Budget 2008 Briefing by Minister of Finance; Division of Revenue Bill [B4-2008]: Financial & Fiscal Commission Input & adoption

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Finance Standing Committee

20 February 2008
Chairperson: Mr Nhlanhla Nene (ANC)
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Meeting Summary

The Minister of Finance, the Director-General of National Treasury and the Commissioner of the South African Revenue Service briefed the Committee on the 2008/09 Budget presented to Parliament on 20 February 2008.  The budget must be seen within the context of drastic changes in the global economic scenario.  Increases in the oil price and the cost of basic foodstuffs exerted pressure on the inflation targets.  A revised GDP of 4%, a current account deficit of 7.3% and a CPIX inflation rate of 7.1% were forecast for 2008/09.  Expenditure totaled R632 billion against revenue of R650 billion.  Significant changes were made to social grants and an amount of R60 billion was committed to Eskom over the next three years.  Tax relief for both individuals and companies was announced.  The foreign exchange control was replaced by a system of prudential regulation.  A surplus of R18 billion was expected.

Members’ questions pertained to land reform, the increases in the cost of fuel, food, electricity and the fuel levy and the effect of those increases on inflation, the need to encourage foreign investment, the bond market, increasing competitiveness in the global market, the amount of old age and disability grants, the financial assistance to Eskom and the lack of correlation between the funding allocated the outcomes delivered by the Departments of Education and Health in particular.

The Chairperson of the Financial and Fiscal Commission briefed the Committee on the recommendations made to the National Treasury on the Division of Revenue Bill [B4-2008].  Specific recommendations were made on Clauses 15, 16, 17, 18 and 31 of the Bill.  The FFC and National Treasury disagreed on the establishment of a national agency to oversee the legacy effects of the 2010 FIFA World Cup, the extension of the National School Nutrition Program and including maintenance of the road transport infrastructure in the formula used to determine the Provincial Equitable Share allocations

The Deputy-Director General - Intergovernmental Relations and the Chief Director, National Treasury briefed the Committee on the Division of Revenue Bill [B4-2008].  Changes to the clauses, schedules and appendices were presented.  The impact on the Provincial Equitable Shares was illustrated.  The division of revenue and details of the provincial and local government allocations were provided.  National Treasury’s response to the FFC proposals was discussed.

Members asked questions about the effective date of the clauses in the Bill and requested clarity on the property rates grants, specific purpose recurrent grants and allocations in kind.  Members were very concerned about the alignment of priorities between National, Provincial and Local Government and the need to ensure that funds allocated were properly applied.

The Bill was adopted by the Committee, without amendments.

Meeting report

 

Briefing by the Minister of Finance on the 2008/09 Budget
The Hon Trevor Manuel, Minister of Finance, briefed the Committee on the highlights of the 2008 budget that was presented to Parliament on 20 February 2008 (see attached document).

The budget needed to be seen in the context of a global economic environment that differed significantly from the previous year.  The United States Federal Reserve expected a recession, occasioned by the sub-prime crisis.  It was now estimated that loans worth US$400 billion would be written down by banks.  This resulted in the inability to finance transactions already underway and led to a lack of trust in inter-bank relations.

The banking crisis extended to Europe as well - the United Kingdom recently announced the nationalisation of Northern Rock and France experienced the Société Générale scandal as a result of a rogue trader and too little oversight.  Inflationary pressure was being felt in the rest of Europe as well as in Japan, India and China.  The Chinese economy was affected by problems with energy supply.  China was dependent on the US for exports and a slowdown in that market resulted in a downwards revision of its Gross Domestic Product (GDP) growth rate.  India experienced similar downward trends and it was unlikely that South Africa would be spared.

GDP in South Africa was expected to slow to 4% and this was in line with the expected revenue collection for the year.  International capital markets have tightened considerably and access to loans was more difficult.  South Africa had a savings rate of 14% to GDP and an investment rate of 21% to GDP.  The gap of 7% was the current account deficit that has to be financed by foreign savings.  The country’s fiscal policies included maintaining a surplus and ensuring that spending plans can be financed.

