Division of Revenue Bill: briefing and adoption; Financial and Fiscal Commission input

Meeting report

FINANCE PORTFOLIO COMMITTEE, FINANCE SELECT COMMITTEE: JOINT MEETING
26 February 2001
DIVISION OF REVENUE BILL: BRIEFING & ADOPTION; FINANCIAL AND FISCAL COMMISSION SUBMISSION

Relevant documents:
Division of Revenue Bill [B11-2000]
Financial and Fiscal Commission submission (See Appendix below)
Division of Revenue Bill: slide presentation (included in the minutes)
National Treasury draft technical amendments to Division of Revenue Bill

SUMMARY
Concerns were raised that provincial allocations had decreased. The Financial and Fiscal Commission stated that provincial allocations would increase in the future though they refrained from providing guarantees in this regard. Interest was shown in possible alternatives that the FFC have considered to boost the earnings of provinces.

The National Treasury was inundated with questions on conditional grants. Especially the requirement that in order for funds to be allocated to a grant, it must be accompanied by proper substantiation. A problem arises when requests for grants are unsubstantiated. The Department had made provision in Clause 24(3) for a temporary solution whereby such grants are regarded as unconditional grants. What concerned the committees was the absence of a long-term solution.
The committee formally considered the Bill and adopted it with technical amendments as provided by the Department.

MINUTES
Financial and Fiscal Commission (FFC)
Mr Jaya Josie, Acting Deputy-Chairperson of Financial and Fiscal Commission, said his presentation would highlight points of congruence and divergence of the Division of Revenue Bill. [See Appendix 1 at the end of these minutes for his presentation]

Discussion
Mr K Andrew (DP) noted that total government expenditure had increased by ±10% whereas provincial equitable share only increased by ± 8%. He felt that provinces were being squeezed in favour of some other sphere of government. He asked what the views of the FFC are on this trend.

Mr J Josie replied that the reason for the current increase of national share over the decrease in provincial share is because the provinces were adequately resourced to provide the services that they are providing. He said that some time in the future there would be an increase in provincial equitable share and decrease in national share. However he was hesitant to take a stance, as his assertion would be unsubstantiated. He would be in a better position to give a firm view at the end of the year.

Dr G Koornhof (UDM) remarked that the FFC has previously stated that they intend to look into the issue of provincial taxes. He asked them when they can give the committee a briefing on it.

Mr Josie said they would make recommendations on provincial taxes in April for the upcoming year 2002.

Prof B Turok (ANC) asked how much help do provinces receive from the National Treasury in dealing with their financial services.

Mr Josie stated he is not in a position to answer the question. He did point out that much closer co-operation is needed.

Mr K Durr (Western Cape, ACDP) asked if the foreseen possible increases in provincial revenues would be attributable to tax revenues from gambling. He noted that the FFC had previously referred to other forms of taxation that could be considered to boost provincial revenue. What types of taxes have been considered? Is a surcharge on income tax a possibility? If so, has it been referred to the Katz Commission?

Mr Van Gass, deputy programme manager of the FFC stated that they have considered a variety of options to boost the revenues of provinces. Some of the possibilities include fuel and gambling levies. Mr Josie added that three years ago they had considered a surcharge on income tax but the Katz Commission would not allow it. Provincial sales tax is also not an option as the Constitution states that a sales tax is a national tax. He emphasised that they are weighing up various alternatives and that they are working closely with the National Treasury.

Ms S Botha (DP) asked whether HIV/AIDS figures are taken into account when making recommendations on equitable share and grants.

Mr Josie explained that much of the funds allocated towards AIDS had been previusly slotted into primary health care along with other opportunistic diseases. He emphasised that this year they wish to include a parameter in health care specifically for AIDS.

Ms Q Mahlangu (Gauteng, ANC), Chairperson of the Select Committee on Finance noted that the Select Committee would deal with this Bill in detail.

In conclusion, Ms B Hogan (ANC) asked if it was correct that the FFC would have a report by April 2001. Mr Josie stated that it should be ready by the end of April.

