Division of Revenue Bill: Hearings

NCOP Finance

06 March 2001
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report


6 March 2001

Relevant documents:
National Treasury Presentation (See Appendix 1)
Financial and Fiscal Commission Presentation (See Appendix 2)
SALGA submission (see Appendix 3)
Auditor General Presentation (see Appendix 4)
Department of Health Presentation
Division of Revenue Bill [B11-2001]

The National Treasury dealt with its constitutional mandates to provide resources to all three spheres of government. The presentation dealt with the revenue raising powers of provinces and municipalities and how this fact impacted on the total allocation allotted to each sphere of government. An important point in case they added, was that the fiscal system of the country was maturing, and thus the capacity of the National Treasury to deal with the challenges facing the division of revenue was strengthening.

The Financial and Fiscal Commission dealt with the recommendations they had tabled for the current financial year. It stated that its focus had been on the provincial share with the use of the costed-norms approach as an analytical tool. It was also stated that with the new municipal structures in place, greater emphasis would now be placed on ensuring capacity building of municipalities.

The Office of the Auditor General concerned itself with the accountability arrangements especially in respect of transfers and grants. They asked that a closer look be taken at section 31(3) of the Bill as being inconsistent with the function of the Auditor-General and noted that section 15(2) could result in a weakening of financial management.

Department of Health spoke on conditional grants. The members of the committee voiced concern over a track record of under-spending by the Department of Health as well as overcrowding at clinics. Dr Chetty (Deputy Director-General of Health) stated that the issues of home-visits and revised hours were currently under investigation by the Department. It was established that provinces submitted business plans in advance before the new financial year for budgetary allocations. The Minister is looking into the possibility of sending consultants to the provinces to help them with the drafting of these business plans.

The SALGA presentation was not minuted. Please refer to their document.

National Treasury
Mr I Monomiat, Deputy Director-General of the National Treasury, presented on the Department's behalf. He stated that Section 2.4 of the Constitution required that government provide resources to all three spheres of government. He added that total allocation of funds is subject to final approval by parliament, this allocation consisting of both the equitable share and unconditional grants. A total of R233 billion had been made available to provinces, which is 26% of GDP. He added that R48 billion had been allocated to national government for debt servicing costs.

He noted that both provinces and local government had tax raising and borrowing powers and that these had to take place within a legal framework. He said that the focus during this financial year would be to increase infrastructure development for provinces. He added that the RSC levies currently being charged by local government were in the process of being re-designed. A problem surrounding local government was that lenders are reluctant to lend to municipalities and thus most borrowing by municipalities is short-term. He said that the introduction of the Local Government Public Finance Management Bill aims to create an environment of assurance for lenders.

There were too many infrastructure, capital and capacity grants and these would be consolidated into fewer but yet more effective grants. He also suggested that municipalities should start preparing three- year budgets in line with the Public Finance Management Act. He explained that the reason that provinces get such a large share of the total revenue was that provinces only raise 3.5% of their total revenue on their own, and thus depend on revenue collected nationally. Another case in point was that provinces perform the most essential social functions such as education, health services and roads. On the other hand, local government raises more than 90% of its own revenue and only one third of municipality services are public goods. National and provincial departments had also taken over the providing of some local government functions such as water provision and building roads.

Mr Durr (ACDP) raised his concern about the gambling industry and how provinces were using it as milk-cow in the absence of their tax raising capacity. He asked the National Treasury if they had considered the devastating effects on the social fabric when approving the gambling licences

The Deputy Minister answered that gambling had gone through an intensive national consultation process and the decision to go ahead with the casinos was not foisted upon provinces. He also added that the Provincial Tax Regulation Bill was considering the medium term potential being increased for provinces to raise revenue.

