Bills of Exchange Amendment Bill; SA Reserve Bank; Revenue Laws Amendment Bill; 2nd Adjustments Appropriation Bill: voting; FFC

Meeting report

FINANCE SELECT COMMITTEE
7 November 2000
BILLS OF EXCHANGE AMENDMENT BILL, SOUTH AFRICAN RESERVE BANK BILL, REVENUE LAWS AMENDMENT BILL; SECOND ADJUSTMENTS APPROPRIATION BILL: VOTING; FFC RECOMMENDATIONS: REPORT

Documents handed out
Bills of Exchange Amendment Bill [B 47B - 2000]
Revenue Laws Amendment Bill [B 70 - 2000] with the explanatory memorandum
Comments on the Revenue Laws Amendment Bill by SARS
Second Adjustments Appropriation Bill
Explanatory Memorandum: Adjustments estimate 2000/01
Finance and Fiscal Commission (FFC) Recommendations to the 2001-2004 MTEF Cycle: Draft Report of Select Committee

Committee Reports published in the ATC, dated 07/11/00:
- Intergovernmental Fiscal Review (see Appendix 1)
- Financial and Fiscal Commission (FFC) Recommendations on the 2000-04 MTEF Cycle (see Appendix 2)

Chairperson: Ms Q Mahlangu

SUMMARY
The committee passed the Bills of Exchange Amendment Bill, the South African Reserve Bank Amendment Bill, and the Revenue Laws Amendment Bill.

The committee deliberated and voted on the Second Adjustments Appropriation Bill. Members however expressed concern over the vast amounts of unforeseeable and unavoidable expenditures that cropped up in various departments. A large portion of the discussion revolved around the expenditures by the Health Department, the IEC, SARS as well as the cost of the transition that local government is going through. The committee also reviewed a report by them on recommendations made by the FFC to the 2001-2004 MTEF Cycle. Members suggested amendments and recommendations to be incorporated into the report and it was agreed to by all. The Chair asked members to submit their comments on the Intergovernmental Fiscal Review report to the clerk of the committee by the following day. She also reminded members to get their official passports in order in view of their upcoming study tour to Europe early next year.

MINUTES
Bills of Exchange Amendment Bill
Adv De Jager from the South African Reserve Bank took the Committee through the Bill. Adv Blackbeard from the South African Reserve Bank and Mr Daly of the Banking Council were also present. The committee members had the opportunity to ask questions as they went along. He went through the amendments in two categories.

Category 1: Proposed amendments for purposes of simplification and clarification:
Clause 1 - the word ''banker'' is changed to ''bank''.
They have also defined ''a collecting bank''.

Clause 2 - they have inserted the words ''non-existing person'' after the word ''fictitious''. If one becomes the holder of a cheque that is made out to someone else [where the holder is not the payee] then the cheque becomes payable to bearer. No endorsement is necessary.

Dr Conroy (NNP) asked how one would know if someone was non-existent.
Advocate De Jager replied that this was a factual question which would have to be proved.

Clause 4, 20 - 23, and 26 - certain concepts are being deleted as they have fallen into disuse and are not used in the commercial world anymore.

Clause 6, 16, and 17 - in terms of the Bills of Exchange Act if a person signs a cheque not as a drawer then the person is an endorser of the cheque and therefore liable to all further parties for the cheque. An aval is a guarantee given on a cheque and it was not previously included. It is now included. Clause 6 specifically provides for signing cheques as a guarantor.

Clause 7 - this is being removed because it is never used.

Clause 9 and 10 - the term ''holder for value'' is being removed and replaced with the term ''onerous title''.

Clause 12 - the words ''by Bill'' are removed because it has no meaning.

Clauses 14, 18, 45, and 46 - these clauses are outdated therefore they will be removed.

Clause 24 and 25 - in terms of section 67 of the Principal Act if a bill is lost before it is overdue then the holder can ask the drawer for a new bill. However this does not apply to those instances where the Bill is destroyed or where it is a note. They are now extending it to these 2 circumstances.

Mr Durr (ACDP) asked if the Bill provided for the scenario where an electronic cheque was destroyed because a computer had crashed.

Advocate De Jager replied that there is a section which deals with electronic cheques. He noted however that the Bills of Exchange Act (BEA) did not provide for a cheque to be drawn up electronically. It can be presented for payment electronically and one can receive payment for it electronically but in terms of the law the original instrument must be in writing and it must be signed. Thus electronic presentment is enabled but paper must exist at the outset.

