Division of Revenue Bill: Final Mandates; Division of Revenue Bill Hearings Committee Report

NCOP Finance

19 March 2001
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FINANCE SELECT COMMITTEE
20 March 2001
DIVISION OF REVENUE BILL: FINAL MANDATES; DIVISION OF REVENUE BILL HEARINGS COMMITTEE REPORT

Relevant documents:
Division of Revenue Bill [B11B - 2001]
Parliamentary Law Advisers Memorandum on the Division of Revenue Bill (See Appendix 1)
National Treasury Memorandum on the Division of Revenue Bill (See Appendix 2)
Parliamentary Law Advisers' proposed amendments to the Division of Revenue Bill (See Appendix 3)
Final report of the Select Committee on Finance on Public Hearing on the Division of Revenue Bill (See Appendix 4))

Chairperson: Ms D Mahlangu

SUMMARY
The Chair again voiced her disappointment with certain provinces for not presenting their final mandates on the Division of Revenue Bill in an acceptable form. This problem coupled with the fact that the committee lacked a quorum prevented voting taking place on the final mandates.

Clause 31(3), to which the Auditor-General had objected to in the previous meeting, again sparked a lengthy debate. The Parliamentary Law Advisor and the National Treasury were asked to comment. Even though their respective views on the clause were divergent, a compromise was reached and the clause was amended to suit the Auditor-General.

The committee adopted the committee report on the public hearings on the Bill with minor changes. The Chair concluded the meeting by insisting that all provinces hand in their final mandates in an acceptable form prior to the next meeting. She informed members that she would be discussing the lack of co-operation by certain provinces with the Chairperson of the National Council of Provinces.

MINUTES
Provincial Final Mandates: Division of Revenue Bill
The Chair announced that they would not be dealing with their final mandates, as they are unable to vote on them due to a lack of a quorum. As in the previous meeting the Chair was again disappointed that only a few provinces had presented their final mandates in a documented, substantive form.

Auditor General's proposed amendment: Division of Revenue Bill
The Chair stated that in the previous meeting much discussion had ensued on Clause 31(3) of the Bill and consequently she had requested the Parliamentary Law Advisors and the National Treasury to give their comments on the concerns that were raised.

The clause is currently set out as follows in the Bill:
Clause 31(3): Liability for costs incurred in violation of principles of co-operative governance and inter-governmental 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)."

Mr Anton Meyer, Chief Parliamentary Law Advisor stated that they had raised a number of issues on Clause 31(3). Firstly, the clause as it stands requires the Auditor-General (AG) to identify the individual responsible for the unauthorised expenditure. This exercise would require a disciplinary procedure that is unfortunately not provided for in the clause. Neither is the AG required to follow any other procedure that may be prescribed elsewhere. Consequently Clause 31(3) allows an amount to be recovered from an individual without proper administrative or judicial process being followed. Mr Meyer felt that it is therefore inconsistent with Sections 33 and 34 of the Constitution.

A second point that he made was that Section 188(1) and (2) of the Constitution sets out the primary functions of the Auditor-General and that any additional powers and functions prescribed by national legislation should be complementary to it. Mr Meyer stated that the quasi-judicial function being imposed on the AG is not complementary to its primary function. He felt that it is totally inappropriate.

Mr Meyer also stated that the use of the term, "unauthorised expenditure" is inconsistent with the definition of the term in the Public Finance Management Act (PFMA). He felt that the expenditure envisaged in the clause would seem to amount to ' fruitless and wasteful expenditure' as defined in Section 1 of the PFMA, and not to " unauthorised expenditure". To create another circumstance of "unauthorised expenditure" which is not in line with the definition in the PFMA would lead to too much confusion. (For detail on the comments by the parliamentary law advisors please refer to the attached document.)(Appendix 1)

Discussion
Mr B Marais (ANC, Free State) referred to the phrase, "recovery without delay" in Clause 31(3) and asked whether it must be interpreted that the AG would only be able to recover the monies after the court's decision or alternatively in terms of the process as is set out in the PFMA.

Mr Meyer stated that if one looks at the intention of the Bill, "without delay" does not necessarily mean immediately. It could be construed as meaning as soon as reasonably possible.

Mr Marais stated that it is then correct to assume that the disciplinary powers of a department would not kick in until such time that the procedures in the PFMA are exhausted. He also asked whether a junior official in a department is able to take another organ of state to court without the express permission from his superior.

Mr Meyer felt that he is not qualified to answer the question. Mr V Kahla, legal advisor to the National Treasury, stated that the decision to litigate is made by the office bearers.

Dr E Conroy (NNP, Gauteng) asked what the phrase, " determined by the Auditor-General" in Clause 31(3) means.

Mr Meyer stated that it refers to a process determined by the AG.

Mr Durr (ACDP, Western Cape) asked if the issue is important enough to delay the passing of the Bill. Is the problem so serious or is it sufficient to note it and to deal with it the following year?

The Chair stated that even if the committee amends the Bill, it could still be referred to the National Assembly by 1 April 2001.

