Intergovernmental Fiscal Review and other Matters (Provisional) (IGFR)

NCOP Finance

13 May 2003
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Meeting report

SELECT COMMITTEE ON FINANCE

SELECT COMMITTEE ON FINANCE
14 May 2003

INTERGOVERNMENTAL FISCAL REVIEW; BANKS AMENDMENT BILL; INSURANCE AMENDMENT BILL; BOPHUTHATSWANA NATIONAL PROVIDENT FUND ACT REPEAL BILL; SEFALANA EMPLOYEE BENEFITS ORGANISATION ACT REPEAL BILL

Acting Chairperson
: Mr T Ralane

Documents handed out:
Banks Amendment Bill [B15-2003] Explanatory Memorandum at end of Bill
Financial Services Board presentation on Banks Amendment Bill
Insurance Amendment Bill [B52-2002] Explanatory Memorandum at end of Bill
Presentation by FSB on Insurance Amendment Bill
Amatole District Municipality report on the Intergovernmental Fiscal Review (IGFR)
Summary of input on chapters 2,3 and 10.
Intergovernmental Fiscal Review 2003
Bophutatswana National Provident Fund Act Repeal Bill [B13-2003]
Sefalana Employee Benefits Organisation Act Repeal Bill [B14-2003]
DPLG Input to Select Committee on Finance.
Chapter 10 Presentation by DPSA
FFC IGFR Submission
National Treasury presentation on Chapters 2, 3 and 10 of the IGFR( awaited)

SUMMARY
Briefings were given on the Banks Amendment Bill and the Insurance Amendment Bill by the Financial Services Board. Both Bills were adopted without amendment.

The Amatole District Municipality, the National Treasury, the Department of Public Service and Administration and the Department of Provincial & Local Government and the Finance and Fiscal Commission gave input on the Inter Governmental Fiscal Review 2003.

Background briefing was given on the Bophuthatswana National Provident Fund Act Repeal Bill and the Sefalana Employee Benefits Organisation Act Repeal Bill.

MINUTES
Banks Amendment Bill
Adv M Blackbeard (Financial Services Board) reminded the Committee that during deliberations on the Banks Amendment Act of 2000, this Committee had directed that the gender insensitive provisions in the Bank Act of 1990 be removed. The bulk of the amendments in this Bill was to carry out this directive.

Other amendments related to corporate governance, the rotation and appointment of auditors and the prevention of undesirable practices in accordance with both the King 11 Report and the Myburgh Commission Report on the Regal Insurance collapse. Further provisions provided for more effective powers for the Registrar of Banks and enhancing the prescriptive requirements for investment of bank capital and the issuing of bank loans (see document for briefing).

Discussion
Ms J Fubbs, (ANC, Gauteng Provincial Legislature) asked for assurance that in terms of Clauses 17(b) and 22 of the Bill the name of a bank would be prominently displayed even in regard to product descriptions.

Adv Blackbeard answered in the affirmative.

Ms J Fubbs referred to Clause 40 of the Bill [amending Section 60(6)(a)] and asked if it would not be preferable if the words "fit and proper person" could be defined as it was in the Australian legislation.

Adv Blackbeard responded that a narrower definition was not advisable. That court cases provided a broad understanding of the definition but only in relation to the facts of the relevant cases. However, the Audi Alterem Partem rule ensured that the relevant party had the right to make representations. Further, all decisions would have to be impartial in accordance with natural justice. He believed that the legislation in Australia, Britain and the USA did not define the words "fit and proper person"

Voting on Bill
The Bill was passed in its entirety without amendment.

Insurance Amendment Bill
Mr A Swanepoel (FSB Deputy Executive Officer: Insurance) presented the background to the Bill covering both the long-term and short-term insurance acts. He emphasised the need for insurance to foster trade, to cover expanding national and international risks, and create jobs. The Financial Services Board together with the Insurance Ombudsman were the leading supervisors in the industry. The Bill contributed to the development of the prudential requirements of the insurance industry. It sought to ensure accountability to the public with the management of insurance companies by fit and proper persons approved by the Registrar. The Bill sought to control the types of institutions allowed to issue funeral policies. The proposed amendments are set out as follows:

Amendments identical to the Long-term and Short-term Insurance Acts:
- Definitions
- Advertising material related to insurance policies.
- Registrar's control of name translations, shortened forms of names and name derivatives.
- Control of direct business of reinsurers
- Notifications of changes in directors.
- Issuing and buying back of shares.
- Control of policy misrepresentations.

