Medium Term Budget Policy Statement (MTBPS) spending priorities public hearings: Ceasefire Campaign, SALGA,& FFC; Division of Revenue Amendment Bill [B17-2011] adoption

NCOP Appropriations

08 November 2011
Chairperson: Mr E Songoni (ANC) & Mr T Chaane (ANC, North West)
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Meeting Summary

The Select and Standing Committees on Appropriations held public hearings on the spending priorities of the Medium Term Budget Policy Statement.

The Ceasefire Campaign advocated demilitarisation in South Africa. The organisation sought to promote human security by making society conscious of the possibility of a world without wars and armaments so that resources currently expended on militarisation could be utilised for social development. Militarism was based on an outmoded mythology that rested on an undemocratic, hierarchical and gendered view of the world. The expected increase from 2008/16 in military spending was irrelevant since South Africa was at peace with its neighbours.  Recommendations included demilitarizing the non-military functions of the South African National Defence Force, developing civil society’s capacity for defensive resistance and peacekeeping intervention, mothballing the South African National Defence Force, reducing the defence vote to 0.5% of gross domestic product and increasing the number of Government jobs in human security. Ceasefire proposed that an inclusive, democratic, civil society-based process be initiated to reconsider South Africa’s defence. In the interim  there was to be an expansion of the scope of the Defence Review Committee,  substantial decrease in weapons purchase, no increase in South African National Defence Force staff, increase in Government jobs in human security and retraining  the South African National Defence Force staff for those jobs, and no increase in budget for 2012/13 with an eventual  reduction to 0.5% of gross domestic product.

Members noted that while the ideas of Ceasefire were interesting they were idealistic and needed more substantial evidence before they could be taken into consideration. Members also noted that the Committee was not the appropriate platform to discuss issues about the reviewing of military policy as the main concern was on the review of the budget only. Members inquired on what basis the recommendations proposed by Ceasefire were premised.

The South African Local Government Association briefed the Committee on its comments and observations of the 2011 Medium Term Budget Policy Statement. The general observations outlined in the presentation included the observation that the current economic environment was constrained by a slowing economy - hence the need for more fiscal prudence.  It was noted that the slowing economy could negatively affect the local government revenue and service delivery and hence the need for the reprioritisation of the municipal budgets towards more investment in infrastructure.  An increased commitment towards the protection of the baseline allocation to local government was evident from the R5 billion added to the local government  allocation over the 2012 Medium Term Expenditure Framework. The Association emphasised that there was a need for empirical studies into the cost of service delivery in local government to inform decisions about the vertical share of revenue. With regard to equitable shares, R 2.2 billion was added over the 2012 Medium Term Expenditure Framework which was less than a 10% increase in the total local government equitable share allocation. This increase was a pass-on cost in relation to salaries and bulk services. Mention was also made of the review of the equitable formula that was currently under way which could result in a more equitable distribution of funds between different municipalities based on their varying fiscal capacities. Other outcomes from the review included a new poverty line and more municipal services covered, such as fire-fighting and storm water drainage systems among small municipalities that were reliant on the equitable shares allocation. In the conditional grants, R2.8 billion was allocated for direct transfers and R994 million for indirect transfers to municipalities to be used for the upgrading of informal settlements in cities, large town bulk infrastructure and solid waste management in rural municipalities. A summary of the issues raised to the Minister of Finance in the recent Budget Forum was also noted. This included the issue of unfunded mandates and ad hoc national policies and legislative amendments such as the Administrative Adjudication of Road Traffic Offences Act 1998 (Act No. 46 of 1998) which were constraining the municipalities' own revenue sustainability. Greater commitment by national and provincial Government to paying outstanding property rates to municipalities was highlighted. Also it was noted that the Deeds Office needed to provide property data to municipalities free of charge in order to assist in improving billing integrity and achieving a clean audit. The Association through its facilitation of budget week workshops and the distribution of financial circulars hoped to impress upon its members the need to redirect spending towards front-line services to reduce non-core and ineffective expenditure. National Treasury also had to develop a framework of revenue management that could be applicable to all policy and legislative impacts on local Government revenues.

Members inquired if the presenter was mandated to make the presentation and submit the recommendations given. Members also sought clarification on the relationship between the direct and indirect transfers. Members also raised questions on what was to happen to the money that was appropriated for councillors who were not re elected in the May elections. An emphasis was also made on the need to capacitate municipalities in order that they might be able adequately to utilise conditional grants allocated to them.