National Treasury
Mr I Momoniat, Deputy Director of Intergovernmental Fiscal Relations made the presentation to the committees. He pointed out that the National Treasury did take the recommendations of the FFC into account when drafting the Bill. Here follows an outline of the presentation:

Division of Revenue Bill [B11-2001]
Intergovernmental Fiscal System
· Intergovernmental system maturing
· Section 214 of Constitution and IGFR Act
- Processes for consultation for allocations
- Budget Council and Budget Forum
- FFC
· Total allocations
- Determined by Cabinet
- Equitable share plus conditional/other grants
· Chapter 7 & Annexure E of Budget Review

Fiscal framework
[table not included]

Changes to Fiscal Framework
· Provinces
- Provincial Tax Regulation Bill
Expected to take effect from 1 April 2002
- Borrowing
Project-based capital borrowing

· Local Government
- Property tax and RSC levy redesign
- User charge policy and implementation
- Borrowing reforms
- Consolidation of infrastructure and capacity grants
- Three year allocations

Fiscal capacity and functions
· Provinces
- Raise 3.5% of own revenue
- Social services (85%) and roads are public goods
· Local Government
- Raise over 90% of own revenue
- Only one third of functions are public goods
- Two thirds of functions are user charge services
· National Government
- Over half actual spending on protection services
- Other national functions: higher education, admin, policy or regulatory

Division of Revenue
[table not included]

Division of Revenue
· National share
- Increases up to 2001/02 to 40,5% from 39,4%
- Declines after 2001/02 to 40,0% in 2003/04
- Higher at end of MTEF than in 1999/00
· Provincial share
- Decreases to 2001/02 to 56,4% from57,6%`
- Rises after 2000/01 to 56,7% in 2003/04
- Lower at end of MTEF than in 1999/00
· Local share
- Increases to 3,1% in 2000/01 and 3,3% in 2003/04
- 2000/01 Budgeted share 2,0%
- Roll-overs increase 2000/01 to 3,0%

Reconciliation with DoR Bill
· Schedule 1: legal vs economic/functional
· National share-
- National allocation (mostly appropriated)
- Debt servicing and contingency reserve
- Conditional grants (provincial and local)
· Provincial share
- Equitable share only, excludes cond grants
· Local share
- Equitable share only, excludes cond grants

FFC recommendations
· Project 2001:Recommendations 2001/02 -2003/04
- Proposals focused on provincial share only
- Costed-norms for basic social services
· Budget Council considered proposals
- Recommended retention of current formula
- Use costed norms as an analytical tool
· NCOP hearings (11 October 2000)
Annexure E of Budget Review (Part 1)

Costed-norms
· Cannot use to determine budget allocations
- between spheres (vertical division)
- between departments within a province
- Demand for funds exceeds supply
- Prioritisation of functions/services
· Vertical division
- Costed norms for national and local govt?
- Bias against depts which cannot be costed?
· Non-availability of data

Conditional grants: Lessons
· Most grants flowing smoothly
- BUT purpose often not clear
- Poor non-financial monitoring
- Late planning and allocation
· Continuing non-transfers and non-spending
· Consolidation/Rationalisation
· Appendix to Annexure E
- Transparency in criteria for division
- Three-year allocations

Provincial Government Allocations
Equitable share formula
· Jointly recommended by FFC and govt
· System takes into account fiscal imbalances
· No changes to current formula
- No update for formula
· medical aid, education, RSC remuneration
· update on weightings
- Full phase-in by 2003/04
· Phase-out of R293 grant

Components of the formula
· Education share - 41 per cent
· Health share - 19 per cent
· Social security share - 17 per cent
· Basic share - 7 per cent
· Backlog component - 3 per cent
· Economic component - 8 per cent
· Institutional component - 5 per cent

Equitable shares
[table not included]

Conditional grants
· Legally from the national equitable share
· To fund:
- National priority programmes
- Compliance with national norms and standards
- Cross-border spill-overs
· Total R13,2 bn in 2001/02
· R14 bn and R15 bn in outer years
· Table 7.6 in Ch 7 of Budget Review