Amendments specific to the Long-term Insurance Act, 1998:
- Actuarial calculation of assets, liabilities and capital adequacy
- Exemptions from the Act of loans or advances to policyholders.
- Exemptions to banks regarding receipts for policies
- Payment of interest on long term loans

Amendments specific to the Short-term Insurance Act, 1998
- Prohibition of the use of the words "funeral" or "burial" in policies
- Provision of free policy copies by insurers
- Improved wording of Schedules 1, 2 and 3.

Mr B Clark (Head of Long-term Insurance Registration & Policy: FSB) and D van Staden (Head of Short-term Insurance Registration & Policy: FSB) then went through the Bill dealing with the amendments to the Long term and Short-term Insurance Acts respectively.

Discussion
Mr K Durr (ACDP) asked why a provision had not been introduced to curb class actions. He mentioned that class actions had mushroomed in the United States and that posed a threat to the stability of the insurance industry.

Ms J Fubbs (ANC) queried the uniform application of premiums regardless of the financial means of the beneficiary. She felt that the premium on a policy should reflect the financial position of the policy holder. She then asked the presenters of the Bill why insurance companies continued to use small print setting out onerous conditions on the beneficiary She believed that a duty should be placed on insurance companies or their agents to carefully explain the conditions contained in small print and to set them out more conspicuously in the policy.

Mr Swanepoel explained that it had been the case that the industry was undecided about class actions. He suggested that it should perhaps be left to be settled in another domain. The advent of HIV/AIDS meant that the matter would need to be investigated as a matter of urgency. As regards the suggestions that premiums should be tailored to the means of the beneficiary, this approach might be impracticable. Stronger competition was needed to drive premiums down. Attention was being given to investigating an assistance based market. As regards the fine print in policies, it was hoped to overcome this by greater consumer education and to give the insurance ombudsman more powers to control the market.

Mr Makgato.(ANC) enquired as to what had been done to protect the public against the collapse of companies issuing funeral policies.

Mr Swanepoel said that the risk of collapse of funeral parlours in respect of issued policies was very real. Provision of the use of the words "funeral " or "burial" in short-term policies and advertising material was designed to reduce the risk of consumers falling into the hands of unstable funeral businesses. The fines imposed on unregistered operators had been increased but the control of these businesses had to be tightened further.

Ms Fubbs congratulated FSB on the innovation of publishing a memorandum on the objects of the Bill that accompanied both Bills.

Mr Haasbroek (Limpopo) referred to Clause 11 and asked if policy holders would be protected against an institution that unfairly withheld a dividend.

Mr Makgato referred to the list of stakeholders who had commented on the Bill and asked if anything could be read into the fact that the Banking Council of South Africa had not commented on the Bill.

Mr Swanepoel stated that the Bill gave greater powers to insurance organisations to trade shares in order to contribute to the stability of the sector. The same could be said about the tightening of the process of valuation of assets for balance sheet purposes and the valuation of assets to secure loans. As regards consumer education, urgent attention was being given to simplifying the reading material. In this regard information would be supplied in cartoon form and also in the language of the consumer.

Ms Fubbs expressed concern about the inability of some consumers to maintain premium payments. She wanted to know whether policies could be changed, cancelled or converted.

Mr Swanepoel replied saying that cancellation could be effected by terminating payment of premiums. He added that on cancellation, surrender values could be paid out up to a high percentage of premiums paid. He mentioned that it would not be wise to give short-term institutions the right to cancel policies.

Voting on Bill
The Bill as a whole was adopted without amendment.

Intergovernmental Fiscal Review - Amatole District Municipality
Mr V Mlokoti, Municipal Manager, took the Committee through their report (see document). He explained that the municipality was a pilot site for finance and budget reforms. Amatole had successfully managed the transfer of staff and assets as well as budgets via the Transitional Facilitation Committee. He then looked with the budget trends over a five year period. He reported on capital/project expenditure, operating revenue, property taxes, regional service levies, and government grants. He also dealt with provincial transfers, municipal borrowing, key budgetary challenges, electricity leakages, audits and annual reports, public private partnerships and personnel issues and statistics.

