Division of Revenue Bill [B5-2015]; Appropriations Bill [B6-2015]: briefing

Standing Committee on Appropriations

27 February 2015
Chairperson: Mr S Mashatile (ANC) and Mr M Mohai (ANC, Free State)
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Meeting Summary

A delegation of senior staff from the National Treasury briefed the Joint Meeting of the Select Committee on Appropriations and the Standing Committee on Appropriations on the 2015 Division of Revenue Bill and the 2015 Appropriations Bill. A joint meeting of the Select and Standing Committees on Appropriations to interrogate the 2015 Division of Revenue Bill was held, following the tabling of the budget earlier in that week. National Treasury also presented the 2015 Appropriation Bill, although discussion at this meeting was limited to the Division of Revenue Bill.

A brief introduction was provided of the Appropriation Bill and the requirements set out in relation to spending and transfers in the Public Finance Management Act, and the Money Bills Amendment Procedure and Related Matters Act, which set specific time frames for reporting on the fiscal framework and revenue proposals, and times within which the Division of Revenue and Appropriation Bills must be passed. Until such time as the Appropriation Bill was passed, departments may still spend, but essentially must not exceed 10% of the budget per month.
The new budget appropriation had taken account of the reorganisation of Cabinet structures. Expenditure ceilings were reduced, by R25 billion, R10 billion and R15 billion in the years between 2014 and 2017. Non interest expenditure was predicted to grow at an average of 7.4% over the 2015 MTEF period, and an unallocated reserve of R65 billion, for unforeseen expenditure and emergency government priorities, was made available for the 2015 MTEF period. The departments receiving the largest funding were described. ~

The presentation on the 2015 Division of Revenue Bill noted that the Financial and Fiscal Commission makes recommendations on the Division of Revenue ten months before the start of the financial year, and government would table its response at the tabling of Budget, on those recommendations directly or indirectly related to section 214 of the Constitution. The split of revenue was national government (47.9%), provinces (43%) and local government (9%). There would be more conservative growth at national level, but provincial and local government fiscal frameworks were largely unchanged, except for functions and funding shifts, and the local government one focused on accelerating infrastructure investment for basic services and reforming the city agenda. New packages to transform cities were informed by the National Development plan, to try to address the continuing problem of apartheid spatial patterns, with funding for this to come from both national government and cities’ own revenues. Measures to support cities included modifications to the infrastructure grant system, using the neighbourhood development partnerships to support economic hubs in large urban townships, and reform of the system of development charges, looking into metropolitan municipalities' sustainability,

using the Development Bank to leverage investment and expanding the infrastructure delivery management system. A list of recommendations tabled by the parliamentary committees, together with the Minister of Finance's responses, was tabled. The next part of the presentation took the Committee through changes to the Division of Revenue Bill, the provincial budget frameworks and some elements of the equitable share, although National Treasury conceded that far more time would be needed to explain it in depth. Updates to the equitable share formula for local governments were not excluded to above-inflation increases in bulk costs of electricity and water, which had been fully funded. During 2015 the formula would also be updated to reflect the new municipal boundaries which were due to come into effect in 2016.

Members asked for more explanation on the transfers and the equitable share, asked what was taken into account in the determinations, and the allocations made in some of the provinces. They wondered how overspending in one year would be corrected in another, and questioned the spending and allocations for disaster funding, particularly in North West and Northern Cape. They asked if there were incentives, and which provinces were under-performing, asked National Treasury to look into what happened to money prior to the year of implementation of the Municipal Infrastructure Grant, asked where broadband infrastructure appeared, and when the numbers of vacant posts in departments would be reported. They asked for clarity whether the number of grants were being reduced, or merely consolidated, how expenditure reductions would affect service delivery, whether reduction on the Expanded Public Works Programme was not in contradiction to the government's aim of job creation, and whether the shifting of funding to the Moloto Road project would affect the general road maintenance grant. They suggested that better monitoring was needed on the 8% that was supposed to be spent on maintenance, wondered why National Treasury and not the provinces were training municipalities, raised concerns about the schools infrastructure programmes, suggested that environmental impact assessments must be done prior to submitting business plans, and  commented that whilst there were opportunities investigated for longer-term loans to municipalities, this might have the unintended effect of actually increasing their debt and spending less on services. One Member suggested that there must be consequences when municipalities failed to perform.
 

Meeting report

Chairperson's opening remarks
Co-Chairperson Mr S Mohai (ANC) welcomed the delegation of senior staff from the National Treasury (NT), led by the Deputy Director-General: Intergovernmental Relations, Ms Malijeng Ngqaleni.