Clauses 19, 28, 30, 34, 36, 37, 39, 40, 41, and 42 - here the word ''banker'' is also changed to ''bank''.

Category 2: Proposed amendments in the interest of consumers
Clause 3 - this deals with the definition of a cheque. They have brought a cheque made out to cash or to order into the ambit of the definition.

Clause 8 - it is possible to sign a cheque on behalf of someone else, example for a company. The problem existed in the past where there was uncertainty whether the person who signed incurred personal liability or whether the party on whose behalf the cheque was signed incurred liability. In terms of the amendment it is now clear personal liability for the person signing is not incurred.

Clause 43 - the amendment provides that the cheque can be presented electronically.

Clause 44 - subclause (2) is being repealed. It deals with signatures on cheques.

Clause 29 - the drafters had met with academics on this and have redrafted it since the first briefing to the NCOP. Clause 29 deals with the responsibility shared between banks and private individuals for payment on forged cheques. In terms of the amendment, individuals (natural persons) are only liable if the chequebook gets lost and the person knows that the cheques are being fraudulently used and does not alert the bank. Beyond this there is no liability for the individual.

If the drawer is a company, a close corporation, a government office, or any other financial institution then there is a ''duty of care'' which applies while such entity is in the custody of chequebooks. If there is fault on the part of one of these entities which caused the forgery to take place then the bank is not liable. If there is no fault the bank is liable.

Beyond these instances the bank is liable.

The Chairperson commented that shops call and enquire before they accept cheques. She asked why banks do not do the same thing.

Mr Daly replied that these check the credit history of the person and give an indication of whether the funds are available in the account to make the payment. The problem arises where the drawer has the ability to pay the cheque but because of the owner's negligence someone has forged the cheque. The bank is now paying on the fraud. Currently the bank is liable for all forged cheques. This is on the basis that the bank did not get a mandate to pay on the cheque from the owner. There was no true instruction to pay. Thus the bank is liable for forgery with or without the negligence of the drawer. Where the drawer facilitated the negligence, responsibility can shift. Of all English law countries, South Africa is the first to shift responsibility like this.

Clause 32, 33, and 35 - this deals with the instruction on the cheque to the bank to pay in accordance with the drawers interest. They are trying to make it easier for the banks to understand what the drawer wants to do.

Cheques marked ''non- transferable'' are not transferable. Cheques marked ''non-negotiable'' can still be negotiated further. However people mark cheques ''non-negotiable'' intending them to be non transferable. The amendment provides that if a cheque is marked ''non-negotiable'' then the bank does not consider it ''non-transferable'' (even if this was the drawers intention) and the Bank is therefore not liable. However to protect people who are in the habit of marking cheques ''non-negotiable'' when they mean ''non-transferable'' the legal position between individual parties for cheques marked ''non-negotiable'' will be to make the cheque ''non-transferable''. Thus, because of the amendment the law still applies strictly between persons but the bank is now not liable for cheques intended to be ''non-transferable'' but marked ''non-negotiable''.

The Committee agreed to the Bill.

South African Reserve Bank Amendment Bill
Mr De Jager explained that a bank must hold a minimum reserve balance. This is currently 2.5% of the bank's total liability to the public. Banks may deduct vault cash from this. This amendment gives the Governor of the Reserve Bank the power to determine what percentage of vault cash may be deducted from the minimum reserve balance.

The committee agreed to this Bill.

Revenue Laws Amendment Bill
Mr Kosie Louw of SARS took the committee through the main issues in the Bill. The committee members had the opportunity to ask questions as he went along.
Some of the important issues that he went through are listed below. In addition to these there are a few other amendments and many consequential amendments.

Amendments to definitions in the Income Tax Act
Definition of spouse - Clause 1
In terms of the amendment people in same-sex permanent life relationships are also considered as ''a spouse'' for tax purposes. They have also extended the definition to include people married in terms of a religious system such as Indian marriages and any other type of marriage, for example, customary marriage.

Dr Conroy asked if it would not be unconstitutional to exclude heterosexual couples who live together without being married from the definition of spouse.

Mr Louw replied that they had taken advice on this from Professor Dennis Davis. He was of the opinion that the difference between the two situations was that heterosexual couples are not prevented from marrying in terms of the law. On the other hand it is illegal for same-sex couples to get married.

Mr Conroy asked what would happen if the law on gay marriages changed so that same sex couples were allowed to marry. Would this change the tax law provision?

