Division of Revenue Bill: National Treasury briefings and public hearings

Meeting report

National Treasury presentation
Mr Kenneth Brown, Deputy Director General: Intergovernmental Relations, National Treasury, said that National Treasury (NT) had rationalised the Division of Revenue Bill (DoRB or the Bill) quite significantly. NT had inserted ‘four main policy issues’ within the Bill. The first change concerned how NT managed unspent conditional grants in both provinces and municipalities. The second change had to do with having firm allocations for public transport and infrastructure and systems grants for the cities. The third main change regarded the pledging of conditional grants and the processes to be followed. The fourth main change was to the flow of funds when the big cities would be accredited to deliver human settlements functions.

Ms Wendy Fanoe, Chief Director, Intergovernmental Relations, NT, explained the legal basis of the Division of Revenue Bill and the impact upon it of The Money Bills Amendment Procedure and Related Matters Act, 2009 (MBAPRMA). She gave extracts from the Report of the Minister of Finance to the Standing Committee on Appropriations. With regard to the Municipal Infrastructure Grant (MIG) and poor–performing municipalities, she emphasised that it was important to achieve the correct balance between obtaining capacity building and withholding funds, since if there were no penalties, the monies would just accumulate and go to waste. She also referred to land reform and rural development, noting that the Standing Committee had recommended that additional money be prioritised towards land reform. The Minister of Finance had agreed. Also, a conditional grant in kind would be allocated to the Department of Human Settlements, but specifically earmarked towards rural development and new alternatives and technologies. She referred to the Department of Public Works (DPW), its asset register and qualified audits. With regard to the maintenance of water infrastructure, it was important to note that water was a concurrent function: municipalities were responsible for the ‘retail’ function, but it was important that they made appropriate investments in maintenance too.

Ms Fanoe noted that the Select Committee on Appropriations had also made a number of recommendations, and gave extracts from the Report of the Minister of Finance to the Select Committee. She referred to economic development and rural communities. The Committee had recommended that the extended public works programme (EPWP) be extended to rural areas, and that the Department of Cooperative Governance and Traditional Affairs (COGTA) assist rural municipalities. It was important to note that the EPWP had been extended to smaller municipalities. Ms Fanoe also referred to the framework response to the global economic crisis; wage-based incentives for employment creation; and the efficiency and effectiveness of education expenditure. The Committee had recommended that Government facilitate the implementation of the much-needed national health insurance system. Government was investigating and developing options for implementing this. The Minister of Health had established an advisory Committee. As soon as its work was complete, it would be referred to Cabinet for consideration. Additions had been made to the health budget, as detailed in the Minister’s response on the right hand side of slide 15. She referred to capacity-building support for municipalities with regard, to which the Committee’s recommendation had been similar to that of the Standing Committee (slide 16).

Ms Fanoe explained the layout of the DoRB. It consisted of 39 clauses, as compared to 53 in 2009. Schedules 1 to 8 divided revenue between the three spheres of government and within spheres. There was a memorandum on the objects of the DoRB. The attachments of the Bill (Annexure W1-W14) provided the conditional grant frameworks (provinces and municipalities) and municipal allocations per grant, and ‘captured’ the clauses in the previous Bill concerning the conditional grants. Duplication had been removed. The Act itself would contain only the main clauses and Schedules 1 to 8; the remainder would fall away and be published separately by National Treasury. Grant frameworks for all provincial and local government conditional grants and allocations contained in the Appendix (amended to incorporate parliamentary inputs) needed to be gazetted within 14 days of the enactment of the Division of Revenue Act (DoRA).

Ms Fanoe explained technical changes (slide 19) and new clauses (slide 20), before providing a clause-by- clause analysis (slides 21-25). Ms Fanoe then outlined the 2010 DoRB Schedules (slide 26), followed by annexure and appendixes (slide 27).

Ms Fanoe explained that Chapters 8 and 9 of the Budget Review summarised national, provincial, and local government funding. Annexure W1 of the DoRB provided greater detail and contained six parts: an explanation on how division took into account sections 214(2)(a to j) of the Constitution; the 2010 division of revenue between the three spheres; Government’s response to the Financial and Fiscal Commission (FFC) proposals; the allocations to the provinces; the total Government allocations; and the fiscal framework issues in provinces and local government that needed further work (slide 28). Appendices W2 to W14 were outlined (slides 29-31).

Mr Brown said that a conditional grant was not an entitlement to a province or a municipality. If they failed to spend that money, it must revert back to the National Revenue Fund. This was a most important principle to understand. In the past three to four years, National Treasury had implemented that portion of the DoRA ‘religiously’, as it had related to provinces. Provided that provinces had demonstrated that they had committed the money, approval had been given to them to retain the money. However, over the years National Treasury had collected unspent conditional grants. It had first applied that principle to municipalities in 2009-2010. Municipalities had accumulated substantial unspent conditional grant funding. In such cases, therefore, National Treasury had therefore offset conditional grant funding against the equitable share.

Mr Brown said that an important change had been with regard to the Bus Rapid Transit (BRT) scheme, known in Cape Town as the Integrated Rapid Transit (IRT) scheme. Because this project was straddled over a number of years, municipalities had indicated the need for certainty in their allocations, so that if they accelerated BRT programmes, they could borrow money and manage their cash flow. The cities had been given that certainty.

Mr Brown said that a change had emanated from a study performed in Limpopo on water and sanitation. It was noted that if a municipality knew that there was ‘easy money’ available by way of a conditional grant, it would make less effort to collect its own revenue, preferring instead to borrow from the Development Bank of Southern Africa (DBSA), and pledging to make repayments from the conditional grant. National Treasury had highlighted that risk. Moreover, a grant may have been intended for more than one purpose, and if ‘pledged’ in respect of one project, other purposes might be prejudiced. There was also a risk concerning maintenance if grants were ‘pledged’. Therefore, National Treasury had agreed that municipalities could pledge, but only after prior consultation with the National Treasury.  