The most significant changes in the budget were the increased spending in social security.  The reduction to age 60 in the qualification age for old age pensions for males will be phased in over three years.  In discussions held with the Department of Social Development, it was apparent that many recipients of the child grants should not be receiving the grants.  It was expected that the way the means test was applied will be changed and although the child grant was extended to include children up to the age of 15, the grant will be subject to eligibility criteria.  For example if parents expected the Government to support their indigent child, then the child must go to school.  A different form of administration was required and implementation was therefore deferred to January 2009.

Overall spending was increased by R116 billion to R632 billion.  This included the commitment to Eskom for R60 billion over the next five years.  The first R20 billion was expected to be required in the Medium Term Expenditure Framework (MTEF).  Income tax relief for individuals amounted to R7.7 billion. The corporate tax rate was reduced by 1% to 28%.  Persons earning less than R46000 p.a. was exempt from income tax and the administrative burden on small business turning over less than R1 million was reduced.  Exchange controls were removed and replaced by a system of prudential regulation.  A dividend withholding tax will be introduced.  Expected revenue of R650 billion was expected and a surplus of R18 billion meant that the country was standing on solid ground.

Discussion
The Chairperson thanked the Minister for his presentation and opened the floor for questions.

Mr B Mnguni (ANC) noted that R1.6 billion was allocated for land reform and asked whether this was sufficient to meet Government’s restitution target.  The cost of electricity was increasing, resulting in an increase in the inflation rate.  He asked how this was reconciled with Government’s call to keep inflation down.  Referring to the reduction of headline corporate income tax to 28% detailed in page 61 of the budget review document, he asked how the intended reduction in the cost of capital would be measured.

Mr S Marais (DA) noted the expected surplus of R18 billion and the contingency of R20 billion.  He asked for clarity on the relatively large amounts that were set aside for unexpected expenditure.  The current account deficit of 7.2% of GDP was acknowledged to be too large but he doesn’t see any direct encouragement to foreign investors to increase direct investment.  Although the scrapping for foreign exchange regulations was welcomed it was replaced by certain limits and he asked whether this was not a restrictive factor.  There appeared to be no correlation between the funds allocated to Government departments and the results and he wanted to know why there were no strong measures to ensure that the money was spent effectively and in a goal-oriented manner.

Mr K Moloto (ANC) asked how sufficient turnover and support for the local bond market would be ensured.  He wanted to know what the rationale was for rejecting the share incentive scheme in favour of the percentage reduction scheme for mining exploration.  He asked how Government proposed to manage the downside risks to the inflation rate and growth targets in view of the higher oil and food prices.

In response to Mr Mnguni’s question, Mr Manuel conceded that the issue of land restitution was a challenge.  The availability of large amounts to purchase land would trigger speculation and huge increases in the price of land.  The ability of departments to meet their commitments was constantly evaluated and in the case of land, the Department of Land Affairs was also subject to lengthy quasi-legal processes.  A portion of the funds made available for land restitution was in settlement of claims dating back up to five years ago.  Although the targets were difficult to achieve, it was important to retain the focus.  The speed of land restitution and reform was not determined by Land Affairs alone.  In addition, there was the issue of converting the asset to generate income on an ongoing basis.  An additional R500 million was allocated to the provinces to increase agrarian support for emerging farmers.  The R3 billion for land restitution and further R3 billion for land reform was well considered.

