ATC130429: Report of the Select Committee on Appropriations on the Division of Revenue Bill [B2 – 2013], dated 24 April 2013

Standing Committee on Appropriations

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE DIVISION OF REVENUE BILL [B2 – 2013], DATED 24 APRIL 2013

REPORT OF THE SELECT COMMITTEE ON APPROPRIATIONS ON THE DIVISION OF REVENUE BILL [B2 – 2013], DATED 24 APRIL 2013

The Select Committee on Appropriations , having considered the Division of Revenue Bill [B2 – 2013)] (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 (Act 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 (Act 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, (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 (Act 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 2013 Division of Revenue Bill (the Bill) in the National Assembly on 27 February 2013. On 14 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, the Committee consulted the Financial and Fiscal Commission, the South African Local Government Association (SALGA) and all nine provinces. The Committee further scheduled public hearings for 26 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 from M r. J P Mashego .

2. The 2013 Division of Revenue Bill

The 2013 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 2013 Budget tabled by the Minister of Finance. The 2013 SONA followed on the 2012 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, which is the vision of the country for the next 20 years.

Accordingly, on 27 February 2013, the Minister of Finance tabled before Parliament the 2013 National Budget together with the Division of Revenue Bill [B2-2013] (the Bill) as required by the above-mentioned legislative frameworks.

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 a very sound fiscal policy guided by principles of counter cyclicality, debt sustainability and intergenerational fairness. The Minister further indicated that: “Within a constrained environment, government has three fiscal goals – moderate expenditure growth to expand public services at a sustainable space, stabilise debt as a share of national income by narrowing the budget deficit and improve the impact of public spending by prioritising capital investment, and reducing waste and inefficiency”.

The Minister further indicated that the budget is presented within the context of the following fiscal framework:

· Countercyclical response to the financial crisis that turned a budget surplus to a deficit;

· Weaker than expected revenue growth that widened the deficit to 5.2% of GDP in 2012/13, but the deficit is expected to narrow down to 3.1% of GDP by 2015/16;

· Government is trimming national departments’ expenditure, reducing the contingency reserve by R23.5 billion and reprioritising R52.1 billion in support of key government priorities.

The Minister indicated that the 2011 Census had revealed that the following scale of challenges still faces South Africa :

· Uneven population growth in various provinces with a dramatic increase in some provinces and municipalities;

· Backlogs remain a major challenge despite the fact that more households have access to basic services where backlogs on electricity and water show gradual decline, backlogs on access to refuse removal is increasing while backlogs on access to sanitation remain stagnant.

The Minister also indicated that the Bill responds to these challenges as follows:

· Government must learn to do more with existing resources by improving efficiency and reducing wastage;

· A new local government equitable share formula will increase transparency and also promote accountability for the use of resources;

· Reconfiguring of health infrastructure grants to promote flexibility in delivery;

· Introducing a new system for allocating provincial infrastructure grants that will link funding to planning;

· A new municipal water infrastructure grant administered by the Department of Water Affairs to accelerate backlog eradication;

· Additions are made to baselines over the Medium Term Expenditure Framework (MTEF) period with R10.2 billion for this financial year, whereby national will receive R6.3 billion, provincial R3.1 billion and local government R0.8 billion, respectively. Allocations for 2014/15 increased to R16.2 billion (R10.6 billion for the national sphere, R4.7 billion for the provincial sphere and R0.9 billion for the local sphere). For the 2015/16 financial year, the national sphere receives an additional R24.8 billion, the provincial sphere receives R17.3 billion and the local sphere receives an additional R6.6 billion.

