Division of Revenue Bill 2004 [B4-2004] Portfolio Committee on Finance Ismail Momoniat 20 February 2004

Intergovernmental Fiscal System Section 214 of Constitution and IGFR Act Requires an annual Division of Revenue Bill Section 10(5) of the Intergovernmental Fiscal Relations Act gives effect to Constitution Consultation processes for all allocations Explanatory memorandum (Annexure E) Budget Council and Budget Forum FFC Extended Cabinet with provincial Premiers and chairperson of SALGA

2004 Division of Revenue Bill Section 76(4) Bill and has to start in NA Most important Budget Bill, not a s75 money bill! Clauses 1-35 of the Bill Schedules 1-7 divides revenue bet 3 spheres Memo on the objectives of bill Explanatory attachments Annexure E (also part of Budget Review) Appendix E1 & E2: Frameworks on all conditional grants (provincial and local) Appendix E3 to E6: LG allocations by municipality for both national & municipal financial year Appendix E7 Demographic data for Local Government Equitable share and Municipal Infrastructure Grant

DOR: Schedules Schedules 1 to 7 Equitable Share allocations (Schedules 1-3) Schedule 1 divides eq share between 3 spheres Schedules 2 divides provincial equitable share between 9 provinces Schedule 3 divides local equitable share between 284 municipalities Conditional Grant allocations (Schedules 4-6) Schedules 4 and 5 on provincial grants, by province Schedules 6 on LG grants (no division by muni) Allocations by municipality in explanatory attachments Allocations-in-kind (Schedules 7)

Fiscal framework

Division of revenue

Response of National Govt to FFC Proposals Part 1 of Annexure E

Key Proposals on DoR Census 2001 results released in 2003 Update formulae with new data for 2004 Comprehensive review of formula for provincial and LG equitable share grants for 2005 MTEF Review of all conditional grants Review of LG Fiscal Framework Restructuring of electricity distribution Division of functions 3 Jan 2003 Review of RSC and municipal service levy

Process to consider FFC proposals FFC Submission: DoR 2004/05 Focus is on two main sets of issues First set deals with DOR issues pertaining to each sphere of government Second set focus on the intergovernmental system Response should be viewed against the review of LG and Provincial fiscal review Budget Council considered prov proposals Budget Forum considered LG proposal Premiers invited at Extended Cabinet Cabinet decides on div of revenue thereafter

FFC Provincial Recommendations HIV and Aids funding and health conditional grants Equitable share formula Education component Health component Welfare component The FFC also made overall proposals regarding the equitable share formula Framework for Comprehensive Social Security Reform

Response of N Govt to FFC provincial proposals Governments current approach to HIV and Aids funding is largely in line with FFC recommendations The proposal to consolidate all HIV and Aids grants will be explored during the review of provincial fiscal framework It is difficult to evaluate ES spending on HIV and Aids On health conditional grant proposals national Departments of Health and Education and the National Treasury review the funding of academic and tertiary hospitals PSNP to be administered by education in 2004/05

Response of N Govt to FFC provincial proposals Health component of ES formula Regular updates not possible due to lack of updated data Replacement of current datasets used in component with alternative data being explored Education component of ES formula ‘out-of-school’ enrollment retained as stabiliser ECD phase into ES formula by adjusting the age co-hort to 5-17 ABET proposal will form part of the broader review On welfare component of ES formula Should be viewed against current developments pertaining to the shifting of social security function Two Bills before parliament Increasing the weight of welfare component will not address FFC concerns as other areas of spending are crowded out

FFC proposals on LG Revenue capacity and the ES formula Municipal institutional capacity Financing development nodes Differentiated approach to municipalities

Response of NG to FFC on LG On the revenue capacity of LG and the ES formula Government supports the FFC proposals Recognise the need for a review of LG fiscal framework On I-element Will form part of the broader LG fiscal framework review Capacity building CG Will form part of LG fiscal review and steps are to be taken to minimise the number of CG in system Grants will be assessed in terms of outputs and outcomes

Response of NG to FFC on LG On financing development nodes FFC is raising valid issues on ISRDS and URP The current ES transfers still fund transitional programmes and can only be phased out in a few years time Funding for nodes will be explored with the fiscal framework review Gov agrees that the programmes be evaluated On the differentiated approach to municiaplities Legislation provides for a differentiated approach Consideration is being given to a differentiated approach based on capapcity

