Minister on Budget 2006; Division of Revenue Bill [B3-2006]: input by National Treasury & Finance & Fiscal Commission

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES & JOINT BUDGET COMMITTEE
16 February 2006
MINISTER ON BUDGET 2006; DIVISION OF REVENUE BILL: BRIEFINGS AND FINALISATION

Chairpersons:
Mr N Nene (ANC)
Mr T Ralane (ANC) [Free State]
Ms L Mabe (ANC)
Mr B Mkhaliphi (ANC) [Mpumalanga]

Documents handed out:
Presentation by Minister on National Budget 2006
Taxation Proposals on Income Tax
FFC presentation on Division of Revenue Bill 2006
FFC Submission on Division of Revenue Bll 2006
National Treasury presentation on Division of Revenue Bill 2006
Estimates of National Expenditure 2006
National Budget Review 2006
Appropriation Bill [B2-2006]
Division of Revenue Bill [B3-2006]
Additional Adjustments Appropriation Bill [B4-2006]

SUMMARY
The Minister highlighted a few key points of the 2006 budget and focused on the projected growth rate of 5% per year over the next three years without significant government intervention, which was due to factors such as revenue over-runs as a result of very strong corporate profits across the board, the very strong profitability from the resources sector and a high import bill.

Members asked various questions including on the low increase in social assistance to the poor and the elderly, inadequate incentives for the private sector to create employment, why current levels of revenue were not expected to remain in the short-term, the benefits of research and development for the man in the street, the need for more financial assistance for civil society groups focused on health issues and the need to link resource allocation with meaningful expenditure.

The Financial and Fiscal Commission presented an overview of recommendations pertaining to the Division of Revenue Bill. An analysis of expenditure within each sphere of government was provided. Detail was elucidated on spending performance of the various grants.

Members asked crucial questions on, amongst others, the ability of conditional grants to contribute to skills enhancement, lessons learnt from the Gauteng Rail Project, a list of unintended matters related to equitable share, whether the Division of Revenue Bill covered both equitable share and conditional grants, the success rate of implementation of equitable share, the splitting of administration costs for grants between the national and provincial governments, the state of readiness of local government to deliver houses and the need to better fund municipal health provision.

National Treasury briefed the Committees on the 2006 Division of Revenue Bill. The link between the municipal infrastructure grant, housing delivery and the equitable share was clarified, and it was explained that National Treasury would now be granting re-allocations on condition that the funds were spent in the particular financial year. Most conditional grants now included a ceiling percentage that could be used to improve capacity. The housing accreditation function was retained in the Bill, together with provisions that related to re-allocation of some of the conditional grants because the need for them still existed. The specific contents of each of the Schedules to the Bill were outlined. Chapter 7 of the Budget Review summarised the extent of government funding across the three spheres, and Annexure E of the Bill provided greater detail on those allocations per sphere

During the discussion the Committee sought clarity as to whether, in terms of the re-allocations, National Treasury required the receiving municipalities and provincial departments to provide reasons as to why they were unable to spend funds within a particular financial year, and the extent to which National Treasury ensured the full spending.

The Committee passed the Division of Revenue Bill without amendments. The DA abstained from voting, pending a mandate, but expressed approval of the Bill.

MINUTES
Introduction by Chairperson
Mr Nene welcomed all to the meeting.

Mr Ralane extended a welcome to the Minister and Deputy Minister, the other officials from National Treasury, the delegates from the Financial and Fiscal Commission (FFC) and the Commissioner of the South African Revenue Service (SARS). He invited the Minister to conduct the presentation.

Briefing by Minister on Budget 2006
Trevor Manuel (Minister of Finance) thanked the Committee for the opportunity to address it. He tendered the formal apologies for members of the delegation who could not attend the meeting, such as the Deputy Minister, as they were deployed in various areas. He stated that the presentation had been distributed to the Committee but proposed that he not in fact go through the entire document, as Members had already spent many hours familiarising themselves with the Budget document and they had all been present at the previous day’s lock-up session. He proposed instead that, subject to the Committee’s approval, he raise two or three points on the Budget after which he would engage in a discussion with the Committee.