The Financial and Fiscal Commission outlined the macroeconomic outlook and fiscal framework, the Medium Term Budget Policy Statement spending priorities, Division of Revenue over the 2012 Medium Term Expenditure Framework, and the adjustments to provincial and local government allocations. Under the macro economic outlook it was noted that South Africa’s slowing economy could have negative impact on sectors such as finance, real estate, business services, manufacturing, and accommodation. In the context of financial consolidation the major concern was the increase in Government debt which was estimated to rise to 40% of gross domestic product by 2015. Therefore the debt service ratio was likely to result in an increase in expenditure being financed by debt. The emphasis under the medium term spending priorities included the job creation, health and the Millennium Development Goals, in particular Goal 4 which emphasized the need to reduce child mortality rates,  Goal 5 to improve maternal health, and Goal 6 which was to combat HIV/AIDS, malaria and other diseases. Under the Division of Revenue an additional R48 billion was proposed to be added in 2012. Total expenditure was to be revised from R811 billion in 2011/12 to R1 trillion in 2014/15.

The Financial and Fiscal Commission gave a summary on the Division of Revenue between national, provincial and local Government. Under the proposed Provincial Adjustment to Provincial Conditional Grants the presentation focused on the reallocation of the R 1.2 billion. In the amended Bill a total amount of R753 million was allocated to provinces to deal with the recent flood damage to various items of infrastructure.  It was to be shared across agriculture (R 149.5 million), housing and education, (R 180 million) and roads (R260 million). While the grants had increased in the Intergovernmental Fiscal Review systems there was no evidence of better expenditure – this was as a result of poor planning and design of conditional grants such as the Expanded Public Works Programme Incentives grants. Issues of capacity spending were also viewed as challenges. Under the Local Government Fiscal Framework, with a particular reference to adjustments to local government allocations, it was noted that local government was at the fore in service delivery. Therefore any adjustment to this sphere had an immediate impact. The following  could be rolled over to the 2010/11 financial year: Water Services operating subsidy grant (R3.5 million for Lephalale Municipality), Department of Human Settlements for rural household infrastructure (R26 million) and Regional Bulk Infrastructure Grant (R10.6 million). The biggest adjustment was the creation of a new baseline allocation for the merged municipalities of Kagisano-Molopo of R790 million from the Department of Cooperative Governance budget. There was an emphasis on ensuring that the capacities of municipalities were increased in terms of grant management.

Members asked if it was possible to integrate budgets to achieve the National Development Agenda across the three spheres of Government. They also emphasised the need for further engagement on the Occupational Specific Dispensation. Members also highlighted that the funds allocated to the disaster programme were inadequate.

National Treasury clarified that the merged municipalities of Kagisano-Molopo were to receive a third of the R790 million stated by the Financial and Fiscal Commission. National Treasury also explained the release of funds in the adjacent budget process. The issue of unspent funds was brought up with an emphasis that the South African Local Government Association must increase the capacities of municipalities.


Meeting report

Ceasefire Campaign Presentation
Ms Laura Pollecutt, Director: Ceasefire Campaign, said that her organisation's vision was to promote a vision of human security by conscientising society to the possibility of a world without wars and armaments so that resources currently expended on militarisation could be utilised for social development.

Ms Pollecult summarised the reasons for demilitarisation: modern warfare did not satisfy the requirements of a “just war” as developed by Cicero, St Augustine, and numerous subsequent authors and theologians. Furthermore militarism was based on an outmoded mythology that rested on an undemocratic, hierarchical and gendered view of the world. In addition the expected projected increase from 2008/16 in military spending was irrelevant considering that South Africa was at peace with its neighbours and did not need to arm itself. Finally the military “defence” promoted local arms races, for example, the arms deal in South Africa was followed by the purchase of a fighter jet in Botswana.

Ms Pollecult described the vested interests in the military-industrial complex. It noted that the arms embargo against South Africa during the apartheid years led to the development of a substantial military industry. After the new dispensation the arms industry, Denel in particular, managed to achieve an inside track in the corridors of South African power. The South African National Defence Force (SANDF) and the defence industry complemented each others’ interests in the continuance of their jobs, their powers and their access to taxpayers’ money, in most cases to protect the power of the governing elite and war profiteers at the expense of the majority.

