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

NCOP Finance

07 March 2002
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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
8 March 2002
DIVISION OF REVENUE BILL: HEARINGS (SALGA, AUDITOR GENERAL, TRANSPORT)

Chairperson: Ms D Mahlangu

Relevant documents:
Division of Revenue Bill [B5b - 2002]
SALGA Submission - Appendix 1
FFC PowerPoint Presentation
FFC Submission to Parliament
Auditor General Submission - Appendix 2
Response to AG submission by Parliamentary Law Advisors- Appendix 2
PowerPoint Presentation by the National Department of Transport (awaited)

SUMMARY
The South African Local Government Association, the Financial and Fiscal Commission, the Auditor General and the Department of Transport made submissions on the Division of Revenue Bill:
- SALGA supports the principles and framework of the Bill but submitted that the allocation to local government is not sufficient.
- The FFC returned to the committee after their submission on conditional grants on 6 March. Their presentation was the same as that to Finance Portfolio Committee on 25 February 2002.
- The Auditor General made a few suggestions in respect of the Bill. The Parliamentary Law Advisor's response to his submission was tabled in the Committee. Treasury responded to the Auditor General's submission.

The Committee passed a motion of desirability on the Bill and the Chair instructed members to brief their provinces and return with a negotiating mandate.

The Department of Transport presented its perspective of the Division of Revenue Bill focussing on bus subsidies, infrastructure grants to Local Government and the problem encountered with the bill. It was submitted that the current allocations do not allow the Department room to grow and prohibits NDOT from extending services to areas and persons neglected in the past.

MINUTES
South African Local Government Association (SALGA)
The SALGA delegation consisted of Mr T Mokwena and Mr J Mettler.

Mr Mokwena summarised the main points of the submission:
Since the local government elections in December 2000 much has happened around structural changes in respect of municipal boundaries. There is the Municipal Structures Act that local government had to get ready for and very soon the Municipal Finance Management Bill will assist in the budget reform process.

He commented that it is not easy to finalise the issues around transition and transformation especially on the fiscal side. The imbalances and the high degrees of poverty are serious problems that make this difficult. Poor management systems and budgeting and the culture of non-payment has not yet been eradicated from local government.

The premise that SALGA moves from is that local government is an independent sphere and must be responsible for the revenue collected and its expenditure. The other tiers must therefore create a supporting and enabling environment.

Financial discipline should take place in local government to ensure service delivery but the challenge is access to the financial markets. The MFM Bill does try to address this but the problem is the creditworthiness of municipalities.

In respect of the self sufficiency of local government he said that it is a principle that they should raise about 90% of its revenue. There are areas that depend on more than 30% of the budget from transfers. When the potential of such municipalities is looked at one will see that the potential is not there to improve the situation. It was submitted that if the government is serious about making local government self sustainable, there must be a serious look at the equitable share. He said that the Property Rates Bill might improve the situation.

He said that the Division of Revenue Bill comes from a background of good consultation and workshops but a grey area remains in that there is a gap between the Budget Council and the Budget Forum. The Budget Council looks at provincial government while the Forum looks at local government issues. It was submitted that consultation between the two bodies is needed before allocations are made.

SALGA was disappointed that not all of the FFC's recommendations had been implemented and submitted that there are a few that could have been implemented.

On capacitation SALGA said that National and Provincial Departments have money for the capacitation of local government. At the moment nobody can say what areas need capacitation and the quality of capacitation cannot be seen. A mechanism is needed to coordinate capacitation of local government. Of the 243 municipalities, we need to know many of them can handle financial matters and how many need capacitation.

SALGA encourages three year budgeting at local government but submitted that the three year budget cycle is never communicated to municipalities and they therefore cannot plan for the money that is coming to them. The National Departments know the figures, the provinces know the figures so surely this should be communicated to local government so that they can plan better.

On the transfer of water schemes by the Department of Water Affairs and Forestry, a national approach was called for because the cost of maintenance is high and municipalities cannot afford it. The assets should not be allowed to wither away after transfer to local government.

Electricity restructuring also has huge implications for local government and lots of work needs to be done as a result of the loss of revenue that local government will experience.

Conditional grants must be phased out because the conditions are stringent and unachievable. These amounts should rather be related to capacity and need and put in the equitable share. A bias must be created toward those who need the money most.

On free basic services, SALGA said that this system along with the indigent policy is too cumbersome. There should not be two systems but rather a national framework needs to be developed to cover both.

In conclusion SALGA supports the Bill. The principles are clear and SALGA understands the rationale behind the framework but the allocations to local government are not sufficient.

Discussion
The Chair commented that SALGA had said nothing about the division of powers and functions of municipalities.

