Financial and Fiscal Commission Amendment Bill: briefing

Meeting report

FINANCE SELECT COMMITTEE
5 August 2003
FINANCIAL AND FISCAL COMMISSION AMENDMENT BILL: BRIEFING

Acting Chairperson: Dr E Conroy (NNP) [Gauteng]

Relevant document
Financial and Fiscal Commission Amendment Bill [B21B-2003]

SUMMARY
The Treasury presentation on the Bill outlined the background to the Bill, as well as the proposed amendments. These primarily provide for the FFC to make recommendations on the financial implications of the transfer of functions from one sphere of government to another, and also provides a structure for the composition of the FFC Board.

Concerns raised by the Committee were:
- the rationale for seeking FFC's advice on the financial implications of the transfer of functions,
- the timing of the FFC's recommendations,
- whether the FFC has the necessary capacity to handle this new responsibility,
- the ratio of provincial nominees to those nominated by other spheres of government
- adequate checks and balances to ensure these Commissioners represent the interests of the provinces equally.

Clarity was sought on the intention of Clause 1(a)(2A) as the formulation was fuzzy, as well as whether Clause 1(a)(2A)(e) is simply an escape clause for the FFC, or has it another intention which is not accurately reflected.

MINUTES
As the Chairperson, Ms Q Mahlangu, was unable to attend the meeting, the Committee elected Dr E Conroy as Acting Chairperson.

Briefing by Treasury
Ms N Sidondi, Treasury Director: Legal Services, addressed the Committee.

Background to Bill
In 2001 Parliament enacted the Constitution Second Amendment Act 61 of 2001, with Sections 4 and 7 of the Act deal mainly with the composition of the Financial and Fiscal Commission (FFC). Section 4 amends Section 163 of the Constitution which deals with, inter alia, the procedure in which local government will participate in the compilation of a list from which the President will appoint members to the FFC. Section 7 amends Section 221 of the Constitution, which deals with the composition and term of the office of the members of the FFC.

These sections have not yet come into effect because national legislation has to be effected that would bring these two sections into operation. This Bill also amends the Organised Local Government Act of 1997.

Contents of the Bill
The Bill seeks to clarify the role of the FFC when the powers or functions are assigned by an organ of State from one sphere of government to another. It obligates the assigning organ of State to notify the FFC of the financial and fiscal implications of that assignment. In the past powers and functions have been shifted from one sphere of government to another, and this has at times resulted in unfunded mandates for provincial and local government. The Bill also requires that the assigning sphere requests the FFC to make a recommendation or advise in respect of the assignment. Within 90 days from the date of the receipt of the request, the FFC will then make a recommendation or give advise on that assignment.

The Bill provides that the shift will not be of legal force or effect unless certain conditions are met. This includes that the organ of State must state to the FFC that it has considered the recommendations or advice of the FFC, and the extent to which it has does this.

The Bill also reduces the composition of the FFC from 22 members to 9 members. Four members of the FFC will still be appointed by the President, which will be the Chairperson and Deputy Chairperson and two other members. Three members will be appointed from a list of nominees compiled in consultation with the Premiers. The process for the appointment of these three members is as follows: when a vacancy occurs the Minister of Finance will notify the Premiers in writing and the Premiers will nominate at least one person per Premier, for appointment to the FFC. The Minister will then compile a list of nominees. The Premiers will have to reach consensus on a shortlist from which the President will appoint the three members, which will consist of one person extra than the actual number of vacancies available. Should the Premiers not reach consensus on the shortlist, then the list of nine nominees compiled by the Minister will then be sent to the President for appointment. The President will then appoint three members from that list. This appointment will have to be done within 90 days from the date of the opening of the vacancy.

Two persons will be appointed from a list compiled in consultation with organised local government, in the process described in the Schedule to the Bill. The President must consult the Premiers or local government, as the case may be, when a member of the FFC is being removed from office.

There are also technical changes to the Bill, which essentially seek to align the Bill with the PFMA. These are Clauses 4 and 5 of the Bill. The transitional arrangements are captured in Clause . It provides that those FFC members that are currently in office will continue to occupy that office until the end of their term, and they will be deemed to have been appointed by this Bill when it becomes an Act.

Mr Jaya Josie, FFC Deputy Chairperson, speaking on behalf of the FFC, noted that the FFC had been instrumental in the very beginning in proposing many of these amendments, after consultation and discussion with the Members of Parliament and the executive. There is nothing more that the FFC wants to be added to the Bill, and it concurs with the proposals put forward by Treasury.

Discussion
A provincial representative sought clarity on the setting of the number of days for the nominations at 90. It seemed like too long a time.