Provinces: Major grants 2001/02
· Health - R5,9 billion, mainly for central hospitals, training, rehab and nutrition (7)
· Treasury - R3,6 billion, to ensure budgeting & financial management, infrastructure (2)
· Housing - R3,3 bn billion (2 grants)
· Education - R298 million (3 grants)
· Other -R235 million
· Phase out of R293 grant

Total transfers to provinces
[table not included]

Provincial Allocations
· Total provincial share grows at 7,5% pa over MTEF
· Equitable share grows at 7,7% pa
· Conditional grants
- Need for greater purpose and transparency
- Criteria for division and use of data
- Appendix to Annexure E in Budget Review

Local Government Allocations
Local Government
· Transformation challenges lie ahead
· Total transfers rise from R6,5 billion to R7,8 billion over the MTEF, in support of the transition process and the delivery of free basic services
· Equitable share rises by 11% a year
· Support to enhance municipal capacity remain critical: credible budgets, improved financial management and effective service delivery

National transfers to Local Government
[table not included]

Equitable share
· Equitable share rises
- from R1,9 bn to R2,6 bn, R3 bn and R3,6 bn
- includes R293 allocation
- To enable the provision of free basic services
· Formula - 2 components
- I grant and S grant
- Adjustments to formula after demarcation
- alpha component, household income level
- Annexure E (part 5)

Other LG Allocations
· Other operating grants
- Water (R692 mil in 2001/02)
- Transition (R250 mil and R200 mil)
· Capacity and Restructuring grants
- Consolidation and rationalisation
- R681 million in 2001/02
· Infrastructure grants
- CMIP, Water, Public Works consolidation
R2,2 billion in 2001/02

Division of Revenue Bill
Division of Revenue Bill, 2000
· Required by Constitution (section 214)
· IGFR Act (no 97of 1997) - section 10
- Bill
- Annexure E in Budget Review
· Section 76(1) process in terms of s 76(4)
- not a money bill
- introduced in National Assembly
- introduced in NCOP after NA passes bill
- back to NA if any NCOP amendments

Budgeting principles
· Comprehensive budgeting process
· Three year budgets in all spheres
· Transparency of criteria for division
· Use of generally accredited data
· Timeous preparation of grants
· All grants on budget of beneficiary govt
· Clear accountability arrangements
· Monitoring to focus on performance

Types of Grants in Bill
· Schedule 1 - equitable share (vert division)
· Schedule 2 - division between provinces
· Schedule 3 - general and allocated-functions
· Schedule 4 - grants to provinces
· Schedule 5- grants to local government
· Schedule 6 - indirect grants

Key differences with 2000 Act
· 3-year allocations (outer years indicative)
· More user-friendly layout
· Principles of intergovernmental budgeting
- Ensuring all transfers are audited
· Better alignment with PFMA
- reporting times (15 days, 20 days, 22 days)
- similar treasury regulations for other transfers
- role of Auditor-General

Key differences with 2000 Act
· Clearer roles for transferring and receiving accounting officers
· SALGA allocation not taken off local government share (to DPLG budget)
· Technical improvements

Discussion
Dr Rabie asked for particulars on the abuse of suspense accounts by the provinces.

Mr Momoniat stated that suspense accounts are used to store funds that have not been allocated. The problem arises when these accounts are not cleared every month. In June 2000 regulations were passed that made it incumbent for accounting officers to clear these accounts. He felt that the Auditor-General should enforce these regulations and punish individuals who do not abide by them.

Mr Andrew referred to Annexure E pages 264 and 265 of the Budget Review document. He noted that conditions that apply to various grants must be submitted by 30 April 2001. He felt that the grants and the conditions that apply to them have not been thought through. Mr Andrew also referred to page 259 and asked why there were discrepancies in the granting of grants for HIV.

In response to the first question, Mr Momoniat stated that these grants have been in place for a long time and that they have in fact been thought through. He added that the requirement of having to submit conditions is to justify the allocation of funds for the grant. If the requirements are not met, then the grant would be considered as being unconditional. The process, as set out in Clause 8, would only for this year. However, next year if no information is submitted to substantiate a grant, the funds would not be allocated. The information is required to monitor the process.