He noted that National Treasury would make presentations on both the 2015 Appropriation Bill and the 2015 Division of Revenue Bill but asked that questions at this meeting should focus on the Division of Revenue Bill (DORB) as the National Treasury would appear before the Committee again the following week.

2015 Appropriation Bill: National Treasury overview   

Ms Raquel Ferreira, Director: National Budgets, National Treasury, delivered the presentation (see document attached). She said that the Appropriation Bill (the Bill) provided for the appropriation of money from the National Revenue Fund in terms of Section 15 of the Public Finance Management Act (PFMA) of 1999. Spending was subject to the PFMA and the provisions of the Bill itself. For transfers to sub-national government, the 2015 Division of Revenue Bill also contained provisions in terms of which spending must take place.

The Money Bills Amendment Procedure and Related Matter Act 2009 required that after the tabling of a national budget:

1) Parliament must:submit a report to the National Assembly (NA) and the National Council of Provinces (NCOP) on the fiscal framework and revenue proposals;

2) The Division of Revenue Bill must be passed no later than 35 days after adoption of the fiscal framework by Parliament;

3)  Parliament must pass the Appropriation Bill, with or without amendments, within four months after the start of the financial year, namely 31 July 2015.

Prior to the 2015 Appropriation Bill being promulgated, departments would incur expenditure in terms of Section 29 of the PFMA, which made provision for spending before an annual budget was passed. This meant that up until the end of July,their expenditure may not exceed 45% of the 2014/2015 budget, and similarly monthly expenditure could only amount to 10%.

Promulgation of the 2015 Appropriation Act was necessary as soon as possible.

The appropriation of the budget had taken into account the extended and re-organised Cabinet as announced by the President in May 2014.

 

The expenditure ceiling had been reduced by R25 billion in the first two years of the Medium Term Expenditure Framework (MTEF) period, R10 billion in 2015/16 and R15 billion in 2016/17.

Resources within the main budget lowered the expenditure ceiling amount to R3.47 trillion over the 2015 MTEF period, R1.09 trillion in 2015/16, R1.15 trillion in2016/17 and R1.22 trillion in 2017/18. Non-interest expenditure was predicted to grow at an average of 7.4% over the 2015 MTEF period. An unallocated reserve of R65 billion was made available for the 2015 MTEF period. This reserve was earmarked for unforeseen expenditure and emergency government priorities.

  

Departments which had received the largest funding over the 2015 MTEF period, and their accompanying 2015 Appropriation Bill votes, were:

1) Defence and Military Veterans;

2) Water and Sanitation;

3) Police;

4) Rural Development and Land Reform;

5) National Treasury and Telecommunications and Postal Services;

6) Transport

7) Human Settlements.

  

Overview: 2015 Division of Revenue Bill

Ms Ngqaleni said the outline of this presentation made particular reference to allocations to provinces and recommendations from parliamentary committees and the Financial and Fiscal Commission (FFC).

The FFC makes recommendations on the Division of Revenue ten months before the start of the financial year. Government then presents its response at the tabling of Budget.

In compliance with section 9 of the Intergovernmental Fiscal Relations Act, national government responses only deal with FFC recommendations directly or indirectly related to section 214 of the Constitution.

The presentation highlighted the division of revenue for the 2015 MTEF as being split between national government (47.9%), provinces (43%) and local government (9%).

While the national fiscal package required more conservative growth over the period, provincial fiscal frameworks were largely unchanged except for functions and funding shifts. The local government fiscal framework focused on accelerating infrastructure investment for basic services and reforming the city agenda.

Of particular focus was the new fiscal package to transform cities. This was informed by the National Development Plan. The package outlined that South African cities continued to be defined by apartheid spatial patterns, with poor residents living in dormitory townships far from opportunities. The infrastructure investment needed to change the shape of cities, and this shape would come from national government and cities’ own revenues, as cities accounted for the majority of the economy and national tax base.

Measures to support cities to increase their contribution to infrastructure development included:

1) Modifying the infrastructure grant system;

2)  Refocusing the neighbourhood development partnership programme to support the development of economic hubs in large urban townships;

3) Reforming the system of development charges to improve fairness and transparency and reduce delays in infrastructure provision for private land developments;

4) Reviewing the sustainability of existing own-revenue sources for metropolitan municipalities;

5) Expanding opportunities for private investment in municipal infrastructure through the Development Bank of Southern Africa increasing its origination of long-term loans

6)  Expanding the infrastructure delivery management system.

Ms Ngqaleni then made reference to the various recommendations made by the Standing and Select Committees on Appropriations as they related to the Division of Revenue for provinces and local government. Alongside each of the recommendations was the Minister’s response and and indication of any action taken (see attached presentation).