Mr Manuel said that the inflation target was important as an anchor for monetary policy.  He commended the Monetary Policy Committee for maintaining the necessary discipline.  He said that there had been a steady decline in the real cost of energy since 1989 – in that year the cost was 22.02 cents, compared to the current 13.31 cents.  This was not sufficient to cover the cost of electricity generation and transmission.  At the same time, the price of coal had increased rapidly.  He asked who was expected to pay for energy if Eskom was unable to cover costs.  He explained that the cost of electricity comprised 3.55% of the basked of commodities used to measure inflation and any increase in the cost of energy must be seen in that context.  In addition, there was a cost involved in dealing with the emissions from power stations.

Mr Pravin Gordhan, Commissioner of the South African Revenue Service (SARS), said that the goal was to broaden the tax base and to achieve better compliance so that the tax rate for both individuals and companies could be lowered.  This was achieved by the Minister during his tenure.  It was apparent that investment in the country by both the private and the public sector had increased.

Mr Lesetja Kganyago, Director-General of the National Treasury said that revenue from corporate taxes had increased from 15% to 24%.  Although it was difficult to estimate the exact effect of a 1% reduction in the corporate tax rate, it was certain that a lower tax rate had a stimulating effect.  The level of corporate tax rates was not out of line in comparison to other countries.

In response to Mr Moloto’s question, Mr Kganyago explained that the borrowing requirement was negative at the beginning of the year but grew towards the end of the year.  This was a result of an acceleration in investment by state-owned enterprises (SOEs).  A negative trend in borrowing requirements had a negative effect on the bond market.  It was important to measure the bond market’s performance and to ensure that it remained functional and accessible, should it be necessary to make use of it in future.  National Treasury had implemented switch options to consolidate assets into more liquid investments but this did not appear to have had a negative effect on the market.  The bond market increased form R10 trillion at the beginning of the year to over R11 trillion towards the end of the year.

Mr Kuben Naidoo, Head: Budget Office, National Treasury explained that the amount budgeted for land reform over the next three years totalled R10 billion.  In response to Mr Marais’ question, he said that the R38 billion contingency reserve over the next three years was not part of the surplus but was held in reserve to fund ongoing policy expenditure.  This included the R20 billion commitment to Eskom as well as R2 billion for investing in alternative energy resources.

Mr Naidoo said that there was a definite improvement in Government’s capacity to spend, particularly in infrastructure development projects.  Overall, 96% of budget was spent and in the case of provinces, 99% of budget was spent.

Mr Naidoo explained that the increase in the inflation rate during the first half of 2007 was driven by higher food and fuel prices but during the second half of the year, it was estimated that inflationary pressure had broadened and that 75% of the basket of commodities used to measure inflation had increased in cost.  The second round effects were being felt already and it was important to retain vigilance.

In reply to Mr Marais’ question, Mr Manuel said that foreign investment was a tricky subject and needed to be considered in the context of industrial policy.  The key was to target companies that provided employment and brought technology and money into the country, rather than borrowing locally.  Therefore, institutional investors were targeted.  He said that most countries have prudential regulations that were used to evaluate institutional investors for the granting of licenses.  The prudential regulations applicable to companies that managed other people’s money were not considered to be more restrictive.  The rules must be applied and Government was responsible for ensuring that money invested by people was protected.  The Société Générale scandal in France was an example of the impact when things went wrong in this regard.  The Financial Surveillance Department of the Reserve Bank was responsible for managing the regulations and to ensure that any contraventions were dealt with.

In response to Mr Marais' question, Mr Manuel said that National Treasury could not supervise everything that happened.  The process for the granting of allocations was rigorous and once the Division of Revenue Bill was passed, Parliament must be vigilant in ensuring that the law was obeyed.  In terms of the PFMA, National Treasury published monthly expenditure reports.  If Parliament was not satisfied with the way an allocation was applied, it had the power to insist that it was corrected.  He urged Parliament to exercise the power it had in this regard.
Cannot supervise everything that happens

In reply to Mr Moloto’s question, Mr Gordhan explained that international benchmarking of the flow-through share concept was investigated.  Such a scheme was difficult to administer in the South African context.  The overall demands for venture capital were considered and it was decided to adopt the alternative scheme for both mining and non-mining activities.