Mr Ralane approved of the proposal.

The Minister stated that the point that National Treasury would like to reinforce was that, building on the growth of 5% during the previous financial year, government was looking at a growth of 5% per year over the next three years without significant intervention. National Treasury had analysed the 5% growth rate and recognised that there were a few features: the first were the revenue over-runs as a result of very strong corporate profits across the board, which was indicated in the Medium Term Budget Policy Statement (MTBPS) during the previous financial year. There was also very strong profitability from the resources sector. Over and above that was the high import bill, in an environment in which the currency was relatively strong, which resulted in capital goods being good for growth going forward and on the other hand it was also good for consumers.

He stated that these factors must be borne in mind when considering how government could use what it currently had to best effectiveness This would include identifying what could be done to expand the growth opportunities and potential in the economy, and thus the focus of the budget was largely on investment in infrastructure as well as human resources. There was an attempt at a set of focii that looked at the quality of services and put in place a series of measures that required National Treasury to deal with those issues on an ongoing basis. .

Discussion
Mr J Stevens (DA) raised a concern about the lack of attention shown in the budget towards the elderly and the poor. This oversight appeared particularly callous in light of the massive profits generated by private sector companies and tax concessions granted to taxpayers. The indigent and vulnerable had only received a five percent increase in grants in line with inflation. The action of government indicated a lack of political will to improve the lives of the poor. Old age pensioners were only receiving R40 extra per month. He asked why social security grants only received an increase related to the rise in inflation.

Mr I Davidson (DA) asked why the budget contained insufficient incentives for the private sector in order to increase involvement in development initiatives. The country continued to attract insufficient levels of Foreign Fixed Investment. The private sector was not investing enough capital into economic expansion within South Africa. A basic principle of taxation was to encourage the private sector to invest in order to create jobs.

Mr K Moloto (ANC) asked why the Finance department regarded the current levels of revenue as temporary and susceptible to cyclical pressures while consumer demand remained strong.

Mr E Sogoni (ANC) noted the increased allocation in the budget for Local Government to R26 billion and reminded Members that the Development Bank of South Africa (DBSA) had committed itself to assist the process of skills development - 90 DBSA officials would be seconded to municipalities. He asked whether such numbers were sufficient.

The Minister of Finance asserted that grants and pensions had been the largest growth area in government expenditure over the years. Social grants had experienced an average annual growth of 20%. Choices had to be made between various functions. The take-up of grants had been increased. All grants had to maintain pace with inflation. The value of individual grants could not rise in accordance with an increase in the number of grants. A fine balance had to be achieved between the extent of social assistance and the combined value of grants. The imposition of minimum wages in certain economic sectors caused problems for economic actors, such as farmers. Grants should not be set in sectors at a higher rate than the existing minimum wage levels as this would dis-incentivise workers and encourage reliance on social assistance. Government should not be regarded as the employer. The government would seek to transform the retirement fund industry in its entirety in the long term. A discussion paper would be released in one month. Government wanted to avoid a situation where people relied on state pensions for survival. The department did not believe that the present revenue overrun of R40 billion was sustainable. Current drivers such as high corporate profitability, high VAT returns and increased vehicle sales would not persist indefinitely. The government must not commit to consumption expenditure. Two choices were faced, either to cut pension increases or borrow money. Increased borrowings would devalue previous attempts to reduce the value of debt servicing.

The unit within the Treasury dedicated to the promotion of public-private partnerships (PPPs) had achieved a significant amount. Government receives many requests for public-private partnerships. Shared risk was the core element of public-private partnerships. Costs could not be socialized and profits privatized. A dam was being developed on the Mpmumalanga border that contained public and private investment. Certain private sector activities would require own funding. Government would focus on infrastructure expansion. However, the private sector was proving reluctant to invest the necessary resources and expected the public sector to be the sole contributor. Private sector enthusiasm for PPPs was waning.

