Report of the Select Committee on Appropriations on the 2010 Division of Revenue Amendment Bill, dated 10 November 2010

Having considered the Division of Revenue Amendment Bill [B35-2010], the Select Committee on Appropriations, reports as follows:

1. Background

Section 12 of the Money Bills Amendment Procedure and Related Matters Act, No. 9 of 2009 (the Act) requires the Minister of Finance to table the Division of Revenue Amendment Bill together with the revised Fiscal Framework if the adjustments budget effects changes to the Division of Revenue Act (DoRA) for the 2010/11 financial year. This is intended to foster transparency and ensure smooth intergovernmental relations. The Intergovernmental Fiscal Relations Act (1997) prescribes the process for determining the equitable sharing and allocation of revenue raised nationally. Sections 9 and 10 (4) of the Act set out the consultation process to be followed with the Financial and Fiscal Commission (FFC), including the process of considering recommendations made with regard to the equitable division of nationally raised revenue.

In enforcing section 77 of the Constitution, the Money Bills Amendment Procedures and Related Matters Act, No. 9 of 2009 was enacted. This budget reform empowers Parliament to amend the government budget and therefore plays a greater role in ensuring that the most urgent needs of South Africans are addressed. It provides Parliament with necessary instruments to oversee government actions and monitor its fiscal discipline. While this reform is widely welcomed, the Select Committee on Appropriations (henceforth referred to as the Committee) is mindful that this legislation will be phased in over the years. The Committee’s concern and focus is on the establishment of the Parliamentary Budget Office that will provide more support to enable the Committees on Appropriations and Finance to fulfil their legislative responsibilities.

The Division of Revenue Amendment Bill was tabled in Parliament on 27 October 2010 by the Minister of Finance during the tabling of the 2010 Medium Term Budget Policy Statement (MTBPS).

Clause 1 (the focus of this brief) of the Bill provides for the substitution of Schedules 1 to 8 of the Division of Revenue (DoRA) for Schedules 1 to 8 of the Bill. The Schedules to the Bill address the following matters:

• Additional unconditional and conditional allocations to provinces and municipalities;
• The allocation of unallocated conditional allocations to provinces and municipalities;
• The re-allocation of conditional allocations in terms of section 18 of the DoRA;
• Roll-overs of conditional allocations to provinces and municipalities not transferred by national departments during the 2009/10 financial year;
• Increases to a conditional allocation to a province or municipality through virements under section 43 of the Public Finance Management Act, 1999 (Act No. 1 of 1999) or section 28(2)(d) of the Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003), as the case may be; and
• The re-allocation of conditional allocations that were not correctly reflected in the Schedules to the DoRA.

2. Equitable division of revenue raised nationally among the spheres of government

Table 1: Schedule 1

Sphere of Government	Column A	Column B	Column C
	2010/11 allocation	2010/11 adjustments	Amount adjusted
National	R’000	R’000	R’000
	527 001 492	519 980 624	-7020868
Provincial	260973745	265139448	4165703
Local	30167706	30558566	390860
Total	818142943	815678638	2464305

National Treasury (2010) [adapted]

The adjustments ended up in a net reduction of R2.4 billion whereby expenditure estimates levels decreased from R818.1 billion to R815.7 billion. The total allocations to national departments decreased by R7.0 billion, allocations to provinces increased by R4.2 billion and allocations to local government increased by R0.3 billion. In effect the general decrease will not impact on provincial and local spheres of government like on the national sphere of government where allocations were reduced. It is clear the reduced allocations are due to shortfall in the unexpected revenue collected. In terms of section 6(1) of the DoRA if actual revenue raised nationally in respect of the financial year falls short of the anticipated revenue set out in Schedule 1, the national government bears the shortfall and in terms of section 6(2) of the DoRA if actual revenue raised nationally in respect of the financial year exceeds the anticipated revenue set out in Schedule 1, the excess accrues to the national government, subject to subsection (3).