Mr Louw said that they would research this matter further.

Definitions of ''gross income'' and ''resident'' - Clause 2
These amendments are crucial as they relate to the essence of the shift from a source plus to a residence minus system of taxation. A definition of ''international headquarter company'' is also added.

Amendments to clauses in the Income Tax Act
Rebate in respect of foreign taxes on income - Clause 4
This regulates the foreign taxes rebate. In respect of clause 4B (ii) Mr Louw explained that excess credit could now be carried forward for an extended period of 7 years (instead of 3 years as in the past). This means for example: Germany and SA both tax an individual. The person is taxed at a higher rate in Germany than in SA. SA has to give a rebate if Germany has the first right of taxation. For example, if the excess is R8 (the rebate due), then this amount can be carried forward for a period of up to 7 years so that the accumulated amount of the rebate can be offset against the tax payable.

Mr Louw distinguished this provision from subclause 4(5). This subclause provides that if an assessor made an error in the assessment then the mistake can be rectified for up to 5 years down the line but not later than this.

Notional tax allowance - Clause 6
The Income Tax Act provides for the writing off of certain assets used by a taxpayer for the purposes of his or her trade. These deductions must now be extended to assets used by a taxpayer for his trade outside of SA.

In respect of depreciation SARS built in what is referred to as a notional allowance. The notional allowance is found in many sections and is used to establish a tax value for each asset. In terms of a notional allowance it is deemed that one has claimed the allowance.

Taxation of Controlled Foreign Entities (CFEs) - Clause 10
It sets out when a CFE will be taxed plus the various exclusions in respect of CFEs.

Mr Kolweni (ANC) asked if there was anything about a tax holiday in the Bill.
Mr Louw replied that there was not as this had already ''run its course''.

Ms Fubbs (ANC) asked what criteria existed to identify tax avoidance entities.
Mr Louw replied that the Bill contained two anti-avoidance rules. There are transfer pricing criteria such as the arms length test. They have also identified certain high risk areas to counter anti-avoidance.

Tax sparing provisions - Clause 11
In terms of this the Minister may waive the application of section 9E. He may however only do so if the dividends are remitted to the Republic and if the dividends are derived from a project which he (the Minister) has approved. Guidelines are set out for the Minister to follow when exercising this waiver. One such guideline is the economic benefits of the project for the Republic.

Foreign pension funds - Clause 13(1)(d)
This sets out that taxing amounts received from social security or pensions from another country will be put on hold for three years. This is to allow SARS to research the broad implications of taxing this money.

Mr Durr noted a complaint in respect of clause 13(d): there is a specific category of pensioner that does not fall under this three year exemption provision. This is the pension in a personal pension plan that is kept by government. This pension is either additional to the social security pension or in place of a government pension. It is very popular overseas and governments encourage people to move their money into a money scheme. Sometimes they get an increase of a notional 10% which now becomes taxable. To solve this problem he suggested that the subclause must not define the two particular categories of pension as it does in subclauses 13(d)(i) & (ii).

Mr Louw replied that Mr Durr must look at the definition of ''gross income''. In terms of this an important point was whether the income was received or accrued [for the money to be taxable]. To determine this one must look at the particular terms of the pension fund in question. If the foreign pension works like the SA basic annuity fund then the money does not accrue to the holder while paying the contributions. In SA the insurer is taxed on the income generated from the capital. Only when the money gets paid out to the holder does the holder get taxed. If this overseas fund works like SA funds then it will not get taxed in the hands of the resident. One will need access to the rules of the fund to determine exactly what kind of fund it is.

Taxing people for income earned abroad - Subclause 13(1)(p)
The person will be taxed whether the employer is South African or foreign. An exemption will apply if the person is outside of SA for an aggregate of 183 days during a 12 month period. Mr Louw noted that industries have reacted favourably to this amendment.

Ms Fubbs noted the reference to ''full day'' in subclause 13(1)(p)(i) and asked how many hours a full day related to.
Mr Louw replied that a full day was 24 hours. This meant that the person had to be out of the country for 24 hours. However the person is not expected to have worked for 24 hours. The work hours will refer to what is normal in that persons work relationship with the employer.

Ring fencing foreign losses - Clause 27
In terms of this a company which operates outside of SA cannot set foreign losses off against its South African income. This is done to protect the SA tax base.

Determination of taxable income or losses in foreign currency - Clause 33
This is a new section which has been inserted to specify the date on which conversion of currency must take place in respect determining the amount of a foreign loss or gain for tax purposes.