Mr l Kganyago (Director-General: National Treasury) stated that business leaders constantly asked for detail on levels of government investment and the locations of such investment. Government planned to invest 20% of gross domestic product (GDP) per annum over the next three years. He acknowledged that foreign direct investment (FDI) remained low. Companies tended to use shares as acquisition currency. Most companies investing in South Africa openly stated that their strategy was to use the country as a base to expand into Africa. South Africa would continue to attract such investment. Government would continue to engage with the private sector on a regular basis including black business groups. The government desired a tax regime with few incentives and exemptions. Tax holidays were not seen as productive.

Mr P Gordhan (Commissioner: South African Revenue Service) declared that the private sector had received a reduction in corporate tax of R24 billion over the past three years. The government was committed to reduce compliance costs for business. The corporate tax rate would be reduced by 2%.

The Minister of Finance acknowledged that capacity shortfalls remained a major challenge for municipalities. Certain municipal managers had low skills and consequently accountability was compromised. Most Integrated Development Plans were drawn up by consultants with little input from communities. Therefore budgets did not correspond to real needs on the ground. The lack of building inspectors in certain municipalities compromised the quality of housing developments. Municipal managers had to play a greater role in development plans and implementation. Necessary skills had to be imported into municipalities through employment of skilled individuals. Total reliance should not be placed on the private sector to supply vital services. The DBSA plan was to temporarily deploy experienced individuals to act as mentors in municipalities where skills were needed. The DBSA had responded favourably to the proposal. Elected councillors must ensure that service delivery took place. Payment to the Southern African Customs Union (SACU) had increased by 1% of GDP. The formula within the international agreement had changed. The percentage was determined by the level of trade achieved by countries within the region. Countries, such as South Africa, with high levels of international trade would have to contribute more to the revenue pool.

Mr Nene referred to the promotion of retirement savings and asked how the budget could pass on the benefits of the lower tax rate.

Mr D Gumede (ANC) asked what social benefits would result for the man in the street from incentives for research and development.

Mr Y Bhamjee (ANC) reminded members of the low capacity-levels within municipalities and asked whether conditional grants could contain a skills enhancement component to ensure that resources were expended effectively.

Ms J Fubbs (ANC) noted that the present budget was the most expansionary yet. Service delivery had to occur in an integrated manner. However, a lack of co-ordination existed between the provincial governments, the Integrated Development Programme (IDPs) and the budget. Attention would have to focus on the mechanism to achieve development as opposed to the allocation of financial resources. Allocations should be reduced or increased based on an annual analysis of the efficacy of expenditure.

Ms D Robinson (DA) [Western Cape] noted the increase in funding for libraries but asked whether NGOs dealing with chronic diseases could receive additional funding from government.

The Minister of Finance reiterated that the government would produce a paper within a month outlining proposed changes to the retirement fund industry. Much consultation would occur between government and role-players to determine appropriate measures. A sound agreement had recently been struck regarding retirement annuities. The adjudicator would not accept any sales by misconception within the industry. Disclosure rules would remain important. Some amendments would be likely to the 1956 Act. A discussion with Members would occur in due course.

Incentives for Research and Development were important as innovation was necessary to sustain the economy. South Africa had to increase its number of patents. South Korea now had more patents than Australia. Research would allow the economy to be less dependant on commodity prices. Certain grants would have to be reconsidered to improve the level of efficacy. Some grants had proved to be highly productive. The bureaucratic maze involved in utilising grant funds to pay for outsourced services was counterproductive to the sustainability of small businesses. The oversight role should be strengthened to improve implementation of grants.