Budget spending projections also make provision for about R3.6 billion in under spending at a national level (including declared savings). Offsetting this R9.6 billion available on the main budget against the R7.2 billion in the adjustments budget, the total estimated level of spending decreases to R2.5 billion.

3. Determination of each province’s equitable share of the provincial sphere’s share of revenue raised nationally

Table 2: Schedule 2

Province	Column A	Column B	Column C
	2010/11 allocation	2010/11 adjustments	Amount adjusted
Eastern Cape	R’000	R’000	R’000
	40134424	40789918	655494
Free State	15959310	16217212	257902
Gauteng	45134335	45869090	734755
KwaZulu Natal	56742834	57632201	889367
Limpopo	33237814	33766574	528760
Mpumalanga	21323198	21640037	316839
Northern Cape	7101615	7201470	99855
North West	17314124	17567122	252998
Western Cape	24026091	24455824	429733
Total	260973745	265139448	4165703

National Treasury (2010) [adapted]

The current adjustments resulted in the expenditure level estimates in provinces increasing from R261.0 billion to R265.1 billion. The additional allocation of R4.2 billion to provincial equitable share was distributed as follows:, KwaZulu Natal increased by R0.889 billion, Gauteng R0.734 billion, Eastern Cape by R0.655 billion, Limpopo by R0.528 billion, Western Cape by R0.429 billion, Mpumalanga by R0.316 billion, North West by R0.252 billion and Northern Cape by R0.099 billion respectively.

4. Roll Overs held back due to the unspent conditional grants by local government sphere

Table 3: Schedule 3

Province	Column A	Column B	Column C
	2010/11 allocation	2010/11 adjustments	Amount adjusted
	R’000	R’000	R’000
Eastern Cape	4450185	4453126	2941
Free State	2805978	2831056	25078
Gauteng	5445197	5445197	0
KwaZulu-Natal	5533344	5712667	179323
Limpopo	3666434	3678434	12000
Mpumalanga	2803310	2909548	106238
Northern Cape	909198	929810	20612
North West	2563886	2599921	36035
Western Cape	1990175	1998808	8633
Total	30167706	30558566	390860

National Treasury (2010) [adapted]

Except for Gauteng, all provinces experienced roll overs due to the unspent conditional grants by local municipalities. Although the Committee has noted the rolling over of funds; there is still a need for more clarity to further explain the circumstances leading to such under expenditure especially with regard to funds that are supposed to support the extension of free basic services to indigents. On the other hand, the Committee need to ensure that these funds target critical needs such as indigents, repairs and maintenance of ageing infrastructure.

In Eastern Cape, four municipalities received increased allocations- Sunday’s River Valley Municipality received increased allocations from R25.7 million to R26.1 million, Nxuba Municipality increased allocations from R16.2 million to R16.3 million, Inxuba Yethemba Municipality received increased allocations from R32.8 million to R34.2 million, Senqu Municipality received increased allocations from R66.4 million to R66.8 million.

In Free State, five municipalities received increased allocations – Kopanong an increase from R72.7 million to R78.0 million, Mantsopa an increase from R53.9 million to R55.1 million, Motheo District an increase from R 152.3 million to R152.7 million, Phumelela an increase from R44.2 million to R45.1 million and Metsimaholo an increase from R79.0 million to R143.9 million.

In KwaZulu-Natal, seven municipalities received additional allocations – Vulamehlo an increase from R24.5 million to R25.6 million, uMuziwabantu an increase from R30.3 million to R31.3 million, Zululand District an increase from R198.6 million to R215.4 million, Jozini an increase from R48.5 million to R54.1 million, Hlabisa an increase from R39.2 million to R43.7 million, KwaDukuza an increase from R50.9 million to R57.9 million, and Ubuhlebezwe an increase from R35.4 million to R42.3 million.

Limpopo’s total allocations increased from R3.6 billion to R3.7 billion where three municipalities received additional allocations – Makhuduthamaga received an increase from R107.3 million to R111.8 million, Molemole an increase from R57.0 million to R61.3 million and Thabazimbi an increase from R45.1 million to R48.2 million.