On the second point, Mr Momoniat stated that R1bn has been allocated towards AIDS. He explained that the grants are determined by the Director- Generals of departments themselves. The funds are there but subject to process.

Mr Andrew reacted that the problem lies in the fact that Parliament has to vote for money. He added that the explanations for why the funds are needed are not forthcoming.

Mr M Booi (ANC) stated that if proper monitoring systems are not in place, what are they as members of parliament to do. Is there a solution?

Mr Momoniat conceded that it is a problem to vote on something that is not clearly stated. He made the point that the Bill is mainly to ensure the equitable allocation of funds. The funds must still be divided amongst departments. Mr Momoniat tried to assure the committees that problems are only foreseen for this year. The temporary solution of treating unsubstantiated grants as unconditional grants is set out in Clause 24(3) of the Bill. He added that most of the larger grants are clear enough. Problems tend to surface when dealing with the smaller grants. The intention is eventually to phase out the smaller grants.

The Chair stated that she was glad to see that the National Treasury is applying its mind to find solutions to these problems. Referring specifically to Clause 24(3) of the Bill.
Ms Hogan asked whether guarantees could be given that these problems would be sorted out by next year.

Mr Momoniat was hesitant to give guarantees but said that programs are being put in place to address these problems.

Ms R Joemat (ANC) felt that if smaller grants are going to be phased out, would smaller communities not be the ones to suffer?

Mr Momoniat replied that he shares Ms Joemat's concern but the reality is that funds could only be allocated to grants if the reporting requirements have been complied with.

Division of Revenue Bill: voting
Mr Momoniat ran through the clauses of the Bill, proposing minor technical amendments as he proceeded clause by clause. The committee agreed to the Bill and adopted it with these technical amendments.

The meeting was adjourned.

Appendix:
FINANCIAL AND FISCAL COMMISSION:
SUBMISSION ON THE DIVISION OF REVENUE 2001/02 TO THE PORTFOLIO COMMITTEE ON FINANCE
February 2001

-1- INTRODUCTION AND OVERVIEW
Legislative and Institutional Context
Section 214 of the Constitution requires that a Division of Revenue Act be enacted by Parliament on an annual basis. This Act determines the equitable division of nationally raised revenue amongst the three spheres of government and the horizontal division between the provinces.

The Intergovernmental Fiscal Relations Act of 1997 outlines the process of consultation for the Division of Revenue Bill. Sections 9 and 10(4) of the Act outline the process of consultation with the Financial and Fiscal Commission (FFC), whilst Section 10(5) requires an explanatory memorandum (Annexure E) in the Division of Revenue Bill which explains how the FFC's annual recommendations have been taken into account.

This submission provides the Commission's commentary on the Division of Revenue Bill and relates closely to the FFC Recommendations for the 2001-2004 Medium-Term Expenditure Framework (MTEF) period. Points of congruence, divergence and further consultation with Government are noted.

Overview of FFC Recommendations for MTEF 2001-2004
In this report the FFC made a number of key recommendations. The FFC's first recommendation noted that provincial governments are mandated by the Bill of Rights (Chapter 2) of the Constitution to provide basic services and it suggested that the process is best served by first defining basic education, primary health care and social security. It was noted that provincial governments are primarily accountable for the delivery of these basic services. It was thus essential that the progressive realisation of these basic rights should consequently be provided for in the calculation of the Provincial Equitable Share (PES).

As an advance on its early approach, a methodology for calculating the PES was proposed in the FFC's second recommendation. The approach suggested that basic services be defined in terms of cost per beneficiary, with allowances made for variations in the cost of delivery for different target groups and the inclusion of policy parameters determined by Government.

The FFC's third recommendation noted the trade-offs in the provincial budget allocation process between providing for basic services (the S-Element), fixed institutional costs (the I-Element) and other provincial functions (the B-Element).

Issues raised by the FFC Recommendations for 2001-2004 MTEF
The Commission is pleased that Government concurs with the importance of the FFC's first recommendation, and that the usefulness of the costed norms approach as an analytical tool can be explored further. The Commission also acknowledges the concerns expressed by Government and recognises that any dramatic changes to provincial allocations could be detrimental to the development of predictable allocations to provinces in the short-term.

