GAUTENG LEGISLATURE

FINANCE COMMITTEE: NEGOTIATING MANDATE ON THE DIVISION OF REVENUE BILL[BILL 4B-2004]

1. INTRODUCTION
The Chairperson of the Finance Committee tabled a Negotiating Mandate on the Division Revenue Bill [ B 4B-2004] which also took into account the :amendments made by the National Assembly [B 4A-2004]. The Negotiating Mandate for the Division of Revenue Bill and its amendments were adopted unanimously by the Finance Committee on Friday 27
February 2004

2 PROCESS FOLLOWED
The Division of Revenue Bill (B4-2004], a Section 78 Bill will; informally referred to the Finance Committee on Friday 20 February 2004 in terms of Rule 6.48 (1) for information and planning. The amendments contained! in [B 4B-2004] came before the Committee on Friday 27 February 2004 with the formal referral for consideration in terms of Rule 6.49(1 )(c).

In terms of Section 10 of the Intergovernmental Fiscal Relations Act, 1997 (Act No 97 of 1990) ("the Act"). each year when the annual budget is introduced, the Minister of Finance must introduce in the National Assembly a Division of Revenue Bill for the financial year to which that budget relates

- The Standing Committee on Finance d liberated on the Division of Revenue Bill, a Section 76 Bill. Chairperson Joan Fubbs, Member Mike Seloane, and the Committee Researcher Michael Youash attended the briefings from National Treasury, the Financial and Fiscal Commission. The South African Local Cover-n tent Association and 'tie Departments of Education, Health, Social Development and Housing gave inputs during the hearings which followed the briefings The briefings and hearings on the Division of Revenue Bill were held by the NCOP Select Committee on Finance on Wednesday 25 February 2004, which the Gauteng Finance Chairperson another member of the Finance Committee and the researcher attended. Clarifications were obtained on the Bill from National Treasury, the Financial an Fiscal Commission and inputs were made by several departments and SALGA.

- On Thursday 26 February 2004, Chairperson Joan Fubbs 'rid Member Mike Seloane briefed the Finance Committee on issues arising from the briefings at the NCOP after the briefing from Researcher Michael Youash

- The Division of Revenue Bill reflects an extensive consultative process with the nine provinces through the MECs for Finance, the Financial and F seal Commission, which is an independent statutory body, the Budget Council, the Budget Forum, SALGA, the Minister's Committee on the Budget and Cabinet. After this process of consultation the sharing of revenue is implemented on the vertical division between the three spheres of government and the horizontal (formula based) division It the nine provinces. This complies with the spirit and letter of Section 214(2) of the Constitution which requires that the Bill may only be enacted after the provincial and local spheres of government and the FFC have been consulted, and after any recommendations of the FFC have been considered.

- The Committee had already considered the submission of the Financial and Fiscal Commission on the Division of Revenue for 2004-2005. The response from National Treasury to the FFCs recommendations which is contained in Annexure E of the Division of Revenue Bill, was also deliberated upon by the Committee

3. PRINCIPLES OF THE BILL
The principle is also informed by Section 214(1) of the Constitution which requires that Section 214(2)(a)-(j) should be taken into account. These include national interest, provision for debt, needs of national government and emergencies the allocation of resources to provide for basic services and to meet developmental needs, fiscal capacity and efficiency of provincial and local spheres of government. reduction of economic disparities and promotion of stability and predictability.

3.1 IMPLICATIONS OF THE BILL
The compliance of the Division of Revenue Bill with the requirements of the Public Finance Management Act (PFMA); Act 1 of 1999 (as amended by Act 29 of 1999) was also noted. Conditional grants to be transferred to the Gauteng Province were taken cognisance of by the committee.

The Division of Revenue Bill contains many conditional grants. While conditional grants are considered to be legitimate funding mechanisms₁ they do have impacts on the fiscal management of the recipient spheres of government - this is recognized by Clause 22 of the Bill, which allows National Government to withhold transfers in terms of Section 216 of the Constitution.