Amendments to other Acts
Amendment to the Customs and Excise Act - Clause 60
This amendment was made to facilitate the African Growth Agreement. In terms of this agreement the United States offered some Southern African countries the opportunity to export certain products (they are starting off with textiles) into the United States without paying customs and duties. There are certain measures in place to regulate this.

Amendment to the VAT Act - Clause 64
Municipal structures will be reduced in accordance with recent legislation. In terms of this amendment the old and the new structures which have been amalgamated will be considered the same structure for VAT purposes.

Taxation Laws Amendment Act - Clause 72 and 73
The Taxation Laws Amendment Act regulates the exempt status of Public Benefit Organisations (PBOs) and the tax deductibility of donations to these organisations. The Act also refers to the ''receipts and accruals'' of these organisations for tax purposes. It was found that the test for the exempt status of a PBO was too strict because it required acts of the PBO to be of a ''philanthropic and benevolent nature''. In light of this the word ''and'' has been replaced with ''or''. Also, the reference to ''receipts and accruals'' was found to be unnecessary because there must be a physical flow of money. Therefore there can be no accrual. The words ''and accrual'' are now deleted.

The Bill was passed by the Committee

Second Adjustments Appropriation Bill
Mr Andrew Donaldson (National Treasury) gave the committee an overview of certain unforeseeable and unavoidable expenditures that have been be provided for in the Adjustments Estimate. Agriculture, Defence, Education, Health and Transport are some of the areas where these expenditures were incurred. He also explained the increase in expenditure for 2000/01 compared to the expenditure as provided in the main budget. [For detail, refer to Annexures B and A in the attached Explanatory Memorandum].

Discussion
The discussion dealt specifically with certain provisions of Annexure B.

Ms Fubbs (ANC) asked:
- How could a figure be set for expenditure on foot and mouth disease when the disease has not been contained as yet?
- Why has no provision been made for expenditure on cholera?
- Why do we have exchange rate losses? Do we not have contingencies in place such as hedging?

Mr Donaldson replied that it is possible that if foot and mouth disease is not contained it could lead to increased expenditure. He explained that if this happens, they might have to provide for another adjustments estimate this year. He said that
provincial health budgets do make provision for new health problems such as cholera and he stressed that provinces do have contingency plans for this. Regarding exchange rate losses, he stated that this is a complex issue. They are nevertheless having discussions with the Department of Foreign Affairs to try to find a solution.

Dr Conroy (NNP, Gauteng) asked the following questions:
- Why was the amounts spent by the IEC so huge and how could it be unforeseeable and unavoidable?
- Why were there such large amounts of unforeseeable and unavoidable expenditures by SARS? Did the Minister not take his department into his confidence or was it just a matter of bad planning?

Mr Donaldson replied that the IEC expenditures have been a concern for the National Treasury for a while. He stated that the IEC budget is included in the budget for Home Affairs. The problem is that the IEC does not provide Home Affairs with a detailed run-down of their expenditure. It is for this reason that the National Treasury deals directly with the IEC. Mr Donaldson pointed out that the IEC still does not give them indications of their specific spending campaigns.

Mr Donaldson explained that the Treasury had underestimated the cost of changing from a source-based form of taxation to a residence-based form of taxation. He explained that it is a very complex process and many expenses were not foreseen.

The Chair asked why so much money was spent on the hostage crisis?
Mr Donaldson stated that the Foreign Affairs Department would have more info on this. He did however state that funds were needed to establish a crisis centre abroad and travelling costs also contributed to the expenditure.

Mr Lucas (ANC, Northern Cape) asked why local authorities had unavoidable and unforeseeable expenses? What were these expenditures exactly for?

Mr Donaldson replied that it would seem that the expenses were for physical infra-structural costs and for transitional costs.

Mr Lucas asked what is the exact figure for the transitional costs?

Mr Donaldson stated that he is not in a position to give an exact figure as they are only subsidising the transition not financing the entire transitional process.

The Chair stated that she was shocked that there were so many unavoidable and unforeseeable costs. She felt that it puts a drain on funds and is an issue that should be addressed.

The Chair put the Bill before the committee and it was unanimously accepted.

Draft Committee Report on FFC recommendations on 2001-2004 MTEF Cycle
The committee went through the report clause by clause and the Chair asked members to suggest changes if they so wished.
Clause A: Introduction
The committee agreed to it.