Ms Pollecult outlined that the 2% of gross domestic product (GDP) referred to in submissions to Parliament by the Minister of Defence, as a “World Bank” recommendation and benchmark was incorrect as it was listed by the North Atlantic Treaty Organisation (NATO) which was militarist and maintained an aggressive posture and was therefore irrelevant to South Africa.

In addition, military spending was not insurance because when the insured had been paying premiums and an insured event happened the policy paid out, unlike military spending where the taxpayer had been paying for military spending in peacetime and when war broke out military spending increased and there was loss of lives and extensive damage done to property.

Ceasefire recommended demilitarizing the non-military functions of the SANDF, developing civil society’s capacity for defensive resistance and peacekeeping intervention, mothballing the armed forces as in the case of Costa Rica, reducing the defence vote to 0.5% of GDP, and increasing the number of government jobs in human security.

Ceasefire envisaged that an inclusive, democratic, civil-society-based process be initiated to reconsider South Africa’s defence. In the interim the organisation suggested that there was to be an expansion of the scope of the Defence Review Committee, substantial decrease in weapon purchase, no increases in SANDF staff, an increase government jobs in human security and retraining of SANDF staff for those jobs. Finally there was to be an eventual decrease of the budget to 0.5% of GDP.

Discussion
Ms R Mashingo (ANC) asked for clarification on the assertion made in the presentation that Government needed to focus on human security when already that was the primary focus of the Budget.

Ms Pollecult noted that she implied that more resources could be channelled to that cause.

Mr C de Beer (ANC, Northern Cape) stated that every country needed a defence force and asked for further clarification on the recommendations made such as “moth balling”.

Ms Pollecult replied that “moth balling” did not mean doing away with the defence force but it meant that the military did not become the main focus. Demilitarisation also meant that resources could be channelled to more pressing human needs. This was necessary for ensuring a more equitable society. She further indicated that she had not mentioned that the function of the police should be abrogated.

Mr B Mashile (ANC, Mpumalanga) commented that Ceasefire was simplifying a complex issue. He noted that while the argument was interesting it was idealistic and not plausible in the real world as South Africa was part of the global world that had real threats.

Mr Mashile asked for the statistics of military spending of other countries. In addition he asked if the trend was that they were increasing or scaling down their capacities.

Ms Pollecult replied that the Members had a closed perspective in their views and needed to be more open- minded to the proposal made by Ceasefire. She acknowledged that the ideals were new and required open- mindedness on the part of Members, but some of the radical ideas were part of what had been fought for.

Mr Mashile did not agree with the statement that South Africa did not have enemies, as was shown in the case of Libya.

Mr Mashile and Mr L Ramatlakane (COPE) asked what informed the argument given by Ceasefire and whether it was based on empirical evidence.

Mr Mashile asked for the basis at which Ceasefire had derived its figure of 0.5%.
Mr Ramatlakane asked what informed the budget projections given for the year 2015/16.

Ms Pollecult noted that the figures were based on an independent study done by the Stockholm International Peace Research Institute (SIPRI).

Mr Ramatlakane noted that he appreciated the presentation but asked if the argument took into consideration the policy perspective. It was therefore insufficient to propose changes to these policies if that had not been the case.

Mr Ramatlakane commented that Ceasefire was not taking the Catino perspective to a logical conclusion.

Mr Ramatlakane mentioned that Ceasefire needed to present more substantial evidence to validate its arguments.

Mr Ramatlakane and Ms L Yengeni (ANC) said that they believed that instead of cutting down on military spending, Government needed to increase funding.

Dr P Rabie (DA) noted that currently South Africa was a member of the Depository Receipt Issuers' Conference (DRIC) and needed to protect its trade through coasts such as Mozambique that had pirate threats. In addition he noted that 60% of South Africa’s borders were unprotected and it was surrounded by unstable neighbours such as Zimbabwe where civil war could not be ruled out - hence the need for a stronger army.

Dr Rabie mentioned that the military was essential as it was a means of training and employing the unemployed youths.

Ms Pollecult replied that this function could be taken up by other sections such as education.

Dr Rabie commented that a comparison could not be made between South Africa and Costa Rica as the two countries were very different.

Mr M Swart (DA) noted that South Africa had a regional mandate of maintaining peace security and also needed to protect its coasts. He added that even if the costs were transferred to another Government entity costs could still be incurred for the above mentioned purposes.

Mr J Gelderblom (ANC) commented that a strong army was necessary for investor confidence.