Mr Mokwena outlined SALGA's stance. He said that functions and powers should be vested where they can be performed best. If a category B municipality is better placed to perform a function, it should not be placed with a category C municipality and vice versa.

Mr Ralane (ANC) asked if SALGA gets funds from government to address capacity problems.
He wanted clarity on the relationship between the indigent policy and free basic services. Finally, he commented that there are two types of rural areas, the first is where people have been living for a long time and the second is the areas where people where forcibly removed to. He asked for the solution for the latter rural areas where there is non-arable land and it is difficult to provide proper services.

Mr Mokwena replied that the level of service must be decided on so that people get what they can afford and government provides what it can afford. The two, the indigent policy and free basic services, are not related and provide additional administrative duties. The written submission goes into further detail.

A member commented on the culture of non payment and the emphasis of the Systems Act on consultation, participation and involvement. He asked how these principles of the Systems Act can be used to ensure that communities accept municipal rates and taxes.

Mr Mettler replied that the key to getting communities to buy into the payment of services is participation. Public participation must take place right from the outset and must not be limited to a single mass meeting. He said that the vision of the Systems Act now links what the municipality wants and how it will fund the service provided. Never before has a plan been conceived that takes into account all the role-players.

Mr Raju (DP) referred to the lack of communication and said that since the elections in December 2000 the status of local government has been elevated so this level of government should be treated on a respectable basis.

The Chair suggested that SALGA follow the amendments to the Intergovernmental Fiscal Relations Act closely and make an input before and during the parliamentary process.

Secondly, she said that the Department of Provincial & Local Government is working on a framework for capacitation and asked if SALGA has seen it and whether it is not adequate.

Thirdly, she commented that as long as the issue of the division of powers and functions is not sorted out, there will be no predictability of the figures in the MTEF.

Finally the Chair wanted facts supporting the suggestion that certain municipalities are not able to collect revenue to their full capacity.

Mr Mokwena replied that the source or revenue is rates and taxes but there are areas where there are no rates. He said that more information would be given to the Committee and he also referred the Committee to the FFC's report that also raises the issue.

On the division of powers and function, he said that SALGA and DPLG have agreed that the schedule to complete the devolution of powers and functions will be completed for the latest in mid-March.

On the framework for capacity building, he replied that it was only looked at during the February MinMec.

Mr Mokwena advised that SALGA will make submissions on the amendments to the Intergovernmental Fiscal Relations Act.

Mr Taabe (ANC) asked what role local government plays in the fight against HIV / AIDS.

Secondly he referred to errors in transfers. The Division of Revenue Bill legislates how errors must be handled. He commented that surely there must be some administrative procedure to deal with errors and legislation is not necessary.

Mr Mokwena replied that there is a mayoral forum on HIV / AIDS, there are AIDS councils in municipalities and workplace forums. These were a few examples of local government's role.

Mr Kahla (Treasury) responding to the second question said that the Constitution requires an equitable share. To withdraw money after it has been deposited in the provincial revenue fund must be done by way of an appropriation bill. If money flows erroneously then there should be a provision to deal with this to show that government is not tampering with the equitable share.

Financial and Fiscal Commission (FFC)
The FFC was represented by its Vice Chair, Mr Josie as wells as Mr Van As and Mr Makinta.

The presentation was in three parts (see document). The first dealt with the government's response to the FFC's 2002 proposals and recommendations. The FFC submitted that government supports and concurs with most of its proposals and recommendations.

The second part was a comparative analysis of the 2002 / 03 Budget and the 2002 MTEF. This includes an analysis of the National, Provincial and the Municipal Budgets.

The third part looks at the trends in the realisation of the Constitutionally Mandated Basic Services (CMBS). The FFC focused on Education, Social Security and Primary Health Care.

Discussion
Mr Ralane referred to the table indicating unequal expenditure levels on education per child in the various provinces and asked what was its impact on output and why there was this imbalance.

Mr Makinta relied that the biggest cost is teachers salaries and this could skew the picture. Other factors are the number of private schools in certain provinces. Gauteng has the lowest spending per learner and this reflects the big population. He added that the table shows how people in different provinces are treated differently.

Mr Ralane followed up by saying that the Northern Cape spends the most per child but because of the expansive province there are areas where there is no access to education so the figure is based on only a few of the learners of school-going age.

Mr Lucas (ANC) referred to the lack of excitement of provinces in taking advantage of the Provincial Tax Regulation Process Act and asked why is there a delay in provinces using the legislation to formulate proposals to raise their own revenue.

He also asked when the recommendations and framework in respect of the contingency reserve will be completed because it seems as if time is wasted on this where it could be spent on more pressing issues.

Finally he commented that all the departments have grants for HIV / AIDS and expenditure shows that this duplication impedes delivery. He asked what advice the FFC has to government to make the grants more efficient.

