Division of Revenue Bill: negotiating mandates

Meeting report

FINANCE SELECT COMMITTEE
14 March 2001
DIVISION OF REVENUE BILL: NEGOTIATING MANDATES

Documents handed out
Division of Revenue Bill
Letter from the Auditor-General (See Appendix 1)
Negotiating mandates from:
Kwazulu-Natal (See Appendix 2))
Gauteng (See Appendix 3)
Eastern Cape
Northern Province
Northern Cape
North West
Free State
Western Cape

Chairperson: Ms D Mahlangu

SUMMARY
The majority of the negotiating mandates with the exception of Kwazulu-Natal and Gauteng accepted the Bill without amendments. The Chair expressed her disappointment in the way provinces had drafted their negotiating mandates as the majority of the provinces, with the exception of Kwazulu-Natal and Gauteng, had not raised any concerns. A heated and lengthy discussion ensued on the issue.

Concern was expressed over the granting of conditional grants where the required conditions have not been met. Specifically that a precedent could be set for allocations to be made to provincial departments despite the required conditions having not been met. The Auditor General's letter raised concerns over certain clauses of the Bill, especially Clause 31(3) which confers an additional function upon the Auditor General. The committee remained unconvinced by the Auditor General's argument for not wanting to perform the function.

The National Treasury tried its best to allay most of the concerns. The committee however seemed convinced that the National Treasury was opposed to the Bill being amended, as much they tried to deny it.

MINUTES
The Chair commented that in reading some of the negotiating mandates, she felt that members had not applied their minds sufficiently to the Division of Revenue Bill. She was impressed with Kwazulu-Natal and Gauteng's mandates as they reflected exactly what their concerns were on the Bill, be it of a substantive or technical nature. However she was disappointed with the rest of the provinces for not being so thorough. The Chair specifically singled out the Western Cape and the Northern Province \. She said that it reflects a lack of interest by members in the committee's work.

Mr K Durr (ACDP, Western Cape) took exception to the Chair's comments. He felt that the Western Cape had contributed greatly to the Bill in discussions directly with Treasury. He explained that the reason for their inputs not being reflected in the negotiating mandate, is because they are already reflected in the Bill itself.

Mr I Momoniat, National Treasury's Chief Director: Inter-governmental Fiscal Relations, confirmed this to be true.

Mr B Marais (ANC, Free State) shared Mr Durr's feelings.

Mr Makgatlo (ANC, Eastern Cape) stated that he understands the Chair's concerns and conceded that his negotiating mandate document lacks substance.

Dr E Conroy (NNP, Gauteng) said that this problem stems from the timing of the Bill which is immediately after the tabling of the National and Provincial Budget. Each year the committee has to rush through the Bill in order to get it passed. He suggested that the Bill be tabled prior to the Medium Term Budget Policy Statement, which occurs in the September preceding the forthcoming financial year.

The Chair felt that her comments were not baseless. A mandate of one paragraph is not good enough. The committee must be given full explanations of mandates. She emphasised that Executive Councils of provinces are given an opportunity to impact on the Bill and yet they do not seize the opportunity.

Mr Durr stated that the inference that can be drawn from the Chair's comments is that no discussions on the Bill had taken place prior to the negotiating mandate which was not the case. He also pointed out that no guidance had been given on the format for the negotiating mandate. In the future he would submit a concise negotiating mandate.

The Chair replied that there is no standardised format for negotiating mandates. In essence, it should include what was discussed on the Bill leading up to the negotiating mandate.

Dr Conroy stated that it seems that an executive summary of discussions would suffice.

The Chair suggested that the committee proceed issue by issue rather than looking at the mandates individually one at a time.

Clause 15(2): Duties of transferring national officer
" A transferring national officer who has not complied with subsection (1) must, unless the National Treasury has, for exceptional reasons directed otherwise, transfer such funds unconditionally to provinces and municipalities: Provided that the Minister may determine that such funds be allocated on the basis of the equitable division of revenue formula."

The Chair stated that the gist of the comment made by Gauteng on the clause was that the spirit of the clause is appropriate but that it only needs to be reworded.

