Financial Intelligence Centre Amendment Bill: Adoption & Financial & Fiscal Commission Recommendations on Division of Revenue

Meeting report

Financial Intelligence Centre Amendment Bill (the Bill): Financial Intelligence Centre (FIC or Centre) Briefing
Mr Pieter Smit, Head: Legal Policy, FIC, briefed the Committee on the Financial Intelligence Centre Amendment Bill, highlighting the background, the objectives of the Bill, the significant amendments and comments and misconceptions pertaining to the principal Financial Intelligence Centre Act (FICA).

FICA had established the regulatory framework to facilitate prevention, detection, investigation and prosecution of money laundering and terror financing activities and complemented the Prevention of Organised Crime Act. FICA obliged institutions to identify customers, and set rules for the keeping of records, reporting of information, implementing of internal rules, and appointment of compliance officers and training of staff.

The Financial Action Task Force (FATF) on Money Laundering recommended that South Africa should give appropriate and adequate responsibilities and powers to supervisory bodies to enforce the FICA, and ensure consistency in the enforcement powers afforded to supervisory bodies. The objective of the Bill was thus to do this, to address the powers and functions of supervisors, and to provide the legislative structure for administrative enforcement of obligations under FICA. The Bill therefore made provision for supervision and enforcement of compliance, institutional accountability, and extension of the powers and functions of the Centre to enhance supervision and enforcement of compliance in a coordinated and integrated manner, together with supervisory bodies.

Consistent powers were therefore given to supervisory bodies, and there was provision for exchange of information between the Centre, supervisory bodies and law enforcement agencies. This would improve the proper administration of the FICA and would also be consistent with international standards for regulation and supervision in relation to anti-money laundering measures.

Mr Smit said that the perceptions of regulatory overlap between the Centre and supervisory bodies was uninformed. When a person was subject to the jurisdiction of a supervisory body, the Centre could exercise the administrative enforcement powers afforded in the Bill only if it had requested the supervisory body to act and the latter failed to do so. The Centre was not a super-regulatory body, but rather a body that worked in conjunction with supervisors to ensure compliance. The Centre would only act once the supervisor failed to adequately address concerns.

Funding was a concern as in many instances the additional functions allocated by the Bill would have financial implications for the supervisory bodies. Therefore the Bill empowered them to use any authorised levies or charges levied in accordance with other laws to defray expenditure incurred in performing their obligations under FICA.

Mr Smit said that there had been opinions expressed that certain bodies were deemed inappropriate to act as supervisory bodies, such as the Law Society of South Africa and the Johannesburg Stock Exchange. He said that this could not be addressed in the Bill. The legislative authority to amend the Schedules to FICA had been delegated to the Minister, who must attend to the appropriate listing of supervisory bodies.

The Parliamentary Law Advisors and the Office of the State Law Advisor had certified that the Bill and its administrative penalties were constitutional and consistent with other laws.

Discussion
Mr Z Kolweni (ANC, North - West) said that this Bill was similar to the original Act, and he did not understand the need for the FIC to appear before the Committee. He noted that the presentation did not indicate the real need for the Bill.

Mr Smit replied that these amendments were intended to enhance the supervisory and inspection powers. For instance, he said, had there not been clauses in the Financial Intelligence Centre Act it would have been difficult to inspect Fidentia, as there would have been no legal framework for this action. These amendments would now provide the mandate for the FIC to conduct its affairs in a much more integrated manner.

Mr Kolweni asked who would ultimately supervise the different regulatory bodies.

Mr Smit said this was a difficult question, as supervisors or regulators were accountable to the political legislation governing them. The relevant Minister thus assumed responsibility for oversight, as guided by policy directives emanating from that Minister’s Portfolio and Office. The supervisors’ budget, performance, accountability and decision-making function had to be in line with government’s policy directives and good practices, and ensure that South African consumers were protected.

Mr E Sogoni (ANC, Gauteng) asked what the international best practices were and how these were reflected in the Bill, and whether regulators would have the power to sanction those members who did not comply with policy directives.