Nonetheless, the Commission notes that litigation such as the Grootboom case points to the need to chart the progressive realisation of basic rights within available resources. Through the application of its research methodology, the FFC will be able to ascertain the affordability of the norms and standards and the direction of changes to these norms and standards. Far from undermining provincial budgetary autonomy, the FFC believes that its approach facilitates decisions around the trade-offs between basic services and other constitutional functions assigned to provinces by the Constitution.

In light of the concerns highlighted by Government, this submission considers ways in which areas of common agreement and interest between Government and the FFC can be furthered. This includes:
Considering means by which the provision of basic services, as envisaged in the Constitution, can be highlighted in MTEF budget and planning processes;
Supporting means and measures of efficiency and effectiveness in sub-national government operations;
Utilizing costed norms projections as analytical tools for evaluating provincial allocations and performance;
Investigating common access to and development of databases; and
Investigating the development of a framework around capital grants. This is in accordance with the Commission's fifth recommendation that, over the medium-term, provincial infrastructure backlogs be funded through conditional grants from national government.

This document is structured to address three key aspects of the Division of Revenue Bill for 2001/02:
The Division of Nationally Raised Revenue amongst the three spheres of Government;
Utilisation of the Provincial Equitable Share; and
The Conditional, and notably the Capital, Grant system.

Finally, consideration is given to provincial revenue raising powers in line with the FFC's fourth recommendation that a tax capacity (T-Element) measure be retained within the Provincial Equitable Share formula but that it be set at zero for the medium-term.

-2- COMMENTS ON THE DIVISION OF NATIONALLY RAISED REVENUE
Analysis of the Division of Revenue amongst the spheres of Government

Following an analysis of anticipated trends in the division of nationally-raised revenue amongst the 3 spheres of government (as indicated in the Division of Revenue Bill 2001), the Financial and Fiscal Commission notes the following:
The trend towards declining provincial allocations is expected to reverse in 2002/03.
The trend towards increasing allocation to local government (and particularly the Equitable Share) continues over the medium-term to 2003/04.
Assuming the achievement of inflation targets of 4.5% per annum by 2003/04, the anticipated growth in allocations to all spheres of government would suggest real increases in expenditure. This would enable progressive realization of basic services.

Table 2a Projected Growth in the Allocations of Nationally Raised Revenue amongst the three Spheres of Government

-3- ALLOCATION OF THE PROVINCIAL EQUITABLE SHARE
3.1 Constitutionally Mandated Basic Services
In accordance with its first three recommendations for the MTEF Cycle 2001 to 2004, the FFC model allows provincial governments to allocate their resources between mandatory "basic services" and other functions assigned to provinces by the Constitution. This Provincial Equitable Share Model is based primarily on available norms and standards for education, health and welfare.

In developing its PES Model, the FFC is also researching the criteria by which provincial governments and departments allocate their funding, with a view to attaining a measure of synchronicity between sets of norms and standards which could be acceptable to all three spheres of government. It aims to identify commonalities of approach between provinces and compare with national norms and standards set at national government level. Continuous consultation will characterise the FFC's research process.

Application of the FFC's Provincial Equitable Share Model
The FFC's Provincial Equitable Share Model for 2001 uses the criteria listed in the FFC's second recommendation of May 2000. The underlying demographic and socio-economic data, the per capita costs, the policy weightings and other assumptions are listed in Annexure A.

Specifically, it was suggested that:

A portion of each province's Equitable Share be calculated to ensure the provision of basic education, and that:
This be based on a per learner cost for 4 different target groups of learner defined as above or below the poverty line in either an urban or rural location and that
Account be taken of (a) national policy on the funding of inappropriate age learners and (b) provincial variations in remuneration.