Mr Vuyo Kahla, legal adviser to the National Treasury, stated that he would not be making a presentation of his comments but that he would rather react to what the parliamentary legal advisers had stated since they share opposing views. (For detail on the comments made by the National Treasury please refer to the attached document.)(Appendix 2)

Mr Kahla dispelled Mr Meyer's point that the clause is in conflict with Section 33 of the Constitution for not setting out a process. He stated that where an organ of state is excercising public power, the rules of natural justice apply.

On the question of the usage of the term, " unauthorised expenditure", Mr Kahla stated that it must be viewed from within the context of the Bill. He emphasised that the Bill and the PFMA are two different pieces of legislation and therefore the definitions do not have to be the same. They do not deal with the same subject matter. Mr Kahla pointed out that unlike Clause 31 in the Bill, the "unauthorised expenditure" in the PFMA does not cover all organs of state. For example it does not cover unauthorised expenditures of municipalities. He emphasised that Section 3(3) of the PFMA provides that in the event of any inconsistency between the PFMA and any other legislation, the provisions of the PFMA would prevail.

Mr Kahla consequently believed that Clause 31(3) is not unconstitutional and that it is in line with administrative justice. However, he stressed that it is still the committee's prerogative to amend the legislation if they wish to do so.

Mr A Kamedien, legal advisor to the Auditor-General, stated that the issue is not about the recovery of the funds. Their concern is that they must identify the individual who committed the unauthorised expenditure. He added that they are auditors and therefore the function in Clause 31(3) does not fall within the ambit of their powers and functions. Mr Kamedien was quick to point out that in the previous meeting the National Treasury had committed themselves to performing the recoveries.

Mr Meyer stated that if a provision were to be inserted giving effect to a procedure being outlined in the regulations then they would not have a problem with the clause. Mr Kahla agreed.

Mr Kamedien felt that the suggestion is a reasonable one and that if National Treasury and the Parliamentary Law Advisor are in agreement, then so are they. The committee also agreed.

Mr J Theron (DP, Gauteng) asked if the procedure is already envisaged or must it still be drafted?

Mr Kahla stated that Mr Meyer had already with his help, whilst the meeting was going on drafted an amendment to the clause to give effect to what they had agreed on.

Mr Durr was concerned that matters dealing with financial management are being included in the Bill when they ought to be dealt with in the appropriate legislation. He added that a further problem is that the Bill is repealed each year which means that issues of financial management that are supposed to be permanent are lost.

Mr Kahla stated that he was aware that issues on financial management should ideally be included in the PFMA. He added that the amendment to Clause 31(3) is only a temporary solution.

Mr Meyer and Mr Kahla presented to the committee with two alternatives for amending Clause 31(3). (For detail refer to the attached document)(Appendix 3) They both felt that the second alternative is the better of the two:

On page 12, from line 44, to omit subsection (3), and to substitute:

"(3) The amount of any such fruitless and wasteful expenditure must, in terms of a prescribed procedure be recovered without delay from the person who caused the organ of state not to comply with the requirements of subsection (1)."

The committee agreed to the above proposal.

Mr Marais was concerned that their mandates do not reflect the changes that they had agreed to in the meeting. Mr Durr shared his concern and felt that the amended Bill must first be referred to the provinces for comment.

The Chair stated that due to time constraints this would not be possible, as the Bill has to be completed by the 1 April 2001. She pointed out that the amendment does not change the substance of the Bill and that the mandates in any event state that the provinces support the Bill. Dr Conroy agreed with the Chair.

Mr Durr remained unconvinced and stated that they have mandates for a different Bill. He asked if they could possibly only refer the amendment back to their provinces. Mr Durr suggested that the secretary of the committee, Mr Henry Eksteen, provide a background of their discussions together with the amendment to the provinces.

The Chair asked the committee secretary to provide the provinces with transcripts of the meeting as well as copies of the amendment.

The Chair informed the committee that they would have a special meeting on Monday, 26 March 2001 to deal with the Bill and that the Bill would be debated in plenary session the following day.

The Chair again brought up the issue of provinces not handing in their final mandates in an acceptable form and stated that she would be referring the matter to the Chairperson of the National Council of Provinces. She insisted that final mandates be handed in by Friday, 23 March 2001 so that they could be dealt with in Monday's meeting.

Committee Report on the Public hearings on the Division of Revenue Bill
The Chair asked for comments on the draft report from members.

Mr Durr stated that municipal borrowing is mentioned on page five of the report but no mention is made of provincial borrowing. He asked if provincial borrowing is not as important as municipal borrowing. He added that the impact of the budget on the Unicity is one of the greatest challenges facing the National Treasury, Parliament and the provinces. Why is there no mention made of this issue in the report?

The Chair stated that the reason why municipal borrowing is mentioned in the report is because the South African Local Government Association (SALGA) had brought it up in their submission. This does not however mean that provincial borrowing is not as important. She emphasised that the report is essentially only setting out what happened during the public hearings. However if the committee feels that certain issues should be included in the report then it would be considered.
The Chair agreed that the issue of the Unicity is one of great importance. She stated that it is important for the committee to know how municipalities are going to realign their functions.

Mr Z Kolweni (ANC, NW) stated that even though the concerns raised by Mr Durr are important, he felt that issues that were not raised in the public hearings should not contaminate the report. He proposed that the committee ask the Minister for further clarity on the issue raised by Mr Durr.

Members recommended certain technical changes to the report to which the committee agreed.

