Division of Revenue Bill: Briefing &Adoption; Financial & Fiscal Commission Recommendations on Division of Revenue Bill

Meeting report

FINANCE PORTFOLIO, SELECT AND JOINT BUDGET COMMITTEES
25 February 2005

Division of Revenue Bill [B8B-2005]
Proposed amendments to the Division of Revenue Bill
Treasury PowerPoint presentation on the Bill.
FFC PowerPoint Submission on the Bill
Executive Summary of FFC submissions
Budget Review 2005 (link to Treasury website)

SUMMARY
The National Treasury briefed the Committee on the budget process and timeframes for all spheres of government. The consolidated spending figures in Table 7.6 of the Budget Review were initial projections. They would become accurate once each province and each municipality had tabled its budget.

National Treasury had approved new formulae for allocating funds to provinces and municipalities. The changes to the formulae for provincial and local government equitable share grants were necessitated by the shifting of administration of social grants away from provinces , housing and municipal health services. The review of conditional grants was not yet complete. The formula for local government was getting outdated. Lack of data for each municipality remained a major problem. The Regional Services Council levy would be replaced by another tax as from next year.

The review of the provincial equitable formula by National Treasury resulted in the addition of two additional components: a poverty component to make the formula redistributive and an economic activity component to take into account revenue raising capacity of provinces.

National Treasury agreed with most of the recommendations made by the FFC in respect of provinces. Some disagreements were due to lack of data. There was also agreement on the new formula for local government.

Members felt that it would be preferable for the Portfolio Committee to have a more thorough look at the Division of Revenue Bill. It was important to change procedures to ensure that the Committee would not just push through important pieces of legislation.

MINUTES
The Chairperson said that the Division of Revenue Bill would be dealt with in great detail by the Select Committee on Finance. National Treasury’s presentation would focus on its reaction to the Financial and Fiscal Commission (FFC) recommendations on the Division of Revenue Bill.

National Treasury presentation on the Division or Revenue Bill [8-2005].
The National Treasury was represented by Mr I Momoniat (Deputy Director-General: Intergovernmental Relations), Ms J Ferreira (Director: Legal Services) and Mr M Booysen (Director: Local Government).

Mr Momoniat made the presentation (see document attached). The budget process was driven by section 214 of Constitution and the Intergovernmental Fiscal Relations Act. National Treasury was obliged to table the division of revenue in Parliament. It was expected to consult with the Budget Council, Budget Forum and the FFC. He outlined the budget timeframe for all spheres of government. The consolidated spending figures in Budget Review Table 7.6 were initial projections. They would become accurate once each province and each municipality had tabled its budget. National Treasury had to approve new formulae for allocating funds to provinces and municipalities. The change in respect to provincial formulae was necessitated by the shifting of social grants away from provinces to the South African Social Security Agency (SASSA).

DiscussionMr S Asiya (ANC) noted that lack of data remained a problem. He asked if this meant that the distribution of funds was not as equitable as it would have been if there was sufficient data.

Ms J Fubbs (ANC) asked how National Treasury was dealing with the ceding of equitable share by local government. She also asked how the control of personnel in respect of social grants would be done once people were transferred to the SASSA. This was important to know given that the payment of personnel to administer social grants would still be made through to provinces.

The Chairperson asked if provinces would have the right to award tenders for the distribution of social grants once the Social Security Agency was up and running.

Mr Momoniat replied that the FFC had suggested that there should be rules on the ceding of the equitable share. The suggestion was rejected because it was believed that the rules approach would create its own set of risks. With regard to social grants, he said that there were administration costs per grant and this varied from R20 to R50 per grant. Some service delivery contracts provided that a provider was entitled to a percentage of the grant. This meant that every time a grant was jerked up the provider got more money for doing nothing more. It was hoped that SASSA would assess all tenders with the view of bringing down the costs. The staff costs would ultimately be paid through the administration grant.

Mr M Malahlela (ANC) asked if municipalities had capacity to collect data. He felt that the National Treasury seemed to suggest that it could only distribute funds equitably if it had reliable data and that it would keep the funds if there was not reliable data. He also asked if National Treasury had any role to play in order to ensure that data was forthcoming.

Mr Momoniat replied that there was some data available. There were the census results, data on how much water was provided per municipality and how many electricity connections existed per municipality. The revenue was still divided despite data problem. However, it was important to ensure that the data used in the division of revenue was reliable, objective and could not be challenged. It was important, for example, to judge school demands. The number of pupils in the school was an important factor in assessing the demands. The problem was that the National Department of Education collected such information but published it very late. The data collected also came with problems because the Department relied on principals. Some principals inflate the number of pupils because they thought they would get more money if their schools had many learners. Information from hospitals was also not reliable for the purposes of health services. Consequently, Treasury used medial aid data to decide how much to allocate for health services. He wondered why national Departments did not have the required information. It was surprising that the available information was no better than it was a decade ago.

