan, adding further downward pressure on commodity-linked currencies.

Quarterly Bulletin September 2015  

Exchange rates of the rand

Percentage change

	30 Sep 2014 to 31 Dec 2014		31 Dec 2014 to 31 Mar 2015		31 Mar 2015 to 30 Jun 2015		30 Jun 2015 to 9 Sep 2015
Weighted average*		0,3		-0,2		-1,8		-8,0
Euro		1,3		7,3		-4,1		-10,3
US dollar		-2,9		-5,2		-0,3		-10,2
Chinese yuan		-1,8		-5,2		-0,3		-7,7
British pound		1,5		-0,2		-6,3		-8,0
Japanese yen		6,2		-4,8		1,4		-11,3

* Against a basket of 20 currencies

The real effective exchange rate of the rand essentially moved sideways from December 2014 to June 2015, broadly maintaining the external competitiveness of local producers in foreign markets.

  Quarterly Bulletin September 2015

Turnover in the South African foreign-exchange market

The net average daily turnover in the foreign-exchange market for the South African rand declined by 5,4 per cent from US$18,7 billion in the first quarter of 2015 to US$17,7 billion in the second quarter. Transactions in the swap market, which amounted to US$14,3 billion per day in the first quarter of 2015, decreased to US$12,8 billion in the second quarter. By contrast, daily transactions in the spot and forward markets increased from US$2,8 billion to US$3,0 billion and from US$1,6 billion to US$1,9 billion respectively over the same period.

Quarterly Bulletin September 2015  

Monetary developments, interest rates and financial markets

Money supply

The twelve-month rate of growth in the broadly defined money supply (M3) has fluctuated around 7 per cent over the past four years. During the four years to 2014, growth in M3 generally fell below that of nominal GDP, but this trend started to reverse towards the end of 2014 with year-on-year growth in M3 exceeding that in nominal gross domestic product from the fourth quarter of 2014. By the second quarter of 2015 growth in M3 averaged 8,4 per cent, surpassing the growth of 5,7 per cent in nominal GDP over the same period as sluggish activity and lower commodity prices weighed on the level of nominal value added in the economy. In July 2015 year-on-year growth in M3 accelerated somewhat to 10,3 per cent.

With growth in money supply exceeding that of nominal GDP, the income velocity of circulation of M3 receded moderately from 1,47 in the first quarter of 2014 to 1,44 in the first quarter of 2015 and 1,39 in the second quarter.

The firmer growth in M3 deposits in recent months was underpinned by growth in deposits of both the household and corporate sectors. The gradual uptick in M3 growth can partly be ascribed to:

• an environment of rising interest rates in a setting where the bulk of M3 deposits is interest-bearing;

• accelerating inflation and moderately rising real final demand;

• a build-up in precautionary balances by asset managers in the wake of renewed financial market volatility; and

• upward revaluation of foreign currency-denominated deposits included in M3 as a result of the depreciation of the rand.

  Quarterly Bulletin September 2015

Analysed by maturity, twelve-month growth in cash, cheque and demand deposits (M1) mostly exceeded that of the longer maturities during 2014 and in the first half of 2015. The buoyant growth in M1 continued in the early months of 2015 but subsequently moderated somewhat from 11,9 per cent in February to 9,7 per cent in July. Growth in the short- and medium-term deposits associated with M2 fluctuated sideways at around 7,2 per cent in the seven months to July 2015. Following the two increases in the repurchase rate in 2014, twelve-month growth in long-term deposits trended higher to break the negative growth trend recorded since August 2013 and turned positive from November 2014. The recovery in long-term deposits continued in early 2015, with its growth rate reaching 11,3 per cent in May, probably spurred upwards by the moderate increases in interest rates. However, growth moderated to 4,3 per cent in July.

Overall, M3 rose by R86,2 billion in the first quarter and by R83,7 billion in the second quarter of 2015, exceeding the cumulative increase of R120,7 billion during the same period of 2014 by a wide margin. The deposit holdings of the corporate sector rose by R50,9 billion in the second quarter of 2015 due to a considerable increase in the deposit holdings of financial companies, while non-financial companies drew down on their deposit holdings. During the same period, the household sector increased its deposit holdings by R32,8 billion, substantially higher than the R16,0 billion recorded in the first quarter.

Quarterly Bulletin September 2015  

M3 holdings of households and companies

	Quarterly change (R billions)						Percentage holdings of total M3 deposits
	2014		2015				2014		2015
	4th qr		1st qr		2nd qr		4th qr		1st qr		2nd qr
Households		28,8		16,0		32,8		31,2		30,8		31,1
Companies		-37,6		70,2		50,9		68,8		69,2		68,9
Of which: Financial		-41,2		29,3		63,0		38,7		38,6		39,6
Non-financial		3,6		40,9		-12,0		30,1		30,6		29,3
Total M3 deposits		-8,7		86,2		83,7		100,0		100,0		100,0

Corporate deposits gradually accelerated during the course of 2015, with non-financial companies contributing the most to the increase. Year-on-year growth in the deposit holdings of the corporate sector accelerated from 5,3 per cent in January 2015 to 8,7 per cent in July, while the deposit growth of non-financial companies accelerated from 7,5 per cent to 12,6 per cent over the same period. Twelve-month growth in deposits of financial companies also ticked higher from January, reaching 5,8 per cent in July. Growth in the deposit holdings of the household sector reached a recent high of 13,0 per cent in November 2014 but then levelled out to fluctuate around 12 per cent in the six months to June 2015. In July, growth in household deposits came to 14,0 per cent.

Statistical counterparts of change in M3

R billions

	2014				2015
	3rd qr		4th qr		1st qr		2nd qr
Net foreign assets		-5,4		-27,6		15,8		78,4
Net claims on the government sector		21,5		6,8		8,0		-3,3
Claims on the private sector		51,9		34,3		109,4		23,4
Net other assets and liabilities		1,6		-22,3		-46,9		-14,8
Total change in M3		69,6		-8,7		86,2		83,7

In a statistical sense, the rise in M3 during the second quarter of 2015 was mainly attributable to an increase in net foreign assets coupled with an increase in claims on the private sector. Decreases in net other assets and liabilities as well as net claims on the government sector softened the overall increase in money supply in the second quarter. Net foreign assets increased alongside a weaker exchange value of the rand, which affected the value of foreign currency-denominated loans and advances as well as foreign-issued derivative assets. A relatively sizeable short-term foreign loan was also granted to an investment holding company to fund the acquisition of a stake in an international health club operator. Net other assets and liabilities decreased, resulting from a rise in other liabilities of banks to domestic counterparties.

Credit extension

Growth in bank credit extended to the private sector traced that in nominal domestic expenditure over the past three years, fluctuating at twelve-month rates of around 8 per cent throughout this period. Growth in credit extension was underpinned by demand for credit by the corporate sector, while growth in credit extension to households remained subdued. In July 2015 year-on-year growth in total loans and advances decelerated to 7,2 per cent as growth in credit extension to corporates slowed from 15,0 per cent in April to 11,4 per cent, while that to households accelerated marginally from 3,3 to 3,6 per cent. The implementation of regulations applicable to individuals, imposing prescribed parameters for credit affordability assessments as part of the

  Quarterly Bulletin September 2015

revisions to the National Credit Regulations, published by the Department of Trade and Industry in March 2015, but subsequently delayed to September, could serve to curtail the extension of credit to the household sector. This could be exacerbated by the proposed lowering of the maximum interest rates which may be charged on unsecured credit. The current high level of consumer debt, rising domestic interest rates, the increase in the maximum personal income tax rate, elevated petrol prices and higher electricity tariffs continued to add pressure on household finances, consumer confidence and credit demand. The ratio of household debt to disposable income improved marginally in the second quarter of 2015 as growth in income exceeded that in debt over the period.

The quarterly increase in loans and advances amounted to R9,4 billion in the second quarter of 2015, down from the R39,3 billion recorded during the same period in 2014 and also significantly lower than the R97,6 billion recorded in the first quarter of 2015. The weaker expansion in aggregate credit extension during the second quarter was largely the result of a contraction in the usage of general loans and bank overdrafts by the corporate sector. The quarter-to-quarter⁸ growth rate in total loans and advances to the private sector nonetheless increased from a recent low of 5,7 per cent in the fourth quarter of 2014 to 7,2 per cent in the first quarter of 2015 and further to 10,6 per cent in the second quarter.

Other loans and advances – which consists of general loans, bank overdrafts and credit card advances – maintained its role as the dominant driver of credit extension during 2014 and the first half of 2015. Growth in the asset-backed credit categories remained relatively subdued but gradually increased during 2014 and the first half of 2015, mostly on account of improving growth in mortgage advances.

Following a brisk increase of R76,1 billion in the opening quarter of 2015, other loans and advances contracted by R4,5 billion in the second quarter as general loans extended to the corporate sector fell back during this period, while the uptake of overdrafts by the corporate sector also lost momentum. The second quarter was characterised by the repayment of a significant amount of loans by various non-financial corporates. As a result, year-on-year growth in the category for other loans and advances moderated from a recent high of 16,5 per cent in July 2014 to 9,8 per cent in June 2015 and 10,3 per cent in July.

Compared to the buoyant double-digit growth rates recorded between 2010 and 2013, twelve-month growth in general loans to the household sector now maintains a subdued growth path, fluctuating below 5 per cent in 2014 and the first half of 2015. In July 2015 growth measured 5,6 per cent, up from 2,9 per cent recorded in April. The recent uptick in growth could partly be attributed to a low base in the previous year, coupled with a slight increase in demand for general

Quarterly Bulletin September 2015  

loans. The overall slowdown in this credit category probably reflected caution by households in the wake of weak growth in employment and income, exacerbated by the recent interest rate increases and relatively tight lending conditions. The proposed regulations on reducing the maximum interest rate that may be charged on unsecured loans could further serve to reduce banks’ appetite to grant such loans to especially high-risk, low-income households.

Mortgage advances made up around 54 per cent of total loans and advances in 2010, but this share gradually dwindled to 43 per cent in early 2015 as it lost ground to the high-growth categories of instalment sale credit and general loans. However, the average monthly increase in mortgage advances outstanding gradually recovered from R1,7 billion in 2012 to around R4 billion per month in 2014 and further to R5,1 billion in the first half of 2015. The current recovery in mortgage advances has been skewed towards commercial property, although growth in mortgage advances on residential property also gained pace, albeit more modestly. The increase in mortgage advances on commercial property could partly be attributed to an ephemeral rise in loans to listed property funds, some of which have been switching away from funding in the bond market while expanding their property portfolios. Twelve-month growth in mortgage advances gradually edged higher throughout 2014 and early 2015, reaching levels last seen in 2010. In the first half of 2015, the year-on-year growth averaged 4,7 per cent, up from around 3 per cent over the same period a year ago. Elevated capital repayments on mortgage advances have been contributing to the moderate growth in net new mortgage advances over the past three years. In July, growth over twelve months came to 5,0 per cent.

The rate of expansion in instalment sale credit and leasing finance, which mainly represents the financing of vehicles, reached a peak towards the end of 2013 but subsequently lost momentum. Twelve-month growth deteriorated from a peak of 14,2 per cent in October 2013 to 4,8 per cent in June 2015 and 4,5 per cent in July due to a decline in especially the consumer-driven new car market, while corporates also cut down on their usage of instalment sale credit. The decline in instalment sale credit and leasing finance was also exacerbated by a securitisation transaction that took place in June 2015, which reduced the amount outstanding on the balance sheet of the banking sector. Industry sources indicate that the slowing in the new car market occurred despite attractive incentive packages on offer by most automotive companies and the continued purchasing of new vehicles by the car rental sector.

The corporate sector’s reliance on bank-intermediated funding edged higher in 2014 and early 2015, diverging further from the weak growth in credit extension to the household sector. The noticeable increase in credit extension to the corporate sector in recent months was particularly robust in the category for other loans and advances, notably general loans and bank overdrafts.

