REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE DIVISION OF REVENUE BILL [B5 – 2014], DATED 25 MARCH 2014

The Select Committee on Appropriations, having considered the Division of Revenue Bill [B5 – 2014)] (National Assembly-Section 76(1)), referred to it and classified by the JTM as a Section 76(1) bill, reports as follows:

 

1.      Introduction and background

 

Section 10(1) of the Intergovernmental Fiscal Relations Act, 1997 (No. 97 of 1997), requires that each year when the annual budget is introduced, the Minister of Finance must introduce in the National Assembly a Division of Revenue Bill (the Bill) for the financial year to which that budget relates. The purpose of the Bill is to provide for the following –

(a)        the share of each sphere of government of the revenue raised nationally for the relevant financial year;

(b)        each province’s share of the provincial share of that revenue; and

(c)        any other allocations to the provinces, local government or municipalities from the national government’s share of that revenue, and any conditions on which those allocations are or must be made.

According to Section 7(1) of the Money Bills Amendment Procedure and Related Matters Act, 2009 (No. 9 of 2009) (the Money Bills Act), the Minister of Finance must table the annual national budget in the National Assembly as set out in Section 27 of the Public Finance Management Act, (No. 1 of 1999) at the same time as the Appropriation Bill. Furthermore, Section 7(3) requires that the Division of Revenue Bill must be introduced at the same time as the Appropriation Bill. 

In terms of Section 4(4) of the Money Bills Act, a committee on appropriations has the power and functions conferred to it by the Constitution, legislation, the standing rules or a resolution of a House, including considering and reporting on -

·           spending issues;

·           amendments to the Division of Revenue Bill, the Appropriation Bill, Supplementary Appropriations Bills and the Adjustment Appropriations Bill;

·           recommendations of the Financial and Fiscal Commission, including those referred to in the Intergovernmental Fiscal Relations Act, 1997 (No. 97 of 1997);

·           reports on actual expenditure published by the National Treasury; and

·           any other related matter set out in the Money Bills Act.

According to section 7(3) of the Money Bills Act and section 76(4) of the Constitution, the Division of Revenue Bill must be tabled in the National Assembly and thereafter it must be dealt with in accordance with the procedure established by Section 76(1) of the Constitution. In accordance with these sections, the Minister of Finance (the Minister) - Mr. Pravin Gordhan - tabled the 2014 Division of Revenue Bill (the Bill) in the National Assembly on 26 February 2014. On 13 March 2013 the Bill was transmitted to the National Council of Provinces and referred to the Committee in accordance with Section 76 of the Constitution. 

Section 9(1) of the Intergovernmental Fiscal Relations Act of 1997 requires the Financial and Fiscal Commission (FFC) to submit recommendations to the Minister of Finance on the division of revenue for the coming budget 10 months before the start of the financial year. This Act further requires the Minister to include a memorandum within the Division of Revenue Bill indicating the extent to which the recommendations of the FFC were taken into consideration by the Minister.

Section 7(4) of the Money Bills Act prescribes that the Minister of Finance must submit a report to Parliament at the time of the budget explaining how the Division of Revenue Bill and the national budget give effect to, or the reasons for not taking into account, the recommendations contained in the following reports:

·           Budgetary review and recommendation reports (BRRR) submitted by committees of the National Assembly in terms of section 5 of the Act;

·           Reports on the fiscal framework proposed in the Medium Term Budget Policy statement (MTBPS) submitted by the finance committees in terms of section 6 of the Act;

·           Reports on the proposed division of revenue and the conditional grant allocation to provinces and local government set out in the MTBPS submitted by the appropriations committees in terms of section 6 of the Act.

Section 9 of the Money Bills Act provides the following procedure for the adoption of the Division of Revenue Bill:

1)     After the adoption of the fiscal framework, the Division of Revenue Bill must be referred to the committee on appropriations of the National Assembly for consideration and report;

2)     After the Bill is referred to the National Council of Provinces, the Bill must be referred to the committee on appropriations of the Council for consideration and report;

3)     The Division of Revenue Bill must be passed no later than 35 days after the adoption of the fiscal framework by Parliament.

Following a briefing by National Treasury on the 2014 Division of Revenue Bill, the Committee consulted the Financial and Fiscal Commission, the South African Local Government Association (SALGA), the Parliamentary Budget Office and all nine provinces. The Committee further scheduled public hearings for 18 March 2013 in line with section 9(5)(b) of the Money Bills Act. An advertisement was placed nationally in all 11 official languages, calling for submissions from interested parties and stakeholders. The Committee received and considered a written submission (s) from Budget and Expenditure Monitoring Forum.