Mr Smit replied that international best practices dictated that regulators did have the right to sanction those members who failed to comply with policy directives, and that severe penalties could be imposed; as was the case with the Bank of Scotland that was sanctioned by the bank regulator in the United Kingdom.

Mr Kolweni asked whether there was any correlation between FICA and the National Credit Act.

Mr Smit replied that there was no direct link between FICA and the National Credit Act (NCA) as the NCA was more recent then FICA. He added that the NCA was implemented with the aim of creating a new sector of financial governance.

Mr Sogoni noted that the Bill provided for an appeals mechanism. He asked how this appeals mechanism would work, as the Bill was not clear on the timeframes involved.

Mr Smit replied that the Bill did not prescribe any timeframes as it would come into operation when signed into law, and that the FIC would provide secretarial support to regulators. The FIC had also recruited new staff and formulated a budget plan to primarily deal with this Bill.
The appeals mechanism, as called for by the Bill, would be up and running by March 2009.

Mr Sogoni questioned the constitutionality of inspection as prescribed by the Bill.

Mr Smit replied that there would be no infringement on the right to privacy as contained in the Constitution, and therefore there was no constitutional impediment to the Bill. He noted that regulators would be required to inspect their members on a regular basis. Inspections only related to compliance and information obtained could not be used in a criminal case, unless SAPS was involved. The information obtained would be used at the sole discretion and for the sole purpose of the regulator who conducted that inspection, and not for a criminal investigation.

Mr Sogoni asked what the nature of the relationship between the FIC and regulatory bodies were at present.

Mr Smit replied that the legislation had provided the enabling framework for implementation. It did highlight the close relationship between the FIC and regulatory bodies. He said that the nature of implementation relied on the FIC and the regulatory bodies. The Bill also required the FIC and the regulatory bodies to enter into Memorandums of Understanding, as both had an obligation to ensure that the legislation was enforced.

Members considered the clauses of the Bill and the Motion of Desirability. They resolved unanimously to adopt the Bill.

Financial and Fiscal Commission (FFC): Recommendations on the Division of Revenue
The Financial and Fiscal Commission recommendations in relation to the Division of Revenue were tabled at the meeting, and the Committee Members and Members of the provincial legislatures (MPL) discussed the various issues.  

Financing Basic Education: Learner Transport and Re-ranking of Schools
Three of the key findings of the FFC pertaining to learner transport were that there had been no specific national policy that dealt with the provision of learner transport, no clear definition and division of responsibility between the Department of Education (DoE) and the Department of Transport (DoT) at national and provincial levels, and questioning of the criteria used to determine eligible learners for the transport; the recommendation that those living more than 5km away would be provided with such transport.

The FFC thus recommended that the national norms and standards for the provision of learner transport should be established, and there must be an obligation of provinces to implement statutory provisions to ensure that all learners were afforded the opportunity of equal access to the right of education.

In addition the FFC found that schools and learners had been reassigned to National Qualification (NQ) levels NQ1 and NQ2. The implication was that increased funding allocations would be required. The FFC also concluded that the national re-ranking of schools required that all schools in the same ward be allocated the same poverty score. The ranking did not always reflect poverty distribution and the actual needs of the schools and the learners.

The FFC recommended that government should review the method used to inform the national quintile ranking of schools. This method should take into account the socio-economic circumstances of the learners, rather than classifying schools according to the wards/neighbourhood in which they were located.

Discussion
Mr C Nordier (MPL, Free State) asked what the time frames on the draft policy on Learner Transport. He was pleased to see the recommendations on ranking.

Mr Bongani Khumalo, Deputy Chair, FFC, replied that the FFC had not yet received the relevant information as the Department of Transport (DoT) was still working on the policy framework.

Ms J Ndimande (MPL and Chair of Education Committee, Limpopo) said that there had been concerns and confusion about the ranking system of schools divided according to wards. Many South African schools were poor and situated in disadvantaged areas. The problems around learner transport had been exacerbated by children attending schools far from their own villages, instead of local schools.