  Quarterly Bulletin September 2015

Year-on-year growth in credit extension to the corporate sector accelerated from an average rate of 8,3 per cent in 2013 to 13,8 per cent in 2014, reaching 15,0 per cent in April 2015 before moderating somewhat to 11,4 per cent in July. The recent slowdown in loans and advances extended to the corporate sector was partly related to a high base a year ago, but also reflected the repayment of general loans previously entered into by various non-financial companies.

Twelve-month growth in credit extension to the household sector has been receding since late 2012, reaching an average rate of 4,3 per cent in 2014, down from an average of 8,3 per cent a year earlier. Growth remained sluggish in the first half of 2015, reaching 3,6 per cent in July. Credit extension to households grew by R26,9 billion in the first six months of 2015, slightly less than the R27,4 billion recorded in the same period of 2014. The modest growth during the first half of 2015 was mainly supported by improving growth in mortgage advances, while instalment sale credit and general loans to the household sector remained subdued.

Growth in bank credit by economic sector over the year to June 2015

Sector	Percentage change		Percentage of total credit extension
Electricity, gas and water		45		1,5
Real estate		38		9,2
Finance and insurance		23		18,6
Mining and quarrying		19		2,9
Wholesale and retail trade		17		5,0
Agriculture, forestry and fishing		15		2,1
Business services		15		3,2
Transport, storage and communication		15		2,8
Community, social and personal services		14		8,6
Construction		10		1,0
Manufacturing		4		4,4
Households		-4		36,0
Other		-13		4,9
Total		8		100,0

Quarterly Bulletin September 2015  

By economic sector, year-on-year growth in the second quarter of 2015 was dominated by the electricity and real-estate sectors, followed by the financial-intermediation and mining sectors, as shown in the table on the previous page. The electricity sector benefited from the financing of the various phases of the renewable energy projects initiated by government, while the expansion of portfolios by listed property funds probably boosted loans to the real-estate sector. Improving conditions in the property market also resulted in the steady growth in credit extension to the construction sector throughout 2014 and the first half of 2015. Financial intermediation represents a significant portion of total credit extension, and growth in loans within the sector remained healthy in the second quarter of 2015. Credit to the mining sector improved from the second half of 2014 following an end to the protracted strike activity. Due to weak consumer demand, growth in credit to the wholesale and retail trade sector nearly halved from 32 per cent in September 2014 to 17 per cent in June 2015. The weak demand conditions also had a dampening impact on growth in credit extension to the manufacturing sector.

Interest rates and yields

The Monetary Policy Committee (MPC) continued on its path of gradual policy normalisation, raising the repurchase rate by 25 basis points to 6 per cent at its July 2015 meeting. The decision was made against the backdrop of rising inflation risks emanating from a weaker exchange rate of the rand, in turn related to global market reaction to expected US policy normalisation and the decline in commodity prices. In addition, further upside risks to inflation were expected to come from food prices. The MPC remained cognisant of the fragile state of the economy and of the fact that domestic inflation was not driven by demand factors. The domestic growth outlook remained weak as both the supply and the demand sides remained constrained amid declining business and consumer confidence. Regardless of the tightening of policy, the monetary policy stance was still viewed as supportive of the domestic economy as the expected inflation trajectory implied that the real repurchase rate would remain low and below its longer-term average. For the full statement, see page 84 of this Quarterly Bulletin.

After inching higher from March 2015, money-market rates generally retracted somewhat from early June following a short-term respite in the weakening of the exchange value of the rand. Rates again moved higher from mid-July when the exchange value of the rand once again started weakening. During this time, short-term interest rates also reacted to the MPC decision to increase the policy rate by 25 basis points, effective from 24 July. For example, from the start of April 2015 to 23 July, the three-month Johannesburg Interbank Average Rate (Jibar) remained relatively stable, increasing by only 5 basis points to 6,16 per cent. Following the decision by the MPC to raise the repurchase rate, Jibar increased by 14 basis points to 6,30 per cent on 24 July

  Quarterly Bulletin September 2015

2015 where it remained until early September. Subsequent to the change in the domestic policy rate, longer-dated rates showed signs of levelling out in early August when the exchange value of the rand stabilised. After trending lower from a recent high of 7,57 per cent on 8 June 2015 to 7,37 per cent on 10 July, the twelve-month Jibar again increased during the course of July and late August. By 8 September, the rate stood at 7,68 per cent.

The tender rate on 91-day Treasury bills initially followed a declining path from 6,13 per cent on 8 January 2015 to a recent low of 5,68 per cent on 22 May, but the trend reversed when the rate increased to a high of 6,16 per cent on 31 July. The low demand for Treasury bills was attributed to investors showing a preference for cash to meet their monthly and quarter-end commitments. The rate remained range-bound in August with some acceleration to 6,26 per cent on 8 September.

During the second quarter of 2015, funding costs for the banking sector continued to trend higher. The spread between the repurchase rate and the South African benchmark overnight rate (Sabor) has been narrowing, especially since the Bank implemented a new liquidity management strategy in August 2013 aimed in part at increasing the level of the money-market shortage. Sabor increased to 5,78 per cent on 8 June 2015, exceeding the repurchase rate for the first time since the Bank started calculating Sabor in 2007. The higher Sabor was also partly the result of banks shifting their funding into longer-term deposits due to increased competition for term funding alongside Basel III requirements. Sabor subsequently trended slightly below the repurchase rate and stood at 5,90 per cent on 8 September.

Due to the higher money-market shortage, the implied rate on one-day rand funding in the overnight foreign-exchange market also increased to a recent high of 7,23 per cent on 8 June 2015 before moderating to 6,00 per cent on 3 July. Subsequent to the increase in the repurchase rate from 24 July, this rate fluctuated between 6,08 and 6,62 per cent up to early September. Increases in the implied overnight rates could partly be ascribed to:

• a general shortage of rand in the forward market, reflecting increased funding activity by offshore banks;

• the Bank’s liquidity-draining operations through foreign-exchange swaps;

• a decline in the number of active offshore participants and a general decline in risk appetite due to tighter global foreign-exchange liquidity conditions, global regulatory reforms as well as domestic interest rate expectations; and

• inefficiencies in rand liquidity flows between domestic money-market desks and foreign-exchange forward desks in the interbank market.

Quarterly Bulletin September 2015  

Towards the end of June 2015, the forward rate agreement (FRA) curve steepened at the short end as the market started to discount a higher probability of an increase in the policy rate in response to rising short-term risks, such as a worsening inflation outlook due to the weaker exchange rate of the rand and the uncertainty around the start of the US policy tightening cycle. The 1x4-month FRA increased from 6,16 per cent at the end of May 2015 to 6,30 per cent in late June, and after levelling out in August rose somewhat to 6,49 per cent in early September. However, during this period the longer end of the curve initially declined alongside the recovery of the exchange rate of the rand from mid-June to mid-July and the rejection of the additional electricity tariff increases by the National Energy Regulator of South Africa (NERSA). Long-term rates again fluctuated higher from late July when the exchange value of the rand weakened. The twelve-month FRA increased from 6,79 per cent on 16 July to 7,26 per cent on 8 September.

The prime lending rate and the predominant rate on mortgage loans increased by 25 basis points to 9,50 per cent at the end of July 2015. Rates on the different deposit and loan categories of private-sector banks generally increased in line with these changes. For a comprehensive analysis of interest rate developments in recent years, see the box below.

Box 6 How closely do interest rates on bank loans to households follow the repurchase rate?

Monetary policy has been accommodative in the post-crisis era, with the policy rate declining from 12 per cent per annum in 2008 to a low of 5 per cent in July 2012 where it remained up to early 2014; even allowing for the subsequent increases, its most recent level of 6 per cent is half its 2008 peak level. Interest rates generally followed the movements in the policy rate, but the spread of lending rates above the repurchase rate widened in recent years, reflecting a tightening of credit standards and a repricing of risk. During the period, households also shifted towards the types of bank loans that carry a higher interest rate risk premium. This box reviews how the interest rates faced by household borrowers have evolved since 2008.

The adjustment of lending margins

Having experienced substantial increases in impaired loans and write-offs, banks reviewed their risk premiums on loans in the period following the 2009 recession as their risk appetite waned and lending standards were tightened in the challenging macroeconomic environment. At the same time, challenges were also posed by increased regulatory scrutiny and rising operating costs as the South African banking sector started gearing up for the further implementation of the Basel III supervisory requirements.

As can be seen in the accompanying graph, key interest rate spreads widened significantly over the past seven years. However, the exact contribution to this widening of regulatory changes, on the one hand, and macroeconomic conditions, on the other, cannot be quantified.

  Quarterly Bulletin September 2015

After a period of relatively relaxed credit standards alongside rising property prices, with the end of the property boom banks started tightening their standards and even though the monetary policy stance became progressively more accommodative, the interest rate spread on mortgage advances widened. In turn, the tighter credit standards contributed to the slow growth in mortgage advances in recent years.

Instalment sale finance refers to the financing of movable assets and is generally dominated by vehicle finance, which constitutes around 85 per cent of instalment sale credit. The spread between the interest rate on instalment sale credit and the repurchase rate recorded a significant upward adjustment in 2009. A surge in overdues and repossessions triggered the pronounced repricing of risk by banks on this type of credit. The margin has generally been maintained in subsequent years although the spread narrowed somewhat from 2013 alongside buoyant vehicle sales.

The category of ‘other loans and advances’ includes general loans, credit card advances and overdrafts. While this covers a variety of products, the interest rates on these loans are generally charged at a much higher rate than those on the asset-backed categories of mortgage advances and vehicle financing. The risk premium included in these interest rates already increased in 2007, and has been broadly maintained in recent years.

Quarterly Bulletin September 2015  

Changes in the composition of household credit

Mortgage advances have traditionally been the dominant category of credit taken up by households. However, in the wake of the 2009 recession the composition of credit underwent a gradual change. The uptake of mortgage loans slowed markedly as the fixed property market ran out of steam, while growth in other categories of credit, such as instalment sale credit and general loans, gathered pace. The progressive change in the uptake of credit is especially evident when the composition is expressed as a percentage of total loans and advances to households, as shown in the accompanying table.

Composition of household loans in selected years

Per cent

As at December	2008		2010		2012		2014		2015*
Mortgage advances		69,6		68,6		61,3		58,7		58,7
Instalment sale and leasing finance		14,9		14,5		15,9		17,4		17,1
Overdrafts		2,7		2,3		2,3		2,6		2,5
Credit card advances		5,5		4,9		6,0		6,7		7,0
General loans		7,3		9,6		14,5		14,6		14,7
Total		100,0		100,0		100,0		100,0		100,0

* June

Mortgage advances declined from around 70 per cent of outstanding bank credit to households in December 2008 to less than 60 per cent in June 2015. Other categories of credit, such as general loans, picked up strongly from 2009 as unsecured lending gained momentum, but levelled out from 2012. Instalment sale finance and credit card advances also increased in recent years.

Calculating a weighted average household lending rate

By using the composition of loans and advances to the household sector and applying the applicable interest rate¹ to each category of credit, it is possible to derive a weighted average interest rate for the household sector. The rate may be compared to the repurchase rate to indicate how the combined effect of the change in preference for credit and the change in the risk spreads charged by banks affected the interest rate burden of households.

Weighted average rate

As at December	Repurchase rate		Weighted average rate		Margin to repurchase rate
2008		11,5		14,91		3,41
2009		7,0		11,12		4,12
2010		5,5		10,21		4,71
2011		5,5		10,47		4,97
2012		5,0		10,47		5,47
2013		5,0		10,45		5,45
2014		5,75		11,23		5,48
2015*		5,75		11,27		5,52

* June

There was some narrowing of the spread between the average repayment rate for households and the repurchase rate in 2008, indicating the easier credit conditions that prevailed during the period, but the margin started to widen early in 2009. While households have benefited from the easier monetary policy stance since 2008, the pass-through of the benefit has weakened in subsequent years, especially since 2010 when growth in unsecured lending started to accelerate. Banks progressively tightened the risk premium on interest rates for most categories of credit in the period following the 2009 recession, but households also increased their exposure to the more expensive categories of credit. Exposure

1 The weighted average interest rate as reported by banks, inclusive of both new and existing loans, for each category of credit

  Quarterly Bulletin September 2015

to instalment sale credit and general loans has increased since 2009, while growth in mortgage loans decelerated. The rising margin is therefore a combination of tighter credit standards and a change in households’ exposure towards loans that carry a higher risk premium reflected in the interest rate. However, the margin stabilised from late 2012 when growth in unsecured lending started to decelerate.

