Division of Revenue Bill & Conditional Grants: briefing and hearings

NCOP Finance

05 March 2002
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
6 March 2002
DIVISION OF REVENUE BILL & CONDITIONAL GRANTS: BRIEFING AND HEARINGS (HEALTH & WATER)

Chairperson: Ms Mahlangu

Relevant documents:
Division of Revenue Bill [B5b - 2001]
National Treasury PowerPoint Presentation

FFC PowerPoint Presentation - Conditional Grants
FFC Submission - Conditional Grants

SUMMARY
National Treasury briefed the Committee on the Division of Revenue Bill. The briefing was the same as the one given to the Finance Portfolio Committee on 25 February 2002.

The Financial and Fiscal Commission (FFC) made a submission on conditional grants. There was some confusion as to what the FFC had to talk about and they will return on 8 March 2002 to give their assessment on the Division of Revenue Bill.

National Departments were invited to make a presentation on conditional grants. The Department of Water Affairs and Forestry and the Department of Health made presentations.

MINUTES
National Treasury Briefing
Mr Momoniat, Deputy Director General, Ms Ngqaleni, Director: Intergovernmental Fiscal Relations, and Mr Kahla, Chief Director: Legal Services briefed the Committee on the Bill.

Mr Momoniat said that Annexure E is the heart of all the issues and he would go through this before getting into the Bill. Annexure E is the explanatory memorandum of the Budget Review and is also included in the Bill.

The outline of the presentation was the following:
- Fiscal Framework - Part 2 of Annexure E
- Response of National Government to FFC Proposals - Part 1 of Annexure E
- Provincial Allocations - Part 4 of Annexure E
- Local Government Allocations - Part 5 of Annexure E

Coming to the Bill Mr Momoniat said that it was required in terms of Section 214 of the Constitution. There are only a few changes to this year's Bill. The major change is to remove the implied exclusion of Category C municipalities from receiving equitable share allocations as a result of a court decision.

The budgeting principles that apply are:
- Comprehensive budgeting process
- Three-year budgets in all spheres
- Transparency of criteria for division
- Use of generally accredited data
- Timeous preparation of grants
- All grants given must appear on the budget of beneficiary government tier
- Clear accountability arrangements
- Monitoring to focus on performance

In a clause by clause analysis, Mr Momoniat showed that the Bill remains the same. Part VI takes into account the new constitutional amendments therefore Clauses 21 & 22 dealing with delays and withdrawals only apply to conditional grants.

Another change is Clause 23 - a transitional issue - to allow reallocations between municipalities.

Discussion
The Chair asked Mr Momoniat to share with the Committee the outcome of the court dispute. She also asked what were the implications of the municipal allocations not being done especially if the Bill gets passed.

Mr Momoniat replied that the Constitutional Court must still confirm the judgment but the order was to remove Section 5(2) from the Act as it excluded a whole category of municipalities from receiving part of the equitable share. He said that the relevant section is not in this year's Bill.

Mr Kahla added that the Natal Provincial Division ruled that Section 5(2) was inconsistent with the Constitution because it excluded Category C municipalities from receiving allocations from the equitable share of local government. The judge was not sure if the Constitutional Court would agree. To avoid ambiguity, the section is not in this year's Bill.

Mr Momoniat responding to the second question said that the Constitution and the Intergovernmental Fiscal Review do not call for allocations per municipality. In the past the municipal allocations also came after the Bill was passed.

Mr Kolweni (ANC) wanted clarity on the formula for councilor remuneration.

Mr Momoniat replied that Treasury does not look at the actual cost. The Institutional (I) component has been increased significantly taking into account population size and income. The larger municipalities get far less than the poorer municipalities. He advised that the Department of Provincial and Local Government runs this grant and more information on the formula can be provided by them.

Mr Durr (ACDP) commented than when money is borrowed, it has to be repaid. Provinces collect only 3% of its revenue. There is no revenue stream to finance the payment of debt. He said that it seemed silly that provinces borrow the money and then use national grants - that get transferred to provinces - for interest payments. He asked if the provincial tax source was not a source of revenue to fund the borrowing requirement for long term projects.