Ms Sidondi replied that the aim here is to sort the matter out within a short period. If it is left unattended to for quite a while it could have unintended consequences. The 90 day period thus sets a time limit within which the appointment has to be finalised.

Mr Mokgato sought clarity behind the reason to seek the advice of the FFC on the financial and fiscal implications. Does it further enhance the current provisions in the PFMA relating to unfunded mandates?

Mr Josie responded that the intention of the Bill is to offer an opportunity in the event of a challenge to the assignment of a particular power or function to another sphere of government. The problem may arise where the equitable share mechanism of the national revenue is to be discussed and decided upon, such as the social security grants. If this function were to be assigned to a national sphere of government, there are implications for the way in which the equitable share would be reconfigured. In this case it becomes incumbent on the FFC to make recommendations on the allocations to the spheres of government in terms of the portion that may go to the equitable share, as well as that portion that may go to the national sphere of government for allocation for a national instead of a provincial function. This is required by Section 214 of the Constitution, and is the most important consideration when dealing with unfunded mandates and their implications on the equitable sharing of national revenue.

Mr Mokgato stated that his concern is with the time at which the recommendation is provided, because the FFC makes its recommendation 10 months before. How can the FFC come back to look at a change in the configuration when it has already made its recommendations?

Mr Josie replied that the FFC Act contains provisions which grants the FFC the power to make recommendations during the course of the year. It has thus made recommendations on any changes or legislation that comes before Parliament. It is thus not bound to the ten month period here, only in terms of the equitable share. But if there is an important matter that needs to be commented on, such as a Bill that has an impact on intergovernmental fiscal relations, the FFC can comment in the course of the year. It has done so in the past.

Dr Hildegaard Fast, Manager: FFC Parliamentary Office, added that when there is the assignment of a function it can have implications on the equitable share, as Mr Josie indicated. It can also have other implications on the intergovernmental fiscal system, and the FFC might wish to give recommendations throughout the year on this. There is provision in the Municipal Systems Act for the assignment of functions to local government, and the FFC was asked by the Department of Provincial and Local Government in 2001 to provide comments on the shift of disaster management functions to local government. The FFC then made a submission in November which talked about the implications for the equitable share, conditional grants and for the contingency reserve. Thus these mandates also go beyond the equitable sharing, and the FFC does provide comments when there is a formal request from government.

Mr Mokgato asked what the role of organised local government would be in the appointment process.

Ms Sidondi responded that the Organised Local Government Act prescribes this process for the appointment of members to the FFC, but the process that is envisaged there has been changed by the Constitution Second Amendment Act. Thus Section 163, as amended in 2001, now sets out the process for the appointment of members to the FFC.

Ms Joan Fubbs, Chairperson of the Gauteng Province Standing Committee on Finance, stated that Clause 2 contains no deadline for the process of notification of each Premier.

Ms Sidondi replied that she would take up this point with her colleagues in Treasury.

Mr Josie stated that the President has to be given a reasonable period of time within which to notify the Premiers, so that they can act within a reasonable amount of time. One of the big problems has been the lack of urgency in making the nominations, so perhaps Treasury would have to consider a formulation which suggests that the Minister submit the list in a time which is reasonable for the Premiers to consider the nominations.

Ms Fubbs questioned the capacity of the FFC to properly handle the shift in functions envisaged, especially as a serious amount of consequential work would result from such shifts. Its resources are currently stretched to the limit, and she is not sure whether the FFC in fact has the capacity to implement the Bill.

Mr Josie responded that the issue of capacity has always been a crucial one for the FFC, and it has always had to cut the cloth to suit the demands that have been made on its time. As the pressures on the FFC increase it is thinking that it has not used the Commissioners available to the optimum, because it is difficult to sustain paying people who have great expertise. There should be some indication that any increased volume of work should have a concomitant capacity boost for the FFC, although this would probably not be addressed in this legislation.

The Acting Chair stated that he does not understand Mr Josie's response, because Item 7 in the Memorandum to the Bill states that the Bill has no financial implications for the State. There are thus financial implications because Mr Josie has just stated that the more the Commissioners are used, the more they would have to be paid.

Mr Josie replied that this should not be part of this legislation. What normally happens is that the FFC presents its budget, and it can access the budget through the adjustments. Thus this need not be carried here as an implication.

Ms Fubbs contended that Mr Josie's response would result in further problems with unfunded mandates with commissions of this nature. The principle here is that this legislation has financial and other resource implications, it is a fact.

Ms Sidondi responded that she would have to take this matter up further with Mr Ismail Momoniat, Treasury DDG: Intergovernmental Relations, and the reply will be channelled to the Committee Secretary.