Mr Kolweni (ANC) commented that it was good that conditional grants were being allocated to local government but as long as there was no education process in place to teach municipalities how to access these funds, huge rollovers from financial year to financial would still occur.
Ms Fubbs (ANC) said that the constraining conditions around the allocation of conditional grants were not proving to be useful in addressing infrastructure backlogs. She also added that in the event that these funds do come through, they arrive so late that it is impossible to effect maximum utilisation of such grants

The Deputy Director General said that his department would try to address these issues

Financial and Fiscal Commission
Mr Josie, the Deputy Chairperson of the FFC, acknowledged that the response from the National Treasury towards the costed-norms approach had been well taken. He said that the focus of the FFC during this year would be to redress backlogs. He stated that recommendations with regard to local government had been omitted from their initial 2001 Report since the framework for local government had not been in place yet at the time. He added a need existed to formulate standardised norms and standards in consultation with the relevant stakeholders with particular reference to the Education Department.

Office of the Auditor General
The panel from the Office of the Auditor General: Mr Benjamin, Mr Botes and Mr Conradie was introduced. The Chairperson conveyed to the Committee an apology from Mr S Fakie, the Auditor-General, for his absence from the meeting. Mr Conradie proceeded to make the presentation to the committee on behalf of the Auditor-General. Their interest in the Bill is not with the amounts allocated but with the accountability arrangements especially in respect of transfers and grants.

They asked that a closer look be taken at section 31(3) of the Bill as being inconsistent with the function of the Auditor-General and noted that section 15(2) could result in a weakening of financial management.

Mr Momoniat (Deputy Director-General National Treasury) stated that he did not see section 15(2) weakening accountability and that non-compliance would prove the only weak point.

Mr Taabe (ANC Mpumalanga) referred to point 8 of the presentation with regard to the funding of the proposed viability study.

Mr Conradie stated that section 15(2) could be construed to have changed the nature of the grant from that of conditional to unconditional. He stated further that funding for the viability study would have to be sought as none had been provided for as yet.

Dr Conroy (NNP Gauteng) made a general comment as to the desperate financial situation with which numerous municipalities were faced.

Ms Fubbs (ANC Gauteng) stated that there was a need for clarification as to the exact role of the Auditor-General.

Mr Momoniat stated that if Provinces, Municipalities or Government Departments were not forthcoming with their financial statements then they would have to prove that they should get their share of the budget.

The Chairperson called for the committee to discuss the issues raised in the meeting in a series of meetings that were still to follow. He asked the panel from the office of the Auditor-General to look at the matters raised and see how they could take the issues forward in the meetings to follow. The chairperson thanked the panel for their input.

Department of Health
The chairperson welcomed the Honourable Minister and Dr Nkomo (chairperson of the portfolio committee on Health). The chairperson also welcomed the panel from the Department of Health consisting Dr Chetty (Deputy Director-General of Health), Mrs Mgijima and Mr Muller.

Dr Chetty apologised for the absence of the Director-General as he was attending a court case that was dealing with the issue of affordable drugs. Dr Chetty then proceeded to make a presentation on Conditional Grants .

Ms Fubbs (ANC Gauteng) voiced her concern over a track record of under-spending in the Department.

Mr Kolweni (ANC North-West) raised the issue of over-crowding and understaffing of clinics that he had noticed in his constituency and inquired as to whether plans were afoot for recruitment drives and home visits by health-care workers.

Dr Chetty affirmed that she would look into the concerns raised by the members.

Mr Theron (DP Gauteng) referred to the relatively low grants afforded to the Umtata and Pretoria academic hospitals to upgrade them to the standards that would be expected.

Mr Lucas (ANC Northern Cape) referred to the HIV/AIDS grant and asked whether there was synergy between other departments such as Education, Welfare and Health so that a uniform output was obtained.

In response Dr Chetty stated that all grants were under constant review to investigate problem areas. She stated that in the past there were problems relating to cash flow that resulted from a complicated procedure for claiming grants by National and Provincial departments.
Dr Chetty stated that shortages of staff were not related to conditional grants and that there was a difference between a perceived and actual shortage. She stated that access times were being looked at to accommodate people at times when they were not working as well as home visits.
Dr Chetty stated that HIV/AIDS was one of the biggest priorities of Government and that each department had its own budget for HIV/AIDS.