The meeting was adjourned.

APPENDIX 1
PARLEMENT VAN DIE REPUBLIEK VAN SUID-AFRIKA
PARLIAMENT OF THE REPUBLIC OF SOUTH AFRICA

MEMORANDUM
TO: CHAIRPERSON: SELECT COMMITTEE ON FINANCE
FROM: PARLIAMENTARY LAW ADVISERS
SUBJECT: DIVISION OF REVENUE BILL
DATE: 19 MARCH 2001

1. You have requested our comments on the submissions from the Auditor-General on the Division of Revenue Bill.

2. The first submission is that clause 31 of the Bill inappropriately assigns the power to the Auditor-General to decide who would be responsible for unauthorised expenditure in terms of clause 31 of the Bill.

3. Clause 31 reads:
1. " An organ of state ...must..., make every effort to settle the dispute with the other organ of state...
2. In the event that a dispute is referred back by a court in accordance with section 41(4) of the Constitution... the expenditure incurred by that organ in approaching the court is regarded as unauthorised.
3. 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 requirement of subsection (1)"
[Our underlining]

4. The wording underlined means that the Auditor- General must identify the responsible individual. Such an exercise would require a procedure such as a disciplinary procedure, which is normally preceded by an investigation in order that one might determine out of more than one person involved in a matter whom the ultimate responsibility, lies with. However, clause 31(3) does not seem to envisage such a procedure. It simply says that the expenditure concerned must be "recovered" from the "individual" determined by the Auditor-General to be responsible. No procedure is prescribed and there is no indication that the Auditor-General is required to follow any procedure, which may be prescribed elsewhere. To the extent that clause 31(3) allows that an amount can be recovered from a person without proper administrative or judicial process, it is in our opinion inconsistent with sections 33 and 34 of the Constitution.

5. In terms of section l88 (l) and (2) of the Constitution, the Auditor-General must audit and report on the accounts, financial statements and financial management of the relevant institutions. The additional powers and functions, which may be prescribed by national legislation, in our view should be consistent or complementary to the primary function.

6. A further problem with clause 31 is that its use of the term "unauthorized expenditure" is inconsistent with the definition of the term in the Public Finance Management Act (PFMA). If anything, the expenditure envisaged in clause 31((2) of the Bill would seem to amount to "fruitless and wasteful expenditure" as defined in section 1 of the PFMA, and not to "unauthorized expenditure". In our view it could lead to confusion to create another circumstance of unauthorised expenditure, which is not in line with the definition in the PFMA. In this regard it is important to note that section 3(3) of the PFMA provides that in the event of any inconsistency between the PFMA and any other legislation, the provisions of the PFMA prevail.

7. Furthermore, the PFMA provides in express terms for disciplinary steps or procedures against accounting officers or officials for financial misconduct, including fruitless or wasteful expenditure- see for example sections 38(I)(h), 81 and 84.

8. The amendments proposed by the Auditor-General to clause 21 of the Bill do not seem to be essential. They are intended more for the sake of clarity. In our view the provisions concerned will in any event have to be interpreted in line with the Auditor-General's proposals. With regard to the first proposal (the insertion of the words "if material") we point out that clause 21 specifically provides that it does not derogate from the powers of the Auditor-General in terms of the Constitution and any other law. In terms of section 3(2) of the Auditor-General Act, 1995, the Auditor-General must perform his or her functions in accordance with that Act, notwithstanding the provisions of any other law.

Z Adhikarie / M Raphela / A M Meyer
Parliamentary Law Advisers

APPENDIX 2
MEMORANDUM
TO:
Chairperson: Select Committee on Finance

FROM: Legal Adviser: National Treasury

DATE: 19 March 2001

SUBJECT: DIVISION OF REVENUE BILL, 2001 [B11B-2001] ("THE BILL")
1. We have given consideration to the Parliamentary Law Advisers' comments on the Bill and would respond as set out below. We would, however, emphasise at the outset, that due to urgency, our response would be limited to the submissions of the Parliamentary Law Advisers and may be supplemented later should that be necessary.

2. The Parliamentary Law Advisers have, with respect, avoided giving a direct answer to a question which is clearly cardinal in the present difference of opinions between the Office of the Auditor-General and the National Treasury: Whether section 31(3) of the Bill is inconsistent with the provisions of Chapter 9 of the Constitution, in particular section 188 of the Constitution.

3. The only instance where the Parliamentary Law Advisers suggest potential unconstitutionality is when they say that: '... However; clause 31(3) does not seem to envisage such a procedure ["such as a disciplinary procedure] It simply says that the expenditure concerned must be "recovered" from the "individual" (sic) determined by the Auditor-General to be responsible. No procedure is prescribed and there is no indication that the Auditor-General is required to follow any procedure which may be prescribed elsewhere. To the extent that clause 31(3) allows that an amount can be recovered from a person without proper administrative or judicial process, it is in our opinion inconsistent with sections 33 and 34 of the Constitution.' (emphasis added)