 

2.      The 2013 Division of Revenue Bill

 

The 2014 State of the Nation Address (SONA) by His Excellency President J G Zuma outlined South Africa’s programme of action which serves as the basis for the 2014 Budget tabled by the Minister of Finance. The 2014 SONA followed on the 2013 SONA by retaining the five key government priorities with emphasis placed on massive public sector infrastructure investment, job creation, economic stimulation, and eradication of poverty, unemployment and inequality. All these priorities also appear in the National Development Plan (NDP), which is the vision of the country for the next 20 years.

Accordingly, on 26 February 2014, the Minister of Finance tabled before Parliament the 2014 National Budget together with the Division of Revenue Bill [B5-2014] (the Bill) as required by the above-mentioned legislative frameworks.

The Bill classifies schedules from Schedule 1 to 7 in order to divide revenue among the three spheres of government. Table 1 below shows the equitable division of nationally raised revenue among these three spheres of government.

The Constitution sets out specific criteria for the sharing of nationally raised revenue among national, provincial and local spheres of government.

The Bill was presented within sound fiscal policy decisions guided by the principles of counter cyclicality, debt sustainability and intergenerational fairness. A large part of the Bill remained unchanged since 2013. Revisions to the 2014 Division of Revenue Bill were informed by the following policy decisions:

·           Institutionalising better planning in provincial infrastructure programmes;

·           Laying the foundations for faster and more inclusive growth in city economies;

·           The growing role of indirect grants in a differentiated system;

·           Efforts across all spheres to prioritise the eradication of bucket sanitation; and

·           Increased transparency, accountability and ease of administration of conditional grants, including technical refinements.

Another addition in the Bill is the incentive approach in terms of provincial infrastructure grants. The intention of this approach is to encourage proper planning and successful implementation of infrastructure projects. This is an attempt to strengthen the reforms introduced in the 2013 Division of Revenue Act, which required provinces to plan infrastructure spending two years in advance in order to receive health and education infrastructure funds transfers. The direct health and infrastructure grants for the 2014 Budget were determined on this basis for new infrastructure projects. Existing provincial commitments are however catered for in the 2015/16 allocations. Another notable change is that the Health Facility Revitalisation Grant no longer has separate components requiring a gazette to shift funds between them. This change increases flexibility for provinces to ensure they spend their infrastructure budgets.     

 

Table 1: Equitable Division of Nationally Raised Revenue among the National, Provincial and Local Spheres of Government

 

 

Spheres of Government

     

Column A

                      

Column B

 

2014/15

Allocation

               Forward Estimates

2015/16

 

2016/17

 

 

(R'000)

(R'000)

(R'000)

National

735 604 179

794 415 136

858 716 824

Provincial

362 468 075

387 967 462

412 038 815

Local

 44 490 145

  50 207 698

  52 868 706

TOTAL

1 142 562 399

1 232 590 296

1 323 624 345                                                                                                                                               

 

According to the Bill, the expenditure in the Medium Term Expenditure Framework (MTEF) remains within the boundaries set out in the 2013 Budget. The national and provincial departments reportedly implemented savings measures and reprioritised spending to make additional resources available to fund government priorities in the 2014 Budget. Excluding debt-service costs and the contingency reserve, allocated expenditure share between the three spheres amounted to R1.1 trillion, R1.2 trillion and R1.3 trillion over each of the MTEF years accordingly. The national share included conditional allocations to provincial and local spheres of government, general fuel levy sharing with metropolitan municipalities, debt-service costs, and the contingency reserve. The provincial and local equitable share had been designed to ensure fair, stable, and predictable revenue shares and to address economic and fiscal disparities.

 

2.1    Provincial allocations

The table below shows the total allocation of the provincial equitable shares (PES), conditional grants to provinces in 2014/15, and the estimated PES allocations in the outer years.

Table 2: Provincial equitable share, conditional grants, forward estimates

 

Province

Column A

Column B

Column C

Provincial equitable share allocations

Conditional grants allocation

Forward Provincial Equitable Share Estimates

2014/15

(R'000)

2014/15

(R'000)

2015/16

(R'000)

 

2016/17

(R'000)

 

Eastern Cape

52 154 185

9 846 000

55 389 093

57 876 235

Free State

20 883 346

6 158 000

22 223 230

23 158 399

Gauteng

68 672 720

16 935 000

74 214 209

80 243 782

KwaZulu-Natal

78 138 477

15 941 000

83 347 554

87 887 479

Limpopo

43 274 194

7 580 000

46 108 942

48 621 896

Mpumalanga

29 354 919

6 352 000

31 448 977

33 727 900

Northern Cape

 9 651 945

3 406 000

  10 276 650

 10 941 191

North West

24 706 979

5 621 000

26 527 825

28 385 986

Western Cape

35 631 310

9 917 00

38 430 982

41 195 947

Unallocated

-

197 000

-

-

TOTAL

362 468 075

81 955 000

387 967 462

412 038 815

 

Columns A and C of the above table show the equitable share allocations of R362billion, R388 billion and R412 billion respectively for each year of the MTEF. Column B indicates conditional grant funds totalling R82 billion allocated to provinces for the 2014/15 financial year. Also included in column B are unallocated funds of R197 million (for the provincial disaster grant).

