ATC111117: Report on 2011 Division of Revenue Amendment Bill

NCOP Appropriations

Report of the Select Committee on Appropriations on the 2011 Division of Revenue Amendment Bill, dated 17 November 2011

 

Having considered the 2011 Division of Revenue Amendment Bill [B17-2011], the Select Committee on Appropriations reports as follows:

 

1.                   Background

Section 12 of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009 (the Act) requires the Minister of Finance to table the Division of Revenue Amendment Bill together with the revised Fiscal Framework if the adjustments budget effects changes to the Division of Revenue Act (DoRA) for the 2011/12 financial year. This is intended to foster transparency and ensure smooth intergovernmental relations. The Intergovernmental Fiscal Relations Act (1997) prescribes the process for determining the equitable sharing and allocation of revenue raised nationally. Sections 9 and 10 (4) of the Act set out the consultation process to be followed with the Financial and Fiscal Commission (FFC), including the process of considering recommendations made with regard to the equitable division of nationally raised revenue.

 

In enforcing section 77 of the Constitution, the Money Bills Amendment Procedures and Related Matters Act, No. 9 of 2009 was enacted. This budget reform empowers Parliament to amend the government budget and therefore play a greater role in ensuring that the most urgent needs of South Africans are addressed. It provides Parliament with necessary instruments to oversee government actions and monitor its fiscal discipline. While this reform is widely welcomed, the Select Committee on Appropriations (henceforth referred to as the Committee) is mindful that this legislation will be phased in over the years. 

 

The Division of Revenue Amendment Bill (the Bill) was tabled in Parliament on 25 October 2011 by the Minister of Finance during the tabling of the 2011 Medium Term Budget Policy Statement (MTBPS).

 

Clause 1 (the focus of this brief) of the Bill provides for the substitution of Schedules 1 to 9 of the Division of Revenue Act (DoRA) for Schedules 1 to 9 of the Bill. The Schedules to the Bill address the following matters:

• Additional unconditional and conditional allocations to provinces and municipalities;
• The allocation of unallocated conditional allocations to provinces and municipalities;
• The re-allocation and roll-overs of conditional allocations (in terms of section 18 of the DoRA) to provinces and municipalities not transferred by national departments during the 2010/11 financial year;
• Increases to a conditional allocation to a province or municipality through virements under section 43 of the Public Finance Management Act, 1999 (Act No. 1 of 1999) or section 28(2)(d) of the Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003), as the case may be; and
• The re-allocation of conditional allocations that were not correctly reflected in the Schedules to the DoRA.

 

2. Equitable division of revenue raised nationally among the spheres of government

 

Table 1: Schedule 1

Spheres of Government	2011/12 Allocation   R’000	2011/12 Adjustment Allocation R’000	Adjustment amount   R’000
National Provincial Local	566 322 576 288 492 831 34 107 901	562 174 845 291 735 509 34 107 901	-4 147 731 3 242 678 0
Total	888 923 308	888 018 255	-905 053

Source: National Treasury (2011a and b), adapted.

 

The net effect of the 2011 adjustments is a reduction in the 2011/12 estimates of expenditure from R888.9 billion to R888.0 billion. The national allocation has been adjusted downwards by R4.148 billion from R566.323 billion to R562.175 billion. The provincial equitable share allocation is adjusted upwards by R3.243 billion and the local government equitable share allocation remained unchanged.

 

3. Determination of each province’s equitable share of revenue raised nationally

 

Table 2: Schedule 2

Provinces	2011/12 Allocation R’000	2011/12 Adjusted Allocation R’000	Adjustment amount R’000
Eastern Cape Free State Gauteng KwaZulu-Natal Limpopo Mpumalanga Northern Cape North West Western Cape	44 120 028 17 520 835 50 428 480 62 927 556 36 348 545 23 378 714 7 742 909 9 271 431 26 754 333	44 644 170 17 722 579 50 967 615 63 584 195 36 793 208 23 662 205 7 827 173 19 481 922 27 052 442	524 142 201 744 539 135 656 639 44 663 283 491 84 264 210 491 298 109
Total	288 492 831	291 735 509	3 242 678

Source: National Treasury (2011a and b), adapted.

 

The provincial equitable share was adjusted upwards from R288.493 billion to R291.736 billion to provide for higher remuneration increases than what was provided for in the main budget. Provinces were advised to budget for wage increases of 5.5 per cent; however the wage agreement between labour and government resulted in a 6.8 per cent increase. The additional allocation of R3.243 billion was allocated to provinces based primarily in proportion to their shares of total expenditure on education and health personnel and balanced with shares of expenditure on personnel in other sectors.

 

 4. Proposed Conditional Grants to Provinces:

4.1 New Grants: Funding allocations to provinces for Flood Damage 

The Bill provides for funds for the repair of infrastructure damaged by floods in the 2010/11 financial year. The funds are divided between provinces based on the assessment of flood damage by the National Disaster Management Centre. The funding will be rolled out as follows: R180 million through the Housing Disaster Relief Grant (this grant will provide funding for emergency relief in support of reconstruction work to housing and related infrastructure damaged by floods in terms of the provisions of the National Human Settlement Programme in Eastern Cape, Free State, Gauteng, KwaZulu-Natal; Limpopo, Mpumalanga, North West and Northern Cape Provinces); R240 million through the Transport Disaster Management Grant (this grant will assist in repairing road infrastructure damaged by floods in Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Limpopo, North West and Northern Cape Provinces); R149.6 million through the Agriculture Disaster Management Grant (this grant will provide relief to farmers from the effects of floods in Eastern Cape, Free State, Gauteng, Limpopo, North West and Northern Cape Provinces).

 

4.2 Adjustments of existing conditional grants

The Bill provides for adjustments on the existing conditional grants as follows: the Education Infrastructure Grant is increased by R180 million and the Health Infrastructure Grant is increased by R2.6 million.   

 

4.3 Roll-overs of withheld conditional grants

The Bill explains that in the 2010/11 financial year a range of conditional grants to provinces were withheld due to non-compliance and/or under-spending by provinces. The withheld funds have been rolled over and the conditional grants have been adjusted as follows: the Comprehensive Agriculture Support Programme (CASP) has been increased by R10 million; the Infrastructure Grant to Provinces, which is re-established through the Division of Revenue Amendment bill, has been increased by R1.089 billion; the Ilima/Letsema Projects Grant has been increased by R5 million; the Community Library Services Grant has been increased by R26.5 million; the Technical Secondary Schools Grant has been increased by R10.5 million; and the Hospital Revitalisation Grant has been increased by R84.5 million.

 

4.4 Allocation of Unallocated Funds

The Division of Revenue Amendment Bill acknowledged that the 2011 Division of Revenue Act did not allocate funds for the Schools Infrastructure Backlogs Grant. This grant of R700 million is meant for the eradication of inappropriate school structures in provinces. The provincial distribution is allocated as follows: Eastern Cape has been allocated R520.7 million; Free State R22.3 million; Gauteng R6.6 million; KwaZulu-Natal R46.2 million; Limpopo R41.6 million; Mpumalanga R38.2 million; Northern Cape R8 million; and North West R5.2 million.

 

5. Conditional Grants to Local Government

5.1 Conditional Grants Roll-overs

The Bill approves the following roll-overs: R3.15 million for the Water Services Operating Subsidy Grant to Lephalale Local Municipality (LIM362); R26 million for the Rural Households Infrastructure Grant, an indirect grant implemented by the National Department of Human Settlement to fast-track the rollout of on-site water and sanitation solutions (e.g. ventilated improved pit toilets); and the R10.6 million Regional Bulk Infrastructure Grant, an indirect grant through which the National Department of Water Affairs builds bulk water supply systems that cross municipal boundaries on behalf of municipalities.  

 

The Bill also approves a reduction of the Regional Bulk Infrastructure Grant from an amount of R1.704 billion to R1.686 billion. The difference of R28.6 million is earmarked for feasibility studies of projects which may potentially be funded through the grant. A further transfer of R21.6 million from the direct Water Operating Subsidy Grant to the indirect Water Service Operating Subsidy Grant has been approved. Of this amount, R18.4 million comes from the recovery of a previous over-payment to Vhembe District Municipality and a further R3.15 million will be funded from the rollover of funds described at the beginning of the above paragraph. The Bill allocates R790 000 to North West 397 (NW397) Municipality. This new municipality, formed by the merger of Kagisano and Molopo Local Municipalities, was not allocated funds in the 2011 Division of Revenue Act. 

 

5.2 Allocation of Unallocated Funds and Savings

The Bill shows that an amount of R50 million was not allocated in the 2011 Division of Revenue Act with respect to the Financial Management Grant. An amount of R11 million has been declared as savings and will be returned to the National Revenue Fund; and R39 million will be allocated to municipalities for a new engineering internship programme. Through this programme recent engineering graduates and technicians from universities of technology, and scientists will be employed to deal with water quality issues.

 

5.3 Other Local Government Sphere Related Allocations

The Bill also provides an amount of R266 million for a once-off gratuity for non-returning municipal councillors after the 2011 municipal elections.  This amount will be reflected on the vote of the National Department of Cooperative Governance and Traditional Affairs as part of the 2011 Adjustment Appropriation Bill/Act. 

 

6. Submission by Financial and Fiscal Commission

The Financial and Fiscal Commission (herein under referred to as the Commission) noted that an additional R48 billion will be added in the 2012 Medium Term Expenditure Framework. The Commission explained that after a net adjustment of R2.9 billion in 2011/12, the total expenditure envelope grows from a revised R811.1 billion in 2011/12 to R1 trillion by 2014/15. They submitted that using the base year 2011 consumer price inflation (CPI) of 5%, this represents an average real growth in expenditure of about 2.3% over 2012 MTEF. Compared to the 2010 MTBPS growth rate of 2%, the provincial government allocation is growing at a slower rate of 1.4 %. As a result the share in allocations for national and local government is projected to grow, while that for provinces declines, though marginally from 44.9% to 44.6% over the MTEF. The Commission welcomes the increase in Local Government revenue share from 8.4% to 8.6%, whereas the national share increased from 46.7% from 46.8%.

 

The Commission welcomes the allocation of new disaster grants as listed in clause 3.2 (Agriculture Disaster Management Grant, Housing Disaster Relief Grant, and Transport Disaster Management Grant). The Commission indicated that it was working on a disaster funding project to be tabled with the next set of Division of Revenue recommendations for the 2013/14 financial year. The Commission further submitted that a rethink is needed on the ability of the fiscus to cope with the recurrent natural disasters and alternative funding arrangements should be explored to minimise risk exposure to the public sector.  Above all, the Commission advised that emphasis should be placed on funding disaster risk reduction rather than funding after the occurrence.

 

The Commission also highlighted that over time the number of grants in the Intergovernmental Fiscal Relations system increased but evidence of good expenditure performance and quality delivery has not emerged. The Commission submitted that capacity to spend is a critical challenge at provincial level and there is poor reporting on non-financial performance of conditional grants. The Commission submitted that poor planning and design of certain conditional grants (e.g. Expanded Public Works Programme Incentive Grant) affect performance.

 

On the adjustments to Local Government allocations, the Commission submitted that local government is at the forefront of service delivery and any adjustment in this sphere would ordinarily have immediate impact. The Commission welcomed the rolling over of the 2010/11 financial year conditional grants funds. The Commission supported the allocation of R790 000 to NW397 Municipality. Moreover, the Commission also noted the government’s savings of R50 million from the unallocated portion of the Financial Management Grant, of which R11 million shall be returned to the national fiscus while the remainder (R39 million) is effectively used for a new engineering internship programme.

 

 

The Commission submitted that it welcomes the shift in the composition of public expenditure towards investment and economic development. The Commission further highlighted that rolled-over grants are due to under-expenditure as a result of weak capacity and poor performance, therefore there is a need for providing capacity development and assistance to struggling provinces and municipalities in grants management. The Commission also cautions against persistent in-year re-allocations to the Division of Revenue allocations. This has the potential to undermine the credibility of the transfer system. The Commission suggested that the solution lies elsewhere and there is a need in the long term to look at the design of the grants.

 

7. Consideration of Mandates

All provinces submitted their Negotiating Mandates, and they were in support of the Division of Revenue Amendment Bill [B17-2011].  The Province ofMpumalanga submitted its Negotiating Mandate in support of the Division of Revenue Amendment Bill [B17-2011] but with the following recommendations:

 

“(i) Regional Bulk Infrastructure Grant (RBIG)

·         That schedule 7 of the Bill must be adjusted to not only reflect the bulk of the grant, namely R1.686 billion, but it must include the individual figures as per the allocation for the feasibility study for each respective municipality as reflected in Appendix 1 of the Bill;

·         The Bill must provide for the respective grants to be paid to the individual municipalities so that they are in a position to pay upfront for the conducting of the feasibility studies.”

 

The Committee deliberated on this matter and asked for the perspective of National Treasury. The official from National Treasury explained that the schedule 7 grant allocation already includes the feasibility study funds. The detailed explanation is on the original Division of Revenue Bill [B4-2011 (reprint)] on page 250 which lists the Mpumalanga benefiting municipalities.

 

The RBIG generally overarches a number of municipalities. For efficiency reasons and in order to have the infrastructure linked it is much better for the province to take oversight responsibility. National Treasury cannot support the request to transfer the funds directly to municipalities, as that will be contrary to the intention of the grant, which is a grant-in-kind.

 

As to the request that the allocation for feasibility studies be reflected individually, it would be taken forward and could be implemented in the 2013 budget.

 

“(ii) Allocation of the Health Infrastructure Grant

• When the Equitable share formula is revised  it should take into account all matters relating to backlogs in terms of health services as well as health facilities with specific reference to poorer provinces.”

 

The Committee noted this recommendation but commented that Mpumalanga Province through the MEC of Finance should take it to the Budget Council where the matters affecting equitable share formula are deliberated in detail. 

National Treasury also indicated that the Provincial Equitable Share is poverty-based by its nature.

 

“(iii) Conditional Grants to cater for Disasters

That the purpose of the Agriculture Disaster Management Grant be amendment to read:

• To relieve farmers from the effects of floods and or other natural disasters in North West, Eastern Cape, Northern Cape, Free State, Gauteng, Limpopo and Mpumalanga Province.”

 

The Committee deliberated on this recommendation and consulted the National Treasury. The Committee heard that this grant only deals with past events that have been officially declared disasters.  It looks at what could realistically be spent between mid-December 2011 (the earliest that funds will be released) and the end of March 2012. Although Mpumalanga Province is not listed among the provinces that shall benefit from the Agriculture Disaster Management Grant, provision has been made for the province in the Housing Disaster Relief Grant and the Education Infrastructure Grant.

 

With respect to Final Mandates, all 9 (nine) provinces voted in favour of the Division of Revenue Amendment Bill [B17-2011].

 

8. Observations

8.1        The Select Committee on Appropriations notes and appreciates that its recommendation on the 2011 Division of Revenue Bill report that NW397 be allocated funds by the Department of Cooperative Governance and Traditional Affairs has been implemented. NW397 has been allocated R790 000.00 through the Municipal Systems Improvements Grant;

8.2        The Committee welcomes the roll-over of grants funds, however it is concerned by the fact that these roll-overs are often as a result of a lack of capacity or fiscal dumping by national and provincial departments which leads to under-expenditure by provinces and municipalities;

8.3        The Committee notes that small and poor municipalities are disadvantaged by the allocation criteria of the Expanded Public Works Programme Incentive Grant;    

8.3        The Committee is concerned about the lack of stringent measures to manage the always unanticipated or unforeseen increases in the compensation of employees in all three spheres of government which leads to increases in the wage bill for government. Furthermore, the Committee notes that provinces have not fully implemented the Occupation Specific Dispensation (OSD); and

8.4        The Committee is concerned that the tight programming necessitated by the Money Bills Amendment Procedure and Related Matters Act No 9 0f 2009 puts provincial legislatures under pressure thus affecting the quality of inputs made by provincial legislatures and their discharging of their duty to involve the public as required by section 76 of the Constitution.  

 

9. Recommendations

9.1        The Committee recommends that there should be continuous enhancement and capacity building in municipalities and provincial departments that are unable to spend and manage conditional grants;

9.2        The Committee recommends that in dealing with the adjustments for increased cost of salaries as well the expansion and implementation of theOccupation Specific Dispensation (OSD), government should be mindful of the rising public sector wage bill relative to other priorities. Government should consider entering into multi-year wage agreements with organised labour; 

9.3        The Department of Public Works should provide technical assistance to smaller municipalities in order for them to benefit from the Expanded Public Works Programme Incentive Grant;  and

9.4        The Select Committee on Appropriations, having considered the 2011 Division of Revenue Amendment Bill [B17–2011], recommends to the House that it be approved (without amendments).

 

10. Conclusion

In conclusion, the Committee will monitor the utilisation of these additional grant allocations through the in-year monitoring process which forms part of Parliamentary oversight. This will enable the Committee to check whether financial legislation such as the Division of Revenue Act (DoRA), the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA) are adhered to by provincial and local government spheres. The Committee will also monitor the efficiency of administration in compiling and spending various schedules so that schedules are not incorrectly recorded, classified or misplaced in the process. This will assist the Committee to identify challenges and enhance the level of accuracy and compliance in all levels of government through making relevant recommendations during the in-year monitoring process.

 

 

Report to be considered.