Mr Gelderblom asked if the presentation could be accepted in any European country.

Ms Pollecult noted that Europe was currently in crisis and therefore could not be used as a role model.  She added that America had an aggressive posture and therefore this accounted for the reasons why its military spending was increasing.

Mr Gelderblom commented that the presentation negated the fact that Africa was characterized by military interventions and instability and therefore the need for a strong military remained.

Mr M Mbili (ANC) mentioned that South Africa was not at peace with itself. He noted that there were “groupies” or sections in society who still believed that the previous regime was more suitable and could try to push that agenda even through military means. He added that in some parts of the country these “groupies” had not been disarmed and therefore there could be resurgences. What prevented this was the fact the country had a strong army.

Mr Mbili noted that contrary to the presentation the purpose of the military was not just to support the interests of the elite but to protect the people of South Africa.

Ms Yengeni noted that the theory that supported a stateless society, with no defence force was not practical and no longer existed.

Ms Pollecult noted that she had not mentioned that in the presentation. The function of the police could still be maintained.

Ms Yengeni mentioned that she felt that Ceasefire misinterpreted what Comrade Tokyo had meant when he said “Ceasefire”.

Ms Pollecult replied that the concept was mentioned at the funeral and that was where the whole concept emerged. She added that the organization was credible as it had been in existence even during apartheid when it was involved in the End Conscription Campaign (ECC) against the conscription of white youths by the South African army to suppress resistance to apartheid in the black townships. The organisation also had worked with the Government on projects like the anti-land mine campaign.

Ms Yengeni mentioned that the presentation undervalued the value of Denel as she felt that it was a strategic asset to the country and the fact that the country had such expertise was something that needed to be applauded.

Ms Pollecult noted that Denel was a capital intensive organisation that benefited the top management and not the low level employees.

Ms Yengeni asked which functions should be taken over by the SANDF and those that should not be performed by them.

Ms Pollecult replied that the local coast guard was better positioned than the Navy to guard the coastal areas. The emphasis was to replace military functions with policing functions.

Ms Yengeni and Mr Mbili reminded Ms Pollecult on how to conduct herself in Parliament. They noted that the views brought up had to be interrogated and this was not always agreeable.

Ms Pollecult replied that she had not meant to offend anyone in her responses.

The Chairperson noted that the views were welcomed. However, whether the Members agreed or disagreed depended on it being deliberated at a later stage. He indicated that the current platform was not the most appropriate for the suggestion of a change in the military policy of the country. He thanked the presenter for the input. He hoped that the message that the presenter received was not that the Members were questioning the credentials of Ceasefire but that the purpose of the questions was to learn and gain clarification. Hence the Members were not dismissing the presentation.

South African Local Government Association (SALGA) presentation on the 2011 MTBPS
Mr Jonathan Patrick, Specialist: Municipal Finance at the South African Local Government Association (SALGA), gave apologies on behalf of the Chairperson, Councillor Thabo Manyoni, who could not attend the meeting.
Mr Patrick observed that the current economic environment was constrained characterised by a slowing economy - hence the need for more fiscal prudence.  It was noted that the slowing economy could negatively affect local government's revenue and service delivery and hence the need for the reprioritisation of the municipal budgets towards more investment in infrastructure. There was also an increased commitment towards protecting the baseline allocation to local government (LG) as evident from the R5 billion that was added to LG allocation over the 2012 Medium Term Expenditure Framework (MTEF).

As to the broader fiscal framework of municipalities there was a need for empirical studies into the cost of service delivery in LG to inform decisions about the vertical share of revenue in the three spheres of Government. Such studies could ultimately underpin the LG fiscal framework review which was under-way.

With regard to equitable shares, R2.2 billion was added over the 2012 MTEF which was less than a 10% increase to the total Local Government Equitable Shares (LGES) allocation. This increase was a pass-on cost in relation to Salaries and Bulk Services.

SALGA believed that the rising cost of bulk services and demand for basic services required higher inflation increases to the LGES as municipalities had to provide for repairs and maintenance of infrastructure through which free basic services were delivered. It was noted that these basic services provisions were gradually becoming unaffordable to municipalities.

SALGA noted that the review of the equitable formula which was under-way could result in a more equitable distribution of funds between different municipalities based on their varying fiscal capacities.

Other outcomes from the review included a new poverty line, and more municipal services covered, such as fire-fighting and storm water drainage systems among small municipalities reliant on the equitable shares allocation.