The Chairperson asked whether the Millennium Development Goals (MDG) vote would be revised in line with the downward projection of the GDP growth rate.

Mr Manuel replied that funding for the MDG included a portion for the execution of tasks.  For example the budget for universal primary education of R121 billion was adequate but unless all the elements were in place, the goal would not be attained.  It was necessary for teachers to be in class teaching, schools must be an environment that encouraged learning and schools must be held accountable for both learning and teaching.  The same principle applied to health.  There was concern over the high infant and maternal mortality rates - other elements such as the provision of potable water and sanitation also played a role.  Where there were gaps in the system, it was not just a money problem.  Sufficient funds were available to achieve the MDG goals but the management issues must be dealt with as well.

Mr Singh (IFP) recalled discussions held by the Committee with National Treasury in October 2007.  At the time, Members were concerned by the possibility of double-digit increases in the cost of electricity.  The question was asked if Eskom needed additional funding but the response was that Eskom had a healthy balance sheet and was able to fund expansion by itself.  He referred to the section on the Eskom capital investment detailed on page 53 of the budget review document.  He asked if the Minister was satisfied that Eskom’s expansion program would be adequate to meet the country’s needs and reduce the pressure on consumers.  He wanted to know if any conditions were attached to the granting of the funds to Eskom.  Page 66 of the budget review document referred to a tax deduction for landowners who preserved the habitats and biodiversity on their land.  He asked whether this program will be managed by the Department of Environmental Affairs and Tourism and if there were any plans for the roll-out of such a program.  Given the higher cost of food, he asked if it was not possible to increase the old age and disability grants to R1000, rather than the R940 provided.

Mr M Johnson (ANC) observed that there appeared to be a competition for resources and conflicting demands between agriculture and development.  He referred to the problem of inadequate savings by the nation and asked whether savings methods were effective.  Pension and provident funds were available to those who were in formal employment and there were plans for mandatory contributions to retirement funds.  He asked if it was not possible to assess savings methods to see if progress was being made or not.  He referred to media reports that the Minister was “walking a tightrope” between Government programs and the ANC party resolutions that were taken at the Polokwane conference.  He saw no evidence of that and asked Mr Manuel to comment.

Mr Mnguni asked whether the cost of foodstuffs should not be capped to avoid rising inflation as was done in China.  He asked whether the price of land should not be capped too.  He wanted to know how much was made available to South Africa from the Opportunity Entrepreneurial Activity (OEA) funding.

Mr Moloto asked why South Africa received a lower credit rating than other countries in Africa, given our level of development.  He referred to the 40% taxation on closely-held companies and asked if this included family-owned businesses.  He asked why the participation rate of the labour force was lower in South Africa than in other countries.  He requested clarity on the remaining items on the tariff book.

In reply to Mr Singh’s question, Mr Manuel confirmed that there was no request for funding from Eskom in October 2007.  He explained that regardless of its status as a state-owned entity, National Treasury did not budget for Eskom’s capital needs and since its inception, it was run on the basis that it would fund development out of its own resources.  The request for funding was therefore unusual and he expected that there will be much discussion of the issues in the coming weeks.  Eskom looked at private investors to fund its new generation power stations.  These were very long term projects and in general, private investors looked for shorter term opportunities to recoup their investment.  Another problem was the gap between the cost of production and the cost of sales.  The principle where consumers paid for the costs of Eskom was a sound approach, although there may be short-term funding requirements.  He warned that it was unlikely that the relative low cost of energy in South Africa would continue.  The present scenario was not sustainable and it was necessary for the cost of electricity to be increased to cover the cost of production.  The question was what increase will be permitted by the Regulator.  This would have an impact on revenues, the balance sheet, the speed of development and the cost of borrowing.  He gave Members the assurance that discussions between Eskom and National Treasury will be tougher than between Eskom and the banks.