Mr Brown said that Government was shifting to target outcomes in order to increase efficiency and improve performance to support inclusive development. Five priorities in the 2009 MTSF were ‘unpacked’ into 12 measurable outcomes. Over the next three years, expenditure was to be channelled towards the following priority areas: improving the quality of education, upgrading health care, promoting public safety, supporting rural development, creating decent jobs, building sustainable human settlements, and encouraging efficient local government. (Slide 33).

Mr Brown gave further detail of the fiscal framework (part 1 of Annexure W1) with reference to key funding items for provinces; and key funding items for municipalities or built environment (slides 32-36). Additional allocations were indicated in tables (slides 37-38). The Division of Revenue was indicated in tables (slides 39-42).

Mr Brown noted that the share of local government was steadily increasing. The growth of the national departments was far slower, in favour of provincial and local spheres, where service delivery took place. There had been quite ‘an aggressive savings campaign at the national level’, an example of which was the travel in economy class of delegates to meetings and use of ‘class A’ cars. He hoped that the Committee would assist the National Treasury to promote the savings campaign to provincial and local level also. However, he noted that if a province saved, the money did not revert to national funds, but remained within the province for reprioritisation.   

Ms Fanoe outlined the response of National Government to the Financial and Fiscal Commission’s proposals (slides 43-58). She emphasised rental housing (slides 50-52) and the assessment of the institutional and fiscal capacity support and mechanisms for local government (slides 57-58). It was extremely important to indicate the purposes of the Siyenza Manje initiative. It was actually national Government support to local government to enable it to build capacity. There should be more co-ordination, and more transparency, but Government did not agree with the FFC recommendations that appropriations for the Siyenza Manje should be allocated through the division of Revenue, like other capacity grants to promote order, transparency and accountability. Government’s reply was that the funds were allocated to the Development Bank of Southern Africa (DBSA) to perform local government capacity building on behalf of local government, and that one-third of the funding came from the DBSA’s own revenues (slide 58). Ms Fanoe added that national departments co-ordinated initiatives regarding Siyenza Manje.  

Mr Brown outlined provincial allocations (part 3 of Annexure W1) (slides 59-64), with particular reference to the provincial equitable share formula (slide 60). For example, the health share was based on the proportion of the population with and without access to medical aid. The poverty component was based on the Income and Expenditure Survey from Statistics South Africa (Stats SA). The economic output component was based on data for the gross domestic product (GDP) by region. Information for this was derived from Stats SA also.
Changes to the provincial equitable share formula were indicated in slide 61.The structure of the formula remained unchanged, but the data had been updated. However, Mr Brown said that one had to ask if the formula was dynamic enough to respond quickly to changes in Government priorities. National Treasury was re-examining the formula.  

Mr Brown indicated total transfers (equitable share plus conditional grants) to provinces for 2010-2011 (slide 65); new conditional grants to provinces (slide 66); and all conditional grants to provinces 2009-2010 to 2012-2013 (slides 67-68). Referring to funding concurrent functions, Ms Fanoe explained budgetary decisions and their implications, and gave the examples of Mpumalanga, Limpopo, and North West (slides 69-71).

Ms Fanoe outlined local government allocations (part 4 of Annexure W1) with reference to revisions to local government (LG) baselines; transfers to local government; the local government equitable share formula; the size of the local government equitable share (LGES); and lapsing and new conditional grants to local government and other reforms (slides 72-77).  Ms Fanoe also indicated infrastructure transfers to local government, 2006-2007 to 2012-2013 (slide 78); and capacity and other operating transfers to local government (slide 79). It was important to note that in case of such transfers it was necessary to ensure that schemes should be demonstrated to be working well so that they did not collapse on transfer.  Work to be done in future on provincial and local government fiscal frameworks was outlined. This included a review of the provincial fiscal framework and equitable share; progressive implementation of differentiated approach to funding local government; progress made with implementation of local government reform; and improved monitoring of performance of provinces and local government. Mrs Fanoe dismissed the argument that National Treasury was under-funding municipalities. The equitable share had substantially increased over time.

Discussion
The Chairperson asked questions of clarity.

Mr B Mashile (Mpumalanga, ANC) asked how the wage subsidy was treated. Secondly he asked about the effects of inflation on the grants for infrastructure.

Mr T Harris (Western Cape, DA) asked how National Treasury differentiated between saving and under-spending. He had hoped that Advocate Frank Jenkins would be present to answer questions on what the Committee could amend, in the light of the Money Bills Amendment Procedure and Related Matters Act, 2009. He asked further about the National Treasury’s use of data and how it responded to updating of data and changes in the rating of the credibility of data. He asked what the sanctity of the National Treasury formulae was. The Committee had returned from an oversight visit to the Northern Cape where the same question of the Siyenza Manje had arisen repeatedly. That visit showed depressing municipal capacity. Siyenza Manje was ‘a light at the end of the tunnel’. The FFC’s proposal would give municipalities more capacity. He asked about the withdrawal of the public transport infrastructure grant. Lastly he asked about the role of Parliament in the review of the equitable share formulae.

The Chairperson asked about capacity-building grants.

Mr Brown asked for some indulgence on the wage subsidy. The Minister had indicated that by the end of March 2010 a clear policy would have been determined. It would be too early for Mr Brown to say whether there would be involvement from provinces. He did not think that a specific sphere would be involved. He suggested that provinces concerned with the state of disrepair of schools could use the refurbishing of schools as a means of generating employment. He saw a specific role for municipalities and provinces in employment generation that would be quite different from wage subsidies. An efficient municipality could become a catalyst for economic growth. In fact municipalities were ‘the engines of growth’. The wage subsidy would be targeted at industry to increase its capacity to generate work opportunities.