In terms of conditional grants,  there was an additional R2.8 billion for direct transfers and R994 million for in-direct transfers to municipalities which was to be used for the upgrading of informal settlements in cities, large town bulk infrastructure, and solid waste management in rural municipalities. In addition to these interventions, SALGA intended to work towards integrated bulk raw water storage facilities to support service delivery in smaller, mainly rural, municipalities, funding for roads infrastructure management capacity in the rural municipalities, and targeted support towards improvement of capacity in rural municipalities such as the initiative for urban municipalities under the Urban Settlements Development Grant. An emphasis was made on the need for municipalities to be better capacitated to plan and execute projects funded through conditional grants.

Mr Patrick then summarised issues raised in the recent Budget Forum to the Minister of Finance. It was noted that Government had to address the issue of unfunded mandates which according to the Financial and Fiscal Commission (FFC) submission for 2012/13 Division of Revenue were estimated at R4 billion per annum in metros. An additional issue was ad hoc national policies and legislative amendments, such as the Administrative Adjudication of Road Traffic Offences Act 1998 (Act No. 46 of 1998) (AARTO), which were constraining the municipalities' own revenue sustainability as they were not functional. Concerns were also raised over the rates ratios for categories of properties in terms of the Municipal Property Rates Act 2004 (Act No. 6 of 2004) (MPRA).

Furthermore the National Energy Regulator of South Africa (NERSA) tariff processes that were not aligned to the Municipal Finance Management Act 2003 (Act No. 56 of 2003) (MFMA) budget process were highlighted as a major constraint.

Mr Patrick emphasised the role of the national and provincial Governments and noted the need for an increased commitment to paying the outstanding property rates to municipalities. SALGA also noted the need for the provision of property data from Deeds Office free of charge to municipalities which in turn could assist in improving billing integrity and achieving clean audits.

In conclusion, Mr Patrick noted that SALGA, as a result of the tight fiscal environment, impressed upon its members the need to redirect spending towards front-line services, and to reduce non-core and ineffective expenditure. This was to be facilitated in the next Budget Week workshops which would be scheduled over the next few months in preparation for the financial year 2012/13 and the distribution of a financial circular.
Finally it was noted that National Treasury needed to develop a framework of revenue management  applicable to all policy and legislative impacts on local Government revenues. This framework had to include a compulsory assessment of the implementation costs which could be re evaluated in two years to deal with any unintended consequences.

Discussion
Mr Mashile questioned Mr Patrick's mandate to make the presentation as he feared that the leadership might refuse to own the recommendations given.

Mr Patrick replied that, from an administrative perspective, he was mandated to make the presentation. But he could give a direct answer as to whether the submissions made could be mandated and therefore would have to refer the matter to the Executive.

The Chairperson noted that he appreciated Mr Mashile’s reservations but mentioned that the Committee could not challenge the decision made by SALGA. He added that should its executive dispute the contents of the document then could further action be taken at a later date.

Dr Rabie mentioned that it was unacceptable that national and provincial Government had not made greater efforts and commitments to paying the outstanding funds to municipalities as they needed to set an example for the smaller vulnerable municipalities. He requested for a written response as to why the process was taking such a long time and the total outstanding amount in property rates.

Mr Patrick replied that the proportions of the outstanding debt still needed to be determined as there were still some outstanding issues. He added that National Treasury and the Department of Cooperative Governance was currently working on a document to table these outstanding debts. However, when the results were made available SALGA could give a written response.

Ms Mashigo asked what SALGA had done to capacitate municipalities on the issue of spending conditional grants.

Mr Patrick replied that SALGA in collaboration with other Government departments was working on capacitating municipalities. He noted that recently when National Treasury recalled funds that had not been utilized SALGA assisted in the process.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that, in the case of KwaZulu-Natal, when more prudent measures were implemented the municipalities were able to bring their finances under control without having adverse impact on the service delivery.

Ms Mashigo asked for clarification on the relationship between the indirect and direct transfers.

Mr Patrick replied that direct grants were directly transferred to municipalities into the municipal accounts. With these transfers municipalities could directly dictate the conditions through which the funding came to them. While indirect transfers were transferred from the fiscus to the national departments that implemented infrastructure projects on behalf of the municipalities, in indirect transfers municipalities had limited control of the funds.

Mr Ramatlakane asked why SALGA needed an empirical study to evaluate service delivery in local Government.

