Division of Revenue Bill: briefing; FFC & SALGA Submissions on the Bill

Meeting report

FINANCE SELECT COMMITTEE
10 March 2003
DIVISION OF REVENUE BILL: BRIEFING; FFC & SALGA SUBMISSIONS ON THE BILL

Chairperson: Ms Q D Mahlangu

Relevant Documents
Division of Revenue Bill [B9 - 2002] includes Explanatory Memo and all Schedules
Corrections/Amendments to Division of Revenue Bill in Finance Portfolio Committee (Appendix 1)
PowerPoint Presentation by National Treasury
FFC PowerPoint Presentation on its submission
FFC Submission on Division of Revenue Bill
FFC Table of Figures: Overview of Government Spending & Financing Trends & Projects (email [email protected] for document)
SALGA PowerPoint Presentation points (Appendix 2)
SALGA submission

SUMMARY
National Treasury warned that if legislatures do not exercise their oversight responsibility there would be non-performance and thus non-delivery. Legislatures need to be militant and squeeze out information from departments in order to exercise their oversight role effectively. The need for municipalities to budget in order to provide for accountable expenditure was stressed.
Both government and the Financial and Fiscal Commission acknowledged the need for a review of current allocative formulae for the equitable share and of the intergovernmental fiscal system in general.

The Financial and Fiscal Commission noted that there was broad agreement with government and not many differences about its recommendations on the division of revenue. However, it felt that there is a lack of clarity on the mechanism, principles and criteria to be applied regarding the contingency reserve.

SALGA commented that primary health care had not been included in the budget to municipalities. Studies should determine if certain provincial functions need to be assigned to municipalities such as primary health care. Given the limited institutional capacity in some municipalities to plan and implement IDPs and budgets, it said that there should be a greater effort to build capacity to achieve better service delivery. The allocation to local government infrastructure that is projected to translate to job creation does not adequately address unemployment.

MINUTES
Briefing by National Treasury on the Division of Revenue Bill
The National Treasury was represented by its Director-General, Ms Maria Ramos, Deputy Director-General, Mr Ismail Momoniat, and Chief Director: Legal Services, Mr Kahla.

Overview
Mr Momoniat reported that the current Bill was not much different to last year's one - in fact, it was almost identical. The Bill, especially Annexure E, must be read in conjunction with the relevant sections of the Budget Review. The Bill had been tabled with the main budget on 26 February 2003. The Intergovernmental Fiscal Review will be published in the first week of April 2003. This would lay the basis for the annual report that would appear in October for the 2003/04 financial year.

It was stressed that non-financial information needs to be linked to the budget. If legislatures do not exercise its oversight responsibility there will be non-performance and thus non-delivery. Co-ordination is needed in the oversight process.

All local government grants should be published by municipalities. The grant system will be six years old this year. Thus, it was time for a comprehensive review of the fiscal system.

Fiscal Capacity and Functions
In terms of the policy objectives of the government, it has responded by extending social security, restructuring education, boosting the fight against HIV/AIDS, intensifying the fight against crime, and increasing infrastructural expenditure.

Social security child grants will have been extended for children up to 14 years of age by 2005. A huge boost in education is expected particularly for textbooks and early childhood development. In health an effort will be made to attract personnel with scarce skills. HIV/AIDS programmes would receive a boost and nutrition programmes would be increased. Spending on medicines and other critical supplies would also be increased. With regard to infrastructure, there would be increased expenditure on roads. There would also be an increase in conditional grants; this is largely due to an increase in the child support grant. Local government would see an extended provision of basic services. It is hoped that these measures would reinforce capacity.

Response of National Government to the Proposals by the FFC
The government's view is that there needs to be a review of the Intergovernmental Fiscal Framework. It is suggested that proposals for next year need to be separated from the current ones. There is agreement with the analysis. Particularly with the need to maintain conditional grants for early childhood development and the establishment of a separate agency to disburse social grants. However, the government felt that it was too early to look at funding for electricity.

The government felt that the FFC's other proposal were old, and that some were for research purposes. Overall there was no broad disagreement with the FFC's proposals. The government needed to know from the FFC why the current system for the equitable share formula should change. On the contrary, the government felt that the current system actually works very well. The equitable share formula has not changed from last year.

Financial reporting of transfers is probably the weakest aspect in the system. The National Treasury was speaking to the Auditor-General to look into this. All grants should be budgeted for by municipalities. There should be monthly monitoring of conditional grants.

