Division of Revenue Bill [B4-2009]: briefing by Treasury

NCOP Finance

13 February 2009
Chairperson: Mr T Ralane (ANC)
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Meeting Summary

The Committee was briefed on changes to the 2008 Division of Revenue Act, the Fiscal Framework, the response of National Government to FFC proposals, as well as provincial and local government allocations.

Discussion was extensive, with the plight of rural areas and local government, especially poorer municipalities, prioritised. Members drew attention to financing needs for roads providing access to health care, and water services.

Fuel levies were interrogated and it was submitted that fuel levies from poor rural areas were going to the metropolitan centres. This amounted to the poor subsidising the rich.

Committee members requested more information on how equitable share weights were determined for the provinces, and how migration patterns were established.

The availability of funding for rural disasters, and the role of the contingency reserve, received considerable attention.

The relationship between district municipalities with capacity, and smaller municipalities, provoked intensive discussion. Municipal Infrastructure grants and equitable share money had been received by district municipalities to provide water and sanitation services to the smaller municipalities. This money was used for their own salaries by stronger district municipalities, while hospitals in the smaller municipalities had to go without water and children were dying of waterborne diseases.

The Expanded Public Works Programme Incentive grants came under scrutiny, with the resulting suggestion that the Department of Provincial and Local Government, the Treasury and the Department of Public Works co-ordinate more effectively as the Expanded Public Works Programme was a priority government programme.


Meeting report

Briefing by National Treasury on the Division of Revenue Bill [B4 – 2009]
Mr Kenneth Brown, Acting DDG: Inter Government Review for the National Treasury, presented the Bill under the following headings:

Changes to the 2008 Division of Revenue Act
Schedules 1 to 7 of the old Act remained unaltered. The added Schedule 8 referred to Incentives to provinces and municipalities to meet targets for priority government programmes.

Layout of Bill and contents (see document)

Fiscal Framework
This section comprised Division of Revenue tables relating to Changes over baseline, 2009/10 – 2011/12 (Table W1.4); Division of Revenue between spheres of government, 2005/6 – 2011/12 (Table W1.3); and Schedule 1 of the Division of Revenue Bill, 2009/10 – 2011/12 (Table W1.5).

Financial and Fiscal Commission (FFC) proposals and government’s response
FFC recommendations consisted of three parts: provincial, local government and cross-cutting.

The FFC’s Provincial proposals centered around the financing of basic education, notably the re-ranking of schools and learner transport. Financing of health care included an infrastructure for primary health care and health outcomes. Transport included the classification and earmarking of roads. Housing proposals included addressing bottlenecks hampering housing service delivery.

The FFC’s Local Government proposals included augmenting LG revenue through replacement tax for the abolished RSC levies. A proposal on electricity pricing generation and distribution, referred to restructuring of the electricity distribution industry (EDI), electricity investments and electricity pricing policy. The World Cup 2010 Transport infrastructure proposal concerned the financing of public transport.

Cross-cutting FFC proposals dealt with a performance monitoring framework for Education, Health, Public Works and Transport, and Housing. Data was required on local government.

Provincial and local government allocations
The structure of the provincial equitable share formula had remained unaffected. The only impact had been on the data. The impact of data updates had been phased in over the following three years. This section of the briefing included tables on Implementation of the equitable share weights, 2008/09 -2011/12 (W1.10); Full impact on equitable shares (Table 8.3); and Total transfers to provinces, 2009/10 (W1.6).

New conditional grants to provinces included the Expanded Public Works Programme Incentive grant for provinces, the Public transport operations grant, the Technical secondary schools recapitalisation grant and two disaster related grants. The disaster related grants were for 2009/10 only, and referred to the cholera disaster response grant, and the housing disaster relief grant.

Concerning local government allocations, the emphasis was on the funding of poorer municipalities. The LG equitable share formula had been reviewed to improve funding of poorly resourced municipalities.

New conditional grants to local Government included the Expanded Public Works Programme (EPWP) Incentive for municipalities grant, the Rural transport services and infrastructure grant and the Electricity demand-side management grant.

Capacity building and other current transfers to local government, 2005/6 – 2011/12, was set out in Table W1.24.

Mr Ralane commented on the poor state of rural roads that provide access to clinics.

Mr D Botha (ANC, Limpopo) remarked that when boreholes broke down in rural areas, people were stranded without water for 3 to 4 months. Local authorities did not know their own budgets. As a result, clinics were left without water.

Mr Ralane added that a sense of urgency about rural budgets was needed. Local authorities had to have more self-sufficiency.

Mr Brown responded that the Minister of Health did not have an oversight team. A provincial unit would be established. Such a unit would be given detailed information on provincial budgets.

