FFC Recomendations on Division of Revenue 2003/4: Double Taxation Agreement (Seychelles & South African)

Meeting report

FINANCE SELECT COMMITTEE
20 May 2002
FFC RECOMMENDATIONS ON DIVISION OF REVENUE 2003/4; DOUBLE TAXATION AGREEMENT (SEYCHELLES AND SOUTH AFRICA)

Chairperson: Ms Q Mahlangu (ANC)

Documents handed out
Financial and Fiscal Commission PowerPoint Presentation
Financial and Fiscal Commission Submission: Division of Revenue 2003/2004 [this document will be available at end of May on the new FFC website at www.ffc.co.za ]
Plan for Public Hearings on the FFC Recommendations (see Appendix)

SUMMARY
The presentation by the Financial and Fiscal Commission discussed the compensation to be paid to municipalities for losses relating to transfer of electricity distribution, holding companies liable for the damage caused by construction failures, the re-location of old age pensions with national government, the need to address the inequalities in self-generated revenue by municipalities themselves and the alarmingly high salaries paid to municipal councilors.

The Recommendations of FFC Public Hearings were amended to now provide for public hearings in three different provinces, with each group hosting three provinces.

The Report on the Double Taxation Agreement between South Africa and the Seychelles was agreed to by Members.

MINUTES
The Chair welcomed all present and invited Mr Daya Josie, Deputy Chairperson of the Financial and Fiscal Commission (the FFC), to commence the presentation.

Briefing by the Financial and Fiscal Commission
Mr Josie provided background information on the establishment of the FFC, and informed Members that its legislative mandate is to advise the South African government on the division of revenue among the national, provincial and local government spheres. The framework of FCC proposals is guided by the criteria set out in Section 214(2)(a)-(j) of the Constitution, which deals with issues such as national debt and other obligations, the needs and interests of national government, provinces and municipalities and economic disparities among provinces.

The FFC's overarching proposal is that equitable shares should take account of Constitutionally Mandated Basic Services (CMBS) as well as the provision of provincial capital grants, which should be part of a review of the provincial equitable share formula.

Dr Hildegarde Fast, FFC Manager: Parliamentary Office, informed Members that the current municipal borrowing and finance markets framework should be restructured, and a differentiated approach to municipalities be adopted, together with a combination of market discipline and a rules-based approach.

The division of powers and functions of district and local municipalities should be reformulated, so that the general principle would now be that local municipalities are responsible for service delivery, unless they do not have the necessary capacity. The municipality councilors would be remunerated from local government revenue.

The current electricity distribution framework would also be restructured, with municipalities receiving compensation for losses related to transfer, the availability of a municipal levy on electricity to all municipalities and the restructuring of electricity distribution (RED) boundaries co-terminus with municipal boundaries.

Mr Bongani Khumalo, FFC Research Co-ordinator, stated that a conditional grant for Early Childhood Development (ECD) should continue until its incorporation into the equitable share. The formula for ECD funding would not discriminate between public, community-based and independent schools and should be poverty-weighted.

The 2002/2003 budget has allocated R400m through the provincial equitable share to address HIV/AIDS, and the FFC believes that conditional grants are the most appropriate mechanisms for targeting spending on HIV/AIDS.

Dr Fast stated that the FFC proposals on the equity share suggest that disaster management funding requires further development of central funding mechanisms and a programme for nationally identified prevention or mitigation projects. The contingency reserve should be used for economic purposes, and "new spending priorities" would be classified as a policy reserve.

Mr Josie noted that the FFC proposals on social security call for FFC guidelines to assist stakeholders in reviewing the Comprehensive Social Security Review. It is also proposed that the national government should be responsible for old age pensions, and a national social security agency should be established to facilitate such matters. The current equitable share formulae should be reviewed.

Discussion
Mr T Ralane (ANC) stated that he generally agreed with all proposals made by the FFC, but inquired whether the last point on Slide 6 "Local Government Proposals 1" implied that policy on affirmative action would be implemented to assist these municipalities in building credit-worthiness.

Mr Khumalo replied that page 7 of the FFC Submission contains a matrix detailing the short- to long term approaches for a transition to a market-regulated municipal borrowing framework, together with the changes taking place in local government and within intergovernmental transfers. These grants need to be stabilised. This matter is related to the capacity of the particular municipality, and one manner in which to deal with this is by employing the public sector to develop institutions to assist the poorer municipalities by drafting capital management plans etc., but without directly financing them.