4. We submit that there is nothing in section 31(3) of the Bill, which suggests that there would be recovery without proper administrative or judicial process. There is, in any event, an established presumption of statutory interpretation to the effect that where a statute authorises the exercise of a power, which may affect individual or property rights, "the powers so given are to be exercised in accordance with the principles of natural justice. Baxter explains the position by stating that '[l] like all presumptions of statutory intention, the presumption that natural justice is applicable, has independent weight deriving from the
common law in which the principles were first developed. The audi alteram partem principle is the most significant of these principles and requires that the person concerned should be given the opportunity of presenting the other side of the story.' (G E Devenish: Interpretation of Statutes (Juta) (1992))

5. This presumption of statutory interpretation was emphasised in perhaps more eloquent terms in Corbett JA's (as he was then) meritorious judgment in Attorney-General, Eastern Cape v Blom & Others 1988 (4) SA 645 (A) when he held that there is a right to be heard in cases where there is a statutory empowerment to give a decision which may prejudicially affect a person's property or liberty, unless a statute, expressly or impliedly, excludes such a right. We submit that section 31(3) neither expressly or impliedly excludes this right which one Honourable Judge traced its origin to the Garden of Eden inquiry whether Adam had eaten from the tree. Accordingly section 31(3) of the Bill does not, in our opinion, violate the right to just administrative action set out in section 33 of the Constitution.

6. Further, we submit, that any administrative action which materially and adversely affects the rights of a person must, in terms of the Promotion of Administrative Justice Act, 2000 (Act No 3 of 2000), comply with the procedures prescribed in that Act. Steps would accordingly be taken to ensure that regulations in terms of the Bill provide for a procedure for the determination, which observes the principles of natural justice.

7. We submit further that there is nothing in section 31(3) of the Bill, which suggests that the jurisdiction of the courts is ousted or restricted. Bell and Engle have observed that the "clearest exclusionary words are required to oust jurisdiction". (Bell & Engle: Cross Statutory Interpretation at 148) As Devenish puts it, "There is a strong presumption against the interpretation of a statute that would have the effect of excluding the jurisdiction of the courts." (Devenish (supra) at 195). Any individual who has a problem with a determination in terms of section 31(3) of the Bill retains " the right to have a dispute that can be resolved by the application of law decided in a fair public hearing before a court..."

8. We would also emphasise that we take seriously what Lord Simon, in Pyx Graniti Co Ltd v Minister of Housing and Local Government [1960] AC 260, once referred to as "the inalienable remedy of Her Majesty's subjects to seek redress in Her Courts."

9. The Parliamentary Law Advisers also comment that a 'further problem with clause 31 is that "unauthorized expenditure" is inconsistent with the definition of the term in the Public Finance Management Act (PFMA). If anything, the expenditure envisaged in clause 31(2) of the Bill would seem to amount to "fruitless and wasteful expenditure" as defined in section 1 of the PFMA, and not to "unauthorized expenditure". In our view it could lead to confusion to create another circumstance of unauthorized expenditure, which is not in line with the definition in the PFMA. In this regard it important to note that section 3(3) of the PFMA provides that in the event of any inconsistency between the PFMA and any other legislation, the provisions of the PFMA prevail.

10. The Parliamentary Law Advisers, through the comment set out in paragraph 9 above, would appear to utilise the PFMA (as an earlier Act) as a guide in the interpretation of the provisions of the Bill. We respectfully submit, however, that in order for the PFMA to be utilised in this manner it [the PFMA] and the Bill 'must be kindred legislation, which requires that they must deal with the identical subject-matter; not merely give effect to a single policy or, to use the Latin expression, they must be in pari materia (pari here does not mean similar or like, but identical). (Devenish (supra) at 133)

11. Bennion expresses the view that statutes are in pari materia if-
(i) They have been given a collective title;
(ii) They are required to be construed as one;
(iii) They have short titles that are identical ; and
(iv) They deal with the same subject-matter on the same lines. (see
Bennion: Statutory Interpretation at 516)

12. The PFMA and the Bill we submit do not fit in the scheme set out by Bennion in paragraph 11 above. They do not have a collective title; they are not required to be construed as one; they do not have identical short titles, one is the Public Finance Management Act, 1999 and the other, the Division of Revenue Act, 2001; and they do not deal with the same subject-matter on the same lines.

1 3. It is instructive to note that the Bill, while utilising, in certain instances, the same words or expressions as those in the PFMA provides in section 1 thereof: "In this Act, unless the context indicates otherwise, a words to which a meaning has been assigned in the Public Finance Management Act bears the same meaning, and..." (emphasis added)

14. The provision of section 1 of the Bill, in our opinion, addresses the issue of any inconsistency with the PFMA by allowing for instances where regard must be heard to the context and that there accordingly be a departure from the definitions of the PFMA.

15. We need to emphasise that the Bill, unlike the PFMA, applies also to local government. Accordingly, we would caution against overly reading the PFMA into the Bill.

16. We respond accordingly.

Kind regards
Vuyo D Kahla
LEGAL ADVISER

APPENDIX 3
PARLIAMENTARY LAW ADVISERS
PROPOSED AMENDMENTS TO DIVISION OF REVENUE BILL
[B11B-2001]

Clause 31
1. On page 12, in line 44, to omit "unauthorised" and to substitute "fruitless and wasteful"

2. On page 12, from line 44, to omit subsection (3).

ALTERNATIVELY:
On page 12, from line 44, to omit subsection (3), and to substitute:

"(3) The amount of any such fruitless and wasteful expenditure must, in terms of a prescribed procedure be recovered without delay from the person who caused the organ of state not to comply with the requirements of subsection (1)."