Conclusion

Monetary policy has been accommodative since 2008, with the policy rate declining to levels last recorded more than 30 years ago. This provided households with substantial relief in terms of their repayment burden on bank credit. However, when calculating a weighted average repayment rate for the household sector and comparing it to the repurchase rate, it is evident that the spread has widened since 2009. Part of the reason is the generally tighter credit standards adopted by banks in a challenging macroeconomic environment while also gearing up towards the requirements of Basel III. However, households also recorded a shift in exposure towards loans that carry a higher interest rate risk premium. Accordingly, the average interest rate faced by households on their borrowing from banks has not moved parallel to the policy interest rate set by the Bank, but has effectively become somewhat more restrictive – by as much as 2 percentage points over the past seven years. This probably contributed to the weak growth in the household sector’s credit uptake in recent years.

In line with movements in government bond yields, interest rates on the RSA government retail bonds changed as depicted in the table on the next page. After peaking at R12 billion in July 2012, the amount in issue of all retail bonds declined to R7,3 billion in July 2015, although the downward trend bottomed out in recent months alongside increases in the yields on fixed-rate bonds.

South African bond yields continued on an ascending trend in most of 2015, although there was a short-lived pull-back from mid-June when global concerns about the Greek debt crisis subsided. Several factors contributed to the upward trend in yields, including:

• concerns regarding the slowdown in China’s economy and turmoil in Chinese financial markets;

• the depreciation in the exchange value of the rand;

• the (limited) recovery in the oil price;

• the increase in the repurchase rate; and

• uncertainty regarding the response of financial markets to an imminent increase in US policy interest rates.

Quarterly Bulletin September 2015  

Interest rates on South African government retail bonds

Per cent

Effective from:	2-year bond		3-year bond		5-year bond
Fixed rate:
1 Mar 2014		7,25		7,75		8,25
1 Feb 2015		7,25		7,75		8,00
1 Jun 2015		7,75		8,00		8,50
1 Aug 2015		8,00		8,25		8,50
Inflation linked:	3-year bond		5-year bond		10-year bond
1 Dec 2014		1,25		1,75		2,00
1 Jun 2015		1,00		1,50		1,75

The daily average yield on the South African R186 government bond (maturing in 2025/26/27) increased from a low of 7,07 per cent at the end of January 2015 to 8,55 per cent on 8 September. Similarly, the daily closing yield on the US ten-year government bond increased by 52 basis points from 1,66 per cent at the end of January 2015 to 2,18 per cent on 8 September.

The spread between South African and US government bond yields rose to a peak in 2008 and thereafter moved broadly sideways, reaching 609 basis points in August 2015 – 60 basis points above its long-term average taken from 2008. South African bond yields started to track US bond yields more closely in recent years and this intensified from mid-2013 after the tapering announcement by the US Federal Reserve. With South African bond yields sensitive to US bond yields, which in turn are sensitive to movements in the US federal funds rate, the increase in the US federal funds rate, widely expected in the remainder of 2015, is therefore likely to set off a train of events that may also filter through to local bond yields.

  Quarterly Bulletin September 2015

Following these developments in the bond market, the yield curve moved higher from the end of January 2015 to September across the maturity spectrum. Therefore the yield gap, measured as the difference between yields at the extreme long and short ends of the curve, widened from 207 basis points at the end of January 2015 to 317 basis points on 8 September, with the upward sloping yield curve remaining noticeably flat from the 15-year maturity category onwards.

Some deterioration in the inflation outlook was apparent from the recent upward trajectory in the break-even inflation rate. This approximation of expected long-term inflation is calculated as the difference between the nominal yield on conventional government bonds and the real yield on inflation-linked government bonds. Focusing on the eight-year maturity range,

Quarterly Bulletin September 2015  

break-even inflation recorded a low of 5,24 per cent at the end of January 2015, but subsequently fluctuated higher to above the 6 per cent level and amounted to 6,72 per cent on 8 September. The upward movement in break-even inflation arose from both a decline in real yields on inflation-linked bonds and an increase in nominal yields.

Consistent with the general upward trend in domestic bond yields, the currency risk premium⁹ on South African government bonds widened from 305 basis points in January 2015 to 390 basis points in May, as the yield on rand-denominated bonds increased more pronouncedly than yields on US dollar-denominated bonds. Thereafter, the premium narrowed to 345 basis points in August, with a more prominent increase in the US dollar-denominated bond yield.

The sovereign risk premium on South African government US dollar-denominated bonds in the ten-year maturity range trading in international markets narrowed from an average of 224 basis points in January 2015 to 201 basis points in May, before widening to 249 basis points in August. This was broadly aligned with the concurrent movements in the JPMorgan Emerging Markets Bond Index Plus (EMBI+)¹⁰ yield spread above US government bonds, reflecting the ebb and flow in investor sentiment towards US dollar-denominated debt instruments of emerging markets.

Money market

The actual daily liquidity requirement of the private-sector banks varied between a high of R47,9 billion and a low of R29,7 billion during the second quarter of 2015, slightly wider than the range of R34,3 billion to R43,3 billion recorded in the first quarter of 2015. The gradual longer-term rise in the daily liquidity requirement of the private-sector banks reflected the reforms introduced in recent years to keep the money-market shortage closely aligned with conditions in the money market, ultimately improving the effectiveness of the transmission of monetary policy.

During the second quarter of 2015, liquidity to the net amount of R1,6 billion was injected into the money market, compared to a net injection of R1,1 billion recorded in the first quarter. For the three months to June 2015, the net effect of the collective change in the amount of notes and coin in circulation outside the Bank as well as banks’ required cash reserve deposits contracted money-market liquidity by R2,2 billion. The Bank utilised its liquidity management instruments to partly offset the factors that had impacted on money-market liquidity conditions, injecting R0,2 billion into the money market during this period. In July 2015 liquidity management operations served to inject R2,1 billion into the market, while overall money-market conditions were characterised by a net drainage of R3,1 billion.

  Quarterly Bulletin September 2015

Money-market liquidity flows

R billions (easing + tightening –)

	2015
	Jan–Mar		Apr–Jun		Jul
Notes and coin in circulation		9,1		1,3		-2,1
Change in cash reserve accounts		-1,7		-3,5		-2,8
Money-market effect of SARB* foreign-exchange transactions in the spot market		-1,3		-0,8		-0,3
Government deposits with SARB		0,0		0,0		0,0
Use of liquidity management instruments		-7,3		0,2		2,1
Reverse repurchase transactions		-0,4		0,0		1,4
SARB debentures		-2,9		0,5		2,2
Forward position (swaps)		-10,0		1,0		-4,0
Corporation for Public Deposits call deposits with SARB		6,1		-1,3		2,5
Other items net		2,2		4,4		0,0
Liquidity provided to banking system		1,1		1,6		-3,1

* SARB: South African Reserve Bank

Spot sales of foreign exchange by the Bank amounted to R0,8 billion during the second quarter of 2015 and had a contracting impact on money-market liquidity. At the same time, maturing foreign-exchange swaps of R1,0 billion, previously entered into by the Bank, had an expansionary impact on the money market.

From April to July 2015 capital redemption payments and scheduled coupon interest payments on various government bonds amounting to R22,5 billion were effected from the government tax and loan accounts, with only R53 million of this amount accruing to the Bank.

On 7 July 2015 the Bank signed a multilateral Inter-Central Bank Agreement with the BRICS central banks in Moscow, Russia. The agreement was created for the purpose of implementing the Contingent Reserve Arrangement (CRA), as announced at the BRICS Summit in Fortaleza, Brazil. The CRA provides a framework for the provision of liquidity to other BRICS countries through currency swap arrangements. The purpose of the CRA is to help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net, and complement existing international arrangements. Following the ratification of the CRA Treaty by all the BRICS countries and the finalisation of the agreement, the CRA – with an initial size of US$100 billion – will become effective.

On the same occasion, the Bank and the People’s Bank of China signed a Memorandum of Understanding (MoU) for the clearing and settlement of the renminbi in South Africa. Both central banks agreed to coordinate and cooperate on the supervision, oversight and clearing of the renminbi in South Africa and also to exchange information to facilitate the continuous improvement and development of bilateral trade. The MoU signifies an important milestone reached in the continuous joint effort to build capabilities in the South African financial markets to better serve bilateral trade, investment and financial flows between China and South Africa.

Bond market

Funding activity in the primary bond market remained robust in the first seven months of 2015, reflecting increased demand for funding, especially by the public sector. Net issues of bonds by the public sector amounted to R126 billion in the first seven months of 2015, with national government accounting for 90 per cent of that funding. National Treasury issued two new government bonds in July 2015 and one in September:

• a conventional fixed-income bond, the R2035, with a coupon rate of 8,875 per cent and a maturity date of 28 February 2035;

• an inflation-linked bond, the I2033 bond, with a real coupon interest rate of 1,875 per cent and a maturity date of 28 February 2033; and

• a conventional fixed-income bond, the R2040, with a coupon rate of 9 per cent and a maturity date of 31 January 2040.

Quarterly Bulletin September 2015  

The new issues, initially announced in the Budget Review 2015, aimed to broaden the funding options available to government and the investment options available to savers.

Private-sector bond funding in the first seven months of 2015 was still largely driven by banks. Net bond issues of R23 billion made by the private sector in the first seven months of 2015 were slightly lower than the net issues of R24 billion recorded over the same period of 2014. Banks contributed R18 billion to total net issues by the private sector, while non-bank private companies recorded net bond issues of only R0,4 billion in the first seven months of 2015. The weak economy and the flexibility offered by bank loans contributed to the subdued issuance by non-bank private companies.

Funding through short-term commercial paper and securitised instruments picked up in the seven months to July 2015 after having recorded net redemptions in 2014. As a result, the total nominal value of debt securities listed on the JSE increased by R147 billion in the first seven months of 2015, bringing the outstanding nominal amount to R2,2 trillion at the end of July, with bond market capitalisation reaching R2,6 trillion in that same month. Of the total outstanding nominal amount in issue at the end of July 2015, general government accounted for 67 per cent and banks for 13 per cent, followed by public corporations with 12 per cent and non-bank private companies with 5 per cent.

  Quarterly Bulletin September 2015

While Share Transactions Totally Electronic (Strate) has been the only central securities depository since its inception in 1999, the Financial Services Board has now granted Granite Central Securities Depository (Granite) a financial market infrastructure licence to operate as such a depository. The licence mandate is for bonds and money-market instruments. Granite plans to be operational by the first quarter of 2016.

Turnover in the secondary bond market picked up in the first eight months of 2015, following higher volumes traded and, on average, lower bond yields compared with 2014. The daily average turnover of R95 billion in the first eight months of 2015 was 17 per cent higher than in the corresponding period of 2014. Repurchase agreements accounted for 66 per cent and standard transactions for 32 per cent of the total value traded in the first eight months of 2015. The All-Bond Index (ALBI) recorded an unimpressive return of 3 per cent in the first eight months of 2015 as risk, uncertainty and volatility continued to permeate the bond market.

The issuance of rand-denominated bonds by foreign borrowers in the European bond markets slowed in the first eight months of 2015, as shown in the accompanying table. Redemptions simultaneously rose noticeably. In the Japanese Uridashi bond market, rand-denominated bond issuances seemed to be on a recovery path in 2015, but redemptions of these bonds also rebounded. Consequently, total net issues of rand-denominated bonds in both markets amounted to R9,8 billion in the first eight months of 2015, just more than half the net issues recorded in the corresponding period of 2014.