Mr Manuel said the amount of the old age and disability grants was a tough call but a higher amount was not affordable.  He said that the goal was the introduction of a mandatory contributory retirement fund.  This concept differed from savings accounts and he gave the example where the pool of available investment capital in Australia was significantly increased by its super-annuation program.

In response to Mr Johnson’s question, Mr Manuel said that funding was not available for things that were not developed.  Agrarian reform was a fundamental issue and an integrated sustainable rural development strategy was in place.  National Treasury would consider development proposals but it was up to Members of Parliament to assess outcomes.

Mr Manuel said that the budget was determined prior to the Polokwane conference and was not affected by the decisions taken.  He does not believe that there were any contradictions and said that everyone understood the challenges faced by the country, regardless of their political affiliation.  He expressed appreciation for the manner in which Members of this Committee from the various political parties worked together on the issues.

In reply to Mr Mnguni’s questions about price-capping, Mr Manuel said that such measures did not necessarily improve the lives of those it was intended to benefit.  If Members proposed such a system, they had to decide on how it would be implemented.  He cited the examples of attempts to regulate the price of paraffin and bread.

Replying to Mr Mnguni’s question, Mr Andrew Donaldson, Deputy Director-General – Public Finance, National Treasury said that approximately R1.5 billion flowed into the country from OEA.  This was less than 1% of the budget and South Africa was therefore not fiscally reliant on this source of funds.  However, a variety of projects was supported through technical assistance cooperation agreements.  The new initiatives and assistance with system and capacity building was welcomed.

Responding to Mr Moloto’s question, Mr Donaldson said that the low participation rate of the labour force could be attributed to a number of factors.  He mentioned the history of the evolution of the labour market and the narrow definition of the labour force.  He said that there were 4 – 5 million persons classified as discouraged workers – these were people who had the potential to be active in the labour market but they were not actively looking for work.  Other reasons were the gap between the first and second economies, the gap between the urban and rural economies, a history of exclusion form the modern economy, the high portion of the population who live in rural areas, the spatially inefficient structure of cities that make it difficult for people to travel to work and the mismatch between education and training systems and job opportunities.  The school-leaving age was relatively high, which was not necessarily a negative factor.  A number of strategies were being developed to address these challenges.

Mr Donaldson explained that the issue of tariffs on intermediate goods was the responsibility of the International Trade Administration Commission of South Africa (ITAC).  There were fewer items on the tariff book but it was necessary to address the matter sector by sector and product by product.  Mr Manuel added that extensive research was done by an international panel and the results were expected to be released in the near future.

Replying to Mr Moloto’s question, Mr Gordhan explained that the rationale for the 40% tax on closely-held companies was to prevent individuals avoiding tax by taking advantage of the 28% tax on companies.

Responding to Mr Singh’s question, Mr Frans Tomasek, General Manager: Legislative Policy, SARS said that there was a strong link between the various Acts supporting sustainable development.  More information was given on page 71 of the budget review document.

Dr Deon George (DA) said that the increase in the fuel levy appeared to contradict the efforts to reduce inflation and asked whether any modeling was done to assess the impact of the increase.  He referred to the budget deficit, which appeared to be widening and mentioned the skills shortage as one of the barriers to export growth.  He said that South Africa was not competitive enough and asked what steps could be taken to encourage competitiveness in the global market.

Ms Abbie Mchunu (IFP, KwaZulu Natal) referred to the lowering of the qualifying age of men for old age grants and asked if it was not possible that this could be applied immediately to disabled men who had not yet reached the retirement age.  She wanted to know if there was assistance in rural areas for people who had spent all they had on building a house and who were not unable to pay rates on their properties.  Referring to the agricultural grants to provinces, she noted that details were provided of the R416 million spent during the 2006/07 financial year but no information was given on the R451 million allocated for 2007/08.

