Division of Revenue Bill: hearings (SALGA, Auditor General, Transport)

This submission will deal with the Division of Revenue Bill and the framework for conditional grants to local government for the 2002/2003 financial year.

To inform this house on the viewpoints of SALGA with regard to the Division of Revenue Bill for the 2002 / 2003 financial year, as well as on the proposed legislative framework for the Division of Revenue. It is our intention to recommend to this house a practical role that SALGA can play in the fiscal frameworks associated with conditional grants design and management of conditional grants by various line departments.

Institutionally, the character of municipalities has changed, through the redemarcation of municipal boundaries and the new structural form introduced by the Municipal Structures Act.

The Municipal Systems Act also introduced operational changes, and parallel to that, the financial systems of local government will be reformed through the introduction of the Municipal Finance Management Act, Budget Reforms Project and the introduction of the Generally Accepted Municipal Accounting Practice policy framework.

The local government transition and transformation have not and will not be easy in fiscal and financial policy terms. Many municipalities are still facing financial problems associated with inefficient service delivery patterns and high levels of poverty amongst their communities, other because of the ineffective management systems and lack of administrative capacities coupled with inefficient budget systems. In many municipalities non-payment of services plays a major role in hampering effective financial sustainability.

The government policy framework on local government finances identifies the following as key issues:

1. Local government is a sphere of government independent and accountable, with clear revenue and expenditure responsibilities. The role of the national government is, accordingly, limited to providing an enabling regulatory environment within which municipalities can effectively and efficiently manage their financial responsibilities.

2. Local government must be fiscally disciplined in line with constitutional and legislative obligations.

3. The White Paper on local government points out that own revenue is the primary source of municipality income.

4. Access of municipalities to capital markets should be increased to effectively enhance independence from other spheres of government. Discipline in financial management should be introduced to spread the burden of funding capital investment equitably over generations and promoting efficient infrastructure and allocation of capital.

Municipal revenue is obtained through the systems of property taxes, regional levies, service charges, and fees. The National Treasury is of the opinion that local government as a whole, from its own revenue base, covers 90 per cent and more of its operating income. This is not true especially with regard to rural areas. In those instances, up to 37% of a municipality's income derives from grant allocations.

With respect to property taxes, a more coherent national approach to property tax in the form of the Property Rates Bill is currently in the pipeline. The proposed system provides municipalities with a range of options for flexible combinations of taxes on land and on improvements, according to specific circumstances.

The Intergovernmental Fiscal Relations Act maps out a legislative procedure for the division of revenue in South Africa. The Act further provides for institutional structures to facilitate the Division of Revenue process, namely the Budget Council and the Budget Forum. SALGA is recognized by the Act as a body to be thoroughly consulted on fiscal policy matters. In view of the consolidation of grants to local government and the increasingly critical role that local government plays in the improvement of the quality of lives of the poor, it is our contention that the Act be re-looked with a view to include organized local government in the Budget Council

The 2002/2003 division of revenue process was kick-started by the division of revenue workshop, which had the sole intention of attempting to open up the budgeting process in South Africa. Key to the workshop was to outline the fundamentals of fiscal policy framework and technical issues associated with the prioritization of needs in South Africa. The workshop provided an insight into the base line allocations to the municipalities.

The opportunity afforded to us to address this house today is welcomed by organised local government. We believe that we have succeeded to address some of our difficulties and we are positive that our deliberations in this process added significant value. We have experienced this year's process in a very positive way especially at the Budget Forum. However, we want to emphasise that the time has come to include SALGA in the deliberations at the Budget Council.

The recommendations contained in the document relative to the above matter are, in the main, welcomed and supported. However, one area of concern, that would have major implications to local government, needs to be reviewed, that is, the issue of free basic services, and the utilization of the equitable share therefore.

Chairperson it is our contention that a distinction should be made between the indigence policy and the provision of free basic services. Whilst we support all the measures aimed at alleviating poverty, we also believe that a standard framework guiding municipalities in the execution of the poverty alleviation function needs to be developed. Other line functions, e.g. the Department of Social Services would make choices as to where a paypoint for the department must be. However, the question remains who then becomes responsible for the building of that paypoint and the running costs thereof.

It is our submission therefore chairperson that funding for municipalities must go beyond the equitable share of the nationally raised revenue. Hence our support of the recommendations of the FFC of 2001/2.