Actual expenditure figures were supplied to Parliament every month. Every department was responsible for its own expenditure. The Minister remained responsible for outcomes but not actual expenditure. The Committee had to hold the Executive to account in accordance with measurable objectives. Section 32 of the Public Finance Management Act (PFMA) provided the Committee with the right to question outcomes and issues such as under-spending. The lack of funding for specific NGOs had to be taken up with the respective provincial governments. A relationship existed between Provincial departments and service providers in civil society. All social grants would be a national competence from 1^st April. A crucial question was deciding which organisations would benefit from financial assistance.

Financial Fiscal Commission (FFC) Presentation on Division of Revenue Bill
Dr B Setai (Chairperson) commented on the annual Division of Revenue Bill. The Minister of Finance had to consult with the Commission prior to the introduction of the Bill.

Mr J Josie (Deputy Chairperson) added that expenditure was analysed within each sphere of government. Municipalities had to be provided with sufficient funds to carry out assigned functions. He also elucidated on spending performance issues.

Discussion
Mr S Asiya (ANC) stated that the link between conditional grants and skills development could not be underestimated. Conditional grants should contribute to capacity enhancement. He asked why attempts at poverty alleviation and job creation had variable results within different provinces.

Mr T Vezi (IFP) asked for further detail on the lessons learnt from the Gauteng Rail project.

Mr Bhamjee asked why a recommendation had been made to not include conditional grants in the Local Government Equitable Share conditional grants should contain a component that facilitated skills development and proper administrative processes in order to ensure delivery and encourage maintenance of projects.

Mr Ralane sought clarity on "matters other than intended" within the equitable share scheme and asked for examples of common instances.

Mr J Josie (Deputy Chairperson: FFC) stated that provinces had autonomy over how equitable shares could be spent. Premiers determined strategies and priorities for expenditure. The share was a lump sum that provinces could use at their discretion based on specific needs. Competencies within provinces tended to be located in one provincial department that hamstrung overall developmental efforts.

Mr C Van Gas (Manager: Budget Analysis) declared that the most well-established regional economic programmes were situated in the Western Cape, Gauteng and Kwazulu-Natal. Certain projects would originate at the provincial level and then be elevated to the relevant national department. Such funding arrangements would be listed as transfer payments. Intended policy outcomes of economic development projects would not be specified. Improvements in performance budgeting would alleviate some of the problems. Approximately one percent of conditional grants had to include administration and capacity-building resources. A consistent approach was needed across conditional grants to avoid unfunded mandates. New programmes would require set-up costs. More research was needed on areas where conditional grants were spent other than intended. For example, money intended for expenditure in specialised hospitals was spent on secondary hospitals. Conditions should be loosened in certain instances.

Mr B Khumalo (Project Manager: Fiscal Policy) responded that the Gauteng Rail link contained some key lessons for future planning including the need to provide for links at a lower level to incorporate communities into the project. For example, other modes of transport had to be accessed by the link.

Mr Josie stated that the equitable share had to capture the development needs of municipalities. A general allocation to local government had to include a development component but there was no guarantee that the allocated amount would be used appropriately. A suitable development mechanism was required to facilitate meaningful output.

Mr Khumalo stated that the normal provision of revenue for capacity development in municipalities had to be conceptually separate from the development formula as they were distinct forms of financial flows.

Ms Fubbs sought clarity on the conditional grants. Unspent conditional grants should not be a unilateral decision but should be taken in consultation with the provinces. She asked whether the same principle applied to local government. She asked whether the Division of Revenue Bill covered both conditional and equitable share grants. However, the objects of the Bill did not include conditional grants and she asked if this was correct. She asked for clarity on certain technical issues related to housing proposals.

Mr Ralane noted that the changing of business plans during the implementation process of conditional grants created a problem. Further interaction between the Committees and FFC was required to address the shortcoming. Provincial departments tended to produce poor plans accompanying fiscal transfers. Provincial MECs would declare on a regular basis that the implementation of conditional grants was proceeding smoothly although the reality tended to show a distinct lack of activity at the provincial level. For example, the Provincial Taxation Process Bill had only been implemented in the Western Cape. Under-spending also occurred with equitable share grants.