Appendix 4
Final Report of the Select Committee on Finance on the Public hearing on Division of Revenue Bill (11B-2001) .
The Select Committee on Finance, having considered and examined the Division of Revenue Bill (11B-2001) in March 2001, reports as follows:

A) Introduction
The Committee held public hearings on Tuesday 6 March 2001 and Wednesday 7 March 2001 in order to consider the Division of Revenue Bill (11B-2001). The following stakeholders participated: National Treasury, the Financial & Fiscal Commission, South African Local Government Association (SALGA), and the Auditor General. In addition, the following national department participated:
Department of Health;
Department of Education;
Department of Water Affairs and Forestry;
Department of Housing;
Department of Public Works;
Department of Social Development; and
Department of Provincial and Local Government.

The Minister of Health and the Deputy-Minister of Finance were in attendance.

The Select Committee on Finance is mindful that South Africa's fiscal environment and the inter-governmental relations give priority to the servicing of the national debt. The costs of servicing debt are met before resources are shared between the three spheres of government. In addition, the Committee observes that the fiscal system is maturing. Although the vertical division of revenue between spheres is determined by Cabinet (a political decision), a process of extensive consultation within the executive was adhered to and which included the MECs responsible for Finance, organised local government, the Budget Council, Financial and Fiscal Commission, and the Budget Forum. After debt servicing costs and contingency reserves are deducted, the total to be shared between the three spheres of government amounts to R208,1 billion, R223,6 billion and R238,5 billion over the three MTEF years.

The committee also noted that the national share increases from 39,4 per cent in 2000/01 to 40,5 in 2001/02 and declines marginally to 40,0 per cent in 2003/04. The share dedicated to local government also rises from 3,0 per cent in 2000/01 to 3,3 per cent in 2003/04. The provincial share declines correspondingly, from 57,6 per cent in 2000/01 to 56,4 per cent in 2001/02 and increases marginally to 56,7 per cent 2003/04. It is important to note that this amount includes both the equitable shares and the conditional grants. Equitable shares refer to the allocation of revenue to the national, provincial and local spheres of government as required by the Constitution while the Conditional grants are transfers from the national budgets to sub-national governments. They are determined by national government and are earmarked for specific priority programmes. They are listed in the Division of Revenue Bill, which also stipulates their monitoring and reporting requirements for all conditional grants. Conditional grants were introduced into the intergovernmental system in 1998. The objectives of conditional grants are as follows:
· to provide for national priorities in provincial budgets;
to promote national norms and standards;
· to compensate provinces for cross-boundary flows;
· to provide specialised services and to effect transition by supporting capacity building.

The combined conditional grants for provinces and local government amounts to R1, 7 billion rands. 88,7 per cent of national transfer to provinces constitute equitable shares while the remaining 11,3 per cent flows through conditional grants. However, in the case of local government, conditional grants constitute 60 per cent of the total transfer. It is the contention of the Select Committee on Finance that the administration and performance of conditional grants are in urgent need of review. This urgent need to review the conditional grants prompted the Committee to host the public hearings on the Division of Revenue Bill and to invite affected national departments. While the administration of conditional grants may have improved, huge underspending on a number of grants is common. This nonspending adversely affects the delivery of important basic social services.

The division of resources between the three spheres is determined primarily by the initial baseline allocation in the 2000 budget, together with additional priorities identified for the additional resources. The new priorities identified over and above the existing priorities are as follows:
· Increasing child support grants;
· Counteracting the HIV/Aids epidemic;
· Poverty alleviation programmes, including social security and provision of basic services to the poor;
· Additional costs arising from new demarcation of municipalities;
· Increasing infrastructure spending in order to redress the backlogs in maintenance; rehabilitate and to promote the development of infrastructure;
· The need to improve the efficiency of the criminal justice system.

B) Key issues for committee consideration
B1) Conditional grants
B1.1) Conditional grants to provinces

In 2000 the National Treasury conducted a review of the conditional grant framework. The review identified the need to reduce the number of conditional grants in order to rationalize the number of grants.

The Department of Health, Housing, and the National Treasury administer the largest proportion of conditional grants to provinces.

Four small grants have been merged into the supplementary grant administered by National Treasury. These grant are the Financial Management Grant on the Treasury Budget, a capacity building grant on the Department of Housing vote, the National Land Transport Transition Act Grant on the Department of Transport vote and the R293 grant on the Department of Provincial and Local Government vote.

The R293 grant forms part of the Supplementary Grant in 2001/02, after which it will go into the provincial equitable share. The Supplementary Grant also includes R243 million over the MTEF period for pilot projects to improve financial management in health departments and hospital management.

New conditional grants introduced in the 2001 budget are the Infrastucture Grants, the Pretoria Academic Hospital Grant and the Early Childhood Development Grant. Provinces required to repair flood damage, supplement infrastructure expenditure in social services such as roads, schools and health facilities, will use infrastructure Grants. The Pretoria Academic Hospital Grant will support the construction of new buildings while the early Childhood Development Grant will fund pilot projects in relation to early-childhood and pre-primary schooling . Previously the Department of Education used donor funding to finance these projects. In addition, these new grants proceeded much sooner with considerable advanced planning and policies are in place already. The availability of funds through conditional grants is commensurate with implementation phase of the programme.