Discussion
Ms Fubbs said that she was impressed with the high standard of the budgets and their achievements. She commented that the total salary, wages and allowances as a % of expenditure was remarkably low at 22%. It was usually 40% to 50% of expenditure. She said that it was sad to note the inability of the province to promptly meet its costs to Amatole with regard to delegated services. Further it was unacceptable that the Eastern Cape Provincial Departments neglected to gazette the funds to be transferred to municipalities. As regards the Public Private Partnerships (PPPs) she commended the way the statistics had been broken down into departments.

The Committee was assured of Amatole's dedication to Section 154 of the Constitution which demanded co-operation. The matter would be discussed at the District Mayor's Forum and would be resolved by consultation between the parties. The transfer notification problem and outstanding monies by the Province had been taken as a challenge to resolve the matter in accordance with the Constitution.

Mr Mlokoti reaffirmed that there was no intention to issue a summons on the Province. He assured the meeting that the difficulty would be thoroughly discussed and resolved in forthcoming meetings.

In response to the district municipality being asked about its outstanding loan that was due to be repaid in 2004 and whether provision had been made for this, it was noted that proper steps had been taken for the provision for the repayment of the loan.

Mr K Jacoby, Director of Finance (ADM), explained that the 22% salary ratio was artificially low because of the roll-over of projects from various municipalities. Once the projects were implemented the ratio would rise to about 60%.

Mr Makgato asked whether the ADM had quantified the amount of unfunded projects. He referred the meeting to Section 35 of the Public Finance Management Act which made the matter of transfers without notification a transgression.

Mr Mlokoti confirmed that transfers had been received without notification from the province.

The meeting was again reminded that the principles of co-operative governance were not a matter of choice. The provisions in the Constitution were categorical.

National Treasury input on Intergovernmental Fiscal Review
Mr V Pillay (Chief Director of Local Government) and Mr Dondo (Director Finance) presented (see document).

Afternoon Session
Department of Provincial & Local Government (DPLG) input on Intergovernmental Fiscal Review
Ms Jackie Manche, Deputy Director General: DPLG Institutional Reform and Support, noted the policy background for the Intergovernmental Fiscal Review is that of building a developmental state. In order to achieve this, the three spheres of government must work in an integrated, co-operative and complementary manner. They must have the requisite capacity to address new and emerging challenges.

Chapter 2: Trends Provincial Budgets
The presenter indicated that provinces have the responsibility for key delivery functions of social services, provincial roads and agricultural support. Given that these services generate little or no revenue but yet comprise 95% of provincial spending, they have to be funded largely through national transfers. Accordingly, provinces receive the largest share of grants - over 56,8% - from nationally raised revenues.

Current spending and budget trends indicate that provinces are focusing on pro-poor programmes by consolidating social service delivery, increasing capital spending and enhancing the quality of spending. Consequently provincial budgets show a growth of 7.1 % in social services expenditure in 2003/04 and a real average growth of 5.5 % over the 2003/04 MTEF. Personnel expenditure has shown a steady decline from 59.1% of total provincial expenditure in 1999/00 to 51.6% in 2002/03 and is projected to drop to 46.4 in 2005/06.

The Department identified the following challenges:
- Planning: integrated planning and alignment between provincial and national departments.
- Implementation: enhancement of investment in socio-economic infrastructure
- Monitoring and evaluation: need for national departments to monitor non-financial performance of provinces

The Deputy Minister of Finance had presented a report on the state of provincial finances to the President's Co-ordinating Council. In noting the challenges facing provinces the PCC resolved that:
-Premiers need to take corrective measures necessary to improve spending capacity and prevent fiscal dumping.
- Challenges with regard to low capital spending need to be investigated and private sector participation to needs to be encouraged

Chapter 3: Local Government Budget Trends.
Local government has the responsibility for both concurrent and exclusive functions as set out in the constitution. A key challenge facing post-apartheid municipalities is that they are expected to expand their service delivery to all residents and to subsidise such services to poor householdsThis challenge must be view in the light of the fact that local government has undergone some restructuring processes which have affected their stability

Municipal capital and operating budgets for 2002/03 are R74.5 billion, reflecting a 15.7% increase over the 2001/02 amount of R64.4 billion. Operating budgets total R61.4 billion, 16.5% more than R52/7 billion in 2001/02. She said that with regard to operational expenditure salaries forms the largest share of the budget. However, personnel costs have remained fairly constant over time. User charges for electricity and water comprise the largest share of operating revenue. With regard to capital expenditure, she said that past performance indicates that capital expenditure has lagged behind than budgeted.