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, then took the Committee through the layout and changes to the clauses of the 2015 Revision of Revenue Bill.

The presentation also outlined the provincial budget framework and touched on key trends in equitable share. These included components of education and health, where the basic components were population driven, and matters of poverty and economic activity.

Updates to the equitable share formula for local governments were not excluded to above- inflation increases in bulk costs of electricity and water, which had been fully funded. During 2015 the formula would also be updated to reflect the new municipal boundaries which were due to come into effect in 2016.

Discussion

Mr T Matlashuping (ANC, North West) stated that he was confused about provinces and total transfers. Considering merely the rural nature of provinces did not actually take full enough account of the effects of local conditions on the population. North West province was more rural and had more backlogs in terms of services than Gauteng, which was more urbanised and yet it had received more allocation. He asked for more explanation on ow the formula worked.

Mr Matlashuping was glad to see Matlosana local municipality in the North West being on the receiving end of a disaster management allocation, for the first time.

Mr C de Beer (ANC, Northern Cape) referred to reduction in transfers to provinces. Departments like health and education were over-spending and he wondered how this was corrected in that financial year.

Mr De Beer questioned what had happened to the allocation for a flooding disaster along the Orange River in the Northern Cape. There had been zero expenditure on that allocation for about two to three years and the money was returned to the National Treasury. He wondered where that money had gone, because the floods as well as failure to spend the allocations had a huge effect on farmers along the river, who had to carry the burden of the disaster costs.

Mr De Beer asked what incentives there were for provinces to perform and which provinces were and were not doing well. 

Mr De Beer asked what had to been done by municipalities prior to the year of implementation of the Municipal Infrastructure Grant (MIG). There appeared to be non-compliance. Money had been "dumped" into the Northern Cape for libraries, but he questioned where that had gone and whether the funding had been used to balance another department’s books?

Mr N Gcwabaza (ANC) referred to slide 16 of the Appropriation Bill presentation and questioned why the infrastructure estimates given did not make allowance for broadband infrastructure. This was very important, both in terms of connectivity and job creation.

He asked if there were any figures to illustrate the number of vacant posts in the various departments. If not, then he wondered at what stage that information would be made available.

Mr Gcwabaza also drew attention to slide 7 of the Division of Revenue Bill presentation, referring to the fiscal package to transform cities. The presentation mentioned modifying the infrastructure grant system. He questioned whether National Treasury was saying it was reducing the number of grants or consolidating grants into one major grant?

Mr M Figg (DA) asked if service delivery would be sacrificed through the R25 billion expenditure reduction. He asked if more investment should not be made in the areas where people lived, in relation to where they worked. He said there should be more monitoring of the 8%of the capital budget which was meant to be spent on maintenance.

Mr Figg referred to slide 15 of the DORB presentation and asked why National Treasury was responsible for providing training to municipalities to strengthen compliance with regulations. He questioned whether this should not rather be the responsibility of the provinces and municipalities, to provide for training in their budgets.

Mr Figg asked if the equitable share formula should not take into account that more should be made available to provinces who contributed more in revenue.

Dr C Madlopha (ANC) said concerns had been raised around performance of schools’ infrastructure programmes. National Treasury said it was supporting the provinces through the infrastructure delivery improvement plan. However, an oversight visit to the Eastern Cape revealed that of the 339 schools that were targeted for MTEF, only 91 had been finalised.

Dr Madlopha asked if the National Treasury could make it a condition that when business plans were submitted to it by municipalities for the Municipal Infrastructure Grant that an Environmental Impact Assessment had to have been done in advance.

Dr Madlopha pointed out a reduction in spending on the Extended Public Works Programme. She asked if this would not affect job creation, which was a government priority.

Ms E van Lingen (DA, Eastern Cape) asked if land performance backlogs would be addressed sufficiently. The Municipal Demarcation Transitional Grant appeared only to be available to Gauteng and KwaZulu-Natal She wanted to know what was happening in terms of the rest of the project that was being managed by the Department of Cooperative Governance and Traditional Affairs.

Mr L Gaehler (UDM) asked why, based on Census 2011, KwaZulu-Natal received a larger allocation that Gauteng, even though Gauteng had a higher population?

Mr A McLaughlin (DA) raised a concern over the re-allocation of R149 million from the Provincial Roads Maintenance Grant to the Moloto Road project.

Mr McLaughlin referred to slide seven of the DOR Bill presentation which stated that National Treasury would be expanding opportunities for private investment in municipalities through the Development Bank of Southern Africa increasing its origination of longer-term loans. He applauded the sentiment but said he was concerned that municipalities would be encouraged to borrow more money. This meant more debt and less money for services.

He also asked about the 8% maintenance target.