Research on the Education Sector (see Annexure B) suggests that provinces tend to:
Differentiate per capita costs by income group more finely than the FFC but place less emphasis on the urban-rural distinction;
Place greater emphasis on boosting non-personnel expenditure on complementary inputs required to improve the quality of service delivery. A wide variation in per capita non-personnel expenditure is noted.
These trends are to be expected and even welcomed, as they indicate that provinces are responding to different circumstances, such as the differences in costs of service delivery.

A portion of each province's Equitable Share be calculated to ensure the provision of primary health care based on a per capita cost for four different age and gender target groups and on the anticipated degree of utilization, poverty levels and population dispersion.

Research on the Health Sector (see Annexure C) suggests a definition of primary health care that covers District Services (mainly clinical services) and a portion of Hospital Services that deals with out-patients. A high degree of inequality between provinces in terms of per capita costs is noted. The average cost of primary health care per capita is calculated to be R183 per year.

A portion of each province's Equitable Share be calculated to ensure the provision of social security based on:
Average per capita grant amounts for the six social security programmes (means tested by poverty, age, gender and disability), with
Allowance for progressive phase-in rates.

Research on the Welfare Sector (see Annexure C) suggests that the FFC's PES Model parameters are essentially the same as those followed by most provinces. Increases in grant amounts have been noted. The report also indicates greater detail on means-testing in various provinces and there may be cause to adjust poverty cut-off points in the PES Model.

On the basis of its current assumptions, the FFC's PES Model generates the following allocations to basic health, education, and welfare for 2001/02. The table below provides an indication of how provincial governments might choose to budget for the provision of basic services.

Table 3a Indicative Calculations for Provinces in the Provision of
Basic Health Care, Basic Education, and Social Security

Other Provincial Expenditure Assignments
Following the vertical division of revenue presented in the Division of Revenue Bill of 2001, it follows that what remains of a province's Equitable Share after allocations for the provision of mandatory basic services and fixed institutional costs (that is, the I-Element) are the other functions assigned to provinces by the Constitution (i.e. the B-Element). The FFC's current PES Model for 2001/02 generates the following indicative division between basic services and other functions and is intended to highlight the trade-offs that provincial governments may need to make.

Table 3b Indicative Allocations for Provinces between Basic Services and Other Functions

Proposals for further work by the FFC
In light of concerns expressed by Government on the application of its methodology only to health, education, and welfare, the Commission proposes that consideration be given to identifying and investigating other components such as provincial infrastructure, early childhood development, adult basic education and training, secondary health care and welfare services.

With the recent improvement in the medium-term sustainability of provincial finances and the selective relaxation of cost-containment measures, a number of national priorities have been identified by Government for consideration by provinces. These include:

Increased take-up of the child support grant. In this regard, the FFC's PES Model calculates the anticipated funding requirements for all six social security grants and includes a take-up parameter, which can be adjusted on an annual basis to assist provinces in budgeting for the increased demand. The FFC regards the provision of the child support grant as a "basic service".

Increased allocation of social sector spending on complementary non-personnel inputs (e.g. text-books and medicines) and essential professional and managerial staff. The FFC can consider including measures of structural efficiency (such as ratios of personnel to non-personnel expenditure) in its calculations of the funding needs of "basic services".

Maintenance of provincial infrastructure and capital equipment. The FFC would support initiatives by provincial governments to establish infrastructure or capital funds which could match conditional capital grant allocations from the national sphere.

-4- CONDITIONAL GRANT SYSTEM
The FFC supports the initiatives of the National Treasury to consolidate and rationalize conditional grants and agency payments from nationally-raised revenue into a more simple and streamlined system of fiscal transfers. Provincial Treasuries might consider similar systems reform in their fiscal dealings with municipalities.

An overview of conditional grants from the national to the provincial and local spheres is offered below.

Social Sector Grants
The National Department of Health offers a number of operational, institution-building and capital grants to provincial health departments.

Conditional grants for operational or current expenditure include the:

Central Hospital and Redistribution of Specialized Health Services Grants;
Integrated Nutrition Program.

With respect to (a), The FFC suggests that these grants be conditional on a minimum standard of service being provided through these facilities. Consideration might be given to treating these facilities as a national program, rather than a provincial one. In this way, complex measurement issues relating to spill-over effects can be minimized.

