Municipal Fiscal Powers and Functions Bill: briefing & voting

Meeting report

FINANCE SELECT COMMITTEE
13 June 2007
MUNICIPAL FISCAL POWERS AND FUNCTIONS BILL: BRIEFING & VOTING

Chairperson: Mr T Ralane (ANC, Free State)

Documents handed out:
National Treasury presentaion on unicipal Fiscal Powers and Functions Bill
National Treasury response to public hearings on Bill held in May 2007

Audio Recording of the Meeting

SUMMARY
The briefing by National Treasury provided an overview of the constitutionality of the Bill. The Bill would deal with outstanding Section 229 legislation by regulating the initiation of municipal taxes and defining the manner in which the Minister of Finance oversees, regulates and makes authorisations in respect of municipal surcharges and taxes other than property rates and municipal user charges.

A major advantage of the Bill was that it would provide for norms and standards for surcharges, which would overcome the problem of surcharges that were too high, and would also lend increased transparency to the process of imposing surcharges, which had traditionally been a hidden charge in municipal tariffs.

An important element of the Bill was that it provided a regulatory framework for the grant allocations that were used to replace the Regional Services Council (RSC) levies that had been abolished in 2006. The amounts of these grant allocations were determined after municipalities submitted financial information for a three year period, and were calculated after an average rate of increase was projected over a three-year period. Different municipalities received different grant amounts, as not all RSC levies had increased at the same rate. The grant allocations were an interim arrangement and if no alternative tax mechanism was in place after the three years have elapsed, the allocations would continue. 

There was a measure of deliberation over whether sufficient public consultation had taken place, but consensus was reached that submissions made to the Portfolio Committee was adequate, and that all the relevant role players had been consulted. The Bill’s status as a Section 75 Bill further did not warrant extensive public hearings at the National Council of Provinces level.

The Committee agreed to the Bill without any amendments.

MINUTES
Briefing by National Treasury
Mr Lungisa Fuzile (Deputy Director-General, Intergovernmental Relations, National Treasury) provided an overview of the constitutional framework of the Bill. Municipalities could impose property rates, surcharges on municipal services and, if authorized by national legislation, other taxes, levies and duties, but could not impose income tax, VAT, general sales tax or customs duty (Section 229 of the Constitution). Any rates, taxes, surcharges or levies imposed by municipalities had to be exercised in a way that did not prejudice national economic policy, economic activities across municipal boundaries, or the national mobility of goods, services, capital or labour. The Bill would deal with outstanding section 229 legislation by regulating the initiation of municipal taxes and defining the manner in which the Minister of Finance oversees, regulates and makes authorisations in respect of municipal surcharges and taxes other than property rates and municipal user charges. This section of the Bill made it clear that only taxes regulated by legislation could be imposed.

The Bill was aimed at ensuring proactive regulation of municipal taxation powers, providing a framework for new municipal taxes and prescribing norms and standards for municipal surcharges. The Bill was not intended to impede a municipality’s ability to collect its own revenue or to allow for the introduction of new municipal taxes. The aims of the Bill had been clearly stated in order to pre-empt any misconceptions that may arise.

The Minister of Finance must authorise a municipal tax, and has to consult with the Minister of Local Government, organized local government and the Financial and Fiscal Commission (FCC) prior to authorization. The Minister must inform all role players of the outcome of their application within a six month period. Municipalities are authorized to impose tax. Municipalities are further authorized to collect taxes, unless the Minister specifically designates another person or institution for this purpose.

The Regional Services Council (RSC) levies were abolished with effect from 1 July 2006. These levies were replaced with RSC levies replacement allocations as a transitional arrangement, while permanent options were being explored. Selection of replacement options was underpinned by attempts to ensure that local government fiscal autonomy is maintained, and that municipalities are protected from fiscal shocks. Replacement options for the RSC levies are VAT zero-rating of property rates, surcharges on user charges, tax sharing of national tax instruments, local business tax and business license fees.

The Bill provided for a distinction between municipal tariffs and surcharges, for regulatory purposes. Surcharges formed part of municipal tariffs, but were hidden charges. The Bill would allow for increased transparency in respect of surcharges. For this purpose, a distinction was made between “municipal base tariff” which refers to the fees necessary to cover the actual cost associated with rendering a municipal service, and “municipal surcharge” which means a charge in excess of the municipal base tariff. The Bill allows the Minister to prescribe compulsory national norms and standards for surcharges in terms of maximum surcharges, different types of surcharges, increases in surcharges and criteria for imposing surcharges.

The Minister of Finance could issue regulations on any matter that must or may be prescribed in terms of the Act and the regulations should be reviewed at least every five years. Prior to issuing any regulations, the Minister must consult the Minister of Local Government, relevant Cabinet members and/or MECs, organized local government and the FCC. The Minister of Finance should also publish draft regulations in the Government Gazette and submit draft regulations to Parliament at least one month in advance.

Transitional provisions in the Bill (Chapter 4) stipulate that a municipality must, within two years of the date on which the Act commences, apply to the Minister for continued authorization of a tax. If a municipality fails to apply for continued authorization, the tax will lapse two years after the date of commencement of the Act.

The Bill held no financial implications for national and provincial government. Implementation of surcharges would not have any additional financial implications for municipalities, as systems to collect surcharges were already in place.

Mr Fuzile said that National Treasury, in drafting the Bill, had consulted the Department of Local Government, SALGA and the FCC, and had also gone through a public consultation process.

Discussion
The Chairperson said that certain municipalities had made investments, but still said that they needed money urgently. He wondered where the logic was in this state of affairs. This was one of the reasons that he felt the Bill had come at a very opportune time.

Mr M Robertson (ANC) said that the Bill was making provision for municipal revenue, but national government was sitting with a surplus. He required clarity on how this surplus had arisen.