Ms Fubbs asked why the Bill is constrained by the Local Government Act, which limits the appointment period to 90 days.

Ms Sidondi replied that the FFC Act does not presently specify the period within which the appointments should be made. Perhaps the amendment seeks to limit the time within which the appointments are made.

Ms Fubbs asked whether the ratio's of local government nominations for the appointments are the same as the ratio applicable to the nominations received from the Premiers.

Mr H Bekker (IFP) [National Assembly] asked whether Clause 5 would not undermine the authority and jurisdiction of the provinces, because the current weighting does allow the President to cut out one of the nominations made by the provinces. Are there any other safeguards in the legislation to prevent this, or is this basically just presented on the bona fides of the President's appointment? Furthermore, the financially weaker provinces could suffer here under Clause 5 or could even be excluded, because they would probably need the assistance of the FFC more.

Ms Sidondi responded that the current formulation of the Bill provides that the Premiers will be consulted and will endeavour to reach consensus on the three nominations, plus an extra person. It should be the Premiers themselves who have to decide on the nominees that would form the pool from which the President must appoint the three members.

The Acting Chair stated that he agrees with Mr Bekker that the financially stronger provinces might have a stronger hand to "push their nominees harder than the financially weaker provinces", whereas the weaker provinces would need the help of the FFC even more. Is there any particular reason why it was changed from the previous dispensation in which each province could nominate one person?

Ms Sidondi replied that the reduction in the membership in the FFC came as a result of the Constitution Second Amendment Act of 2001. She stated that perhaps the FFC would be better able to explain the reason for the reduction.

The Acting Chair stated that he is not questioning the reduction, as everyone agrees that the number of members should be reduced. He stated that he is however questioning the formula for the new appointment process. Would it not have been more logical to have one person nominated by each province?

Dr Fast responded that there are effectively two persons being nominated by the local government sphere under the Bill, and in fact the proposal at the moment is that the provinces get three nominations. Thus numerically the provinces are already stronger than local government. There are also essentially two national nominees. The decision was taken to set the number of provincial nominees at three because there are nine provinces, and the proportional representation would be easier if there are three nominees rather than two. Thus to increase the provincial representation among the three spheres of government would in fact give them a proportionately greater representation on the FFC than the other spheres.

Mr Josie added that the actual principle was established in the Constitution Second Amendment Act of 2001, and Mr Bekker's concern regarding the possible undermining of the authority of the provinces is an important point to note. The principle is that the provinces are having a full say in who gets nominated, from the local government and national spheres as well. The important point her is whether the provinces' nominees are in fact representing the provinces' needs on the FFC. The answer is no, because once they are appointed they are supposed to act in terms of the FFC on an independent and impartial nature, even in respect of their own province's interests. This impartiality is required by the Constitution. This does not however mean that they cannot report back to their province, but this is the tension that has always been there.

He stated that it has to be ensured that the spirit of the 2001 Constitutional Amendment is observed, and also whether the FFC is acting independently in an impartial manner in making these recommendations. Mr Josie stated that he feels this is a very important safeguard, to answer Mr Bekker's concern, because Commissioners can be challenged for breaching this duty to act independently and impartially.

Mr Bekker reiterated that from a practical point of view it is still possible for the President to discard the nominations from the provinces, and it essentially grants the President an "open hand" to make a political appointment in the end.

Ms Fubbs stated that part of the problem is that the provinces have been under the impression that its representatives are being sent to the FFC to look out for the interests of that province. Yet once there it becomes clear that the Commissioners view matters "on a national outlook".

Secondly, Ms Fubbs stated that she does not believe that this would allow the provinces with greater financial leverage to benefit unfairly, because the nominees were decided on by consensus. Even party political concerns are overcome by the fact that consensus has to be reached.

Thirdly, Ms Fubbs proposed that the representatives from the provinces may actually be better able to serve the interests of the provinces if the number is reduced.

Ms Sidondi replied that she would take Mr Bekker's question and the three raised by Ms Fubbs up further with her colleagues in Treasury.

Ms Sithole, a representative from the Limpopo Province, asked whether the phrase "as amended by Act 29 of 1999" could not be inserted after "Public Finance Management Act" in Clause 5, for consistency.

Ms Sidondi responded that this proposal can be effected.

A representative from the Kwazulu-Natal Province contended that an amendment to an Act does not change the title of that Act. Thus Clause 5 is correct as it currently stands in the Bill.

Ms Sidondi agreed, but stated that "as amended by Act 29 of 1999" can be added if the Committee so wishes.