Capital infrastructure grants include those for the construction of two academic hospitals and the rehabilitation of others. The FFC suggests that consideration be given to including the latter grant in the Provincial Infrastructure Grant.

The projected rapid increase in the funding made available to the National Department of Education's "Early Childhood Development Program" over the medium-term is welcomed. The FFC suggests that consideration be given to including Early Childhood Development as a component of constitutionally mandated basic education.

Provincial Infrastructure Grants
In its May 2000 document, the FFC's fifth recommendation suggested that provincial infrastructure backlogs be funded through conditional grants from nationally raised revenue. The FFC therefore welcomes the significant projected increases in the National Treasury's Provincial Infrastructure Grant over the medium-term, and notes that Government has acknowledged the Commission's recommendation in this regard. The FFC is developing a capital grant model which can be used as a tool to assess the impact of this grant on infrastructure backlogs.

Proposals relating to the design and conditionality of the Provincial Infrastructure Grant are supported in principle. These include (a) the use of a formula to determine the horizontal allocation between provinces, (b) the principle of matching grants by provinces, and (c) the requirement that such apply to maintenance and rehabilitation of infrastructure as well as new construction.

The Provincial Infrastructure Grant is intended to cover infrastructural requirements of the Education, Health and Provincial Transport functions as well as "rural development". The FFC suggests that the concept of "rural development" needs to be more clearly defined in relation to the respective functions of provincial and local government.

4.3 Municipal infrastructure grants
Section 12 of the Division of Revenue Bill 2001 states that municipal infrastructure allocations will be transferred according to a framework prescribed by National Treasury. This framework will be determined in consultation with the national departments of Provincial Affairs and Local Government, Water and Forestry, Housing, Public Works, Mineral and Energy Affairs and Transport.

The FFC supports the initiative of developing an integrated planning approach to the provision of municipal infrastructure.

The fragmented allocation mechanisms currently in place cannot be conducive to integrated development. Services should not be viewed in isolation, as some services are interrelated. For example, developing a system of waterborne sewerage may require the upgrading of local wastewater treatment works, and new or upgraded roads can facilitate the provision of services such as refuse collection. In addition the current system allows duplication for service provision. For example, the Consolidated Municipal Infrastructure Programme covers water and sanitation projects, but so does Community Water and Sanitation Supply programme. Even if such grants have different target groups, there is bound to be some overlap. Moreover, further uncertainty is created by the fact that separate national departments that have separate institutional arrangements that currently administer infrastructure grants.

Therefore in determining the new framework, consideration could be given to consolidating municipal infrastructure grants. Four comments are made in this regard:
The Housing Fund includes provision for municipal infrastructure, namely the reticulation of water, sanitation, road access and electricity. Co-ordination between the various bulk infrastructure grants is crucial in avoiding the discontinuities of providing for bulk and reticulated infrastructure separately.
The approach of the Department of Water Affairs and Forestry in distinguishing between capital and operating grants is supported in principle.
Consideration could be given to establishing a mechanism, which ensures that municipalities confirm their willingness to take on the operational commitments following the transfer of a capital asset.
An approach of classifying infrastructure programs by urban, rural and regional economic development objectives may be considered useful.

4.4 Institution-Building Grants
A number of financial management and institutional restructuring grants for provincial and municipal governments are listed in Schedules 3 to 5 of the Division of Revenue Bill. The approach of consolidating these grants is supported, especially to avoid duplication of grants offered by the the National Treasury and the Department of Provincial and Local Government.

-5- PROVINCIAL REVENUE-RAISING POWERS
Provincial Tax Powers
The Intergovernmental Fiscal Review 2000 notes the budgeted decline in provincial own revenue. Some investigation is suggested as to whether this reflects a reduced incentive to collect own revenue or a prior classification of former national government transfers as provincial revenue.

The FFC suggests that most current provincial taxes are essentially inefficient, requiring high administrative costs and serving more of a regulatory or supportive than a revenue-raising function. Further research into the allowed list of provincial taxes and incentives to encourage own revenue collection will be undertaken by the FFC.