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

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

Spheres of Government

Colum A

Column B

Allocations

Forward Estimates

2013/14

(R'000)

2014/15 (R'000)

2015/16

(R'000)

National

676 920 412

733 566 388

791 822 019

Provincial

337 572 412

359 924 199

383 697 159

Local

40 581 787

44 490 145

50 207 698

TOTAL

1 055 074 611

1 137 980 732

1 225 726 876

2.1 Overall Budget Allocation

Total expenditure (revised estimates) has increased by R88.1 billion from R966.967 billion for the 2012/13 financial year to R1.055 trillion for the 2013/14 financial year. This marks an increase by 9.1 per cent in nominal terms from the 2012/13 financial year. The budget further increased to R1.1 trillion and R1.2 trillion in the 2014/15 and 2015/16 financial years, respectively. For the financial year 2013/14, the national sphere receives R676.9 billion (accounting for 64.2%), and the provincial and local spheres receive R337.6 billion (32%) and R40.6 billion (3.8%), respectively. These allocations take into account government’s spending priorities, the revenue-raising capacity and responsibilities of each sphere of government and inputs from various intergovernmental forums, the South African Local Government Association (SALGA) and the Financial and Fiscal Commission (FFC). The provincial and local equitable share formulas are designed to ensure desirable, stable and predictable revenue share, and to address economic and fiscal disparities.

2.2 National share of nationally raised revenue

Including conditional grants of R111.1 billion of which R76.6 billion is for provinces and R34.5 billion for local government (and also debt service cost of R99.7 billion, contingency reserve of R4 billion, and the general fuel levy of R9.6 billion), national departments were allocated R676.9 billion of the overall nationally raised revenue for the 2013/14 financial year. Over the MTEF, the national revenue allocations for national government will grow from R676.9 billion in the 2013/14 to R791.8 billion in the 2015/16 financial year.

2.3 Provincial share of nationally raised revenue

An amount of R44.4 billion has been added to the provincial fiscal framework over the MTEF period of which R36.1 billion is an increase in the equitable share and R8.2 billion an increase in conditional grants.

The provincial equitable share formula has been updated with data from the 2011 Census, and the impact of the updates on the provincial equitable share is to be phased in with effect from the 2013/14 to the 2015/16 financial years. Excluding conditional grants, provincial departments were allocated R337.5 billion or 32 per cent of the available funds and an additional R76.6 billion in conditional grant funds. The provincial equitable share allocation increased by R24.5 billion to R337.572 billion in 2013/14 compared to an allocation of R313.016 billion in the 2012/13 financial year. Over the MTEF the provincial equitable share is estimated to increase from R337.6 billion in 2013/14 to R383.7 billion in 2015/16.

The 2011 Census showed population shifts from the mid-year 2011 population estimates. The implication of this population shift is that some provinces will have their equitable share increased while other provinces will experience declining equitable shares over the MTEF period. Provinces with declining equitable shares are the Eastern Cape , Free State , KwaZulu-Natal and Limpopo while provinces with increased equitable shares are Gauteng , Mpumalanga , Northern Cape , North West and Western Cape . An additional amount of R4.2 billion has been added to the 2013 MTEF to assist provinces such as Eastern Cape , Free State , KwaZulu-Natal and Limpopo to adjust to their declining equitable shares. These additional funds will only cover a period of three years.

The provincial equitable share (PES) allocations include R2 billion in the 2013/14 financial year, and R2.2 billion and R2.3 billion in the 2014/15 and 2015/16 financial years, respectively. These funds were previously part of the Devolution of Property Rate Funds Grant that has been phased into the PES after assessment of the grant’s performance in 2012 confirmed that sufficient progress has been made and provinces will be in a better position to take full responsibility (i.e. with effect from the 2013/14 financial year) for property rates with respect to properties owned and deemed to be owned by provincial departments.

Table 2: Determination of each province’s equitable share of the provincial equitable share of nationally raised revenue

Province

Colum A

Column B

Allocations

Forward Estimates

2013/14

(R'000)

2014/15 (R'000)

2015/16 (R'000)

Eastern Cape

50 164 506

52 337 533

54 611 258

Free State

20 000 325

20 905 461

21 897 266

Gauteng

61 374 917

67 431 166

74 049 582

KwaZulu-Natal

73 509 972

77 812 867

82 110 075

Limpopo

41 361 830

43 264 039

45 268 523

Mpumalanga

27 210 543

29 079 599

31 092 725

Northern Cape

9 021 508

9 620 556

10 264 595

North West

22 754 264

24 419 406

26 216 949

Western Cape

32 174 547

35 053 572

38 186 186

TOTAL

337 572 412

359 924 199

383 697 159

Column A of Table 2 (above) shows the horizontal allocation of the provincial equitable share across all nine provinces in the 2013/14 financial year, and the forward estimates in column B. As shown in Table 2, KwaZulu-Natal Province received the highest share of R73.5 billion followed by the Gauteng Province with R61.4 billion, the Eastern Cape Province with R50.2 billion and the Limpopo Province with R41.4 billion. Provinces that received the smallest share included the Northern Cape Province with R9.0 billion, the Free State Province with R20.0 billion and the North West Province with R22.8 billion.