Although there are not many changes to the Bill, there are substantial changes in Sections 5.6 and 5.7. Section 8 will affect water boards. There was no need to talk about the process for the equitable share. There was also no need to refer to SALGA in the Bill. Section 20 had been amended in the National Assembly.

Mr Momoniat emphasized the need for municipalities to budget in order to provide for accountable expenditure.

Discussion and Questions
Mr Ralane (ANC) asked whether Treasury had attempted to align allocations to municipalities with the Integrated Development Plans (IDPs) and Provincial Plans.

Ms Ramos explained that it was very important that each municipality draw up their own IDPs. The situation at present is that consultants are drawing up these plans without them being rooted in local realities. Policies should drive the budget process. It is expected that there would be many changes in IDPs in years to come as the process matures.

Mr Ralane asked what was the rationale for the decline in equitable shares in Schedule 3. How are allocations determined in Schedule 6 [Recurrent grants] and according to which formula? With regard to special food security there was none for the Northern Cape. Considering the Indirect Grants in Schedule 7A, how is this worked out and who will be targeted.

Mr Momoniat replied that the rationale for the schedules is the equitable share formula and that one needs to look at each particular grant and particular municipality and at the formula. On the food projects, he said that one needed to look at the whole picture.

Mr Mokate (ANC) commented that the baseline of the economic cluster was being ignored and that there was no emphasis on increasing expenditure at this level. He also sought more clarification on the state of capacity building and transfer payments.

Mr Momoniat agreed that social expenditure is important and keeps on rising, however, this should not crowd out the economic cluster. Budgets have to be reported on so as to make sure that spending takes place as budgeted. More oversight is needed in order to monitor performance.

Mr Kolweni (ANC) wanted to know whether Eskom was allowed to deliver electricity directly to the consumer.

Mr Momoniat replied that Eskom was not stopping the supply of electricity. There is an agreement between municipalities and Eskom. Eskom provides electricity to municipalities and they in turn sell it to the consumer. The consumer then pays the municipality for electricity and Eskom is then paid in return. Thus grants flow to municipalities and then to Eskom. However, more formalisation is needed on the role of Eskom.

Mr Nene (ANC) sought clarity around issues regarding the contingency reserve. He also commented on the need for a programme of capacity building for financial managers.

Mr Ralane commented that there needed to be more oversight with regard to the contingency reserve as departments were now budgeting for this.

Mr Theron (DP) asked on which roads money is to be spent, as the secondary roads were in a bad state. Further, given that a certain amount of electricity and water is supposed to be free, how is this going to benefit the poor buying these services at the corner shop? Lastly, to what extent in the budgetary process is there satisfaction with maintaining services and processes.

Mr Sogoni (UDP) commented that the establishment of a national grants agency was likely to create problems. He also commented on the failure of aligning policy statements with the allocation of resources. A case in point is that the president's policy announcement on urban and rural renewal appears not to be aligned. How is alignment to be improved?

Ms Ramos explained the contingency reserve: when a three-year budget is introduced, it is done with a number of assumptions on growth, inflation, the state of the global economy and so forth. Within a three-year planning environment it is important to set aside a reserve to respond to the macroeconomic environment. Thus, it is the contingency reserve that is able to take certain shocks in the economy if and when they occur. The contingency reserve deals with unforeseen and unavoidable expenditure during emergencies. The contingency reserve gets appropriated through an adjustment budget.

On the establishment of a national grants agency, Ms Ramos replied that the government could choose to avoid the establishment of an agency and maintain the payout of grants as is. However, the objective is to streamline the process, make it more efficient and enhance the quality of service. Much consideration is being given to the design, costing and efficiency of the kind of service to be delivered. She recommended that the committee call in the Public Service & Administration and the Social Development Departments as they are key in the setting up of this agency.

With regard to policy statements and its alignment with resources, Ms Ramos asserted that problems have been remarkably reduced. She agreed that there is a need for much more consciousness regarding the alignment of the budget. However, it was also admitted that confusion still happens at national and provincial level.

Mr Momoniat said that the committee needs to ask the Department of Provincial and Local Government (DPLG) about urban and renewal projects. It was important to get detailed information from departments. He emphasized that legislatures need to be militant and squeeze out information from departments in order to exercise their oversight role effectively.

Financial and Fiscal Commission submission on Division of Revenue Bill
The FFC was represented by its Chairperson, Mr Murphy Morobe, Deputy Chairperson, Mr Jaya Josie, Budget Analysis Manager, Mr Conrad van Gas, Parliamentary Office & Local Government Projects Manager, Dr Hildegarde Fast, Fiscal Policy Analysis Manager, Mr Bongani Khumalo.

