Division of Revenue Bill: National Treasury, FFC and SALGA briefings

NCOP Finance

01 March 2005
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Meeting Summary

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Meeting report

FINANCE SELECT COMMITTEE

FINANCE SELECT COMMITTEE
2 March 2005
Division of Revenue Bill: NATIONAL TREASURY, FFC AND SALGA BRIEFINGS

Chairperson:
Mr T Ralane (ANC)

Documents handed out:
Division of Revenue Bill [B8B-2005]
Powerpoint presentation by Treasury on Division of Revenue Bill
Powerpoint presentation by the Financial and Fiscal Commission on Division of Revenue Bill
PowerPoint presentation by SA Local Government Association on Division of Revenue Bill
SALGA comments on Division of Revenue Bill
Financial and Fiscal Commission submission: Executive Summary
Financial and Fiscal Commission submission: Chapter 2 Recommendations

SUMMARY
National Treasury addressed the Committee on the Division of Revenue Bill [B8B – 2005] and the new formula that was being used to determine the equitable share for provinces. Discussion points were around the transfer of funds from non- or under-performing provinces and also the housing accreditation for municipalities.

After the lunchbreak, the Committee was briefed by the South African Local Government Association (SALGA) on the Division of Revenue Bill. SALGA's briefing focused on three key points, which were simplicity, predictability and cost of service. They felt that the eradication of multiple grants had led to the introduction of the Municipal Infrastructure Grant, but the Bill would reintroduce multiple grants. Furthermore, SALGA felt that Regional Services Council (RSC) levies should be replaced by easily collected forms of revenue. Members’ concerns included the incompetence of provinces when dealing with municipalities.

MINUTES
The Chairperson pointed out that from the public hearings on provincial budgets, it had emerged that correct data was important. He stressed that the Committee would insist on this and asked Treasury to make a note about this.

National Treasury briefing
Mr L Fuzile, Chief Director: Intergovernmental Relations, National Treasury, addressed the Committee as in the PowerPoint presentation attached. He pointed out that the Division of Revenue Bill was a legal requirement as a result of Section 214 of the Constitution. He added that a different formula was now being used to determine the division of revenue, because of changes over the years. The changes to these formulae were also the result of recommendations that the Financial and Fiscal Commission (FFC) had made in the past. He explained that the weightings that were being used in the formula had changed. The Early Childhood Development grant was now being included in the equitable share. The school age cohort component had been eliminated to determine the equitable share. The enrolment data that was obtained from schools was not reliable and therefore the enrolment and school age cohort was given an equal weighting. As far as the health sector was concerned, he said that the FFC had recommended that more reliable data be used. Consistent data however was not always available. The economic activity component had been reduced quite considerably in the new formula. This was because it tended to offset the redistributive element in the current poverty formula. The FFC had also recommended that cost disability be taken into account to ensure equity and efficiency. Although this was a good idea, it was difficult to do as these cost disabilities differed for each of the provinces. He added that the Government was not keen to make rules for municipalities regarding the equitable share. Municipalities were responsible for this money. If Government wanted to be more specific about how money should be used, it would be given as a conditional grant. Referring to the weighting system, he said that this was not done scientifically. The average expenditure over the past few years was used to obtain the present weightings. It was his opinion that these weightings could not be determined scientifically. Treasury would be open to suggestions as to how this could be improved. The new formula would be phased in over a period of three years. As far as housing was concerned, he said that it was the aim of government to accredit all of the big municipalities by the end of the current financial year.

Discussion

Mr D Botha (ANC – Limpopo) referred to the stopping of allocations as mentioned in the Bill. He asked what Treasury would be putting in place should an allocation be stopped because of non-delivery. This was a matter of concern, as the people on the ground would suffer.

The Chairperson pointed out that should delivery not happen, the particular councillor would not be re-elected.

Mr Z Kolweni (ANC – North – West) asked if the transfer of allocations meant that funds would be taken away from a province in dire need to one that could use it.

Ms D Robinson (DA – Western Cape) asked if the clause relating to the transfer of funds meant that other areas could compete for these funds.