Rand-denominated bonds issued in international bond markets, January to August

R millions
	Eurorand				Uridashi				Total
	2014		2015		2014		2015		2014		2015
Issues		20 455		16 661		1 539		4 925		21 994		21 586
Redemptions		2 285		6 497		2 401		5 293		4 686		11 790
Net		18 170		10 164		-862		-368		17 308		9 797

Exchange-reported data show that non-residents were net sellers of local bonds for three consecutive quarters up to the first quarter of 2015, but subsequently became net buyers of local bonds to the value of R5,8 billion in the second quarter and R0,1 billion in July 2015 as nominal yields in the South African market offered value. Thereafter, non-residents reverted to

Quarterly Bulletin September 2015  

net sales of local bonds to the amount of R0,5 billion in August. Non-residents’ participation rate in the local secondary bond market averaged 10 per cent in the first eight months of 2015, comparable with 11 per cent in 2014.

Share market

Share markets throughout the world experienced turmoil in the first eight months of 2015. Equity capital-raising activity in the domestic and international primary share markets by companies listed on the JSE nevertheless continued briskly and amounted to R136 billion in the first eight months of 2015 – 20 per cent higher than in the corresponding period of 2014. Thus far in 2015, companies in the industrial sector accounted for 65 per cent of the total equity capital raised. Delistings on the JSE continued to exceed new listings in the eight months to August 2015, similar to the corresponding period of 2014.

Despite the decline in share prices from late April 2015 onwards, turnover in the secondary share market remained high in the first eight months of 2015, boosted by higher volumes traded. The value of shares traded on the JSE averaged R19 billion per day thus far in 2015, compared with R16 billion recorded over the same period in 2014. The market capitalisation of the JSE came to R11 trillion in August 2015 – 8 per cent lower than the all-time high recorded in April 2015.

Non-residents continued demonstrating strong interest in the domestic secondary share market in 2015, with an average participation rate of 20 per cent in the first seven months of 2015. Exchange-reported data reflected net purchases of local shares by non-residents amounting to R20 billion in the second quarter of 2015, the highest level since the third quarter of 2009, representing an increase of R7,5 billion from the first quarter of 2015. Non-residents increased their holdings of shares by a further R7,6 billion in July and August 2015, bringing cumulative net purchases to R40 billion in the first eight months of 2015 – noticeably higher than in the corresponding period of 2014.

The FTSE/JSE All-Share Price Index (Alsi) increased by 18 per cent from a recent low of 46 673 index points on 15 October 2014 to an all-time high of 55 188 index points on 24 April 2015, mainly supported by the depreciation in the exchange value of the rand and higher international equity prices. Subsequently, the Alsi dipped below the 50 000 index level for the first time since January 2015, declining by 10 per cent to 49 573 index points on 8 September. This was as a result of, among other factors, weaker global equity prices and lower global commodity prices following concerns over slowing Chinese economic growth and their market turmoil.

  Quarterly Bulletin September 2015

This dragged down the domestic resources sector, which recorded a loss of 21 per cent over the period 24 April 2015 to 8 September. In US dollar terms, the Alsi declined by 28 per cent from 23 July 2014 to 8 September 2015, alongside the depreciation in the exchange value of the rand. Meanwhile, in the US the Standard & Poor’s (S&P) 500 Composite Index declined by 1 per cent over the same period.

The total earnings of companies listed on the JSE fell by 8 per cent in the first eight months of 2015, which lifted the historical price-earnings ratio of all classes of shares from 16,8 in January 2015 to 18,6 in August. The dividend yield for JSE-listed companies increased from 2,1 per cent in February 2015 to 2,6 per cent in August.

Market for exchange-traded derivatives

With 2,3 million contracts traded, trading in commodity futures and options contracts on the Commodity Derivatives Market of the JSE during the first eight months of 2015 was 24 per cent higher than in the corresponding period of 2014. This was alongside the surge in domestic prices of agricultural commodities, in response to tightened grain supply emanating from recent drought conditions, and the adverse movements in the exchange value of the rand. Domestic white maize prices continued on a much higher trajectory than that of yellow maize, as white maize supply remained hard-hit with the lowest predicted harvest in eight years. Persistent declines in international wheat prices triggered another increase in the domestic wheat import tariff in June 2015; in support of local wheat production, the Department of Trade and Industry, with assistance from the International Trade Administration Commission of South Africa, increased the wheat import tariff from R461 per ton to R800,1 per ton. Subsequently, the wheat import tariff has been decreased to R510,6 per ton in August.

In July 2015 the JSE introduced a foreign-referenced cash-settled milling wheat contract following the signing of a licensing agreement with Euronext. This contract provides market participants with access to the benchmark European milling wheat contract, and is traded and settled in rand. Furthermore, the JSE added to its Quanto commodity product range the first can-do option, namely the Quanto corn commodity can-do contract.

Lacklustre performance in the currency derivatives market of the JSE continued during the eight months to August 2015, evidenced by a 3 per cent decline in trading activity when compared with the corresponding period of 2014. However, trading volumes in the interest rate derivatives market registered an increase of 11 per cent over the same period. Turnover in all derivatives traded on the JSE during the first eight months of 2015 is shown in the table on the next page.

Quarterly Bulletin September 2015  

Derivatives turnover on the JSE, January to August 2015

Type of derivative	Value (R billions)		Change over one  year (Per cent)
Equity		4 106		15
Warrants		0,4		-17
Commodity		484		38
Interest rate		533		12
Currency		330		4

Real-estate market

In the course of 2015, South African house prices continued to rise but at a slower pace. In August 2015 year-on-year increases in the nominal prices of residential property ranged between 4 per cent and 6 per cent across the different barometers depicted in the accompanying graph. The gradually declining trend in most indicators of nominal house price growth since the fourth quarter of 2014 was consistent with subdued economic growth, the moderate increases in the repurchase rate together with expectations of possible further interest rate increases, as well as tight household finances and subdued consumer confidence. Similarly, the consumer price index for actual housing rentals remained lacklustre, with inflation in rentals averaging around 5 per cent over the past five years.

Residential property transfers refer to all residential property purchases made, including all cash and mortgage bond transactions funded by banks, private individuals and non-banking institutions. After the number of transfers picked up marginally from the low levels in 2009 to late 2014, it tapered off to July 2015, impacted by poor demand for mortgage credit and constrained consumer confidence.

  Quarterly Bulletin September 2015

Box 7 Divergence in house price behaviour

While the behaviour of national average house prices is important from a macroeconomic viewpoint, national averages often hide considerable divergence at the disaggregated level. Data from Lightstone, for instance, show that price inflation of luxury, high-value and intermediate-value houses have moved closely together in recent years, but that the prices of houses in the low-value segment have over the past ten years consistently risen more strongly than those of the more expensive housing segments, as shown in the accompanying graph.

The low-value segment – houses with a current value of less than R250 000 – is where most people enter the commercial housing market for the first time, in many instances moving from informal dwellings to a formal-sector house. Included in the low-value segment is Reconstruction and Development Programme (RDP) housing, where prices are volatile. This segment has benefited from salary and wage increases that have in recent years generally been higher for low-income earners than for the average worker. The absence of transfer duty on property transfers in the low-value segment, alongside demographic and spatial shifts that result in many people moving into formal houses, probably favours the low-value segment.

Quarterly Bulletin September 2015  

Non-bank financial intermediaries

In the second quarter of 2015, the balance sheet of non-bank financial institutions¹¹ was buoyed by new investment as opposed to market revaluations. The consolidated assets of these institutions grew marginally by 0,3 per cent from the first quarter of 2015 to R7,9 trillion in the second quarter, representing a year-on-year increase of 7 per cent. Although the asset base of these institutions is traditionally dominated by insurers and the Public Investment Corporation, unit trusts were largely responsible for the growth in the balance sheet of non-bank financial institutions in the second quarter of 2015. The assets of non-money-market unit trusts remained broadly unchanged at R1,8 trillion in the first and second quarters of 2015. Holdings of non-money-market unit trusts were supported by growth in funds that invest in diversified multi-asset portfolios rather than in equity portfolios.

Heightened volatility in global financial markets and the decline in equity prices in the second quarter of 2015 contributed to a decline in exposure to the share market. The percentage of assets held by non-bank financial intermediaries in equities fell by 1 percentage point from the first quarter of 2015 to 56 per cent of total assets in the second quarter.

Holdings of fixed-interest securities by these intermediaries were influenced by an increase in bond yields in the second quarter of 2015. As a ratio of total assets, fixed-interest securities increased slightly by 0,3 percentage points from the first quarter of 2015 to 28 per cent of total assets in the second quarter. Uncertainty around the share market seemed likely to encourage investment in debt securities, as this asset class provides long-term investors with stable cash inflows over time.

Non-bank financial intermediaries’ holdings of cash and deposits increased by 0,5 percentage point from the first quarter of 2015 to 7 per cent of total assets in the second quarter. Investment in money-market unit trusts increased by R14 billion from the first quarter of 2015 to the second quarter, possibly benefiting from the resurgence of risk aversion amid the decline in equity prices. The reallocation of funds into cash and deposits was probably supported by expectations of further increases in interest rates.

The value of loans extended by non-bank financial intermediaries remained unchanged at 6 per cent of total assets in both the first and second quarters of 2015. However, gross loans extended by vehicle finance companies in the form of instalment sale credit and leasing finance increased by 4 per cent to R110 billion over the same period, despite increased pressure faced by households and weak consumer confidence.

  Quarterly Bulletin September 2015

The deterioration in economic conditions contributed to an increase in the withdrawal of funds from these intermediaries in the second quarter of 2015, exacerbated by job losses and subdued household disposable income. Meanwhile, investment income received by non-bank financial institutions moderated slightly in the second quarter of 2015 due to lower dividends received.

In July 2015 National Treasury released for comment draft regulations and a related explanatory memorandum on implementing retirement reforms, with the aim to lower charges and improve market conduct in the retirement industry. Retirement funds would be required to operate a set of default policies that rebalances the interests of fund members and service providers, once the draft regulations were adopted. The draft default regulations were published in terms of section 36(1)(c) of the Pension Funds Act 24 of 1956.

Flow of funds

Funding by non-residents into the domestic economy was led by loans and bond acquisitions during the first quarter of 2015. A collective inflow of R16,0 billion in long-term government bonds and securities issued by public enterprises was recorded in the first quarter of 2015, adding to the R60,4 billion advanced through loans. Furthermore, the foreign sector acquired portfolio equity amounting to R22,0 billion during the same period. However, this display of appetite for emerging-market securities was counteracted by some foreign parent companies selling their positions in the domestic subsidiaries, which resulted in total equity transactions recording a net outflow of R14,6 billion in the first quarter of 2015. Non-residents’ interest in the South African financial market occurred as the US Federal Reserve’s monetary policy normalisation continued to be deferred amid lustreless economic data, lifting international investor sentiment towards emerging-market economies.

The financial intermediation sector recorded higher total inflows during the first quarter of 2015 compared with the final quarter of 2014, as deposit receipts increased at a faster pace and more than offset the lower inflows¹² into the retirement and life funds. The intermediaries received deposits amounting to R64,7 billion and inflows into retirement and life funds of R20,6 billion in the first quarter of 2015, from R50,9 billion and R29,9 billion respectively registered in the final quarter of 2014. The growth rate of deposits reflected the lower base effects as the fourth quarter is usually a high expenditure period induced by festivities. Meanwhile, the lower inflows into retirement and life funds partly reflected job losses in the economy. Financial intermediaries continued to channel funds through credit extension and bond and equity purchases. They extended a collective amount of R209 billion through credit extension and bond and equity purchases in the first quarter of 2015. In line with their financial obligations, banks intermediated mostly through credit extension, while non-bank financial institutions acquired bonds and equities during the period under review.