Mr Khumalo replied that Limpopo government should not have had uncertainty about the quintile system as wards were targeted as per the election wards, and that it had nothing to do with the manner in which schools had been ranked. He agreed that it was common practice for learners from disadvantaged urban areas to attend schools in more affluent areas. Nothing prevented them from doing so as schools were classified differently, even though they were situated in the same ward.

Mr P Nketu (MPL and Chair of Public Works and Roads Committee, Free State) asked what the National Service Delivery Norms and Standards entailed and how this would ensure that the transport provided was adequate. Many rural areas were inaccessible and had bad road infrastructure. Provincial governments should move away from accepting :”luxury” tenders, as many of the luxury buses provided were not suitable for the roads on which they must travel.
He also felt that the 5km baseline was too much; this was too far for learners to walk. He asked that it be reduced.

Ms N Mtsweni (MPL and Chair of Finance Committee, Mpumalanga) thought that the new ranking system would not help to alleviate the plight of disadvantaged and rural schools, as there were other factors such as transport and risks involved.

Mr K Sesele ( MPL and Chair of Education Committee, Free State) added that in the Free State, many learners had not been able to attend classes, as the Department of Education (DoE) had not yet paid the relevant service providers. There was thus a need for a particular date to be set for individual increases per departments, as the Free State had a shortfall of R25 million for education in 2007, due to money not going to where it was initially allocated.

Mr A Dawood (MPL, Gauteng) added that he too also aware of two service providers that had not yet been paid, as the provincial Education Department had indicated that they had lost the relevant documentation.

Mr Sogoni said that he appreciated the recommendations made by the FFC. Scholar transport should make life easier for the child and the relevant policy directives had been clear on responsibility. He agreed that the 5km baseline needed review as this was still too far for learners to walk.

The Chairperson stated that the relevant departments should clarify who should shoulder responsibility for leaner transport. There must be accessible roads to and from rural villages. He agreed that the 5km radius baseline was inappropriate.

Ms Mtsweni noted that there was a need for the FFC to simply this matter. She said that it was the responsibility of the DoE to provide learner transport, and that the relevant parties should not dismiss nor discourage the use of bicycles as this had been very successful in the Eastern Cape.

The Chairperson noted that there was a need to engage with both provincial governments and service providers together, to force provincial administrators to pay the service providers. He said that he would also invite these service providers to the public hearings to hear their grievances.

Mr Khumalo replied that the FFC had looked at the South African Schools Act, which made it clear that DoE was the entity that had to assume responsibility for learner transport, with assistance by the DoT. He added that the National Land Transport Act had certain provisions concerning the transportation of learners and people with disabilities, and that they had to ensure that the transport for learners was adequate and safe.

Mr Khumalo said that Norms and Standards pertaining to any programme of government were clear, as they were rooted in the desired outcomes of these programmes. In this case the desired outcome was for an effective and efficient learner transport system.

He stressed that the current budgetary allocation to the various provincial Education Departments had not been sufficient to cover all programmes that these departments wished to implement. There was a need for more funding. The FFC had already made a submission to the DoE to review this process of allocation.

The FFC was willing to visit provinces and assist them in problems pertaining to what was discussed.

Mr Khumalo stated that the idea of giving bicycles to rural learners was not a bad idea, but the practicality of such a programme might not be sustainable as factors such as theft, bad roads and weather should be taken into account.

Mr Kenneth Brown, Chief Director, National Treasury, said that it was useful for provincial MECs of Finance and Economic Development to be present at meetings like this as they ultimately were responsible for budgetary allocations in their provinces. He said that provinces did not use their discretion when they made allocations and that many provinces were interpreting norms on service delivery and budgetary priorities differently from each other. Mr Brown noted that provinces were involved in centralising their budgets. In Mpumalanga not all the money was allocated to the DoE at once.

In response to the issue of learner transport, he added that it was important to take action against  officials responsible for the bureaucratic bungles around non-payment of service providers. The National Treasury would engage with the DoE and DoT in addressing these problems.

Mr C Smith (MPL and Chair for Local Government, Northern Cape) added that there was also a problem around finding suitable accommodation for learners. Some learners in the Northern Cape were living in absolute squalor because their parents could not afford to pay more money on proper lodgings. He asked whether government could not set-up central boarding houses or hostels to alleviate this problem.