Mr Brown said that the infrastructure grant for provinces made up about a third of what provinces were spending on infrastructure. The remainder of the money came from provinces themselves. They managed their infrastructure portfolio to take inflation into account. However, it was most important to be aware of collusion within the construction industry. The inflation seen within infrastructure was actually an artificial kind of inflation, resulting from the fact that Government had weak contract managers who allowed for inflated pricing within the construction sector to continue unabated. It did not necessarily mean that it was higher-than-normal inflation. He gave examples of the World Cup stadia. R8.5 billion had originally been allocated for refurbishment and construction. However, there had been an escalation to R13 billion, not because of inflation, but rather because of the way that the contracts had been signed. Some of the contracts had been open-ended. National Treasury believed that it was necessary to improve contract management to be able to mitigate inflation. Some provinces had built schools for R70 million each. However, the same schools could have been built for R24 million. It was more a matter of how people managed their infrastructure portfolio. 

Ms Jeannine Bednar-Giyose, Director: Fiscal and Intergovernmental Relations, NT, said that the first point was about deducting unspent conditional allocations from previous financial years, which had not been repaid by municipalities to the national revenue fund. This complemented some of the Municipal Finance Management Act (MFMA)’s provisions. This would be in Clause 20 of the Bill, which set out a detailed process to provide authorisation for the offsetting of those amounts and defined a process for engagement between National Treasury and the municipality. This provided an opportunity to look at other ways in which the municipality could repay those amounts, in accordance with an agreed payment schedule. Thus there was a clear process of engagement. Clause 8(4) dealt with the inclusion of providing firm funding, to be allocated over the entire MTEF period, for the public transport and infrastructure grant. Those allocations would be regarded as firm allocations. Clause 8(5) dealt with the prescription of the requirements for ‘pledging’ for municipalities of future conditional grant allocations for future financial years, in particular for purposes of securing a loan. It required them, firstly, to obtain the approval of the National Treasury to ‘pledge’ future conditional allocations. Municipalities accredited under the National Housing Act were included in Clauses 15(4) and (5), which provided that municipalities and provinces must enter into a payment schedule and submit it to the National Treasury. Clause 15(5) provided that the payment schedule could be amended in the event that the transfers had to be withheld or stopped in terms of Clauses 16 and 17. In Clause 16(6), provision was made to include the transfers from the province to the accredited municipalities within the overall withholding and stopping processes provided for within the Bill.

Mr Brown said that National Treasury preferred to use an agency to obtain objective data to protect the formula. He explained some of the challenges that National Treasury was facing with regard to Siyenza Manje, which had distorted the labour market in the municipal environment. Chief financial officers and other senior officials had tended to leave those municipalities and become contractors at considerably higher salaries than they earned as employees. Secondly there was a problem with the sustainability of capacity-building, and the chances of achieving an exit strategy with such consultants were remote. Another problem arose when the DBSA loaned money to municipalities and installed its own experts to protect its investment. This had nothing to do with the vision of capacity-building. Many of the problems in municipalities had to do with governance, when the mayors and the councillors were non-functional and were at the same time interfering in the day-to-day running of the municipality. These mayors and councillors did not have the competencies to run a municipality and conduct proper oversight. These governance failures were serious.

A second strand of failures concerned budgeting and financial management. National Treasury had held an interaction with the municipality of Tshwane earlier that week. It was necessary to look at the core functions of a municipality. Spatial development management, water, sanitation, and electricity supply were among the essentials. It was seen that there was lack of alignment between core functions and budget. Even in such a big municipality, it was evident that those kind of failures occurred. The delivery of municipal services was largely driven by infrastructure. The DBSA also added its own money, but National Treasury did not think it appropriate to regulate this through the Bill. If this were to be done, then the institutional arrangements would have to be amended. The memorandum of understanding (MOU) that Government had entered into with the DBSA would end on 31 March 2010, and would be reviewed with the object of ‘sharpening’ capacity-building. It had to be accepted that for some municipalities no capacity-building initiative would be sufficient. Alternative solutions would have to be found to managing those municipalities. Additionally, he suggested that municipalities should draw up 30-year spatial development plans in order to prepare for the influx of new residents forecast by World Bank studies.

Ms Bednar-Giyose said that in terms of the Money Bills Amendment Procedure and Related Matters Act, 2009 (MBAPRMA), Parliament did have the power to amend both the provisions of the Bill and the schedules, which formed part of the Bill. There were certain requirements stipulated in the MBAPRMA that provided a framework for amendments. It was not an unlimited and unfettered power. Clause 39(6) of the MBAPRMA described some of the factors that must be indicated in the report that the Committee would need to make, if it was to make any amendments, and it must indicate the effects of the proposed amendments. The scope of the amendments must fall within the fiscal framework already approved by Parliament. Amendments that would require changes to the fiscal framework would not be permitted. The Committee Report must also motivate the impacts of the proposed amendments on service delivery. The broader implications of making those amendments must be taken into consideration. To assist Parliamentary committees, the MBAPRMA had established the Parliamentary Budget Office. It was vital that this should be fully capacitated and staffed to enable all parliamentary committees to have access to information to enable them to make informed amendments. Also, throughout the entire budget process, there needed to be ongoing interaction between National Treasury and the committees.

Mr Brown added that nothing stopped Parliament from asking for details of the formula currently used by National Treasury.

Public hearings on DoRB:
Department of Health (DoH) presentation
Dr Kami Chetty, Acting Director-General, Department of Health, said that Members needed to be aware that 95% of the Department’s budget consisted of the five conditional grants for which it was responsible. These monies were immediately disbursed. The actual budget for the national Department was ‘quite small’. Most of the budget increase had been for the strategic health programmes, of which the largest was HIV and AIDS.  The Department had also managed a single disaster-response grant on cholera. The Department had handled both Schedule 4 and 5 conditional grants since 1998. Schedule 5 grants were a very specific allocation to provinces. The National Treasury Services Grant had an inflationary increase over time. The Health Professional and Training Grant had seen a steady, inflationary increase. The Department also received the Hospital Revitalisation grant, which was project-based, and was not confined to buildings but applied to equipment as well. There had been an increase in this grant, but there were significant challenges.  The HIV and AIDS grant was not just for treatment but for prevention, counselling, and voluntary testing. There was also a subsidy for antiretroviral (ARV) treatment. Dr Chetty explained the method of operating the grant. This grant had been increased steadily.