Mr Ramatlakane asked for clarification on what was meant by the statement that the equitable share should be informed by a fiscal framework.

Mr Patrick replied that at the moment there were basic cost estimates which determined the allocations of which a final determination had been done in 2004. It was therefore necessary through research to update these estimates to inform the budget allocation and determine decisions around the vertical division of revenue.

Mr Ramatlakane asked what was meant by the varying fiscal capacities of municipalities.

Mr Patrick replied that, according to the local budget and expenditure review which outlined what was meant by the fiscal capacities of municipalities, the fiscal capacity of a municipality emanated from the powers and functions it had and its ability to raise its own revenue on its own. The above basically underscored the fiscal capacity of municipalities and varied from different municipalities.

Mr Sinclair asked about the disjuncture of NERSA tariff policy process with the PFMA budget process.

Mr Patrick noted that he was not clear in terms of the legislative proposals that could be made around the question. He noted that a written response could be made at a later date. He mentioned that the suggestion made by the Budget Forum was that NERSA got together with the other stakeholders to address the issues and pave the way forward.

Mr K Sinclair (COPE, Northern Cape) asked what could be done to prevent unspent funds at municipalities.

Mr Patrick replied that SALGA could impress upon its members the need to be better able to deal with their budgetary processes. The platform to share best practices on greater efficiencies could be created at the scheduled Budget Weeks Workshops.

Mr Sinclair asked what was going to happen to the money appropriated for the councillors who were not re-elected in the May elections. What was the process of ensuring that the councillors received their gratuity.

Mr Patrick replied that he would have to give a written response.

The Chairperson noted that they were some limitations in SALGA's response and hopefully the answers  could be found in the FFC presentation. SALGA's written response was to be submitted before 11 November 2011.

Financial and Fiscal Commission briefing
Mr Bongani Khumalo, Acting Chairperson and Chief Executive Officer, Financial and Fiscal Commission (FFC), mentioned that some of the Members could be hearing the presentation for the second time as it was a joint meeting, and indicated that the presentation originated from a base document and therefore the FFC had tried to tailor-make the presentation to suit the Committee. It had its focus on four areas which were mainly the macroeconomic outlook and fiscal framework, the MTBPS spending priorities, Division of Revenue over the 2012 MTEF and the adjustments to Provincial and Local Government Allocations

Dr Ramos Mabugu, Director: Research and Policy, Financial and Fiscal Commission, outlined that under the macroeconomic outlook and fiscal framework that the South African economy remained vulnerable in terms of interruptions in the global recovery. He added that the slow recovery of the economy had a negative impact on sectors such as finance, real estate, business services, manufacturing and accommodation.

He added that in the South African context financial consolidation was still of paramount importance as the major concern was Government debt which was set to rise to 40% of GDP by 2015 after which it was expected to stabilize and decline. Debt service ratio was increasing pointing towards increasing debt burden and towards expenditure being financed by debt. Finally there was a sharp increase in foreign indebtedness, though its share remained fairly constant over the medium term.

The key emphasis under the medium term spending priorities included the job creation, health and the Millennium Development Goals, in particular MDG4 which emphasized the need to reduce child mortality rates, MDG5 - improved maternal health,  and MDG6 - to combat HIV/AIDS, malaria and other diseases. It was also noted that the proposed National Health Insurance scheme needed to be re-evaluated with the need for Government to come up with an interim financing mechanism that was credible. There was also need in the area of social security to strengthen selected child welfare programmes through childhood development services, and home and community based child care and protection.

Under the Division of Revenue an additional R48 billion was proposed to be added in 2012. Total expenditure was to be revised from R811 billion in 2011/12 to R1 trillion in 2014/15.

A summary was given on the Division of Revenue at the levels of national, provincial and local Government. Provinces and LG each grew moderately by 1.4% and 4% to deal respectively with the shortfall in compensation of employees and sustain the provision of Free Basic Services (FBS) to the poor.

Mr Tebogo Makube, Programme Manager: Fiscal Policy, Financial and Fiscal Commission, said that under the proposed adjustment to provincial allocations each province was to receive an adjustment of the R3.2 billion that been added to cover higher-than-budgeted-for wage agreements. The risk of not funding this shortfall was that each province would be forced to hold back on expenditure needed for other areas of service delivery. The adjustment to the further education and training (FET) colleges' wages should be linked to performance output and outcomes from these colleges.