Mr Momoniat replied that Treasury is grappling with this kind of problem. He said it was illegal to borrow for consumption and that provinces should borrow for the right reasons i.e. inter generational benefits. He said that it was not necessarily a bad thing that part of the equitable share is used to finance debt. From the Budget Council Lekgotla it became apparent that provinces are taking a cautious approach to borrowing.

Mr Ralane (ANC) asked what judicial and non-judicial mechanisms are available to ensure disputes over the division of revenue will be resolved.

Mr Momoniat replied that the door of Treasury is always open. Treasury realized the problem in KZN and addressed it in the Appropriations Bill and R300 million extra was given to provinces. He said that those who instituted legal action had been wrongly advised and it was an expensive lesson to learn. For this reason, non-legal measures to resolve disputes are very important.

Mr Aulsebrook (KZN Provincial Legislature) asked if Treasury had a policy on the payment of conditional grants. Is there a uniform policy or do the various departments determine how it is paid, for example, in equal tranches or reimbursement for expenditure or project-related.

Mr Momoniat replied that the payment schedule is simple. Money is not paid by specific project. The accounting officer says x amount has been spent and then the funds are transferred. He said there have been delays in transfers when there has been no spending but the delay will not be for no reason. Mr Momoniat said there are no real problems in this area.

Ms Nqgaleni added that transfers have improved. Departments say how much they need and for what and it is the departments that must be held accountable and be asked what was achieved. She urged committees to look at the monthly spending reports of provinces.

A member of SALGA asked if there is going to be any change to the policy on DM areas (areas managed by district municipalities). Category C municipalities must match the allocation to DM areas but they are unable to do so.

Mr Momoniat replied that district-managed authorities are being addressed. These will be funded by Category C municipalities. He said that the Department of Provincial and Local Government can give more detail on this.

Financial and Fiscal Commission (FFC)
The FFC delegation consisted of Mr Josias Josie, Deputy Chairperson, Mr Van Gas, Mr Khumalo, Ms Fast and Mr Makinta.

The FFC made a submission on conditional grants (see Appendix 1). There was a misunderstanding about the content of the presentation. The Committee had wanted the departments to present on their conditional grants and the FFC to present their views of the Division of Revenue Bill.

Discussion
Mr Ralane asked if the FFC had thought about investigating the affordability of basic services. He said that people are provided houses but cannot afford basic service fees and then the house gets attached, leaving the people in the same position as before.

Mr Josie replied that the problem could be dealt with through a costing approach. Whatever the costs are there is still Section 214(2)(a) - (j) of the Constitution that is good guideline. It is the state that must determine how revenue is collected and how it is distributed. The Constitution only calls for the basic services to progressively realised.

Mr Kolweni asked what had happened to the Presidential Programme for Children and how it was linked to the Early Childhood Development Programme (ECD).

Mr Josie replied that he was not sure if the two programmes were linked but that most of the child care issues were taken up by the ECD.

A member asked if it was the conditional grants that were a problem or if the monitoring and the full implementation of the conditions was a problem. Regarding poverty alleviation, he noted that the economic component has been revised down. He was concerned for the Eastern Cape as there is always a worry about poverty alleviation and food security there which impact on health and other social needs.

Mr Khumalo replied that the downward revision of the economic component is better for poorer provinces and will have no negative effect for poorer provinces.

In line with poverty alleviation, Mr Josie pointed out that the FFC will make proposals on a comprehensive social security scheme in April.

Mr Taabe referred to the FFC point in its submission that provinces find it difficult to spend the HIV grants. He said that he cannot imagine how there could be underspending around the HIV / AIDS grant and wanted clarity.

Mr Josie said that the member does not have to be too concerned with this. There are specific problems with technical abilities on how and where to spend initially. The first six months is a learning curve on how to spend the money and getting used to what the conditions are. The spending takes place in the last six months. This is an inherent problem with conditional grants and therefore the FFC wants the number of conditional grants reduced. If the grant is part of the equitable share then provinces can plan for it over the three-year MTEF cycle.