Quarterly Bulletin September 2015  

The general government sector’s deficit position narrowed substantially to R5,0 billion in the first quarter of 2015 from R14,6 billion recorded in the final quarter of 2014. This small deficit emanated mainly from higher capital transfers of R14,7 billion by local governments during the first quarter of 2015, up from R9,2 billion in the fourth quarter of 2014 – a trend that normally coincides with the fiscal year end. Most of these capital transfers were conditional grants earmarked for municipal infrastructure, urban human settlements and public transport infrastructure. Government’s borrowing position was financed through the issuance of long-term government bonds, which amounted to R68,9 billion during the first quarter of 2015. The general government continued to secure funding from non-residents and the domestic financial intermediaries sector, including other monetary institutions, the Public Investment Corporation, insurers and retirement funds, and other financial institutions.

During the first quarter of 2015 non-financial corporate business enterprises’ total flows grew faster, along with the increase in the pace of capital outlays. Both private and public corporate businesses’ gross capital formation increased, resulting in an overall growth rate of 16 per cent from R120 billion in the final quarter of 2014 to R139 billion in the first quarter of 2015. Non-financial corporate business enterprises recorded an aggregate financial shortfall of R5,8 billion, as the surplus position of the private corporate businesses was not enough to offset the deficit incurred by the state-owned enterprises. The shortfall was financed through the issuance of public enterprises securities as well as loans and advances. In particular, the electricity supplier raised funds from the international bond market during the first quarter of 2015. National Treasury also announced that the proceeds from the sale of its stake in Vodacom would be used to finance the R23 billion budget allocation to the electricity supplier, which should improve the power utility’s financial position. However, the ongoing disruptions in electricity supply, coupled with a rating agency’s lowering of the electricity supplier’s long-term credit rating to non-investment grade, will probably negatively affect its risk profile and borrowing costs in the short term

The household sector’s total flows amounted to R37,6 billion during the first quarter of 2015, which was 12 per cent lower than in the fourth quarter of 2014. Having registered a deficit position of R48,6 billion during the first quarter of 2015, households sourced loans amounting to R38,1 billion. Funds acquired through mortgage loans amounted to R10,3 billion, which was higher than the R3,0 billion recorded in the final quarter of 2014. However, bank loans and advances slowed from R12,2 billion to R9,9 billion over the same period. Overall, household demand for credit remained sluggish against the backdrop of fewer employment opportunities and relatively tight lending conditions. At the same time, the household sector’s flows into retirement and life funds slowed from R24,8 billion in the final quarter of 2014 to R17,2 billion in the first quarter of 2015, while cash and deposits remained broadly unchanged at the R22 billion level.

  Quarterly Bulletin September 2015

Public finance¹²

Non-financial public-sector borrowing requirement¹³

In the April–June quarter of 2015, the non-financial public-sector borrowing requirement amounted to R58,2 billion – more than double the amount recorded in the same period a year earlier. The higher non-financial public-sector borrowing requirement resulted from higher cash deficits recorded by both consolidated general government and the non-financial public enterprises and corporations. In turn, the deficit recorded by consolidated general government was driven by a widening in the deficits of national and local governments.

Non-financial public-sector borrowing requirement

R billions

Level of government	Apr–Jun 2014*			Apr–Jun 2015*
Consolidated general government		8,1			29,4
National government		27,5			35,4
Extra-budgetary institutions		-2,8			-2,2
Social security funds		-9,3			-3,3
Provincial governments		-7,8			-8,1
Local governments		0,5			7,6
Non-financial public enterprises and corporations		18,8			28,8
Total**		26,9	**		58,2	**
As percentage of gross domestic product		2,9			5,9

* Deficit +, surplus –

** Components may not add up to totals due to rounding

The non-financial public-sector borrowing requirement amounted to 5,9 per cent of GDP in the first quarter of fiscal 2015/16 compared with the ratio of 2,9 per cent recorded in the same period of the previous fiscal year.

The borrowing requirement of consolidated general government amounted to R29,4 billion in the first quarter of fiscal 2015/16, or R21,3 billion higher than in the April–June quarter of 2014. It therefore shot up to 3,0 per cent of GDP in the first three months of fiscal 2015/16 compared with 0,9 per cent recorded in the same period a year earlier.

Quarterly Bulletin September 2015  

South Africa’s non-financial public enterprises and corporations recorded a preliminary borrowing requirement of R28,8 billion in the first quarter of fiscal 2015/16 – some R9,9 billion more than the borrowing requirement recorded in the same period a year earlier. The widening of the cash deficit could be attributed to prominent growth in total expenditure which far outpaced the modest growth in total cash receipts.

Preliminary estimates indicated that the net investment in non-financial assets by non-financial public enterprises and corporations amounted to R19,6 billion in the first quarter of fiscal 2015/16, virtually unchanged from the same period of the previous fiscal year. Despite the internal challenges faced by some of the state-owned companies, their prominence in the economy was maintained. The Budget Review 2015 projected that infrastructure-related spending by state-owned companies would reach R362 billion over the three-year planning period, with the bulk of the spending channelled to the energy, water and sanitation, telecommunications as well as transport sectors.

Non-financial public enterprises and corporations continued using the bond market as their main source of funding for capital expenditure. Net issuances of domestic marketable bonds by these entities amounted to R3,9 billion in the first quarter of fiscal 2015/16, bringing the aggregate value of outstanding marketable bonds to R234 billion at the end of June 2015. The major state-owned companies – namely Eskom, Transnet and the South African National Roads Agency Limited (SANRAL) – accounted for 86,6 per cent of the total.

Preliminary data indicated that national government’s cash receipts from operating activities totalled R247 billion in the first quarter of fiscal 2015/16, representing a year-on-year rate of increase of 5,8 per cent. Brisk collections in most major tax categories contributed to the rise in national government cash receipts.

Cash payments for operating activities of national government amounted to R280 billion in April–June 2015, or 8 per cent more than in the first three months of fiscal 2014/15. Compensation of employees recorded an increase of 6,5 per cent year on year, amounting to R31,4 billion during the period under review. Grants to other levels of government accounted for 56 per cent of total expenses, recording a year-on-year rate of increase of 7,4 per cent.

Summing national government net cash flow from operating activities, together with net investment in non-financial assets, yielded a cash deficit of R35,4 billion in April–June 2015. This was R7,9 billion higher than the cash deficit recorded in April–June 2014.

  Quarterly Bulletin September 2015

In the first quarter of fiscal 2015/16, provincial governments’ financial activities resulted in a cash surplus of R8,1 billion – R0,3 billion higher than the cash surplus recorded in April–June 2014. The Budget Review 2015 projected a surplus of R0,2 billion to be recorded by this level of government for the 2015/16 fiscal year as a whole.

Provincial government cash receipts from operating activities amounted to R121 billion in the first quarter of fiscal 2015/16, representing a year-on-year rate of increase of 5,7 per cent. Growth in total cash receipts was predominantly boosted by grants from national government and amounted to R118 billion in the quarter under review. These grants – equitable share and conditional grants – increased at a year-on-year rate of 5,7 per cent during the first quarter of fiscal 2015/16.

For the period under review, provincial government expenditure – cash payments for operating activities together with net investment in non-financial assets – recorded a year-on-year rate of increase of 5,8 per cent and amounted to R113 billion in the first three months of fiscal 2015/16. Provincial governments’ compensation of employees recorded a 3,6 per cent year-on-year rate of increase in April–June 2015. The slower increase in the compensation of employees could be attributed to the decline in the head count of provincial personnel. Personnel spending on educators and health practitioners amounted to R60,6 billion in the first quarter of fiscal 2015/16, with these two functional sectors constituting 86,6 per cent of the total compensation of employees.

Provincial governments’ deposits with the Corporation for Public Deposits increased from R21,3 billion at the end of March 2015 to R22,9 billion at the end of June 2015. At the same time, their deposits with private banks and their overall indebtedness increased from R10,8 billion to R18,4 billion and from R0,4 billion to R0,6 billion over the same period respectively.

Preliminary data indicated that local governments’ cash deficit widened substantially and amounted to R7,6 billion in the first quarter of 2015/16 compared with the negligible cash deficit recorded in the April–June quarter of 2014. The increased cash deficit could be attributed to a stronger decline in receipts than in payments.

Cash receipts from the operating activities of local government recorded a year-on-year decrease of 18,0 per cent to amount to R56,7 billion in the first quarter of fiscal 2015/16. Municipal own revenue declined significantly, contributing to lower-than-expected cash receipts by local government. At the same time, municipal voluntary transfers other than grants were revised downwards in the first quarter of fiscal 2015/16.

Cash payments for the operating activities of local government recorded a decline of 10,6 per cent year on year to amount to R50,4 billion during the April–June quarter of 2015. The decline was the result of lower purchases of goods and services. Net investment in non-financial assets amounted to R14 billion in the first quarter of 2015/16, some 5,3 per cent more than in the same period a year earlier.

Preliminary data of extra-budgetary institutions indicate a cash surplus of R2,2 billion in the first quarter of fiscal 2015/16 – moderately lower than the cash surplus of R2,8 billion recorded in the same period a year earlier. The decrease in the cash surplus could be attributed to higher cash payments owing to an increase in the purchases of goods and services.

Social security funds recorded a preliminary cash surplus of R3,3 billion in the first three months of fiscal 2015/16, compared with a cash surplus of R9,3 billion recorded in the same period a year ago. The Budget Review 2015 projected that this sub-level of consolidated general government would record a cash surplus of R11,6 billion for the full fiscal year.

Budget comparable analysis of national government finance

In the first quarter of fiscal 2015/16, national government expenditure followed a lower-than-budgeted path. Spending by national government totalled R271 billion during this period, or 6,8 per cent more than in April–June 2014. The Budget Review 2015 envisaged that national government spending would increase by 8,0 per cent year on year to amount to R1 222 billion

Quarterly Bulletin September 2015  

in fiscal 2015/16. Relative to GDP, national government expenditure amounted to 27,3 per cent in the first three months of fiscal 2015/16, slightly more than the expenditure ratio of 27,0 per cent recorded a year earlier.

National government expenditure in fiscal 2015/16

	Originally budgeted Full 2015/16				Actual Apr–Jun 2015
Expenditure item
	R billions		Percentage change*		R billions		Percentage change*
Voted amounts		679,5		8,6		151,1		9,0
Current payments		194,6		9,2		43,1		8,8
Transfers and subsidies		464,8		8,4		106,1		8,8
Payments for capital assets		16,7		9,9		1,8		23,5
Payments for financial assets		3,4		-2,9		0,0		-7,2
Statutory amounts**		542,8		7,3		119,6		4,2
Of which: Interest on debt		126,3		10,2		19,6		-3,0
Total expenditure		1 222,3		8,0		270,7		6,8

* Fiscal 2014/15 to fiscal 2015/16

** Including extraordinary payments

In the first quarter of fiscal 2015/16, current payments recorded a year-on-year rate of increase of about 9 per cent. The rise in current payments was driven by higher spending by the Departments of Police as well as Defence and Military Veterans. These two departments form part of the Justice, Crime Prevention and Security cluster, which contributed 73,3 per cent to total current payments.

Transfers and subsidies registered an increase over the period under review that was well-aligned with the budget for the full fiscal year. Departments within the Social Services cluster – mainly responsible for education, health and social services – accounted for 63 per cent of total transfers and subsidies. Further contributions to the higher transfers and subsidies were from the Department of Transport, which falls under the Economic Services and Infrastructure Development cluster.

Expenditure on capital assets amounted to R1,8 billion in April–June 2015, or 23,5 per cent more than in the corresponding period of the previous fiscal year. The Department of Water and Sanitation had to drive urgent critical projects due to drought disasters and some carry-over of the bulk water infrastructure projects from fiscal 2014/15. The Budget Review 2015 estimated that payments for capital assets would increase by 9,9 per cent year on year to total R16,7 billion in fiscal 2015/16.

In the period under review, payments for financial assets decreased by 7,2 per cent in April–June 2015 when compared with the first three months of fiscal 2014/15. This spending item mainly consists of the recapitalisation of state-owned companies.