The Department of Health administers eight conditional grants; the Department of Provincial and Local Government administers five and the Department of Social Development administers two. The Health grants comprise over 42 per cent of total conditional grants to provinces.

Gauteng also raised a concerned that conditional grants are so conditional that they are extremely constraining and encourage roll-overs.

B 1.2) Conditional grants to local governments
The following are the new local Government conditional grants:
· Local Government Restructuring Grant - assist large municipalities to undertake complex institutional and budgetary restructuring exercises. These costs imposed are deemed to be short-term but their yield is realised only in the medium term. Municipalities with budgets over R300 million are eligible for these grants.
· Local Government Support Grant - this grant will assist the smaller municipalities. It is likely that this grant will merge with the Local Government Restructuring Grant.
· Municipal Finance Management Grant - will assist municipalities to reform their financial management and budgeting practices. Allocations are made for each year of the MTEF period.
· Municipal Systems Improvement Grant - will have a five year lifespan and will be allocated in terms of a framework determined by an interdepartmental committee.
· Transition Grant - has been established to assist municipalities to meet the once-off costs incurred as a result of merging of municipalities. The life span of this grant extends over two years and will subsequently be incorporated into equitable shares

B 2) Municipal borrowing
The encouragement of a municipal debt market is a new development for local government financing. While an active debt market for municipalities will promote greater responsibility, regulations will be in place to govern municipal borrowing. This will establish requirements for raising loans and put in place a framework unambiguously outlining the positions of both borrowers and lenders.

The Select Committee on Finance will approach the Asset and Liability Management Division of the National Treasury for clarity on the impact of additional activity of municipalities in the bond market on interest rate and the level of state debt.

B3) Issues raised during the deliberations
B 3.1) Underspending of conditional grants

1)Department of Education: With regard to education conditional grants in respect of Financial Management and Quality Enhancement, underspending has been noted for two consecutive years. In the current year, reports reflect that spending is still very slow, amounting to less than 50 per cent for the 9 months into the financial year. The public hearing was informed that only 37% of the total allocation was spent as at 31 January 2001.

Department of Health: The Select Committee has observed that serious underspending is recorded in the Hospital Rehabilitation Grant, Redistribution of Specialised Health Services Grant and the Integrated Nutrition Programme Grant. The committee was also informed that that at least, 68% of the Integrated Nutrition Programme has not been spent in the current financial year. Underspending has been recorded for at least three consecutive years. In addition, with regards to the Redistribution of Specialised Health Services conditional grant, trends to the end of December 2000 show that spending is still very low, at less than 40 per cent of allocated amount. However, the construction of the Umtata Regional Hospital is proceeding as scheduled and the National Department of Health has already shouldered its share of the construction costs.

Department of Housing: With respect to the Housing Fund conditional grant, the Committee learnt that underspending occurred in the 1999 financial year while current spending for the 2000 financial spending is only about 52% of the budgeted amount. With respect to the Human Resettlement Redevelopment Pilot conditional grant, it is observed that underspending also occurred in the 1999 financial year and by 31 December 2000 financial spending was less 30 of the allocated amount.

The following explanations were offered for the poor performance of condition grants.

a)We were informed that originally inexperience with the conditional grants mechanism coupled with delays and uncertainty about the release of funds made proper planning very difficult.
b)In subsequent years inexperience and uncertainty about how exactly the mechanism was supposed to operate continued to present some difficulties. In addition, the capacity of the Department (both at provincial and national level) was not fully geared for optimal conceptualization, management and implementation of conditional grant mechanism. This led to late planning.
c)Delays also occurred as a result of tender/procurement process (Department of Housing, Education and Health).
d) Moreover, the unanticipated difficulties associated with co-ordination of projects are a major cause of underspending of conditional grants. Most projects (Housing, Education, Social Development and Health) involve negotiations at school, municipal, district, provincial and national levels, which is a time-consuming factor. This is further aggravated by the lack of capacity in some provinces and municipalities.
e) A crucial element of underspending is also the availability of donor funds for similar projects (Department of Education). The process of accessing donor funds is a lot simpler and requires fewer administrative hurdles.
f)Some grants (for example HIV /Aids) were introduced late in the financial year. Such grants were introduced in the Supplementary Budget for 2000/01. This budget was tabled in Parliament on 14 June 2000 . The transfer of fund was gazetted as late as 28 August 2000. These projects commenced in late 2000. However spending for such grants will increase substantially in 2001.
g)Natural phenomena such as floods and tornadoes resulted in under-utilization of conditional grants (Department of Housing in Eastern Cape, Northern Province and Mpumalanga). Although the duration of natural disasters was short, the periods of delay were logically beyond the incidence of the disaster itself. In addition, since municipalities and local governments undertake construction of homes in the Eastern Cape, the recent local government election had an adverse effect on delivery of houses.
h)In some provinces junior public servants without appropriate skills are given the responsibility of administering huge grants.