Clause B1: Local Government
The Chair suggested that they include a provision that states that the committee invited local government to make inputs but that there was no response from them.
The committee agreed to the suggestion.

Clause B2:Expenditure on delivery of services versus personnel; Clause B3: Data Collection
The committee agreed to these.

Clause B4: Unfunded mandates
Dr Conroy suggested the removal of the word, "also" in the second line from the top of page 3 and to replace it with, "however". The sentence would read, "It however emerged that Clause 35 of the Public Finance Management Act deals adequately with unfunded mandates and all concerns arising from adoption of the costed norms approach in relation to unfunded mandates would be addressed by this Act."
The committee agreed.

Clause B5: Performance based budgeting
The Chair suggested that they include a provision that makes reference to the Public Finance Management Act (PFMA). Ms Fubbs made the following suggestions:
(i) In line 6 of the clause to insert the words, " and economy" after the word, "efficiency"
The sentence would read," In other words, performance budgeting measures the efficiency and economy of converting input-mix to outputs.
(ii)In line 2 of the clause to insert, "in line with policy" after the word, "resources". The line would read, "The essence of performance budgeting is to allocate resources in line with policy in terms of objectives to be met and to correlate resources and results."
The committee agreed to the suggestions.

Clause B6: Macroeconomic constraint versus cost and norms approach
The Chair suggested the removal of the words, "versus cost norms approach" from the title of the clause.
The committee agreed.

Ms Fubbs asked the Chair if she could have permission to reformulate the clause and come up with a suggestion at a later time. The Chair and members agreed.

Clause B7: Unconditional/conditional grants until Clause B9: Validity of using one province as proxy in costing analysis
The committee agreed to these clauses.

Clause B10: Social Service sector
Ms Fubbs stated that she wishes to make certain amendments to the clause but that she would submit them later to the committee. The Chair assented and agreed to come back to the clause.

The Chair did however suggest the removal of the first sentence in the third paragraph. The third paragraph would now start with the sentence, "Both IDASA and the Financial an Fiscal Commission support the suggestion to distribute education resources according to nine different learner groups." The committee agreed to it.

The Chair stated that there were certain recommendations that were not included in the report. Provisions relating to the following are to be included:
· Public hearings dealing with the budget deficit must be held.
· Norms and standards that the FFC could not come up with must be formulated.
· A provision that states that local government forms part of the vertical division.
· To deal with issues on the cost and norms approach.
· Recommending further interaction with the provinces.

The Chair concluded the meeting by asking members to submit comments on the Intergovernmental Fiscal Review (IFR) report. She stated that she would appreciate it if they could submit it to the clerk of the committee by 10 am the following day. The Chair also reminded members to get their official passports in order, as they would be embarking on a study tour to Europe early next year.

The meeting was adjourned.

Appendix 1:
Report of the Select Committee on Finance on the Intergovernmental Fiscal Review, dated 7 November 2000:

The Select Committee on Finance, having considered and examined the Intergovernmental Fiscal Review, reports as follows:

A Introduction
1. On 6 November, the Committee held a meeting to consider the Intergovernmental Fiscal Review (IGFR), during which the National Treasury and the Deputy Minister of Finance made presentations. The Committee also invited IDASA to make a presentation.
2.Executive summary
The Committee was guided by the input from the National Treasury and the submission by IDASA:

(1) The presentation by the National Treasury was on each of the chapters contained in the IGFR.

(2) The submission by IDASA focused on financial shortfalls not reflected in the IGFR.

B Meeting on IGFR on 6 November
1.National Treasury and Committee discussion
The IGFR is a document that seeks to provide a snapshot of how IGF relations are currently evolving, highlighting the successes and shortcomings and indicating the variances that exist between provinces and municipalities.

The Provincial Equitable Share has declined as a result of Defence acquisitions. This will be corrected and reflected in the Budget Policy Statement. However, a healthy picture is emerging: The budgetary overspending incurred during 1996-97 and 1997-98 has been turned into a budget surplus, which will assist provinces in dealing with debt incurred by way of overdrafts. This will assist provinces to deal with macro aspects like quality and effectiveness of spending and improving quality of delivery. A balance has to be struck between social services and capital/infrastructure spending in the provinces.

As regards Health, conditional grants seem to be a big problem, due to a large portion of the Health budget being dominated by conditional grants. Problems range from non-transfers by national departments to stringent conditions that national departments place on provinces as a condition to transfer funds, as well as underspending by provinces or local authorities.

