REPORT FOR THE SELECT COMMITTEE ON FINANCE ON THE 2003/04 DIVISION OF REVENUE BILL - DEPARTMENTAL MUNICIPAL HEARINGS

1. Introduction
On 6 March 2003 the Division of Revenue Bill [B9 - 2003] (National Assembly - sec
76) after introduction in the National Assembly, amended [B 9B - 2003] by the Portfolio
Committee on Finance, was then referred to the Select Committee on Finance of the
National Council of Provinces. The committee then proceeded with its working on the
bill by hosting public hearings dated from Monday, 10 March 2003 to Thursday, 14
March 2003.

The Committee wishes to express its sincere appreciation to all the participants for their submissions and contributions during the hearings. The Committee would further like to express its appreciation to National Treasury, the chairperson of the Financial Fiscal Commission and his staff, SALGA, the Office of the Auditor General, Director-Generals, Deputy Director Generals and Chief Financial Officers from the Departments of Housing, Health, Water and Forestry, Social Development, Provincial and Local Government, Education and Minerals and Energy for their participation via submissions.

2. Objectives of Hearings on the Bill
The Division of Revenue as set out in Section 214 of Chapter 13 of the Constitution establishes that an Act of Parliament should provide for the equitable distribution of revenue raised nationally among the national, provincial and local spheres of government to ensure that the provinces and municipalities are able to provide basic services and perform the functions allocated to them. Section 214 (2) details criteria to be taken into account in determining the division of revenue and indicates the consultation process necessary before enactment of the Division of Revenue Bill.


Over the last three years, a number of reforms have been introduced in relation to the administration of conditional grants, with the view of enhancing their effectiveness as means of facilitating improved delivery at sub-national level. Notably, provinces and local government now receive three-year allocations for conditional grants and a framework for each grant setting out the purpose of the grant, measurable objectives, conditions, allocation criteria, past performance, amongst other things.

The objective of the hearings on the conditional grants administered by departments / municipalities via oral submission was based on the following requirements:

1.To gather a detailed exposition on the formula and criteria used for allocating each grant for 2002/03, 2004/05 and 2005/06, and the extent to which these comply with section 214 of the Constitution. In particular, how the allocation mechanism take into account each of the factors set out in section 214(2) (a) to (j). To also furnish all statistical data used for the formula, and indicate the source of all such statistical data. To note that this information is critical for the committee to assess whether a department is in compliance with the criteria outlined in sections 214(2)(a) to 0) of the Constitution, stating which criteria may not be applicable, and for those that are applicable, how the grant gives effect to that criterion.

2. To record trends in allocations, transfers and actual expenditure of all Department's conditional grants. Analyse the actual allocations by province and municipality, including the per head allocation for that grant (using the population numbers per municipality published in Appendix E7 of the 2003 Division of Revenue Bill, or for provinces, the population data in Annexure E as used for the provincial equitable share formula).

3. To briefly assess the Department's I municipality monitoring capacity and past performance, for both the current year 2002/03 and the past year (2001/01), how Department's monitors compliance every month by provincial and/or local governments as required by the 2002 Division of Revenue Act, including the conditions pertaining to the grant, as set out in the framework for the grant. To indicate whether departments ensures that it does receive the monthly reports required from receiving provincial departments or municipalities, and if not, what are being done to ensure compliance. Where non-compliance occurred in 2001/02, explaining the steps taken to ensure full compliance in the current financial year (2002/03), and indicate whether there is evidence of improvement. In instances where the Auditor-General has qualified an audit due to a conditional grant, explaining the steps Departments are taking to address the A-G's concerns.


4. To assess quantitative and qualitative indicators/information on performance of conditional grants administered by department for the 2001/02 financial year, using the ones set out in the framework for the grant as a point of departure. In particular, a focus on the non-financial performance indicators used by departments.

5. And to motive why this grant should continue to be a conditional grant, arid not part of the equitable share or an unconditional grant.


The division of Revenue 2003/2004 is consistent with the previous years which
2001/2002, 2002/2003. The previous two financial years showed a slow increase in real terms of the equitable share for Provinces and municipalities. Schedule 1 in the Division of Revenue:

Spheres of Government

Column A 2003/2004
Allocation

Column B Forward Estimates 2004/05

Forward Estimates
2005/2006

National

R' 000
185 235 905

R' 000
200 954 497

R' 000
220 351 687

Provincial

142 386 031

155 313 096

167 556 442

Local

6 343 478

7 077 546

7 698 179

Total

333 965 414

363 345 139

395 606 308



The above table illustrates the point that because of improved tax collection we are able spend more money on social non-infrastructure and social infrastructure related issues.

This graph also shows that municipalities are getting a bigger share from the nationally raised revenue. Again for the first time, share of the equitable share for all municipalities has been published in the Division of Revenue Bill 2003/2004 before this house. This will assist municipalities to know what they are getting from the nationally raised revenue but also this development will assist them to plan and to put adequate revenue collection policies in place in order they should be able to deliver services basic to people.

3. Presentations by Departments and Municipalities
In conducting the public hearings we needed to bring to fore the importance of the Public Finance Management Act 1 of 1999. Therefore management of these grants is very important in ensuring service delivery. Departments must ensure that these grants flow smoothly between the transferring officer and the receiving officer as per the requirement in the framework of the conditional grants.

The importance of conditional grants cannot be overemphasised because they fund important functions, Early Childhood Development, HIV/Aids, Integrated Nutrition Programme which include the Primary School Nutrition Programme, Extension of the Child Support Grant up to the age of 13, Provision of bulk water supply by water and forestry, Home Based Care, Poverty relief, Consolidated Municipal Infrastructure Programme (CMIP), Intergrated National Electrification Programme (INEP)

3.1 The Performance of Grants, its Successes and Difficulties
1. The Early Childhood Development in the next cycle of the MTEF will be incorporated into the equitable share so that provinces can therefore decide on their own how best to utilize the resources without deviating from the principles of providing classrooms for grade R's in all the schools.

2. The Primary School Nutrition programme will in the next MTEF cycle be included in the Department of Education budget vote but it will continue as a conditional grant and we welcome this decision since this grant was not being utilized fully under the Health department. We have been assured that the two departments are finalizing a transitional plan. In the 2004/05 and over the MTEF 2005/06 going forward this function will fall under education. Notably there has been a huge increase in the School nutrition programme this is because of the high number of learners who go to school without meals and probably who will come back from school to the same circumstances, so these meals are very important for such learners who dearly need them most.

Grants managed by the Department of Water and Forestry
3. Water supply systems built by the Department of Water and Forestry and later to be handed over to municipalities is welcome but we would like to see a clear plan of hand over to those municipalities who have capacity and ensure that the maintenance of these does appear in their budget before they take over the function of maintenance. The water schemes that have been built indeed are important for poor people to get clean and safe water from their taps.

Grants managed by the Department of Health
4. Health Professions Training and Development Grant, this grant is very important because it will assist rural provinces to attract professionals to go and work in the under-served provinces. It will also enable shifting of teaching activities form central hospitals to regional and district facilities, Therefore it is very crucial that we monitor how this grant is going to perform throughout the financial year. This is a direct response from the issues raised in the Intergovernmental Fiscal Review of2OOl, where it was stated that the Professionals are concentrated in Gauteng and Western Cape in the main.

5. HIV/Aids grant: this grant has not perform well because the amounts involved are too small, at this point we have raised over the years that some of these grants must be consolidated into one big grant so that the impact can be felt and we can be in a position to measure the stated measurable objectives or outputs.

6. Hospital Management and Quality Improvement Grant

The purpose of this grant is to strengthen management in hospitals, development of management and structures. This grant is very important because many public hospitals do not have good and strong management employed by these hospitals. Systems are not effective and efficient for the proper utilisation of the limited resources that government is providing to these public health institutions. It is the view of the committee that these improvements will lead to many people to use public hospitals.

Grants managed by Social Development
7. HIV/Aids Home Based Care: is managed by social development and the purpose is to give services to orphans and vulnerable children who are infected and affected by HIV/Aids. It is important that some of these grants are clearly meant to intervene in the scourge of HIV/Aids but it is however disappointing that some provinces have not spent the whole amount allocation given by National departments.

8. Extension of the Child Support Grant (CSG): We have seen a major increase over the years, which in the current financial year the CSG was supposed to be extended to 3 million children in the country. In the 2003/04 Financial year we have seen the extension up to the age of 13 over the support Grant being introduced and it will continue over the METF and this will be done in phases: 2003/04, from 7 and 8 year old children; 2004/05, 9 and 10 year old children will be incorporated and 2005/2006 financial year 11,12 and13 year old children will be catered for. The phased approach will assist to absorb the shocks that might impact on the budget process because if it is introduced at once, for all the above age groups, it will indeed have a negative impact that will be ensure an smooth and swift recovery.

9. Food Relief Grant: This grant is aimed at assisting poor households who have severely been affected by the increase in food prices. The criteria used were the household expenditure per province, which gives indication of poverty levels per province in particular targeting women and children in the rural areas.

Grants managed by Department of Provincial and local Government
Consolidated Municipal Infrastructure Programme grants: - Transfer of funds from the transferring department to a particular municipality should not be transferred via the province but it must be sent direct to the relevant municipality because the flow of funds is very slow.


The allocation to the 21 nodal points remains a key concern to the select committee in particular because National Departments have not contributed their portion in the financing of these nodal points. We would like to raise a serious concern that the failure of these departments to contribute will undermine the stated objective of the nodal points and we will continue to raise the matter with DPLG and other affected departments.

4. Auditor General
The Auditor General's has made engaged with National Government Departments including their failure to do monitoring of the conditional grants, which were given to provinces and different municipalities. We also have a new provision in the bill section 20, which refers to the duties of the AG, the clause refers to that the AG may audit the grant and submit the report to parliament. This is as a result of our engagement with the Auditor General.

The AG has given the committee shocking figures that some national departments, some provincial departments and some municipalities do not pay audit fees. This seems to be a matter of concern to the committee.

Municipalities need to ensure that their budget reflect what is contained in the Integrated Development Plan. This is very important in order for us as a country and a nation to be able to measure outputs. The conditional grants for financial management is aimed at assisting municipalities with capacity building.

Municipalities, which appeared before the committee indicated that provincial departments and other national departments, do not pay for their rates and taxes.

5. Achievements:
· The report of the Select Committee dated March 2001, based on the Division of Revenue Bill [B11B 2001], indicated that some grants were introduced rather late during the financial year (Gazetted 28 August 2000), which posed a spending problem. With the division of revenue being tabled earlier and the budgetary system in constant refinement this problem seem to be addressed. At this stage this issue are being addressed and welcome the efforts made by Treasury. The publication of municipal conditional grants is surely a step in the right direction and would give municipalities a more predictable and stable fiscal environment that will make municipalities more attractive to private lenders and investors. Another achievement well noted.
· The recommendations made by the committee in the 2002 DOR - hearings report has also being adhered too, in the context of the need to strengthen accountability and transparency and increased efforts to improve reporting, a clear indication of this is the current Municipal Finance Management Bill currently before the parliament, to be enacted soon.
· Introduction of tight measures to deal with departments that have not implemented the PMFA, a challenge that was noted in the report of DOR 2002. This has been dealt with in section 55 of the PMFA and also the clause 20 of the DOR - Bill 2003 and will further be strengthened in the regulation as catered for in clause 33 of the DOR bill.

6. Recommendations:
_· Strategic plans need to speak to budget to ensure consistency and ensure performance.

· Provinces need to table a summary of their allocation to municipalities timeously to allow municipalities to plan.

· Office of the Auditor General: audit committee and internal audit should be strengthened this should be done in the broader context when intergovernmental system is reviewed after the first ten years of our democracy.

· Encourage discussions between service providers and municipalities to negotiate services delivery agreement to strengthen accountability of (political authority) to people / clients it serve (basic service rendering)

· Municipal budgets should be aligned with Integrated Development Plans (if) P's)

· DOR allocations to spheres - challenges municipalities and provinces to take allocation of grants and own revenue and align it with own revenue and budget consistent with IDP's.

· IDP's in process of change, growing development- due to statutory requirements of IDP's therefore municipalities must use the conditional grant for capacity building in order to produce credible and proper IDP's and avoid usage of consultants.

· Cash flow plans should be monitored / reported quarterly to prevent fiscal flow dumping - early warning systems in the form of quarterly reports should be used effectively as tools to monitoring.

· Devolving of further functions is supported but function must be followed by funds.

· Where possible we would like to call upon National Departments to give funds direct to municipalities who have capacity.

· There is difficulties with the published figures by the treasury visa vesa the departmental figures and we will urge all department to work towards systems that talk to each other or one another.

· Policy difference which result to delays in the delivery of services must be avoided at all cost and we want to appeal to all government departments at all levels and in between departments to improve in this area.

7. Conclusion
Sincere thanks to the Ministers who took time to appear before the committee including those who sent written apologies or made phone calls to the chairperson of the committee. Many thanks to my colleagues from provinces with the exception of the Northern Cape, which did not have a representative for most of the proceedings, and KZN arrived on the last day. Lastly thanks to the permanent delegates with exception of the N/Cape and KZN, your contribution and interaction with the departments was very informative and Henry Eksteen for hard work and dedication to his work of assisting the committee, my sincere thanks to you.

I would like to thank the NCOP Presiding Officers and Chief Whip who gave permission to remain in Parliament and conduct the public hearings.