A member inquired as to whether Provinces submitted medium to long-term or year to year budget requirements and also who monitored the calorie intake for the school's nutritional programme.

Dr Chetty responded by saying that business plans were submitted in advance before the new financial year. The Provincial Head of Health and the National Director-General approved these business plans.

Mrs Mgijima stated that calorie intake was measured at one third of the recommended daily allowance and that in totality it has been seen as a beneficial exercise.

The Honourable Minister stated that the issues raised in the meeting would have to be looked at in conjunction with other Government departments who also have an interest in the various health schemes. She also stated that she was looking in to sending consultants to the Provinces to help develop business plans because of a lack of capacity to do so at Provincial level.

The chairperson adjourned the meeting.

Appendix 1:
National Treasury

Division of Revenue Bill [B11-2001]
6 March 2001
Select Committee of Finance

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

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
- 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 Percentage share 2001/2
National 40,5% [39,4% (2000/1); 40,2% (2002/3; 40,0% (2003/4)]
Provinces 56,4% [57,6% (2000/1); 56,4% (2002/3; 56,7% (2003/4)]
Local 3,1% [3,0% (2000/1); 3,2% (2002/3; 3,3% (2003/4)]

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)

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 available]

R million

Revised 1999

2000 Budget

2001 Budget

Medium term estimate

Medium term estimate

E Cape






Free State
























N Cape






N Province






North West






W Cape












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
[Ed. Note: table not included; email
info@pmg.org.za for it]

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
[Ed. Note: table not included; email
info@pmg.org.za for it]

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

National Treasury grants: Restructuring grant
Municipalities with over R300 mil budgets
· Transformation and modernisation
· Restructuring to improve efficiency
· Rigorous analysis of fiscal position
· Evidence of real effort
· Johannesburg:R525 million over 3 years
· Payment in terms of agreements

National Treasury grants: Financial Management
Budget, Accounting and Financial Management
- Three -year budgets
- Local Government Financial Management Bill
· Pilot projects
- metros, district councils, big Category B municipalities
- extend to smaller municipalities thereafter

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

Appendix 2:
February 2001

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.

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

Sphere of Government

Annual Growth 2000/01 to 2001/02

Annual Growth 2001/02 to 2002/03

Annual Growth 2002/03 to 2003/04

















Equitable Share




Conditional Grants












Equitable Share




Conditional Grants












Analysis of the Distribution of the Provincial Equitable Share amongst Provinces

The Financial and Fiscal Commission notes the anticipated growth of individual provincial Equitable Shares as a reflection of the medium-term transition path from existing to targeted allocations in accordance with the current PES formula agreed to by Government.

Table 2b Anticipated Growth in Provincial Equitable Shares for the 2001/2004 MTEF

Sphere of Government

Annual Growth 2000/01 to 2001/02

Annual Growth 2001/02 to 2002/03

Annual Growth 2002/03 to 2003/04





Eastern Cape




Free State








KwaZulu Natal








Northern Cape




Northern Prov




North West




Western Cape




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


Basic Education

Primary Health Care

Social Security





Eastern Cape

6 825 mil.

1 982mil.

4 296 mil.

Free State

2 404 mil.

820 mil.

1 557 mil.


6 014 mil.

1 800 mil.

2 491 mil.

KwaZulu Natal

8 224 mil.

2 432 mil.

4 135 mil.


2 830 mil.

858 mil.

1 371 mil.

Northern Cape

813 mil.

299 mil.

438 mil.

Northern Prov

5 732 mil.

1 577 mil.

2 866 mil.

North West

3 075 mil.

1 025 mil.

1 866 mil.

Western Cape

3 746 mil.

1 067 mil.

1 346 mil.






R 39 662 mil.

R 11 858 mil.

R 20 367 mil.