Mr Van Gas added that the early warning system tracks spending on a monthly basis and projects the final figures for the end of the year. The final figures could therefore be very different.

The member followed up his previous question on conditional grants and said that there are figures on conditional grants for the next three years and he does not accept that it would be easier to plan if the money was part of the equitable share. The figures might be soft but the provinces do know that they will not get less. The member was asking if there is a problem with the conditional grants because in his opinion there is not.

The Chair asked that the discussion end here and that the FFC come back on Friday to present their views on the Division of Revenue Bill.

Department of Water Affairs and Forestry (DWAF)
Mr Mike Miller, Director General, made the presentation to the committee.

He said that the key issues for 2002 around the Division of Revenue Bill is whether it will ensure that DWAF will be able to comply with its constitutional obligations, that it will ensure the building and development of local government and whether it will promote sanitation.

The key water service issues in the Bill are the following:
- there are new arrangements for the capital programme
- there is a dedicated programme for sanitation but a question remains around the funding thereof.
- there are also questions around the capacity building programmes.
- new arrangements for operational budget
- there will be a transfer of operations to local government
- the Bill covers the issue of free basic water
- there is a water service policy review

One of the new arrangements for the capital programme is the rationalization of conditional grants. There is one Municipal Infrastructure Grant administered by the Department of Provincial and Local Government. In this new arrangement, the money is spent by one department but another is responsible for the attached conditions.

The DG said that because many responsibilities are being transferred to local government, any capital grant must be accompanied by capacity building. DWAF is helping local government develop water service development plans.

The sanitation project will be lead by DWAF as decided by Cabinet. The DG said that from 2003 there is no money in the budget for this function so the coordination between departments will have to be very strong. Government has placed a high priority on the sanitation programme.

The timetable for the transfer of water services to local government is such that schemes will be transferred to local government in three years. Local government will have to pay providers for water.

The DG pointed out that agriculture and conservation activities are done by DWAF but as yet is not in the Division of Revenue Bill so there is no allocation for this function. The DG hoped that it would be included in the future.

Concluding remarks on the Division of Revenue Bill
The DG said that this year's Bill is better aligned with the Department. There has been good consultation with Treasury. The Bill involves substantial policy issues:
- the phasing out of the capital programme,
- the transfer of schemes to local government
- the regulatory approach of the Bill. The government had been committed to simplifying regulation and committed to an outcomes approach. The DG asked if government was now going back to a rules-based approach as signalled by this Bill.

He said that coordination is needed in respect of infrastructure and constitutional imperatives cannot be ignored. It is important for the new system to be constitutionally sound so that government will be able to defend court action by showing that there is a progressive realisation to ensure water delivery. He again called for expenditure on agriculture and conservation to be brought into the Bill.

Discussion
The Chair pointed out that the Committee had asked DWAF for a presentation on the performance of grants and whether set outputs had been achieved.

The DG replied that the capital grant would have been spent by the end of the financial year on the purposes it was intended for. There are no final figures but spending does peak towards the end of the year.

Mr Ralane asked if the Department has proper systems to allow for the monitoring of compliance with the Public Finance Management Act.

The DG replied that the department does report on a monthly basis and there are no problems or else they would not be getting the money.

A member commented that the monitoring and maintenance of infrastructure is very important. Some municipalities have no tax base and the member wanted to know whose role it is to look after the infrastructure that is put in place. He asked if DPLG is in a position to take over and asked what would DWAF's role be.

The DG replied that a capacity building component is part of most programmes. DWAF achieved 66% coverage of free water in the country because the department went to municipalities and helped them plan and implement. The DPLG has no water expertise and DWAF intend to make its expertise available. By 2005 the budget for operations will be included in the equitable share, i.e. there will be a transfer to municipalities for running of programmes.

