Idasa submission on Constitution of the Republic of South Africa Second Amendment Bill, 2001

1) The Tabling of Money Bills and Chapter 13 Legislation - Section 1 of the Bill

Summary: Section 73 (2) of the Constitution establishes that only a cabinet member, a deputy minister, or a member or committee of the National Assembly may introduce draft legislation in the National Assembly. But only the cabinet member responsible for national financial matters (i.e., the Minister of Finance) may introduce a money bill. The bill proposes that the principle that only the Minister of Finance may introduce a money bill be extended to all legislation emanating from the provisions of Chapter 13 of the Constitution. Excepted would be legislation relating to the financial administration of legislatures, the remuneration of persons holding public office mentioned in section 219, and regulating rates on property in terms of section 229(2)(b).

Analysis: The effect of this amendment would be that only the Minister of Finance could introduce money bills and generally most other legislation which gives effect to Chapter 13, the financial chapter of the Constitution. The financial legislation that would be affected by the amendment relates to matters that typically impact on macro-economic policy and the financial administration of the state. Normally, this legislation would fall within the line function of the National Treasury, and the aim of the amendment, therefore, is to ensure that the National Treasury assesses such draft legislation and the impact it may have on these areas. This would mean that other cabinet members and Members of Parliament may no longer introduce legislation that regulates the format, timetable and content of budgets, procurement, issuance of guarantees, the powers and functions of the Reserve Bank, provincial and municipal loans etc. Currently, it is only money bills to which this restriction applies.

The amendment makes budgetary sense in that it would assign control over legislation that will have an effect on fiscal aggregates and the macro-economy to the Minister of Finance. However, one could question the inclusion of legislation relating to the budget system in this broad sweep. The amendment would mean that only the Minister of Finance could introduce legislation requiring changes to budget formats, for instance. Two issues apply here: (1) In a hypothetical situation where a current budget system allows a Minister of Finance undue access to and control over budgetary systems and therefore funds, the hands of all other actors would be tied to change this situation. Similarly, other actors may in future wish to update budget management systems, but be unable to table legislation to force such changes if the Minister of Finance were reluctant. (2) The counter argument would be that the existing legislation (such as the Public Finance Management Act) provides sufficient checks and balances, so that the need for review may not seem pressing at the moment. However, systemic needs shift over time. In addition, a future Minister of Finance may put through changes inimical to good governance, which would have to be reversed once their detrimental implications have become clear.

Recommendations: This provision should be qualified to allow for legislative change to originate from outside the Treasury. The normal constitutional wording here would be a phrase such as "This legislation may only be introduced with the consent of the minister responsible for financial matters", as a less restrictive alternative. Under such a provision, if the minister were to withhold consent, such an action would call for a public explanation of this refusal, and would thus force transparency. At the same time, the "gentler" option would have the same effect of bundling control over the legislative agenda in these matters in the hands of the Minister of Finance, by providing her or him with an agenda-setting veto.

Summary: The proposed amendment to section 76(4)(b) would have the effect that a bill envisaged in Chapter 13 of the Constitution be dealt with in terms of section 76 of the Constitution, if it contains a provision that affects the financial interests of provinces (i.e., even if other provisions of the bill do not affect these interests). Section 76 outlines a procedure that affords more powers to the National Council of Provinces (NCOP) in the law-making process than the alternative process under section 75.

Analysis: This amendment would avoid a situation in which legislation that forms a coherent whole in terms of content has to be split into different parts for purely procedural reasons. Such bills are referred to as "mixed bills". The "splitting" of a bill became necessary, for instance, in the case of the Public Finance Management Bill, and greatly complicated the legislative process.

The proposed amendment is also in line with international best practice in two-chamber legislatures. In Germany, for instance, the procedure for "mixed bills" is not regulated by the Basic Law (i.e., the German Constitution). But the convention has evolved that these bills be treated as bills affecting the constituent units of the federation, which affords a more substantial role to the regional chamber of the German Parliament.

Recommendation: We support the amendment.