Mr Khumalo replied that he was aware of such problems, and that it was an issue that had to be discussed.

Mr Brown added that government ought to think about building or amalgamating certain boarding houses or hostels in order to provide adequate accommodation to learners.

The Chairperson added that provincial delegations had to ensure that service providers were paid as it could lead to non-election of certain public representatives who failed to deliver on their mandates.

Health: Primary Health Care and Fiscal performance of Community Health Clinics
The FFC had noted that the period between 2003 and 2005 was characterized by under spending of 7.74%, whilst in 2006 this under spending declined slightly to 6.17%. Both instances of under spending fell within the cautionary range of the Auditor-General.

The FFC determined that currently only aggregate, province-level performance had been made available, which made it difficult to measure institutional performance related to particular clinics, increased allocation of resources to rural/urban clinics and whether excessive or marginal growth was the result under or over-spending.

The FFC recommended that just as the Division of Revenue Act (DORA) required indicative allocations to schools and hospitals to be gazetted with the tabling of budgets, this should now be extended to clinics and other Primary Healthcare (PHC) facilities as and when they came under provincial control.

Discussion
Mr Sogoni said that he understood the rationale behind the recommendations made by the FFC on Health related matters, but that the FFC had failed to take into account the other factors that had to be considered, such as lack of sanitation and water, electricity and non-existent road infrastructure.

Mr M Ginindiza (MPL, Mpumalanga) emphasised the point made by Mr Sogoni, saying that clinics and hospitals were a necessity, but so was adequate access to these health facilities. Provincialisation had had a destructive impact on service delivery and must be addressed.

He added that the Hospital Services Transformation plan was supposed to be implemented according to provincial profiles, but the reality had been that this plan would lead to reduction of hospitals in all provinces. He said that this would adversely affect and compromise service delivery.

The Chairperson noted that the rapid rise in food and fuel prices had had a disastrous effect on the poor and marginalised the world over, and that these factors had to be taken into account.

He expressed his concern at the problems affecting the DoE National Schools Nutrition Programme (NSNP) and said that in some quarters it had been described as the Schools “malnutrition programme” because of children becoming ill.

Mr Dawood said that there had been tension between South African Local Government Association (SALGA) and municipalities on issues such as primary health care, and that problems pertaining to capacity, urbanization, relocation and inadequate ambulances had seriously undermined service delivery in health. He added that there were problems around community and primary health care facilities, due to lack of clear policy directives, and that in some communities brand new community health care facilities were not being used because of the uncertainty.

The Chairperson stated that in Eastern Cape province R425 million was under spent in 2007, despite the fact that certain hospitals in that province did not have medicine. He said that this was unacceptable, and that provinces had to start prioritising to get value for their money.

Mr Sogoni said there was a need for provinces to identify what they deemed as important and to fast track service delivery, while not compromising on norms and standards.

Mr Nketu said that at the moment the Provincial Infrastructure Grant was solely used for the construction and upgrading of provincial roads, although it should be used for the construction and upgrade of health facilities as well. There was a need for some system of compliance in relation to this grant, as many provinces relied on this grant as a major source of funding.

The Chairperson added that the Division of Revenue was clear on how the Infrastructure Grant had to be spent. One of the core requirements of this grant had been the capacity of provinces to adequately spend the money. The decisions by the Provinces on spending must be in line with the requirements set by the Division of Revenue Act.

Mr Khumalo replied that the provincialisation of health care had become a problem, and that the FFC had made recommendations to the Portfolio Committee on Health, but that their recommendations had not been taken into account when the legislation was drafted.

He said that the problem with provincialisation had been that some municipalities were richer then others. Resource gaps ultimately affected service delivery. There was a need for the policy directives on primary health care to be reviewed and adequately addressed.

Mr Khumalo noted, in relation to the NSNP, that the problems had been recognized by the FFC, as its researchers had discovered on a visit to the Eastern Cape that learners had become sick as a result of the food they received at schools, and that there had been no set menus. It was imperative for the DoE to ensure that the facilities where food was prepared met the safety and hygiene standards of the Department of Health (DoH).

