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FINANCE SELECT COMMITTEE
4 April 2000
DIVISION OF REVENUE BILL: DISCUSSION OF NEGOTIATING MANDATES
Division of Revenue Bill
North West Province
The delays associated with the transfer of funds from provinces to municipalities dominated the discussion. It was generally agreed that one problem was the fact that grants went via the Provinces instead of directly to the Municipalities. Provinces in turn, blamed National Government, saying that the delays emanated there. The Finance Department however cautioned against removing the discretion that Directors General had in permitting direct transfers to municipalities given the shaky financial development of some municipalities.
Other concerns raised was the possible cash flow problems due to the first supplementary allocation being received as late as mid July, the late allocation of conditional grants, the unsubstantiated reduction in provincial budget allocations and the withholding of R293 grants and the problem of unfunded recurrent expenses. The Bill's compliance with the Public Finance Management Act was questioned and it was agreed that before the final mandate stage, the Committee needed to be briefed on various details of local government finance.
The Chairperson requested discussion of the key issues arising from the negotiating mandates.
Western Cape's concerns
Mr K Durr (ACDP Western Cape) raised one of the four main concerns of the Western Cape in which it envisaged a cash flow problem with the supplementary allocations to provinces if the first instalment was only paid on 18 July 2000 (Clause 10). In the Bill clause 10(1) provides that this grant must be transferred in three instalments to provinces, while clause 10(2) provided that the first instalment be paid over not later than 18 July 2000, subject to certain conditions.
Western Cape recommends that four equal payments be made, i.e. first in April, then July, October 2000 and January 2001. This is because the last instalment for the previous financial year would have been transferred in January 2000 which might mean a gap of six months if the first payment of the new financial year were made at the latest possible date of 18 July 2000. A cash flow problem would mean that expenditure to be incurred will have to be financed from the weekly equitable share transfers, which are already committed, e.g. personnel expenditure and social grants.
Ms Fubbs said that the Bill itself gave reasons for the first instalment being so late. These reasons were consistent with the requirements of the PFMA - the fact that money may not be transferred until final accounts were there. Thus no one should get money for which they could not account.
Mr Vuyo Kahla, Legal Advisor for the Department of Finance, said that he did not foresee a problem with proposal by the Western Cape for four instalments rather than three. He would nevertheless have to confirm this with the Department.
Secondly, the Western Cape had a legal problem, in that they felt that the Bill was at variance with the Public Finance Management Act, since clause 19(1)(a) of the Bill provides that the Director-General of Finance may, inter alia, effect transfers to provinces in the first six calendar months of the next financial year to a maximum of 55 per cent of the "equitable share" of each province set out in Schedule 2 of the Bill. This provision is not consistent with Section 29(2)(b)(i) of the Public Finance Management Act, 1999 (Act 1 of 1999), which refers to the "amount appropriated" in the previous annual budget. It is recommended that the Division of Revenue Bill be aligned with the Public Finance Management Act.
The Western Cape also had the following concerns. In the National Assembly the Portfolio Committee on Finance proposed that the first portion of the column marked "Additional Conditions" of Schedule 3A be amended by inserting the underlined wording "projected spending on health". This proposal cannot be supported as it is open-ended and makes fiscal discipline difficult.
Clause 16 provides that a notice must be published in the Government Gazette "without delay" for allocations, which are not set out in the Schedules to the Bill. To maintain orderly financial administration it is suggested that the frequency of such publications be provided for, such as quarterly or half-yearly with a formal cut-off date which is achievable within the provincial adjustment budget process. A suggested date would be 15 November 2000.
Mr Kahla said that he would have to respond to the four issues raised by the Western Cape after consulting with certain officials of the Department. It was the first time that he had seen the negotiating mandates and was not able to reply.
Mr Durr requested such response to be in writing and indicated that he would need to bring the feedback to the Western Cape by Thursday 06 April.