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


Basic Services

Other Provincial Functions






Eastern Cape

13 103 mil.

4 862 mil.

17 965 mil.

Free State

4 780 mil.

2 238 mil.

7 018 mil.


10 306 mil.

5 542 mil.

15 848 mil.

KwaZulu Natal

14 791 mil.

6 243 mil.

21 034 mil.


5 059 mil.

2 147 mil.

7 206 mil.

Northern Cape

1 549 mil.

984 mil.

2 533 mil.

Northern Prov

10 175 mil.

3 835 mil.

14 010 mil.

North West

5 965 mil.

2 796 mil.

8 761mil.

Western Cape

6 158 mil.

3 604 mil.

9 762 mil.






R 71 887 mil.

R 32 250 mil.

R 104 137 mil.

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.

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.

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.

Appendix 4:

This submission will deal with the Division of Revenue Bill and the framework for conditional grants to local government for the 2001/2002 financial year.

To inform this house on the viewpoints of SALGA with regard to the Division of Revenue Bill for the 2001/2002 financial year, as well as on the proposed legislative framework for the Division of Revenue. It is our intention to recommend to this house a practical role that SALGA can play in the fiscal frameworks associated with conditional grants design and management of conditional grants by various line departments.

Institutionally, the character of municipalities has changed, through the redemarcation of municipal boundaries and the new structural form introduced by the Municipal Structures Act.

The Municipal Systems Act will also introduce operational changes, and parallel to that, the financial systems of local government will be reformed through the introduction of the Municipal Finance Management Bill, Budget Reforms Project and the introduction of the Generally Accepted Municipal Accounting Practice policy framework.

The local government transition and transformation have not and will not be easy in fiscal and financial policy terms. Many municipalities are still facing financial problems associated with inefficient service delivery patterns and high levels of poverty amongst their communities, other because of the ineffective management systems and lack of administrative capacities coupled with inefficient budget systems. In many municipalities non-payment of services plays a major role in hampering effective financial sustainability.
The government policy framework on local government finances identifies the following as key issues:
Local government is a sphere of government independent and accountable, with clear revenue and expenditure responsibilities. The role of the national government is then limited to providing an enabling regulatory environment within which municipalities can effectively and efficiently manage their financial responsibilities.
Local government must be fiscally disciplined in line with constitutional and legislative obligations.
The White Paper on local government points out that own revenue is the primary source of municipality income.
Access of municipalities to capital markets should be increased to effectively enhance independence from other spheres of government. Discipline in financial management should be introduced to spread the burden of funding capital investment equitably over generations and promoting efficient infrastructure and allocation of capital.

Municipal revenue is obtained through the systems of property taxes, regional levies, service charges, and fees. The National Treasury is of the opinion that local government as a whole, from its own revenue base, covers 90 per cent and more of its operating income. This is not true especially with regard to rural areas.

With respect to property taxes, a more coherent national approach to property tax in the form of the Property Rates Bill is currently in the pipeline. The proposed system provides municipalities with a range of options for flexible combinations of taxes on land and on improvements, according to specific circumstances.

The Intergovernmental Fiscal Relations Act maps out a legislative procedure for the division of revenue in South Africa. The Act further provides for institutional structures to facilitate the Division of Revenue process, namely the Budget Council and the Budget Forum. SALGA is recognized by the Act as a body to be thoroughly consulted on fiscal policy matters.

The 2001/2002 division of revenue process was kick-started by the division of revenue workshop, which had the sole intention of attempting to open up the budgeting process in South Africa. Key to the workshop was to outline the fundamentals of fiscal policy framework and technical issues associated with the prioritization of needs in South Africa. The workshop provided an insight into the base line allocations to the municipalities.

The opportunity afforded to us to address this house today is welcomed by organised local government. We believe that we have succeeded to address some of our difficulties and we are positive that our deliberations in this process added significant value. We have experienced this year's process in a very positive way especially at the Budget Forum.