3.2 Sustaining Fiscal Equity
The provincial allocation in the Division of Revenue Bill reflects a sustained commitment to ensuring provinces have the necessary resources to act as the principle delivery vehicles of national policies, while recognising the Constitutional competence of local government to deliver basic services. The equitable share for provinces is 43.4 per cent of allocations for 2004-2005. This level, including the allocations to all the levels of government, is sustained over the medium term.

3.3 Intergovernmental Fiscal Relations
Time, effort and experience demonstrate the significant interdependence across the three spheres of government in South Africa. However, local government is assuming an increasing degree of responsibility. Legal instruments such as the Management Act (MFMA) (to come into effect from July 1, 2004) render more explicit the expectations of municipal government. Many of the changes to various clause of the Division of Revenue Bill arise from the changes being affected at the local government level.

These changes serve to commit members of all three spheres of government to the further capacitation of municipalities. The effective utilization of national conditional grants to both provinces and local government can be adversely affected by the challenges facing municipalities.

3.4 Division of Revenue and Provincial Priorities
The Division of Revenue Bill prioritises HIV and AIDS prevention and treatment, social security expansion, poverty reduction through targeting, non-personnel inputs for education, enhancing the capacity of local government structures, investments in infrastructure with special attention on labour-intensive projects for job creation, hospital revitalisation, and overcoming delivery short-comings in the area of capital expenditure.

These priorities are served through a variety of mechanisms within the Division of Revenue Bill. Specific conditional grants address some of the priorities. Overlapping with the conditional grants, are new data sources that improve government’s Revenue Bill. Specific conditional grant with the conditional grants, are new data sources that improve government ‘s ability in the area of poverty targeting. Infrastructure development is dealt with through conditional grants, clauses in the Division of Revenue Bill and the discretion of provinces to spend on capital projects through the provincial equitable share-creating jobs in process.

3.5 Division of Revenue: Formulae and the IGFR system
The Bill establishes the basis for pending reforms. The incorporation, in some areas, of new statistical data and some modifications to certain grants reflect that further reform is necessary.

3.6 Conditional Grants - General
For 2004-2005, conditional grants to provinces and local government are 5.74% and 1.78% of the total allocation respectively . This amounts to R27.7 billion for 2004-2005 and is scheduled to reach R37.7 billion by 2006-2007 financial year. Concerns remain about the quality of financial management around conditional grants.

The number of conditional grants for provinces presently stands at 19 This is considered to be a high number and suggest the need for rationalisation of conditional grant mechanisms. Of greater concern the quality of the "measurable objectives/outputs" required for each conditional grant. Given the demands of the Public Finance Management (Act No 1,1999) (PEMA), it is mandatory that government ensure robust measurable objectives that increase the transparency of the conditional grants with a view to realising greater effectiveness.

A need is emerging for the Office of Auditor General to begin following issues from one year to the next and the need for the Auditor General to perform a focused audit on conditional grants. Presently, concerns raised by the Auditor General are noted for the financial year in question and then left aside, only to return the next financial year. Consequently, potential gains in performance from a more robust accountability framework are being lost.

4.COMMENTS MADE BY THE FINANCE COMMITTEE ON THE DETAIL

A number of issues arose in the detail of the Division. of Revenue Bill. These issues can have significant impacts on the fiscal management capability of provincial government. As a result, these issues have been explicitly dealt with in the following sections of the Committee’s report.