Mr Taabe commented on the fact that it was a cabinet decision to make DWAF responsible for the Sanitation Programme. Mr Miller had said there will be no resources in 2003 for this purpose and the member felt that the funds have to be made available.

A member of SALGA commented that maintenance costs for some water schemes will be high and this must be taken into account. He also commented that the incentives given by the Bill takes away objectivity when dealing with such issues. He pointed out that the Bill states that there is no agreement on the transfer of schemes then Treasury can take away the operating subsidy and give to whoever will operate the scheme. The Constitution states that it is the responsibility of the municipality to provide this service and therefore he has a problem with this provision.

The DG replied that the operating subsidy will only be taken away if the municipality refuses to take over the scheme. This is a type of intervention and in no way flouts the Constitution.

On the incentives, he said that the incentives was not DWAF's idea. The incentives might be useful but there is a risk that it will go to the better-off municipalities who can afford to take over the schemes rather than to those who cannot. It seems that it should work the other way around.

On maintenance costs, he said that these costs are part of providing basic services and understood it to be included in the equitable share. If the equitable share is not enough for this function then it must be taken up with the FFC. The DG added that DWAF has said that there is not enough money in local government to meet the needs.

Health Department
The Director General, Mr A Ntsaluba, in his introductory remarks made these points:
- There are a number of conditional grants.
- There has been an improvement in the specification of the grants.
- The restructuring of grants has been embarked on over a two-year period especially in respect of the National Tertiary Services (NTS) Grant.
- The Department is happy about the introduction of the hospital management component to ensure rehabilitation of hospitals.
- The Department will continue to experience difficulties on the provincial side but this will be focussed on.
- Spending is improving.

Dr K Chetty, Deputy Director General, listed the various conditional grants falling under her department:
- The operational grants consist of Central Hospitals, Health Professionals Training & Research and the Hospital Management grant .
- The capital grants consists of the Redistribution and Specialised Services grant, the Hospital Reconstruction and Rehabilitation grant and the Construction grant (for the three teaching hospitals for Durban, Pretoria and Umtata).
- Further grants are the Primary School Nutrition Programme (PSNP), the Integrated Nutrition Programme (INP) and the HIV / AIDS grant.

For the sake of clarity, Dr Chetty listed last year and this year's grants as some of the names have changed:
- Central Hospitals and Redistribution of Tertiary Services grant will be called the National Tertiary Services (NTS) grant.
- Health Professional Training & Research Grant will be called the Health Professional Training & Development Grant.
- Hospital Reconstruction & Rehabilitation will be called Hospital Revitalisation grant.

Purpose and performance of grants:
NTS Grant / Central Hospitals
The NTS grant is to ensure:
- collective planning of highly specialised services
- that long term strategic planning is not disrupted by budgetary problems
- that all citizens have equity of access to services and that there is reasonable distribution of services
- and to eliminate the need for one province to charge another for these services.

The criteria for division of this grant tries to ensure that if provinces provide similar services that all that perform such services receive funds. No province must be excluded.

There is 100% anticipated expenditure for this grant ( Central Hospitals) for 2001 / 2002.

In the analysis of amounts going to provinces in the 2001/2002 financial year and for the next MTEF cycle it is clear that provinces such as KZN, Eastern Cape, Northern Cape and Free State have a jump in allocation. This recognises the fact that certain provinces performed tertiary services but never got enough money. The Western Cape and Gauteng have always been overfunded but the allocation remains constant to ensure that there is no service delivery gap and to provide for a smooth transition.

Health Professionals Training and Research / Development
- This grants supports training of all categories of health professionals, to compensate provinces for the additional service costs and to pursue the policy objective of shifting most teaching from central hospitals.
- The anticipated expenditure for all provinces at the end of this financial year is 100%.
- The allocation per province follows the same pattern as the NTS grant.

Redistribution of Specialised Services
The purpose of this grant is:
- to improve the equity of access to tertiary care
- to reduce the number of people who have to be transferred
- to build expertise, specialist training, clinical standards and morale
- to build up facilities, resources and tertiary services in at least one hospital per province.