Dr Chetty drew Members’ attention to the criteria for allocation and the purpose of the various grants, and the various challenges. These included capacity to manage grants. The Department had improved capacity at the national level, but was still concerned about capacity at the level of the provinces, in respect of financial management, monitoring and evaluation, and data management. Also there was a problem with compliance, which affected several grants. The Department was taking remedial measures, which included improving data collection and reporting systems.

Dr Chetty gave special attention to the Forensic Pathology Services grant, which was for a very specific purpose. As Members were aware, the South African Police Service (SAPS) had formerly been responsible for mortuaries, but this responsibility had been transferred to the Department of Health, with the aim of providing a comprehensive medical forensic service to the criminal justice system. The allocation criteria were specific to the project. The Department had received only inflationary increases. The intention had been for this grant to be ‘once-off’ and end in 2010-201, but it might have to continue until 2011-2012 in order ‘to modernise and revitalise’ the mortuaries. The Department had requested additional funds.

Dr Chetty reviewed the provincial allocations, of which KwaZulu-Natal had the largest share, followed by Gauteng, and then Eastern Cape, and Western Cape. Dr Chetty did not go into details because of time constraints. She emphasised numerous problems with contractors, who had delayed the project and imposed huge escalation fees. This was a problem that was not confined to the forensic pathology services grant. On account of this the Minister had encouraged the Department to employ its own engineers to monitor building projects. The Department had also raised the matter with the Department of Public Works (DPW). The Department was improving its reporting mechanisms and systems.

Dr Chetty explained the allocation criteria for the Hospital Revitalisation Grant, which was based on cash flow for the different provinces. Dr Chetty also explained some of the rules and regulations, the implications of project overspends, and remedial action taken. The Department sought to use a uniform design for buildings in order to economise on architects’ fees and to make use of public-private partnerships (PPPs) to revitalise hospitals. Dr Chetty spoke about the challenges of the health professions training and development grant.

Department of Rural Development and Land Reform (DRDLR) presentation
Mr Thozi Gwanya, Director-General, Department of Rural Development and Land Reform, explained the appropriation across the Department’s five programmes: administration; geospatial and cadastral services; rural development; restitution; and land reform. Mr Gwanya gave special attention to the rural development programme, which reflected the Department’s focus, since its reconstitution under the 2010 governmental restructuring as the Department of Rural Development and Land Reform. This Department had asked National Treasury for additional funding of R6 billion when given its new mandate, but it was given less than R1.9 billion. The Department had realigned its strategic plan in conformity with the amounts allocated to it. The Department did not have any conditional grants. However, the manner in which the Department implemented its comprehensive rural development programme involved interaction with provinces and municipalities. The Department was undergoing ‘a learning curve’. The communities concerned prioritised their needs.  Pilot projects were under way. Business plan and service-level agreements were drawn up for such projects. Transferring of funds would be a challenge to the Department, which anticipated a problem of transferring monies to the municipalities and provinces in accordance with their requests, and would result in a delay. The Department had, earlier that week, held a meeting with the Department of Human Settlements (DHS) on the approach to implementing the rural sanitation programme to improve sanitation in areas covered by agreements between the two departments. The same could be said of the Department of Agriculture, Forestry and Fisheries (DAFF) in regard to implementing the village school programme, a joint programme between the Department of Education, the Department of Water Affairs, the Department of Agriculture, Forestry and Fisheries, and the Department of Rural Development and Land Reform. There were to be gardens and water-harvesting in all the rural schools. Thus the Department would be involved in the two human settlements and water grants mentioned by National Treasury. An amount of R1.148 billion included in the transfers and subsidies budget of the Department’s land reform programme was allocated to the Agricultural Land Holding Account, commonly known as the Proactive Land Acquisition Strategy (PLAS).

Mr Gwanya explained the constraints regarding the 2010-2011 allocation per programme (slide 3).

Department of Energy (DOE) presentation and Eskom submission
Mr Marin Masemola, Executive Manager: INEP, Department of Energy, said that with regard to the Integrated National Electrification Programme (INEP), all schools were, according to the set target, planned for completion in the 2009-2010 financial year. The electrification programme was implemented by both Eskom and some licensed municipalities and the allocations were made available through schedules 6 and 7 of the DoRB for both municipalities and Eskom respectively. The criteria used when electrification funding was allocated to municipalities included considerations of backlog; rural bias; availability of forma settlements; bulk infrastructure availability; existing houses; and past performance. He explained the percentage split of the national backlog (slide 5).

The spatial development of the previous regime had been urban-biased. This had left the rural countryside without any infrastructure of any kind. Therefore the programme was aimed at improving the standard of living in the rural areas. The availability of formal settlements was a challenge in most urban areas, where the majority of the backlog was in informal settlements. Local governments, together with the Department of Human Settlements, needed to formalise those settlements. This was currently being implemented through other strategies, among others the Breaking New Ground (BNG) strategy. The availability of land was essential to ensure the eradication of informal settlements.

Challenges included limited programme funding; built infrastructure availability, especially in rural areas; and the need to improve the communications strategy between the spheres of government. Further challenges were experienced since municipalities did not report on a regular basis. Monthly, quarterly and annual evaluation reports were required. Other municipalities did not request funds according to payment schedules, there were delays in the signing of contracts, and failure of municipal managers to sign monthly process reports as required, coupled with lack of capacity and competence to administer the programmes.

Mr Isaac Sokopo, Corporate Specialist, Eskom, submitted that Eskom fully supported the intention of the Bill and had made the following general comments. In order to optimise the INEP grant, municipalities allocated a grant must be given flexibility to use their allocation for the electrification of settlements that might be in Eskom’s area of supply, if Eskom did not have enough funding to do this. In that event, the municipalities must either implement the project themselves, using Eskom’s designs, or appoint Eskom as a contractor to carry out the work. On completion of the project, the networks creased and associated customers should be transferred to Eskom at no cost and form part of the electrification assets under the custody of Eskom. Notwithstanding the re-gazetting, the Department of Energy must be given the authority to move funding between Eskom and municipalities in the event that either Eskom of the municipality was not performing in accordance with the plans submitted to the Department. The decision should be taken and formalised before re-gazetting in order not to lose time. The decision to do so must rest with the Department and not with the recipient of the grant.