Mr S Dithebe (ANC) [National Assembly] noted that the national government did not want to bear sole administration costs for functions assigned to local government. He asked how costs would be split between national and local government. He sought further clarity on the alternative proposal made by the FFC regarding the distribution of costs.

Mr E Sogoni (ANC) asked whether the FFC had engaged in research to indicate levels of capacity of local government to provide housing. Provincial MECs constantly claimed that municipalities possessed insufficient skills to adequately address the housing shortages. He asked for a progress report on the state of readiness of Metros to deliver houses. Municipalities tended to provide superior health services to provincial units while receiving lower levels of financial assistance.

Mr Khumalo declared that the FFC proposed the linking of three crucial issues namely, the initial approval of housing subsidies, the allocation ascribed to the equitable share grant and the Municipal Infrastructure Grant (MIG). Suitable infrastructure was needed to accompany the provision of houses. Such infrastructure would be provided by grants. Time lags had to be avoided in the linking of each component. Grants did contain a portion dedicated to administration and other costs. The percentage of a grant allocated for such costs had to relate to the revenue-raising capacity of specific municipalities.

Mr Jaya promised to provide Members with a comprehensive report on the level of under-spending at the local government level. The reallocation of unspent funds would be arranged in consultation with stakeholders. Reasons for the removal of money would have to be established. Provinces would have to be monitored to ensure that fiscal transfers were spent correctly. The readiness of municipalities to deliver houses would have to be assessed.

Briefing by National Treasury on Division of Revenue Bill
Mr Ralane introduced the National Treasury delegation that would be addressing the Committee on the Division of Revenue Bill

Mr L Fuzile (Deputy Director-General: Intergovernmental Relations) stated that he would conduct a large portion of the presentation, which would be brief. The FFC presentation covered much of the issues dealt with in National Treasury’s presentation and on which the two had reached consensus. He however wished to touch on a few of those matters.

The first was the link between the MIG, housing delivery and the equitable share. If in an ideal world all the data needed for all the formulae could be updated annually, then the issue raised by the FFC would not be a factor. If all the necessary data on the equitable share were to be available regularly so that the database could be updated regularly, then everything would take care of itself. The current problem was that that was not the case and, even though government knew the problem existed, there was not much it could do about it in the absence of the necessary data. He stated that the FFC’s proposal was sensible, but was difficult if not impossible to implement.

The second issue was that of re-allocations. The implication, although it was not expressly stated in law, was that the department that wanted re-allocate a conditional grant must interact with the provinces that would be affected. Having said that, it was important to note that there were different types of conditional grants for different items. For example, the preference was to retain some of the ‘specific purpose grants’ within a certain programme, so that they could be transferred from one province to another but within the same over-arching programme. However, there were certain grants, such as the Provincial Infrastructure Grant (PIG), whose allocation was determined by the province itself. The province could thus decide to transfer the grant from one programme or provincial department to another, and the national government was only authorised to intervene when in fact the funds were not re-allocated at all.

The third issue was capacity, especially with regard to housing accreditation. Most conditional grants now set a ceiling percentage of the total conditional grant that could be used to improve and ensure capacity. The expectation was that housing accreditation would begin in the large municipalities that had the necessary resources and, if they did not have the needed capacity, they would have been able to provide the housing accreditation function in a very short period of time. Furthermore, if an additional function was handed to them, there was a reasonable understanding that they would be able to use a portion of the conditional grant funding to properly capacitate that additional function.

Mr Fuzile focused his attention on the presentation and the Division of Revenue Bill. The Bill was being presented to Parliament at a point where government had learnt important lessons from former division of revenue legislation. The PFMA and the Municipal Finance Management Act (MFMA) prescribed several requirements that ensured effective financial management. There were however sections of the Division of Revenue Bill that from time to time became redundant, as it repeated things that were contained in those Acts. National Treasury had begun to weed out such sections.