Mr Momoniat requested that if amendments are to be suggested, that provinces should identify whether they are substantive or technical amendments.

Mr V Kahla, legal advisor to the National Treasury, added that he would deal with the subsection from Gauteng's perspective.

Mr Makgatlo noted that a conditional grant is provided for a specific priority programme. He asked if this subsection allows for funds to be allocated for a different purpose.

Mr Momoniat replied that the purpose of the grant remains exactly the same, only the mechanism used to make the allocation is different.

Mr Makgatlo felt that if provinces do not fulfill the requirements of the conditional grant and yet the funds are to be allocated to them in any event, then what would force them to comply with the requirements in the future?

Mr Momoniat pointed out that these grants have already been approved by national and provincial departments. Even if the conditions are not met, the funds would still be spent on the purpose intended. For example, funds intended for nutrition would only be spent on nutrition. He said that "realistically speaking" the provinces would be unable to fulfill the conditions attached to conditional grants by 15 May 2001. It is for this reason that the provision has been drafted. He added that the provision only applies to the current financial year and that in the future if provinces do not meet requirements, they would be disqualified from receiving funds.

Mr Makgatlo was unconvinced. He remained concerned about funds being allocated without conditions having been fulfilled.

Mr J Aulsebrook (IFP, Kwazulu-Natal) said that funds have already been allocated to provincial budgets. He felt it would be impossible for provinces to state fully by 15 May 2001 where and when they are going to spend the funds. He stated that he supports the subsection fully.

Mr Kahla said that there would be some level of control as the National Treasury would still be able to impose conditions as to how funds are to be spent.

The Chair asked the committee whether there is agreement on Clause 15(2) despite the issues raised. The committee agreed.

Comments by the Office of the Auditor General
The Chair pointed out the Auditor General's concerns with Clause 31(3) and Clause 21:

Clause 31(3): Liability for costs incurred in violation of principles of co-operative governance and intergovernmental relations
" Any expenditure regarded unauthorised in terms of subsection (2) must be recovered without delay from such individual who is determined by the Auditor-General to have caused the organ of state not to comply with the requirements of subsection (1)."

The Auditor General felt that the function assigned to his Office in the clause is wholly inappropriate.

Mr Kahla said he could not understand why the function is inappropriate. He added that the function would be performed in their capacity as an outside body. They would not be performing an executive function. Neither would they become a party to the dispute.

Ms Cronje (Kwazulu-Natal) echoed what Mr Kahla had said. The Auditor-General's reasoning did not convince either Ms Cronje or Mr Aulsebrooke.

The Chair asked the parliamentary law advisors whether it is appropriate for this function to be bestowed upon the Auditor General.

A parliamentary law advisor replied that they had only received the relevant documents at the meeting and that they were still familiarising themselves with them. However they did point out that they are only aware of the Constitution and the Auditor General's Act as being able to bestow functions on the Auditor-General. They were not aware of any other Act being able to do this.

Mr Botes (Auditor General's Office) said that even though Section 188(4) of the Constitution allows subordinate legislation to bestow functions upon the Auditor-General, the Auditor-General's Office prefers to act as an outside auditor and not as a judge and jury as the provision requires. He thus felt that the clause is inappropriate and not in line with Chapter 9 of the Constitution.

Mr Marais asked what is so inappropriate about the clause.

Mr Kahla pointed out that the powers and functions of the Auditor General are not only provided for in the Auditor General's Act but are included in various other Acts. The gist of the Auditor General's function would be to identify where an unauthorised expenditure had taken place. An executive body would "do the punishing" of the department responsible for the unauthorised expenditure.

The Chair stated that the issue seemed clearer.

The parliamentary law advisors were satisfied that the function in Clause 31(3) falls within the ambit of the Auditor General's office.

The Chair asked the Auditor General's representative what the difficulty is in the Auditor General's Office performing the function as it seemed to be well within its capability.

Mr Botes replied that they do not want to be investigator and judge.

Mr Momoniat interjected that they would not be the judge, the courts would be the judge. They only have to perform an investigative function. He added that the provision would in any case only be included in the Bill for the current financial year. Next year the provision together with all the other financial management provisions would be included in the Public Finance Management Act (PFMA).