The recommendations contained in the document relative to the above matter are, in the main, welcomed and supported. However, one area of concern, that would have major implications to local government, needs to be reviewed, that is, the issue of free basic services, and the utilization of the equitable share therefore.

Cognisance should be taken of the context under which this particular allocation came into being. The equitable share to local government was, and in our view, not a new allocation of monies to local government, but is merely a redistribution of grants that were given to Provinces to manage or to grant to the previous black local authorities. Although it is clear that these areas fall under the jurisdiction of local government, without exception, the state of infrastructure and the provision of services, to say the least, are precarious and local government will need the equitable share in years to come to address this inadequacy.

It is therefore our strong belief that the equitable share is, in terms of the Constitution, a grant to local government for the rendering of basic services to its communities. The rendering of services includes the maintenance of networks, human resources cost, etc. The current document suggests that the equitable share is targeted to subsidise poor households, which in itself is problematic, and will cater for unnecessary confusion amongst the community at large.

SALGA would further like to state that local government accepts the challenge to render free basic services to the poor in our communities, but would like to register our objection that the equitable share should be used for this purpose.

Free basic services, which will basically mean assistance to the poor, should be handled as a specific transfer of funds allocated for a service, which is not the competency of local government, namely welfare. These transfers should include the direct cost of the service and the administration cost with regard to an indigence register.

Based on a research conducted by SALGA it was clear that the cost for rendering subsidized service to the poor was almost 300% higher than the equitable share allocation. In one particular municipality the cost (R 86 per household per month) was R 7,4 million per year, whilst the equitable share was R 1,4 million, thus a shortfall of R 6 million per year, excluding the cost for the administration of indigence register.

Given the above, it becomes more and more problematic to local government to execute its obligatory functions as stated in the Constitution and deliver a service that should better the lives of the people of South Africa, particularly the poor.

In view of the foregoing, SALGA believes that the manner in which the S grant component of the equitable share as set out in the second bullet point of paragraph 7 in the Discussion document creates expectations, and accordingly should be deleted, as this will create major problems at a practical level.
The paragraph in question should be substituted by the following:

The S grant is provided to enable local authorities to provide some relief to the poor by means of introducing suitable life-line tariffs and /or step tariffs in respect of basic services. The Municipal Systems Act requires local government to give consideration to this issue.

SALGA is of the opinion that there should be a clear distinction between the concept of free basic services for all, as per the Manifesto, and the assistance of the poor. It is clear that there are various views with regard to this matter, and we as SALGA would like to see a consensus direction with regard to this.

Despite what is said in our submission and the arguments for and against free basic services, the time has come to clearly state publicly.



It has become clear that the Department of Finance, and by extension the Financial and Fiscal Commission are beginning to appreciate the importance of local government.

SALGA appreciates the increase in the equitable share, though the share of local government is still a low percentage of nationally raised income.

The proposed incorporation of the water and sanitation grant into the equitable share may assist with the provision of free basic services to the poor.

The report states that the base with regard to poverty in households be changed from household income to imputed household expenditure. It is not clear what the definition of imputed household expenditure entails and what the effect of this change would be.

SALGA mainly supports the principle of cross subsidization in tariffs, including a life-line tariff for some of the services, especially water. If the supply of electricity is no longer the competency of local government, it is clear that it will negatively influence service delivery as well as the financial position of local government.

SALGA would like to register its contention to be part of the process to distribute and monitor the conditional grants. It became evident to us that some of the grants to local government are not transferred in the financial year allocated. This process should be streamlined and care should be taken that these grants reach local government as planned, and that there should thus be no rollovers from previous years.

Chairperson it is thus our humble submission that in the main, we support the recommendations as set out in the document but with the following minor exceptions:

That this house takes note of SALGA's concern with regard to the concept of free basic services and the way that it is set out in the document.

That SALGA recommend that the second bullet point of paragraph 7 of the discussion report be substituted as indicated earlier.