Mr Khumalo added that it was important that when primary health care facilities were constructed all relevant departments should ensure that there were accessible roads and infrastructure as guided by the Infrastructure Development Program.

Infrastructure Access: Impact on health outcomes
The FFC concluded that in poorer countries or areas where clinic networks had been under-developed, an expansion of access through the provision of more public clinics improved the likelihood of treatment.

FFC had therefore recommended that there should be greater emphasis on improving the quality of service provided at clinics, and the adequate funding of existing PHC facilities.

Transport: Road Classification
In its annual submission to the DORA 2006/2007, the FFC had highlighted the fragmented manner of the delivery and funding of roads infrastructure. The FFC now was finding that classification and re-classification of roads according to the DoT was in line with the recommendations made by the FFC. The classification and reclassification of roads would resume soon after finalisation of the guidelines and should be finished in the 2008/2009 financial year.

Several provincial roads had also been earmarked for incorporation into South African National Roads Agency Limited (SANRAL) over the past couple of years. Limpopo and the Northern Cape had been the only two provinces that had earmarked their provincial roads for incorporation into SANRAL.

The recommendations made by the FFC were that the process of classification amongst national, provincial and municipal spheres of government should be accelerated in line with the classification framework already established. The Premiers of those provinces that had not yet applied for earmarked provincial roads to fall under the national road network must make application without delay.

Discussion\
The Chairperson noted that there had been confusion on who should assume responsibility for the construction and upkeep of municipal roads, and certain municipal institutions did not have the capacity to spend the money allocated to them. All departments should be implementing time frame specifications as conditions to the funding.

Mr Sogoni thought that the reclassification of roads was going to be problematic as the relevant institutions were already passing the buck on who should assume responsibility for them. He said that there was a need for some mechanism to ensure that all roads were classified. Several provinces, because of their poor budgeting, were dependent on grants for road maintenance.  Roads were deemed as an important component of economic growth, hence priority status had to be attached to this classification.

Mr Sogoni added that he had a problem with the submission of non-financial data. It contained very little information on where the money actually went, and that municipality budgets differed. These factors must be taken into account.

A Limpopo delegate noted that his province had responded positively to SANRAL’s proposed incorporation of roads into the national roads network.

Mr Khumalo replied that he was unsure of why only the Northern Cape and Limpopo responded positively to the classification of roads. Premiers of other provinces had been urged to write a formal letter to SANRAL so the process of classification could commence.

Mr Khumalo said that ideally it would be a positive development if truckers could be urged to use alternative roads to national roads, as they seemed to have a major impact on the deterioration of these roads. The FFC had engaged the Mpumalanga Provincial Government already on the transportation of coal, as this formed an integral part of that province’s economy and electricity supply. He added that problems around over spending were transitional issues that had to be addressed, and that many roads had been fast tracked for 2010.

Mr Brown noted that the problem with deteriorating roads in Mpumalanga had to be addressed as a matter of urgency, and that he hoped that engagement would ultimately lead to an accelerate response to this problem. Provinces must consider how best to communicate the message of whether alternative roads would be suitable for heavy-duty vehicles. SANRAL had also called on the transport industry to make use of the rail network, rather then roads, to ease the congestion on provincial roads.

Ms N Kiviet (MPL, Eastern Cape) said that the various government departments did not have quality assurances in respect of road construction. Several roads had been washed away after being constructed in the Eastern Cape. She added that departments would continue to spend large amounts of money on maintenance if they did not adequately address this problem.

Mr Sesele asked what power of sanction this Committee had over money not being spent on programmes for which it was earmarked. The provincial governments were often reneging on what was initially prioritised in their budgets.

A delegate from the Free State had the same problem. He noted that the Flanders government allocated R30 million to the Free State government, to be used for certain upliftment programmes within this province. Subsequently a further R120 million for developmental programmes was allocated. This, however, was paid into a separate account, without alerting the National Treasury.