Key steps are taken to improve the management of these grants.
a)The participation of senior leadership (for example HEDCOM - Head of Education Committee - and CEM (Council of Education Ministers) in determining priorities right through the sector.
b) A dedicated capacity and institutional mechanism at Ministry level for realistic planning and co-ordination at national and provincial level have been established. These changes and greater clarity on the part of National Treasury and the National Departments on how the conditional grant mechanism is to function have created conditions that should enhance performance.

The Select Committee of Finance and other relevant Select Committee in the NCOP will closely monitor this spending pattern of conditional grants, which has serious consequences for delivery of services.

B 3.2) Accountability requirements of conditional grants
Accountability concerns, with regard to conditional grants, were raised by the Department of Water Affairs and Forestry and the Office of the Auditor General. The Auditor -General argued that Part IV, V and VI of the Bill could be more appropriately contained in long-term legislation like the PFMA instead of an annualised Bill. The Office of the Auditor General also argued that municipalities do not properly disclose conditional grants in the financial statement. Disclosures by municipalities and government departments are inadequate because the prescribed format of financial statements are inadequate to address them. In addition, it is highly unlikely that municipalities and departments will be able to comply with the requirement of conditional grants since internal audit functions are not functional yet. The Auditor-General may not be in a position to conduct a full audit, especially when audit fees are still outstanding. We were informed that the transfer of provincial funds to suspense accounts is also unconstitutional.

B 3.3) Clustering of conditional grants
There are too many conditional grants in the system. For example, there are three HIV / Aids grants which are allocated to the departments of Health, Education and Social Development. While the purposes of each of these grants are different, substantial opportunities exist for the re - clustering of conditional grants. The purpose of the Health grant is to improve access to voluntary HIV counseling, testing and community mobilization; the purpose of the education grant is to deliver life skills and HIV / AIDS education in schools; the purpose of the Social Development grant is to develop home-based care programmes in communities. Similarly, the Provincial Infrastructure Grants and the Consolidated Municipal Infrastructue Programme could also be re-organised.

B 3.4) Specific clauses of the Bill
Discussions on the following clauses are aimed at further improving the Bill:

a) Clause 15 (2) of the Bill, which refers to the conversion of the conditional grants to unconditional transfers to provinces and municipalities, weakens the financial monitoring systems of the grants. However, the National Treasury argues that this conversion is used as an instrument to prompt national departments into compliance with the reporting requirements of conditional grants. National Treasury further argued that the conversion of grants to provincial equitable shares does not compromise financial oversight responsibilities because the Auditor- General would still have to audit provincial financial records.

b) The Office of the Auditor - General also alleges that Clause 31 (3) of the Bill over-extends its brief because the recovery of funds from negligent individuals is not the responsibility of an external auditor. This executioner function should reside with the NCOP or the Legislator.

The Committee is of the view that while the intention of this clause is noteworthy, the Division of Revenue Bill 2001 is not an appropriate place for such a clause. The Committee is of the view that this must be dealt within the PFMA. In addition, if Government or the Department has intentions of extending the powers of the Auditor- General, it must be undertaken as per requirements of Section 188 (4) of the Constitution.

B 3.5) Concerns of SALGA
Concerns raised by SALGA is that although the National Executive issues proclamation on free basic services, no consideration is given to
a)prior consultations with SALGA;
b) Additional provisions of financial resources to this sphere of government for the purposes of providing free basic services. The National Executive proclamation is tantamount to an unfunded mandate.
In addition, SALGA alleges the following:
a)2001 increases in its equitable share is misleading because these were not new allocations but a mere re-distribution of grants from provinces and/or old black local authorities;
b)equitable shares should not be used to provide free basic services but a specific fund should be made available just to render this service. SALGA argues that the cost for the provision of basic services was 300 per cent higher than the equitable shares made available to municipalities. However, this view was strongly contested by the National Treasury, Department of Provincial and Local Government and the Financial and Fiscal Commission. All argued that the increased equitable shares of local government and an internal subsidy system should be designed in such a way that local government and municipalities should be able to play it's constitutional role in the provision of basic services to the poor.

Since SALGA receives its allocation from the Department of Local and Provincial Government, instead from provisions in the Division of Revenue Bill, the question raised is: to whom will it be accountable and, when will it give clarity on utilisation of government transfers?

B 3.6) The timing and tabling of the Division of Revenue Bill
The contention is that if MECs must release their provincial budgets at least within two weeks after the National Budget, it would suggest that the vertical division, as stipulated in the Division of Revenue Bill, has been accepted prior to its having been passed by National Parliament. This questions the value of hosting public hearings on a Bill whose contents have received acceptance by provincial Legislature without formal acceptance by the NCOP and National Assembly. The provision of the Intergovernmental Fiscal Relations Act of 1997 provides the legal basis for the simultaneous tabling of The Division of the Revenue Act with the National Budget. This legal requirement should be reviewed!

B 3.7) Three-year allocation of conditional grants to municipalities
The Department of Provincial and Local Government understands the need to have predictability and certainty in the allocation of grants to municipalities and shares their understanding with the National Treasury that a movement to a three year allocation for municipalities will enhance planning. However, it will be extremely difficult for the Department to provide three-year allocations before the next financial period but it will honour its obligation to submit its report to the National Treasury by the 15 May 2001.