Provincial revenue seems to register a decline as a result of a lack of capacity. A good example is the inability of provinces to manage licence fees. There are, however, initiatives to improve this. The quality of infrastructure at provincial level seems to be better than at local level.

A range of reform mechanisms is under way to improve local government finances. These include a local government version of the Public Finance Management Act, known as the Municipal Finance Management Bill, and a range of other initiatives.

Surplusses should not be viewed as unspent money, but as funds to be used to pay off deficits which provinces have incurred during the first few years since their establishment. Provinces that are using surplusses to their benefit should be commended, and those that are lagging behind in this regard should start following suit. The problem seems to be that provinces are not classifying their deficits in a uniform way.

Provinces still face the challenge of reducing classroom backlogs, increasing quality of teaching, expanding early learning opportunities and furthering literacy programmes. On average, provinces spend 40% of their budgets on education. Poorer provinces usually have a higher proportion of children than richer provinces, and have inherited an education system that has higher repetition rates. Gauteng, the Western Cape and the Northern Cape have fewer children, higher pass rates and hence spend less of their budgets on education.

Health expenditure at provincial level has been one of the fast-growing areas of spending in the government since 1995. Although personnel expenditure is of concern, the key challenges that face provincial health departments are the impact of HIV/AIDS, better hospital management and achieving greater equity in health delivery while maintaining standards of quality.

The social security grants are the government's most significant poverty alleviation programme (R18,2 billion in 2000-01). It constitutes 86% of provincial welfare expenditure. Welfare expenditure grew at 5% in 1999-00, and is projected to grow at 3,8% in respect of the MTEF. As the applications for of child support grants increase and the pressure to provide inflation-linked increases in respect of welfare grants mounts, balancing the expansion of a social security net while maintaining the real value of grants will provide a major challenge.

The general understanding is that if a department does not spend its funds this year, it will be fruitless to allocate the same amount of money for that particular department next year. The challenge is to spend the allocated budget well in order to address the backlogs, repair roads and ensure delivery.

The view during the Committee discussion was that the budget should be directed at outputs, more specifically on those within provinces. With the implementation of the Public Finance Managemnt Act, this issue will be addressed in time.

2. IDASA
IDASA feels that a new expenditure pressure is placed on provinces and does not appear in the IGFR numbers. The National Treasury indicated to provinces not to overspend and to pay off their debt. Where previously indicated spending pressures increase, provinces tend to neglect certain important basic services that should be funded.

There is clearly a need for education development, and the national Department of Education will clearly fund this training. The problem is that, when you train a teacher, you will have to pay that teacher more. Where will these funds come from? Early childhood development will be phased in from next year onwards, which will also have financial implications. Another priority is the phasing in of national norms and standards (spending on books and school maintenance) - where will these funds be taken from? More money will have to be allocated in this regard, and it is not reflected in the numbers.

As regards Health, AIDS is the primary cause of concern. The other is the Basic Conditions of Employment Act, which will have implications for personnel expenditure.

The Welfare budget is undergoing a decline of 7%, and unemployment has also risen, so social security payments should not be below 7%. Only 27% of children eligible for the child support grant have applied for it. What would happen if the other 73% were to apply? In respect of the disability grant, only about one third receive it. What would happen if all others participants apply for it? Linking these grants to inflation is another problem. HIV/AIDS victims will also have to be allocated certain grants as the AIDS crisis unfolds.

The report does not say to whom provinces owe money and at what interest rates funds are allocated, who the creditors are and what the maturity structure is or when they have to repay the money. These are some of the questions that undermine the credibility of the figures contained in the IGFR.

C. Recommendations
1. A study tour should be undertaken to start to understand what the provinces are facing and what they are experiencing. They should look at the following:

(1) Monitoring the trends and ensuring that they reflect the policy commitment.

(2) Monitoring the flow of funds to provinces, in particular the conditional grants, through mechanisms such as quarterly reports submitted by accounting officers.

(3) The impact of social spending on HIV/AIDS.

(4) Revenue collection and its lack of capacity.

(5) Infrastructure development.

(6) Capacity problems.

2. The IGFR should be tabled at a more appropriate time, to place the Committee and the provinces in a much better position to peruse it.

D. Conclusion
The Committee commends the National Treasury for instituting the second IGFR. It reflects their commitment to be transparent in the way that provincial and local finances are dealt with. The document is a clear indication that we are heading in the right direction. As much as the National Treasury is not obligated to produce this information, it serves as an important tool to execute oversight in the National Council of Provinces.