Mr Y Bhamjee (ANC) focused on housing and accreditation of municipalities. He said that the eThekwini Municipal Manager had indicated to him that there was no accredited metropolitan. The Durban municipality had the capacity and could make a significant input on housing delivery.

Mr Momoniat replied that some people felt that accreditation should have taken place long time ago. The problem was that in terms of the Constitution, housing was a schedule 4A as opposed to a schedule 4B function and this was quite odd. The housing problem would only be sorted out once municipalities had the full power to administer housing. Provincial housing departments had in the last two years dumped monies onto metropolitans. Fiscal dumping was often down towards the end of a financial year. The audit process by the Auditor General had never picked this up despite the fact that Treasury had always reminded them about the practice. The Division of Revenue Bill contained a clause aimed at pushing the pace of the accreditation process. All metropolitans should be accredited by the end of the year. Metropolitans would not have capacity if they had never performed the function before. They would begin to develop the necessary capacity once they were given functions to perform. Many of them had the necessary capacity but it had declined over time. Some would do a better job than some province despite the lack of capacity.

Ms R Joemat referred to page 75 of the Bill and noted that the Eastern Cape provincial share was going down and migration was given as a reason for this. She asked which provinces were getting advantages due to migration. She wondered why National Treasury was intending to eliminate the RSC levy but at the same time introduce another tax in its place. She said that some municipalities had the tendency of shifting funds to various services so that they could be seen to have been spending funds allocated to them.

Mr Momoniat replied that no province lost out in terms of allocation and all provinces got an increase over their baseline allocation. Even the Eastern Cape would get a bigger share of social grants.

Mr N Nene (ANC) was surprised by the absence of the backlog component in table E7. He also asked how the elimination of the RSC levy would impact on the revenue raising capacity and the formula for allocating funds to municipalities.

Mr Momoniat replied that some metropolitans were able to collect around R5b in RSC levies. Some district councils did get the levy and never used it. There was a need of greater transparency on the use of the funds. In some cases the fiscal powers were not aligned with the functions. There was no intention of taking any revenue away from a municipality that was currently collecting it. The backlog component was included under the provincial infrastructure grant. It was hoped that all backlogs would get smaller as money was allocated to reduce them.

Mr D Botha (ANC) commented that some District Councils did not release monies in time to municipalities and this had caused some problems.

The Chair pointed out that the Bill was very important and the Portfolio Committee was supposed to spend a great deal of time considering it. However, the Committee could only do a perfunctory job on the Bill and would leave it to the Select Committee for in-depth consideration. The Committee should have in-depth discussion of the Bill in future. He asked if Treasury was taking any steps to amend the constitutional requirement that the Bill should be tabled before the National Assembly. He also asked if provinces would have the right to award tenders for the distribution of social grants once the Social Security Agency was up and running.

Mr Momoniat replied that Treasury could include a clause in the Bill to the effect that the Division of Revenue Bill should be tabled in the National Council of Provinces (NCOP) if this was what members wanted. The Bill would still go to the National Assembly because it was a section 76 Bill. Parliament had in the past indicated that it was not in favour of the Bill being tabled in the NCOP.

Mr Z Kolweni (ANC) asked to what extent the new formula took account of the presidential nodes.

Mr Booysen replied that the nodes were taken into account for the next two years during which Treasury would be phasing in the new formula. Mr Momoniat added that the FFC had said that one could not take a few municipalities and say these were nodes and should therefore be favoured. There might be poor people in other municipalities.

Mr Bhamjee felt that the Portfolio Committee was not doing justice to the Bill by not carefully interrogating it. He wondered if the Committee was just rubber stamping what National Treasury had said in the Bill. It was important for the Committee to play its oversight role.

Ms B Hogan (ANC) agreed that the Committee had not dealt with the Bill in a satisfactory manner. She asked if the money for anti-retroviral (ARV) programmes was transferred through conditional grants. She referred to page 112 of the Bill. The information on the number of people who had received ARVs was very scant. She noted that there was voluntary counseling and testing services and a number of counselors were trained. There was a lot of concern about progress made in respect of access to ARVs. She noted that the Bill provided that there should be quarterly reporting and asked if there was a problem with information management systems. The Treatment Action Campaign had information on each hospital that was offering ARVs.

Mr Momoniat agreed that the process looked at the Bill comprehensively. The roles of the Departments were very important. Many Departments received a "strong emphasis of matter" in their audit outcomes because of conditional grants. Treasury did not have the kind of information Ms Hogan referred to because Departments were unable to provide it. The NCOP had been very militant in requesting each Department responsible for a conditional grant to furnish information on the grant. One could ask why Departments were given conditional grants if they were not spending them. Treasury would be happy if the Committee was to take a militant approach on finding out how conditional grants were being used. There was 96% expenditure in 2003/04 of the comprehensive HIV and AIDS grant. She found it difficult to understand why the roll out was slow whilst there was good expenditure. This was a conditional grant and one the conditions was that there should be quarterly reporting. She asked what was the power of the conditions attached to a grant.