Baselines of some conditional grants to provinces have been revised downward. This was due to the challenging economic environment and fiscal constraints that forced government to find savings from existing baselines to fund key priorities.

The Bill further introduced the following major changes to provincial conditional transfers:

· The Devolution of Property Rate Funds Grant is phased into the provincial equitable share;

· Reforms to health grants to provide greater flexibility by merging the three health infrastructure grants into one grant with three components;

· A new Provincial Roads Maintenance Grant formula that is based on provincial road networks, road traffic and weather conditions;

· The Human Settlement Development Grant whereby the new settlement function will be assigned to six metropolitan municipalities, with the assignment target date being the start of the municipal financial year (1 July 2013);

· The 2014 African Nations Championship Health and Medical Services Grant will be introduced as an indirect grant for 2013/14 only to support provinces hosting the 2014 African Nations Championship;

· A revised approach to provincial infrastructure grants. The Bill introduced a new approach to institutionalise planning for provincial infrastructure grants. The new approach requires provinces to submit plans in line with the bidding process for the grant.

2.4 Local share of nationally raised revenue

The local government fiscal framework responds to the constitutional assignment of powers and functions to this sphere of government. The framework refers to all resources available to municipalities to meet their expenditure responsibilities. National transfers account for a relatively small proportion of the local government fiscal framework, with the majority of local government revenue being raised by the municipalities themselves through their revenue raising powers although the ability to raise own revenue depends on the capacity of each municipality.

For the 2013 MTEF, the local government equitable share (LES) formula has also been updated with data from the 2011 Census and the formula has also been revised. The impact of the updates and revisions on the LES will be phased in over the next five years. The new LES formula is based on the following principles:

· Objective and fair;

· Dynamic and able to respond to changes;

· Recognise diversity among municipalities;

· Only use high quality, verifiable and credible data;

· Transparent and simple;

· Provide for predictability and stability.

The objectives of the new LES are to:

· Enable municipalities to provide basic services to poor households; and

· Enable municipalities with limited own resources to afford basic administrative and governance capacity and perform core municipal functions.

According to the National Treasury the following are some of the advantages of the new LES formula:

· Its structure responds directly to the formula objectives;

· Cost estimates for basic services are more realistic;

· Poverty measures cover nearly 60 per cent of households in South Africa ;

· Institutional funding for poor municipalities is better targeted;

· Funding for community services is included explicitly for the first time;

· Key data used will be updated annually; and allocations to poorer municipalities are increased.

The structure of the new LES formula is as follows:

· The first part consists of the basic services component that provides for the cost of free basic services for poor households;

· The second part enables municipalities with limited own resources to afford basic administrative and governance capacity and perform core municipal functions;

· The third part provides predictability and stability through a correction and stabilisation factor, which ensures that all of the formula’s guarantees can be met.

Excluding conditional grants and the sharing of the general fuel levy, municipalities were allocated R40.5 billion or 3.8 per cent of the nationally raised revenue in the 2013/14 financial year. If the conditional grants and the sharing of the general fuel levy are included the allocation to local government increases to R84.7 billion which is about 8.9% of the total allocations to the various spheres. The LES increased by R3.2 billion or 8.6 per cent to R40.6 billion for the 2013/14 financial year compared to a revised estimate of R37.3 billion in the 2012/13 financial year. Over the outer two years of the 2013/14 MTEF, the local government share of the nationally raised revenue is estimated to increase from R40.6 billion in 2013/14 to R44.4 billion (2014/15) and R50.2 billion (2015/16), respectively.