Ms Sithole stated that this phrase should be included here for the following reason: when the PFMA was enacted in 1999 it dealt specifically with the national sphere of government, and the it was amended to include the provinces. This Bill involved both provinces and local government, and the phrase "as amended by Act 29 of 1999" thus has to be included in Clause 5.

The Acting Chair stated that Ms Sidondi would have to check whether this amendment can be effected, and has to send the response to the Committee Secretary. Ms Sithole's amendment would of course take the form of a negotiating mandate from the Limpopo Province.

Ms C Botha (DA) [Free State] suggested that the manner in which the representatives are nominated and appointed in the Bill is not the important point here, if the deciding factor is the requirements that the FFC imposes on the Commissioners serving on it, and their functioning.

Ms Fubbs asked why the Bill has only been brought forward now and not earlier?

Ms Sidondi responded that she would take Ms Fubbs' query up further with her colleagues in Treasury.

A representative from the Mpumalanga Province asked whether Clause 1(a)(2A)(a) leaves any option or authority to the assigning organ to take part of the recommendation made by the FFC, or whether it has to take the complete recommendation.

Secondly, it is not clear in Clause 1(a)(2A)(d) when the final approval would take place, because it suggests that you indicate in order for the approving authorities to check whether you have aligned yourself with the recommendation or not.

Ms Sidondi replied that what is sought here is that the assigning sphere or organ of State will the made the request in the prescribed form and the FFC will make a recommendation or advise. But the assigning sphere is at liberty to indicate what portion of the recommendation or advice it has used. This is stated in Clause 1(a)(2A)(d).

The representative from the Kwazulu-Natal Province contended that Clause 1(a)(2A)(b) is peremptory, because it states that the "Commission must… make such recommendation or give such advice on the intended assignment as may be appropriate". The FFC thus has no choice. Yet Clause 1(a)(2A)(e) implies that the FFC has a choice between making a recommendation or not. Thus Clause 1(a)(2A)(d) and (e) do not "rhyme together".

Ms Sidondi responded that there would be instances where the shift is envisaged but the FFC might not have any recommendation to make, perhaps because it is satisfied with the financial implications of the shift. This situation is envisaged by Clause 1(a)(2A)(e).

Mr Josie stated that the way Clause 1(a)(2A)(e) is phrased does create the impression that there is an escape hatch from Clause 1(a)(2A)(b). Perhaps Clause 1(a)(2A)(e) should be phrased differently so that it is consistent with Clause 1(a)(2A)(b).

Ms Fubbs agreed that the wording of Clause 1(a)(2A)(e) has to be tightened up, to reflect the original intention. The use of the word "despite" creates the perception that the intention is to allow the FFC a way out, and to effectively ignore this legislation. Yet this is not the case, as the true intention of Clause 1(a)(2A)(e) is to allow the FFC to not comment on the shift if it is satisfied with the financial implications of that shift. Yet this true intention is bedeviled by the inclusion of "despite".

Dr Fast replied that the intention behind Clause 1 is sort of a parallel process to other instances in which government is required to take into account the recommendations of the FFC, such as in Annexure E of the Budget Review. It is clear that the organ of State is not bound by the recommendations made by the FFC, but it is however legally bound to indicate the extent to which it has considered the recommendations. Clause 1(a) should thus be considered in the same light as Annexure E.

During the discussions by the National Assembly on this Bill Members raised concerns with the fact that the FFC does not always make recommendations or advice when called upon to do so. Clause 1(a)(2A)(e) should be seen in the same light. This does happen.

Mr Josie added that the intention here has to be very clearly crafted, because it is creating confusion.

Mr Bekker stated that he agrees that Clause 1(a)(2A)(e) is superfluous. If it is clearly an escape clause for the FFC if it fails to deal with the matter within the specified period of time, then the intention behind the clause is clear. If Clause 1(a)(2A)(e) were scrapped completely, the use of "as may be appropriate" in Clause 1(a)(2A)(b) is so wide that the FFC would be fully safeguarded.

Ms Fubbs stated that the Gauteng Province does not understand the intention behind Clause 1, nor has the true intention been made any clearer during this meeting. If Clause 1(a)(2A)(e) is accepted, as it currently reads, it is the provinces with less financial leverage that would be most prejudiced.

The Acting Chair stated that it is clear that this matter will not be solved today.

Ms Fubbs proposed that the clarification on the clauses be provided in writing, together with the concerns raised.

Ms Sidondi agreed that it could be e-mailed to the Committee Secretary.

The Acting Chair noted that Members agreed, and that the information will be sent in consultation with the FFC.

The meeting was adjourned.