Kwazulu Natal's concerns
The Kwazulu Natal Legislature had a similar observation which was under point two of its concerns on the issue of unallocated grants. It stated that these grants are given by the National Departments to the provinces towards the end of the financial year. This is problematic as the provinces cannot effectively expend these funds within the limited space of time and without having planned for such expenditure. It would be advisable if the provinces are advised of the conditional grants early in the financial year in order to be able to plan or even start expending such funds even before they are actually transferred to Provinces.
The Kwazulu-Natal delegate also raised the issue of recurrent expenses. When National Government decided to allocate funds for the building of a school, for example, then it had an obligation to make provision for the recurrent expenses of such a school as well. To simply allocate funds to build the school without planning for its sustenance was unacceptable.
Mr Kahla said that recurrent expenses was an issue which the Department had also looked at in relation to conditional grants. If one looked at Section 7(1) which dealt with conditional grants, the kind of information looked for in grant applications submitted to the Director General prior to the transfer of such grants, included information on any associated and future costs arising from the grant but not covered by it. This was the kind of information required from any department that applied for a conditional grant.
Ms J Fubbs (ANC Gauteng) commented that Gauteng had also raised a similar problem regarding timeous payments in Section 8(3). In this section there was no clarity on timeframes for agreeing upon the amount of costs to cover the rendering of agency services.
Mr Kahla said that 8(1) dealt with the agreement that had to be entered into to ensure proper monitoring. The parties dealing with an agency payment would at that point also identify what the costs would be. He expected that the deadline in respect of the agreement in 8(1) would also apply in respect of the cost to be charged in terms of 8(3).
Ms Fubbs said that with regard to conditional grants generally, the previous division of revenue as well as the present one seemed to have a similar problem in that the three-month delay in the payment of conditional grants did lead to problems in delivering the services related to that grant.
Mr Kahla said that the more fundamental point, which had been made in respect of conditional grants, was that they appeared to undermine the role of provinces in the budgeting process. The Department had been exploring the option of moving away from these conditional grants since they did in some ways interfere with the budgeting process. One expected that as the budgeting process developed there would be a move away from this kind of budgeting. A big concern was that in many instances conditional grants came about because Departments had funds of which they had not been aware.
He believed that Section 19(3) facilitated a proper regulatory process for the timeous distribution of conditional grants. The deadlines for the submission of applications for grants were being set earlier by the Accounting Officers of the Departments. For grants which would be issued in 2001 the deadline was August 2000. The problem this year had been that most of the information on the conditional grants had only been received in February 2000!
Eastern Cape's concerns
Mr Suka (ANC Eastern Cape) said that the Eastern Cape was "singing the same song" regarding the delays in transfer of grants to the province. This meant that expenses were incurred in terms of interest which provinces had to pay. This had to be speedily remedied. He was also concerned about the reduction in funds transferred to the provinces without there being substantive motivation for such reductions. For instance there were concerns with regard to the town personnel grant, called the R293 grant. This was intended for salary expenditure which could not simply be withheld without looking at the actual situation in the province. The transferring Department had suddenly suspended this grant and had left the province to deal with this.
In 1999/2000 the budgeted figure had been R70 million, however the expenditure was R72,2 million. Suddenly the budgeted figure was reduced to R59 million, and yet there was still the same number of personnel and the same expenditure figures. There had to be clear motivation for this kind of reduction.
Mr Kahla said that clause 14(2) provided for a process of re-allocating R293 grants taking into account all the changes which may have happened in terms of numbers decreasing in certain areas for example. According to the economists the information received from the Eastern Cape did not warrant a change of the figures as they stood. If there was further motivation and clarity around the figures, then the Department would invoke 14(2) to actually deal with this problem.
Secondly with the health conditional grants it took the whole year to sort out administrative matters to the extent that either it comes during the last month of the year or a request has to be made for a roll-over.
Mr M Madlala, Chairperson of the SALGA Finance Working Group, said that the problem with funds which went to provinces and were received too late was that they had to be returned. Funds destined for Local Government should go directly to Local Government so that the funds could be spent.