He said that the state of roads had already become an issue two years before. Road budgets had been increased, but this did not always lead to gravel becoming tar. In the Eastern Cape, discrepancies in road-building costs compounded the problem. Certain provincial roads were being reclassified as national. There were critical roads in Limpopo and Mpumalanga, for which financing needs had to be discussed. Provincial premiers had to take the initiative.

Concerning fuel levies, Mr Ralane remarked that levies collected in rural areas went to metropolitan centres.

Mr Botha said that this fact was hard to explain to the provinces. It amounted to poor rural areas having to subsidise the metropolitan areas. How was this to be explained to people on the ground? Would the metro areas still receive the replacement levy grant, in addition to this one? There was the perception in the rural areas that people were taxed to enrich the metro areas.

Mr Ralane agreed that the rich had to subsidise the poor, and not vice versa. It was difficult to implement the Property Rates Act in the provinces. In rural areas, it was often not paid.

Mr Brown answered that RSC levies were collected by metros and large districts. Small localities did not receive them. Offices in Johannesburg collected from rural areas like De Aar, because of centralisation. The intention was to phase in such powers for all municipalities. However, once the fuel levy had been collected, it was redistributed.

Mr Botha commented that agriculture was by far the largest diesel user in the country. How was it to be explained to farmers that diesel was taxed to subsidise Johannesburg?

Mr Brown replied that the rebate system enabled farmers to reclaim on taxed diesel.

Mr Ralane enquired about Table W1.10 (Implementation of the equitable share weights, 2008 – 2011/12). The table did not seem to reflect the movement of rural young people to Gauteng to work, and then to return to the provinces when they were older.

Mr Botha referred to the situation where people lived in Rustenburg or Hammanskraal and worked in urban centres in Gauteng. How was this treated by the weighting formula?

Mr M Goeieman (ANC, Northern Cape) asked about North West losing Merafong, and the implications for the weighting.

Mr Brown responded that the FFC was working on the formula. In the Table, it was assumed that Merafong was still included in North West.

Mr Ralane asked if Merafong was assumed to be part of North West until 2011/12, why was it that the phasing was not flat, like Mpumalanga?

Mr Brown replied that migratory patterns had been taken into account. Migration occurred from Eastern to Western Cape, for instance. The Northern Cape weighting had been increased by infusion from Kgalagadi.

Mr Goeieman said that things were perhaps assumed too hastily. How could it be known how people would migrate?

Mr E Sogoni (ANC, Gauteng) suggested that a proper input from Stats SA the following week, be awaited. The Committee had to be workshopped to understand the weighting process.

Mr Ralane remarked that many issues contributed to the formula. There was “a bigger basket of things”. Stats SA would be able to enlighten the Committee. Migrations were occurring all the time, there had to be some established patterns.

Mr Goeieman asked how the 2011/12 figure for Northwest had been arrived at.

Mr Brown replied that reductions and increases were actually phased in. The Eastern Cape figure of 15.2% for 2011/12, for instance, actually reflected reductions that were already effective in 2008/9. This was done to ensure smoother transitions.

With reference to the Technical secondary schools recapitalisation grant (2010/11), Mr Sogoni asked how Technical schools differed from equity colleges.

Mr Brown answered that the Technical schools offered technical and applied subjects, but awarded the regular matric certificate, whereas the equity colleges did not.

Mr B Mkhaliphi (ANC, Mpumalanga) enquired about the management of agricultural and forest disasters.

Mr Brown replied that the challenge consisted in designing immediate, intermediate and long term management systems. Where rapid intervention was needed, the Minister could authorise intervention before the disaster budget was tabled. Contingency results included disasters, this enabled the Minister to move fast.

Mr Mkhaliphi said that allocations had been known to disappear. The disaster would happen and everybody would plead poverty.

Mr Ralane referred to an emergency clause that empowered the Minister, granting access to the contingency reserve.

Mr M Robertson (ANC, Eastern Cape) reminded the Committee of the disaster at Elliot, where many people had never been paid out.

Mr Ralane noted that as being a specific matter that had to be followed up.

Mr Sogoni pointed out that the contingency reserve had proved to be slow in paying out, there always seemed to be a time lag, with some people not yet paid out after three years. The reserve was centralised, and in outlying districts like Port Alfred, disaster upon disaster had occurred while the contingency reserve could not be accessed.

Ms Jeannine Bednar-Giyose, Director: Fiscal and Intergovernmental legal section of the NT, noted that the scope of Clause 38 of the Bill had been expanded. Subclauses 3, 4 and 5 provided for other allocations.

Mr Ralane asked about responding in terms of the contingency reserve. What did the provincial legislature do about the situation in Elliot and other places? In the new parliament, such matters would have to be workshopped and followed up.

