Division of Revenue Bill: adoption

NCOP Finance

02 March 2004
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Meeting report

FINANCE SELECT Committee

FINANCE SELECT COMMITTEE
3 March 2004
DIVISION OF REVENUE BILL: ADOPTION

Chairperson:
Ms G Mahlangu (ANC) [Gauteng]

Documents handed out
Division of Revenue Bill [B4-2004]
Portfolio Committee Amendments to Division of Revenue Bill [B4A-2004]
Gauteng Final Mandate
Western Cape Final Mandate
Mpumalanga Final Mandate
Limpopo Final Mandate
Northern Cape Final Mandate
Free State Final Mandate
North West Final Mandate
Kwazulu-Natal Final Mandate

SUMMARY
The South African Local Government Association (SALGA) raised the following concerns with the Bill: - Clause 8 allowed the municipality to withhold payment to the public entity for services rendered for reasons not agreed upon the in service level agreement.
- Clause 11 allowed Treasury to impose additional conditions that could further exclude municipalities from receiving the infrastructure grant.
- Clause 13 did not stipulate whether the capacity building framework would be devised in consultation with SALGA.
- Clauses 16, 23 and 26 dealt with rollovers and, because it did not stipulate a clear measure for what constituted underspending, allowed National Treasury to shift its parameters.
- Clause 18 did not stipulate whether SALGA would be part of the consultation process in deciding the role of local government structures.

The Committee stated that it was sympathetic to SALGA's concerns but thought this was not the appropriate forum to address them. They urged SALGA and National Treasury to in future resolve these matters between themselves before addressing the Committee, as this would expedite proceedings. Members then presented their Final Mandates and adopted the Bill without effecting any amendments.

MINUTES
Division of Revenue Bill
The Chair informed Members that she had consulted the SA Local Government Association (SALGA) on the Bill, and they would now be addressing the Committee on their concerns. Treasury officials present would then also respond to those issues. She reminded Members that, although the National Assembly has adjourned for the term, this Committee should not shy away from proposing amendments.

Clause 8: Transfers to entities
Ms S Kesaobaka-Makotoko, SALGA Manager: Municipal Finance and Fiscal Relations, stated that SALGA acknowledged that the clause was good for local government. However, it was concerned particularly with 8(4) and 8(5) that suggested Treasury could withhold transfers to municipalities when there was a disagreement between it and the public entity. The municipality could decide to withhold payment for a number of reasons, one of which was that the public entity did not live up to the service level agreement. This clause thus deprived the municipality of the ability to determine the arrangement between it and the public entity.

Mr M Booysen, Treasury Director: Intergovernmental Fiscal Relations, responded that in the case where a public entity failed to provide an acceptable level of service, the municipality should have the right to withhold payment. There could also be other reasons, and so this clause had been included.

Mr l Fuzile, Treasury, stated that the intention was to ensure that public entities that incurred costs in servicing municipalities in good faith, were not disadvantaged by municipalities that refused to pay afterwards. Discretion to withhold the direct transfer to the public entity would not be exercised in a reckless manner, but a due process mechanism would occur to ensure that the matters provided for in the service level agreement were complied with. This process would then determine whether it was unfair for the municipality not to meet its obligation. This kind of due process mechanism could not be legislated.

Mr M Makoela (ANC) [Limpopo] saw no ambiguity in the clauses. Clauses 8(4) and (5) flowed from Clause 8(1) that allowed the municipality itself to transfer payment to a public entity. Clause 8(4) and (5) then provided for following steps if that municipality failed to transfer the funds after service delivery.

Mr Musa Soni, SALGA: Director of Policy and Strategy, stated that SALGA's point related to different spheres of government. Public entities were not accountable to the public because they were set up either directly or indirectly by municipalities. Public entities flouted this accountability when the possibility was created for Treasury to transact directly with the public entity, and the public accountability of elected leadership at local government level was thus removed. This was even worse in the absence of a due process mechanism, as was the case in this clause. It was left to the discretion of the parties involved in the transaction. The primary issue for SALGA was who would be accountable for public resources at a local government level.