Secondly, as the Minister had mentioned on the previous day in his Budget speech, in the current financial year provision was made to deal with the social security financing transitional mechanism. It provided for the funding of the functions by means of a conditional grant, and as a result special provision had to be made to deal with it. The reason was because, as of 1 April 2006, conditional grants would become an exclusive national function and the need for those provisions fell away. To take account of that, there was thus a major change in the Bill.

Two provisions were retained in the Bill. The first related to housing accreditation. National Treasury proposed that this provision be removed from the Bill, but the Department of Housing pleaded for it be retained. National Treasury hoped that significant progress would be made in 2006/7 to speed up the accreditation process. The second were the provisions that related to re-allocation of some of the conditional grants because the need still existed, even though it was not applied as rigorously during the current financial year. He stated that National Treasury had learnt that if the provisions on re-allocations were limited to those instances in which it was guaranteed that the funds would be utilised in the current financial year, the reason for the re-allocation was negated. It was thus important for National Treasury to allow further flexibility to provide for the possible re-allocation on the understanding that the money could be rolled forward to another financial year at least once. He hoped that the Committees would accept that proposal.

The Bill also made provision for any untoward matters that might arise from the Cross boundary Municipalities legislation, because in certain instances not enough progress has been made as provided for in the relevant legislation which eradicated those municipalities. He requested Mr K Brown (Director: Provincial Budget Analysis) to add any further information that might be necessary.

Mr Brown stated that he would move speedily through the presentation, as some of the areas in the presentation had already been covered. The presentation outlined the intergovernmental system and the 2006 budget timeframes. He provided an outline of the Bill and explained the contents of the seven schedules to the Bill as follows: Schedule 1 dealt with the allocations between the three spheres of government, Schedule 2 dealt with the provincial equitable share among the nine provinces and Schedule 3 divided the local government equitable share among the 283 municipalities. Schedules 4 to 6 outlined the conditional grant allocations, and Schedule 7 dealt with allocations-in-kind to the local government sphere.

Chapter 7 of the Budget Review summarised the extent of government funding across the three spheres, and Annexure E of the Bill provided greater detail on those allocations per sphere. He indicated that a review of provincial and local government fiscal framework was tabled in 2005, and during 2006 National Treasury had updated the existing formulae for new data.

With regard to the issue around housing accreditation raised by the FFC, Mr Brown stated that it must be sped up and National Treasury must look at allocations per municipality, moving forward. Some of the conditional grants were currently under review, such as certain health and education grants.

He noted that the presentation outlined and addressed the FFC’s recommendations, and he would thus only focus on the recommendation relating to housing delivery. Government agreed that it must look to all three spheres of government in terms of the assignment of powers and functions regarding housing accreditation. At the same time however, the implications of the shifting of those functions from one sphere to another must also be considered, which would include costs and administration. .

He stated that government was, however, of the view that not every function lent itself to those kinds of norms and functions. For example, for the coming budget the archive function was shifting from the national Department of Arts and Culture to the Western Cape. The funds would follow for that particular function and would include the administration of that function. If one considered housing accreditation, however, if all three metropolitans in Gauteng, for example, were to be accredited to deliver housing services, it could potentially mean that the Gauteng provincial department of housing would need to be dissolved. This would cause problems. The decision was taken to assign at least a portion of the grants for administration, which currently stood at 3%. Thus, depending on the specific function and how it moved across the spheres, rules might have to be designed to take that into account.

Furthermore, as mentioned by the Minister in his speech of the previous day, the Bill also sought to improve capacity of municipalities, which involved the Development Bank of South Africa. It was aimed at improving the overall performance of municipalities in terms of infrastructure deliver, and not only the provision of conditional grants. He stated that Section 9(3)(b) of the Bill effected this by building in a capacity component into the PIG, because National Treasury had noticed that provinces were increasingly reporting that they lacked the necessary capacity to deliver on infrastructure. Latitude was this built into the system to allow them to use part of the PIG to build the necessary capacity.