The general assumption that local government raises its own revenue also needs a thorough review. This also calls for the review of the Formula for the allocation of equity share.

There is a need for the establishment of the database on local government in respect of financial matters. Ideally, this should be initiated by the Treasury in collaboration with the DPLG and SALGA.

It seems as if every national and provincial department has a programme for the capacitation of local government, however what is lacking is the coordination of these projects. There is therefore a need to coordinate all such initiatives. In addition, it will he critical for provincial governments to indicate clearly in their budgets how and to what extent they make provision for local government capacity building.

In terms of the MTEF, provincial departments are aware of their minimum allocations. However, that is never communicated to municipalities which makes planning a nightmare at local level and contributes to role-overs.

Transfer Agreements

The transfers of function from the departments to municipalities must be done in consultation with the department of provincial and local government and organised local government. Such agreements must make clear provision for the maintenance of the infrastructure that has been transferred.

- Revenue laws

- Electricity restructuring

Conditional grants which are eventually going to be phased out must be done away with. The funds from these must be channeled towards the local government equitable share. This would assist municipalities with poor revenue bases to effectively perform their duties thereby improving the lives of the majority of the people.

Our argument on this issue has been and remains that the powers and functions must be allocated to the category of municipality where they will be administered most effectively and efficiently. In instances where the re-allocation of either water or electricity may lead to the loss of revenue, we acknowledge the point made by the FFC that the introduction of cost -related tariffs may similarly lead to the loss of currently generated revenue.

Cognisance should be taken of the context under which this particular allocation came into being. The equitable share to local government was, and in our view, not a new allocation of monies to local government, but is merely a redistribution of grants that were given to Provinces to manage or to grant to the previous black local authorities. Although it is clear that these areas fall under the jurisdiction of local government, without exception, the state of infrastructure and the provision of services, to say the least, are precarious and local government will need the equitable share in years to come to address this inadequacy.

It is therefore our strong belief that the equitable share is, in terms of the Constitution, a grant to local government for the rendering of basic services to its communities. The rendering of services includes the maintenance of networks, human resources cost, etc. The current document suggests that the equitable share (S grant) is "designed to meet operating costs of a municipality when providing basic services to low income households", which in itself is problematic, and will cater for unnecessary confusion amongst the community at large.

SALGA would further like to state that local government accepts the challenge to render free basic services to the poor in our communities, but would like to register our objection that the equitable share should be used for this purpose.

Free basic services, which will basically mean assistance to the poor, should be handled as a specific transfer of funds allocated for a service, which is not the competency of local government, namely welfare. These transfers should include the direct cost of the service and the administration cost with regard to an indigence register.

Based on a research conducted by SALGA it was clear that the cost for rendering subsidized service to the poor was almost 300% higher than the equitable share allocation. In one particular municipality the cost (R 86 per household per month) was R 7,4 million per year, whilst the equitable share was R 1,4 million, thus a shortfall of R 6 million per year, excluding the cost for the administration of indigence register.

Given the above, it becomes more and more problematic to local government to execute its obligatory functions as stated in the Constitution and deliver a service that should better the lives of the people of South Africa, particularly the poor.

In view of the foregoing, SALGA believes that the manner in which the S grant component of the equitable share as set out on p61 in the Discussion document creates expectations, and accordingly should be deleted, as this will create major problems at a practical level.

The paragraph in question should be substituted by the following:

The S grant is provided to enable local authorities to provide some relief to the poor by means of introducing suitable life-line tariffs and / or step tariffs in respect of basic services. The Municipal Systems Act requires local government to give consideration to this issue.

SALGA is of the opinion that there should be a clear distinction between the concept of free basic services for all, as per the Manifesto, and the assistance to the poor. It is clear that there are various views with regard to this matter, and we as SALGA would like to see a consensus direction with regard to this.

Despite what is said in our submission and the arguments for and against free basic services, the time has come to clearly state publicly.

It has become clear that the Department of Finance, and by extension the Financial and Fiscal Commission are beginning to appreciate the importance of local government.

SALGA appreciates the increase in the equitable share, though the share of local government is still a low percentage of nationally raised income.

The report states that the base with regard to poverty in households be changed from household income to imputed household expenditure. It is not clear what the definition of imputed household expenditure entails and what the effect of this change would be. Whatever the change, it is clear that when the new census data becomes available, there may in the end be drastic changes to allocations made to municipalities. It is our contention that where such changes would result in a significantly lower allocation, that it be phased in over a period in order for a municipality to budget appropriately.