Discussion
The Chairperson asked for National Treasury’s comments.

Mr Brown commented on the Department of Rural Development and Land Reform presentation. If a municipality was going to render a specific function, those things must be reflected within some kind of gazetted allocation. Any allocation made to provincial or local government must be so reflected, except for an allocation that could possibly be made in kind. This was the difference between Schedule 7 and the remainder of the Schedules. He said that National Treasury would liaise with departments to regularise all the allocations that would be going to those specific municipalities. It was necessary to find a way to achieve a synergy between departments whose projects overlapped. The National Treasury was to hold a MinMEC with the Department of Health within the next two weeks to take the health agenda forward. National Treasury was generally happy with what had been presented.

Mr C de Beer (ANC, Northern Cape) requested the Department of Health to investigate the previous performance of contractors before it engaged them. He gave the example of a hospital of which the ceiling was falling in. It was not only the NCOP Members who should conduct oversight. National departments would have to be more active in monitoring. He also gave an example of a provincial department which had received an audit disclaimer for seven consecutive years.

Mr Harris said that implementing norms and standards entailed verifying them first. He asked about the process of designing the health grant formulas. He asked about the health professions development and training grant. He asked what had happened to a recommendation five years previously to review this grant.

A Member asked the Department of Health if the allocation for the hospital in Gauteng would be a new one. He asked the Department of Rural Development and Land Reform about the figures for restitution, and the Department of Energy about alternative sources of energy, in particular, wind turbines.  

Mr Mashile said that it was unfortunate that some allocations were made on the basis of population figures for the provinces. In particular the Health Department’s training grant was allocated on the basis of population. He asked how the Department compensated for the fact that a province such as Mpumalanga might train health professionals who thereafter would migrate to Gauteng, a more populous and therefore more amply funded province. The size of the allocation determined the quality of the services provided. If allocations were not made strategically, then the interventions that could be made would be small. He was worried about the implications of the Department of Health’s employing engineers. He feared it would start a trend that would sooner or later affect even the National Treasury, and might lead to the closure of the Department of Public Works.

A Member asked about a hospital in Qwa Qwa, Free State, and the issue of contractors; he also asked about allocations for energy efficiency. 

Mr De Beer asked about the problem of patients who crossed borders to avail health facilities and therefore put pressure on the resources of another province.

The Chairperson asked the Department of Health about the reopening of nursing colleges, and the Department of Rural Development and Land Reform about support for municipalities in the deep rural areas.

Dr Chetty responded that it was not the Department of Health which employed the contractors who did work for the Department, but the Department of Public Works. This was part of the reason behind the Department of Health now employing its own engineers. DoH sought a means of blacklisting contractors in consultation with the National Treasury, or alternatively benchmarking them. Recently, DoH had experienced a contractor who simply walked off the job, after being paid millions. The Department sought to cap escalation costs. Patients crossing provincial borders posed a big dilemma. Other provinces had such concerns, since healthcare knew no boundaries. Patients had a right to go to the nearest facility. She suggested addressing the problem through the equitable share formula and the new models that the Department was examining in consultation with the National Treasury. It had been a problem for a long time. DoH had developed a corpus of core standards for hospitals and patient care. The FFC had examined the work of the Department and made recommendations, to which DoH responded, but the FFC was ‘not intimately involved’ in those allocations. DoH had reviewed the health professions training development grant. DoH had a complete unit to examine maintenance since it received the blame if health faculties were substandard.

The Chairperson asked about the vacancy rate in the Department of Health.

Dr Chetty replied that it was 25%. The Department’s personnel budget had increased by about R24 million.
Overall, the Department had been obliged to reprioritise, since it could not afford its current personnel structure. There were a number of unfunded posts that were vacant, and these would be abolished, which she thought would please NT.

Mr Brown said that the solution to problems of infrastructure was linked to improvements in the Department of Public Works.

A Member asked about rural development, formulas, and backlogs. He said that the migration to urban areas was linked to the under-development of rural areas. It was therefore necessary to ask how better to address the issues of the rural economy that had been neglected in the past.  

Mr Gwanya said that the nature of rural development was such that there was a big overlap. He referred Members to the Strategic Plan of the Department of Rural Development and Land Reform which had been tabled in Parliament, and endorsed by Cabinet.  This plan reflected the needs of the people in the rural areas. The Department was ‘the initiator, the facilitator, the co-ordinator and the catalyst’. He described the Department’s council of stakeholders, which discussed the integrated development plans (IDPs) of the municipality concerned. DRDLR was essentially a co-ordinating department, in contrast to which he noted a tendency of officials to want to work ‘in boxes’. However, the integrated approach advocated working as a team. The Department was left with about 3 000 rural land claims.

Mr Harris asked the Department of Energy for clarification about its backlogs. He also asked how much money Eskom owed to municipalities, and how the debts had arisen. He asked further about progress of the energy efficiency programme.

Mr Masemola responded that in all the rural municipalities Eskom was the distribution licence holder, and in the deeper rural areas Eskom was responsible to provide the electricity service. Eskom reported on a monthly basis to those municipalities since it was a service provider. Most of the Department’s delays were not in execution, but in the procurement process.

South African Local Government Association (SALGA) presentation
Mr Mayur Maganlal, Executive Director: Economic Development and Planning, SALGA, commented that the 2010 Budget provided important support for local government to sustain service delivery as the economy started to recover. SALGA understood that additional funding was made available to local government for free basic electricity, eradication of infrastructure backlogs by 2014, provision of bulk infrastructure for water and sanitation, and to expedite the provision of water and sanitation in rural areas.