In Mpumalanga, municipalities received additional allocations from R2.8 billion to R2.9 billion whereby four municipalities received additional allocations as follows – Mkhondo an increase from R73.3 million to R80.8 million, Thabachweu an increase from R59.5 million to R62.6 million, Mbombela an increase from R247.6 million to R295.9 million and Bushbuckridge an increase from R339.7 million to R387.1 million.

Northern Cape received an additional R612 million whereby five municipalities received additional allocations – Hantam received an increase from R15.6 million to R17.4 million, Karoo Hoogland received an increase from R10.1 million to R12.1 million, Ubuntu received an increase from R13.9 million to R16.7 million, //Khara Hais received an increase from R40.5 million to R45.4 million, and Sol Plaatjie received an increase from R121.7 million to R130.9 million.

North West received an additional R360.3 million whereby five municipalities received additional allocations – Moses Kotane received an increase from R179.2 million to R186.4 million, Mafikeng received an increase from R96.3 million to R102.4 million, Kagisano received an increase from R42.8 million to R49.4 million, Ventersdorp received an increase from R35.2 million to R37.6 million and Tlokwe received an increase from R69.0 million to R82.8 million.

Western Cape received an additional R390.8 million whereby four municipalities received additional allocations – Matzikama received an increase from R27.1 million to R31.3 million, Bergrivier received an increase from R18.7 million to R20.9 million, Overstrand received an increase from R26.9 million to R28.0 million and George received an increase from R58.2 million to R59.3 million.

5. Allocations to provinces to supplement the funding of programmes or functions funded from provincial budgets

This Schedule comprises of a number of conditional grants and the only grant that has changed is the Further Education and Training Colleges Grant which received an additional R31.2 million during the adjustment period. According to the National Treasury 2010/11 First Quarterly Reports, there was no spending for Further Education and Training grants as at 30 June 2010. While the Committee welcomes the increase, the Committee is concern that less than anticipated expenditure in the first quarter would negatively impact on the second quarter expenditure projections.

6. Specific purpose allocations to provinces: Schedule 5 Grants

Out of approximately nineteen grants in this category, only three grants received additional allocations – Comprehensive HIV and Aids Grant, Human Settlements Development Grant, and Devolution of Property Rate Funds Grant.

The purpose of the Comprehensive HIV and Aids Grant is to enable the health sector to develop an effective response to HIV and Aids, to support the implementation of the National Operational Plan for Comprehensive HIV and Aids treatment and care, and to subsidise in-part funding for the antiretroviral treatment programme. This Grant was allocated R6.0 billion for the baseline, during the adjustment the grant received an additional amount of R40 million.

The purpose of the Human Settlements Development Grant is to provide funding for the creation of sustainable human settlements. Although, in total, this Grant received additional allocations of R15 000 million only Gauteng received an increase from R3.7 billion to R3.8 billion while North West had its allocations reduced from R1.2 billion to R1.1 billion. There were no changes in allocations to other provinces.

The purpose of the Devolution of Property Rate Fund Grant is to facilitate the transfer of property rates expenditure responsibility to provinces, and to enable provincial accounting officers to be fully accountable for their expenditure and payment of provincial property rates. The grant received an increase from R1.0 billion to R1.8 billion. The Public Works Report shows that 49 per cent of the allocation was spent as at the 30 August 2010 in this regard. This grant could be the main source of revenue generation for municipalities and can also reduce the current debt by government departments to municipalities. While the Committee welcomes the increase in this grant, there is a need for the relevant Committees and other stakeholders to ensure that there are systems and plans in place that will enable provinces to spend the additional allocations efficiently and economically. This will assist the government to be able achieve value for money in such expenditure and required outcomes.

7. Schedule 6 Grants: Specific purpose allocations to municipalities

Two grants in this category received additional allocations and they are the Water Services Operating Subsidy Grant and Municipal Drought Relief Grant.