Mr Fuzile said that there had been under-spending for the past few years. There were certain things that needed to be done but that could not take place due to a lack of capacity, rather than a lack of resources. This had led to the surplus.

The Chairperson said that despite the fact that norms and standards had been introduced, the Bill appeared to have a “one size fits all” approach.

Ms Jo-ann Ferreira (Chief Director: Legislation, National Treasury) said that Bill was not intended as a “one size fits all” piece of legislation, as it formed part of a much broader process, and also made provision for the phasing out of surcharges.

The Chairperson asked whether the Bill was really necessary.

Ms Ferreira said that the Bill was very necessary in order to ensure adequate controls. The Bill held particularly important implications for surcharges. It enforced increased transparency with regard to surcharges, which were hidden within municipal tariffs

Mr D Botha (ANC) said that he was very concerned about people having to pay multiple taxes. He also needed more information on the grants that had been allocated as replacements for RSC levies. He asked how the amounts of grants were determined.

Mr Fuzile replied that before the grant amounts had been determined, municipalities had been asked to submit financial information for a three year period. This information was then used to project the average rate of increase of RSC levies over a three year period. The income of certain RSCs showed greater increases than others, so the same average projection rate could not be given to all RSCs.

Mr Fuzile said that the Bill made adequate provision for managing multiple taxation and ensuring that different taxing mechanisms are aligned.

The Chairperson said that grant allocations were only interim allocations for three years. He asked what would happen after this three-year period has elapsed.

Mr Fuzile said that if there was no other mechanism in place that could replace the RSC levies after three years, the grant allocations would most likely be continued. An example of a new mechanism to replace RSC levies could be transfer duties. In the context of the current property boom, it was likely that transfer duties could raise the same amount as RSC levies. It could be viable to give revenue from transfer duties to municipalities instead of to national government, as is currently the case.

The Chairperson asked for more clarity on high surcharges imposed by municipalities.
 
Mr Fuzile replied that the surcharges imposed had to allow for a reasonable rate of return. For example, if a municipality was buying electricity from Eskom at R1 per unit, one could not expect them to impose a surcharge of 80c per unit. Furthermore, the Bill provided for norms and standards for imposing surcharges. Increased transparency meant that municipalities had to provide an indication of the surcharge that was being charged. This would prevent a situation where people were taxed without knowing that they were being taxed. The Public Finance Management Act also allowed for interaction among stakeholders, so that municipalities could be asked how certain revenues would be utilized, for example to pay salaries or to provide a service. If the Bill did not exist, people would have no recourse when they felt they were being overtaxed.

Ms D Robinson (DA) said that she was concerned that municipalities would utilize increased revenue for paying salaries. She also asked about the implications of the Bill for the concept of a single public service.

Mr Fuzile replied that municipalities do indeed tend to prioritise salaries when they get more money. If a municipality failed to fix a broken tap in the community, less people would be affected than when the municipality failed to pay salaries, as service delivery would be severely affected if a staff member became disgruntled. The situation was such that the various municipalities paid different salaries, and that certain municipalities could afford to hire expensive staff, while others could not. Payment of salaries was therefore a priority in order to retain existing skills and ensure consistency in service delivery. One way of addressing this problem would be to regulate the payment of salaries by municipalities.

Mr Fuzile said that with regard to a single public service, it was always dangerous to raise one issue in the context of another. The Committee was concerning itself with the implications of the Bill for the various stakeholders as well as the community, and her question would best be answered in the context of legislation pertaining to public service administration. The danger was that he would make statements that were in no way aligned to the priorities and initiatives of public service and administration, and that it would be better if he steered clear of such discussion.

Mr C Goeieman (ANC) asked whether the Bill would be implemented immediately, or whether it would be phased in, as had been the case with the Public Finance Management Act.

Ms Ferreira said that norms and standards for surcharges was a critical issue in this respect and would require a period of adaptation. Many municipalities would therefore not be able to comply immediately. The Bill made provision for a phasing-in process as well as a period of exemption.

Mr Goeieman asked whether the NCOP would also have its own process of public consultation in the form of public hearings.

Ms Ferreira said that the document had been tabled in the Portfolio Committee and that the input of all those who had made presentations in the public hearings, had been recorded. From a constitutional perspective, the Select Committee was not required to conduct further public hearings.

Mr Botha said that if the Bill was passed by the NCOP and he went into his constituency and asked people whether they were aware of the Bill, he might be met with answers that showed that insufficient public consultation had taken place. He needed clarity on ground level involvement as well as the role played by SALGA in the consultation process.

Mr M Tolo (ANC) said that some Committee members were, in a way, put into a corner when the RSC levies were abolished. There were many disparities among municipalities, with some feeling that they were being denied their source of revenue. He needed to be comfortable when in going to his constituency and saying that after sufficient public consultation, this would be the way forward.

The Chairperson said that the Bill was principally a Section 75 Bill [national competence bill] and there was therefore no negotiation mandate in place and no need for extensive public hearings. If the Select Committee was to hold public hearings, it was not certain who would be invited to attend these hearings, as all the stakeholders had been consulted. Public hearings would actually be a waste of time.

Mr Fuzile said that in addition to public hearings, municipalities had been consulted at an indaba hosted by the Department of Local Government and held at Caesar’s Palace. As soon as the Bill had become available, it was put up on the government website and SALGA was asked to send it to all municipalities.

The Chairperson added that it was also clear from the submissions that entities such as the Institute for the Management of Finance Officials and the Financial and Fiscal Commission, had made sufficient input.

The Committee reached consensus that sufficient consultation had taken place.

Voting on Bill
The Committee agreed to the Bill without any amendments.

The meeting was adjourned.