FFC proposals on intergov system Bulk of proposals are work-in-progress Proposals related to CBS, expenditure assignment, costed-norms,performance management,building institutional capacity, funding instruments for poverty-alleviation Gov response just an initial response Gov welcomes the emphasis on the need for certainty in functions Expenditure assignment is complex and calls for greater cooperation Re-assignment of social grants underway CBS taken account of in vertical and horizontal DOR

Provincial Allocations Part 4 of Annexure E

Provincial Allocations Total provincial share allocation increases from R161,5 bn in 2003/04 to R181,1 bn 2004/05 and to R216 bn at end of MTEF Biggest allocation to KZN at R36,9 bn in 2004/05 (compared to R32,2 bn 2003/04) Next highest EC (R30 bn), Gtg (R29 bn) Lowest to NC (R4,4 bn) Equitable share R159,9 bn, or 88,3% Conditional grant R21,2 bn

Total transfers to provinces 2002/03 to 2006/07

National transfers to provinces(1) National transfers make up 97% of total provincial revenue in 2004/05 Equitable share makes up 88,3% of national transfers to provinces Rises from R144,7bn in 2003/04 to R159,9bn in 2004/05 and will peak at R186,4 bn by 2005/06 R19,7 bn added to ES over the next three years, a growth rate of 8,8 %

National transfers to provinces(2) Conditonal grants grow from R16,7 bn in 2003/04 to R21,2bn in 2004/05, and will rise to R30bn by 2006/07 Growth in CGs largely linked to Child support extension grant R3,7bn, R6,9bn and R9,3bn Food relief of R388m each MTEF year HIV and Aids in health R782 million, R1,1bn and R1,7bn R750 million for CASP Growing infrastructure grants 19 Conditional grants 2002/03 Audit concerns

Local Government Allocations Part 5 of Annexure E

Local Government priorities Bulk of pro-poor spending is in provinces and local government Accelerate the rollout of free basic services Electricity, water and sanitation, refuse removal Municipal infrastructure development MIG to provide the infrastructure to rollout free basic services Contributing to job creation Capacity building grants to support MIG implementation MFMA implementation Building in-house capacity in planning, budgeting and financial management

Local Government Allocations National allocations an important and growing source of revenue for municipalities Comprise about 14,4 per cent of total LG budgets, but can be as high as 90 per cent in some municipalities Increases by R3,9 bn over the next 3 years Total allocations grows to R17,1 billion in 2006/07 from R12,4 billion in 2003/04 Equitable share is most significant comprising 55 per cent of allocations allowing greater discretion at local level Equitable share increase to R9,4 billion in 2006/07 from R6,4 billion in 2003/04

LG Allocations (continued) R21,6 billion earmarked transfers made to LG over the MTEF Infrastructure grants also receive a major boost to address backlogs Grow to R6,0 bn in 2006/07 from R4,1 bn in 2003/04 – R1,7 bn increase over baseline Capacity building and restructuring grants are allocated R2,2 bn over the three years Mainly to support the implementation of MIG and the MFMA Support municipal restructuring

Clauses in the Bill

Division of Revenue Bill 2004 Bill largely same as 2003 DOR Act Substantive changes: New clauses to align the Bill with MFMA (additional definitions, 1(2 and 3), 14(3), 16(3), 18(3)) 3 additional clauses in section 8 to strengthen the regulation of provision of municipal services through public entities 4 new sub-clauses in section 11 to facilitate the phasing in of infrastructure grants to MIG, facilitate better planning and reporting on performance

Division of Revenue Bill, 2004 Substantive changes additional clause in sections 23 and 26 to restrict reallocation of grants between municipalities additional clause in section 23 as interim measure to deal with uncertainties regarding possible take up of additional funds to HIV/Aids for roll out of ARV treatment plan New section 35 to deal with underspending of capital grants

Analysis of transfers National Treasury

Analysis of Provincial Formula Formula updated education, population and economic data (2001 Census) Weighting for social grants is 18%, but provinces will spend29,3% of eq share I 2003/04, and rising Allocations are redistributive, as can be seen in Table E21 in Annexure E Gauteng, W Cape and to a lesser extent KZN get less than per capital average

Local Government Transfers As reflected in tables E17, E22 and E23 in annexure E Total transfers as percentage of municipal budgets average 13,7% country wide as high as 55,2% in Limpopo municipalities, as low as 4,0% in Gauteng municipalities Total transfers as percentage of budgets for sample municipalities only 3,0% in Cape Town only 3,2% in Johannesburg as high as 92,1% in Bohlabela (Bushbuckridge)