2.5 Amendments introduced as part of Bill

The Bill introduced some changes when compared to the 2012 Division of Revenue due to some specific policy adjustments. These could be outlined as follows:

· There are reforms on provincial infrastructure grants. The transferring national officer of a schedule 4 grant allocation will be responsible for submitting a monthly provincial report on provincial infrastructure expenditure partially or fully funded by the allocation within 30 days after the end of each month to National Treasury in the format determined by National Treasury;

· Over the next three years government aims to achieve better value for money from investment in provincial infrastructure. A new approach to infrastructure conditional grants is intended to institutionalise proper planning. Provinces will be required to bid for these allocations two years in advance and financial incentives will be built into grants for provinces that implement best practices in delivering infrastructure projects. This new approach will be used to reward provinces that follow best practices for planning and procurement by establishing a performance based funding mechanism with incentives;

· The Health Facility Revitalisation Grant has been formed through merging three health infrastructure conditional grants (the Health Infrastructure Grant, the Hospital Revitalisation Grant and the Nursing Colleges and Schools Grant) with three components. Any shift between grant components needs to be approved and gazetted by the National Treasury;

· A new grant, the National Health Grant, has been introduced. This grant has two components, to support infrastructure projects and to support the National Health Insurance Scheme pilot sites;

· The 2014 African Nations Championship Health and Medical Services Grant has been introduced for 2013/14 only to support provinces hosting the 2104 African Nations Championship;

· A total of R1.1 billion has been reprioritised from the School Infrastructure Backlog Grant, in order to align the baseline allocation of this grant with the capacity to spend, to the Community Library Services Grant as it provides a complementary service to education;

· Additional clauses added to Section 16 to more comprehensively deal with the shifting of a function in cases where a function is assigned to a specific metropolitan municipality;

· The Rural Households Infrastructure Grant (RHIG) which was previously a schedule 7 grant (allocation-in-kind) has been changed into a schedule 5B (or direct) grant;

· The introduction of the Municipal Water Infrastructure Grant, which aims to accelerate the delivery of clean water to communities that do not have access to basic water services. The grant provides funding to municipalities to plan and implement various projects, including construction of new infrastructure and the refurbishment and extension of existing water schemes. A total of R4.3 billion is allocated over the 2013 MTEF;

· The expansion of the Rural Roads Asset Management Systems Grant, which aims to improve rural roads infrastructure and allocates funds for the collection of accurate data on the condition and usage of rural roads in line with the Road Infrastructure Strategic Framework for South Africa. The data will assist rural district municipalities with their planning regarding road infrastructure and maximise the impact of such infrastructure;

· The introduction of the Integrated City Development Grant, which aims to provide an incentive for metropolitan municipalities to integrate and focus their use of all available infrastructure investment and regulatory instruments to achieve a more compact urban spatial form. A total of R340 million is allocated over the 2013 MTEF;

· The reorganisation of the Public Transport Infrastructure Grant which was previously the Public Transport Infrastructure and Systems Grant. It differs from the original grant in that the operational portion has been separated; therefore the grant will only fund capital expenditure. The grant aims to support cities to create new, and improve existing, public transport and non-motorised transport infrastructure, and includes provision for the Bus Rapid Transit Systems Infrastructure.

2.6 Expenditure outcome and revised estimates

For the financial year 2011/12, national and provincial spending amounted to R885.9 billion, including transfers to provinces and municipalities. This represented 99.1 per cent of a total adjusted appropriation of R893.7 billion.

Provincial expenditure fell 1.3 per cent short of an adjusted budget of R373 billion in 2011/12, primarily due to under-spending on health and basic education in the Eastern Cape , KwaZulu-Natal and the Free State .

Municipalities under-spent by R31 billion in 2011/12, representing 11.7 per cent of total budgeted municipal expenditure. Of 278 local municipalities, 212 under-spent their transfer receipts by more than 5 per cent, while 30 over-spent by more than 5 per cent. These figures do not include expenditure from municipalities’ own revenue. According to the revised expenditure estimate for 2012/13, national departments are projected to under-spend on their national allocations by R4 billion, out of a total adjusted budget of R546.4 billion (0.7 per cent).