Mr Manuel requested that questions on the division of revenue were held over until after the presentations on the Division of Revenue Bill.  The Chairperson agreed to the suggestion.

Ms Refilwe Mashigo (ANC, Limpopo) said that there was a lack of alignment between the priorities of the national department and the provinces.  Funds were allocated to the provinces to implement national priorities but accountability was lacking.  She said that in some cases, houses were built but were not electrified because the license was held by Eskom rather than the local municipality.  This resulted in houses being vandalised and non-achievement of the housing objectives.  She asked if the funds provided for Eskom would be used to electrify houses.

Ms N Mokoto (ANC) asked what the extent of the indebtedness of municipalities was.  She wanted to know why the public sector was allowed to borrow from the private sector.  She asked how effective the bond buy-back or exchange program was and how the funds were channeled.  She referred to the Departments of Education, Health and Home Affairs where funds were allocated year after year but the desired outcomes were not delivered.  She asked if the strategies were revisited to ensure that the required results were achieved.  She requested clarity on the municipal infrastructure grant.

Mr Marais requested clarity on the motivation behind the increase in the fuel levy.  He said that the increases in the levy together with an increase in contributions to the Road Accident Fund (RAF) and the expected sharp increase in fuel would have a negative effect on transport costs.  He said that investment in infrastructure by the private sector was already sizable but Government was still seen as the primary investor in this sector.  He asked what could be done to stimulate direct private sector investment in infrastructure and suggested that public/private sector partnership initiatives were considered.

Ms Louisa Mabe (ANC, Chairperson of the Joint Budget Committee) noted that revenue from the duty on alcoholic beverages was less than that of tobacco and asked if increasing the “sin taxes” was effective in encouraging people to stop smoking.

Mr Manuel explained that most countries accepted the principle of taxing commodities like fuel and the necessity of maintaining tax increments.  It was necessary to increase the fuel levy for this reason.

Mr Manuel said that the RAF was a system in serious need of attention.  He mentioned recent reports in the media of a foreign visitor who was claiming R1.3 billion from the fund.  Such claims put the RAF in danger of becoming bankrupt.  The ongoing viability of the RAF remained unresolved and as a part of social security, it was necessary for Parliament to apply its mind to finding a solution.

In response to the questions about the current account deficit, Mr Manuel cited the example of Australia, which had a deficit for years.  He explained that a competitive advantage was not a permanent thing and one cannot expect to hold an edge by becoming complacent.

Replying to Ms Mchunu’s question, Mr Manuel said that the disability grant was the same as the old age grant but a person cannot receive both.  Unfortunately it was not possible to accommodate unemployed men of 60 years and older until the lower qualifying age for the old age grant was phased in.

Mr Kganyago referred Ms Mokoto to the table outlining the public sector borrowing requirement on page 54 of the budget review document.  He explained that the PFMA contained provisions governing borrowing by local government.

Mr Kganyago provided a lengthy explanation of the bond market.  He said that the impact of the bond buy-back and exchange on the fiscal account was investigated and will only be felt in the next 15 years.

In response to the questions about the fuel levy, Mr Tomasek explained that the use of fuel had a negative environmental impact.  He pointed out that the percentage of the fuel levy to the pump price was very low compared to international standards.  The increase was kept below the inflation rate as well.

Mr Manuel shared Ms Mokoto’s concerns regarding the alignment of allocations to provinces with Government priorities.  He explained that National Treasury worked closely with provinces and indicated how the money should be spent.  Once the money was in place, the question was how to monitor its application.  He said that money was not the only problem in the education and health systems.  It was also necessary to employ sound management principles and have accountability to the local communities.  Freedom was not without responsibility and it was necessary for communities to work alongside Government in the delivery of services.

Mr Manuel referred Mr Marais to the graph on gross fixed capital formation by sector published on page 36 of the budget review document.  He mentioned significant projects coming on stream, including Anglo Coal, Vodacom, chemical and aluminium plants but acknowledged that the base bas not yet broad enough.