SALGA’s main concerns were that growth in the Local Government Equitable Share of 15% per annum over the next three years would  only cover continuing current levels of services, given the high increases in the bulk price of electricity. Local government’s need for funding was enormous and municipalities with low capacity for raising revenue required further fiscal support to broaden service delivery to communities that were generally poor. Smaller municipalities struggled to maintain institutional capacity for effective local governance and administration.  Larger municipalities were facing increasing growth in backlogs with declining gearing capacity (slide 3).

Mr Maganlal said that direct transfers were transfers made directly from a transferring national or provincial department into the primary bank account of a municipality. They comprised the local government equitable share and conditional grants.

Conditional grants were application based at the level of indicative allocation over Medium Term Economic Framework (MTEF) (submission of business plans and project plans). 

However, not all municipalities were aware of the relevant application processes. Municipalities must be supported to institutionalise key management processes resulting from participation in conditional grant programmes. Monitoring processes should be streamlined to ensure efficiencies in grant management (slide 4).

Mr Maganlal said that indirect transfers were those made to a national department or dedicated organisation in terms of the Division of Revenue Act (DoRA). They comprised conditional grants for infrastructure and capacity building. SALGA noted that communication of those grants should be improved as municipalities were not always sure how those grants worked. It was important to indicate them in the IDP as projects benefiting the municipality, and to reflect them in the municipal budget as a benefit, but not as part of the fundable budget. Implementing national departments and public entities must streamline management of these grants and improve communication with municipalities (slide 5).

Mr Maganlal commented generally on the infrastructure grants. The real growth of 7% in total infrastructure grants over the Medium Term Expenditure Framework (MTEF) was welcomed, since it would fast track the eradication of backlogs and support economic growth. However, there was a need for alignment of infrastructure grants to cities, and a need for focused national funding solutions with support from the DBSA for loans to smaller municipalities, where merited.

SALGA’s main concerns were that the link to real backlogs was questionable since the latest data was not available. There was an increase in capital spending, but no adequate support for operational and maintenance costs. There was a lack of technical capacity to implement and oversee major capital projects The growth in grants contributed to a lower appetite for borrowing. The reporting burden was costly and time- consuming, with 13 different grants and seven different departments, and not enough information on how the grants worked; and grants from provincial departments were not always gazetted (slide 6).

Mr Maganlal commented specifically on the rural transport services and infrastructure, the rural household infrastructure, the electricity demand-side management (EEDSM), and the integrated national electrification programme (INEP) grants (slides 7-8). 

Mr Maganlal commented on capacity-building and other operating grants. Capacity-building grants (including Siyenza Manje) grew by only 1% in real terms over the MTEF, while the local government turnaround strategy hinged on improved municipal capacity. Capacity-building initiatives could only be effective if municipalities improved on leadership, accountability, governance and technical skills.

SALGA’s main concerns were that there was no co-ordination between grants, for example, MSIG, FMG and Siyenza Manje. There was no account of the impact of the grants, especially on smaller municipalities. Local government was not central to setting the agenda for capacity-building programmes. The reporting burden was costly and time consuming, with five different grants and five different departments. Provincial allocations must be gazetted and promptly transferred, for example, the funding for libraries and other operations functions performed on behalf of the provinces (slides 9-11).

SALGA supported the provisions to ensure the return of unspent funds, but urged the Government to consider that the nature of the problem might be the poor design of specific grants, especially newly created grants, and requirements such as project registration that delayed implementation. Other reasons could be fiscal dumping, poor planning and implementation capacity, and the spending of the grants against their purpose which was indicative of a deeper funding problem, especially in smaller and poorer municipalities who struggled to raise their own revenues for operations. SALGA recommended that the off-setting of unspent grants should not be once-off but rather should be negotiated with each municipality (slide 12).

Department of Basic Education presentation
Mr Theuns Tredoux, Chief Financial Officer, Department of Basic Education (DoBE), and Department of Higher Education and Training (DoHET), explained the restructuring of the Department and the distribution of its budget over its five programmes. The content of the first part of the presentation was similar to that given previously to the Standing Committee on Appropriations. 
 
Mr Tredoux explained the funding of the education sector equitable share (slide 9), and gave the preliminary budgets of the provincial education departments for the 2010 MTEF (slides 10-12). He then explained the four conditional grants for which Basic Education would be responsible over the MTEF period (slides 13-14) and the grant frameworks (slides 15-23) followed by the proposed allocations 2010-2011 to 2012-2013 (audit results only) per province (slide 24).

Mr Tredoux explained the management and monitoring of the Technical Schools Recapitalisation Conditional Grant (slide 26).

Department of Higher Education presentation
Professor Mary Metcalfe, Director-General, Department of Higher Education and Training (DoHET), explained the restructuring of the Department and the distribution of its budget over its five programmes.

The Department would be responsible for one Schedule 4 conditional grant, with effect from 01 April 2010, namely the grant for the Further Education and Training (FET) Colleges Sector. This would be based on the previous funding of the FET college sector through the provincial equitable share. The purpose of the grant was to ensure the successful transfer of the FET colleges function to the Department, and was a general conditional allocation to the provinces (slide 9).  Grant management and monitoring would be performed as part of the normal baseline allocation of the Department. The allocations for the grant made provision for the improvement of the conditions of service for the lecturers employed by college councils. Some of the key outputs of the grant would be the enrolment of a minimum of national vocational programmes as set out in college enrolment target planning; expanding information and communications technology (ICT) for teaching and learning towards connectivity norms, continuing to implement systems for the delivery of transversal MIS services; implementation of the funding norms for FET colleges; and refurbishment, maintenance and repairs of infrastructure and equipment to support the delivery of approved programmes (slide 10). She set out the conditions of the grant in Slide 11.

The Department would be responsible to provide a framework for the development of college operations plans and strategic plans and monitor the grant according to approved college operational plans. It must consolidate and submit quarterly reports to the National Treasury. It must monitor the use of the grant against the set outcomes and take appropriate action in case of discovery of non-compliance. The Department should calculate the programme based funding per college based on the funding norms for FET colleges each year and recommend the transfer of this to the relevant FET college, evaluate the performance of the conditional grant; and submit the required evaluation report (slide 12).

