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.