He explained, in conclusion, that the local government equitable share formula was very redistributive in nature and was very "pro poor", and that it moved money from the richer metro’s to the poorer areas. If the formula were to be adjusted to take into account the fact that housing generally was becoming more urban, it could reverse the impact and the intention of the local government equitable share.

Mr Fuzile replied to the question posed earlier by Ms Fubbs regarding the objects of the Bill, and stated that he believed the objects did in fact cover both the equitable share and conditional grants. In fact the use of "equitable" in Section 2(a) was not intended to exclude conditional grants. Furthermore, Section 2(c) and (e) were even more explicit and referred to "all allocations".

The Chair agreed.

Discussion
Mr T Vezi (IFP) [PC Finance] stated that there were certain structures and buildings in the local government sphere that were established with very good intentions, but which have now impeded development and have become white elephants. One such example was a special high school he knew of which still does not have an access road. He asked National Treasury to suggest any solutions to the problem.

The Chair ruled that this was a complex political issue which National Treasury was not in position to respond to.

Mr Fuzile replied that he would just like to inform Mr Vezi that the national Department of Transport was currently on the verge of completing a document on a transport framework, the purpose of which was to ensure that there would not be any roads in the country that were not classified or that were not assigned to a specific government sphere to look after. It would be follow by an analysis of all the roads in existence to assess the resource requirements, in order to elevate their quality to acceptable standards.

Ms D Robinson (DA) [Western Cape] sought clarity on the assignment of powers and functions with regard to libraries. It was a provincial function but not much was being done about it.

Ms Fubbs stated that she heard the response given by National Treasury regarding the steps taken to address the bottlenecks in housing accreditation, but contended that it did not fully take into account the practical problems on the ground. She appealed to National Treasury to look at some sort of system, even though all the necessary data was not currently available. She hoped that National Treasury would avoid relying on a lack of data as an excuse in 2006.

Secondly, Ms Fubbs contended that the objects of the Bill were unclear, as it referred to "division" and "share" interchangeably throughout the Bill. This created uncertainty.

The Chair informed Ms Fubbs that the objects of the Bill were based on the exact wording of the Constitution. He requested Ms Fubbs to identify the specific areas in which the confusion occurred.

Mr Fuzile replied that there could very well be inconsistencies in the Bill which the National Treasury would correct, as it strove for consistency when drafting its legislation.

Mr M Malahlela (ANC) [National Assembly] noted the statement made during the presentation that National Treasury had amended its re-allocation policy to grant the allocation on the condition that it would be spent in the particular financial year. He asked whether this included a requirement that municipalities and provincial departments provide reasons as to why they were unable to spend funds within a particular financial year, and how National Treasury would be positive that they would in fact be able to spend the re-allocation in the specific year.

Mr Fuzile agreed with Mr Malahlela. The idea of re-allocation was to minimise under-spending at any given point in time, as well as to speed-up service delivery. The re-allocation was granted on the understanding that the original allocations were informed first and foremost by need. Thus if the need and capacity existed in the same place it made sense to move the resources there.

He stated that the re-allocation model was not tried and tested, as National Treasury had only piloted it in 2006 upon a request by the Department of Health for its hospital revitalisation grant. National Treasury found the primary problem to be the fact that they could not predict early in the financial year that there would be underspending, because the current reporting system did not allow it. The decision was thus taken to still effect the allocation, even if the information was received late in the financial year, so that they could be granted the resources to build the capacity that was lacking.

Motion of Desirability
The Chair read the Motion of Desirability on the Bill, to which Members agreed.

Committee Report on Division of Revenue Bill
The Chair read the Report.

Mr Davidson stated that he could not agree to the Bill as he had not yet obtained a mandate from the DA caucus. He stated that the DA did however support the Bill.

The Chair noted that the Committee agreed to the Bill, without amendments. He stated that the Bill would be debated in the National Assembly tomorrow and would then be passed on to the NCOP.

Conclusion
Mr Nene thanked National Treasury for the presentation

The meeting was adjourned.