The Chairperson replied that public and elected representatives had a civic duty to report mismanagement and other forms of malpractices, but that internal dynamics made this problematic, as people feared they might get marginalised if they did so. However, the duty remained to highlight problems that hampered effective service delivery.

Housing
In its annual submission to the DORA 2006/2007, the FFC had recommended that municipalities with the necessary capacity be accredited to administer housing programmes, in an effort to relieve the housing delivery bottle necks and rampant under spending by the national and provincial housing departments.

The FFC concluded that the process of transferring funds was bureaucratic and inefficient, as the Integrated Housing Settlement Development Grant was the dominant source of funding and comprised 80% of total provincial housing budgets. Due to high under spending municipalities received funding late or not at the correct times, which gave rise to the notion of “Fiscal Dumping”.

The FFC noted that the key reason for the poor spending performance was the lack of capacity in government institutions responsible for housing delivery.

Strategy for Local Government Revenue
The FFC undertook, in its annual submission to the DOR 2007/2008, to conduct a broader assessment of the local government fiscal framework and to explore other potentially viable revenue sources for local government.

The FFC indicated that new revenue sources must meet the criteria for good taxes and be suitable for local collection, with emphasis on the importance of “own revenue” for local government.

In view of this the FFC recommended that a reformed fiscal framework should not compromise the fiscal autonomy of municipalities and that the replacement for the Regional Services Council (RSC) levy, which had formed a significant source of municipal revenue, should be a tax that enhanced the fiscal autonomy and discretion of local governments.

Restructuring of the Electricity Distribution Industry
In its annual submission for DOR 2002/2003, the FFC recommended that municipalities had to be compensated for all losses related to the transfer of electricity distribution to Regional Electricity Distribution (RED) centres. The FFC had concluded that even though the Constitution assigned the function to reticulate electricity to municipalities, there were no constitutional implications for reassigning the function to a public entity. The problem related to REDs was that the delay in the finalisation has led to uncertainty amongst stakeholders in the electricity distribution industry.

The FFC recommended that government should address the potential loss of a crucial revenue source for local government that would result from the establishment of REDs. It also recommended that government must finalise the legislation in respect the transfer of assets, the national policy framework and the establishment of the REDs.

Electricity Prices and the South African Economy
South Africa was currently experiencing a significant electricity crisis, which called on government to tackle the ongoing crisis as this was central to growth, household well-being and employment.

The FFC recommended that government should work with the National Energy Regulator of South Africa to implement a framework that dealt effectively with electricity pricing. This framework should capture the scarcity of the resource in a pricing environment that reflected costs, efficiency, stability, and, eventually externalities.

It was also noted that new forms of electricity generation technologies had to enter the market for greater efficiency of resource allocation.

Public Transport: 2010 FIFA World Cup
The FFC conducted an assessment in 2007 of the macro impacts of government’s financing of the 2010 World Cup. Their report highlighted the possible public finance risks associated with cost overruns and project delays.

Provisional Data issues:
The FFC noted that although budget guidelines stated that budgets and expenditure information on learner transport should be recorded under the goods and services component, this information was only available in the provincial budget and expenditure databases of two provinces, of Mpumalanga and the Western Cape.

The recommendation was that Provincial Education Departments should be obliged to report on budgets and spending on learner transport, in line with the new economic reporting format.

In respect of No fee Schools, the FFC concluded that although data on the number of schools by household income quintile was available through government gazettes, the budget allocations were still not reflected across the nine provinces. The 2008 DOR Act required that this information be gazetted per school with the tabling of the budget. Therefore the FFC recommended that the National Department of Education should make publicly available and accessible the funding norms of no-fee paying schools, to assess the pro-poor impact of school funding norms.

The FFC recommended that Health data for vulnerable groups, such as the provision of ante-natal care to women, the availability, affordability and accessibility of health facilities for TB, HIV/AIDS, children, older persons and persons with disabilities, should be collected and improved using the South African Statistical Quality Assurance Framework.

