ATC090312: Report Division of Revenue Bill

NCOP Finance

First Report of the Select Committee on Finance on the Division of Revenue Bill [B4 – 2009] (National Assembly – sec 76), dated 12 March 2009

The Select Committee on Finance, having considered the subject of the Division of Revenue Bill [B 4 – 2009] (National Assembly – sec 76), referred to it, and classified by the Joint Tagging Mechanism as a Section 76 Bill, reports the Bill without amendment.

Second Report of the Select Committee on Finance on the Public Hearings on the Division of Revenue Bill from 24 February to 3 March 2009, dated 12 March 2009

Introduction

The report deals with the hearings convened by the Select Committee on Finance on the Division of Revenue Bill [B4-2009], from 24 February to 3 March 2009.

The following stakeholders were invited to make submissions on their respective allocations with the specific emphasis on the conditional grants:

· Department of Agriculture

· Department of Education

· Department of Health

· Department of Minerals and Energy

· Department of Provincial and Local Government

· Department of Sport and Recreation

· Department of Transport

· Department of Water Affairs and Forestry

· Department of Arts and Culture

· Department of Public Works

· National Treasury

· South African Local Government Association (SALGA)

· Financial and Fiscal Commission (FFC)

To foster transparency and ensure smooth intergovernmental relations, section 214(1) of the Constitution requires that every year a Division of Revenue Act (DORA) determines the equitable division of nationally raised revenue among the three spheres of government. 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.

The 2009/10 budget was tabled amidst challenges of a global financial crisis and the deteriorating international environment, noted by the National Treasury to be significantly affecting South Africa’s growth prospects. In its reports tabled in Parliament the National Treasury projected that the economic growth would slow down to 1.2% of the Gross Domestic Product (GDP) in 2009.

The 2009 budget was framed by 5 objectives that guide government’s policy response over the medium term, namely to:

(a) protect the poor;

(b) build capacity for long term growth;

(d) maintain a sustainable debt level; and

(e) address sectoral barriers to growth and investment.

The total national budget for 2009/10 amounts to R738.5 billion, from which National Government is allocated R483.6 billion, provinces R231 billion and local government R23.8 billion over each of the medium-term expenditure framework (MTEF) period. These figures are inclusive of the debt service costs and the contingency reserve. The allocations take into account government’s spending priorities, the revenue-raising capacity and functional responsibilities of each sphere, and inputs from various intergovernmental forums and the recommendations of the FFC.

The explanatory memorandum of the Division of Revenue outlines Government’s priorities for the 2009 MTEF as follows:

(a) Enhancing the quality of education;

(b) Improving the provision of health care, particularly for the poor and to reduce infant, child and maternal mortality rates;

(d) Expanding the built environment to improve public transportation and meet universal access targets in housing, water, electricity and sanitation; and

(e) Decreasing rural poverty by taking steps to raise rural incomes and improving livelihoods by extending access to land and support for emerging farmers.

CHANGES TO THE 2008 DORA

Technical changes have been effected on the Bill with a view to improving readability of the Act and different sections have been aligned to further facilitate the implementation of the provisions of the Act. Some of the technical changes effected to the Bill are discussed briefly in the paragraphs below.

Grants introduced in the 2008/09 financial year:

· The Agriculture’s Ilima / Letsema Projects Grant intended to boost food production by assisting previously disadvantaged South African farming communities to achieve increase in agricultural production. A total of R650 million over the MTEF period is allocated for this grant of which R50 million is for the 2009/10 financial year. A transfer from the National Treasury in respect of this grant was only done to Northern Cape (R45 million) with the province only spending R16, 8 million of that total transfer as at 31 December 2008.

· The Overload control Grant aimed at preserving road infrastructure by ensuring that overloading practices are significantly reduced. With a three year life span, the grant is allocated R10.069 million in 2009/10 and R11.038 million in 2010/11. The allocation for 2009/10 is divided between Gauteng (R5.034 million) and Limpopo (R5.035 million), while the 2010/11 allocation will go to the Eastern Cape (R5.519 million) and Mpumalanga (R5.519 million). While the grant has been in existence since 2008/09, no transfers were made from national to province in respect of this grant.

· The Sani Pass Grant aimed at developing road infrastructure projects to promote regional integration, development and connectivity between neighbouring states. This grant ends in the 2009/10 financial year. An amount of R34.3 million is allocated for 2009/10. No spending has occurred on this grant.

· The Agriculture Disaster Management Grant which is allocated R60 million in the 2009/10 financial year has, as its objective, to relieve farmers from the effects of drought / veldfires, cold spells, hailstorms and flood in identified areas. This grant ends on 31 March 2010. While there were no amounts transferred from national to the provinces in respect of this grant for the financial year 2008/9, Mpumalanga spent R8.1 million, Limpopo R60.1 million, North West R6.4 million, Free State R24.6 million and Western Cape spent R17.3 million.

