2011 Division of Revenue Bill: Financial and Fiscal Commission briefing

Standing Committee on Appropriations

02 March 2011
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Committee met with the Financial and Fiscal Commission, as well as National Treasury, to continue its discussions on the Division of Revenue Bill, as it had not had sufficient time, during the meeting on 24 February, to address all the issues. The Financial and Fiscal focused on over-expenditure in departments such as health and education. Diverting of resources away from other priorities had occurred and there was an urgent need to reinforce the basics of public service administration. Infrastructure funding injections and review of conditional grants offered massive opportunities for urban development. The FFC would support municipalities using their power to use local taxation instruments properly, but stressed that this should not be seen as an alternative to dealing properly with debt recovery. No amendments should be made to the Municipal Property Rates Act without reviewing their likely impact. The comprehensive review of the Provincial Equitable Share (PES) commenced in 2007, and this translated into substantial changes in the 2011 Division of Revenue Bill. Work on health component reform was comprehensive. The FFC welcomed the Division of Revenue Bill, but stressed its concerns over health and education overspending, and urged fast-tracking of service delivery. Members asked if the over-spending problems in Eastern Cape, in particular, were created by backlogs or under-budgeting, and noted that overspending in education resulted from more emphasis being placed on meeting personnel costs. Members asked about the National Health Insurance proposals, but heard that the FFC was still working on its findings. The question was posed whether the existing grants were properly coordinated, and how new grants were intended to improve service delivery, and further queries were made on the impact of infrastructure changes, schedule 7 grants,   
how resources were diverted, how ratios on expenditure were set and enforced, and for clarity on FFC’s suggestion that existing revenue instruments should be better used. Members asked if funding could be withheld from departments and emphasised that allocations must result in service delivery. A Member asked about the allocation of revenue to sports facilities, and asked who was responsible and whether specific amounts had been set aside.

Meeting report

Opening remarks:
The Chairperson noted the apologies. He reminded Members that this was a follow up to the meeting of 24 February, since the Committee had not had sufficient time to engage with the Financial and Fiscal Commission (FFC) and National Treasury (NT) on the Division of Revenue Bill.

He also welcomed Ms H Malgas (ANC), Chairperson of the Portfolio Committee on Basic Education.

2011 Division of Revenue Bill: Financial and Fiscal Commission submission
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, highlighted the Commissions’ submission of the Division of Revenue Bill (DORB). FFC’s recommendations in the past had emphasised protection of soft targets in the health and education budgets, and improvements in quality of service and efficient management. Overspending on the health and education budgets constituted a major concern and this was not leading to better output. Diverting of resources away from other priorities had occurred and there was a need to reinforce the basics of public service administration as a matter of urgency.

The FFC had found that there was a massive opportunity for urban development through infrastructure funding injections and reviewing of conditional grants. These grants were linked to housing and basic services, public transport connectivity, jobs, investment and enterprise.

The FFC supported continued strengthening and increasing of taxation powers towards municipalities. However, there was a need to maximise existing revenue instruments. The outcome of increasing tax burdens on communities should not be used to compensate for poor debt recovery by municipalities. Where collection was satisfactory, new revenue sources, such as imposition of local business tax, was encouraged. There was a need for government to conduct a thorough impact assessment of all proposed amendments to the Municipal Property Rates Act, prior to legislating any changes.

Mr Khumalo explained that a comprehensive review of the Provincial Equitable Share (PES) commenced in 2007. The 2011 Division of Revenue Bill reflected government’s intention to implement substantial changes to the PES for the 2011 Medium Term Expenditure Framework (MTEF). The FFC found that work done by government on the health component reform was very comprehensive, and was moving in the right direction. Other proposals made included education financing and changes to weighting. The FFC would continue its own research work on the formula to align it with changed service delivery arrangements, especially concurrent functions.

Overall, the 2011 Division of Revenue Bill was welcomed by the Commission. However, he reiterated that the health and education overspending were of grave concern. Vibrant built environments constituted a massive opportunity for fast tracking service delivery. The FFC appreciated robust engagements with all spheres of government and would intensify its stakeholder engagement process in order to get to grips with the impact of the allocations made through the Division of Revenue Bill. 

Discussion
Ms H Malgas (ANC) said that FFC had previously referred to concerns about the gross over-spending on education in some provinces, such as the Eastern Cape. She wanted to know whether this problem was created by backlogs or whether there was under-budgeting for this province.

Mr Khumalo said that the overspending in the education sector was mainly due to higher personnel costs as a result of a higher demand for educators. The province was given an appropriate amount of funding, but the mismanagement of these funds could be the reason why there was such a backlog in providing basic educational services. The recession had also resulted in the need for fiscal consolidation and the larger part of the provincial budget was used for the staffing component. As a result, some programmes aimed at assisting learners directly, such as school feeding programmes and scholar transportation, had suffered.

Mr L Ramatlakane (COPE) said that he had read the media reports on the previous meeting of 24 February. He wanted to know more about the National Health Insurance (NHI) projection made by the Minister of Finance.

Mr Khumalo said that the FFC was still awaiting details around the NHI proposal from government. FFC was hoping to outline the possible alternative ways to funding the NHI. Once the Minister had tabled alternative proposals, the FFC would put in its initial findings and look at the sustainability of this programme. The FFC was hoping to use the tax approach, whereby funding would be assisted by tax deductions, rather than a debt approach, but this was currently under discussion.

The Chairperson said that there were fewer new grants allocated to job creation. He commented that the FFC had to be concerned about the many grants that were not properly co-ordinated. He asked how these numerous new grants would assist in achieving the goal of service delivery.

Mr Khumalo responded that the FFC had made many recommendations to Treasury on grants. The main focus was the education infrastructure backlog. Government needed to take advantage of the grants allocated as the framework was already in place, but the problem lay with the implementation of these grants. The responsibility in the end lay with the national departments.

Ms Malgas asked whether the infrastructure changes were likely only to benefit the mud schools.

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that reference should be made to “unsafe structures” overall, and not only to mud schools. She added that pages 120 and 121 of the Division of Revenue Bill outlined the Medium Term Expenditure Framework (MTEF) allocation of R700 million for 2011/12.

The Chairperson asked whether the Schedule 7 allocation was still a grant.

Ms Fanoe confirmed that it was still a conditional grant, but the national department would spend it on behalf of the provinces. It would take about three years to address backlogs in the provinces. There was a proviso that provinces must have dedicated capacity to address service delivery, and then the money would be transferred directly to them.

Mr Ramatlakane asked what was meant by the “diverting of resources from other priorities” as indicated on slide 3 of the presentation by the FFC.

Mr Khumalo said that this meant there was a need to protect soft targets in the health and education sectors. The personnel pressures in education had resulted in the diversion of targets, because then there was less money to spend on school books, school feeding programmes and other items. A conscious decision was then taken to cut down on these to pay for educators, balancing the one priority against another.

Ms Malgas (ANC) said that there was a ratio on expenditure, but asked who enforced this ratio when allocating budget to personnel and to goods and services.

The Chairperson thought it was the responsibility of the department concerned to enforce the ratios of expenditure.

Mr Khumalo highlighted that ratios evolved through negotiated agreements. The enforcement was not “set in stone”. National Treasury did look at the adherence to such agreements but it was mostly a moral standpoint. The Minister of Finance could only give guidelines as to how money should be spent, but it remained situational, as no norms were available.

Mr Ramatlakane asked what was meant by the “need to maximise existing revenue instruments” as shown on slide 5 of the FFC presentation.

Mr Khumalo explained that there were possible moves from municipalities to use their powers more stringently. Municipalities were allowed to levy certain taxes upon residents, according to Section 229 of the Constitution. There were some cities who wanted to impose local business taxes, but the FFC was of the opinion that this could lead to exploitation by some municipalities. There was no need to introduce new taxes before making proper use of the current tax systems.

Mr G Snell (ANC) said that at the start of the financial year all stakeholders would come together to discuss issues of financial planning, but during the year things might change, leaving the Committee feeling powerless to do anything to bring about positive changes. It was not possible to hold funds back from departments who were under-spending. He asked what controls were available at national level to ensure proper spending.

Ms Fanoe said that it was correct that money could not be held back from departments, but it was possible for NT to hold back the conditional grants. Section 100 of the Constitution did empower the National Executive to take action, but this was a very severe step when all other possible avenues had already been explored.

Ms R Mashigo (ANC) highlighted that the Committee wanted to see money attached to service delivery. Action needed to be taken. The FFC presented projects over the years, and these projects moved from one year to another, yet there was little improvement. She was not happy with the steps being taken, and said that people would lose faith in the current government if things did not change.

The Chairperson said that he had a problem with the fiscal framework, particularly with regard to the building of sports facilities. He asked who was responsible for the building of these facilities. The Department of Sport and Recreation had said that all schools would have access to school sport facilities. The Department of Education had said that each school must have its own facility. In townships and villages, there were no facilities, so one stadium had been used for all inter-school events. In the suburban areas, which were previously the so-called “white” areas, most schools offered full facilities, which promoted the growth of sport in young children. It was unclear whether the infrastructure funding included an amount set aside for the development of sporting facilities, or whether this money was mainly for water, sanitation, electricity and other such needs. Nothing had been stated about sporting facilities.

Ms Fanoe said that a specific amount had been set aside for the creation of sporting facilities in schools. This was broken down in the allocation, on pages 152 and 153 of the Division of Revenue Bill. One of the outcomes of the Municipal Infrastructure Grant (MIG) was that a number of additional sport and recreation facilities would be developed to service poor communities. It was the responsibility of the Department of Sport and Recreation (SRSA) to assist municipalities with the planning of sport and recreation facilities and to monitor the implementation.

The meeting was adjourned. 

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