Indications are that the provinces would have spent all this grant by the end of this financial year, except for the Eastern Cape.

Hospital Reconstruction and Rehabilitation
The purpose of the grant is to fund major reconstruction and rehabilitation in all provinces. There is a degree of underspending on this grant. Provinces like Gauteng, KZN, Western Cape, Northern Province and Northern Cape have overspent. The additional funds came from these provinces' equitable share. The allocations to provinces over the MTEF cycle has improved but not substantially. More will be needed.

Integrated Nutrition Programme (INP) & Primary School Nutrition Programme (PSNP)
The focus of this grant is school feeding, nutrition education and health promotion. Part of the PSPN conditional grant is used to create infrastructure for and fund recurrent expenditure of the INP. There is underspending on the INP. The Department of Health has a strategy to go into provinces to strengthen performance.

National Integrated Plan for Children and Youth infected by HIV / AIDS
The purpose of the grant is to ensure access to appropriate and effective integrated system of prevention, care and support services, pilot sites for the prevention of mother to child transmissions, home based care, step down facilities, counseling and voluntary testing.

The principles for the division of the grant are the following:
- areas of highest prevalence
- priority provinces identified by Cabinet
- areas where poverty alleviation programmes and the INP are being implemented
- areas in need of social upliftment.

Spending has been low. Infrastructure first needed to be developed and mechanism needed to be put in place to ensure a smooth roll out. people needed to be trained in counseling. These components are not the largest part of the expenditure and much more needs to be done on infrastructure. The department has a strategy and once the foundations are laid, spending patterns will improve.

The allocations for this grant in the MTEF period have increased significantly.

The DG concluded by making the following points:
- there are some problems with spending that are external to the department. An example is the Eastern Cape where there is a problem with the tender board.
- Gauteng and KZN show a low spending on the HIV grant. The DG said that the grant is so small and the problem is so huge that they use their own resources.
- There has been a shift of the NTS grant to provinces that are underdeveloped for equity purposes and a significant need was identified in these provinces.
- A minimum number of actual feeding days (156 days) has been introduced
- The programme at Nelson Mandela Teaching Hospital is almost complete and this is very important for service delivery in the area.

Discussion
Mr Kolweni (ANC) commented that Hospice in the North West called him to share its frustrating experience with budgetary constraints. It is integrated into the Hospital programme but there is no budget for it. The NGO sector is crucial for the delivery of many services such as home-based care. He was unhappy at the treatment of Hospice because it and other organisations do tremendous work. He appealed to the Department to do something.

The DG replied that he would pick up on the point raised. Policy is focussed on the extensive use of NGOs like Hospice and the department does interact with them constantly

Mr Theron (DP) asked when Pretoria Academic Hospital will be complete and if the three new teaching hospitals will enhance the training of doctors.

The DG's response was that Pretoria Academic will be completed by the end of 2003. There is no doubt that the three new teaching hospitals will enhance training capacity. An example is that Umtata Medical School enrollments have increased to 103 from about 60.

A member commented that underspending on the PSNP is troubling. He said that it is illogical to say learners are hungry at R level and primary level but are not hungry at high school. There is no programme for the feeding of high school learners so once they enter high school it is back to square one. He said that he is not naïve to think that we can feed high school learners now but asked if there is a possibility that the programme could be extended.

The DG replied that the problem with the PSNP reflects a larger problem. The same is true for the child security grant because it is only provided to age 7. He added that the PSNP cannot be easily extended.

A member asked why there is no increase in the NTS grant for Mpumalanga and the North West.

The DG answered that these provinces do not perform a significant amount of tertiary services.

Ms Mahlangu asked why is Health hanging onto the Nutritional Grant instead of shifting the function to Education who has the infrastructure to deliver. She said that this question had been raised before.

The DG replied that Cabinet had nstructed a group of Ministers to look at this. The DG did not want to express an opinion because he did not know the position of his Minister. He added that this was a complex issue.

There were no further questions and the meeting was adjourned.

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