3) The Definition of Money Bills - Section 3 and 5 of the Bill

Summary: Section 77 of the Constitution defines a national money bill. The proposed amendment would broaden this definition to include bills abolishing or reducing, or granting exemptions from, any national taxes, levies, duties or surcharges, or authorising direct charges against the National Revenue Fund. Read with section 73, the implication of this proposed amendment is that only the Minister of Finance could introduce such legislation. Section 120 of the Constitution defines provincial money bills. The bill proposes that the definition of provincial money bills be amended along similar lines.

Analysis: These amendments make sense in terms of strengthening the cohesion of the tax system. In line with the principle that all operations with a fiscal effect should be on-budget so that their fiscal impact and effectiveness in terms of priorities can be viewed against broader budget concerns, this amendment allows only the Minister of Finance to introduce legislation that will directly affect the overall level of revenue, or the composition of revenue. Exemptions from taxes, for example, carry a cost that must be made up elsewhere to achieve the same aggregate level of taxation. This amendment will increase the transparency of the state’s fiscal operations (with no hidden tax expenditures through other legislation). It will therefore also strengthen accountability: it would no longer be possible for the minister to argue that a skewed tax distribution or too high tax rate is due to legislation introduced by actors other than the National Treasury (and similarly at provincial level). At the same time, legislation according to section 214 of the Constitution is expressly exempted from the rewording, so that the amendment would maintain the role of the NCOP in the passing of the Division of Revenue Bill according to section 76 of the Constitution.

Recommendation: We support the amendment.

Summary: Sections 4, 6 and 7 of the bill propose changes to the intervention mechanisms provided by, respectively, sections 100 and 139 of the Constitution. Currently, section 100 provides an intervention tool for the national executive to intervene, directly or indirectly, in provincial affairs in cases where provinces fail to fulfil executive obligations. Provinces have a similar intervention tool with regard to the local authorities under their jurisdiction, which is provided by section 139 of the Constitution. The amendments would alter section 100 so as to allow national intervention in provincial as well as local government affairs. According to the proposed changes, this concurrent national and provincial power to intervene in the local sphere would then be co-ordinated by national legislation.

In addition, both sections of the Constitution would be amended in order to change the role of the NCOP in any such interventions. Presently, interventions have to end unless approved by the NCOP within 14 days of its first sitting after an intervention commenced. The suggested changes would remove this approval requirement, but instead provide the NCOP with the power to pass, at any time, a resolution that would force the end of an intervention.

Analysis: First, the amendments, on balance, would downgrade the role of the NCOP by turning it into a reactive body. Although the NCOP would, perhaps intended as a quid pro quo, obtain a veto that would allow it to end an intervention at any time, this gain in power in our view does not compensate for the loss of power implied in the removal of the requirement for proactive approval. Second, the proposed changes would weaken the role of provinces, as the increasing supervisory responsibilities of the national government diminish the supervisory responsibility of the provinces. This is a significant change. Assigning supervisory responsibility to provinces makes fundamental constitutional sense, as the legislative competence areas of schedule 4 and 5 of the Constitution are linked with explicit local government implementation requirements (as prescribed through the division of each of these schedules into two parts, A and B). The functional need for co-operation of provinces and local government, by virtue of constitutional design, is thus by far greater than that of the national government and local government. It would thus seem desirable that provinces retain at least the primary supervisory obligation.

The proposed amendments would establish concurrent national and provincial powers with regard to intervention in local government affairs, while leaving it open as to which of the remaining two spheres has the primary duty of intervention. This could introduce a moral hazard problem, in the sense that any of these two spheres may neglect oversight under the assumption that the other should intervene. More specifically, the supervisory duty of provinces seems unclear, and less binding, if provinces can have the expectation that the national government may intervene at the local level. While the memorandum to the bill notes that such a concurrent intervention power would be co-ordinated in national legislation, it leaves open the content of this legislation.

Recommendations: We recommend against the national government obtaining concurrent supervisory obligations with regard to local government, as we regard this as undesirable on the basis of a constitutional structure that intimately links provinces and local authorities across a number of important functional areas. However, if the national government's intervention power with regard to local government affairs is to be allowed, this should be done within an overarching intervention framework that places the primary supervisory duty over local governments with the respective provincial administrations. Only in cases where the latter neglect these duties, the national government should be allowed to intervene. This would remove the moral hazard problem, by establishing a cascading intervention structure, and establish an incentive for provinces to honour their obligations. The co-ordination of such explicit concurrent power should be processed in tandem with the proposed changes, so as to avoid confusion over roles and responsibilities, and a blurring of accountability lines. If the principle underpinning the proposed amendment is accepted, we would advise that until the contours of this regulatory effort are made known, the proposal should be put on hold.