Replying to Ms Mabe’s question, Mr Manual explained that the so-called “sin taxes” were part of the excise taxes levied on non-essential goods.  The duties were relatively low by international standards and there was a danger of encouraging smuggling if the taxes were raised too high.  This would result in an uncontrolled environment that was not desirable.

The Chairperson asked the Minister to comment on media speculation that attributed the decline in the currency to the abolishment of the exchange control regulations.  He asked if details of the new poverty line determined by Statistics SA were available.  He asked what impact the new basket of commodities used to measure inflation was expected to have.

Mr Manuel replied that the fluctuations in the exchange rate were the result of speculation.  There was heavy selling hours before the budget address without there being any rational basis for that.  He advised that Statistics SA was expected to release the data on the poverty line in the next three weeks.  The results of the household income and expenditure survey conducted in 2006 were due within the next few weeks as well and this information was required before there could be any meaningful discussion on the composition of the basket of commodities used to calculate the inflation rate.  He undertook to forward the information to the Committee.

The Chairperson mentioned that Statistics SA was scheduled to appear before the Committee.  He thanked the Minister and his delegation for the presentation.

Submission by Financial and Fiscal Commission on Division of Revenue Bill
Dr Bethuel Setai, Chairperson of the Financial and Fiscal Commission (FFC) outlined the Commission’s mandate and its presentation to the Committee (see attached document).

Mr Bongani Khumalo summarised the FFC’s general comments on Clauses 15, 16, 17, 18 and 31 of the Bill.  Clause 14 dealt with the Municipal Infrastructure Grant (MIG) and the FFC supported the proposed removal of the provision that the MIG was transferred through the Category B municipality if a Category C municipality did not have sufficient capacity.  Clause 16 dealt with the Gautrain Rapid Rail Link and the FFC suggested that the clause was re-phrased to make it less confusing.  The FFC suggested that the accreditation clause in the Integrated Human Settlement Grant (IHSG) was retained in the Bill.  Clause 18 dealt with the 2010 FIFA World Cup and the FFC recommended that sound reasons were provided when budgets were exceeded.  The Commission supported the provision in clause 31 that the three year allocations were gazetted and suggested that the information was published in major newspapers and on the relevant websites as well.

In general, the FFC agreed with Government’s response to the 2008 MTEF recommendations.  Areas of disagreement included the FFC recommendation that an agency was appointed to deal with the legacy effects of the 2010 FIFA World Cup that was rejected by Government.  The FFC found that it was feasible to extend the National School Nutrition Program to secondary schools but recognised the challenges that had to be overcome first.  The FFC suggested that the Provincial Equitable Share (PES) formula included provision for the allocation of funds to ensure maintenance of the road transport infrastructure but Government cautioned against using such a formula.

With regard to Annexure E, the FFC noted a 1% increase in conditional grants as a share of total transfers to provinces and recommended limitations on the use of conditional grants.  It was suggested that timeframes were imposed on the property rates grants.  The review of the local government fiscal framework was noted.

Briefing by National Treasury on Division of Revenue Bill
Mr Lungisa Fuzile, Deputy Director-General, National Treasury summarised the proposed changes to the 2007 Division of Revenue Act and the new provisions included in the Bill (see attached document).

Mr Kenneth Brown, Chief Director, National Treasury gave an overview of the 49 clauses, seven schedules and eight annexures and appendices to the Division of Revenue Bill 2008.  The structure of the PES formula remained unchanged but the data included the results of surveys conducted in 2007.  Details of the PES percentages and amounts allocated per province were provided.

Mr Brown discussed aspects of the review of local government and provincial fiscal frameworks and presented tables detailing the division of revenue between national departments, provinces and local governments.  Government’s response to the FFC proposals was presented.  Tables with details of the provincial and local government allocations were presented.