FFC did so because Section 2 (c)(iv) of the National Health Act of 2003 made reference to “protecting, respecting, promoting and fulfilling…” the rights of, “vulnerable groups such as women, children, older persons and persons with disabilities.

With regard to Public Works and Transport, the FFC concluded that the current DOR Act specified measurement of certain outcomes; namely the number of job opportunities created and the average length of employment for labour intensive projects and the number of persons participating in the training programs under the Expanded Public Works Programme. Therefore, FFC had recommended that reports for vulnerable groups such as women, youth and people with disabilities should be included in the reporting for all conditional infrastructure grants to provinces and municipalities.

With regard to Housing, the FFC had noted that not all nine provincial DoH complied with the requirements set by the DORA. Data gaps were apparent on issues of properties transferred to occupiers, and the numbers of houses under construction, and numbers completed. Therefore the FFC recommended that all provincial departments that received the Integrated Housing and Human Settlement Grant should comply with the measurable outputs-related to reporting requirements, as detailed in the housing conditional grant framework and publicised in the DORA.

Discussion
Mr Ginindza said that his province was still struggling to address a housing backlog dating back as far as 2004. He added that it was discovered by the Department that several of the contractors had reneged on their contracts and had utilised the money for themselves.

Mr Khumalo said that the FFC had made recommendations pertaining to norms as standards, and that these were included in the initial Division of Revenue Act. However, at the request of the Department of Housing, these had been removed in 2005.

He added that no municipality was accredited yet by the Department, and that the various MECs had to give their input on the criteria that had to be met, as well as the priorities and conditions attached to such accreditation.

In relation to the housing backlog problem, he said that it had to be discussed in its totality. Several housing projects had to be rebuilt after the initial construction was deemed of very bad quality. The national backlog should not apply to those units that had to be rebuilt, but rather be calculated on the number of units that still had to be built from scratch, as determined by the national Housing Waiting List.

Mr Brown said that homeless South Africans had become desperate and had no choice other than to accept what was offered. It was important that the housing delivery function be devolved to municipalities. He stressed that it was also an issue of capacity, fuelled by political and other narrow interests. He noted that it was important for South African cities to implement a long-term vision strategy to better and broaden the scope of service delivery directives, as had other major cities.

Mr E Makwa (Researcher: Limpopo Provincial Legislature) said that municipalities currently generated much of their income from selling electricity and that there had been no indication as to how municipalities would be compensated for the loss of revenue after this function was to be passed to the Regional Electricity Distributor (RED).

Mr Kolweni asked why municipalities had been slow in their response to the Electricity Distribution Industry Policy (EDI), implemented by government to curb the electricity crisis threatening the country. He noted that the pilot RED project failed in Cape Town due to the various stakeholders not being committed.
 
Mr Khumalo replied that the rationale behind the EDI was to make local government a shareholder in the EDI. Therefore there would be no compensation paid to municipalities for the loss of the actual distribution function. The restructuring process had been a very complex one, and because different decisions were being made by Cabinet, confusion and uncertainty had set in.
 
He aid that the RCS levy had been abolished and replaced by a grant and that the revenue sharing mechanism had to be reviewed to bring it in line with policy directives.

Mr Khumalo said that it was important not to infringe the rights of municipalities as enshrined in the Constitution to exercise fiscal powers and functions. National Treasury had indicated that it had been working on a plan to review all policy issues and the FFC had made recommendations.

The Chairperson said that the business sector and civil society would be very critical of government should the redistribution policy fail.

Mr Brown noted that National treasury had indicated that tax room would be created and that revenue would trickle down to those municipalities currently struggling. 

He said that before government introduced the EDI, municipalities had made R 13,5 billion profit annually on electricity sales, and that that money had been allocated to finance other municipal services. He noted that Government had also decided not to phase out the 2010 infrastructure grant.

Concluding remarks by the Chairperson
The Chairperson said that National Treasury and the FFC had to look at the issue of rural areas being under serviced, and whether existing infrastructure would be sustainable through maintenance. There was currently more of an emphasis on urban than on rural roads. He thanked the provincial delegations and said that he hoped the exercise would assist them in speeding up service delivery and delivering on their mandates.