Mr Ralane referred to Slide 7: "Local government proposals 2" which deals with the division of powers and functions between district and local municipalities, and stated that the Welkom district municipality in his constituency controls approximately five municipalities which have to be supported by its small budget. There thus has to be co-ordination and redistribution of resources from the larger local municipalities to the district municipalities, so that the latter may be "jacked up". The FFC is requested to explain the precise manner in which it will achieve this, practically, as the district municipalities do not have the proper muscle to do this.

Dr Fast responded that the general principle is that "finance follows function", and therefore once the function performed by the municipality is identified, it would receive the funding source. The Limpopo Province is currently facing a problem in that the district municipality is providing service delivery on the ground, yet the equitable share was allocated to the local municipality. This situation is confusing at the moment, but once the functions of the municipalities have been identified they will receive funding for these functions. A framework has been set in place to ensure this process, but it has not been implemented yet.

Mr Ralane requested clarity on the "compensation to municipalities for losses related to transfer" on Slide 8: "Local government proposals 3".

Dr Fast replied that the losses are compensated via a municipal levy, and the national government has to play an important role in the paying of the subsidy.

Mr Ralane noted that the independent schools mentioned in Slide 9: "Provincial proposals 1" have the resources to address the situation, and it might therefore not be a bad idea to discriminate here.

Mr Khumalo agreed that the independent schools do have access to more resources than the public schools, and that they should be treated equally with regard to the norms and standards in the funding application procedure.

Mr Ralane asked the FFC to explain whether it has already provided disaster management funding under Slide 11: "Cross-cutting: Equitable Share Proposals", and whether this exercise is "value for money".

Dr Fast replied that the FFC has not done so yet, but the funds would be made available to the provinces as conditional grants.

Mr Ralane referred to the situation where a big construction company erects a large structure, which then collapses and causes damage to the neighbouring residential areas, resulting in loss of life. This is what happened in the not-too distant "Slime Dam" disaster, and the FFC is requested to explain how it plans to hold such companies accountable for the damage caused by a fault in their construction.

Dr Fast responded that the party who constructed the structure has to be brought to book, but the primary problem being experienced in this regard is that these companies no longer exist. Something has to be done to address this serious problem.

Finally, Mr Ralane requested clarity on point two on Slide 13: "Cross-cutting: Equitable Share Proposals".

Mr Khumalo replied that the idea here is not to focus on the body that actually pays, but rather on who is responsible for paying. The norm is that the provincial government pays social security grants, yet the amount to be paid is determined by the national government. The FFC recommends that the national government should be responsible for making such payment as the current dispensation puts the provincial structures under pressure as they have to "top slice" their budget to cover the grants, and the remainder of the budget is then distributed to education, health etc.

Mr Josie added that the Department of Social Development requested the FFC to comment on its practices, and the FFC is of the view that requiring the provincial agencies to distribute these funds puts them in a very difficult position. This is therefore not dissimilar to an unfunded mandate as the provinces are not able to meet their constitutional mandate in terms of promoting and protecting the rights guaranteed under the Bill of Rights. Redistribution should thus be made a national function, as is the norm internationally. This does not mean that the role of the banks in this arrangement would be removed completely, as these are merely mechanisms used to effect payment.

Mr Z Kolweni (ANC) stated that it had been reported that certain municipalities within the Republic are generating more than 90% of their funding from their own revenue. The FFC was asked to explain whether these figures are in fact true, or whether they are mere assumptions. If they are in fact true, the FFC was asked to explain the strategy employed by these municipalities to achieve these results, as this strategy would assist the struggling municipalities, especially those in the rural areas. The problems these municipalities experience with funding in turn adversely affects their service delivery performance.

Dr Fast replied that this is an important point, and it is indeed a fact that South African municipalities on aggregate cover 93% of their revenue themselves. These are the specific figures provided by the Budget Review report. The reality of the matter, however, is that there is a huge difference in these figures, which ranges from 99% in the Durban Metro to less than 5% in rural municipalities. Thus the aggregate masks the true state of affairs that many municipalities do not enjoy similar success.

This matter has to be addressed to ensure the equitable share mechanism achieves much more redistribution so that the rural share can increase, which in turn causes the larger urban share to decrease. This is not always good news because, although the smaller rural municipalities now receive more funding, they still do not possess the necessary infrastructure to spend these funds most efficiently and productively to provide improved service delivery. The FFC thus suggests that these increased funds should instead be employed by the rural municipalities to establish the necessary infrastructure.

Dr E Conroy (NNP) complimented the FFC on a "good submission", and stated that this document provides important insight into the inner workings of the municipal finance structures and plans. The FFC was asked to explain whether the term "disaster" includes natural disasters.

Dr Fast responded that the definition would be limited unnecessarily to confine its meaning to natural disasters alone, especially in view of the recent September 11 events, which cannot be regarded as a natural disaster.