4.1 Certain clauses that take into account the MFMA

The clause contained in the Division of Revenue Bill [B4-2004]to take into account the MFMA are expected to improve local government performance and financial in the area of project planning and management . the bill also reinforces equity through additional measures to ensure that the appropriate funds follow the functions demanded of local government

4.2 HIV and Aids Grant

The HIV and Aids grant for 2004-2005 amounts to R781.6million. By 2006-2007, it is projected to be R1.56 billion. The initial comprehensive plan of the National Department of Health in formulating this grant projected an amount of R1.6 billion within the first year,2004-2005. In total , the grant is 49%, or almost R808 million smaller than desired by the Department . The National Department of Finance is signalling a willingness to allow potential overspending of this grant, catering for the overspend through the adjustments budgets. The National department of Health’s concern is that without concrete measures to allow for potential overspending of this specific grant, it could be implemented differently across provinces depending on the prerogative of each provincial treasury
Regardless of concerns about the possibility overspending of this grant, by not formalising measures that impact on spending levels, the effectiveness of the grant could be compromised

Funding shifts between municipalities within a district

Observable shift in funding reaching municipalities are being interpreted by some as the disadvantaging of poorer municipalities. In fact, the shifts are an outcome of improved data sources-that more accurately reflect the demographic realities of municipalities. More affluent, urban municipalities are receiving greater funds because they attract more poor citizens than less affluent municipalities. The formulae targeting the poor are not geared for municipalities, but individuals. The shifts are not meant to increase the resource and capacity difference between municipalities, but are instead enhancing the way in which the poor are reached by government funding.

4.4Underspending or Slow Spending of Conditional Grants

Clause 35 of the Division of Revenue Bill seeks to unlock financial resources arising from conditional grant received by provincial department. Under-spending in the area of capital projects is of particular concern. The sum of these resources is significant and it is important that they be used more effectively. The clause requires departments to report on the actual state of affairs with respect to these specific funds; keeping in line with the objectives of the PFMA and efforts to improve financial management. The incentive to provincial government is that some of the as yet unutilised funding will be given to the province to cater for other pressing expenses.

Clause 35 can assist provinces in overcoming problems with conditions that prevent effective realisation of conditional grant objectives. The Finance Committee accepts that this is intended to improve performance in the area of conditional grant spending to support delivery rather than a measure to encourage poor financial management. It is also realistic as it takes into account the context in which he difficulties have arisen .

4.5 Weighting of components in the PES and review of the IGFR

Presently the weighting of key elements of the Provincial Equitable Share(PES) may be unsustainable in coming financial years. Social welfare spending represents 29.3% of provincial allocations despite its weighting of 18% in the PES ( 21% of Gauteng’s PES). This imbalance can adversely affect spending in all other provincial competencies, but particularly within the Provincial Departments of Social Services and Population Development.

The above issue is symptomatic of broader challenges in the intergovernmental fiscal relations system . Conditional grant structures, various formulae, and relations between the three spheres of government over the past few years provide important experiences. A comprehensive review of the formulae and IGFR system was scheduled for implementation for this financial year. Regrettably this was not possible due to , inter alia , the need to fully incorporate 2001 Census data , impacts from shift in the social grant function , and restructuring of the electricity distribution industry. Re- examination of the weighting in the PES in the coming comprehensive review must ensure that the formula does not impact on fiscal sustainability into the medium term expenditure framework.

Insufficient standards, sources and application of data also impacts greatly on the performance of the IGFR. It is clear that existing deficiencies in the data used within the IGFR system need to be addressed through regulatory reform and improved standardisation.

Section 10(2)(a) of the IGFR Act allows National Government the freedom to make various types of transfers to provinces ; outside of equitable shares and conditional grants. In the Division of Revenue Bill , such transfers are classified as a "national assigned function grant to provinces". For the 2004-2005 financial year , such transfers constitute approximately R6 billion. The terms of transfers are stipulated I appendix E1 of the Division of Revenue Bill called, Framework for Conditional Grant to Provinces and Local Government" The status of these transfers must be further clarified.