The Chair accepted the point made by Treasury, but Clause 8(4) did not provide such a due process mechanism. The Committee should apply its mind to this matter

Mr Fuzile replied that the aim was to prevent this legislation from being too wordy. Service level agreements would provide for this kind of intervention. If a provision were inserted that provided for a due process mechanism, there would have to be subclauses to spell out these procedures. The expectation instead was that the service level agreement should accommodate such a mechanism.

The Chair stated that normal legislative practice was to refer to a due process mechanism in the clause itself, and the contents could be spelt out in detail in regulations. This reference was lacking in the Bill.

Mr Soni suggested that a reference be inserted regarding a consultation process between the municipality and the public entity, which would create space for dialogue between the parties.

Mr Makoela sympathised with SALGA's concerns but stated that this Bill was not the only legislation that governed intergovernmental relations between Treasury and other spheres of government. SALGA's concern was probably covered in the Systems Act, and it would not thus be wise to transfer those provisions from existing legislation into this Bill.

The Chair stated that, over the past few years, this Committee had informed Treasury that it was not of the view that these kinds of details should be included in legislation, and Treasury had conceded to this. Yet every year, this Committee was faced with legislation that contained activities that should be reflected in some other way in other pieces of legislation, such as the Municipal Finance Management Act.

Clause 11: Municipal infrastructure grants
Ms Kesaobaka-Makotoko stated that a process had been decided to drive the formula-driven allocation of municipal infrastructure grants. There had been adequate consultation in that process, but the current formulation implied that there were additional clauses from National Treasury that related to norms and standards in Clause 5(7). SALGA stressed the need to ensure that access to infrastructure grants targeted poverty and development.

Currently only 64 of 284 municipalities had received unqualified audit reports, and in the previous financial year, at least seven municipalities had not submitted their budgets and financial statements to National Treasury. A clause which stated that municipalities would not, as was predetermined in the MIT 3, receive municipal infrastructure grants according to the current more lenient conditions, were not required to now redress historical backlogs. It did not make sense to make the receipt of municipal infrastructure grants subject to the fulfilment of the strict audit requirements, when most of the municipalities were not able to meet the more lenient stipulations. SALGA's concern was that the conditions contained in the clause should have been discussed at the MIT 3 stage, so that SALGA could have raised these concerns. There would then have been no need to raise issues at this late stage.

Ms M Ngqaleni, Treasury Director: Intergovernmental Relations Division, responded that SALGA appeared to have misinterpreted the clause and its intention. It actually referred to three-ear capital plans to align all the required budget submissions of municipalities in terms of Clause 5(7)(c). It stipulated that municipalities should submit their budgets together with their three-year plans. The conditions stipulated were already included in the infrastructure grant framework, as agreed to in a MITT meeting.

Ms Kesaobaka-Makotoko stated that the implication that National Treasury might redirect funds was contained in the last sentence in Clause 8(3). The problem was thus that this provision allowed National Treasury to set additional conditions, and the municipality might not be able to meet those and so would not be able to receive the grant. The funds could then be redirected to another municipality or another organ of state. SALGA understood this to be a departure from the principle underlying the grant.

Mr Fuzile responded that the intention was to direct all funds due to municipalities to them, so that they could have ultimate control over those funds and could take decisions ahead of time. This would also allow municipalities to implement programmes more effectively, especially those related to infrastructure. The dispensation created by the Bill marked a departure from the previous set-up in which there was much central control of a number of the funds destined for municipal infrastructure. The transition had to be carefully managed so that the new dispensation was not worse than its predecessor. The Bill did not allow for funds to be taken away from one district municipality and be transferred to another due to the risk of underspending. Instead, it stipulated that where a municipality failed to comply due to a lack of capacity to provide services, the district municipality with capacity would then receive the funds to provide that service. It would not make sense to transfer the funds to the municipality when it could not provide the service.