 

National Treasury reported that the equitable share accounted for 81.5 percent of transfers to provinces. No amounts had been reduced on the provincial equitable share in the 2014 MTEF and the following additions had been made:

 

National Treasury further reported that the provincial equitable share had been updated with; the 2013 mid-year population estimates; the 2013 preliminary school enrolment figures; the data on medical aid coverage and health facility usage from the 2012 General Household survey; and the Risk Equalisation Fund for the risk-adjusted capitation index.  Table 3 shows the distribution of the equitable share by province over the 2014 MTEF.

 

Table 3: Distributing the equitable share by province, 2014 MTEF

 

Province

 

Educa- tion

48%

 

Health

 

27%

 

Basic

Share

16%

 

Poverty

 

3%

 

Economic activity

1%

 

Institu-tional

5%

 

Weighted average

100%

Eastern Cape

15.2%

13.4%

12.5%

16.1%

7.5%

11.1%

14.0%

Free State

5.3%

5.4%

5.2%

5.3%

5.3%

11.1%

5.6%

Gauteng

17.5%

21.5%

24.0%

17.2%

34.5%

11.1%

19.5%

KwaZulu-Natal

22.6%

 

22.0%

 

19.7%

 

22.2%

 

15.7%

 

11.1%

 

21.3%

Limpopo

13.1%

10.4%

10.4%

13.6%

7.1%

11.1%

11.8%

Mpumalanga

8.5%

7.3%

7.8%

9.1%

7.0%

11.1%

8.2%

Northern Cape

 

2.3%

 

2.1%

 

2.2%

 

2.2%

 

2.2%

11.1%

 

2.7%

North West

6.5%

6.8%

6.8%

8.1%

6.5%

11.1%

6.9%

Western Cape

9.0%

11.1%

11.4%

6.2%

14.2%

11.1%

10.0%

TOTAL

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

The table above shows the six components of the equitable share formula that capture the relative demand for services between provinces and take into account specific provincial circumstances. According to National Treasury, the formula’s components are neither indicative budgets nor guidelines as to how much should be spent on functions in each province or provinces collectively. Rather, the education and health components are weighted broadly in line with historical expenditure patterns to indicate relative needs. Provinces however have discretion regarding the determination of departmental allocations for each function, taking into account the priorities that underpin the division of revenue.

According to National Treasury, the changes resulting from data updates were much smaller than the previous year, when the formula was updated with the data from Census 2011. The phase-in had been refined as part of the 2014 Budget to ensure a smoother transition to provinces’ new share over the MTEF.

 

National Treasury reported that the following changes had been made to provincial conditional grants:

 

 

2.2    Local government allocations

The Bill further introduced changes to local government conditional grant allocations. The direct transfers to local government decreases by  R3.8 billion the 2014 MTEF. The indirect transfers to local government (allocations spent by national departments on behalf of municipalities) increases by R2.3 billion over the MTEF period. This brings the total decrease in local government allocations to R1.6 billion.

 

The local government equitable share amounts to R147.6 billion (R44.5 billion in 2014/15, R50.2 billion in 2015/16, and 52.9 billion in the 2016/17 financial year) over the MTEF period. According to the Bill, over the 2014 MTEF, R296 billion will be transferred directly to local government and a further R27.4 billion has been allocated to indirect grants.    

 

With respect to challenges in urban economies, the Bill introduces foundations for faster and more inclusive growth. Urban economies are currently underperforming, but are critical to national Gross Domestic Product. The constraints to current growth are reportedly:

·         Structural;

·         Systemic; and

·         Governance related.

 

Cities receive many different infrastructure grants from national government and further contribute from their own funds, but do not always succeed in planning across all their different infrastructure projects to achieve more integrated cities.

The Bill responds to these constraints through the following measures:

 

·         A new clause, clause 14, and several other provisions are introduced in the Bill. The Bill follows an institutionalised approach, using the Built Environment Performance Plan (BEPP) as a tool for changing the spatial development patterns in cities. The BEPP approach requires metros to submit a council-approved BEPP that gives a strategic summary of how the infrastructure programme will be used to develop a more integrated and efficient city. The BEPP is expected to include projects funded by all infrastructure grants (Urban Settlements Development Grant, Integrated National Electrification Programme Grant, Public Transport Infrastructure Grant, Neighbourhood Development Partnership Grant).