Mr Brown explained that the MIG was applicable to 283 municipalities.  Formulae must therefore be objective and ensure certainty.  It was also important to identify where additional support from Government was needed.  Government continued to address the issue of poorer municipalities and introduced a minimum allocation for each municipality.  Formulae will be applied and the aim was to encourage steady growth in the long term.

Discussion
The Chairperson referred to the concern raised by the FFC on the confusing text of subsection (2) to Clause 16 and asked the National Treasury to comment.

Mr Fuzile explained that the Gautrain Rapid Rail Link allocation was a core funding arrangement between Gauteng Province and Government.  The clause dealt with the recording of expenditure and the financial controls that needed to be in place

The Chairperson said that the FFC’s concern was noted and asked if the Commission had a recommendation for the phrasing of the clause.  The wording of the clause was further debated and suggestions and comments were made by Ms Tanya Ajam (Commissioner, FFC), Mr Marais, Ms D Robinson (DA, Western Cape), and Ms Mokoto.  Mr Donaldson conceded that the phrasing of the clause could have been more elegant but the provision was required to give effect to the contract between the parties.  He said it was wiser to leave the wording was left as it was.  The Chairperson suggested that the clause was left as is.

Mr Singh asked when Clauses 15 and 31 would take effect.  He asked for clarity on the conditional grant for property rates.  He asked what was meant by the “specific purpose recurrent grant” and the “allocations in kind” referred to in appendices W6 and W4.

Ms Mashigo had written a letter about the problem with the alignment of priorities between Government and the Thabazimbi local government.  The letter was referred to Mr Brown and the Chairperson suggested that a written response was sent to Ms Mashigo.

Mr Brown explained that the grant referred to pertained to rates on properties that were paid by Government because they had not yet been transferred to the provincial government.  Most of these were schools and clinics that were since identified and transferred to the relevant province’s jurisdiction.  The responsibility for payment of the rates was transferred as well.  The issue of property rates regulations was still under discussion.

Mr Brown said that “allocations in kind” referred to projects funded and completed by a national department, for example the Department of Water Affairs and Forestry.  On completion of the project, the asset base was transferred to the relevant local government.

On the matter of alignment of priorities, Mr Brown explained that there were concurrent functions, shared by National Government and the provinces.  Mr Fuzile said that Section 39 explained the process.  It was a tall order for provincial treasury departments to check if local government outputs matched the allocation of funds.  He gave a detailed explanation of the roles played at executive and provincial levels in the determination of priorities and the allocation of funding.  Ultimately it was the responsibility of the provincial MEC for finance to ensure that funds were properly applied.  He said that the alignment of priorities could not be legislated and depended for success on the cooperation between all levels and across all sectors of government.

Replying to Mr Singh’s question, Mr Brown confirmed that the clauses took effect within two weeks of the start of the new financial year on 1 April 2008.  The actual transfer of funds will take place at the same time.

Ms Mabe referred to municipalities that received infrastructure grants but consistently failed to spend the allocation in spite of enormous pressure to provide for housing and other infrastructure services.  She asked what caused this particular problem.

Mr Johnson asked if there was still a problem with Category B and C municipalities not submitting their budgets on time.

Mr Fuzile said that the issue raised by Ms Mabe could be caused by a variety of reasons as the circumstances of each municipality differed from the next.  The Chairperson suggested that a written response was sent to Ms Mabe in her capacity as Chairperson of the Joint Budget Committee.

Replying to Mr Johnson’s question, Mr Fuzile said that most municipalities now submitted their budgets on time.  The standard of the budgets submitted was much improved but the quality of the focus beyond the next year could be improved.

There being no objections to the Bill, the Chairperson read the formal proposal for adoption of the Bill.  The Committee agreed to adopt the Bill, without amendments.

The Chairperson extended the Committee’s sympathy to the Governor of the Reserve Bank on the death of his mother.

The meeting was adjourned.

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