Second, we recommend that the obligation for the NCOP to approve any interventions be retained, so as not to weaken the constitutionally intended intergovernmental co-ordination function of the council as expressed in section 42(4) of the Constitution, and supported by the vision contained in chapter 3 of the Constitution. But the proposed change introducing an active veto power of the NCOP to end an intervention at any time is welcomed, as it underlines this vision.

Summary: Section 12 of the bill proposes significant changes relating to the composition and appointment of the Financial and Fiscal Commission (FFC) as determined by section 221 of the Constitution. The first proposal is to reduce the total number of commissioners. The second is to downgrade the role of organised local government and individual provincial governments in influencing the choice of commissioners. Presently, the Constitution provides for 22 members, appointed by the President, including a chairperson and deputy chairperson, one individual "nominated" by each of the nine provincial cabinets, two "nominated" by organised local government, and nine others. The amendment would reduce the total number of commissioners to 8, all appointed by the President, including a chairperson and deputy chairperson, two persons chosen "after consulting" the provincial premiers, two persons chosen "after consulting" organised local government, and two others.

Analysis: While the memorandum to the bill does not establish the motivation for this proposed amendment, it may be driven by practical concerns. These may include that the Commission has struggled to ensure adequate attendance of commissioners at meetings, that positions have been left vacant for substantial periods possibly due to the scarcity of adequately qualified individuals, and that a smaller body would generally be more manageable.

During the constitutional negotiations, the rationale for establishing the FFC was to depoliticise the revenue-sharing process. The composition of the FFC was designed to establish a representative forum, including all stakeholders, which was intended to ensure buy-in. The choice of the term "nominate" indicates that provincial cabinets (and organised local government) could expect the persons put forward by them to be appointed by the President. Downgrading the commission to 8 members removes the representative precondition that was to ensure intergovernmental consensus during the revenue-sharing process. The reduction may lead to a politicisation of the appointment process, as it will be difficult to ensure adequate representation of both the ANC and non-ANC controlled provinces. This tension might be aggravated by a weakened role of the provincial sphere in the appointment process, which is to be replaced by a more uncertain consultation requirement.

In addition, the commission's primary mandate is to make recommendations to Parliament and provincial legislatures. Any changes to the current arrangements that might weaken the commission may, at the same time, deprive Parliament and provincial legislatures of a key constitutional resource.

Recommendations: It is submitted that a politicisation of the commission is not desirable. We recommend that the amendment be scrapped. Instead, what might be contemplated is the insertion of a section under section 221 of the Constitution, or in the Financial and Fiscal Commission Act (1997), that no position may remain vacant for more than a given period of time, say six months. In addition, section 15 of the act could be amended to stipulate a higher attendance requirement for the constitution of a quorum, for example two thirds of all commissioners (i.e., 15 of the current 22), or even higher. This would ensure that both the commission as a whole and individual stakeholders will have greater incentives to ensure reliable and committed attendance.

Alternatively, should Parliament decide that a reduction of the number of commissioners is desirable, we would recommend that provinces retain their individual nomination entitlement, that organised local government nominates one further individual, and that the President appoints one additional commissioner. These 11 commissioners should then elect a chairperson and deputy chairperson from amongst themselves, or they could choose to rotate these positions.

Summary: In terms of section 213 money can be withdrawn from the National Revenue Fund either in terms of an appropriation by an Act of Parliament or as a direct charge authorised by the Constitution or an Act of Parliament. This section currently requires that provinces’ equitable share of revenue raised nationally be paid to provinces as a direct charge against the National Revenue Fund. The bill proposes to extend this principle to local government’s equitable share.