SALGA mainly supports the principle of cross subsidization in tariffs, including a life-line tariff for some of the services, especially water. If the supply of electricity is no longer the competency of local government it is clear that it will negatively influence service delivery as well as the financial position of local government.

SALGA would like to register its contention to be part of the process to distribute and monitor the conditional grants. It became evident to us that some of the grants to local government are not transferred in the financial year allocated. This process should be streamlined and care should be taken that these grants reach local government as planned, and that there should thus be no rollovers from previous years.

Chairperson it is thus our humble submission that in the main, we support the recommendations as set out in the document but with the following provisos:

1. That this house takes note of SALGA's concern with regard to the concept of free basic services and the way that it is set out in the document.

That SALGA supports the concept of cross subsidization in tariffs, including a life-line tariff for

some of the services, especially water.

3. That SALGA recommend that the subsidization of services to the poor over and above the concept of free services, becomes a joint process between Bulk suppliers of services and all spheres of government, and that strong links be formed between the parties concerned to address this urgently.

4. That SALGA further recommend that a national study with regard to the subsidization of the poor over and above the concept of free basic services for all, be undertaken within all municipalities to determine the extent thereof.

5.That with special reference to local government conditional grants, it be recommended that

the Division of Revenue Act make provision that Departments with grants to local government should allow SALGA to have access to and be informed on the fiscal framework which amongst other will include:

a. Rationale behind the grant framework

b. The amount dedicated for a particular function in Local Government

c. The implementation programme and time table for spending for monitoring purposes.

d. Conditionalities associated with the grants

e. National and provincial accounting officers

f. Principles of transparency in grants design

7. That SALGA effectively support the rationalisation of conditional grants to local government and the proposed three year allocations of grants to municipalities based on the National Treasury Medium Term Expenditure Framework in order to effect proper planning of municipal services.

8. Lastly, Chairperson, SALGA would like to recommend that their should be a clear distinction between the rendering of free basic services to all as per the Manifesto, and the rendering of subsidized services to the poor, over and above the concept of free basic services to all.

9. It is of critical importance that there be a national policy on indigency to avoid the proliferation of such policies at local level.

Chairperson, I would like to thank you for this opportunity to address this house on this matter and hope that the recommendations by SALGA will add value to the total process.

Appendix 2:
Submission by AG
Draft Division of Revenue Bill 2002
The endeavors of government to improve financial management measures are strongly supported

Not having had the opportunity to study the bill at length and as most of our previous inputs have been addressed, the following specific and general comments are offered for consideration:

Section 8
Public or other entities referred to in this section should be clearly defined. For accountability and budget purposes transfers intended for municipal entities should flow via the accounts of a municipality.

Section 18(2)
Section 19 of the Public Finance Management Act is not applicable to municipal ties. In this regard it is suggested that the words 'contemplated in section 19 of the Public Finance Management Act' be deleted.

Section20
Should be amended to read as follows:

Without derogating from the powers and duties of the Auditor-General in terms of the Constitution and any other law, the Auditor-General must, in the audit report on the financial statements of a department, province or a municipality report on the allocations set out in part Ill as to - (a)

It should be noted that section 20 would only ;apply to audits performed by the Auditor General. The accountability arrangements contained in this section will not apply to entities not audited by the Auditor-General and this aspect should need further consideration.

Section 20 (c)
Should be replaced by the following as the present requirement is inconsistent with the mandate of the Auditor-General

the evaluation of evidence supporting the amounts and disclosures in monthly and annual reports to be submitted in terms of this Act.

It is suggested that the determining of any deliberate attempt to provide misleading information may be performed by the legislature following the Auditor-General's finding on the above.

Section 27 (3)
Replace the words "subsection (1)" with "subsection (2)".

Section 27 (5)
This section should be deleted as it contradicts section 27(1).

Section 28(3)
As previously agreed with the National Treasury it is requested that this section be worded more precisely to include certain issues which could determine the quality of the accountability process. The suggested wording is:

'The National Treasury may, in the interest of improved accountability or debt and cash flow management amend any payment schedule of an allocation listed in Schedule 3,4 or 5, and direct that no transfer of funds be effected through the payment schedule amended in accordance with subsection (1) or that the payment schedule be amended as directed by it in the following circumstances but not limited to these circumstances:

(a) the province or municipality has in a material respect failed to use funds already transferred to it under that allocation;
(b) the province or municipality has failed to meet its statutory financial obligations including payment of audit fees; or
(c) there is another exceptional reason for the modification."