Interest paid on national government debt amounted to R19,6 billion, representing a year-on-year rate of contraction of 3 per cent. However, the interest bill should normalise during the year. This spending category was originally budgeted to increase by 10 per cent and total about R126 billion in fiscal 2015/16.

  Quarterly Bulletin September 2015

Box 8 Restructuring of national government vote programmes

In fiscal 2015/16, the number of vote programmes of national government increased from 38 to 40. The separate vote for Government Communication and Information System was discontinued and migrated to a reconstituted Department of Communications. Three new vote programmes were created, namely the Department of Telecommunications and Postal Services, which oversees the state-owned Telkom and the Post Office; the Office of the Chief Justice and Judicial Administration; and the Small Business Development Department. Various vote programmes also changed names as listed below:

• The Independent Complaints Directorate has been changed to the Independent Police Investigative Directorate.

• Performance Monitoring and Evaluation has been changed to Planning, Monitoring and Evaluation.

• Women, Children and People with Disabilities has been changed to Women.

• Water Affairs has been changed to Water and Sanitation.

Equitable share transfers to provinces, the main source of provincial governments’ revenue, recorded a year-on-year rate of increase of 5,6 per cent, amounting to R95,7 billion in April–June 2015. In the Budget Review 2015, equitable share transfers were projected to amount to R383 billion in fiscal 2015/16 as a whole. The Budget Review 2015 provided for an amount of R10,7 billion to be transferred from the National Revenue Fund to metros as their share of the general fuel levy in fiscal 2015/16. The first payment is normally made in August of each fiscal year as their new budget cycle only starts in July.

In the first quarter of fiscal 2015/16, the cash-flow expenditure of national government amounted to R262 billion, or 5,8 per cent more than in April–June 2014 after accounting for cash-flow adjustments.¹⁴ These adjustments include surrenders, outstanding transfers, the revaluation of inflation-linked bonds, and amortised discount.

The revenue of national government amounted to R234 billion¹⁵ in the first three months of fiscal 2015/16 – some 7,6 per cent more than in the same period of the previous fiscal year. Most of the main tax categories recorded increases although company tax collections contracted. National government revenue was originally budgeted to increase by 9,9 per cent year on year to amount to R1 049 billion in fiscal 2015/16. As a ratio of GDP, national government revenue amounted to 23,6 per cent in April–June 2015 – slightly higher than the ratio of 23,2 per cent recorded a year earlier.

Quarterly Bulletin September 2015  

National government revenue in fiscal 2015/16

	Originally budgeted Full 2015/16				Actual Apr–Jun 2015
Revenue source
	R billions		Percentage change*		R billions		Percentage change*
Taxes on income, profits and capital gains		620,9		10,5		145,4		7,9
Income tax on individuals		394,7		11,5		88,3		14,0
Income tax on companies		203,7		9,2		50,2		-2,1
Payroll taxes		14,7		4,7		3,6		17,2
Taxes on property		13,7		9,8		3,6		21,3
Taxes on goods and services		389,2		9,2		82,3		12,3
Value-added tax (VAT)		283,8		8,6		57,2		10,3
Domestic VAT		314,0		9,4		71,3		3,3
Import VAT		140,0		2,5		27,1		12,6
Taxes on international trade and transactions		42,6		2,6		8,1		12,2
Import duties		41,7		2,9		7,9		13,1
Other revenue**		19,3		-5,3		4,4		-52,4
Less: SACU*** payments		51,0		-1,4		13,3		2,6
Total revenue		1 049,3		9,9		234,0		7,6

* Fiscal 2014/15 to fiscal 2015/16

** Including extraordinary receipts

*** Southern African Customs Union

Higher collections from taxes on income, profits and capital gains were boosted by strong growth in personal income tax, which outweighed the contraction in corporate income tax collections. Personal income tax increased on account of an increase in pay-as-you-earn (PAYE) receipts, partly due to the civil-servant pay increases that were implemented in June 2015. Income tax on companies contracted year on year by 2,1 per cent, owing to lower provisional payments mainly due to the weak performance of the mining and manufacturing sectors. Withholding tax on dividends continued to increase as companies returned their profits to shareholders rather than reinvesting them.

The substantial increase in taxes on property was driven by a significant year-on-year increase recorded in securities transfer tax, together with a firm increase in transfer duties. Higher collections of securities transfer tax reflected the brisk activity in the capital market.

  Quarterly Bulletin September 2015

Taxes on goods and services recorded a notable year-on-year rate of increase, which was above the yearly budgeted increase for this tax category. The increase in taxes on goods and services stemmed from a sharp rise in general fuel levy receipts, together with brisk collections of value-added tax (VAT) and excise duties. The steep increase recorded in the general fuel levy receipts could be attributed to lower-than-expected diesel refunds together with a one-off collection in April 2015. Domestic VAT collections recorded a small year-on-year increase, owing to lower payments from large vendors in the finance, manufacturing, wholesale and retail trade sectors. Higher imports of electrical machinery and equipment boosted import VAT receipts. Taxes on international trade and transactions increased due to higher collections of import duties in the first quarter of fiscal 2015/16.

The budgeted amount for Southern African Customs Union (SACU) payments for fiscal 2015/16 amounted to R51 billion, or 1,4 per cent less than in fiscal 2014/15. The 2015/16 shares have been adjusted to take into account the discrepancies in the payment of the 2014/15 SACU revenue shares. The amount paid out in April 2015 to the SACU member states amounted to R13,3 billion.

Netting national government revenue and expenditure yielded a cash-book deficit of R36,7 billion in April–June 2015, or R0,7 billion more than the cash-book deficit recorded in the first three months of the previous fiscal year. The level of national government expenditure was higher than national government revenue collections, which contributed to the slightly higher cash-book deficit during the period under review. According to the Budget Review 2015, a cash-book deficit of R173 billion was projected in fiscal 2015/16, or 4,1 per cent of GDP. In the first quarter of fiscal 2015/16, the cash-book deficit reached 3,7 per cent of GDP – remaining broadly unchanged when compared with the deficit ratio recorded in April–June 2014.

The primary balance¹⁶ is a useful indicator of the current fiscal effort and fiscal sustainability in a country. In the first quarter of fiscal 2015/16, the primary deficit of national government amounted to R17,2 billion, or 1,7 per cent of GDP. This could be measured against a primary deficit of about R16 billion, or 1,7 per cent of GDP recorded in the corresponding period of the previous fiscal year.

In the first quarter of fiscal 2015/16, the cash-flow deficit of national government amounted to R23,3 billion. This could be compared with a higher cash-flow deficit of R29,5 billion recorded in the first three months of the previous fiscal year. During the period under review, cash-flow revenue increased at a higher rate than cash-flow expenditure, which contributed to the lower cash-flow deficit. After accounting for the cost on the revaluation of foreign debt at redemption,

Quarterly Bulletin September 2015  

the net borrowing requirement amounted to R23,7 billion in April–June 2015. This net borrowing requirement was lower than the net borrowing requirement recorded in the first three months of the preceding fiscal year.

National government planned to raise R13,0 billion from Treasury bills and R145 billion from domestic long-term government bonds in fiscal 2015/16. National Treasury launched a new fixed-income bond and an inflation-linked bond in July 2015. The R2035 and the I2033 bonds were named according to their type and year of maturity, with coupon rates of 8,875 per cent and 1,875 per cent respectively. It was expected that another fixed-income bond, namely the R2040, would be introduced later in fiscal 2015/16. Net issues of Treasury bills and short-term loans from the Corporation for Public Deposits worth R1,7 billion were recorded in the first three months of fiscal 2015/16.

In the first quarter of fiscal 2015/16, government’s net issues of domestic bonds amounted to R37,0 billion. Of this amount, R13,3 billion consisted of inflation-linked bonds, bringing the outstanding balance on these indexed instruments to R372 billion at the end of June 2015. These bonds now account for 25,6 per cent of total domestic marketable bonds. While government continued to finance the bulk of the deficit domestically, it should be borne in mind that although rand-denominated bonds are domestic debt instruments, non-residents do buy and hold them on a significant scale; in mid-2015 non-residents held 35 per cent of the total amount in issue. However, the non-monetary domestic private sector and the Public Investment Corporation (PIC) continued to be the main holders of domestic marketable bonds.

National government financing in fiscal 2015/16

R billions

Item or instrument	Originally budgeted Full 2015/161		Actual Apr–Jun 2015			Actual Apr–Jun 2014
Deficit		173,1		23,3	2		29,5	2
Plus: Cost/profit on revaluation of foreign debt at redemption3		1,4		0,4			4,5
Net borrowing requirement		174,4		23,7			34,0
Treasury bills		13,0		1,7			8,2
Domestic government bonds		144,8		37,0			36,8
Foreign bonds and loans		9,2		-0,9			-7,5
Change in available cash balances4		7,4		-14,1			-3,6
Total net financing5		174,4		23,7			34,0

1. Budget Review 2015

2. Cash-flow deficit (This differs somewhat from the cash-book deficit)

3. Cost +, profit -

4. Increase –, decrease +

5. Components may not add up to totals due to rounding

In the April–June quarter, Treasury bills were issued at an average interest rate of 5,9 per cent, while conventional bonds attracted an average real yield of 8,1 per cent and inflation-linked bonds an average real yield of 1,6 per cent per annum. Between March and June 2015, the average outstanding maturity of national government’s domestic marketable bonds lengthened slightly from 170 months to 172 months.

Foreign bonds and loans recorded net redemptions to the value of R0,9 billion in the first quarter of fiscal 2015/16. The average remaining maturity of the foreign marketable bonds of national government shortened from 115 months at the end of March 2015 to 111 months at the end of June.

The funding activities of national government increased its available cash balances by R14,1 billion, bringing these balances to R226 billion as at 30 June 2015. Deposits with the Bank amounted to R155 billion as at 30 June 2015.

  Quarterly Bulletin September 2015

The sustained issuance of Treasury bills and government bonds resulted in further increases in the national government’s domestic debt. Between March and June 2015, domestic debt rose from R1 632 billion to R1 685 billion. Government’s total debt portfolio continued to be comprised mainly of domestic debt instruments.

The foreign debt of national government remained broadly unchanged at R167 billion – 9 per cent of total debt – from March 2015 to the end of June 2015, as the impact of minor redemptions was neutralised by the depreciation of the rand.

The total gross loan debt of national government, inclusive of domestic and foreign debt, increased from R1 799 billion to R1 851 billion between March and June 2015. As a ratio of GDP, total gross loan debt rose from 46,8 per cent to 47,5 per cent during the period under review. The Budget Review 2015 envisaged that total gross loan debt would total R1 983 billion, or approximately 47 per cent of GDP, at the end of fiscal 2015/16.

Quarterly Bulletin September 2015  

Statement of the Monetary Policy Committee

23 July 2015

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank, at a meeting of the Monetary Policy Committee in Pretoria

Since the previous meeting of the Monetary Policy Committee (MPC), the global environment has been dominated by heightened uncertainty relating to the debt crisis in Greece and the sharp decline in equity prices in China. While the tail risks from these events appear to have dissipated somewhat, uncertainties still remain. At the same time, the risks associated with financial market volatility related to the timing of the first increase in the United States (US) policy rate persist.

Domestically, the growth outlook remains weak, as both the supply and the demand sides remain constrained amid declining business and consumer confidence. The inflation forecast has deteriorated slightly since the previous meeting, notwithstanding the lower-than-expected outcome in June. Headline inflation is expected to breach the upper end of the target range during the first two quarters of next year, while upside risks posed by the exchange rate have increased.

The year-on-year inflation rate, as measured by the consumer price index (CPI) for all urban areas, stood at 4,6 per cent and 4,7 per cent in May and June respectively.

The latter surprised on the downside due to, inter alia, lower-than-expected increases in food price and rental inflation, with upside pressures coming from higher petrol prices. The categories of housing and utilities, food and non-alcoholic beverages, and miscellaneous goods and services contributed 3,1 percentage points to the overall inflation outcome. The South African Reserve Bank’s (the Bank) measure of core inflation – which excludes food, fuel and electricity – moderated from 5,7 per cent in May to 5,5 per cent in June.