·         The BEPP, which is meant to bridge the gap between Integrated Development Plans (IDPs) and the Budget, giving effect to Spatial Development Frameworks, is a critical instrument for investment prioritisation and focus on spatial targeting and integration. These initiatives are introduced in the hope that the R28.6 billion investment budget earmarked for infrastructure in the 2013/14 financial year could change the future development path of the cities.

·         A sum of R356 million has been added to the Integrated City Development Grant that was designed to incentivise cities to plan for change.

·         Moreover, a Project Preparation Facility is being set up by National Treasury to strengthen preparation of large catalytic investment projects/programmes regardless of financing source.

 

Indirect grants become a stronger feature of the 2014 Division of Revenue. Indirect grants are programmes through which national government spends on behalf of other spheres. Under such grants no funds are transferred, rather they allow for services to be provided whilst capacity is being built. Clause 21 of the Bill adds a provision that allows for more conversions between direct and indirect grants. The changes in the provincial indirect grants largely cater for reforms in the health sector. The following shifts of direct to indirect grants were reported:

 

·         R460 million of the Integrated National Electrification Programme in the 2014/15 financial year;

·         R3.3 billion of the Municipal Water Infrastructure Grant over the MTEF; and

·         R132.8 million of the Rural Households Infrastructure Grant over the METF.

 

The Bill further reflects the fact that Government has prioritised the eradication of the bucket sanitation system. A new indirect version of the Human Settlements Development Grant, worth R1.9 billion over two years, has been introduced. Amounts of R899.2 million and R975.4 million have been made available for the 2014/15 and the 2015/16 financial years, respectively. The focus of this indirect grant is to improve sanitation in areas where housing projects do not adequately provide for decent sanitation. Planning and support for this programme is being led by the Departments of Human Settlements, Water Affairs and Cooperative Governance.

 

Moreover, the eradication of bucket sanitation is also funded through the prioritisation of bulk support in the Regional Bulk Infrastructure Grant; a condition in the Municipal Infrastructure Grant (MIG) requiring prioritisation of bucket eradication; a condition in the Urban Settlements Development Grant (USDG) that at least 3 per cent of funds must be used for bucket eradication and sanitation upgrading; and provisions in the Bill that allow funds for MIG and USDG to be converted to indirect allocations if these priorities are not met.

 

The Bill further seeks to enhance transparency, accountability and ease of administration of grants. In terms of the Bill, receiving officers of conditional grants have to include in their expenditure reports reasons why a grant transfer has been withheld or stopped. In addition, National Treasury must set a date for returning unspent conditional grant funds to the National Revenue Fund at the end of the financial year. The procedures in the Public Finance Management Act and Municipal Finance Management Act have been made applicable to the recovery of fruitless and wasteful expenditure. The Bill also requires the national transferring officers to approve the grant allocations and frameworks submitted to National Treasury. The Bill further makes provision for normal rules and procedures for a conditional grant to apply to a new recipient, after funds have been redirected following a function shift during the financial year.

 

National Treasury reported that a total of R323 billion had been allocated to local government over the MTEF. They further indicated that a new local government equitable share formula had been introduced in the 2013/14 financial year following extensive consultation. The new formula, which was being phased in over five years, provided for a subsidy of R293 per month for every household with an income of less than two old age pensions, so that their municipality could provide them with free basic services. The new formula further provided for R8.8 billion in funding for administration and community services in poorer municipalities. National Treasury further reported that the formula had been updated with cost data to account for price increases and estimates of household growth.

National Treasury indicated that the following were additions and major changes to local government conditional grants:

 

 

3.             Interaction with stakeholders

 

3.1        Financial and Fiscal Commission

 

The Committee invited the Financial and Fiscal Commission (the Commission) to make submissions and/or recommendations on the 2014 Division of Revenue Bill in terms of Chapter 13, Section 214 (2) and Section 220 of the Constitution of the Republic of South Africa (Act 108 of 1996); and Section 9 of the Intergovernmental Fiscal Relations Act (Act 97 of 1997).

 

The Commission highlighted and welcomed the following significant changes in the 2014 Division of Revenue Bill:

·         The increased accountability of transferring officers;  

·         Deadlines for repayment of un-approved roll-overs;

·         Incentives and support for integrated cities;

·         Incentives for planning and spending provincial infrastructure conditional grants; and

·         Increasing indirect conditional grants.

 

The Commission further reported that of the R1.02 trillion non-interest allocations tabled for the 2014 financial year, national government receives 47.8%, and provincial and local government receive 43.3% and 8.9%, respectively. Excluding the shifting of savings from departments, an additional amount of R7.2 billion is added in 2014 to fund new priorities. Overall provincial allocations are revised upwards by R29.5 billion - R23.5 billion to the Provincial Equitable Share (PES) and R6 billion to conditional grants. Local government receives an additional R4.7 billion to its equitable share and R1.9 billion to conditional grants.