Provincial education departments would be responsible for supporting the process of concluding the required provincial implementation protocol with the Department, for ensuring provincial officials who were currently supporting FET college functions continued such support and for transferring grant allocations to colleges within 14 days of receipt of the transfer of funds, whilst also confirming transfer with the Department within two days. It was to be noted that the payment of the grant would be in two instalments (April and September), as the grant contained improvements to the conditions of service of college employees. Adjustments to budgets across provinces might be required once the programme costs were aligned with the pending labour agreement (slide 13).

AIDS Law Project. Presentation, 04 March 2010
Mr Nathan Geffen, Researcher, AIDS Law Project, noted that the Aids Law Project (ALP) welcomed the opportunity to make its submission on the Division of Revenue Bill, 2010 (DoRB) to the Committee.
He noted that this was being done for the first time in terms of the MBAPRMA. This submission was endorsed by the Public Service Accountability Monitor, the Treatment Action Campaign and the Rural Health Advocacy Project.

The ALP sought to defend and advance the right of everyone in South Africa to have access to health care services and to ensure that the State discharged its positive obligations in respect of this constitutionally protected right. These obligations included, but were not limited to, the taking of reasonable legislative measures to ensure that the public health system was financed adequately.

The ALP believed that a proper budgeting system and process for the health care system and ensuring the efficient use of available resources was essential if Government was to discharge is constitutional duty to respect, protect, promote and fulfil the right to have access to health care services, as guaranteed in section 27 of the Constitution. Central to the work of the ALP was the Constitutional right to health. Much of the ALP’s submission was focused on the allocations for health and its concerns relating to budgetary problems historically experienced by the national Department of Health (DoH) and its provincial counterparts. However, the ALP believed that many of the substantive issues and principles addressed also had relevance for other departments, in particular the Department of Basic Education.

ALP did not propose specific amendments to the DoRB. Instead, it aimed firstly to emphasise Parliament’s constitutional role in the passing of the national budget and to raise its concerns regarding the structure and implementation of the MBAPRMA, and secondly to provide the Committee with an overview of the budgetary problems facing the health system and to provide some commentary on how such problems might be averted in the future.

ALP recommended that Parliament must ensure that the Parliamentary Budget Office (PBO) was established as a matter of urgency and was provided with the necessary financial and human resources that it required to work on the 2011-2012 financial year budget. The PBO should review the financing of the negotiated Occupation Specific Dispensations (OSDs) for specific categories of health care workers to ensure that sufficient resources had been allocated to provinces to cover the actual costs of implementing OSD in each province. It should engage with the ongoing review of the equitable share formula to ensure that a more nuanced approach to the financial requirements of different provinces was developed, included matching-funds conditions to appropriate conditional grants, to ensure that programmes funded primarily through such grants were not undermined by failures of the provinces to adequately fund complementary programmes. ALP called upon the Minister of Health publicly to release the Integrated Support Team (IST) reports to enable Parliament to review the status and need for improved monitoring and evaluation of Government programmes.

Thereafter the ALP addressed the implementation of the MBAPRMA ; the equitable share allocations and provincial debt in the DoRB; the conditional grant allocations and matching grant allocations; and monitoring and evaluation of provincial programmes and budgets.

Over the past few financial years, provinces had continually overspent provincial budget allocations in both health and education. While some of these over-expenditures could be attributed to poor financial management systems and failures at the provincial level, others were attributable to failures in the national budgeting and allocation process. The ALP analysed such problems in relation to the Occupation Specific Dispensation (OSD) for nurses and other categories of health care workers; and the problem of rolling debt for provincial departments of health.

Although the OSD was a main driver of higher provincial department overspending, it was not the sole cause. The IST reports made it clear that overspending in health in the Free State and Limpopo began prior to the implementation of the OSD. In both provinces, other drivers of provincial overspending were non-OSD related salary increases, medical inflation and higher numbers of patients receiving antiretroviral (ARV) treatment through the public health system than were originally forecast. The fact that provinces had seemingly ‘over-performed’ their targets had unfortunately, far less to do with over-performance than with inadequate monitoring and evaluation (M&E) programmes able to forecast patient need in the provinces.

Conditional grants were the main method by which national Government was able to implement national priorities in areas of concurrent national and provincial legislative competence, by providing provinces with ring-fenced funding to implement those priorities. For the purpose of this section, ALP focused on the Comprehensive HIV and AIDS Grant (the HIV Conditional Grant), though its comments were likely to be relevant to other conditional grants also.

Inadequate M&E systems would inevitably lead to failures to budget according to actual needs in each province and ultimately to further over-expenditures. This was in accordance with the findings of both the Free State and Limpopo IST reports. In this regard, there was great public interest in having all the IST reports published and ALP called upon the Committee to enquire into their status and to hold further public hearings on the reports, or to allow the ALP and other civil society organisations to brief the Committee on the issues raised in the reports that fell within its mandate. In terms of Schedule 6 allocations, municipalities reported to the Department; in terms of Schedule 7 allocations Eskom reported to the Department.

Discussion
Mr Mashile asked about funding for the new universities for Mpumalanga and the Northern Cape, so that he could inform his constituents. .

Mr S Montshitsi (ANC, Gauteng) asked about the three functions received by the Department of Higher Education and Training - of adult education, adult basic education and training, and vocational education. In particular, he asked whether adult education and adult basic education and training would be best placed in the provinces or at national level, in terms of logistics.

Professor Metcalfe said that the Department was certain that these functions should be located nationally. The moving of these functions to the Department had resulted in ‘new synergies’. Public institutions would be much more effective in responding to the needs of skills development than private establishments had been.

Mr Montshitsi also asked if there were two allocations for the National Student Financial Aid Scheme (NSFAS).