Producer price inflation (PPI) for final manufactured goods continued its upward trend, having reached a low point of 2,6 per cent in February. In April and May, the PPI measured 3,0 per cent and 3,6 per cent respectively. The latter was above market consensus, driven by higher-than-expected food, beverage and tobacco product prices which, at 2,2 percentage points, were also the main contributor to the annual change in the PPI. The upward trend is expected to persist, driven by rising agricultural crop prices and electricity tariffs.

The inflation forecast of the Bank has changed marginally since the previous meeting of the MPC, with headline inflation now expected to average 5,0 per cent in 2015, up from 4,9 per cent previously. The forecast for the first two quarters of next year has also been revised upwards by 0,1 percentage points to 6,9 per cent and 6,1 per cent respectively, with a return to within the target range by the third quarter. However, the forecast average inflation for both 2016 and 2017 is unchanged at 6,1 per cent and 5,7 per cent respectively.

The forecast for core inflation is unchanged and is expected to average 5,6 per cent in 2015, moderating to 5,4 per cent and 5,2 per cent in the next two years. As before, much of the persistence of core inflation at these levels is attributed to high levels of wage growth, currency depreciation, and inflation expectations entrenched at the upper end of the target range.

The headline inflation forecast assumes electricity price increases of 13,0 per cent in July 2016 and July 2017. Although the current multi-year price determination allows for an 8 per cent increase from July next year, Eskom is expected to apply for a clawback on diesel usage, and this accounts for the additional 5 percentage point assumption in the model. The main assumptions underlying the model are listed in the annexure to this statement.

Inflation expectations, as reflected in the survey conducted by the Bureau for Economic Research (BER) at Stellenbosch University, have shown a near-term deterioration but are more or less unchanged over the two-to-three-year horizon. Average inflation expectations for 2015 and 2016 increased by 0,2 percentage points, to 5,6 per cent and 6,1 per cent respectively, but declined marginally to 5,8 per cent for 2017. The deterioration was mainly driven by marked

  Quarterly Bulletin September 2015

increases, of 0,6 and 0,4 percentage points respectively, by analysts for 2015 and 2016, and smaller increases by business people. The expectations of analysts and trade unionists remain within the target range but close to its upper end. The expectations of business people are above the target range, with a deterioration over all three years. Average five-year inflation expectations increased from 5,8 per cent to 6,0 per cent.

The median inflation expectations of analysts polled in the Reuters Econometer Survey are almost identical to the Bank’s forecast. The break-even inflation expectations, as reflected in the yield differential between conventional government bonds and inflation-linked bonds, are relatively unchanged since the previous meeting and remain above the target range for all maturities.

Global economic growth has been revised downwards recently, mainly due to the weak first-quarter outcome in the US. While the recovery in the US still appears to be on track amid continued improvements in the labour market, growth this year is expected to be closer to the 2 per cent level compared with expectations of around 3 per cent earlier in the year. The steady but slow improvement in the euro area has continued, following a better-than-expected first-quarter outcome. However, the outlook for the region will in part depend on avoiding negative spillovers from the Greek debt crisis. The near-term risks from this crisis appear to have been averted for now, but the longer-term sustainability of the Greek debt burden remains a concern. Growth in Japan is expected to remain positive but subdued.

The Chinese economy grew at a year-on-year rate of 7,0 per cent in the second quarter, but some moderation is expected in the coming quarters. The sharp correction in the Chinese equity markets appears to have been contained by strong intervention by the authorities, and the impact on the broader economy is expected to be relatively limited, but it does point to some fragility in the financial sector. The slowdown in China has continued to impact on commodity prices, with the platinum price, for example, declining to its lowest level in six years. The prospects for a number of other larger emerging-market economies, particularly Russia and Brazil, remain weak.

Global inflation pressures, particularly in the advanced economies, remain benign, reinforced by declining commodity prices, including that of oil. Against this backdrop, the monetary policy stances in most advanced and emerging-market economies have either remained unchanged or become more accommodative since the previous MPC meeting, with the exception of Brazil where interest rates were increased further. Monetary policies in the advanced economies are likely to remain asynchronous: highly accommodative stances in the eurozone and Japan are likely to persist for some time, while a start of monetary policy tightening is likely in the US sometime this year, followed by the United Kingdom (UK).

The rand exchange rate has been relatively volatile and depreciated significantly since the previous meeting of the MPC. The rand, along with a number of other emerging-market currencies, has been particularly sensitive to changing global risk perceptions relating to the Greek crisis, the volatility in Chinese equity markets, declining commodity prices, and expectations of the start of US monetary policy tightening. Since the previous meeting of the MPC, the rand has traded in a wide band of between R11,82 and R12,58 against the US dollar. Over the period, the rand has depreciated by 5,0 per cent against the US dollar, by 3,6 per cent against the euro, and by 3,5 per cent on a trade-weighted basis.

The rand found some support from the improved current-account outcome of 4,8 per cent of gross domestic product (GDP) in the first quarter of 2015 and the more favourable recent trade data. While these better outcomes may reflect the depreciated real effective exchange rate, further gains are likely to be constrained by the recent decline in commodity prices. The Bank forecasts a current-account deficit of around 4,6 per cent of GDP for the year.

Global capital flows have remained relatively volatile against the backdrop of changing risk perceptions. This has been reflected in non-resident bond and equity flows: according to data from the JSE Limited (JSE), non-residents were net sellers of South African government bonds to the value of R12,7 billion in May and June, but were net buyers of equities to the value of R17,7 billion. To date in July, non-residents have been net buyers of equities and bonds to the value of R3,7 billion and R2,4 billion respectively.

Quarterly Bulletin September 2015  

The rand remains a significant risk factor to the inflation outlook given the vulnerability of both the rand and long bond yields to possible US interest rate increases as well as a deterioration in South Africa’s terms of trade. The inflation forecast assumes a relatively stable real effective exchange rate over the forecast period, implying a nominal effective depreciation in line with inflation differentials between South Africa and her major trading partners. A nominal depreciation in excess of this would pose an upside risk to inflation, although this risk could be ameliorated to some extent should the relatively low pass-through from the exchange rate to inflation persist. The extent to which US policy tightening is already priced into the exchange rate also remains uncertain.

The domestic growth outlook remains subdued amid continued electricity-supply constraints as well as weak business and consumer confidence. Growth in the first quarter of 2015 measured 1,3 per cent, and high-frequency data suggest that second-quarter growth is likely to be broadly similar. The Bank’s forecast for growth in each year of the forecast period has been revised down marginally, to 2,0 per cent in 2015 and 2,1 per cent in 2016, rising to 2,6 per cent in 2017 when some easing of the electricity-supply constraint is assumed. However, risks to growth are still assessed to be moderately on the downside. The recent further decline in the Bank’s composite leading business cycle indicator also suggests a continuation of the weak growth outlook.

The RMB/BER business confidence index has declined for two consecutive quarters, measuring 43 index points in the second quarter of 2015, with confidence in the manufacturing sector particularly low, at 29 index points. The physical volume of manufacturing production has contracted on a month-on-month basis in three of the first five months of this year, and this sector is expected to record negative growth in the second quarter. Although the Purchasing Managers’ Index (PMI) improved in May and June, it remains around the 50 index point level, consistent with a constrained outlook. The mining sector, by contrast, has displayed some resilience, particularly in the platinum-group metals (PGMs) subsector, although the weaker platinum and palladium prices are expected to create further headwinds.

Underlying this subdued growth outlook is the persistent weakness in growth in gross fixed capital formation, particularly by the private sector. These trends contributed to a contraction in non-agricultural formal sector employment, both on a quarter-on-quarter and on a year-on-year basis. During the four quarters to the first quarter of 2015, over 41 000 jobs were shed, of which just over 30 000 were in the private sector.

Although consumption expenditure of households improved somewhat in the first quarter of 2015, this was probably induced by temporary factors, including the decline in the petrol price and lower food price inflation. However, following the increase in personal income taxes alongside higher electricity tariffs and a reversal of the petrol price declines, the outlook for consumption expenditure has deteriorated. This negative outlook is reflected in slowing retail sales growth, declining motor vehicle sales, and the continued weak pace in credit extended to households by the banking sector. Tighter affordability criteria as well as proposals to cap interest charges on unsecured loans are likely to constrain bank credit extension to households further. This is in contrast to the continued buoyant growth in credit extension to the corporate sector. Against this backdrop, the FNB/BER consumer confidence index reached a 14-year low in the second quarter of 2015.

Notwithstanding the recent moderation in nominal wage growth, the pace of growth remains high and contributes to the persistence of inflation at higher levels. Year-on-year growth in nominal salaries and wages per worker moderated to 6,7 per cent in the first quarter of 2015, from 7,3 per cent in the previous quarter. Adjusting for productivity increases, due in part to employment reductions, labour cost increases declined to 4,1 per cent in the first quarter. According to Andrew Levy Employment Publications, the average settlement rate in collective bargaining agreements declined to 7,8 per cent in the first half of 2015, compared with 8,1 per cent in 2014 as a whole.

Food prices remain a concern to the MPC, despite the continued moderation of food price inflation at the CPI level having measured 4,6 per cent in May and 4,3 per cent in June. However,

  Quarterly Bulletin September 2015

the continuing drought in parts of the country has contributed to the upside risk to the outlook, despite benign global food price inflation. Maize and wheat prices have increased significantly since the beginning of the year, and we are yet to see the full impact on consumer prices. At the PPI level, however, cereal and crop price inflation accelerated to 17,8 per cent in May, and both wheat and maize prices are now trading at around import parity levels.

International oil prices have been somewhat weaker since the previous meeting of the MPC, following higher output by Saudi Arabia and the prospects of a resumption of oil exports by Iran. This follows two consecutive months of oil prices in the range of US$60–65 per barrel. Since early July, spot prices have traded below US$60 per barrel, while futures prices are currently trading at around US$58 per barrel for December delivery. The Bank’s forecast assumes a moderate increase in oil prices over the forecast period. Domestic petrol prices have increased by about 90 cents per litre in the past two months. Should current trends persist, a price reduction of around 40 cents per litre is likely in August.

While the June inflation outcomes were below expectations, this respite is expected to be temporary. The persistence of forecast inflation at elevated levels and the continued upside risks to the outlook remain a concern to the MPC. Although inflation is currently within the target range, given the lags in monetary policy changes on inflation, the focus of policy continues to be on the medium-term trend and to ensure that inflation remains comfortably and sustainably within the target range.

Inflation is expected to breach the upper end of the target range for two quarters, and the medium-term trajectory remains uncomfortably close to the upper end of the target range. The upside risks make this trajectory vulnerable to any significant changes in inflation pressures.

Although the risks of higher electricity tariffs have not materialised yet, other upside risks persist. The rand remains vulnerable to the global market reaction to US monetary policy normalisation, particularly in the context of South Africa’s twin deficits. Pressures on the exchange rate have been exacerbated by the recent significant decline in commodity prices, which are likely to impede the favourable current-account adjustment. Some of the rand adjustment has already occurred since the previous MPC meeting, but further reaction to US monetary policy tightening could cause inflation to diverge even further from target and set in motion an exchange rate-inflation spiral. Further upside risks are expected to come from food prices, which have yet to react to the significant increases in spot prices of agricultural commodities.

The MPC has been indicating for some time that it is in a hiking cycle in response to rising inflation risks and a normalisation of the policy rate over time. The MPC is cognisant of the fact that domestic inflation is not driven by demand factors, and the outlook for household consumption expenditure remains subdued. Economic growth remains subdued, constrained by electricity-supply disruptions as well as low business and consumer confidence, and the risks to the outlook remain on the downside. However, as emphasised previously, the MPC must be mindful of the risk of second-round effects on inflation, and it is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels.

The MPC has therefore decided to continue on its path of gradual policy normalisation. Accordingly, the repurchase rate will increase by 25 basis points to 6,0 per cent per annum with effect from 24 July 2015. Four members favoured the 25 basis point increase, while two members favoured an unchanged stance.