Mr Josie replied that the FFC did make recommendations on provincial taxes but Treasury can best answer questions on the delay. He added that in the Budget Council there is muted enthusiasm towards the new power.

He said that the FFC is not preoccupied with the contingency reserve. The FFC is required by law to make recommendations on financial matters but the contingency reserve is not a major issue.

In response to the comment on conditional grants, Mr Josie replied that the member was not present on Wednesday when the FFC made a submission on conditional grants. He suggested that the member get copies of the presentation documents from the clerk.

Mr Mettler commented that in future the analysis of municipal budgets needs to be more specific. It must be broken up into the categories to see the income and spending patterns per category. This will assist in projecting for the outer years.

Mr Josie understood the point by SALGA and said it was useful. He added that when the formula for local government is proposed hopefully it will target the different categories of municipalities.

Mr Pillay (Treasury) commented on the information from municipalities. He said that one must be wary when making a financial analysis based on the information that comes from municipalities because there is no uniformity. He said that the data must be verified when discussing policy.

The Chair commented that she had seen a CD from the Municipal Demarcation Board (MDB) that had data for even the most rural areas on the number of people working, data on the roads and water etc. She asked why nobody has referred to this type of data. This data was from Stats SA and the Chair asked why this relevant information is not being used.

Mr Makinta replied that the information is based on the old boundaries and is seven years old. He added that the results of the new census can be used.

Mr Pillay agreed that it is was impossible to use information based on the old municipalities to inform a financial analysis.

Office of the Auditor General
The submission was presented by Mr Kamedien, a legal advisor in the Office of the Auditor General. The Parliamentary Law Advisors submitted a written response to the submission.
There was no discussion on these issues. (See Appendix 2 for submission and response).

Response by National Treasury
Mr Kahla (Treasury) responded to the Auditor General's submission:

Section 8
The reference to private entities must be deleted then there is no need to define public entities. It is defined in the PFMA and the definition section states that the definitions in the PFMA apply. Treasury disagrees with the suggested draft in the annexure.

Section 18(2)
Treasury agrees with the concern raised and will amend it to read in terms of section 40 or prescribed and then other legislation that follows will be applicable to municipalities.

Section 20
Treasury agrees with proposals on section 20 and will redraft to reflect this.

Section 27(3)
Treasury agrees.

Section 27(5)
Treasury disagrees. There is no contradiction between this section and 27(1). 27(1) requires approval before a transfer of funds take place. 27(5) introduces a penal element should the approval not be sought by the relevant sphere of government.

Section 28(3)
Treasury disagrees with the suggested grounds listed under (a) - (c). The delay of a transfer is to assist the province or municipality to comply with the conditions of the grant. The ground for changing the payment schedule must be limited. Section 216 of the Constitution is the framework for stopping payments and the government should not open itself up to litigation.

Clause 30
Treasury disagrees with the AG and agrees with the Parliamentary Law Advisors. Misconduct as envisaged in the PFMA is imported to this Bill. The section does not say that the provisions of the PFMA apply.

Motion of Desirability / Briefing on the Bill
As the Committee had been fully briefed on the Bill at a joint meeting with the Portfolio Committee on Finance, the Chair read the motion of desirability and the Committee agreed.

There was no discussion but the Chair asked Treasury to overview the Bill once more as committee members had to brief their provinces.

Mr Kahla said that the Bill was the same as in previous years save for a few changes. The major change is in Clause 5(2) to remove the implied exclusion of Category C municipalities from receiving equitable share allocations. This is in response to the KZN High Court decision. Part VI takes into account the new constitutional amendments therefore Clauses 21 & 22 dealing with delays and withdrawals that only apply to conditional grants.

National Department of Transport (NDOT)
The DDG for policy implementation and strategy, Mr Jerry Makokoane, and Ms A Notnagel the Chief Director in the same Directorate made the presentation to the Committee. The focus of the presentation was on:
- Agency payments (Bus subsidies)
- Infrastructure grants to local government (Urban Transport Fund) and;
- Problems encountered with Division of Revenue Act

Agency payments
- Bus subsidies in 1999/2000 in DORA was about R1,2biIlion
- The next financial year 2000/01, the bus subsidies was increased to R1,4 billion
- Distribution not equitable - (not between or within provinces) as it is based on historical routes

* Relative total of bus passengers for the country is 860 million
** Proportional distribution of these passengers per province is:
· Gauteng 22%
· Eastern Cape 4%
· Free State 6%
· Kwazulu - Natal 22%
· Mpumalanga 13%
· Northern Cape 1%
· Limpopo 11%
· North West 13%
· Western Cape 8%
It should be noted that not all passengers are currently subsidized.