Professor Metcalfe explained the allocations and admitted that the nature of them was somewhat confusing.

A Member asked how much had been budgeted for HIV and AIDS Life Skills.

The Chairperson asked the Department of Higher Education about the functions shifted from the Department of Labour. Did this include the employees? Where would they be located? He confirmed that the Parliamentary Budget Office (PBO) had been established.

Professor Metcalfe replied that this depended on which posts were selected to perform the transferred functions, and thereafter on agreement about transfer of budgetary allocations.  The staff members about whom agreement had been reached would be transferred to the Department of Higher Education and Training from 01 April 2010. Agreements had not been completed about the corporate or support staff for skills development. NT and the Department of Public Service and Administration had assisted and the process was continuing. There was also some lack of clarity of present about staff members in provincial offices who had supported the skills functions. The Department of Basic Education had just moved out into their new building, and the employees transferred from Labour would be moving in within the next few weeks.  

Mr Brown said that the National Treasury was reviewing the financing of local government in its totality in order to improve the performance of the grants themselves and to ensure that infrastructure support and the built environment was provided in a more systematic way. In addition NT had conducted a substantial number of its own work studies on the nature of the problem, for example, municipalities which lacked the fiscal capacity to render their functions. These lay mainly in the former homelands. It was, moreover, desirable to work towards making local government self-financing. Once a system of local government became dependent on grants, local accountability would suffer. However, given the peculiarities of the South African local government system, there was a need to differentiate on how to finance local government. Many of the issues raised by SALGA would be taken up by National Treasury in the course of the coming year. National Treasury would also review the equitable share formula to determine how best to finance concurrent functions. However, there was a Constitutional issue that also needed to be resolved. Provinces existed as entities on their own. It was therefore not possible to prescribe an education budget, for example, for a province. The Department of Basic Education had raised ‘this specific misalignment’. FET colleges would be prioritised in the year ahead. The OSD was a minor cause of the problems in the health service. The role of the Parliamentary Budget Office would be very important.

The Chairperson asked National Treasury to give a written and specific response to the concerns raised by SALGA.

Professor Metcalfe said that the budget included allocations for the project started some years before to establish new universities in Mpumalanga and Northern Cape, which already had national institutes of higher education. These institutes offered courses in collaboration with universities in other provinces. Because of the planning process, the establishment of the new universities would not happen this year.  Already in the budget of those collaborating universities, was an amount of R40 million to assist the institutes in Mpumalanga and the Northern Cape.

The Chairperson said that much excitement had been generated by the prospect of the new universities, but it was disappointing to learn that it would be at least five years before they would be opened.

Mr Tredoux replied that there was no longer a conditional grant for Early Childhood Development (ECD). This had been concluded two financial years previously. There were, however, still programmes for ECD within each provincial department. He would submit further details in writing to the Committee.
 
Mr Tredoux said that with regard to the monitoring of the HIV and AIDS Life Skills grant, the cost was about R300 000 to R400 000 per annum. There was a process in the Department of bidding for the costs of each project. It would be finalised before 01 April 2010. He explained the costs of the National School Nutrition Programme. The average cost per meal did not ideally reflect what was required. There were quite substantial deviations from province to province.

Professor Metcalfe said that it was very clear that there had been a political decision to establish universities. She emphasised that the pursuit of excellence should guide the process of deciding to establish a new university, the objects of which should be the search for knowledge, and dedication to research and teaching. It was therefore necessary to be very clear about how to build and establish the best universities.
It was not just about constructing buildings; it was about establishing profound academic programmes. That would happen. The Minister was committed to the project and would be establishing task teams. She felt that it was better to progress slowly but thoroughly.
 
The Chairperson said that he understood Professor Metcalfe’s position, but questioned the wisdom of making an announcement when it was known that the project would not be realised for several years. All the Committee wanted to know was when the Department hoped to start construction. Mpumalanga and Northern Cape had been impacted negatively in many ways, including the equitable share. Many young people had to leave those provinces to pursue their higher education elsewhere. Moreover, when they qualified, they no longer had any interest in returning to their own provinces. There was a need to move with urgency on this issue.

Mr Mashile said that he was worried about the Department of Higher Education’s response on the new university for Mpumalanga. On the one hand, the Department indicated that it was using the funds for existing institutions, over which there was no control at present. Those institutions would not let go easily of those funds. In Mpumalanga there were many colleges of education that had been closed, but their infrastructure still existed. If it was a matter of putting together programmes, then this surely could not take five years. The system of university education was something new, and he considered that a five-year wait was unacceptable. It was also unsatisfactory to depend on other institutions such as the Tshwane University of Technology.

Mr Mashile was also concerned that ECD was being left to provinces. He felt that it had been promoted because children were not being adequately prepared for school. He implied that there was a need for ring-fencing, since funds were liable to be used for competing purposes. There were also the nutritional needs of the ECD children to be considered.  He pointed out to Mr Brown that provinces could not be allowed to do as they pleased.

Mr De Beer said that there was a need for clarity, since high expectations had been created in his province, the Northern Cape, during the election campaign. It was necessary to know what would happen and when it would happen, to appease the expectations of the people.

Professor Metcalfe replied that the Minister would address the issue in his budget speech and give the timeframes. There would definitely have to be more money created through MTEF bids to establish the new universities. The Portfolio Committee for Higher Education and Training and the National Treasury would, quite correctly, require very detailed costing and planning. The MTEF bids would most likely be ready in time to be entered into the next year’s budgetary process. She admitted that her reply might not be what everyone wanted to hear, but it reflected the reality of the long-term building of an institution of higher learning. This was a political question, rather than an administrative one, and the Minister must address it.

Mr Brown said that he hoped to provide to the Committee his detailed written responses to SALGA by Tuesday the following week.

The Chairperson asked the Committee Secretary to give Mr Brown a copy of the programme for the Committee’s tour of the provinces the following week to give briefings on the Bill, and requested that National Treasury inform the Committee of the personnel who would represent the National Treasury at these briefings.

The meeting was adjourned.