The DDG said that the 2002/03 municipal budgets indicate the growing importance of intergovernmental grants. She indicated that municipalities are recipients of too many grants administered by various departments. She also said that those grants come along with different reporting requirements and consequently municipalities' spend too much time reporting than delivering services. She said that these grants are to be phased into a single grant administered by DPLG

MS Manche said that the IGFR identifies the following key priorities for municipalities:
expanding their capacity to provide services, particularly free basic services
improving debt management and
improving revenue collection.

Chapter 10: Personnel
The DDG said that, in general, provinces are ahead of local government in restructuring personnel regimes. One of the reasons for local government lagging behind is that municipalities have gone through three phases of transformation. Nevertheless, both spheres are focusing on improving their skills profile, dealing with surplus staff and attracting professional and managerial expertise.

The IGFR identified the following challenges facing both spheres of government:
- improvement of performance management
- development of performance-based remuneration systems and
- adoption of a more flexible personnel frameworks.

She also said that the DPLG has identified the following additional challenges:
- high level of staff turnover in municipalities
- unfilled posts at managerial levels in municipalities and
- transfer of DWAF staff to municipalities with transfer of DWAF-owned water schemes.

Discussion
Mr Pillay questioned the suggestion by the department that salaries are not a real issue. He said that calculations show a 43% increase over the past three years.

Ms Manche replied that although there has been some increase, such increase was not big enough to be a major cause for concern.

Another member asked how would the DWAF-owned schemes be funded once they had been transferred to municipalities.

Ms Manche replied that a new scheme would be set up to fund the schemes for the first three years. Thereafter grants forming part of the equitable share would finance the schemes.

A concern was raised about continuing housing projects in places where houses are not supposed to be.

The department noted that it is really expensive to provide services where there are sprawling settlements. The DDG concluded that this is a result of poor planning.

Department of Public Service and Administration input on IGFR
Mr Alvin Rapea said that personnel management is key to improving service delivery. He went on to mention the various Acts in terms of which National and Provincial governments employees are employed. In local governments the remuneration, pension and medical aid arrangements differ as they are determined by individual municipalities. However there is a need to address the disparities in the municipalities.

Mr Rapea said that key personnel policy developments since 1994 has seen the establishment of a unified public service. There has also been a right sizing of the public service followed by a reduction in personnel costs and numbers. There has also been some improvements in service delivery as a result of the addition of personnel in sectors like the health and criminal justice.

The presenter noted the need to take initiatives to address the rising labour costs in the public service. There is a need to restructure the Pension Fund. This would result in more flexibility to employers on pension contributions. There would also be improvements on benefits. He also called for the establishment of a single medical aid scheme.

Mr Rapea went on to clarify some points on the IGFR 2003. He said that the second bullet of the last sentence on page 183 creates an impression that grade progression and career pathing systems are separate whereas they are one and the same thing. He also said that reference to 1.2 billion and 1.0 billion on page 187, first paragraph, should be 1.2 and 1.0 million respectively.

Discussion
A committee member expressed concern about the number of employees from the former bantustans, some of whom cannot be trained. He was also concerned that national government is taking skilled personnel from the municipalities. This results in a shortage of skills at the level at which service delivery is to take place.

Another member also raised a concern with regard to the changing organogram of the public service. He indicated that there is too much changing of the leadership in the departments and this hinders proper service delivery.

Finance and Fiscal Commission submission on the IGFR 2003
Provincial Funding trends
Mr Van Gass (FFC) said that between 97/98 and 2001/02, the unconditional equitable share constituted 86% of provincial spending. 10% was constituted of conditional grants that are used to implement national policy objectives. Provincial governments continue to budget for a declining proportion of own revenue. The most important and fastest growing source of own revenue is that legislated in terms of the Road Traffic Act. Provincial surpluses collected over the past three years are being rolled over to fund infrastructure delivery projects over the 2002 and 2003 MTEF cycles. Between 1997/98 and 2001/02 real declines were recorded for provincial spending notably the education and housing functions.