Mr K Durr (ACDP) stated that it was mentioned during the presentation that the local authority would first receive funding from the bank itself, and then from the private sector directly. Yet this has already happened, and there must surely be some manner in which the FFC can influence this ranking system of funding so that categories of local authorities can be established, and the current application of a single set of criteria for both borrowing and granting of subsidies would then be done away with. The confusion created by this system would thus be removed.

Mr Khumalo answered that the FFC does not propose any alterations to the categorising of criteria in this regard because it is not the only party tackling this issue, as it gets buy-ins from relevant roleplayers.

Mr Durr noted that as far as the electricity supply is concerned, the submission states that the national government would have an important role to play here. Trouble could be caused by the introduction of the cross-subsidy at local government level because this would create inequalities, and this would tarnish South Africa's international reputation for having the cheapest electricity in the world.

Dr Fast responded that it is true that South Africa does have the cheapest electricity source in the world, and this fact supports investment into the Republic "in a big way", and the FFC must ensure that the prices are kept at a competitive level. The problem however is that the current price is too low, and should increase by 22% in real terms. Yet the FFC is cautious of imposing too many levies and subsidies, as these could be to the detriment of the electricity industry.

Mr K Durr asked the FFC to comment on whether or not the insurance mechanism would be best placed to deal with such disasters. This is the approach adopted in the United States where only a policy is paid, and this could turn out to be cheaper than paying cash amounts.

Dr Fast replied that the two greatest disaster hazards in South Africa are fire and flooding, and in many cases these figures increase because of the human factor. A perfect example is the fire that swept Cape Town about two years ago which was caused primarily by alien vegetation which is very susceptible to fire, as well as the combination of both natural and human factors.

Mr Sogoni (UDM) requested clarity on the criteria used.

Mr Khumalo replied that a common set of criteria are used to review the report, and these criteria can by used by anyone to evaluate the report.

The Chair referred to page 21 of the Submission dealing with the remuneration of councilors, and stated that the municipalities are coming under increased pressure because everyone is calling for them to be punished for failing to perform. Yet they do not possess sufficient resources to perform properly. No one has suggested feasible steps the municipalities can take, within their current budgetary framework, to meet their salary component. It has been reported that municipal officials receive huge salaries, with mayors receiving the same amount as Ministers. Should this be the guiding principle in this regard, especially as these senior management municipal officials are being paid by the taxpayers money.

Mr Myron Peters, the FFC General Secretary, responded that this is a problem because the municipalities have a different payment system due to the previous historical problems. It has to be remembered that both the national and provincial governments have to abide by the public service regulations, and there is therefore a measure of standardisation here. Yet the local government structures do not fall within the ambit of these regulations and therefore they can set their own salary structures. This particular matter is thus part of a larger political debate.

Dr Fast added that the Department of Provincial and Local Government has published a set of guidelines in 2000 on the upper limit in this regard. Yet these only serve as guidelines, and if the I-Grant is used to meet the upper limit the municipality itself has to fund the excess. This is becoming an increasingly vexing issue as more functions are being transferred to local government, such as police services, health etc. The sooner the framework is put in place to address this issue, the better.

The Chair noted that it is a fair point that the national government must assist in the RED initiative, yet the municipalities do not have indigent policies, and this is not contained in the Submission.

Dr Fast replied that each municipality is required to have its own indigent policy, which came into effect in 2000. The roles of both the local and provincial government have to be implemented here.

The Chair said that the inter-governmental fiscal review of the revenue capacity of the provinces indicates that hospital fee revenue has dropped because of the provision of free health care for pregnant women and children under the age of six years. Yet this document does not reflect the poor management in these hospitals, as well as the poor mechanisms for collecting revenue.

Mr Khumalo stated that he agreed with the Chair that insufficient attention is probably being paid to hospitals and patient fees as far as management issues are concerned. Yet the Submission does refer to incentive structures that have been put in place, and these could be discussed in further detail at a later stage.

The Chair said that the alleviation of poverty is also an important issue and during 2001 the Provincial Tax Regulation Process Act was introduced to address this matter, yet nothing has been heard from this Act since. There has thus been no feedback on whether in fact there are adequate mechanisms for the municipalities to raise revenue via that Act.

Mr Ralane suggested that a joint meeting be convened with the Select Committee on Public Enterprises and Treasury itself to decide on the impact of the provision of the REDs, as well as the impact on the mines who are huge consumers of electricity.

Dr Fast replied that Price Waterhouse Coopers had recently been contracted by the Department of Minerals and Energy to conduct a study on the electricity issue, but REDs were not included. The large companies do not want to be supplied by REDs because they enjoy a complicated and flexible contract with Eskom, and this contract cannot be fully broken without being bought out. This is the current state of affairs despite the fact that REDs are more competitive with each other to enable better competition with Eskom.