The expected inflation trajectory implies that the real repurchase rate remains low and possibly still slightly negative at times, and below its longer-term average. The monetary policy stance therefore remains supportive of the domestic economy. The continuing challenge is for monetary policy to achieve a fine balance between achieving the Bank’s core mandate of price stability and not undermining short-term growth unduly. Monetary policy actions will continue to be sensitive, to the extent possible, to the fragile state of the economy. As before, any future moves will therefore be highly data-dependent.

Quarterly Bulletin September 2015  

Annexure

Summary of assumptions

1. Foreign-sector assumptions

Percentage changes (unless otherwise indicated)	Actual						Forecast
	2013			2014			2015			2016			2017
1. Real GDP growth in South Africa’s major trading partner countries		3,1	%		3,1	%		3,0	%		3,3	%		3,3	%
								(3,3	%)		(3,5	%)		(3,4	%)
2. International commodity prices in US$ (excluding oil)		-6,4	%		-9,8	%		-17,0	%		0,0	%		5,0	%
								(-14,0	%)		(5,0	%)		(5,0	%)
3. Brent crude (US$/barrel)		108,8			99,2			60,2			65,0			68,1
								(60,2	)		(65,0	)		(68,1	)
4. World food prices (US$)		-1,6	%		-3,8	%		-14,0	%		1,5	%		2,5	%
								(-11,0	%)		(2,0	%)		(2,5	%)
5. International wholesale prices		0,3	%		-0,1	%		-2,2	%		0,8	%		1,3	%
								(-2,0	%)		(1,0	%)		(1,5	%)
6. Real effective exchange rate of the rand (index 2010 = 100)		81,91			79,17			81,29			80,50			80,50
								(81,60	)		(81,30	)		(81,30	)
7. Real effective exchange rate of the rand		-10,1	%		-3,3	%		2,7	%		-1,0	%		0,0	%
								(3,1	%)		(-0,4	%)		(0,0	%)

2. Domestic-sector assumptions

Percentage changes (unless otherwise indicated)	Actual						Forecast
	2013			2014			2015			2016			2017
1. Real government consumption expenditure		3,3	%		1,9	%		1,0	%		1,5	%		1,5	%
								(2,0	%)		(1,5	%)		(1,5	%)
2. Administered prices		8,7	%		6,7	%		2,8	%		9,6	%		8,4	%
								(2,5	%)		(9,5	%)		(8,3	%)
– Petrol price		11,8	%		7,2	%		-7,2	%		11,7	%		6,4	%
								(-8,4	%)		(11,1	%)		(6,5	%)
– Electricity price		8,7	%		7,2	%		9,7	%		12,5	%		13,0	%
								(10,1	%)		(13,1	%)		(13,1	%)
3. Potential growth		2,2	%		2,1	%		2,1	%		2,2	%		2,3	%
								(2,2	%)		(2,2	%)		(2,4	%)
4. Repurchase rate (per cent)		5,00			5,57			5,75			5,75			5,75
								(5,75	)		(5,75	)		(5,75	)

* The figures in brackets represent the previous assumption of the Monetary Policy Committee (MPC).

  Quarterly Bulletin September 2015

Foreign-sector assumptions

1. Trading partner gross domestic product (GDP) growth is determined broadly using the Global Projection Model (GPM) of the International Monetary Fund (IMF), which is then adjusted to aggregate the GDP growth rates of South Africa’s major trading partners on a trade-weighted basis. Individual projections are done for the four largest trading partners: the euro area, China, the United States (US) and Japan. The remaining trading partners are grouped into three regions: Emerging Asia (excluding China), Latin America and the Rest of Countries bloc. The assumption takes account of country-specific ‘consensus’ forecasts as well as IMF regional growth prospects.

2. The commodity price index is a weighted aggregate price index of the major South African export commodities based on 2010 prices. The composite index represents the total of the individual commodity prices multiplied by their smoothed export weights. Commodity price prospects generally remain commensurate with global liquidity as well as commodity supply/ demand pressures as reflected by the pace of growth in the trading partner countries.

3. The Brent crude oil price is expressed in US dollar per barrel. The assumption incorporates an analysis of the factors of supply, demand (using global growth expectations) and inventories of oil (of all grades) as well as the expectations of the US Energy Information Administration (EIA), Organization of the Petroleum Exporting Countries (OPEC) and Reuters.

4. World food prices uses the composite food price index of the Food and Agriculture Organization of the United Nations (FAO) in US dollar. The index is weighted using average export shares and represents the monthly change in the international prices of a basket of five food commodity price indices (cereals, vegetable oil, dairy, meat and sugar). World food price prospects incorporate selected global institution forecasts for food prices as well as imbalances from the anticipated trend in international food supplies relative to expected food demand pressures.

5. International wholesale prices refers to a weighted aggregate of the producer price indices (PPIs) of South Africa’s major trading partners, as per the official real effective exchange rate calculation of the South African Reserve Bank (the Bank). Although individual country consumer price inflation (CPI) forecasts provide a good indication for international wholesale price pressures, the key drivers of the assumed trend in global wholesale inflation are oil and food prices as well as expected demand pressures emanating from the trends in the output gaps of the major trading partner countries. Other institutional forecasts for international wholesale prices are also considered.

6. The real effective exchange rate is the nominal effective exchange rate of the rand deflated by the producer price differential between South Africa and an aggregate of its trading partner countries (as reflected in the Quarterly Bulletin published by the Bank). Although the nominal rate is a weighted average of South Africa’s 20 largest trading partners, particular focus is placed on the rand outlook against the US dollar, the euro, the Chinese yuan, the British pound and the Japanese yen. The assumed trend in the real effective exchange rate remains constant from the latest available quarterly average over the projection period. However, due to the time delay in the calculation of the real effective exchange rate, the most recent trend in the nominal effective exchange rate is adjusted with the assumed trend for the domestic and foreign price differential for the current quarter. This may result in a technical annual adjustment over the current and next forecast year that differs from zero.

Quarterly Bulletin September 2015  

Domestic-sector assumptions

1. Government consumption expenditure (real) is broadly based on the most recent National Treasury budget projections. However, since these projections take place twice a year, the most recent actual data points also play a significant role in the assumptions process.

2. Administered prices represent the total of regulated and non-regulated administered prices as reflected by Statistics South Africa (Stats SA). Their weight in the consumer price index basket is 18,48 per cent and the assumed trend over the forecast period is largely determined by the expected pace of growth in petrol prices, electricity tariffs, school fees as well as water and other municipal assessment rates.

The petrol price is an administered price and comprises 5,68 per cent of the overall basket. The basic fuel price (which currently accounts for roughly half of the petrol price) is determined by the exchange rate and the price of petrol quoted in US dollars at refined petroleum centres in the Mediterranean, the Arab Gulf and Singapore. The remainder of the petrol price is made up of wholesale and retail margins as well as the fuel levy and contributions to the Road Accident Fund (RAF). Since most taxes and retail margins are changed once a year, the assumed trajectory of the petrol price largely reflects the anticipated trend in oil prices and the exchange rate.

The electricity price is an administered price measured at the municipal level with a weight of 4,13 per cent in the CPI basket. Electricity price adjustments generally take place in July and August of each year, and the assumed pace of increase over the forecast period reflects the multi-year price determination (MYPD) by the National Energy Regulator in respect of Eskom, with a slight adjustment for measurement at municipal level.

3. The pace of potential growth is derived from the Bank’s semi-structural potential output model. The measurement accounts for the impact of the financial cycle on real economic activity and introduces economic structure via the relationship between potential output and capacity utilisation in the manufacturing sector (See South African Reserve Bank Working Paper Series WP/14/08).

4. The repurchase rate, or the ‘repo rate’, is the official monetary policy instrument and represents the interest rate at which banks borrow money from the Bank. Although the rate is held constant over the forecast period, this assumption is relaxed in alternative scenarios where, for instance, the policy rate responds to deviations of output from its potential and the gap between future inflation and the inflation target, in other words, via a stylised ‘Taylor rule’, one that is based on market expectations of the future path of the policy rate, and other paths (as requested).

  Quarterly Bulletin September 2015

Selected forecast results: Monetary Policy

Committee Meeting on 23 July 2015

Selected forecast results (quarterly)

Year-on-year percentage change	Actual												Forecast
	1		2		3		4		2014		1		2			3			4			2015			1			2			3			4			2016			1			2			3			4			2017
1. Headline inflation		5,9		6,5		6,2		5,7		6,1		4,2		4,7			5,2			5,8			5,0			6,9			6,1			5,8			5,7			6,1			5,7			5,6			5,6			5,6			5,7
														(4,6	)		(5,0	)		(4,6	)		(4,8	)		(6,8	)		(6,0	)		(5,9	)		(5,8	)		(6,1	)		(5,7	)		(5,7	)		(5,6	)		(5,6	)		(5,7	)
2. Core inflation		5,4		5,6		5,7		5,7		5,6		5,7		5,7			5,6			5,5			5,6			5,5			5,4			5,4			5,3			5,4			5,3			5,2			5,2			5,1			5,2
														(5,7	)		(5,5	)		(5,4	)		(5,6	)		(5,4	)		(5,4	)		(5,4	)		(5,3	)		(5,4	)		(5,3	)		(5,2	)		(5,1	)		(5,1	)		(5,2	)

Selected forecast results (annual)

Per cent	Actual						Forecast
	2013			2014			2015			2016			2017
1. Real gross domestic product (GDP) growth		2,2	%		1,5	%		2,0	%		2,1	%		2,6	%
								(2,1	%)		(2,2	%)		(2,7	%)
2. Current account as a ratio to nominal GDP		-5,8			-5,4			-4,6			-4,6			-4,6
								(-4,7	)		(-4,6	)		(-4,7	)

Quarterly Bulletin September 2015  

Notes to tables

Capital market activity: Primary and secondary markets – Table S–30

The separate columns showing net issues of bonds by central government (2030M) and by local governments (2031M) were combined and are now shown as general government net issues (2015M). The figures of local governments were insignificant. The ‘other borrowers’ (2033M) column was removed. This time series historically consisted of the net issues of loans by universities and former technikons which are non-marketable and therefore not relevant for this table; and of the net issues of bonds issued by financial public enterprises, namely the Industrial Development Corporation of South Africa Limited (IDC) and Development Bank of Southern Africa (DBSA). The data of the IDC and DBSA were historically extracted and added to that of non-financial public enterprises to form a new series for total public enterprises (2016M) that is now published in the table.

The JSE’s total share market capitalisation (2024M) and total bond market capitalisation (2025M) were added under ‘secondary market indicators’. Bond market capitalisation includes revalued inflation-linked government bonds.

National government debt – Table S–52 and S–53

The table has been amended to disaggregate the total marketable bonds into three categories: fixed-rate bonds, inflation-linked bonds, and zero-coupon and floating-rate bonds.

Ownership distribution of domestic marketable bonds of non-financial and financial public enterprises and corporations Table S–63

The table for the non-financial public enterprises and corporations has been populated with ownership distribution data from STRATE, whereas previously only the totals were reported. A new table with the ownership distribution of domestic marketable bonds of financial public enterprises and corporations has also been added and populated with data from STRATE, improving the coverage of the public-sector debt in the Quarterly Bulletin. The analysis of the non-financial and financial public enterprises and corporations only includes those institutions that issue marketable bonds.

Balance sheets for social security funds, local governments, and non-financial public enterprises and corporations Tables S–76 to S–78

The balance sheet presentation for the subsectors of the public sector has been amended according to the Government Finance Statistics Manual 2014 and G-20 requirements. While some series remain the same, changes have been made to cater for more appropriate asset and liability categorisation, guided by the international standard manual.

Exchange rates – Table S–106

The monthly average exchange rates of the Brazilian real and the Russian rouble were added to the table. The addition of these currencies ensures that monthly average exchanges rates against the rand are available for all four BRIC countries.

  Quarterly Bulletin September 2015