Mr Morobe noted that the Bill was part of a process that had started in April 2002. He also reminded the meeting that next year would be the tenth anniversary of democracy and the sixth anniversary of the Intergovernmental Fiscal System. It was noted that a review is being mooted

The submission was done in three parts (see document and PowerPoint presentation):
Section 1: assessment of government's response to FFC recommendations.
Section 2: overview of government spending and financing trends and projections.
Section 3: measurement of progress in delivery of Constitutionally Mandated Basic Services.

Mr Josie presented Section 1. It was stressed that government had agreed with the FFC's recommendation that it needed to maintain the conditional grant mechanism for Early Childhood Development before incorporation into the Provincial Equitable Share. The difficulty of funding HIV/AIDS through the conditional grant mechanism only was noted.

Mr Josie remarked that there is broad agreement with government and not many differences with regard to the division of revenue. However, there was a lack of clarity on the mechanism, principles and criteria to be applied with regard to the contingency reserve.

Mr Van Gas presented Section 2 and Section 3. One of the points made what that there were declining learner enrollments except for Gauteng and the Western Cape.

Discussion and Questions
Ms Mahlangu (Chair) asked why provinces were not taking up their responsibility of introducing taxes. She also expressed her concern about the uneven development of provinces.

Mr Morobe responded that this was due to legislative, political and other reasons. He explained that the system is evolving and that disparities are real. There is a broad scheme in trying to spread economic opportunity. It is important to examine how to ensure the integrity of the system. It makes sense that provinces need to raise their own revenue. National Treasury is arguing why introduce a new tax when present provincial tax collections are inefficient and declining.

Mr Bongani reported on his interactions with provinces. He explained that work was ongoing in seven provinces. In terms of priority it is necessary to understand the state of current resources in provinces. Furthermore, the structure of provincial treasuries, especially the revenue sections are not really strong. He recommended that these issues first need to be resolved before the introduction of new taxes.

Mr Momoniat explained that according to legislation the provincial tax act makes provision for the introduction of taxes. There is not necessarily reluctance by provinces to introduce taxes, but rather, it is a case of some provinces taking longer to put together a proposal than others. The question arises: How many taxes should provinces levy? These issues clearly need more discussion. He felt that taxes should not be collected by provinces, but by the South African Revenue Services (SARS) as they are more efficient. He commented that at the moment provinces could not even collect taxes from gambling efficiently.

Mr Botha (DP) asked that since finances have been substantially increased, how is non-delivery measured.

Mr Josie responded that it was difficult to measure unless financial date is available, and that this was hard to come by. Further, it is output indicators and data that determine delivery.

Dr Fast added that provincial and municipal data is not reliable and that the new municipal budgeting framework will not be implemented for the foreseeable future.

South African Local Government Association submission on Division of Revenue Bill
SALGA was represented by Councilor Mvoko and Ms Shiva Makotoko

Cllr Mvoko commented that the 2003 National Budget publishes for the first time a breakdown of national transfers to individual municipalities in the Division of Revenue Bill. This is of particular significance, as the move shall enable municipalities to plan four months ahead of their financial year on 1 July 2003, promoting predictability, transparency and accountability.

SALGA acknowledged the strides that Government has made in ensuring fiscal prudence and macro-economic stability. It also noted that the budget had responded to key priorities and pressures at national, province and local spheres of government.

It made the following points about local government and the division of revenue:
- Capacity building needs to address institutional capacity to develop plans and implement IDPs and budgets in all municipalities. It needs also to address the capacity to monitor service delivery agreements and ensure that service providers carry out their obligations.
- The formula for division of revenue between municipalities is based on the principle of equity and predictability. It is critical that the review of the ES formula is premised on this principle. A revisit on formula should not only be limited to data on household poverty variables, but also on the broader aspects which impact upon the principle advanced in argument for the ES.
- Primary health care is not included in the budget to municipalities. SALGA wishes to see some commitment from national with regards to health and other un-funded mandates.
- Studies should determine whether certain provincial functions need to be assigned to municipalities such as primary health care.
- Adequate credit control and debt collection systems should be in place as well as affordable service provision.
- There is urgent need to develop policy guidelines that deal with matters of indigents.
- The allocation to local government infrastructure that is projected to translate to job creation does not adequately address job creation.
- It believed that the Municipal Finance Management Bill signals a departure from uncertainty to better regulated financial and performance management systems.

Discussion and Questions
Mr Mogatswo (ANC) suggested that funds for primary health care should be allocated to local government and not provinces.