In addition, the Department of Provincial and Local Government expressed reservations about instituting fixed allocations to Municipalities whose conditional grants needs may change over the MTEF period.

The Select Committee welcomes the Transitional Grant for the purposes of restructuring municipalities. The lifespan of these Grants are two years.

B 3.8) Reporting by Provinces and Municipalities
Provinces and Municipalities are expected to report to national department, which would then be able to assess the performance of conditional grants. However, little feedback is received from the affected institutions. Some departments (DPLG) resort to drastic measures by withholding funds from non-reporting provinces and municipalities. The National Treasury is subsequently informed of such measures.

Without these reports no assessment can be made of whether objectives of grants have been met or whether targets have been reached. The inappropriate use of funds designed for re-registration of social security (Department of Social Development) beneficiaries in the provinces is a good example.

B 3.9) Beneficiaries of social security grants and bank charges
The Committee was concerned that poor beneficiaries of social securities are still burdened with bank charges if their social grants are collected from the conventional banking sector. This question was raised separately both to the Department of Social Development and National Treasury. The response is that representations have been made to the Banking Council with a view to excluding bank charges and minimum balance requirements for accounts held by beneficiaries of social security grants. Discussion on such service agreements continues and the Banking Council is amenable to such arrangements but these must be subject to the transformation of the pension beneficiaries system.

B 3.10) Classification of municipalities
Although the equitable share will be distributed directly to `unicity' metropolitan authorities and the B municipalities, the division of powers between Category B and Category C municipalities is crucial. While Category C municipalities revenue base is largely the RSC levies, it will be in receipt of equitable shares when there is no Category B municipality in the district and when Category C municipalities carries out the relevant functions.

However, the committee was informed by SALGA that sufficient progress has been made to ensure that Category C municipalities are phased out within a year. However, the Committee is of the opinion that this transition may take much longer and we will observe the progress in this regard.

C) Recommendations

The Select Committee on Finance recommends the following:

· Reviews of conditional grant mechanisms. Consideration must be given to the following:
a)There are too many conditional grants in the system and therefore, must be consolidated and rationalize to improve its effectiveness;
b)Institution of non-financial monitoring mechanisms such that evaluation of grants are based not only on spending criteria but also on provision of service. Questions such as whether each undernourished child in a school is in receipt of food parcel and whether each RDP funded house is received by the very poor and needy rather than those already in possession of homes in a another area, are good examples of non-financial monitoring. Members of Parliament and civil society bodies also must play a crucial role in exercising oversight responsibility:
c)Timing and appropriate release of grants. Grants should be promptly released by the original source so that all spheres of Government may work as a single continuum. This would result in a constant flow of funds through the intergovernmental system as required in Clause 27 of the Division of Revenue Bill 2001;
d)Improving the design of grants is crucial to the functioning of the entire system of conditional grants. Clear, and perhaps simplified, conditional requirements also have a bearing on the performance of grants;

· The tabling of the Division of Revenue Bill together with the National Budget on Budget Day should be further explored;
· Consideration be given to the transfer of the primary school feeding scheme to the Department of Education because it has the necessary infrastructure to provide such aservice;
· To follow-up on the negotiations between the Department of Social Development and the banking sector on the removal of finance and interest charges for beneficiaries of Social Security grants.
· To invite the Deputy Director-General of the Asset and Liability Management Division of the National Treasury to address us on the impact of local government participation in capital markets;
· To host further discussions on conditional grants and local government financing;
· National Departments and Provinces are expected to comply with the requirements of the PFMA, with regards to employment of Chief Financial Officers for the administration of conditional grants.

D) Conclusion
The Select Committee on Finance congratulates the participants of the public hearing on their detailed and frank submissions.

In addition, the Select Committee thanks all participants for their contributions and looks forward to a long and beneficial association with them.

More importantly, the Select Committee also conveys its special word of appreciation to the Directors-General of the following National Departments for their active participation in the deliberations:
Department of Health;
Department of Education;
Department of Water Affairs and Forestry;
Department of Housing;
Department of Public Works;
Department of Social Development; and
Department of Provincial and Local Government.

The substantial contributions of the Minister of Health and the Deputy-Minister Of Finance is also appreciated by the Select Committee.

The Select Committee on Finance would make the monitoring of conditional grants and local government financing one of its key features of its activity during the forthcoming financial year. We will continue with our engagement with affected stakeholders in this regard.
B 11) Relationship between the FFC, parliament, provincial legislature and local government

In future relations with the FFC, it may be necessary to establish and design appropriate protocols for the Select Committee of Finance and the Financial and Fiscal Commission. Since the Constitution also expects the provincial legislatures to receive reports from the FFC as well, the question arises should the NCOP (via the Select Committee of Finance) co-ordinate the interactions between the provinces and the FFC or should the FFC report direct to each individual province? These mechanisms remain to be resolved.

However, in the case of local government financing, the Select Committee of Finance would propose that the FFC interface jointly with the parliamentary committees on Finance, Local Government and SALGA. A series of meeting should be set up involving these four parliamentary committees and the FFC on their recommendations on local government financing.
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· Have workshop with provinces to interrogate the recommendations of the FFC
· The FFC continues with its work on the implication of Cost and Norms Approach for local government

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