With regard to social development Mr Van Gass said that in 2000 the FFC had ecommended an inter-provincial allocation formula for the social security function. This included a phase-in parameter to enable gradually increased utilisation by the eligible population. The extension of the child support grant to ages 7-14 will be phased in over the medium term. An estimated 3.2 million children will become eligible. Since 2001 there has been a rapid take-up of the disability and foster care grants. Rising unemployment and poverty may be contributing to this rapid take-up. Rapid rates of take-up are leading to a sharp rise in social development budgets, from 19.4% of provincial spending in 1999/00 to 21.6% in 2002/03 and are projected to rise to 25.8% by 2005/06.

With regard to education, learner enrolment in public ordinary and independent schools has declined from 12.3 million in 1996 to 11.97 million in 2002. Whilst there has been a real decline in provincial spending on education, this has been slower than that of learner enrolment. This has in turn enabled an increase in spending per learner. The inheritance of provinces with the highest poverty rates spending the lowest per learner and vice versa remains but the variation in per learner spending, learner-educator and learner classroom ration has been significantly reduced. Poorer provinces tend to have higher concentrations of out-of-age learners and youth unemployment. The FFC recommends that the age weighting of learners be phased out of the PES formula.

Provincial Infrastructure
Mr Makinta said that in response to concerns expressed at Parliamentary hearings in 1999 about inadequate spending by provincial governments on social infrastructure backlogs, the FFC had recommended that national government provide a conditional grant to support the reduction of backlogs. In most provinces there is little evidence that proportionate and real declines in spending on roads are to be reversed over the 2003 MTEF. Only 16.2% of provincial roads are surfaced. Since road and transport are concurrent functions of all three spheres of government, there is an additional demand for co-operative governance. Some provincial roads are likely to be reclassified as part of a strategic road network for which the national government is responsible.

Municipal Financing Trends.
Dr H. Fast said that most property rates and regional levy income is collected in the metros and large urban areas owing to their economic base. It is the role of the inter-governmental fiscal system to ensure that redistribution of resources occurs. There is a need to maintain this redistributive thrust by ensuring that the equitable share formula reflects revenue-raising capacity. Regional levies are in the process of reform. It is important to ensure that revenue accruing through regional levies be retained in the local government sphere since this is where service delivery takes place. Municipalities could borrow funds but are not doing so. Hence the need to develop a differentiated approach to the borrowing market and deliberate policy measures to build the creditworthiness of municipalities. Electrification programmes will be more costly in future due to the rural location of the households not yet electrified.

Discussion
A committee member observed that the FFC's learner enrolment figures are misleading. The figures should have been broken down into rural and urban distinctions so that one would know what is happening where.

Dr E Conroy (NNP) raised his concern about the sprawling settlements where houses are far away from services. He noted that this would push the cost of electricity delivery even higher. He indicated that there is a need to bring the houses together. Another committee member blamed this on the apartheid laws. Also blamed was the lack of data which results in improper planning.

Dr Fast replied that there is a need for incentives to ensure that municipalities curb the spread of such sprawling settlements. Municipalities that show poor planning should be financially penalised.

Sefelana Employment Benefits Organization & Bophuthatswana National Provident Fund: briefing
Mr T Magwaza said SEBO was established in 1988 as an administrator of various funds in the former homeland of Bophuthatswana. A Board of Trustees reporting to the Bophuthatswana government supervised SEBO. The Minister through National Treasury appointed an Oversight Manager (OM). The OM appointed Ernst and Young to act as a watchdog on financial matters. The OM then facilitated the appointment of the Interim Management Committee (IMC) which was tasked with determining the financial and economic viability of the BNPF. The BNF was found to be viable and fully funded. Mr Magwaza said that it was recommended that SEBO should be liquidated. Currently a new fund, Bosele National Provident Fund has been registered as the successor of the BNPF. The presenter said that each person who was a member of the previous fund can be a member of the new fund. Employees of a participating employer may also join the fund. Membership of the fund would cease when an employee leaves service and is fully paid up. It would be possible for members to transfer funds both into and out of the Fund. The repeal of the Acts is necessary to finalise the transformation of the BNPF and to avert potential industrial actions.

The Chairperson adjourned the meeting.

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