Mr Botes reacted that if a court is able to make a ruling on the unauthorised expenditure, is it also not able to decide who is to blame. Why should the AG be responsible for the latter function? He stated however that if the provision remains unchanged they would be willing to compromise themselves for a period not exceeding one year.

Mr Makgatlo was adamant that the Auditor General's Office had no basis for its argument.

The Chair stated that the issue seemed to be one of principle.

Dr Conroy commented that it is difficult to make amendments to the Bill at such a late stage. It seems as if the committee is forced into the position of merely placing its rubber stamp of approval on the Bill.

The Chair felt that the committee seriously has to assess their function. Are they performing a 'rubber stamping' function? She questioned the committee's power and whether they are just wasting time. She added that it would seem that the Bill could not be amended due to time constraints.

Dr Conroy said that it fruitless to have long debates on issues as Treasury would in any event try to convince the committee not to make any amendments to the Bill.

Ms Cronje felt that it is not the committee's duty merely to place a stamp of approval on any Bill that comes before them. If issues are raised, then they should be discussed.

Mr Aulsebrooke agreed that discussing issues is not a waste of time. Members must rather see it as working towards next year's Bill.

Both Mr Kahla and Mr Momoniat stated that Treasury must not be perceived as trying to prevent Parliament from making amendments to the Bill if there are genuine problems with it.

The Chair announced that they share the concerns of the Auditor General but that the issue would be resolved in the future. The committee agreed that the clause remains unchanged.

Clause 21: Duties of the Auditor-General
The AG suggested the following:
(i) insertion of 'if material' in line 46
" Without derogating from the powers and duties of the Auditor-General in terms of the Constitution and any other law, the Auditor-General must, in the audit of financial statements on the allocations in terms of this Act, if material, report on-"

(ii) insertion of 'by the transferring department' in line 50
"(b) whether there was compliance by the transferring department with the certification and reporting requirements of this Act."

Mr Botes alerted the committee that the spirit of their letter is not to take up their time as technical changes could be discussed with the National Treasury at another forum. He stated that the purpose of the first insertion is to make the legislation more accurate. He pointed out that the work that they deal with has to be material. The second insertion was done to make the clause less ambiguous.

Mr Kahla replied that, on the issue of materiality, it was not their intention to change how the audit process is being done. On the question of ambiguity, he felt that the intention is absolutely clear in the subsection. The National Treasury had not forgotten to include 'transferring department' as the intention was that all departments would be included.

The Chair asked for comments from the members on the changes suggested by the AG.

Mr Marais felt that the issues should be referred back to their committees in the provinces. He asked that complaints on the Bill should in future be referred to them before they go to the provinces to have discussions on mandates.

The Chair asked the Office of the Auditor General to clarify the issues further when the committee meets the following week to deal with the final mandates.

The Chair said that even though she had previously stated that they would not deal with the mandates separately but rather with the issues raised, she would ask Kwazulu-Natal and Gauteng to raise their respective concerns on the Bill.

Kwazulu-Natal's concerns
Mr Aulsebrook stated they generally support the Bill subject to certain concerns being addressed:
· Clause 5(1) makes reference to only the equitable share of Category A and B municipalities whereas no mention is made of Category C municipalities.

Mr Momoniat replied that the primary function of dealing with basic services is the responsibility of Category A and B municipalities. Therefore the equitable share is allocated to them. Now that Category C municipalities also perform these functions, funds are allocated to them by Category B municipalities. The reason why funds are not directly allocated to Category C municipalities is because they originally did not have to perform this function. The status quo has thus been maintained even though Category C municipalities perform the function.

· Clause 27(4) makes it compulsory for a province to utilise its own funds for the performance of any obligation that they originally had wished to impose upon a municipality if the requirements in subsection (3) have not been met. It was suggested that the obligation should refer not only to provinces but to national as well.

Mr Momoniat replied that if a province wants to delegate functions to a district council it is their prerogative to do so. The reason why no reference is made to national in subclause (4) is because the national equitable share has been increased.