3. National Treasury briefing

The National Treasury reported that the Bill’s Conditional Grant Schedules have been re-organised so that schedules dealing with the same kind of grant for provinces and municipalities are contained in one schedule. The re-organised schedules are as follows:

  • Supplementary grants to provinces and municipalities are in schedule 4A and 4B, respectively;
  • Specific purpose grants to provinces and municipalities are in schedule 5A and 5B, respectively;
  • Allocations-in-kind to provinces and municipalities are in schedule 6A and 6B, respectively; and
  • Provision for immediate disaster relief to provinces and municipalities are in schedule 7A and 7B, respectively.

The National Treasury also reported that a new formula for allocating the local equitable share has been finalised and approved by all relevant stakeholders. The new formula will increase transparency and will promote accountability for the use of resources.

The National Treasury further reported that a new system for allocating provincial infrastructure grants that will link funding to planning with effect from 2015 has been introduced. They further reported that the new Municipal Water Infrastructure Grant would be administered by the Department of Water Affairs, with assistance from water boards to accelerate backlog eradication.

With respect to provincial fiscal allocations, the National Treasury reported that R44.3 billion (including PES of R36.1 billion and conditional grant funds of R8.2 billion) has been added to the provincial fiscal framework over the 2013 MTEF. Treasury added that the increase in the equitable share resulted in the allocation increasing from R313 billion to R337.5 billion, to cover the following:

  • 2013 wage agreement settlement;
  • Cushion the impact of the phasing in of the 2011 Census data in the provincial equitable share formula;
  • Increase numbers of educators for poor schools and Grade R;
  • Improve diagnostics for tuberculosis;
  • Increase assistance to non-governmental organisations providing social development services; and
  • Absorption of social work graduates.

The conditional grants allocation to provinces has been increased by R8.2 billion from R75.4 billion to R76.5 billion. The bulk of these grant funds is meant for:

  • Continued expansion of HIV and Aids prevention and treatment programmes;
  • Investment in provincial roads;
  • Informal settlement upgrading in mining towns;
  • Improvements in community library services; and
  • School infrastructure improvement.

4. Interactions with stakeholders on 2013 Division of Revenue Bill

4.1 Financial and Fiscal Commission

The Select Committee on Appropriations invited the Financial and Fiscal Commission to make submissions and/or recommendations on the 2013/14 Division of Revenue in terms 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).

4.1.1 General Comments

The Commission welcomed the efforts to improve planning prior to the approval of provincial conditional grants. With regard to the rewarding of performance, the Commission argued that there must be a clear framework detailing circumstances under which performance incentives were granted, including sanctions for below-minimum performance.

The Commission further welcomed the efforts to consolidate and reduce the number of health conditional grants in light of its past recommendations against grant proliferation. The Commission also indicated that the move towards the creation of a block grant to protect health expenditure allocations would give provinces flexibility to allocate resources according to their specific health infrastructure needs. However, the Commission was concerned that only 14% of the R150 million allocated to National Health Insurance (NHI) pilots in 2012 had been spent at the end of February 2013 and therefore supported the decision to reduce the grant over the MTEF period by R25.7 million. The Commission indicated that this would hopefully allow the department time to improve its readiness.

The Commission welcomed as proactive the additions to Section 16 to make provision for the smooth transfer of funds from provinces to municipalities eligible for the assignment of human settlements and public transport functions. They were of the view that the assignment instrument allowed for a differentiated approach dependent on municipal capacity and accountability and satisfied the principle of locating the function closest to the area of need. However, the Commission pointed out that such assignment had financial and fiscal implications that needed to be identified. These included operational funding requirements, transfer of immoveable and moveable assets, and transfer of staff.

The Commission supported Section 19 4(a) which provides for the utilisation of unspent infrastructure conditional allocations for infrastructure damage caused by disasters. However, the Commission felt that there was still a need to comprehensively address this issue, including whether approval to use unspent conditional allocations should be preceded by a formal declaration of a state of disaster, and how to deal with disasters which straddle the borders of provinces or municipalities.

With respect to extending the process for approval of and compliance with payment schedules for schedule 6 grants, the Commission felt that any reform aimed at improved transparency should be supported.

The Commission welcomed the insertion of Section 27, as this transitional clause would enable government to commence with expenditure and implementation of delivery programmes while the Bill undergoes the mandatory parliamentary process for money bills.