 

A total of R28.12 billion is added to the MTEF for new priorities. The major additions in the budget are earmarked for inflation-related salary adjustments. The Commission welcomed the considerable portion of the budget allocated to regional bulk infrastructure to accelerate the delivery of bulk water and sanitation; the rehabilitation of infrastructure destroyed by natural disasters and other priorities in provinces such the introduction of the new vaccine for cervical cancer.

 

3.1.1 Provincial allocations

The Commission submitted that the 2014/15 financial year provincial fiscal framework, including conditional grants, had been revised downwards by R200 million over the MTEF in comparison to the 2013 Medium Term Budget Policy Statement. The proposed move in the Bill to revise the Provincial Equitable Share upwards from R338.9 billion in 2013/14 to R362.5 billion in the 2014/15 financial year to fund higher wage costs was welcomed by the Commission. The Commission further highlighted that the Bill had projected conditional grants to grow by 2 per cent per annum, mainly to fund flood damage caused in the first half of 2013, and a new two year Occupational Specific Dispensation for education therapists.

 

The Commission welcomed the updated provincial equitable share (PES) formula which took into account the 2011 Census data. The Commission supported the phasing-in of the changes in the PES as it would bring stability to the system. The Commission highlighted that the Eastern Cape was expected to be worse off with a 0.5 per cent downward allocation over the 2014 MTEF. The educational component of the PES formula was updated with new enrolment data, the Commission submitted. Gauteng, North West and Western Cape provinces received more funds in their education share due to higher enrolment numbers. Also adjusted upwards after consideration of updated data was the sub-component for health; with the KwaZulu-Natal and Western Cape share increasing by 0.3 per cent, the Commission submitted.

 

Regarding conditional grants, the Commission noted the downward revision in agriculture conditional grants largely due to under-performance. The Commission clarified that the main reasons for under-performance were poor planning, procurement challenges, late submission of business plans, and a skills deficit in some provincial agricultural departments. The Commission supported efforts to improve efficiencies in the sector through leveraging private sector funding, better absorption of available funds, improved coordination with other sector departments and removing existing duplications. The Commission appreciated the introduction of a new conditional grant to fast-track bucket eradication and housing in mining towns funded through a reduction in the Human Settlement Development Grant (HSDG) and the Urban Settlement Development Grant.

 

The Commission cautioned that, while the new initiatives were welcomed, old and still relevant priorities should not be replaced. The reduction in the HSDG was likely to accelerate declining housing unit outputs and there was a need to ensure that capacity existed to ensure that better work is done with appropriate grant frameworks, including exit strategies and timeframes. The Commission added that the interventions in mining towns should respond to individual household circumstances.

 

3.1.2 Local government allocations

The Commission indicated that the Local Government Equitable Share (LES) allocation amounted to R147.6 billion over the 2014 MTEF. The Commission welcomed the improvement in the distribution of LES funds to municipalities through the new formula and indicated that it continued to engage with government as a member of the technical task team that oversees and refines the formula. The Commission also welcomed the upward revision of conditional grants to the local government sphere from R34.3 billion in the 2013/14 financial year to R36.1 billion in the 2014/15 financial year. The Commission supported the improvements in LES and local government conditional grant allocations given the significant service delivery responsibility placed on the local government sphere; but added that building financial and technical capacity, ensuring certainty, accountability and effective service delivery were equally important objectives.

 

The Commission saw the review of the local government revenue instruments as a welcome development; but warned that the overall ability of reviews to be effective in solving fundamental fiscal issues holistically, given persistent challenges, could be constrained by the uncertainty over powers and functions of local government. Amongst issues that could compromise the effectiveness of the reviews were the existence of unfunded mandates faced by local government and uncertainties around powers and functions of district municipalities relative to local municipalities. The Commission was also concerned that little progress had been made on government’s review of the local government functional and fiscal framework that was proposed in 2010.

 

In terms of accountability the Commission welcomed the strong focus on eliminating corruption, a process that has already been actively pursued in municipalities like the Buffalo City Metropolitan Municipality, eThekwini Metropolitan Municipality and others.

 

With respect to the splitting of the Rural Household Infrastructure Grant (RHIG) into a direct and indirect grant, the Commission advised that allocations to the direct component of the RHIG be based on an assessment of the capacity required within the recipient municipalities to successfully implement this Grant. 

 

On capacity constraints, the Commission recommended that government should consider a review of the capacity building grants and programmes in terms of its design, implementation and outcomes. Such a review was important given the numerous capacity-related interventions at the local level including the establishment of the Municipal Infrastructure Support Agency (MISA).