· Kwazulu-Natal was concerned that Clause10 is superfluous to the constitutional provision of Sections 100 and 101(b) and adopts a paternalistic approach.

Mr Momoniat replied that Clause10 is a necessary clause but he conceded that it is paternalistic. The essence of the clause is that in order for supplementary allocations to be made to provinces they must furnish the required information to the National Treasury in order to qualify.

Ms Cronje was glad that Mr Momoniat agreed that the clause is paternalistic. She felt that previously a province was entitled to supplementary allocations unconditionally. However the clause is attaching strings where they had not been in the first place.

Mr Momoniat said that the National Treasury is not quick to impose Section 100 of the Constitution. They would only impose it where an official has reneged on the performance of duties. It is merely a measure to keep officials on their toes.

· Kwazulu-Natal wanted a provision to be included in Clause 28 so that when transfer of funds has been delayed, the interest that has accrued due to the delay should also be transferred to the affected province.

Mr Momoniat replied that arrangements could be made with provincial treasuries to give effect to their request.

Gauteng's concerns
Dr Conroy briefly highlighted the concerns that Gauteng had on the Bill whereafter the Chair requested members to comment.

Mr Kahla asked what the concern was over Clause 25.

The Chair stated that the concern was if funds were wrongfully allocated to a province, how would this be rectified? The issue is whether there are differences in dealing with this problem in the PFMA and the Bill and if so, is it better dealt with in the PFMA.

Mr Kahla replied that the solution is simple. If a province receives money that was not due to it, the amount received would be offset in future transfers to the province.

The Chair asked members if there were any other issues and to her surprise there were none. She remained concerned over the issue of process. She asked members if they wished to consult with the provinces on the issues raised in the meeting.

The committee, with the exception of Mr Marais, unanimously felt that they do not need to discuss the issues raised in the meeting with their provinces.

The provinces with the exception of the concerns raised by Kwazulu-Natal and Gauteng unanimously felt that the Bill should be passed as is.

The meeting was adjourned.

Appendix 1
Letter from Auditor General

Dear Ms Mahlangu

DIVISION OF REVENUE BILL

We thank you for the invitation and opportunity to have addressed the Select Committee on Finance with regard to the Division of Revenue Bill.

The intention of the Auditor-General was to resolve all comments prior to the finalisation of the published Bill, and input was, through the personal involvement of Mr Fakie, provided well within the required time frame.

However, our attendance of the Public Hearing has given rise to the need for further comment.

The Office of the Auditor-General shares the Treasury's commitment to passing the Division of Revenue Bill timeously. If the intention is to try and adopt the Bill without amendments, and it is possible to address the matters below in agreements or subsequent legislation, this Office will be agreeable to such a route.

However, the following comments are submitted for your consideration:

Clause 31(3):
This 'referee' function is a judicial or management function. The function given to the Auditor-General is wholly inappropriate. Any additional powers provided to the Auditor-General, as made possible by section 188(4) of the Constitution, must be appropriately in line with the role of the external auditor. The role should be assigned to a judicial or semi-judicial body or a disciplinary committee of the relevant organ of state. (If not addressed at this stage of the Bill assurance is needed that this will be amended in the future. In the meantime, regulations should be agreed on in terms of clause 33 on a practical, feasible process to deal with this.)

Clause 21:
The issue of materiality should have been addressed as is custom in audit legislation by having the words "if material" inserted in the 46^TH line before the words "report on -"
The subclause would then read:"Without derogating from the powers and duties of the Auditor-General in terms of the Constitution and any other law, the Auditor-General must, in the audit of financial statements on the allocations in terms of this Act, if material report on - ". (In the meantime, for 2001, this could be resolved by an agreement, affirmed in correspondence with Treasury, and indicated in audit reports in the explanation on the scope of the audit.)
Clause 21 can be further clarified by inserting the words " by the transferring department" at Clause 21, the 50^th line, to read:

(b) whether there was compliance by the transferring department with the certification and reporting requirements of this Act

Yours sincerely

AUDITOR GENERAL

Appendix 2
KWAZULU-NATAL NEGOTIATING MANDATE ON DIVISION OF REVENUE BILL [l IB-2001]
The Provincial Standing Committee on the National Council of Provinces mandates the KwaZulu - Natal delegation to the National Council of Provinces to support the Division of Revenue Bill [B11b-2001] in the Select Committee on Finance subject to the following:

1. Clause 5(1) which deals with the equitable share for Local Government only mentions two categories of municipality (a and b) and yet the third category (i.e. c) have also got staff and has no revenue base of its own.