- NDOT needs to address the distribution of subsidies to facilitate some movement towards equity
- Basis for allocation should be reviewed
- The National Land Transport Transition Act, 2000, is providing a premise for fundamental restructuring of public transport based on integrated transport plans
- Government has contractual obligations currently extending from 1-5 years coming with bus companies providing a service
- Current Budget allocation does not provide room for growth

National Department of Transport targets on servicing the broader public as far as it relates to public transport:
- To meet the mobility needs of commuters especially those who travel about 40 km routes per direction
- To alleviate poverty levels of those who cannot afford use of private vehicle use and solely depend on public transport as a means of transport
- To redefine the apartheid legacy of public transport subsidy so as to target the vulnerable and neglected

It should be noted that currently NDOT subsidises mainly workers.

- NDOT and Provinces are developing mechanisms to address the issue of equitability within and between Provinces
- National Treasury is assisting NDOT in ascertaining alternative methods of addressing funding shortages

Infrastructure Grants to local government (UTF)
-The Urban Transport Act, 1977 was established to provide the NDOT with a mechanism to promotes projects of national importance in local government,
E.g. urban renewal project: Extension of Khayelitsha commuter rail line

Infrastructure grants - basis of allocation
- National importance
- Project Based
- Approval - Monitoring and payments based on the business plans

Problems with Implementation of Division of Revenue Act
- Certain projects are co funded - time consuming for provinces and local government
to finalise approval of its portions
- Funding and starting times of projects do not coincide with the period of the Act
- Change of priorities for local government impact on timing for implementation of projects

Discussion
Mr Ralane asked if the outputs of the subsidies for busses and rail is measurable, the quality thereof and what impact it has on the lives of the people. He posed the question against the background of horrible conditions on busses and trains.

The DDG replied that that it is important that outputs are at a level that benefit the population. He used the bus contracts that the department inherited and said that it was difficult to assess the value for money. Since 1996 NDOT introduced competitive tendering. Before the department depended on the contractor to say where the service is provided but now NDOT determines this. The flaw is that workers are still being targeted but they are not the only users of public transport. Scholars, the aged, the disabled and the rural areas also need services. NDOT is addressing the need to have busses at an accepted level through the tendering process. There is a concept of reducing the life span of busses but this causes a cost increase as the chassis is imported.

He said that the needs are unlimited but the current arrangements places the NDOT in a situation where it cannot extend services to areas neglected in the past.

In respect of Metrorail, the DDG said that it does not provide services to make people comfortable. There is refurbishing of coaches underway to lift the standard. The signaling system is also being looked at to increase safety.

The Chair noted that 20% of the funds for the Khayalitsha upgrade had been spent. She asked when the remaining 80% would be spent.

Ms Notnagel replied that the 20% was spent on a feasibility study. The 80% will be spent in the new financial year and thereafter more money will be needed to complete the project.

Clarifying the position on unspent monies on other projects, she said that the NDOT will make a statement in respect of Mabopane. Baragwanath is partly funded by the province but it is not playing along. Buffalo City will see 100% spent at the end of the next financial year.

There were no further questions and the meeting was closed.

Appendix 1
SALGA SUBMISSION ON THE LOCAL GOVERNMENT BUDGET FRAMEWORK 2002/2003

1.Subject

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.

2. Purpose

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.

3. Background

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.

4. Discussion

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.

5. Comments By SALGA

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.

FFC Recommendations

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.

Capacitation

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.

MTEF

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

Water Affairs

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.

Minerals and energy

- Revenue laws

- Electricity restructuring

Conditional Grants

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.

Division of powers and functions

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.

SALGA AS ORGANISED LOCAL GOVERNMENT STATE THAT THE RENDERING OF FREE SERVICES TO ALL AS PER THE MANIFESTO, SHOULD BE SEEN AS A SUBSIDISATION AT THE BASIC LEVELS OF SERVICES BY UTILISING THE EQUITABLE SHARE ALLOCATION AND THROUGH TARIFF CROSS SUBSIDISATION AND STEPPED TARIFFS.

SECONDLY, BY ADDRESSING THE POOR, ANYTHING OVER AND ABOVE THE RENDERING OF FREE BASIC SERVICES AS STATED IN THE PARAGRAPH ABOVE, SHOULD BE SEEN AS THE COMPETENCY OF THE NATIONAL GOVERNMENT, AND IF LOCAL GOVERNMENT SHOULD RENDER SUCH SERVICE, OUR VIEWPOINT STANDS AS

PER OUR SUBMISSION - SPECIFIC FUNDS COVERING THE COST OF THE SERVICE AND ANY ADMINISTRATIVE COST FOR SUCH FUNCTION, SEPARATE FROM THE EQUITABLE SHARE ALLOCATION.

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.

Recommendations

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.

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