 

The Commission noted the introduction of the new Human Settlements Capacity Grant, for which R900 million has been allocated over the 2014 MTEF period. The Commission emphasised the need for consideration and synergies between this intervention and various other capacity-related grants and interventions to avoid unnecessary overlap and duplication. The Commission welcomed the review of local government infrastructure grants currently being undertaken and reiterated its full commitment to working with other stakeholders in the process.

 

On responses by government to the Commission’s recommendations, the Commission advised that Parliament should consider the recommendations that had not been responded to (chapter 2, 4, 10 and 12) in compliance with the requirements of the IGFR Act. The Commission added that Parliament should exercise oversight over accepted recommendations and where responses indicated there were existing interventions, should question the effectiveness of the function budgeting and groups; the FET turnaround strategy and the reigning in of the wage bill. The Commission further advised that Section 214 (1) of the Constitution, including FFC Act requirements, must be adhered to when new conditional grants were introduced.   

 

The Commission viewed as incomplete the government’s response to a recommendation by Parliament that unnecessary rollovers in health grants should be avoided. The Commission said there was a need to ensure that capacity to spend additional funds received was strengthened and possible equity consequences should be addressed. The Commission added that monitoring and evaluation by municipalities and the Department of Cooperative Governance for the local government sphere needed to be improved. The Commission also submitted that grant design by sector departments did not commit resources to designing and monitoring of grants and their performances. The Commission recommended that local government legislation, like the Government Immovable Asset Management Act, be considered. The Commission also highlighted that it was concerned about the weakness of some provincial treasuries as reported by the Auditor-General.

 

The Commission welcomed the overall thrust of the 2014 Division of Revenue Bill which promotes future growth, budget moderation and sustaining core spending. The Commission commented that the focus on the National Development Plan must be maintained and further translated into departmental budgets. The Commission further welcomed the idea of setting expenditure ceilings as proposed in the MTBPS. The ceiling should be adhered to and be part of relevant legislation such as the PFMA. In conclusion the Commission supported the new requirements for institutionalising local integrated planning; but was concerned by the growing trend of indirect grants. In this regard the Commission indicated that there was a need for systemic interventions to address poor performance and indirect grants should be coupled with clear phase-out strategies and synchronized capacity building of under-capacitated provinces and municipalities.        

 

3.2 South African Local Government Association

 

The South African Local Government Association (Salga) welcomed the overall sentiment of the Bill given the economic pressure of the day. Salga submitted that the Bill supports the National Development Plan’s (NDP) vision of building a capable state at local government level through various capacity-building programmes that support rural municipalities. Salga said there was evidence that the local government allocation and the overall 2014 Budget are aligned to the NDP which was essential for job creation. Salga further welcomed the tightening of control measures of government expenditure to curtail wasteful expenditure.

 

With regard to the changes in the Bill, Salga welcomed the impact of the new Local Government Equitable Share which was sensitive to municipalities with lower revenue-raising potential. Salga also welcomed the new Human Settlement Capacity Grant of R300 million to the six metropolitan municipalities. Salga submitted that they had noted that a number of municipal grants had had funds shifted to their indirect components or had new indirect grant components created over the spending period ahead. Salga highlighted the following changes:

 

·         An additional amount of R934 million to the indirect Regional Bulk Infrastructure Grant;

·         A new Integrated City Development Grant R814 million incentive for developing more integrated and efficient cities over the MTEF period; and

·         The new LES formula introduced an additional R293 per month for every household with an income of less than two old age pensions so that their municipality can provide them with free basic services.

 

Salga further noted the direct conditional grant funds of R36.1 billion which was to be transferred to municipalities and an additional R7.7 billion of indirect grants. Salga also noted the increase of indirect grants from 14.3 per cent to 17.6 per cent. Salga also indicated that the Bill shifted R460 million from the direct Integrated National Electrification Programme Grant to the indirect portion of the same Grant.

 

With respect to the Rural Household Infrastructure Grant (RHIG), Salga admitted that since its introduction in 2010/11 financial year the Grant has struggled to perform. Of the R205 million allocated to this Grant in the 2012/13 financial year, only R135 million (66 per cent) had been spent. Based on that, Salga welcomed the conversion of the RHIG into a direct grant to municipalities in the 2013/14 financial year, but submitted that difficulties in spending the RHIG remained despite the conversion of the grant. Salga explained that of the R107 million allocated for the 2013/14 financial year, nothing had been spent as at 30 September 2013. According to Salga, the dual approach to the RHIG grant that the Bill introduced may therefore be the appropriate solution to ensure service delivery while simultaneously strengthening and promoting local government’s role in sanitation. The approach meant that 42 pe rcent of the Grant was to be transferred directly to municipalities upon approval of business plans, whilst 58 per cent was to be spent directly by the national Department of Human Settlements though the signing of service level agreements with municipalities. The Bill required the Department to transfer skills as part of the project implementation. 