Mr J Aulsbrook (IFP – KZN legislature) referred to the revenue raising capacity component in the formula and wanted to know how the potential revenue would be determined and by whom.

Mr E Sogoni (ANC – Gauteng) asked for clarity on the RSC levies that municipalities raised. He also wanted to know whether the devolution of powers with respect to housing had been researched. Referring to the poverty component, he asked how this was determined since some provinces such as Gauteng, was regarded as a rich province, yet it had the most informal settlements.

Ms Robinson (DA – Western Cape) said that the Western Cape was receiving a lower percentage than in previous years, yet it was receiving an influx of people from the Eastern Cape.

Mr B Nkosi (ANC – Gauteng legislature) asked what the figures of the previous year were so that a comparison could be made with the new allocation. He also said that the transfer of funds from one region to another had to be a transparent one. The guidelines for these transfers had to be clear.

Mr Kaliphi (ANC – Mpumalanga) referred to the transfer of the water function to the municipalities and said that municipalities had raised certain constraints around this. Some of these constraints were lack of capacity and a dilapidated water system .He wanted to know what was being done to address these constraints.

The Chairperson raised the issue of conditional grants and said that the national departments determined this. He had reservations around this. He cited the Education Department as an example that was using the education component to disperse funds in the HIV/AIDS grant. This was too broad. He had consulted with the FFC and they had also had the same concern. He asked if it would not be a good idea to use the FFC to assist national departments to work out a formula for disbursing these funds. He remarked that some commentators had said that the budget was pro-poor. He questioned this since part of the formula was that households with services would be funded R130 while those without would be funded R45. He was also concerned that if some municipalities were to receive housing accreditation, there would be a migration of people from those who did not have accreditation to those who did. This also put the burden on municipalities, when the issue that had to deal with was the lack of capacity and under spending of provinces.

Mr Fuzile referred to the transfer of funds from one province to another. He explained that in the past, allocations were shifted if under spending occurred. This could cause a migration of people from one area to another. It was now planned that, with donor funds, a project management team would be sent to assist the province that was under performing. The provincial departments were also asked for monthly and quarterly reports so that Treasury could see in advance what was happening. In some cases there was no other choice but to re-allocate funds.

The Chairperson interjected and said that this could create the situation where ‘glamorous reporting’ could take place because departments knew that funds could be taken away.

Mr Fuzile said that this was a possibility. He hoped however that people would be honourable. He felt that the system would foster possibilities for improvement. He agreed that there needed to be tangible information that could be compared with the financial information. He added that in order to ensure transparency, a short memorandum would go with the transfer. This memorandum would explain why the transfer was taking place and would be in the public domain. He agreed that this would be difficult to implement.

Mr Nkosi (ANC – KZN legislature) interjected and said that the transferring of grants would distort the formula that was being used. He also felt that there might be a Constitutional transgression if this was done. This would cause some provinces to remain underdeveloped. This was a concern as these were essential grants.

The Chairperson said that it was important to bear both scenarios in mind. He asked Mr Fuzile to continue.

Mr Fuzile said that the concerns were valid. The preferred option was that money would go where it was allocated originally. Every year there was under spending of the conditional grants. Under spending meant that some provinces would not have what was planned in that financial year. This did not mean that that those provinces would never have the infrastructure or items that were planned. It would just get these items later than the others. He also explained that amounts that were not spent could not just be rolled over as this only exacerbated the problem. He did not foresee a Constitutional problem as conditional grants were part of national revenue and the national government had a right to decide where and how it was spent.

Dr R Mokate, FFC Chairperson, said that they had recommended that there should not be "money-sitting" and that the government should avoid having interest payments on money that was being utilised. They therefore agreed with Treasury in what it wanted to do and that even though money may be shifted, the objectives of the plan should still be achieved.

Mr M Peter, FFC Executive Manager, added that any imbalance which occured should be corrected in the following financial year.