Under the proposed Provincial Adjustment to Provincial Conditional Grants the presentation focused on the reallocation of the R 1.2 billion. In the amended Bill a total amount of R753 million was allocated to provinces to deal with the recent flood damages to various infrastructure. It was to be shared across agriculture (R 149.5 million), housing and education, (R 180 million) and roads (R260 million).

It was noted that in the long term the FFC was currently working on a disaster funding project to be tabled with the next set of recommendations for 2013/14.  Emphasis was made on disaster risk reduction through maintenance rather than the occurrence funding.

Mr Makube noted that while the grants had increased in the Intergovernmental Fiscal Review (IGFR) systems there seemed to be no evidence of better expenditure performance and quality delivery mainly due to poor planning and design of certain conditional grants such as the Expanded Public Works Programme Incentives (EPWP) grants.

Capacity spending was also noted as a critical challenge at provincial level, for example, in low expenditure related grants, such as the Incentive Grant Programme and HRP. In addition it was noted that poor reporting on non-financial performance of conditional grants was a short coming

Under the Local Government Fiscal Framework, with a particular reference to adjustments to LG allocations, it was noted that LG was at the fore front of service delivery. Therefore any adjustment to this sphere had an immediate impact. The following grants could be rolled over: Water Services operating subsidy grant (R3.5 million for Lephalale Municipality), Department of Human Settlements for rural household infrastructure (R26 million) and the Regional Bulk Infrastructure Grant (R10.6m).

The FFC noted that the biggest adjustment was the creation of a new baseline allocation for the merged municipalities of Kagisano-Molopo of R790 million from the Department of Cooperative Governance. The FFC also reported a saving of R50 million from unallocated portion of the FMG:  a portion (R11 million) was to be returned to the national fiscus, while the remainder (R 39 million) was to be used for a new engineering internship programme across municipalities.

Mr Khumalo in conclusion noted that the Commission welcomed shifts in the composition of public expenditure towards investment and economic development. The issue of unspent grants had to be further investigated. The rolled-over grants were under-spent as a result of weak capacity and poor performance, therefore there was a need for providing capacity development and assistance to struggling provinces and municipalities in grant management. The Commission then cautioned against persistent in-year allocations to the Division of Revenue allocations as these had the possibility to undermine the credibility of the transfer system. In the long term there was a need to look at the design of the grants.

Discussion
Ms Wendy Fanoe clarified that the merged municipalities of Kagisano-Molopo were not going to receive the mentioned R790 million as the conditional grant was a third of that amount.

Ms Fanoe commented on the release of funds in the adjacent budget process. She noted that funds were supposed to deal with the unforeseeable and unavoidable costs and therefore that was why there was an emphasis on the salary composition of the budget in terms of wage negotiations and funds allocated to disaster money.

Mr Sinclair noted that the funds allocated to the reconstruction of infrastructure were insufficient.

Ms Fanoe noted that the allocation was only the first contribution towards the relief of the disaster. Long term payments could be adopted in the infrastructure grant funding. She noted that the adjustments process worked in the following way: legislation needed to be passed; then, after enactment and announcement in the Government Gazette, the funds were allocated to municipalities and provinces. The earlies that the funds could be released was around early December and they needed to be spent before the next financial year, by 31 March 2012.

Ms Fanoe commented that while municipalities were operating in a constrained environment there was a renewed focus to achieve specific outcomes and which meant that Government had to invest smarter.

Ms Fanoe noted the Committee needed to focus not only on how to the money was allocated but on how it was spent.

Ms Fanoe commented that the presentation by SALGA about the infrastructure grant money was important in that it emphasized ways of avoiding the situation of unspent funds.

Mr G Snell (ANC) asked if it was possible to integrate budgets to achieve the National Development Agenda across the three spheres of Government.

Mr Khumalo noted that the Constitution assigned specific functions to specific spheres of Government. It also assigned revenue resources, part of which entailed the equitable share which became the entitlement of each of the three spheres of Government. The current method used a formula to transfer resources in the  equitable share and conditional grants. While the current method had the potential to integrate the budget it had numerous constraints.

The Chairperson noted that there was need to engage more on the Occupation Specific Dispensation (OSD) and more information needed to provided on the details.

Appropriations Standing Committee's Report on the Division of Revenue Amendment Bill (B17- 2011)
Members unanimously agreed to adopt the Report.

The meeting was adjourned.


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