Mr Ralane (ANC) referred to schedule 6 and asked whether SALGA has been able to assess and evaluate all three conditional grants in terms of getting value for money and so forth.

Mr Botha (DP) commented on the process of capacity building and restructuring and suggested that what has happened so far has not improved the situation.

Furthermore there was general observation and growing concern that people were left behind and not involved in the process of determining service fees. This is already leading to an outcry.

Ms Makotoko explained that SALGA have addressed the Budget Committee on backlogs and the inability of people to pay for services. The issue of whether primary health care should be a provincial or local government competency needs some study in order to derive an appropriate answer. With regard to the AIDS pandemic, it was suggested that national government should be doing more in this regard. Regarding infrastructure, it is evident that institutional capacity is improving at local government level.

Cllr Mvoko responded to a question on the access of the poor to free services such as water asked by Mr Theron (DP) during Treasury's presentation. He explained that 6 kiloliters was added free to whatever amount of water is purchased. According to SALGA, this was sufficient.

Furthermore, there were a number of unfunded mandates which have had a bearing on municipalities, and which ultimately led to the collapse of some municipalities. For example, libraries needed to be rationalized in some municipalities where there were separate libraries in African, Coloured and White areas.

Mr Botha follow up by asking whether libraries should fall under local or provincial government.

Ms Makotoko suggested that an assessment should be made in order to determine where they would best be suited.

The meeting was adjourned.

Appendix 1:
Corrections to the Tabled Bill made in the Finance Portfolio Committee
CLAUSE 1
Page 3, line 21: add 6A
Page 3, line 25: add 6A
Page 3, line 29: add 6A
CLAUSE 5
Page 4, remove "the" on page 56 and put uniform treasury norms in MFM Bill, and leave out once MFM is an Act
CLAUSE 11
Page 6, s11 (3): Delete
CLAUSE 18
Page 9, section 18 (1), line 17: add 6A and 7A
Page 9, line 24: add 7A
Page 9, line 38: add 6A exclude 7
CLAUSE 20 (AG changes)
Page 10, line 3 omit "must" and substitute "may"
Page 10, line 4 omit "and" and substitute "or"
Page 10, line 5 omit "not later than 5 months after the end of the financial year"
Page 10, line 19 put "Act" instead of "act"
CLAUSE 21
Page 10, line 34 omit paragraph (b) and substitute:
(b) the municipality is in breach of the measures contemplated in section 5(6); or
CLAUSE 22
Page 10, line 47: add 6A
CLAUSE 28
Page 12, section 28 (1), line 24: add 6A
Page 12, section 28 (2), line 31: omit "4,5 or 6" and substitute "2,3, 4, 5, 6 or 6A"

Appendix 2

SALGA: 2003 DIVISION OF REVENUE
SALGA notes the
+ Expansionary stance of the 2003 budget
- Significant increase in expenditure
- A marked increase in revenue
- Significant Budget adjustment
+ Allocations to individual municipalities that will enhance better planning and implementation.
+ Increase in real terms of the Equitable Share to Local Government

EQUITABLE SHARE TO LOCAL GOVERNMENT
+ During the Budget Forum, SALGA noted the following;
- Backlogs-Basic services, and Housing
- Limited Infrastructure extension to drive service delivery
- Accessibility of Free Basic Water
- Primary Health Care
- Procedure for Disbursing funds to municipalities
- Institutional Capacity

TRENDS
+ National transfers increased at an average rate of 18 percent. Comes from a low baseline.
+ Targeting of the Equitable Share in so far as reaching the poor municipalities goes.
+ Alignment of the budget to IDPs and extent to which JDPs are utilised as a source of information towards the budget.
+ Shifts in Powers and Functions and capacity building requirements that would ensure that in the long-term, category B and C maintain their constitutional and legislative powers & functions

POLICY INTERVENTIONS
+ Improve institutional capacity such that there is alignment and interface between IDPs and budget, and implementation thereofe
+ Review the ES formula to ensure that the principle of equity is achieved.
+ Re-visit the Intergovernmental framework
+ Enact key legislation, MFMB, Property Rates Bill.
+ Review the RSC levies with a view to make it more equitable, and that it remains a municipal revenue source.
+ Ensure that the current revenue mix is maintained

WAY FORWARD
+ Promoting financial and fiscal accountability at Local Government;
- Local Government Budget Week as an annual policy statement
- Budget office and database
- Annual Local Government Fiscal Review
- Undertake the identified policy interventions