Mr Robertson said that it had been Elliot and Mount Ayliff, especially.

Mr Botha noted that 99% of delays had been due to people in administration.

Mr Brown responded that there were long administrative chains. Municipalities, departments, provinces and the Premier all made their own investigations. This caused money to be locked in.

Ms Wendy Fanoe, Director: Local Government Finance Policy of the NT, referred to Clause 30 of the Bill, which enabled small municipalities to obtain funds.

Mr Robertson asked how it could be avoided that Municipal Infrastructure Grant (MIG) funds were used as salaries.

Mr Ralane added that Mr Robertson was from the Eastern Cape, where questions had arisen around infrastructure grants. In the Eastern Cape, Parliament had had cause to wonder where the equitable share was going. Supposedly, everything had gone into roads, but how had it been used? In one area, it turned out that money had been used to refurbish an old train line. The whole resource had been used for this. Punitive measures were called for in such instances.

Mr Sogoni referred to the rural transport allocation. An amount of R10 million had been allocated in a situation where there was a need for general improvement. There had to be clear distinctions about what money would be used for what purposes.

Mr Robertson agreed with Mr Sogoni that R10 million for nine provinces was inadequate.

Mr Brown replied that the said amount was only intended for some small municipalities. A differentiated approach would be adopted, there had to be an indication of what went where in infrastructure. There had to be clear management rules.

Mr Ralane commented that the Committee would have to meet with Transport, to learn how grants were linked to the MIG, specifically to the roads component of the MIG. The alignment of conditional grants was critical.

Mr Ralane proceeded to comment on the Expanded Public Works Programme Incentive grant for provinces. If a project was lodged with Public Works, National or Provincial devolution of property rates were not resolved. There were still unresolved EPWP first phase issues.

Only KZN and Limpopo had been able to create jobs, as through the Gundalasho project. Was it really necessary to incentivise a fish to swim? If municipalities wanted money, they had to create jobs, as a matter of course. MIG had to have an EPWP element. There had to be alignment. Mr Brown had mentioned that EPWP was a government priority. The EPWP incentive grant was a conditional grant, not an equitable share. The Department of Provincial and Local Government (DPLG), the Treasury and the Department of Public Works had to co-ordinate. Money was dumped on municipalities at the end of the year, in the name of EPWP.

Mr Brown responded that the infrastructure grant was increasing, allocation letters were given to provinces during the process of allocation.

Mr Ralane turned to the matter of duties relating to municipalities. There were municipalities speaking on behalf of others in Amatole. In North West, one municipality had taken over the bill of another.

Mr Sogoni agreed that some municipalities had to save others. Rightfully the provincial government had to do that.

Mr Brown replied that district municipalities received money, but not for the purpose of duplicating local municipality functions. There had to be a clear indication of the kind of support they rendered.

Ms Fanoe added that money could only be given to municipalities authorised to perform certain services. Some of these recipients actually did very little. They received MIG and equitable shares, whilst others actually provided the services. The Amatole district municipality was an example of a well resourced district municipality, authorised for water and sanitation services. But local and district municipalities had to talk, otherwise the equitable share funds would go to the district municipality. District municipalities had to be held accountable for water and sanitation services.

Mr Sogoni pointed out that some municipalities received MIGs, which were indeed used to pay salaries, as Mr Robertson had mentioned earlier. These was not the purpose of a conditional grant, it was part of the equitable share. District municipalities had become Big Brothers. They received money, whereas the actual service deliverers did not.

Mr Botha added a comment about Big Brothers. Water and sanitation were equitable share services in Limpopo, but 15 municipalities had no water. District municipalities sat with money that should have been used to serve people on the ground. Hospitals were without water, while district municipalities sat with money, and resources such as engineers. He conceded that there were good district municipalities, but others were doing nothing.

Mr Robertson referred to situations where municipalities had used conditional grants for salaries, while children were dying of waterborne diseases. A firm grip had to be maintained on the situation.

Mr Goeieman suggested follow-ups of monies granted, and consistent oversight.

Ms A Mchunu (IFP, Kwazulu-Natal) cited instances where the MEC had been undermined by district officials.

Mr Ralane agreed that stronger oversight was necessary.

Mr Sogoni also agreed with Mr Goeieman’s suggestion, and added that it had to be done at provincial level. There had to be capacity at both provincial and local levels.

Mr Brown stated that the Treasury would support the Committee in local oversight. It would publish a report on the performance of municipalities in the second quarter, during the following week.

Mr Ralane announced that the Committee would engage with departments during the following week, about changes to the Division of Revenue Bill.

The meeting was adjourned.


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