Mr Momoniat replied that the national Department could delay or stop the grant. In most instances it was the national Department that was not doing its work. They just provided the money without requesting information on outputs.

Presentation by the FFC on the Division of Revenue Bill
Dr R Mokate (Chairperson: FFC) made the presentation in response to the Division of Revenue Bill (see document attached). She was accompanied by Mr J Josie (Deputy Chairperson), Mr B Khumalo (Manager: Fiscal Policy Analysis), Mr C van Gass (Manager: Budget Analysis), Mr M Peter (Executive Manager: Commission Coordination), Mr V Makinta (Database Coordinator and Mr R Nthite (Research Coordinator: infrastructure finance). Dr Mokate highlighted the mandate and objectives of the FFC. There was a need for a proper definition of what the poverty component of the provincial equitable share was intended to achieve as well as the method used to determine its weight. With regard to the backlog component, a separate conditional grant should be created to deal with infrastructure. There was agreement between government and the FFC that the 'windows approach' to the local equitable share should be abolished. There was also agreement that the revenue raising capacity of local government should be incorporated into the local equitable share. However, further work should be done in respect of the design and definition of the spill over component. With regard to measuring of basic municipal expenditure needs, the government should define the basket of basic municipal services. The local equitable share should be protected from being ceded by municipalities. The FFC had suggested the amendment of the Municipal Finance Management Act or making guidelines to deal with the ceding of the local equitable share. The government had opted for guidelines.

Discussion
Ms Joemat was of the opinion that the FFC relied on data in order to formulate recommendations. She asked how the lack of information alluded to by Treasury had affected the FFC in making recommendations.

Mr Josie replied that data was very important. It was important that various institutions collected data on different subject matters. Statistics South Africa also collected data that could be used. The issue was how the data got validated and used. The new formulae adopted by Treasury were population driven. The FFC had made the recommendation for new formula in 1995. The changing and phasing-in of a formula also required data. There were problems with data but one could not just stop the process and not allocate funds. At the same time one could not allocate funds without information on who was entitled to a certain amount of money.

Mr T Vezi (IFP) noted that the FFC believed that there was a need for an assessment of all poverty targeted programmes in order to avoid unnecessary duplication and inefficiency in the allocation of resources. He was concerned that scarce resources were going to waste due to unnecessary duplication of programmes. He referred to a case where the Departments of Welfare, Health and Agriculture and the District and Municipal Mayor had all funded one poultry project. Only the Department of Agriculture should have funded this project because the other departments knew nothing about farming.

Mr B Mnguni (ANC) asked how the economic activity component of the provincial equitable share incentivised provinces to increase their revenue.

Mr Khumalo replied that the economic activity component tried to return some money to provinces that generated more tax. The extent to which national government returned some money to provinces would be reduced if the economic activity component was reduced. Provinces might have to raise more revenue on sources that they had or identify new sources of revenue and this was encouraged by the Provincial Tax Regulation Process Act.

Mr E Sogoni said that it would be helpful to have a breakdown of recommendations that were rejected or accepted.

Ms D Robinson (DA) said that data was crucial to efficiency and the improvement of the quality of life for all people. There should be a list of people who were not responding to requests for information. This would help the Committee in playing its oversight role.

Mr Malahlela asked if the FFC was satisfied with the government's response to a submission it had made with regard to the establishment of the Social Security Agency.

Mr Josie replied that there were great difficulties in the way people were receiving grants. There were difficulties in the transition period. The FFC had made a recommendation for a transitional grant and National Treasury had accepted the recommendation.

Briefing on the Division of Revenue Bill
Mr Momoniat took the Committee through all clauses of the Bill. He proposed various amendments to the Bill (see document attached). Most of the amendments were technical and not substantive. Some amendments were necessitated by the Municipal Finance Management Act. The Bill was substantially similar to other Division of Revenue Bills.

Clause 5: Equitable division of local government share among municipalities
Mr Bhamjee asked what would happen if a municipality's equitable share was not transferred as required by clause 5(3). Some municipalities had complained that transfers often did not take place in time.

Mr Momoniat replied that all transfers were supposed to take place on set dates. Municipalities were expected to provide their financial statements. Those who did not submit their statements were requested to commit themselves to submitting the statements by a particular date. Some transfers were delayed by 30 days. The equitable share belonged to municipalities and Treasury was obliged to transfer it. It did not transfer the money simply because it wanted to clean its books.

Chapter 3: Other allocations to provinces and municipalities
Mr Momoniat said that this chapter clarified the accountability arrangements for Schedule 4 functions. Schedule 4 dealt with allocations that were to provinces and could be divided amongst different departments.

The Chairperson read the motion of desirability and the Portfolio Committee's report on the Bill. The Committee adopted the Bill with the proposed amendments.

The meeting was adjourned.