Mr S Ralane (ANC) [Free State] stated that the capacity of municipalities was raised constantly by various Committees. This clause sought to address that and one should not be suspicious that National Treasury was instead trying to impose other conditions to disadvantage municipalities.

Mr H Bekker (IFP) [Kwazulu-Natal] agreed and expressed that the provision catered for abnormal situations. Under normal circumstances, there would be no withholding of funds and no direct transfers. If there was a lack of capacity, then there was the definite possibility that the funds allocated could be misused and so control should be exercised by National Treasury.

Mr G Lucas (ANC) [Northern Cape] did not understand SALGA's concern as the provision did not appear to have any problems with regard to the implementation of the reporting requirements. He agreed that proper accountability mechanisms had to be put in place for municipalities, but this Bill was not the appropriate vehicle within which to address that issue.

The Chair agreed and stated that this matter should be discussed further by both National Treasury and SALGA, possibly via the Public Audit Bill.

Ms Kesaobaka-Makotoko stated that SALGA was not questioning the need for financial accountability, but instead was concerned about the implications of the additional conditions that could be set by Treasury.

Clause 13: Municipal capacity budget allocations
Ms Kesaobaka-Makotoko said it was important that capacity-building was as co-ordinated as possible, especially with regards to the numerous relevant legislative amendments that would be coming through Parliament from 1 July 2004. SALGA's concern was that Clause 13(1) did not stipulate whether the capacity-building framework would be determined in consultation with SALGA. They had been very active in designing of a capacity-building framework with the Department of Provincial and Local Government.

She continued that during the 2003 Budget Forum, National Treasury had proposed that the capacity-building grant be integrated into the equitable share in 2005, and this was the position reflected in the Bill. SALGA opposed this because the current formative capacity-building framework was not able to measure success adequately. They instead proposed that this review be conducted after three years with a proper plan to guide the intergovernmental framework.

Mr Booysen replied that this clause had been discussed for some time. An interim framework was gazetted in 2002 with specific areas of skills that needed to be prioritised for the framework's integrated planning, financial management, budget planning and spatial planning. The Department was currently working on a capacity-building strategy for municipalities for the next ten years.

Mr Booysen felt that SALGA had misinterpreted the decisions taken at the Budget Forum. The allocations had already been published in the Medium Term Budget Policy Statement (MTBPS) in October 2003. It was agreed that the capacity-building allocations would be capped and would then be reviewed in the outer year.

Clauses 16(4), 23(1) and 26(1)
Ms Kesaobaka-Makotoko stated that these clauses related to roll-overs. They were not new clauses but were slightly modified. SALGA did not disagree with the withholding of funds as this was necessary for fiscal accountability. The problem was that the Bill did not contain a predetermined mechanism that stipulated what constituted underspending in local government. This meant that at any time, National Treasury could shift its measures. The introduction of such a framework had to be taken into account when considering the 2004/2005 Division of Revenue Bill.

Mr Fuzile appreciated Mr Ralane's earlier statement that decisions should not be viewed with "exaggerated suspicion". SALGA feared that National Treasury could arbitrarily state that funds would be re-allocated due to underspending, and that there would be no way of proving that underspending or failure to agree on the performance of a municipal service. This could surely not be the intention.

He stated that there were several things that first had to happen even before spending took place, which included the compilation and submission of a plan as contemplated in Clause 11. When a municipality failed to provide this plan, it was a clear signal that its potential to spend was very low. It was not necessary to specifically stipulate a limit for underspending in the legislation ass this was not easilly determined. National Treasury could, through more structured interaction with SALGA prior to coming before this Committee, have reached more understanding on the thinking behind this clause and how it would be applied in practice.

The Chair stated that it had often happened that such discussions between National Treasury and SALGA only came to the fore during Committee meetings. These matters should have been resolved beforehand.