The Commission welcomed and supported the principles that informed the new Local Government Equitable Share Formula and agreed that it was an appropriate formula for South Africa today. With respect to the new Formula, the Commission made the following points:

· Metropolitan and rural municipalities receive the largest share of allocations as the majority of poor households in the country are in these areas.

· Greater capacity support as well oversight is needed in poorer municipalities to ensure that the provision for free basic services to every poor household is reflected in the municipalities’ budgets.

· The review of the Formula formed part of the process of reviewing the local government functional and fiscal framework.

According to the Commission, a strong feature of the Bill was the continued growth in the number of grants across urban and rural municipalities and provinces. The proliferation of grants had been raised as a major concern by the Commission in the past and it was of the opinion that the matter remained unresolved. According to the Commission, it often led to a confusing array of overlapping programmes with competing or duplicating objectives and conditions and complex implementation and reporting requirements. The Commission further felt that proliferation often reflected framework and programme design weaknesses in the transferring departments, increasing the risk of under-spending and compliance cost for municipalities who already suffered from capacity constraints.

4.1.2 Provincial allocations

The move by government to provide a R4.2 million cushion over the MTEF to absorb the impact of population changes, brought about by new census data, was welcomed by the Commission.

With respect to the MTEF allocation for Education, the Commission felt that an important future consideration should be the associated operational costs of school infrastructure such as safeguarding, maintenance and operation. The Commission was concerned that children in many rural schools did not experience conditions required for effective attainment of learning outcomes, such as proper infrastructure, materials, basic services, safe scholar transport and well equipped teachers. The Commission welcomed government’s decision to publish norms and standards for school infrastructure and to prioritise the replacement of inappropriate school structures with proper facilities. They felt that continued emphasis should be placed on the professional development of teachers, improving school management as well as greater accountability of school principals.

With respect to the allocation for Health, the Commission welcomed government’s intention to improve value for money spent over the MTEF such as the revision of the application process for infrastructure spending. The Commission further recommended the tightening of monitoring and oversight mechanisms on procurement practices in health departments to prevent the irregular, fruitless and wasteful expenditure evident in some provinces where expensive equipment was purchased without any service plan and thus had to be replaced when broken. The Commission believed that human resources, financial management and procurement should be devolved to hospital management to boost efficiencies and performance. With regard to the NHI, the Commission awaited the results of the pilots that were underway and funding arrangements for the new reform.

4.1.3 Local Government allocations

The Commission indicated that the new Local Government Equitable Share Formula incorporated its recommendations to government. The Commission recommended that certain aspects should be monitored in the implementation of the new Formula. These included the need for adequate support mechanisms to assist municipalities to absorb increased allocations and to spend these funds efficiently and in accordance with their constitutional mandate. In this regard, the Commission pointed out that, in terms of Section 154 of the Constitution, national and provincial governments are obligated to appropriately monitor the performance of local government and effectively support and build capacity in municipalities.

With reference to the new Municipal Water Infrastructure Grant, the Commission reported that it supported efforts to align funding with functional assignment areas in order to improve accountability. However, they cautioned that Government should guard against potentially creating unintended overlaps across different grants with similar purposes. This could undermine the original intention of the Municipal Infrastructure Grant (MIG) to deal holistically with municipal infrastructure.

With regard to the conversion of the Rural Household Infrastructure Grant (RHIG) into a direct grant to municipalities, the Commission was of the view that interventions on this grant should be accompanied by improvement in collection of non-financial performance information and spending capacity. The Commission further welcomed the decision to reverse the 2012 proposal to integrate the RHIG with the MIG. They felt that further reforms on the grant should address the reasons underlying the persistent sub-optimal performance of the grant.

The Commission welcomed the plans to review the local government conditional grant system extensively, as well as the more effective monitoring of conditional grant allocations.

4.2. South African Local Government Association

The South African Local Government Association ( Salga ) welcomed the R12.1 billion added to local government allocations over the 2013 MTEF. They also note that additional funding was made available for the following:

· Anticipated increases in the costs of basic services in the outer years of 2013 MTEF;

· Increased access to clean water;

· Integrated city urban development and public transport networks;

· Hosting the 2013 African Nations Championship.