In respect of Clause 8(1) [particularly paragraph (e)] the Committee notes that, although the memorandum required under Section 10(5) of the intergovernmental Fiscal Relations Act, 1997 accompanies the Division of Revenue Bill, the memorandum does not contain all the information required under paragraphs (a) - (f) of Clause 8(1).


The Committee is accordingly concerned that the memorandum accompanying the Bill is apparently to be supplemented with the Clause 8 information at a later stage; the Committee submits that it would be far preferable for the information to be included in the memorandum at this stage, whilst the bill is under consideration.

Clause 10 seems to be superfluous to Constitutional provision as contained in Sections 100 and 101(b) and adopts a paternalistic approach.

The Committee fully supports clauses 13; 14 and 26. The role of SALGA should nevertheless be spelt out in so far as clause 26 issues are concerned.

The typographical error in pages 7 and 9 where "PART IV" appears twice should be corrected to "PART V".

The Committee is of the opinion that donor funds should also be audited by the auditor-general.

Clause 27(4) refers only to the Province. The Committee recommends that the Clause should also refer to National.

In Clause 28, the Committee proposes that where the transfer of funds have been delayed, the interest that has in that period accrued to the funds, should also be transferred to the affected Province.

10. Noting that the Municipal Finance Management Act and other Local Government legislation are in the process of being promulgated, it should be noted that the Division of Revenue Bill should also accommodate such legislation once in place.

And any further amendments, providing that:

Such amendment/s does / do not alter the essential elements of a Bill;
Consensus is reached on such proposed amendment/s by the
KwaZulu - Natal delegates attending the Select Committee finalising the bill and / or the plenary session of NCOP voting on the bill;

In the event of the proviso not being complied with, the proposed amendment/s must be referred to the provincial standing committee on NCOP for decision.

Appendix 2
GAUTENG NEGOTIATING MANDATE ON THE DIVISION OF REVENUE BILL [l IB-2001]

13 March 2001

The Chairperson on the Finance Committee, Ms J L Fubbs, tabled a negotiating mandate on the Division of Revenue Bill [B11B-2001] as follows

1. Process followed
The Standing Committee on Finance and Economic Affairs deliberated on the Division of Revenue Bill [B11 B-2001], a Section 76 Bill, which was introduced in the National Council of Provinces.
· The Chairperson attended public hearings held by the NCOP and a briefing on the Bill.
· A permanent delegate to the NCOP, Ms D Q Mahlangu, also gave additional input on the Committee on other hearings that were held
· The compliance of the Bill with the requirements of the PFMA was also noted.
· The committee also took cognisance of Conditional Grants.
· Subsequently the Committee deliberated on the Bill. The Committee satisfied itself that the Bill addressed the constitutional requirements for an equitable division of revenue, taking cognisance of economic disparities and addressing the fiscal capacity and efficiency of provinces and municipalities.
· The consultative process generates the information on which a decision is made and involves local and provincial spheres of government and the Financial and Fiscal Commission (FFC).
· The role of the FFC, in particular requires the provision of technical data and information to better inform the political process, including considerations of the Budget Council, the Budget Forum, MINMECs, cabinet and Parliament
The FFC indicated its commitment to provide recommendations on criteria for the determination of the delivery of basic services.

2. Principle of the Bill
The principle of the Bill is informed by Section 214(1) of the Constitution and the Intergovernmental Fiscal Relations Act, 1997, to provide for the following;
· the equitable division of revenue raised nationally among the national, provincial and local spheres of government;
· the determination of each province's equitable share of the provincial share of that revenue;
· any other allocations to provinces, local governments or municipalities from the national government's share of that revenue, and any conditions on which those allocations may be made; and
· section 214(2) of the Constitution requires that the Bill may only be enacted after the provincial and local spheres of government and the FFC have been consulted, and after any recommendations of the FFC have been considered.