That SALGA supports the concept of cross subsidization in tariffs, including a life-line tariff for some of the services, especially water.

That SALGA recommend that the subsidization of services to the poor over and above the concept of free services, becomes a joint process between Bulk suppliers of services and all spheres of government, and that strong links be formed between the parties concerned to address this urgently.

That SALGA further recommend that a national study with regard to the subsidization of the poor over and above the concept of free basic services for all, be undertaken within all municipalities to determine the extent thereof.

That with special reference to local government conditional grants, it be recommended that the Division of Revenue Act make provision that Departments with grants to local government should allow SALGA to have access to and be informed on the fiscal framework which amongst other will include:

Rationale behind the grant framework
The amount dedicated for a particular function in Local Government
The implementation programme and time table for spending for monitoring purposes.
Conditionalities associated with the grants
National and provincial accounting officers
Principles of transparency in grants design

That SALGA effectively support the rationalisation of conditional grants to local government and the proposed three year allocations of grants to municipalities based on the National Treasury Medium Term Expenditure Framework in order to effect proper planning of municipal services.

Lastly, Chairperson, SALGA would like to recommend that their should be a clear distinction between the rendering of free basic services to all as per the Manifesto, and the rendering of subsidized services to the poor, over and above the concept of free basic services to all.

Chairperson, I would like to thank you for this opportunity to address this house on this matter and hope that the recommendations by SALGA will add value to the total process.

Appendix 4:

My apologies for Mr. Fakie who is not available due to other pressing matters as you can appreciate. Chairperson, Members of Parliament, other dignitaries, ladies and gentlemen.

Our interest in the Bill is, naturally, not with the amounts allocated but with the accountability arrangements, especially in respect of transfers and grants.

In September 2000, the Auditor-General amended the prescribed format of financial statements of municipalities to require more detailed disclosure of transfers and grants received, and what it was being spent on.

Our frustration with being unable to follow the Rand through to where it was being spent in relation to the newly created transport agencies, lead to a special report on those and other agencies which was discussed at SCOPA on 10 May 2000. In this report we included recommendations on the timeous strengthening of accountability structures in the event of the alienation of State functions or assets.

From the outset the Office of the Auditor-General therefore collaborated with the National Treasury to strengthen accountability arrangements in this and other legislation, and we support the objectives that Treasury is trying to fulfill in this regard. We have made several inputs that have been accommodated already. In essence we argued that out role is to report independently on the measures instituted. This can be shown diagrammatically as follows:

The Auditor-General has the following more general comments to offer:

The requirements regarding the management of grants and transfers in, for example, parts IV, V and VI of the Bill could be more appropriately contained in long-term legislation like the PFMA, in stead of an annual Bill.
We are not able to confirm whether departments, municipalities and other organs of state will be able to comply with the requirements. In many instances, for example, internal audit functions are not yet operational and, in the case of municipalities, enabling legislation is not yet in place.
Our reports are to some extent subject to the availability of financial statements of the auditees, which poses a problem in many cases; where audit fees are also in arrears, the Auditor-General may have to limit the audit.
More guidance could be necessary on the linkage between performance objectives and the division of revenue.
The prescribed format of financial statements should include adequate disclosure of transfers and grants made or received.
The requirement of section 15(2) of the Bill may weaken financial management if proper alternative management measures are not instituted by government.
The requirement of section 31(3) is inconsistent with the mandate of the Auditor-General, and we suggest that this function may be performed by the legislature on this Council.
We have repeatedly reported on the desperate financial position of many municipalities and warned about the impact of this on crucial service delivery, and hope that this Bill will be used to alleviate that situation. We recommended that a viability study on the local government services themselves, not on the individual municipalities, should be done to properly inform the budgetary process.

Ke leboga monyetla wa gobolela ka kgwebo ye, e kgatlisang le go lakaleta mahlase go lekgotla le.

Thank you for the opportunity to speak in such august company and our best wishes for the endeavours of this council.


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