 

Salga also submitted that the following matters would have financial implications when implemented, but had not been budgeted for:

 

·         The Spatial Planning and Land Use Management Act 16 of 2013;

·         New regulations on appointment and conditions of employment of senior managers, requiring municipalities to review their structures by 16 January 2015;

·         The Public Administration Management Bill, which was before the Parliament;

·         Unfunded mandates; and

·         Municipal boundary determination.

 

 

3.3        Presentation by Parliamentary Budget Office (PBO)

 

The PBO showed that while the revenue growth is tracking GDP growth except for the outer year of the MTEF, the real growth in expenditure is slower than revenue. The PBO however found the National Treasury forecasts for growth and inflation are generally higher than other organisations’.

 

Although the PBO recognised the rationale for the expenditure ceiling it however showed that such a decision should be backed up by clearly stated principles or fiscal rules to allay any fears that the indicated expenditure ceiling might be influenced by economic and political pressures.

 

The PBO also indicated that while the total expenditure on infrastructure increases from R252.6 billion in 2013/14 to R286.6 billion in 2016/17, the total expenditure on infrastructure as a percentage of total expenditure decreases from 22.0 per cent in 2013/14 to 19.7 per cent in 2016/17 and also decreases as a percentage of GDP from 7.3 per cent in 2013/14 to 6.3 per cent in 2016/17.

 

The PBO noticed a growth in the trend of moving from direct grants to indirect grants but was concerned that the Bill is not clear on the outputs of the indirect portions of these allocations. The PBO also recommended that the Budget Review should provide a breakdown of provincial expenditure per economic classification to get the full picture of expenditure within provinces.

 

The PBO further indicated that, while slower growth on specific items was acknowledged, the actual amounts should be reflected as well as the per capita spend to determine any efficiency gains.

 

3.4        The Budget Expenditure and Monitoring Forum (BEMF)

 

The BEMF submitted that the Budget of R1.2 trillion which was tabled in 2013/14 financial year, clearly failed to deliver the services the majority of those living in South Africa needed and therefore the BEMF saw a small growth in total government expenditure again in the 2014/15 financial year. The BEMF further emphasised that a limit in real growth in non-interest public spending to approximately 2.6 per cent was asking government to do more with less and provided just the opposite of growth and pulled much needed spending out of the economy and would hamper the achievement of a Capable State. The BEMF was of the opinion that South Africa faced various deficits in addition to a budget deficit, and that the State should consider deficits relating to unemployment, infrastructure and social infrastructure and deficits in our investment in future generations with respect to nutrition, quality of education, employment opportunities and protection of the environment.

 

The BEMF added that a budget deficit was only dangerous if the interest paid on the debt was increasing too much according to the demand on returns from financial investors. The BEMF submitted that it believed that if those resources were invested productively through the Bill in building social capital and improving infrastructure, the medium to long term yields would more than justify a revised deficit. The BEMF recommended that government should allow for a budget deficit of 6 percent. To do so, they submitted, would not make South Africa an exception. They cited that the wealthy economies of the United States of America, the United Kingdom, France and India had all had budget deficit shortfalls in excess of 8 percent of the their GDP. The BEMF emphasized that a mere 2 percentage point increase could inject an additional R67 billion per year into the public purse allowing for a greater expenditure by the three spheres of government that could fund long term social projects.

 

The BEMF further recommended that government should explore greater domestic borrowing.  They argued that government has a R1.5 trillion fund at its disposal through the Public Investment Corporation, from which it can borrow at a reasonable and regulated rate to repair defunct social infrastructure and invest in services that stimulate employment and demand. The BEMF claimed that pension savings had been used to build infrastructure all over the world. The BEMF argued that borrowing from a domestic fund at a regulated interest rate would guarantee that all funds the government has borrowed would be paid back to the creditors. This would not put the South African government and the economy at the mercy of international risk taking financial shocks. The BEMF concluded that it supported greater transparency and access to budget information at provincial and local levels. This could include a black board outside a clinic, school or infrastructure project outlining the budgets, contractor’s responsibility and so forth.

 

The BEMF was further encouraged by the Committee to participate more in the Parliamentary processes and to engage with particular sector departments like Social Development on some of the issues raised in its submission, which could not be addressed by the Committee.