Section 30
The Public Finance Management Act is not applicable to Municipalities. It is therefore suggested that the words 'as envisaged in the Public Finance Management Act be deleted.

General
The requirements regarding the management of grants and transfers contained in parts
IV, V and VI of the Bill could be more appropriately contained in long-term legislation like the Public Finance Management Act and the Municipal Finance Management Bill instead of an annual Bill.

In light of the above it is not considered necessary for the Office of the Auditor-General to make a presentation at the proceedings. Your committee's support to improve financial management and accountability is appreciated.

Yours sincerely
AUDlTOR-GENERAL

Annexure to AG Submission
In light of our written submission, we submit to the committee some suggested clause amendments:

Clause 8:
"Transfers to public entities. municipal entities or private [or other] entities, in order to perform a function that is normally the responsibility of a province or municipality, must be [regarded as being transfers] transferred to such province or municipality."

Clause 20
"Without derogating from the powers and duties of the Auditor-General in
terms of the Constitution and any other law, the Auditor-General must, in the
audit report on [of] the financial statements of a department. province or a
municipality. report on the allocations set out in part III [report on] as to (a)"

Clause 20(c)
"the evaluation of evidence supporting the amounts and disclosures [whether] in [any] monthly reports Or[MA1] annual reports [there was any deliberate
attempt to provide misleading information] to be submitted in terms of this Act."

Clause 28(3)
"The National Treasury may, in the interest of improved accountability or debt and cash-flow management [or on the grounds of substantial noncompliance with any condition to which an allocation is subject,] amend any payment schedule of an allocation listed in Schedule 3,4 or 5, and direct that no transfer of funds be effected through the payment schedule amended in accordance with subsection (1) or that the payment schedule be amended as directed by it in the following circumstances but not limited to these circumstances:

(a) the province or municipality has in a material respect failed to use funds already transferred to it under that allocation:
(b) the province or municipality has failed to meet its statutory financial obligations. including payment of audit fees: or
(c) there is another exceptional reason for the amendment

Response by Parliamentary Law Advisors
TO: Chairperson: Select Committee on Finance
Cc: Chairperson of the National Council of Provinces

FROM': Parliamentary Law Advisers

DATE: 6 February 2002

SUBJECT: Division of Revenue Bill [B5 - 2002]

1. We have been requested to give an opinion on comments by the Auditor-General on the above Bill and whether schedules to an Act can be promulgated by the Minister after the Act has been passed by Parliament.

2. Clause 8
We agree.

3. Clause 18(2)
We agree with the comments of the Auditor-General, although we do not find a reference to "section 19", but to section 40 of the Public Finance Management Act (PFMA).

4. Clause 20
The suggested amendment makes the position of the allocation of funds from national government to provinces and municipalities more clear and specific. From a legal and drafting perspective we support the proposed amendment.

We propose further that clause 20 (with the recommended amendments becoming subclause (1), and that a subclause (2) be added to provide for accountability for entities not audited by the Auditor-General.

5. Clause 20(c)
We agree that the suggested amendment reflects the mandate of the Auditor-General more accurately.

6. Clause 27(3)
We agree with the suggested amendment.

7. Clause 27(5)
We agree with the suggested amendment.

8. Clause 28(3)
From a legal perspective we have no comment (as in the main it is an issue of policy), save to say that the formulation suggested is more clear and specific.

9. Clause 30
We disagree with the suggested amendment. There is no reason why one cannot import the concept "financial misconduct" from another statute, in this case the PFMA, albeit that the Act does not apply to municipalities. Application of the concept imported from the PFMA is a valid form of referencing notwithstanding the fact that the PFMA does not apply to municipalities.

In leaving out the phrase as proposed by the Auditor-General, the clause will be vague and open to numerous interpretations, whereas the intention is to import the concept as it is contained in the PFMA.

10. General
We agree.

11. The Division of Revenue Act, 2001 also does not contain a schedule, which indicates a breakdown, per municipality, of funds allocated to local government. Other schedules in the Act specify each province's equitable share and grants to provinces and local government.

The "schedule" referred to in clause 7 of the Bill does not refer to a schedule to the Bill, i.e. a part of the Bill, but a list of payments to be submitted to the National Treasury.