The Committee expresses its appreciation to the Deputy Minister and Mr Mommoniat (Chief Director: Intergovernmental Fiscal Relations) for their insight and the informative discussion. We are looking forward to the year ahead.

Report to be considered.

Appendix 2:
Report of the Select Committee on Finance on the FFC Recommendations, dated 7 November 2000:

The Select Committee on Finance, having considered and examined the Financial and Fiscal Commission (FFC) Recommendations on the 2000-04 MTEF Cycle, as at May 2000, reports as follows:

A. Introduction
The Committee held public hearings on Monday, 21 August, and Wednesday, 23 August, in order to consider the FFC's report. The following stakeholders participated: The FFC, IDASA, COSATU, the Applied Fiscal Research Centre (AFReC), the Foundation for Education, Science and Technology, the School of Public Management and Administration, University of Pretoria, and provincial finance standing committees (of the Northern Province, Free State, Gauteng, Eastern Cape, Northern Cape and Mpumalanga).

Although the Norms-Costed Approach is welcomed by the Committee, there are areas within this approach that require further research. The Committee would like to pose some very elementary questions in this regard:

1. Whether the current formula impedes delivery of services in the province?

2. Whether we have explored or exhausted the current formula to its full potential in terms of resource allocation?

3. Whether the introduction of a new formula is a panacea to our difficulties in respect of resource allocation?

The Committee is also mindful that South Africa's fiscal environment and the inter-governmental relations is shaped by an obligation to service the national debt, which we cannot escape from, and a division of revenue which distributes the nationally-raised revenue to all spheres of government equitably.

Bearing these introductory comments in mind, the Committee raises some key issues.

B. Key issues for Committee consideration
1. Local government
The Committee holds the view that, since we are faced with the mammoth task of transforming local government, the FFC will have to apply its mind to the role played by the costed-norms approach in the finances of local government. The Committee looks forward to the comprehensive study by the FFC so that we can apply our minds to this sphere of government. The Committee notes that organised local government did not submit its response to the FFC's recommendations.

2. Expenditure on delivery of services versus personnel
The Committee argues that the FFC is silent on the dilemma between spending on delivery of services and/or personnel costs. The costed-norms approach does not offer a solution in resolving this dilemma.

3. Data Collection
The Committee fully appreciates the extent to which the FFC raises questions around the quality of data in the provinces. The Committee is aware that planning is adversely affected, and therefore it needs to interact with the relevant authorities with a view to devising ways of improving financial data at provincial level. The Committee also notes that this was also a concern of the IMF when it last briefed the Committee.

4. Unfunded mandates
While the FFC argued that the costed-norms method imposes desirable constraints on both national and provincial governments, unfunded mandates are less likely to occur. However, the public hearing was informed that the National Treasury feared that the reintroduction of unfunded mandates would be a likely outcome of the costed-norms approach. It also emerged that section 35 of the Public Finance Management Act (PFMA) goes a long way towards dealing with the problems of unfunded mandates, and all concerns arising from adoption of the costed-norms approach in relation to unfunded mandates would be addressed by the PFMA.

5. Performance based budgeting
Since the PFMA refers to performance-based budgeting, the Committee is yet to witness the implementation of such performance-based budgeting. In our view, the essence of performance-based budgeting is to allocate resources in line with policy and in terms of objectives to be met and to correlate results. It is hoped that this form of budgeting would result in more effective monitoring of allocative and delivery efficiency. Service delivery becomes more transparent and accountable. In other words, performance budgeting measures the economic effectiveness and efficiency of converting input-mix to outputs. Performance-based budgeting makes a further distinction between outputs and outcomes. This is best understood by way of a hypothetical example: If X amount of financial resources is used to immunise children, then output would be a Y number of children immunised. However, outcome would be to reduce the infant mortality rate in respect of immunisable conditions.

The Committee would like to see this form of budgeting being used increasingly in South Africa, since it is relevant for attaining our national priorities. The FFC and other stakeholders should continue with their explorations of performance budgeting.

6. Macro-economic constraint
The FFC has not taken the rationale of the costed-norms approach to its logical conclusion. The identified norms and standards are based on the Constitution and does not ignore the need for progressive implementation. The costed-norms approach developed by the allocative protocols of the National Treasury does not conflict with current macro-economic parameters. Key constituencies, such as Cosatu, may renew their call for expansion of the macro-economic parameters with regard to the budget deficit and greater flexibility in macro-economic policy to accommodate meaningful implementation of the costs and norms approach. The Committee should devise means of addressing any calls for adjustment to the existing macro-economic parameters.