Mr Kahla said that he could not provide an immediate answer to this. He however indicated that in Section 14 there was provision for a process to provide for this. In 14(2) the Deputy Director General may after consultation with the relevant head offices and provincial treasuries, amend the transfer mechanism of any funds listed in Schedules 3A, 3B and 3C. A particular Director General could then provide in the transfer mechanism that this particular transfer be directly to a municipality rather than via a province. This was the only way this problem could be dealt with in this Bill.
Mr Madlala said that the reality had been that more than 50% of the grants which were supposed to reach municipalities had not reached them. This situation had to be remedied. This was a sore point for local government. Provincial governments were saying that the reason for this was that they had received the grants late themselves. If this problem could somehow be remedied by the amendment of the Bill then this opportunity should not be lost and steps should be taken to do so immediately. The essence of the matter was that local authorities needed to receive the funds.
Mr Kahla saw no need to amend the Bill since he felt that Section 14(2) adequately dealt with this by providing for the Director General's discretion to amend the transfer mechanism to allow the funds to flow directly from national government to municipalities.
Mr Madlala felt that the adequacy of Section 14(2) depended on the progressiveness and flexibility of the Director General to be able to deal with these issues. The discretion may perhaps not be used which would result in the same problem thus it was questionable whether such a discretion was the answer.
The Chairperson said that SALGA should make a recommendation on how Section 14 could be strengthened, which could be included in the Committee report to the plenary, and the Minister would have to consider these recommendations.
A committee member asked SALGA to clarify whether "transfer of funds directly to municipalities" meant that those funds had to go to individual municipalities or that they should go to SALGA who would decide which municipalities would receive what.
Mr Kahla cautioned against SALGA's proposal for a direct transfer provision. The discretion should remain rather than coming up with a provision that may become very rigid and which could ignore the reality that there were still financial restructuring problems in some municipalities. Not all municipalities were on the same footing.
Mr Madlala said that the Constitution was very clear. The reference was to municipalities and not to the organised local government association. The funds were geared to go to municipalities.
Ms Fubbs raised the issue that Schedule 3C grants were difficult and costly to administer considering that they would not be for very large amounts. There would be a waste of money in administering such grants and it was suggested that they rather be linked to conditional grants.
Mr Kahla said that the biggest difficulty which the Department had experienced in dealing with conditional grants and the Schedules, was the problem of information coming from the Departments very late. This was why in 6(3)(c) (the provision dealing with Schedule 3C grants) Schedule 3C was identified as dealing with "agency payments to be paid on behalf of the Department". Schedule 3C was in fact a convenient dumping ground in respect of grants, which had not been clarified. It may well happen that the Minister will address these concerns during the year by shifting the funds allocated in 3C to where they ought to be set up, perhaps as 3A grants (which contained conditional grants).
Madlala raised the issue of the Demarcation Board and the proposed reduction of the numbers of municipalities.
The chairperson said that this issue was part of a broader issue which had to be raised together with other Committees including the Select Committee on Provincial and Local Government. The Committee would need to be briefed on the "nitty gritties" of Local Government finance before it went to the final mandate stage of adopting the Bill.
Mr A Marais (ANC Free State) wanted to know whether SALGA had provisionally costed the restructuring of the new organised Local Government and if they had, whether they could provide the Committee with figures in preparation for the envisaged meeting.
The chairperson said that she expected SALGA as well as the relevant Director General to come prepared with all relevant information.
Mr M Madlala wanted to know what measures would be taken in the instance of non-compliance with the Bill.
Mr Kahla said that Section 21 dealt with non-compliance with the Bill. He said that this focused on serious or persistent non-compliance with the provisions of the Bill. For instance, if there were certain things, which had to be done by Accounting Officers of various Departments in terms of this Bill, and it was picked up that there was serious or persistent non-compliance with the provisions of the Bill, these officials would be dealt with in terms of Section 21.
The Chairperson said that the Committee awaited the written response to the Western Cape's concerns. The meeting was adjourned.
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