With regard to the Equitable Share, Salga noted the additional resources of R5.4 billion over the 2013 MTEF. They indicated that this represented a real increase over average inflation, but also pointed out that the costs of administering indigent support programmes often exceeded average inflation. Salga further welcomed the new formula as an improvement that promoted transparency, was simpler and made provision for more frequent updating of data which was crucial to reflect changes in municipalities. They indicated that a particularly positive factor was that the new formula provided funding for an expanded basket of municipal services. However, Salga felt that there was a need to update estimates of basic services costs for the 2014/15 Budget, and that the updated cost estimates should be used to evaluate local government’s share of the vertical division of revenue. Salga further noted the additional R3.8 billion for direct transfers and R4.9 billion for indirect transfers to municipalities, mainly for the following:

· Expansion of household access to water and electricity;

· Bulk water and sanitation infrastructure;

· Integrated city development;

· Infrastructure skills development.

Salga expressed the concern that a clearer and more coherent strategy was needed on how infrastructure delivery in local government would be driven. They indicated that departments, who were strategically best suited to deliver, should be identified and that changes should always streamline the reporting burden on municipalities.

With regard to the Municipal Infrastructure Grant, Salga noted that the growth of only 3.5 per cent per year over the MTEF was minimal against the huge demand for roads infrastructure and rehabilitation and the development of micro-enterprises for job creation.

In conclusion, Salga indicated that municipal revenues would still be under pressure during the 2013/14 and 2014/15 financial years, and that Salga would continue to participate in the review of the local government fiscal framework and ensure that emphasis was given to the following:

· Addressing the vertical division of revenue;

· Exploring additional sources of own revenue for local government;

· Addressing unfunded mandates in health, libraries, museums and roads.

5. Mandates from Provinces

5.1 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 submitted mandates were as follows:

5.1.1 Eastern Cape

· The Eastern Cape Province was in favour of the Bill

5.1.2 Free State

  • The Free State Province was in favour of the Bill

5.1.3 Gauteng

· The Gauteng Province was in favour of the Bill

5.1.4 KwaZulu-Natal

  • The Province of KwaZulu-Natal was in support of the Bill

5.1.5 Limpopo

· The Province of Limpopo was in favour of the Bill

5.1.6 Northern Cape

· The Northern Cape Province was in favour of the Bill

5.1.7 Western Cape

The Western Cape Province was in support of the Bill.

5.2. Final Mandates from Provinces

The following provinces supported the Division of Revenue Bill [B2-2013]:

  • Eastern Cape
  • Free State
  • Gauteng
  • KwaZulu-Natal
  • Limpopo
  • Mpumalanga
  • Northern Cape
  • North West
  • Western Cape

6. Findings and observations

On engaging various stakeholders, the Committee made the following findings:

6.1 There is a detailed response by the Minister of Finance to reports of the appropriation committees as stipulated in section 6 of the Money Bills Act;

6.2 There is a detailed response to FFC recommendations by the Minister in terms of section 9(1) of the Intergovernmental Fiscal relations Act, (1997);

6.3 Clause 2(c) of the Bill provides that the object of the Bill is to promote transparency and accountability in the resource allocation process, by ensuring that all allocations are reflected on the budgets of provinces and municipalities and by ensuring that the expenditure of conditional allocations is reported on by the receiving provincial departments and municipalities;

6.4 Clause 13(2)(d) of the Bill requires receiving officers to ensure that infrastructure projects comply with construction industry best practice standards and guidelines, as identified and approved by the National Treasury;

6.5 One of the significant changes from the 2012 Act is that health infrastructure grants have been merged into one grant with three components;

6.6 The 2011 Census revealed that while the number of households that have access to services has increased there are still serious challenges in reducing backlogs in access to refuse and sanitation. At the same time an amount of R291.1 million in 2013/14 budget has been shifted away from the Municipal Infrastructure Grant (MIG) to the new Municipal Water Infrastructure Grant;

6.7 The Devolution of Property Rate Funds Grant has been phased out and added to the PES;

6.8 Budget allocations based on population shifts from Census 2011 results might have unintended consequences in provinces with declining equitable share. At least two municipalities are likely to lose up to 50% in equitable share according to the new figures in the Bill;

