Division of Revenue Bill: Hearings

-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.

Appendix 4:
SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION (SALGA)
REPORT ON THE LOCAL GOVERNMENT BUDGET FRAMEWORK 2001/2002

1. SUBJECT
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.

2. PURPOSE
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.

3. BACKGROUND
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.

DISCUSSION
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.

COMMENTS BY SALGA
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.

SALGA AS ORGANISED LOCAL GOVERNMENT STATE THAT THE RENDERING OF FREE SERVICES TO ALL AS PER THE MANIFESTO, SHOULD BE SEEN AS A SUBSIDATION AT THE BASIC LEVELS OF SERVICES BY UTILISING THE EQUITABLE SHARE ALLOCATION AND THROUGH TARIFF CROSS SUBSIDISATION AND STEPPED TARIFFS.

SECONDLY, BY ADDRESSING THE POOR, ANYTHING OVER AND ABOVE THE RENDERING OF FREE BASIC SERVICES AS STATED IN THE PARAGRAPH ABOVE, SHOULD BE SEEN AS THE COMPETENCY OF THE NATIONAL GOVERNMENT, AND IF LOCAL GOVERNMENT SHOULD RENDER SUCH SERVICE, OUR VIEWPOINT STANDS AS PER OUR SUBMISSION - SPECIFIC FUNDS COVERING THE COST OF THE SERVICE AND ANY ADMINISTRATIVE COST FOR SUCH FUNCTION, SEPARATE FROM THE EQUITABLE SHARE ALLOCATION.

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.

RECOMMENDATIONS
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:
DIVISION OF REVENUE BILL, 2001
PRESENTATON ON BEHALF OF THE AUDITOR-GENERAL

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.