Gauteng needs are specific , given its highly urbanised nature and its attractiveness to people as a source of work . For the Gauteng Department of Education , the rapid influx of learners resulting from migratory patterns impacts heavily on its capacity as it creates constraints. This issue is clearly linked to the data on population used within the IGFR system

For Gauteng's Departments of Education and Health the transfer of the Primary School Nutrition conditional grant is the most significant development The transfer of the function should be made with a view to preventing any disruption to delivery However, given the size of the grant and the delivery expectations, it is recognised that this is a substantial challenge The shifting of the grant from one national department to another will also provide lessons for the coming comprehensive review of the IGFR system. The experience will reveal the quality of coordination systems between departments and their respective provincial counterparts, and between the 10 health and 10 education departments, this speaks directly to intergovernmental fiscal planning.

The Gauteng Department of Social Services and Population Development is actively seeking robust mechanism s in the establishment and then transfer of the National Social Security Agency (NSSA). The weighting of 18% for social welfare in the PES and 21% used by Gauteng is significant and the transfer should prevent any loss of the 3% financing gap for social security.

The MEC of the Department of Finance and Economic Affairs and head of Provincial Treasury agreed that the proliferation of conditional grants could undermine the principles of the equitable share and provincial flexibility in determining funding priorities. The measures to ensure that there is careful consideration of such transfers beforehand are also important . It is recognised that Clause 35 goes some way to addressing the problems encountered by provinces in respect of certain conditional grants particularly those relating to infrastructure such as housing . Conditional grants create obligation and demand on provincial departments and must be justified as essential and effective delivery mechanisms . Audits of the expenditure of conditional grants should be considered not only in the years in which they were allocated for spending but when actually spent.

The progressive realisation of constitutional and policy mandates must form the basis of any approach to reviewing , and possibly reforming the equitable division of revenue. The coming comprehensive review is essential to realising the full potential of all the spheres of government.

5.PROPOSED RECOMMENDATIONS TO TAKE FORWARD IN THE MTEF

The Finance Committee has put forward the following proposal as part of the Budget Reform process.

5.1 HIV/AIDS concerns should be addressed in terms of the overspending projected. Formal, targeted measures for this grant should be developed to ensure uniform , effective implementation of the HIV and AIDS grant.

5.2 The weightings in the Provincial Equitable Share need to be re-examined with a view to enhancing its ability to fairly and effectively allocate resources

5.3 Greater clarity of those elements of the Bill effecting municipalities should be achieved to avoid confusion and misunderstanding.

5.4 The plans for rolling-out the comprehensive review of the IGFR should be made available as early as possible.

5.5 There should be a conscious effort to clarify the nature and role of transfers taking the form of " nationally assigned function to provinces"

5.6 The data need of the fomulae used in the IGFR system that are not fully addressed by the 2001 Census should be explicitly evaluated with a view of improving effectiveness in resource allocation.

5.7 The detailed process of transferring the Primary School Nutrition programme for each province should be assessed to allow a role for oversight processes in ensuring the transfer’s success .

5.8 The reconciliation of the outstanding 3% between the social welfare component of the PES at 18% and Gauteng’s21 should be clarified.

5.9 With improved data including the 2001 census and the experience arising from the provisions of the Division of Revenue were in a better position to review the formulae which would also more effectively allocate financial resources for poverty targeting.

6. NEGOTIATING POSITION ADOPTED BY THE COMMITTEE ON THE PRINCIPLE
The finance Committee at the Gauteng Provincial Legislature supports the principle of the Division of Revenue Bill [Bill4B0-2004]

7. NEGOTIATING POSITION ADOPTED BY THE COMMITTEE ON THE DETAIL
The Committee agrees to all the adopted amendments by the National Assembly Portfolio Committee on Finance and reflected in the Division of Revenue Bill [B4B-2004].

8. ADOPTION OF THE NEGOTIATING MANDATE
The Finance Portfolio Committee unanimously adopted the Negotiating Mandate on the Division of Revenue Bill [B4-2004] on Friday 27 February 2004.

J L Fubbs
Chairperson: Finance Committee