 

 

 

4. Provincial Mandates

 

4.1 Negotiating mandates

In compliance with section 7(b) of the Mandating Procedures of Provinces Act (Act 52 of 2008), Provinces were required to submit their negotiating and final mandates. The following provinces submitted negotiating mandates in favour of the Bill:

 

·         Eastern Cape

·         Gauteng

·         KwaZulu-Natal

·         Limpopo

·         Mpumalanga

·         Northern Cape

·         Western Cape

 

4.2. Final Mandates

 

The following provinces supported the Division of Revenue Bill [B5-2014]:

 

5.   Findings

5.1         The revenue estimates for 2013/14 presented in the 2013 Budget has been revised upwards by R1 billion and such a huge variation is of concern to the Committee.

 

5.2         The provincial and local equitable share had been designed to ensure fair, stable, and predictable revenue shares and to address economic and fiscal disparities.

 

5.3         Despite the factoring in of the population movements in provincial equitable shares over the MTEF, the following increases are reflected in the equitable share allocation of provinces when compared to the previous year’s allocations: Eastern Cape - R1.9 billion, Free State - R710.3 million, Gauteng - R7.2 billion, KwaZulu-Natal - R4.2 billion, Limpopo - R1.8 billion, Mpumalanga - R2.0 billion, Northern Cape - R595.8 million, North West - R1.8 billion, and Western Cape - R3.3 billion.

 

5.4         There have been a number of changes made with regard to conditional grants that might require regular monitoring to assess efficiency and effectiveness. Such changes are:

o    Introduction of new grants;

o    Additions and reductions of allocations to certain grants; and

o    A shift from direct to indirect grants.

 

5.5         The local government equitable share allocation increased within each year of the period under review and by 2016/17 the nominal Rand value of the allocation will have more than doubled from R23.8 billion in 2009/10 to R52.9 billion. For the period 2009/10 to 2013/14, the local government equitable share allocation grew at an average nominal rate of 14.2 per cent.

 

5.6         The new local government equitable share formula imposes major changes to the allocations of some individual municipalities due to the updated 2011 Census data.

 

5.7         The Committee noted that the call for greater transparency and access to budget information at provincial and local levels might strengthen citizens’ right to access information and also improve government accountability.

 

5.8         The Committee noted that National Treasury and the Department of Performance Monitoring and Evaluation have launched a series of expenditure reviews and the initial findings will be released during the 2014/15 financial year.

 

5.9         The Committee noted the Minister of Finance’s responses to Parliament’s as well as the Financial Fiscal Commission’s (FFC) recommendations that are directly and indirectly related to the division of revenue.

 

5.10      The Committee appreciated the reported regular interaction between National Treasury and the FFC as role players within the intergovernmental fiscal relations but also noted the concern that the FFC is not consulted timeously when new grants are introduced.

 

5.11      The Committee noted the call for an assessment of the impact of all the capacity building grants over the past five years.

 

5.12      The Committee noted the concerns with regard to an expenditure ceiling and the need for clear principles and fiscal rules informing the current expenditure ceiling levels.

 

5.13      The issue of unfunded mandates within local government is complicated by issues such as underfunding of assigned functions as well as lack of clarity on powers and functions of district and local municipalities.

 

5.14      The  high road accidents in Moloto Road (R573) in Mpumalanga will require two approaches, that is:

 

5.14.1    Construction of a rail line that also requires additional allocations from the fiscus.

5.14.2    Upgrading of the Moloto Road (R573) which was a provincial read whose funding might require repriotitisation of some funds within the various spheres of government. 

 

6.           Recommendations

 

6.1         National Treasury should provide a clear explanation in future engagements as to why its revenue projections led to a R1 billion upward revisions, representing a huge variation.

 

6.2          National Treasury should ensure that changes implemented to certain conditional grants will expedite service delivery and that national sector departments do not use agencies to implement indirect grants.

 

6.3         National Treasury and the Department of Performance Monitoring and Evaluation should provide Parliament with the findings of the expenditure reviews as soon as the report is completed.

 

6.4         National Treasury and relevant sector departments should consult with the FFC and relevant parliamentary committees timeously when new grants are proposed.

 

6.5         National Treasury should provide Parliament with clear principles and fiscal rules that it applied to arrive at the expenditure ceiling levels.

 

6.6         National Treasury together with Department of Cooperative Governance and Traditional Affairs should look into concerns raised with regard to unfunded mandates at local government, in particular the alleged underfunding of the assigned functions and lack of clarity on the powers and functions of district and local municipalities.

 

6.7         The National Department of Transport should urgently clarify ownership of the Moloto Road  (R573) and ensure that funding is made available for urgent refurbishment of the road as part of the 2014 Adjustment Budget process and the 2014/2015 Medium Term Expenditure Framework.

 

7              Conclusion

 

Having considered the Bill and submissions made by stakeholders and Provinces the Committee reports that it has agreed to the Division of Revenue Bill [B5 - 2014] without amendments.

 

 

Report to be considered.