Analysis: The proposed change appears to be based on practical considerations stemming from the current need for two separate Acts of Parliament to authorise the same transfer. But it is unclear why this should be an issue, apart from the possible minor administrative inconvenience. The problem with the proposed amendment is that individual local governments are not directly established under the Constitution – unlike the nine provincial entities. It seems precarious to give the sum of these entities a constitutional claim to nationally collected revenues when these entities are not individually established by the Constitution.

Recommendation: We advise against the adoption of the amendment.

Summary: The proposed change to section 216(2) of the Constitution rephrases the words in the current subsection that the National Treasury may stop the transfer of funds to an organ of state only with the concurrence of the Minister of Finance. Second, the rephrasing would have the effect that transfers may be stopped not only when financial management standards are breached by the recipient, as implied in the current text. The proposed change to section 216(3) would confine its application to the withholding of a provincial equitable share. The current text of the remainder of this subsection establishes that the consent of the national Parliament is necessary to sanction such action, and this provision would not be affected by the proposed changes.

Analysis: The amendment would clarify this section, while not affecting the checks and balances contained in the Constitution. First, as it is difficult to imagine that the Minister of Finance may not possibly be the head of the National Treasury, the amendment would remove this ambiguity. Second, it makes sense that section 216(2) should not prevent the National Treasury from withholding further payments on conditional grants, for instance, should a province not adhere to the attached conditions. Finally, section 216(3) specifies that the special protection mechanism that requires parliamentary approval refers to stopping the transfer of provincial equitable share allocations, which this subsection seems to have been intended to address in the first place.

Recommendation: We support the amendment.

Summary: This section proposes an amendment to section 217 of the Constitution, which imposes certain conditions on the procurement process. The proposed amendment would make obligatory that organs of state and institutions identified in national legislation design their preferential procurement policies within a framework set out in national legislation.

Comment: We do not have specific views on this proposal at this stage, but reserve the right to modify this position at a later stage.

Summary: The amendment to section 226 of the Constitution is to provide for the enactment of national framework legislation in connection with the withdrawal of money as direct charges against a Provincial Revenue Fund and certain payments from a Provincial Revenue Fund to municipalities.

Analysis: The amendment seems uncontroversial, seeking to ensure common standards with regard to direct charges against provincial revenues. According to section 226(3) of the Constitution, equitable share allocations and other section 214 grants to local government via provinces constitute direct charges against Provincial Revenue Funds. To further regulate the flow of these funds may enhance the efficiency of the mechanism, and ensure compliance. The amendment would seem to strengthen the autonomy of local government as an independent sphere.

Recommendation: We support the amendment.

10) Provincial Tax Powers - Section 14 of the Bill

Summary: In terms of section 228 of the Constitution provinces are empowered to impose flat rate surcharges on the "tax bases" of any levy or duty other than corporate income tax, value-added tax, rates on property or customs duty. The amendment would delete the reference to "tax bases".

Analysis: The amendment would correct a drafting error, as the section seems to envisage surcharges on nationally imposed taxes, levies and duties so as to ensure a level of cohesion and uniformity.

Recommendation: We support the amendment.

11) Provincial and Municipal Loans - Section 15 of the Bill

Summary: The proposed amendment to section 230 of the Constitution would delete the requirement that a province or municipality may raise loans for capital or current expenditure "in accordance with reasonable conditions determined by national legislation". This is to be replaced with a clause allowing national regulation similar to those applying to provincial taxes and municipal fiscal powers (sections 228(2) and 229(2) respectively). In addition, the requirement that bridging finance be repaid within 12 months is removed, and substituted with a requirement for repayment within the same fiscal year.

Analysis: The Constitution contains a drafting error, as the latter provision currently implies that borrowing for bridging purposes could extend across two fiscal years. This amendment is technical in that it would correct the error by requiring repayment not within 12 months, but within the same fiscal year. The removal of the reference to "reasonable conditions" may be more problematic, as it might imply the dropping of a test of reasonableness. On the other hand, as subnational borrowing powers are directly conferred by the Constitution, this may be a sufficient check to ensure that the national legislation referred to cannot be unreasonable without being unconstitutional at the same time.

Recommendations: We support the removal of the reference to "twelve months". But the proposed 230(2) should rather read: "National legislation may determine reasonable conditions for the exercise of the powers outlined in subsection (1)", or similar. In this way, the criterion of reasonableness would be maintained.