The purpose of the Water Services Operating Subsidy Grant is to subsidise water schemes owned and/or operated by the Department of Water Affairs or by other agencies on behalf of the Department. Net additional allocations to the Water Services Operating Subsidy Grant amount to R22.1 million in the 2010/11 financial year and is comprised as follows: R8.4 million is added to the Schedule 6 Grant and R13.7 million is added to the Schedule 7: Grant-in-kind.

However, it will be important to provide a detailed explanation for allocations to specific projects to the Committee so that the expenditure of these additional funds can be effectively monitored.

The purpose of the Municipal Drought Relief Grant is to provide capital finance for basic water supply in municipal infrastructure for affected households, micro enterprises and social institutions. The grant received an additional allocation of R92 million which is specifically allocated to the Mossel Bay Municipality for drought relief.

8. Consideration of Mandates

Seven provinces submitted their final mandates on the 2010 Division of Revenue Amendments Bill to the Committee and all of these provinces voted in favour of the Bill. Therefore the majority of provinces voted in favour of the Bill. The two provinces that did not submit their final mandates are Free State and KwaZulu-Natal.

With regard to negotiating mandates, the North West province raised the following concerns in their negotiating mandates:

- The Provincial Equitable Share (PES) formula in its allocation to provinces and municipalities needs to be reviewed;

- The PES formula alone cannot be used in all aspects of allocation of budgets to provinces, departments and municipalities. Another formula or formulas of varying departments and municipalities should be used;

- The allocation of budgets to municipalities in the North West should be done in consultation with the Province; and

- The conditional grants allocated to the North West departments are insufficient for the work that needs to be carried out by the respective departments.

The North West Province also noted the time constraints for the programme activities related to the adoption of the Bill, making it impossible to comply with the standard procedures as per Section 118 (1) of the Constitution (Act No 108 of 1996), namely to facilitate public involvement in the legislative and other processes of the Legislature and its committees when a Section 76 Bill is referred to the Committee. However, the Committee accepted the reasons for the strict timeframe for the adoption of the Bill; and appreciates the fact that Legislatures were briefed on matters related to the Bill.

The Gauteng Province raised its concern on the hasty manner in which Parliament processes were undertaken in referring the Bill to Provinces as this has a negative impact on the programmes of Provincial Committees in fully complying with the regulations guiding the consideration of NCOP Bills, with particular reference to public participation.

The Western Cape Province proposed the insertion of a clause after clause 1 of the Bill to propose for the amendment of section 29 of the Division of Revenue Act. This to allow provinces to amend allocations to municipalities in respect of human settlement grants after the Adjustment Appropriation Bill is submitted to the legislature, but not later than 14 February each year. Furthermore, the MEC for Finance must approve the date of such amendment and the amendments must be in accordance with the adjustments budget and appropriation legislations.

The National Treasury responded that there is no need for Western Cape Province proposal because section 36 of the Division of Revenue Act 1 of 2010 covers the proposed clause. Section 36 (1) states that the National Treasury may, on written application by the transferring national officer, province, or municipality, exempt such officer, province, or municipality in writing from complying with a provision of Act 1 of 2010. Section 36 (2) goes further to say any exemption granted in terms of subsection (1) must set out the period and conditions, if any, to which it is subject and must be published in the gazette.

9. Recommendation

The Select Committee on Appropriations, having considered the Division of Revenue Amendment Bill [B 35 – 2010], recommends to the House that it be approved (without amendments).

10. Conclusion

In conclusion, the Select Committee on Appropriations (the Committee) will monitor the utilisation of these additional grant allocations through the in-year monitoring process which forms part of Parliamentary oversight. This will enable the Committee to be able to check whether financial legislations such as Division of Revenue Act (DoRA), Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA) are adhered to by provincial and local government spheres. The Committee will also monitor the efficiency of administration in compiling and spending various schedules so that schedules are not incorrectly recorded, classified or misplaced in the process. This will assist the Committee to identify challenges and, enhance the level of accuracy and compliance in all levels of government through making relevant recommendations during the in-year monitoring process.

Report to be considered.