Five new grants introduced in the 2009/10 budget:

· A new type of conditional grant, Expanded Public Works Programme Incentive. This provincial grant has been allocated R1.4 billion over the MTEF period. Payments in respect of this grant will be subject to meeting threshold and performance targets.

· The Public Transport Operations Grant is allocated R11.5 billion over the MTEF period for subsidisation of commuter bus services.

· The Technical Secondary Schools Recapitalisation Grant has been allocated R280 million for equipment and facilities at technical schools.

· The Health Disaster Response (Cholera) Grant has been allocated R50 million.

· The Housing Disaster Relief Grant is allocated R150 million to respond to natural disasters.

Grants to be effected in the 2010/11 financial year:

· The Technical Secondary Schools Recapitalisation Grant will be available to provinces from 2010/11. This grant amounting to R80 million in 2010/11 and R200 million in 2011/12 will provide for equipment and facilities in technical high schools.

Gautrain Rapid Rail Link Project

· An amount of R4.2 billion has been allocated to the Gauteng Province for the implementation of the Gauteng Rapid Rail Link Project, subject to a loan agreement being entered into between the Minister of Finance and the Premier of Gauteng as well as to the province’s continued compliance with the loan agreement once entered into.

The differentiation approach

Large scale migration is a common phenomenon in South Africa where over a third of the population, according to the National Treasury’s 2009 Budget Review, currently resides in the nine largest urban areas, the six metropolitan municipalities (Ethekwini, Nelson Mandela Bay, Tshwane, City of Johannesburg, City of Cape Town and Ekurhuleni) as well as Mangaung, Msunduzi and Buffalo City municipalities. This trend is expected to increase in the years ahead. The National Treasury reports that these municipalities face a dual challenge of keeping pace with demand for infrastructure expansion and maintenance while serving the needs of a growing population.

The 2009/10 Municipal Infrastructure Grant (MIG) has been amended to take into account the differences between large urban and smaller rural municipalities. The grants will target the following areas respectively for the cities and for rural municipalities:

Cities- Integrated planning;

Effective leveraging of resources to eradicate backlogs;

Improving performance in the development of integrated human settlements; and

Effective asset management in line with Municipal Finance Management Act (MFMA) requirements

This grant will be phased in starting with the six metropolitan municipalities in 2009/10 and bringing the 21 large cities over the next two years.

Rural- Addressing infrastructure needs for basic services

Rural development

Other changes to the Bill include: the conversion of schedule 7 grants to schedule 6 grants during the course of the year to prevent under-spending; duties relating to category C municipalities to ensure proper flow of funds between category C and B municipalities for providing basic services; and mechanisms added to deal with the implementation of re-demarcation of provincial and municipal boundaries which come into effect during 2009/10 e.g. Merafong. From the 2009 budget the general fuel levy will be shared between national government and metropolitan municipalities. This will serve as an appropriate replacement for the Regional Service Council (RSC) levy.

In order to facilitate a smooth transition from the RSC levy system to sharing of the general fuel levy system, and to prevent any drastic changes to municipal revenues, implementation will be phased in over a three-year period. Full implementation will be achieved by 2012/13.

FFC RECOMMENDATIONS MADE IN JUNE 2008 AND THE RESPONSE BY GOVERNMENT

FFC Recommendations

In line with section 214(2) of the Constitution and the Intergovernmental Fiscal Relations Act (1997), the FFC tabled its recommendations on the 2009/10 Division of Revenue to Parliament in June 2008. The recommendations were divided into three parts:

Part A: dealt with national-provincial fiscal relations matters relating to financing of basic education and health care, transport and bottlenecks hampering housing delivery;

Part B: dealt with local government fiscal relations matters pertaining to augmenting local government revenue, electricity pricing, generation and distribution and World Cup 2010 transport infrastructure; and

Part C: dealt with intergovernmental data issues.

The Division of Revenue Bill [B4-2009] (section 76(1)) outlines the FFC recommendations as well as the responses by government as indicated below:

PART A: NATIONAL-PROVINCIAL FISCAL RELATIONS

The financing of basic education

Proposal on the re-ranking of schools

The FFC recommended that government should review the method used to inform the national quintile ranking of schools. Rather than classifying schools according to the ward or neighbourhood in which they are located, the method should take into account the socio-economic circumstances of the learners (with particular reference to inequality and poverty).

Government agrees with the FFC recommendation. The Department of Education intends to, in addition to the two poorest quintiles (1 and 2), phase in the no-fee schools policy to quintile 3, which will extend coverage to 60% of schools. The DoE is also working on a policy to provide assistance to schools up to quintile 5 that accommodate very poor learners.

Proposal on learner transport

The FFC recommended that national norms and standards for the provision of learners transport should be established. It added that this will be possible once the location of this function has been clearly demarcated between the national departments of Education and Transport. The FFC advised that this responsibility be clarified as a matter of urgency. In the interim, all provinces were to implement statutory provisions that ensured that learners were afforded equal access to education, irrespective of their province of residence and irrespective of whether they resided in rural or urban areas.