Mr Mvoko of SALGA said that there was a need for a turnaround strategy to help provinces that were struggling so that they could provide the resources needed in a shorter time.

Mr Fuzile continued and said that the concern that provinces were getting less because of the new formula was unfounded. He pointed out that there had actually been a steady increase in the percentage that provinces were getting. The accreditation of municipalities arose from the Housing Act. The Bill was only seeking to accelerate the process. It made more sense to give municipalities the responsibility as they provided the services as well. Capacity in this regard was a big issue. The poverty component was difficult at times to measure. If the number of informal settlements were used, it would not be accurate. Income per home was used as measure and this was more accurate. Even though Gauteng had more informal settlements, the income there was higher than in other centres. Referring to the money allocated per house, he said that the money was given to supply infrastructure and not services. There was no sense in giving money for services when the infrastructure was not present. Having the FFC assist the departments was an issue that had been raised and was a possibility.

Mr M Booysen, Director: Local Government Budget Process, added that the National Treasury did the revenue raising correction for municipalities. Treasury had decided on a non-arbitrary approach. This meant that the parameters and weights could not be imposed on an ad hoc basis. It would also mean that it was not open to manipulation by municipalities. There were two ways in which the revenue raising capacity was arrived at. The first part was to impute the revenue raising capacity if no data was available. This was based on the 2001 census. The second part was to impose a tax or levy. A 5% levy was put on municipalities. A higher rate was not used as the richer municipalities already contributed through VAT and other taxes. Treasury was working at finding alternate ways to deal with RSC levies. This would include tax or grants. Referring to the water-operating subsidy, he said that this was a Cabinet decision and was a bilateral contract process that had to be followed. Municipalities had to enter into a contract and national government would abide by its responsibilities until the grant was phased out in 2011 or 2012.

Mr Mvoko said that there was an assumption that the provincial departments of housing had capacity, whereas the local governments did not. Local governments had not provided this service before so it was unfair to assume that they did not have the capacity. The capacity of provincial departments must be measured before certain functions were removed from municipalities and given to provinces.

Ms Robinson (DA – Western Cape) said that it was important to have checks and balances such as auditing and reliable statistics.

Mr Sogoni (ANC – Gauteng) said that the role of politicians was not clear in the Bill. Mention was made of receiving and transferring officers but it was not clear who they were.

Ms A Mchunu (IFP – KZN) emphasised that reliable statistics was important especially in the area of receiving grants.

The Chairperson asked whether national and provincial Treasury was doing anything to reduce the cost of doing business for example in the tendering processes. He also wanted clarity concerning the late submissions and quality of business plans.

Mr Botha (ANC – Limpopo) referred to his province and pointed out that there had been under spending in the health sector. The Department had pointed out that there was a lack of communication between Treasury and the Department. He wanted to know what kind of follow-up work was done on a quarterly basis to see that funds were spent properly.

The Chairperson referred to Schedule 3 of the Bill and noted that there had been some fluctuations in the last few years. He asked for the reasons for this.

Mr Fuzile referred to a previous question and said that the allocation for the removal of the bucket system was not based on a formula but rather in a response to the need. He agreed that the perceptions of capacity were real. Everyone thought that they had better capacity than the next one. He pointed out that the transferring officers were the officials that were the accounting officers of a national Department responsible for a particular grant. The receiving officer would be the official that was the accounting officer in the provincial Department or municipality that received the grant. Although they featured quite prominently in the Bill, their roles would be in line with accounting officers according to the PFMA and MFMA. The Bill ensured that they would not have more power than what was stipulated in these pieces of legislation. The Bill therefore sought to place accountability in the proper place.

Ms J Ferreira, Director: Legislation, National Treasury added that the Bill sought to place reporting obligations on these officers with respect to conditional grants.

Mr Fuzile continued to say that the issue of tendering was a challenge. Treasury was responsible to provide the legislative framework for this in the PFMA and the MFMA. There was also a process underway to develop this further in the form of the supply chain management framework. The actual process however was removed from Treasury. They were only responsible for providing the framework. Referring to business plans, he said that Treasury was now insisting that these plans be submitted in the previous year. The issue of reliable data was a serious one. The provinces were responsible to supply Treasury with data. Before Treasury released anything, it was first sent to the provinces so that they could verify it.