Clause 18: Annual Financial Statements for 2004/2005
Ms Kesaobaka-Makotoko stated that Clause 18(3) referred to the Municipal Finance Management Act that should have come into operation on 1 July 2004, yet SALGA had not yet been consulted on the roles expected of local government structures. National Treasury should indicate its plans to ensure that those municipalities currently unable to comply with these requirements, would be supported.

Mr Fuzile conceded that National Treasury had not published a plan for the implementation of the Municipal Finance Management Act, but there were complications with timing as this was an election year. Although the Municipal Finance Management Bill came into operation immediately, the financial statements only needed to be submitted at the financial year end of 2004, and the municipalities thus still had time to comply.

The Chair stated that it was a serious problem that the Municipal Finance Management Act did not have an implementation plan, but doubted whether this would stall the Bill. Instead, clarity of understanding was needed between SALGA and National Treasury on the implementation phases of the Act. This Parliamentary meeting was not the appropriate forum.

Mr Fuzile responded that there was an implementation plan for the Municipal Finance Management Act in place, but it had not yet been published. The question was now whether the Municipal Finance Management Act should be launched before or after the elections. National Treasury suggested after the elections.

Discussion
Mr Ralane stated that the issues raised by SALGA, apart from concerns regarding consultation, were well covered in the Bill. It was thus the position of the Free State that the Bill be accepted as it stood.

Mr Makoela agreed and stated that while the Committee sympathised with SALGA's concerns, there were other processes and forums in which they should be raised before coming to this Committee. He proposed that the amendments suggested by SALGA could not be accommodated here. The Committee agreed that SALGA's concerns could not be included in the Bill.

Final Mandates
KwaZulu-Natal province
Mr Bekker presented the Kwazulu-Natal final mandate (document attached) and stated that it supported the Bill, provided the amendments proposed did not alter its substance.

Gauteng province
Dr E Conroy (NNP) [Gauteng] presented their final mandate (document attached) which supported the Bill.

North West province
Mr Z Kolweni (ANC) [North West] presented their final mandate (document attached) which supported the Bill.

Eastern Cape province
The Chair informed Members that the Eastern Cape province had not submitted a final mandate, but had forwarded it to herself expressing their support.

Limpopo province
Mr M Makoela presented the Limpopo final mandate (document attached) which supported the Bill.

Northern Cape province
Mr G Lucas presented the Northern Cape final mandate (document attached) which supported the Bill.

Western Cape province
Mr K Durr (ACDP) [Western Cape] presented the final mandate (document attached) of support for the Bill.

Mpumalanga province
The Chair stated that no delegate from the Mpumalanga province was present today, but the province had forwarded their final mandate of support to the Committee.

Free State province
Mr Ralane presented the Free State final mandate (document attached) which supported the Bill.

Bill adoption
The Chair read the Motion of Desiribility to which Members agreed. The Chair put the entire Bill to the Committee, and noted that Members agreed to it. She read the Committee Report on the Bill to which Members agreed, subject to the effecting of technical amendments.

She stated that she would however like to raise the following problems, because they should not persist into the new Parliament. There were always difficulties when considering the Division of Revenue Bill, especially between SALGA and National Treasury. Those issues should be clarified in a consultation process between SALGA and National Treasury long before they came to Parliament. It was not fair for Committee Members to listen to their back and forth discussion. She was not happy that the Committee passed the Bill without considering SALGA's concerns, especially those raised with Clause 8 of the Bill. The next Parliament should also look into ways of using the Financial and Fiscal Commission (FFC) recommendations more beneficially. She also suggested that Treasury should improve its uneasy relationship with the NCOP. The Director-General had only appeared before this Committee once over the last five years.

At the conclusion of the meeting, Mr Lucas and Mr Bekker thanked the Chair for her leadership over the last five years. The Chair in turn thanked Members and the Committee Secretary, and stated that chairing this Committee had been a great learning experience for her. She wished all Members the best for the future.

The meeting was adjourned.

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