2.1 Position on revenue shortfalls and excess
With respect to shortfalls and excess revenue, it is dear that the national sphere of government is more capacitated to manage risks arising from shortfalls. There also seems to be no reason why provincial governments and local governments should not benefit from the excess of revenue that may arise.
· There may be a need to consider a review of the existing fiscal framework, which
takes into account revenue escalation arising from increases in inflationary forces which also impact on expenditure. This view is informed by the principle of cooperative governance, equity, efficiency and effectiveness

2.2 Fiscal equity
The cost of servicing all grants impacts directly on the vertical allocation of nationally raised revenue, and further distorts the horizontal equitable division of revenue.

· Given that provinces have limited revenue raising capacity, attempts to incorporate such costs into equalisation formulas would contribute to the fiscal equity and efficiency of the three sphere system of governance.
The differences in demography and geography as evidenced in the 1996 census have added a further complexity and have opened the way to diluting fiscal integrity which is evident in the infrastructural backlogs and in the incapacity in some areas within provinces to utilise the allocated financial resources. There is a need for norms and costs to be factored into the allocation of grants to provinces.

3. Provisions
The Constitution sets out the essential prerequisites for an equitable Division of
Revenue based on broad intergovernmental fiscal arrangements within the principles
of co-operative governance.
The Bill requires that the following issues be taken into account:
· the national interest;
· any provision that must be made in respect of the national debt and other
national obligations;
· the needs and interests of the national government, determined by objective
criteria;
the need to ensure that the provinces and municipalities are able to provide basic
services and perform the functions allocated to them;
· the fiscal capacity and efficiency of the provinces and municipalities;
· developmental and other needs of provinces, local governments and
municipalities;
· economic disparities within and among the provinces;
· obligations of the provinces and municipalities in terms of national legislation;
· the desirability of stable and predictable allocations of revenue share; and
· the need for flexibility in responding to emergencies or other temporary needs,
and other factors based on similar objective criteria.

In terms of Section 10 of the Intergovernmental Fiscal Relations Act, 1997 (Act No 97 of 1997) ("the Act"), each year when the annual budget is introduced, the Minister of Finance must introduce in the National Assembly a Division of Revenue Bill for the financial year to which that budget relates.

4. Concerns raised by the Committee
4.1 The Committee remains concerned about the timing of the Division of Revenue Bill, after the tabling of the National and Provincial Budget. It is suggested that the timing of the Division of Revenue be reviewed so that it occurs prior to the Medium Term Budget Policy Statement which occurs in the September preceding the forthcoming financial year.

4.2 The Committee welcomes the indicators and measuring protocol instituted by National Treasury

5. The Detail and Negotiating Positions adopted by the Committee
5.1 Clause 8
The fear expressed by the Department of Water Affairs and Forestry if adequately motivated can be addressed by Clause 29.

5.2 Clause 13
National Treasury have already indicated that existing obligations will be honoured Further assets can be transferred at a later stage No change to this clause is necessary

5.3 Clause 14
Concerns expressed by some departments in this clause can be clearly resolved under Clauses 14(b) and 29.

5.4 Clause 15(2)
Given that this changes the character of the grant from a Conditional to Unconditional, it would be preferable if the spirit of the sentence was sustained but reworded to avoid the carte blanche character currently envisaged.

5.5 Clause 25
The spirit of the clause which invokes the maintenance of rigorous financial management is welcome However, the practical implications of recovery without delay needs to be spelt out more clearly

5.6 Clause 29
This clause is welcomed as it adds to the robustness of the proposed legislation and offers a legitimate option where unavoidable compliance difficulties are occasioned in Clauses 1 - 28.

5.7 Clause 31(3)
This clause should remain as is, where the Attorney General is encouraged to exercise its authority and constitutional powers

6. Conclusion
The Committee supports the principle of the Division of Revenue Bill [B11B - 2001].
However, with respect to the detail of the Bill, the Committee would like its
reservations and recommendations noted above negotiated at the meeting of the
Select Committee

J L Fubbs
Chairperson: Finance Committee