Government agrees with the FFC recommendation. The functional responsibilities with respect to learner transport are those of the Department of Education, which is responsible for the provision of scholar transport, while the Department of Transport is responsible for regulatory requirements with respect to all public transport. Government also notes that once the function has been clarified, scholar transport needs will be included in the integrated transport plans at local government level and aligned with the Public Transport Strategy.

The financing of health care

Proposal on fiscal performance of community health clinics sub-programme

The FFC recommended that, just as the 2008 DORA requires that indicative allocations to schools and hospitals and hospitals be gazetted with the tabling of provincial budgets, this practice be extended to clinics and other public health care facilities, as and when they fall under provincial control.

Government agrees with the FFC recommendation. Given the capacity constraints in certain provinces, attention is currently given to ensuring compliance with existing requirements with respect to indicative allocations for schools and hospitals.

Proposals on infrastructure for primary health care and health outcomes

The FFC recommended that greater emphasis be placed on improving the quality of service provided at clinics and funding the maintenance of existing primary health care facilities. It also pointed out that there remained a need for the construction of clinics in poorly serviced rural and urban informal settlements. The FFC recommends that the health component of the infrastructure grant to provinces (IGP) should be aligned to the roll-out of infrastructure through municipal infrastructure grants (MIG).

Government agrees that emphasis should be placed on improving the quality of health services provided at clinics. In this regard, government introduced in the 2008 Budget a special allocation for complementary infrastructure (water, sanitation and electricity) that targets primary health care facilities. In addition roads expenditure in provinces has increased sharply over the past few years and this trajectory is to be maintained over the MTEF.

Government also recognises that it is exceedingly important that outputs (staffing, equipment, drugs and medicines) be managed in a manner that ensures optimal outcomes.

Government agrees that appropriate coordination between provincial and municipal infrastructure grants will result in optimal outcomes from infrastructure investments. To address any misalignment where it exists, government introduced electricity, water and sanitation grants to ensure that municipal infrastructure supports health and the schools infrastructure programme.

Transport

The FFC comments on the classification and earmarking of roads

The FFC recommended that the process of classifying roads among national, provincial and local spheres of government should be accelerated in line with the classification framework already established. It added that the premiers of provinces with roads earmarked for incorporation into national road system should make the necessary applications without further delays.

Government supports the recommendation that the road classification process be accelerated as proposed by the FFC adding that delays could lead to unintended consequences, such as underinvestment in the function or lack of proper maintenance.

PART B: LOCAL FISCAL RELATIONS

Augmenting local government revenue

FFC comments on replacements for the Regional Service Council (RSC) levies

The FFC recommended that, in view of the abolition of the RSC levy, which formed a significant source of municipal revenue, the replacement revenue source for municipalities should be a tax that enhances the fiscal autonomy and discretion of local governments; strengthens the accountability of local government regarding the administration and use of the proposed tax base; yields an adequate and buoyant revenue stream for municipalities in the face of cyclical instability; and maintains macroeconomic balance.

Government agrees with the FFC recommendation; however, the revenue capacities of individual municipalities need to be taken into account. A replacement revenue instrument that is purely in the form of a tax is unlikely to achieve the desired goal of enhancing local government fiscal autonomy for poorly resourced and rural municipalities. Government suggests that this will at best reproduce the existing inequalities in local government own-revenue generation.

As part of a package of reforms, the VAT zero-rating of municipal property rates and other VAT reforms were introduced in July 2006. Further reforms under consideration include the sharing of the general fuel levy and/or transfer duty in the medium term, a local business tax in the longer term as well as grants as a guaranteed revenue source for municipalities or categories of municipalities.

Electricity pricing, generation and distribution

FFC comments on the restructuring of the electricity distribution industry

The FFC recommended that government should work with the National Energy Regulator of South Africa to put together a financing framework that dealt effectively with electricity pricing. It added that that government should address the potential loss of a crucial revenue source for local government as a result of the establishment of the Regional Electricity Distributors (REDs). The commission also pointed out the need to review legislation as it concerned the transfer of assets, the national pricing framework and the establishment of the REDs.

Government acknowledges that the slow pace of the restructuring of the electricity distribution industry is a concern and is currently addressing the outstanding policy and legislation issues, including asset transfer framework for transferring Eskom’s and municipalities’ assets to REDs. The asset transfer framework prescribed in the Municipal Finance Management Act (2003) deals with municipal asset transfers generally. Possible financial and other risks for Eskom and municipalities will also be addressed by government.

World Cup 2010 transport infrastructure

Recommendations of the financing of public transport

The FFC recommended that spending on public transport infrastructure for 2010 should be linked to broader city development plans. The commission proposes a better resourced public transport infrastructure and systems grant that must continue after the 2010 FIFA World Cup. Projects funded under this arrangement would be selected based on full appraisal of economic, environmental and social cost/benefit; and funding mechanisms to cover maintenance costs of constructed 2010 facilities should be developed.