7. Unconditional/conditional grants
The FFC argues that conditional grants should be squeezed out or removed, thereby implying that the provincial share of nationally-raised revenue will increase. This perspective is not correct, because if we make available additional resources, simultaneously financial sacrifices or compromises will occur elsewhere.

8. Infrastructure and capital backlogs
The key proposal is to supplement provincial capital spending through the use of a conditional grant. At present there is an allowance system, which makes it possible for provinces, when under duress, to use resources, designated for capital expenditure, for the social sector. The FFC's proposal allows and ensures that provinces are allocated an amount for capital expenditure. The FFC needs to continue exploring possibilities in this regard and share their findings with the Committee.

9. Validity of using one province as proxy in costing analysis
The Committee questions the validity of using the Northern Cape as a benchmark to determine the cost of providing a legislative institution and the administration of government. The Committee would recommend that similar studies be conducted for each province.

In addition, there is an urban bias in the report in respect of service delivery. The FFC does not deal with the urban/rural bias by adopting the Northern Cape as a proxy. The Committee argues that the Northern Cape cannot be used as a proxy because it is not classified as a rural province.

Moreover, spending on Health, Education and Welfare squeezes out other forms of spending, which further aggravates the bias in respect of urban versus rural development. The FFC's approach does not help us in resolving these complex development issues.

10. Social Service sector
The Committee takes the strong view that much more research is required in the social service sector. The beneficial effects of the costed-norms approach will be recognised only if there are tangible improvements in the social service sector. The social service sector provides the terrain for testing the usefulness of the costs and norms approach.

While the National Treasury allocates the welfare component on the basis of the need of recipients of three grants, the FFC takes six grants into account. This refinement allows a more equitable distribution of revenue. The foster care grant in the calculation of the welfare component is to be commended, since the demand for this grant is likely to increase commensurate with the increase in HIV/AIDS-related deaths. As a result, the FFC's proposal would reflect new demands on provincial service delivery. Moreover, the welfare-costed norms, as proposed by the FFC, adopt a different strategy with the national Department of Social Development, which is considering restructuring the definition of recipients of social welfare in order to give consideration to the extended family. The provinces also argue that it is still unclear whether primary health care is a provincial or a local government competency. This component of basic service is difficult to cost.

With regard to the other social sector, Education, which has been disaggregated into nine distinct components, both IDASA and the FFC support the suggestion to distribute education resources according to nine different learner groups. Each group will have its own needs and cost implications. The Committee also wishes to remind the FFC that it does not incorporate adult basic education and early childhood education, although providing such services is an extension of human rights.

The cost implication of disaggregating the social service sector is still not clear, and more research is required.

11. Relationship between FFC, Parliament, provincial legislatures and local government
In future relations with the FFC, it may be necessary to establish and design appropriate protocols for the Committee and the FFC. Since the Constitution also expects provincial legislatures to receive reports from the FFC, the question arises whether the National Council of Provinces (via the Select Committee of Finance) should co-ordinate interaction between the provinces and the FFC, or whether the FFC should report directly to each individual province. These mechanisms remain to be resolved.

However, in the case of local government financing, the Committee would propose that the FFC interface jointly with the parliamentary committees on finance and local government as well as with Salga. A series of meetings should be set up, involving the four parliamentary committees and the FFC, on the recommendations on local government financing.

C. Recommendations
The Committee recommends as follows:

1. Public hearings on the implications of an expanding budget deficit should be hosted.

2. The National Treasury should be engaged on developing nationally-determined norms and standards which will guide service delivery.

3. Workshop should be held with provinces to scrutinise the recommendations of the FFC.

4. The FFC should continue with its work on the implication of the costs and norms approach for local government.

D. Conclusion
The Committee congratulates the FFC on changing the mindset in respect of the budgeting process. The FFC has been extremely innovative in its budgetary analysis, and has laid the basis for doing things differently. It has worked extremely hard on developing the costs and norms approach, and the Committee would like to engage with them on an on-going basis. The Committee, together with the FFC, has to draft a schedule of meetings according to which time-frames can be attached to all outstanding issues on a formal and agreed basis.

The Committee expresses appreciation to all the participants for their contributions, and looks forward to a long and lasting association with them.

Report to be considered.