Mr Booysen explained that the fluctuations in the figures were due to a new model coming into force in 2007/08. There were other factors as well such as the phasing out of the R293 personnel grant being phased out in KwaZulu-Natal and the Eastern Cape. The Western Cape and Gauteng would also be receiving more because urban poverty had been under estimated in the previous census. The Free State grant would also be increased because they had a large proportion of households with services. This new model would therefore serve as an incentive to municipalities to provide services to the poor so that their share could increase.

Financial and Fiscal Commission briefing
Dr R Mokate, FFC Chairperson, addressed the Committee as in the PowerPoint presentation attached.

SALGA briefing
After the luncbreak, SALGA briefed the Committee on the Division of Revenue Bill. The Bill was structured according to principles, which were predictability, simplicity and transparency and cost of service.

SALGA proposed that in future when new information which affected the allocation of the equitable share was obtained the same year allocation should be guaranteed. The amount by which the local government equitable share increased would be distributed only to those municipalities negatively affected by the new information. The objective of establishing the Municipal Infrastructure Grant (MIG) was to drop all the different grants targeting local government. The Division of Revenue Bill would see the reintroduction of the different grants. SALGA wanted the National Treasury to create conditions that would promote simplicity and transparency for eligible municipalities to access the MIG.

The revised average cost of service for serviced areas had been acknowledged and that of non-serviced areas had the full support of SALGA. The "one size fits all" approach did not work. The government should consider the introduction of different average service costs for municipalities with relatively comparable cost of services Two different categories of costs would be a more flexible option. The transfer of equitable municipal costs should be done timeously to complement basic cash management requirements in municipalities. This would eliminate the problems emanating from late payments of service providers such as penalties. A new source of revenue or tax should be introduced as a substitute for the Regional Services Council levies (RSC), but it should be easily collectable.

Discussion
Mr Mkhaliphi (ANC) commented that the National Treasury was entitled to withhold funds to truant municipalities. Oversight visits had revealed that some provincial officials would sometimes urge the NCOP to intervene in troubled municipalities. On closer inspection, the NCOP Members would discover that it was actually provinces that had not been playing their role. They had been supporting the municipalities when those municipalities had been encountering problems. He therefore urged the NCOP to play the role of a regulator when dealing with such matters.

The Chairperson felt that the Committee should call an ‘Indaba’, which would involve the Department of Provincial and Local Government (DPLG).

Mr Sogoni (ANC) said all stakeholders should participate in the process of the division of revenue. He asked to what extent SALGA had been involved in drafting the Division of Revenue Bill.

Mr Jaya commented that the DPLG and SALGA should empower municipalities with capacity. That would ensure that problems were tackled head on before they escalated.

SALGA replied that RSC levies had been going to metropolitan councils only. Therefore SALGA was in favour of the abolition of these levies. SALGA's involvement in the drafting of the budget was in the budget forum to raise everything that related to revenue. Another forum at which SALGA had been participating was the extended Cabinet meeting. At both of those forums submissions were made, but the outcomes were totally different.

The current Act provided for the withholding of the equitable share, and the withholding was supposed to happen in three phases. That would mean a gradual tightening of the screws in relation to which steps the municipalities had to take before the transfers could be made. For an example, when municipalities had not submitted the required financial statements. The Constitution provided for funds to be withheld when there was a consistent failure to account. In instances where municipalities had explained why they had not met Treasury standards, they received funding immediately. Regarding conditional grants, it was the transferring official who withheld the funds because those conditions had not been met.

The Chairperson said that there should be a consistent way of engaging all the stakeholders

Treasury briefing on Division of Revenue Bill
Ms J Ferreira, Director Legal Services, Treasury, went through the Portfolio Committee Amendments to the Division of Revenue Bill. (See B 8A-2005). Members asked no further questions.

The meeting was adjourned.

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