6.9 In order to keep the formula simple the new LES formula does not address issues such as vastness of the area and topographic factors that might increase costs of service delivery;

6.10 Municipalities can choose to provide fewer households with free basic services than they are funded for through the LES, provided their budget documentation clearly sets out why they have made such a choice. This discretion has the potential to compromise poor households;

6.11 The National Treasury increased allocations for electricity costs by 16 per cent while NERSA has subsequently only granted ESKOM permission to increase tariffs by 8 per cent;

6.12 In addition to provincial expenditure that fell short of the adjusted allocation by 1.3% in the 2011/12 financial year, audit outcomes further create doubt over the value for money spent as the number of clean audits declined from 152 in 2009/10 to 132 in 2010/11 and to 117 in 2011/12;

6.13 The Neighbourhood Development Partnership Grant has undergone a review and a new strategy, aligned with the National Development Plan, is being implemented. The allocations included in the annexures to the Bill were based on draft allocations before municipal assessments had been completed and allocations had been aligned with the new strategy;

6.14 An amount of R320 million is added to the Integrated National Electrification Programme (municipalities) Grant for a pilot of the Approach to Distribution Asset Management that will refurbish key municipal electricity distribution infrastructure. The allocations per municipality captured in the Bill do not capture these allocations for the projects;

6.15 The Committee noted and welcomed the appointment of the Chief Procurement Officer in the National Treasury and hopes this will strengthen government’s attempt to fight corruption and reduce wastage and inefficiencies.

7. Recommendations

The Select Committee on Appropriations recommends as follows:

7.1 That the House accepts the Minister of Finance’s response to the Appropriation Committees’ recommendations;

7.2 That the House accepts the Minister of Finance’s response to the Financial and Fiscal Commission’s recommendations;

7.3 Although the provincial and municipal equitable share is not conditional, the National Treasury should encourage provinces and municipalities to reflect the weighting attached to each component in the equitable share formula, as well as government priorities, in their budgets;

7.4 National Treasury should include incidences of non-compliance with section 13(2 )( d) of the Bill in the quarterly reports so that oversight bodies can use such information during in-year monitoring;

7.5 National Treasury should ensure that any shifting of funds within the various components of the new Health Grant does not lead to unnecessary roll-overs;

7.6 National Treasury should ensure that the shifting of funds away from the Municipal Infrastructure Grant will not compromise attempts to address the current backlogs in sanitation;

7.7 National Treasury should ensure that the objective of the Devolution of Property Rate Funds Grant is not compromised by phasing it into the provincial equitable share;

7.8 National Treasury should monitor and assess any unintended consequences of declining provincial equitable shares that is due to new population movements to ensure that the pareto optimality principle is applied. That is an allocation of resources in such a way that it is only considered an improvement if at least one person is better off and nobody is worse off;

7.9 National Treasury should look into some alternatives that will minimise the impact of increased costs due to the uniqueness of some areas (such as the vastness and topography of the area);

7.10 National Treasury, in collaboration with appropriate national departments, should improve the monitoring of the provision of free basic services to poor households;

7.11 National Treasury should monitor whether the municipalities provide proper service delivery and budget implementation plans that channel the increased allocations to poor households;

7.12 National Treasury and the Department of Cooperative Governance and Traditional Affairs should intensify measures towards realising Operation Clean Audit so that there is value for the money spent. The Department of Cooperative Governance and Traditional Affairs should further report on a quarterly basis to Parliament on progress made in this regard;

7.13 When gazetting the allocations in terms of Clause 15 of the Bill, National Treasury must use the correct allocations for the Neighbourhood Development Partnership Grant;

7.14 When gazetting the allocations in terms of Clause 15 of the Bill, National Treasury must use the correct allocations for the Integrated National Electrification Programme (municipalities) Grant for a pilot of the Approach to Distribution Asset Management that will refurbish key municipal electricity distribution infrastructure;

7.15 National Treasury should ensure that the appointment of the Chief Procurement Officer strengthens Treasury’s role in enforcing compliance with legislation and Treasury regulations across all spheres of government.

Report to be considered.

Documents

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