Mr McLaughlin said there needed to be consequences for municipalities that were not doing their jobs.

Ms Ngqaleni said that there were differences between provinces and municipalities because sometimes the services provided could not generate revenue as such. Using the education sector as an example, she said that clearly the funding for education in the provinces could not come solely from the provinces' own coffers, so the equitable share formula talked to this. Calculations were not based solely on population sizes. That was why there was a difference between KwaZulu-Natal and Gauteng, because the demand for public services was higher in the former. The formula also did not take account infrastructure backlogs because these were funded through conditional grants.

Answering the question on the impact of the reductions versus the potential over-spending of provinces, she noted that provinces often over projected what they would spend for the year. The issue of projection was one that was being discussed with a view to achieving more realistic projections. There was more that could be done to improve efficiency of spending. The issue of personnel management also needed to be emphasised, alongside the reduction of costs on non-core assets. In a sense, it was a blessing in disguise that there was little money, as this forced the implementation of better controls.

Ms Ngqaleni said the provincial department was never able to spend the money for the flooding in the Northern Cape, and she would have to come back to the Committee with a full answer to the question. Similarly, she would revert to the Committee on the questions of non-performance in the provinces.

She agreed that no proper forward planning was being done, with regard to infrastructure. The culture of forward planning was not entrenched in the departments in provinces and local government. She said National Treasury did have an idea of the statistics of vacant posts. However, it was left to the departments to indicate if post were vital and needed to be filled.

Ms Ngqaleni said that National Treasury was looking at consolidating, and not reducing, the infrastructure grants for city transformation. There was fragmentation of grants, and each of these had its own rules. For example, funding needed to be prioritised for cross-sector projects. There was also an issue around borrowing by cities for projects which did not reap any revenue rewards. The main problem with investment in cities and rural areas was that the growth of the economy mainly happened in the cities. Urbanisation was a global trend, whether or not people liked it. When cities grew, so did the national fiscus, and this would result in there being more money to take to the rural areas.

She said in terms of the reforms that National Treasury was trying to close the loopholes and monitor infrastructure maintenance.

Ms Fanoe conceded that a full explanation of the provincial equitable share and local government equitable share as needed, but this would require more time than available now to detail in full. However, she reminded Members that all the data used in calculating the provincial equitable share was highlighted from pages 77 to page 82 of the Division of Revenue Bill.

In terms of equitable share across provinces, based on population size, she added to the earlier explanation by saying that when allocations were made, only public services were taken into consideration - for example, a commitment to services for public schools as opposed to private schools.

She amplified also on the answer to Mr De Beer about the money allocated for flood relief and confirmed that R50 million flooding relief money had been given to the Northern Cape, and R42 million of that had been spent to date.

She said performance incentive allocations were outlined in the Bill and particularly highlighted that in respect of education, the Eastern Cape, Gauteng, KwaZulu-Natal, the Northern Cape, North West and the Western Cape were receiving incentive allocations. The Eastern Cape, KwaZulu-Natal, the Northern Cape, North West and the Western Cape were receiving incentive allocations for health.

Ms Fanoe asserted that achieving the right balance between maintenance and refurbishment was extremely important. Municipalities would need to prove that they needed the refurbishment money specifically because the life cycle of an asset had run its course, and not just because a bad job had initially been done. Refurbishment money would not just be given on request; it would depend on municipalities doing the right thing. She pointed out that National Treasury was training only 17 municipalities where, because of budget constraints and broader macro-economic stability, that function had not been delegated to the provinces.

Speaking to the suggestion by Dr Madlopha, Ms Fanoe agreed that perhaps it would be a good idea, in the 2016 Division of Revenue Bill, to add in a condition that an Environmental Impact Assessment needed to be done when applying for a Municipal Infrastructure Grant.

She reported that demarcation transitional grants had only been allocated to municipalities in KwaZulu-Natal and Gauteng which had been approved and whose borders would be demarcated after the 2016 elections. Others on the table would be taken into account at a later stage.

Ms Fanoe said the re-allocation of funds to the Moloto Road Project would not result in any less money being available for the Provincial Roads Maintenance Grant, because its allocation was actually quite large.

Ms Julia de Bruyn, Chief Director: Education and related departments, National Treasury, told Members that National Treasury would have to investigate and revert with information on the library grant ,after consulting with the Department of Sports, Arts and Culture in the province

Ms Ferreira noted that the allocation for broadband had been included on Vote 32, the Telecommunications and Postal Services Vote. It amounted to R1.1 billion over the MTEF period. The allocation in the infrastructure table also formed part of that.

Co-chairperson Mr Mashatile thanked the National Treasury for its presentation.

The meeting was adjourned.

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