Government supports the recommendation that projects funded through the public transport infrastructure and systems grant should be selected based on full appraisal of economic, environmental and social cost/benefit. The existing public transport infrastructure and systems grant will continue beyond 2010. The grant is aligned to the Public Transport Strategy. Projects funded under this grant are part of the integrated transport plans contained in Integrated Development Plans (IDPs) of municipalities.

Government is of the view that the costs relating to the maintenance of 2010 FIFA World Cup facilities should be provided by municipalities.

PART C: INTERGOVERNMENTAL DATA ISSUES

Performance monitoring framework

Proposal on Education

With respect to measuring the costs of basic education, the FFC recommended that to assess the pro-poor impact of school funding norms, the Department of Education should make publicly available and accessible the funding norms of no-fee schools in line with provisions of the 2008 Division of Revenue Act requiring indicative allocations by school. Provincial education departments should be enabled to report on budgets and spending on learner transport in line with the new economic reporting format.

Government agrees with the FFC recommendation to make publicly available the funding norms for no-fee schools. The list of no-fee schools per province, per allocation and per location is published annually and is available on the department’s website.

COMMENTS OF THE NATIONAL DEPARTMENTS AND ENTITIES

During public hearings held by the Select Committee on Finance, departments and entities made the following comments on the Bill:

FINANCIAL AND FISCAL COMMISSION (FFC)

Among strategic issues raised by the Commission were the following:

· The DORA was becoming complex and voluminous. To this end the commission called for a comprehensive review of the Bill;

· There were too many conditional grants; and

· The commission proposed that all new Bills should go through a rigorous analysis before introduction.

The Commission also observed that there was a need to evaluate the Expanded Public Works Programme, from the time of inception to establish the number and quality of jobs created through the programme to date. To this end the Commission, while welcoming the attempts to address employment through government programmes, raised a flag of caution.

There were also concerns raised by the Commission in respect of the Bill as follows:

· Government’s responses did not provide details on how the recommendations agreed upon would be implemented;

· The Commission recommended that the tax that would replace the RSC levy should be a good local tax. In its view, the fuel levy fell short of this requirement in that municipalities will have no discretion over the base and rate of the tax

SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION (SALGA)

SALGA in general welcomed the Bill as tabled and presented a set of comments in relation to both general and conditional grants.

The differentiated approach was, according to SALGA, needed in dealing with of the challenges of different categories of municipalities within different geographic contexts.

Expanded Public Works Programme (EPWP)

SALGA raised the following concerns about the nature of the EPWP wage incentives, the eligibility conditions and employment creation targets:

• The proposed phasing in of EPWP targets and wage incentives included a minimum threshold target (based on 2008/09 achievements) which municipalities needed to first meet, before they could be eligible to receive the incentive.

• These targets were retrospectively applied to all districts and municipalities resulting in many being disqualified for eligibility for the incentive.

SALGA therefore made the following proposal:

• That all municipalities who have reported on EPWP be deemed eligible, in order to benefit in the wage incentive; and

• That the incremental performance from a baseline determined by the incentive formula for 2009/10 be encouraged.

Replacement levy for the RSC Levy

SALGA made the following comment in this regard:

• The fuel levy allocation was guaranteed with inflation adjustment for the next three years. From 2012/13 the allocation would be solely based on fuel sales per municipality. In the case of a decline in fuel sales, municipalities will receive less as there are no guarantees.

• The reliance on fuel levy by metros could have unintended consequences (municipalities could promote use of private motor vehicles to boost fuel sales as opposed to promoting public transport and mechanisms to reduce road traffic).

• SALGA noted that it was investigating a Local Business Tax as an alternative/appropriate replacement for the RSC levy.

• It also requested that the challenge of unfunded mandates be looked into adding that functions that were not local government functions (in terms of the Constitution) were assigned to local government by way of sectorallegislation, without related adjustments to the fiscal framework – e.g. Disaster Management (Disaster Management Act) – Schedule 4 (A) of the Constitution.

DEPARTMENT OF AGRICULTURE

In addition to the Comprehensive Agricultural Support Programme (CASP) Grant and the Land Care Programme Grant, the Department also manages the Agriculture Disaster Management Grant with a R60 million allocation for the 2009/10 financial year and the Ilima/Letsema Projects Grant receiving R50 million in 2009/10.

The Committee raised the following areas of concern in respect of the report by the Department of Agriculture:

· There a was need for the programmes of the department to harmonise with those of the Department of Land Affairs;

· It was the view of the Committee that there were projects in Eastern Cape, Free State, North West and many other provinces that were in dire need of the department’s assistance; and

· CASP and the Land Care Grant were grossly underperforming.