Mr Ralane noted that the FFC submission raised the issue of the role of parastatals in the context of poverty alleviation. He said that they should also look at the role the Land Bank has to play in this regard, as this institution has historically provided financial assistance to farmers.

Dr Fast responded that this is a very interesting point and has not been considered by the FFC, but is noted.

Mr Ralane said that the market does lack governance and management, and therefore the Department of Finance and fellow committees have to be included here.

Mr Sogoni referred to the indigent policy and the role of the FFC in this regard, and stated that there are municipalities in his constituency that have decided on and implemented tariffs without the indigent policy having been put in place. The FFC is requested to explain whether it is possible to do so.

Dr Fast replied that it is illogical to develop the one without the other, especially in view of the fact that the Municipal Systems Act stipulates that an indigent policy has to be devised, which has to be arrived at through a public process.

Recommendations of FFC Public Hearings
The Chair stated that hearings on the FFC recommendations will be held in two provinces, Gauteng and Eastern Cape, and key stakeholders from the other provinces will travel to one of these two central points to give input. Statistics South Africa has to be included here, as well as the Department of Minerals and Energy, the Congress of South African Trade Unions (COSATU), the Federation of Unions of South Africa (FEDUSA) and other organised labour roleplayers.

Mr Ralane suggested that Members return to their provinces once again, because the major stakeholders have to be consulted. It is also suggested that two to three days be set aside for these hearings, with each presenter allowed two to three hours for the presentation. The Department of Water Affairs and provincial and local government structures have to be included in this process, to "beef up" the South African Local Government Association (SALGA) process and to ensure consultation with all the provinces and relevant stakeholders.

The Chair assured all present that the Committee would "of course" co-ordinate matters properly to ensure full consultation with all the relevant stakeholders.

Me Peters informed the Committee that the FFC has already received an invitation to address the North West Province and, so as not to waste time, it is requested that the FFC be included in these hearings.

Mr Josie suggested that three groups consisting of three provinces each is preferred, as demarcation along geographical lines would cut down costs. The first group would thus consist of the Gauteng, North West and Limpopo Provinces, the second of the Mpumalanga, Free State and KwaZulu-Natal Provinces and the third from the Northern, Eastern and Western Cape Provinces. This structure would allow for the cross-cutting issues to be dealt with more effectively.

The Chair noted that Members agreed to this format.

Agreement between Seychelles and South Africa
The Chair read out the Report on the Double Taxation Agreement between these two countries, and noted that Members agreed to it.

There were no further questions or comments and the meeting was adjourned.

Appendix:
Committee Document: Public Hearings on the FFC- Recommendations 2003/04

Introduction:
On Monday 29 April 2002 the Finance and Fiscal Commission (FFC) tabled its submission on the Division of Revenue 2003 / 04 in Parliament. This document is particularly important to Parliament and Provincial Legislatures because it contains the proposals for the Division of Revenue 2003 / 04 to the three spheres of government.

During August 2001, the committee, in the form of three delegations, visited eight provinces with the exception of Freestate before drafting a report. This year the committee is again faced with the FFC-Recommendations and has to improve on its working to involve the nine provinces and to draft a credible report that would reflect this planned interaction.

Brief summary of Hearings in Provinces during 2001
The intention of the provincial hearings was to allow for interaction with the FFC -Recommendation 2002 1 03 that would inform the report and the debate in the National Council of Provinces.
The various delegations interacted with the various Standing Committees on Finance in the provinces, where at times some of the interactions were quite rewarding and well attended and others note so good.

The sincerity of the idea to close the gap between provinces and the NCOP by means of direct interaction with the provinces was especially noted by chairpersons and the recommendation was that this type interaction should be a common occurence. However the concern was raised about the timing of the hearings in some of the provinces thus not allowing enough people to attend.
The FFC officials should also be commended for the time and effort that was put into all the presentations in the eight provinces.

Proposed Hearings for 2002
We must admit hosting public hearings in nine provinces is a costly affair of which the
committee budget would not be sufficient.
The proposal therefore would be to host public hearings in two provinces which eg:
Gauteng and Eastern Cape, and then to invite neigbouring provinces ie.
· Gauteng - North West, Mpumalanga, Northern Province, Freestate
· Eastern Cape- Kwazulu-Natal, Western Cape, Northern Cape.
The hearings will be held jointly with the respective province and will be co-chaired. This would allow for the two respective provinces to place and add in their local news papers and invite communities and the various municipalities and other interested parties to participate.
It will reduce the cost and allow for much better interaction.

Further Proposals: