Report of the Select Committee on Finance on Hearings on Division of Revenue Bill, dated 26 March 2003:

The Select Committee on Finance, having held hearings on the Division of Revenue Bill, referred to it, reports as follows:

A. Introduction
On 6 March 2003, the Division of Revenue Bill [B 9 - 2003] (National Assembly - sec 76), after introduction in the National Assembly, and amendment [B 9B - 2003] by the Portfolio Committee on Finance, was referred to the Select Committee on Finance of the National Council of Provinces. The Committee proceeded to work on the Bill by hosting public hearings from Monday, 10 March 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 Finance and Fiscal Commission and his staff, SALGA, the Office of the Auditor-General, Directors-General, Deputy Directors-General and Chief Financial Officers from the Departments of Housing, Health, Water Affairs and Forestry, Social Development, Provincial and Local Government, Education and Minerals and Energy for their participation via submissions.

B. Objectives of hearings on the Bill
The Constitution, in section 214, Chapter 13, provides 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. Hence, the Division of Revenue Bill. 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 past 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 a 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, amongst other things, the purpose of the grant, measurable objectives, conditions, allocation criteria and past performance.

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 takes 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 (j) of the Constitution, stating which criteria may not be applicable, and in respect of those that are applicable, how the grant gives effect to them.

2. To record trends in allocations, transfers and actual expenditure of all departments' 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, used for the provincial equitable share formula).

3. To briefly assess the Departments'/municipalities' monitoring capacity and past performance, for both the current and the past years, how Departments monitor 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 ensure that they do receive the monthly reports required from receiving provincial departments or municipalities, and if not, what is 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. Where the Auditor-General has qualified an audit due to a conditional grant, explaining the steps Departments are taking to address the Auditor-General's concerns.

4. To assess quantitative and qualitative indicators/information on performance of conditional grants administered by a 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. To motivate why this grant should continue to be a conditional grant, and not part of the equitable share or an unconditional grant.

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

National * 185 235 905 200 954 497 220 351 687
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 table also shows that municipalities are getting a bigger share of 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, which is before the Council. 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 that they should be able to deliver basic services to people.

C. Presentations by Departments and Municipalities
In conducting the public hearings we needed to bring to the fore the importance of the Public Finance Management Act, Act No. 1 of 1999. 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 such as Early Childhood Development, HIV/Aids, the Integrated Nutrition Programme (which includes 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, the Consolidated Municipal Infrastructure Programme (CMIP) and the Integrated National Electrification Programme (INEP).

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

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

Grants managed by Department of Water Affairs and Forestry
3. Water supply systems built by Department of Water Affairs and Forestry
These supply systems will later to be handed over to municipalities and are welcomed. However, we would like to see a clear plan of hand-over to those municipalities who have capacity and that it be ensured that the maintenance of these do appear in their budgets before they take over the function of maintenance. The water schemes that have been built, are indeed important for poor people to get clean and safe water from their taps.

Grants managed by 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 from 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 of 2001, where it was stated that professionals are concentrated in Gauteng and the Western Cape in the main.

5. HIV/Aids grant
This grant has not performed well because the amounts involved are too small. At this point we have indicated 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. Systems are not effective and efficient for 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 using public hospitals.

Grants managed by Social Development
7. HIV/Aids Home-Based Care
The purpose is to render services to orphans and vulnerable children who are infected and affected by HIV/Aids. 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 allocation given by national departments.

8. Extension of Child Support Grant (CSG)
We have seen a major increase over the years - in the current financial year the CSG was supposed to be extended to three million children in the country. In the 2003/04 financial year we have seen the grant being extended up to the age of 13, and it will continue over the METF. This will be done in phases: 2003/04 - seven- and eight-year old children; 2004/05 - nine- and 10-year old children; and 2005/2006 - 11-, 12- and 13-year old children. The phased approach will assist to absorb the shocks that might impact on the budget process because if it is introduced all at once, for all the above age groups, it will indeed have a negative impact.

9. Food Relief Grant
This grant is aimed at assisting poor households who have been severely affected by the increase in food prices. The criteria used were the household expenditure per province, which gives an 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
10. Consolidated Municipal Infrastructure Programme grants
Transfer of funds from the transferring department to a particular municipality should not be transferred via the province, but must be sent directly 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 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. We will continue to raise the matter with the Department of Provincial and Local Government and other affected departments.

D. Auditor-General
The Auditor- General (A-G) has engaged with National Government Departments on their failure to monitor conditional grants, which were given to provinces and different municipalities. We also have a new provision in the Bill, Clause 20, which refers to the duties of the A-G. This Clause allows the A-G to audit the grant and submit the report to Parliament. This is as a result of our engagement with the A-G.
The A-G has given the Committee shocking figures, in that some national departments, some provincial departments and some municipalities do not regularly pay audit fees. This seems to be a matter of
concern to the Committee.

Municipalities need to ensure that their budgets 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 some provincial and national departments do not regularly pay for their rates and taxes.

E. Achievements
* The report of the Select Committee, dated March 2001, based on the Division of Revenue Bill [B 11B - 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 seems to have been addressed. At this stage, this issue is being addressed and we 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 Division of Revenue hearings report have also been 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 Local Government: Municipal Finance Management Bill currently before Parliament, to be enacted soon.

* Introduction of tight measures to deal with departments that have not implemented the PMFA, is a challenge that was noted in the report on Division of Revenue, 2002. This has been dealt with in section 55 of the PMFA and also Clause 20 of the Division of Revenue Bill, 2003, and will further be strengthened in the regulation catered for in Clause 33 of the Bill.

F. Recommendations
* Strategic plans need to speak to budgets and vice versa, especially at national and provincial level, to ensure consistency and performance.

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

* Office of the Auditor-General: The Audit Committee and internal auditing should be strengthened. This should be done in the broader context when the intergovernmental system is reviewed after the first 10 years of our democracy.

* Encourage discussions between service providers and municipalities to negotiate service delivery agreements to strengthen accountability (political authority) to people/clients (basic service rendering).

* Municipal budgets should be aligned with Integrated Development Plans (IDPs).

* Division of Revenue 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 IDPs.

* IDPs are in the process of change, the growing development due to statutory requirements of IDPs, municipalities must use the conditional grant for capacity building in order to produce credible and proper IDPs 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 for monitoring.

* Devolution of further functions is supported. However, such functions 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 are difficulties with the published figures by the Treasury vis-à-vis the departmental figures, and we will urge all departments to work toward systems that talk to each other or one another.

* Policy differences, which result in delays in the delivery of services, must be avoided at all costs. We want to appeal to all government departments at all levels and to departments in between to improve in this area.

* The A-G's response indicates that alternative measures should be employed to resolve differences between spheres of government other than the extreme measure of litigation.

G. Conclusion
We would have appreciated more time to allow provinces and municipalities to engage more on the bill. In future we would like to see the NCOP Programme Committee take into account the Division of Revenue Bill and allow more time to provinces and municipalities to engage the bill.

Sincere thanks go 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 those colleagues from provinces. Thank you also to the permanent delegates, as your contribution and interaction with the departments were very informative. Our sincere thanks go to Henry Eksteen for his hard work and dedication to assist the Committee.

Lastly, we would like to thank the NCOP Presiding Officers and the Chief Whip, who gave permission for us to remain in Parliament and conduct the public hearings.

Annexure
List of attendants
Ministry of Education
Joint Budget Committee: National Parliament
Chairperson of Standing Committee on Finance: Eastern Cape
Chairperson of Standing Committee on Finance: Free State
Chairperson of Standing Committee on Finance: Northern Cape
Chairperson of Standing Committee on Finance: Limpopo
Special Delegates: KwaZulu-Natal
South African Local Government Association (SALGA)
Auditor-General
Finance and Fiscal Commission (FFC)
Department of Education
Department of Health
Department of Housing
Department of Minerals and Energy
National Treasury
Department of Provincial and Local Government
Department of Public Works
Department of Social Development
Department of Water Affairs and Forestry
Buffalo City Municipality
Ekurhuleni Metropolitan Municipality
Nelson Mandela Metropolitan Municipality

Report to be considered.