The Committee was of the view that some departments did not grasp the whole purpose of the MTEF and as such there were always cases where the plans were not ready resulting in under-spending. Furthermore, in the Eastern Cape some agricultural projects were initiated and funded by the Department of Social Development.

The Committee emphasised the need to ensure that people who received land as part of the land redistribution and restitution programmes were assisted to become commercial farmers.

The Ilima/Letsema Project was reported to be underway targeting 140 000 households to boost food production. The Committee requested the Department to furnish it with a list indicating where the 140 000 people were for purposes of conducting oversight.

Given that the provincial spending on the CASP was at 62% and 66% on the Land Care Grant at the end of January, the Committee was concerned that the department would under-spend. The Department noted that there was gradual improvement as it had strengthened its monitoring of the grant. A challenge reported by the Department was that procurement plans were not finalised on time by the provinces leading to under-spending.

The National Treasury committed to providing information indicating the extent to which the department was compliant with the provisions of the DORA in respect of submission of plans as outlined in the framework under processes for approval of business plan.

Agriculture spending in provinces was about 7% of the total provincial spending. The National Treasury pleaded with the Committee not to reduce the allocations to the department as this would affect the areas that were in dire need of the department’s support. The Committee noted that it would compile a report for the incoming Committee on the performance of the Department of Agriculture.

DEPARTMENT OF EDUCATION

The Minister of Education approved implementation of revised minimum norms with effect from 1 April 2009 for the 2009/10 financial year as follows:

· Continued feeding of all learners in Quintiles 1, 2 and 3 primary schools

· Programme to be implemented in Quintile 1 secondary schools;

· Feeding must take place on every school day; and

Approved implementation over the two outer years of the 2009 MTEF is as follows:

· Further implementation in secondary schools:

Quintile 2 (2010/11); and

Quintile 3 (2011/12)

· Average meal cost to increase as follows:

Primary: 2010/11 (R2, 10); 2011/12 (R2,30)

Secondary: Increased to 1,75 times that of primary learner: 2010/11 (R3,80); 2011/12 (R4,10)

Funds have also been allocated to provinces to assist with implementation cost for feeding in secondary schools

NEW GRANT - Technical Secondary Schools Recapitalisation Grant

The preliminary allocations for the grant are as follows:

2009/10: R4,602 million

2010/11: R80 million

2011/12: R200 million

The amount of R4,602 million allocated in 2009/10 will be used to assist the Department in the preparation phase to implement the grant. One hundred (100) schools are targeted over the MTEF period.

Recommendations of the Committee in respect of the Department of Education

The Committee recommends that the Department looks into the following:

· Follow up on the R2.7 billion allocated to provincial departments of education in the 2008/9 financial year;

· To ascertain that the money is allocated to the relevant recipient FETs by the provincial departments;

· Follow up on the implementation of the school nutrition programme at secondary schools and to establish norms and standard in respect of the feeding mechanisms to ensure uniformity across the provinces;

· To investigate the reasons for poor spending across the provinces

The National Treasury was requested to assist in these matters.

DEPARTMENT OF HEALTH

The Department manages six conditional grants which make up approximately 95% of its total budget. These grants are:

• HIV and AIDS

• Forensic Pathology Services [Schedule 5]

• Hospital Revitalization

• National Tertiary Services

• Health Professions Training and Schedule 4 Development

• Health Disaster Response (Cholera) - New grant

The department reported the following variances in terms of amounts requested from the National Treasury and the amounts received in respect of the Comprehensive HIV and AIDS Plan:

2008/09 requested: R938 million and received R300 million

2009/10 requested: R1.4 billion and received R200 million

2010/11 requested: R2.1 billion and received R325 million

2011/12 requested: R1.7 billion and received R407 million

The Committee raised a concern about the underfunding of the health department in respect of HIV and AIDS and requested the National Treasury to note this concern since health was a national priority.

Furthermore it was pointed out that there needed to be clarity on what the implications were for underfunding in service delivery and whether there were any guarantees for compensation in cases where the department wasunderfunded.

In respect of health professionals working abroad, the department noted that its challenge was not in preventing the health workers from working outside the country, but whether the country was training enough health professionals for itself and for exporting to other countries.

National Tertiary Services Grant

Final allocations from the funding requests submitted for this grant resulted in the following funding gaps for the respective financial years listed below:

· 2008/09 : R2.2 billion

· 2009/10 : R2.6 billion

· 2010/11 : R3.6 billion

Implications for under funding:

- The provinces had to use their provincial equitable share to fund the gaps;

- Under developed provinces did not achieve the goal of equity and capacity building; and

- The aim of relieving pressure on the costs related to tertiary services from bigger provinces was not achieved.

DEPARTMENT OF PROVINCIAL AND LOCAL GOVERNMENT (DPLG)

While the department noted that some of its inputs had been incorporated in the Bill, it noted the inputs that were not included:

• Infrastructure grant for cities – the DPLG interpreted the new clause (section 9(1) and (2)) in the Bill to mean that transfers to the provinces go through the DPLG vote but the monitoring and reporting only to the National Treasury. This was contrary to the mandate of Vote 29 and duties of the national transferring officer (in this case DPLG);

• The need to increase funds for municipal systems improvements;

• Enabling mechanisms for the DPLG to report to Parliament on performance of municipalities with regard to conditional grants. It was reported that the current framework did not enable the DPLG to reallocate funds to municipalities which had the capacity to spend; and

• Addressing MIG performance audit findings, as indicated below:

The crafting of DoRA in relation to municipal infrastructure was restricting the DPLG’s role in the management of the grant.

Issues raised by the Auditor-General

• The DPLG had limited powers to address under-performance by municipalities;

• Funds from conditional grants should be deposited into a separate bank account by each municipality to ensure proper monitoring; and

• Based on the above proposal, VAT reimbursements from SARS and interest received with respect to MIG funds should be ploughed back to MIG projects by each municipality.

Recommendations of the Committee in respect of the DPLG

The Committee recommended that the DPLG and the National Treasury to look into:

· the concerns raised by the DPLG and to ensure that greater effort was put into ensuring the well-being of poor or low capacity municipalities;

· the funding for Municipal Systems Improvement Grant (MSIG) that was not growing;

· section 9(2) of the Bill as it relates to the function of the DPLG (transferring national officer) with the view to ensuring that the department was given latitude to perform its role; and

· A possible contradiction between section 9(1) and 15(6) as reported by the DPLG.

The two departments met and reported back to the Committee that a paragraph outlining reporting procedures to both the DPLG and the National Treasury would be inserted in the framework of the Bill. This would eliminate any uncertainties as to which department the provinces would or would not report to.

DEPARTMENT OF WATER AFFAIRS AND FORESTRY (DWAF)

In its submission the department raised the following areas of concern in respect of the Bill:

• There was limited direct control by sector departments on how funds were spent and shortcomings in reporting at municipal level made control impossible;

• Essential planning was not mandated in the Bill and this prevented effective performance evaluation;

• The allocations were not being adjusted in accordance with the delivery performance of the Municipalities;

• The need for the differentiated approach in Section 23 where cities were to play a more prominent role in service delivery to be investigated;

• More funding would be needed than was provided in order to eradicate backlogs, especially in Regional Bulk Infrastructure and for eradicating rural backlogs; and

• Ring-fencing of water services budgets, especially in rural areas, was excluded from the Bill.

The department made the following recommendations:

• Reporting responsibilities of municipalities needed to be improved to effectively measure performance;

• The possible role of DWAF and other national departments in supporting planning and implementation of water services in rural areas where municipalities lacked capacity needed to be investigated;

• A differentiated approach for smaller rural municipalities needed to be initiated;

• Section 11, 2(c) should require the submission of monthly reports within 20 days after the end of each month;

• Section 18 (Integrated housing) should include the same monitoring conditions as Sections 11 and 16;

• Section 24 (b1) must include control measures to ensure that grant conditions were met and that proper planning took place.

• The MIG framework needed to be adjusted to align to the objectives attained in the DORA;

• The conditions and framework of the Bill needed to be revised to take into account requirements for an integrated approach towards basic services;

• The initiation of the differentiated approach and the supporting City Budget Forum; and

• Delivery through Water Services Authorities (WSA) to continue where the capacity has been demonstrated.

The DWAF noted that it was best placed to deliver in low-capacity rural areas and the differentiated approach was silent on this. It added that the DOR Bill strengthened the role of cities in delivering services in their areas but was silent on areas/municipalities where there was no capacity to deliver.

DWAF believed it was best placed to support delivery in rural areas and could initiate processes to do so to ensure that funding was placed where there was capacity to deliver as demonstrated through bucket eradication.

DEPARTMENT OF MINERALS AND ENERGY

The department’s electrification allocations for the 2009/10 financial year were highest in the Eastern Cape at R234.3 million, Limpopo R139.7 million and R123.3 million in KwaZulu-Natal. These were the three provinces with the highest levels of electrification backlogs.

The Free State, Gauteng, Western Cape and Northern Cape had no schools electrification backlogs. R67 million was allocated to the Eastern Cape to address backlogs in the electrification of schools and clinics while R83 million was allocated to KwaZulu-Natal for the same purpose.

A concern raised by the Committee in respect of the Eastern Cape allocation was that the province was only targeting 50 schools for infrastructure development.

The department reported that it did not electrify mud schools.

Energy Efficiency Demand Side Management Grant (EEDSM)

The Energy Efficiency Demand Side Management Grant (EEDSM) received a total of R675 million over the MTEF period with R175 million of that being in the 2009/10 budget. The objective of the grant is to implement the EEDSMprogramme by providing capital subsidies to licensed distributors to address EEDSM in residential dwellings, community and commercial buildings in order to mitigate the risk of load shedding. The grant is also aimed at assisting municipalities with the development of capacity to deliver on EEDSM smart metering projects.

DEPARTMENT OF PUBLIC WORKS

Two conditional grants are managed by the Department of Public Works: the new Expanded Public Works Programme Incentive Grant for provinces and the Devolution of Property Rate Funds Grant which was introduced in the 2008/09 financial year.

Expanded Public Works Programme Incentive Grant

The objective of the Bill is to increase the number of full-time equivalent (FTE) employment through labour intensive employment by provinces. This grant will continue until 2014. Its allocations over the MTEF are R151.4 million in 2009/10, R400 million in 2010/11 and R800 million in 2011/12.

The department explained that its target is to create 2 million FTE jobs for poor and unemployed people in South Africa so as to contribute to halving unemployment by 2014. The Committee was informed that the department was targeting municipalities that were receiving the municipal infrastructure grant (MIG).

The framework of the Bill outlines conditions that must be met prior to the incentive being paid out. Allocations to the provinces will be based on the targeted number of FTE’s for each province. The incentive will be paid out based on performance in the previous financial year. Furthermore the incentive amount from under-performing provinces will be re-allocated to performing provinces.

An example of some of the municipalities targeted by the department for the grant was in the Eastern Cape:

· Nelson Mandela Metropolitan Municipality

· Amathole District Municipality

· Tsolwana

· Intsika Yethu

· Emalahleni

· Sakhisizwe

· Chris Hani District Municipality

· Ukhahlamba District Municipality

· Alfred Nzo District

It was the view of the Committee that some of these municipalities did not need the incentive and that focus should be channelled towards assisting the low-capacity municipalities which were mostly rural.

The Committee tasked the National Treasury, DPLG and the Department of Public Works to revisit the framework and look at how the 129 rural municipalities appearing in the AG’s report as low capacity municipalities can beincentivised through this programme. They were tasked to also revisit the targeted figure of only 45 municipalities.

Devolution of Property Rate Funds Grant

This grant is aimed at enabling provincial accounting officers to be fully accountable for their expenditure and payment of provincial property rates. The process was reported to be fully implemented with transfers taking place according to set timeframes.

Some of the challenges expressed by the department in respect of this grant were:

· Challenges relating to obtaining funding from the National Treasury to settle arrears in the Western Cape, KwaZulu-Natal, Mpumalanga, Eastern Cape and Limpopo;

· Challenges with the reconciliation and validation of the claimed arrears; and

· The department’s lack of capacity to conduct the validations.

The following amounts were allocated to the grant over the MTEF:

R996.5 million in 2009/10

R1 096.2 million in 2010/11

R1 162 million in 2011/12

DEPARTMENT OF ARTS AND CULTURE

Libraries and the transformation thereof were critical among the responsibilities of the department and ensuring availability of materials in indigenous languages formed a part of that transformation process. The department was also involved in efforts of ensuring that indigenous languages were fused into the computer language in the country.

Priorities of the department for the 2009/10 financial year included:

• Increasing books and reading material (especially for younger readers)

• Upgrading and construction of library buildings

• Appointment of more staff as well as extensions of contracts

• ICT – New integrated library management system

Further priorities were:

• The construction of a model library in Mdantsane, Eastern Cape;

• Facilitation of the planning and building of two libraries in Khayelitsha, Cape Town;

• Cooperation with correctional services regarding youth at risk;

• Publishing in indigenous languages; and

• Cooperation with Arts, Social Development regarding the production of tactile books.

In respect of conditional grants, the department reported that for the 2008/9 financial year, four provinces had applied for roll-overs. These were the Free State (R199 000), Limpopo (R5 478 000), Mpumalanga (R286 000) andNorthern Cape (R683 000). The Free State and Mpumalanga had spent less than 50% of their allocations by the end of the third quarter while the department’s overall expenditure was at 68% by the end of the third term.

The National Treasury noted that the figures presented were based on the funds transferred and not on the overall allocation. Taking into account the allocation would bring the spending down from 68% to about 58%.

Challenges reported by the department were:

· high staff turnover;

· delays in concluding Service Level Agreements with municipalities;

· supply chain issues in relation to procurement and acquisition of books; and

· Infrastructure related problems.

The Committee noted that, given the strong link between libraries and schools, the Department Arts and Culture needed to engage rigorously with the Department of Education to ensure that libraries were built while addressing the provision of reading material. Libraries, which are community structures, needed to be made accessible to communities.

THE DEPARTMENT OF SPORT AND RECREATION SOUTH AFRICA (SRSA)

This department is responsible for managing the Mass Sport and Recreation Participation Programme Grant. The framework of the 2008/9 Division of Revenue Bill outlined the following measurable outputs for the abovementioned grant: Siyadlala, Legacy and the Schools Sport Mass Participation Programme. Encompassed in the legacy output were the establishment and/or development of 300 sport specific clubs.

The 2009/10 Division of Revenue Bill outlines the purpose of the Bill as that of promoting mass participation within communities and schools through selected sport and recreation activities, empowerment of communities and schools in conjunction with stakeholders and that of the development of communities through sport.

The department was to receive an amount of R402.3 million in the 2009/10 financial year towards Mass Sport and Recreation Participation Programme Grant. It was reported that the following provinces had requested roll-overs of unspent 2008/9 funds: Limpopo (R2.3 million), Mpumalanga (R191 000), Northern Cape (R812 000) and Western Cape (R278 000).

The Department reported the following challenges:

• Slow spending by provinces;

• Lack of capacity for monitoring and evaluation Sport and Recreation South Africa (SRSA); and

• Lack of capacity in provinces

The department also reported that there was a slow turnaround in recruitment processes and that the vetting of applicants further delayed the process.

The Committee was concerned that the department did not report on club development, which was a common feature in the work of the department in the previous financial year. It appeared that this had been replaced with the Legacy Grant. The Committee was not satisfied with the department’s explanation that club development was encompassed in the Legacy. It added that during an oversight visit to Limpopo in May 2008, the provincial department had spent 48% of the club development grant albeit there was no visible club development observed during the visit.

The Committee also raised concerns with the Department that provinces were hosting professional games which were not their core competence. The North West was funding teams in the Vodacom Cup. Gauteng was funding theGauteng Challenge and the Eastern Cape was funding international boxing competitions

Questions were also raised on whether there were any links between the department and the private sector initiatives in terms of the Public Private Partnership.

Recommendations of the Committee in respect of SRSA and the National Treasury:

· The two departments to jointly evaluate whether the structures and clubs developed from the club development grant existed;

· Ensure ongoing support for those clubs;

· Clarify the purpose of the Legacy Grant and monitor it accordingly.

· Establish whether the legacy was in respect of 2010 only, meaning soccer, and establish whether this was targeting host cities or the provinces generally.

While soccer would be the main beneficiary, the department was of the view that other sporting codes would also take advantage of the Legacy Grant. The Committee proposed that it would assist to have an indaba with the relevant stakeholders to look into how they can jointly benefit from the legacy grant.

DEPARTMENT OF TRANSPORT

The Department of Transport manages five conditional grants. These are the:

· Gauteng Rapid Rail Link Grant receiving R2 832.7 million in 2009/10;

· Overload Control Grant (new) receiving R10.069 million in 2009/10;

· Public Transport Operations Grant receiving R3 531.9 million in 2009/10;

· Sani Pass Grant receiving R34.3 million in 2009/10; and

· Transport Disaster Management Grant (new) receiving R11.5 billion over the MTEF.

The department reported that since the 2005/06 financial year it had been running at a shortfall until in November 2008 the department ran out of funds. This was not as a result of under-budgeting but rather that of underfunding. The matter had been largely resolved through the courts.

The department had agreements with the provinces to provide the services to people who needed the service. Various contracts were used in these arrangements ranging from tendering contracts, negotiated contracts and interim contracts. It was reported that the bus operators preferred interim contracts (driven by ticket sales), but the department was now moving from these agency agreements towards conditional grants provided for in the DORA. This would ensure that there were strict conditions that operators would adhere to. Non-compliance would lead to termination of contracts. This would be closely monitored to avoid increasing unemployment.

The department also noted that focus in terms of technical assistance needed to be directed towards Mangaung but more so towards Tshwane which had major problems.

The National Treasury reported that its plans were to complete the contractual engagements by September 2009.

The National Treasury committed to provide a report on the consequences of underfunding reported by the Department of Transport. The Department also committed to provide the Committee with a detailed report tabled before the Portfolio Committee on Transport. It added that the implication of the underfunding was the deterioration of services provided as well as bus operators who do not maintain their vehicles.

It was also the view of the department that the DORA only created a rigid framework and did not provide a solution for providing bus services to the people who needed it.

The National Treasury pointed out that government needed to decide how, in the context of limited resources, it would ensure that settlements were in close proximity to work areas in order to reduce the need for funding in the form of bus subsidies.

National Treasury and the Department were requested to engage on the issue of underfunding and report to the incoming SCOF and PC Transport.

The department was also restructuring the Road Accident Fund (RAF) in such a way that the processes eliminate the need for lawyers. It was reported that structures representing lawyers were opposing this move through the courts.

CONCLUSION

Given the significance of the Division of Revenue Bill in ensuring equitable division of nationally raised funds among the three spheres of government, the Committee thanks all stakeholders for their comments and participation in the public hearings that took place over three days.

REFERENCES

1. Division of Revenue Bill [B4-2009] (section 76(1))

2. Budget Review 2009

3. Presentations submitted by participating departments and stakeholders

4. National Treasury’s 3rd Quarter Report on conditional grants transferred from the national departments and actual payments made by the provinces

Documents

No related documents

ATC090312: Report Division of Revenue Bill

NCOP Finance

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