Division of Revenue Bill 2004 [B4-2004] Select Committee on Finance NCOP Ismail Momoniat, Nompilo Sidondi, Sandra Sooklal, Musa Ndimande 25 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 Consultations with Budget Council and Budget Forum Extended Cabinet with provincial Premiers and chairperson of SALGA

2004 Budget Timeframes Tabling of Division of Revenue Bill with National Budget (DoR) 18 Feb 2004 Tabling of provincial budgets 24 Feb to 2 March in terms of PFMA Consolidated spending function figures only in Budget Review Table 7.6, and this is an initial projection Final consolidated and provincial figures in IGFR, to be published in May Provincial departments also strategic plans To precede portfolio committee hearings on departmental budget

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)

Budget Review: Chap 7 & Annex E Chapter 7 summarise fiscal framework Provides equitable share and conditional grant allocations to provinces and local government Annexure E provides greater detail . Six parts to Annexure E Part 1: deals with how 10 factors in s214(1) of Constitution were taken into account Part 2 Govt’s response to FFC proposals Part 3 deals with fiscal framework, Part 4 and 5 provide details on prov/local allocations Part 6 concludes with brief analysis of IG grants

Appendices E1 and E2 Grant frameworks in Appendix E1 & E2 Gazette by 1 April makes it legally binding Measurable outputs & conditions Allocation criteria many use sector data, not nec certified by Stats SA (eg enrolment) Past performance 2002/03 audit outcomes many with material non-compliance with DOR 2003/04 three quarter projections Transferring dept quarterly reports?

Appendices E3 to E7 Local govt allocations per municipality in Appendices E3 to E5 Total allocation per municipality in E6 National AND municipal financial year Good summary of table E6 in Table E22 or E17 in Annexure E Appendix E7 provides demographic data for LG equitable share and MIG formulae

Review of Provincial and LG Fiscal Framework 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

Corrections to DoR in NA Schedule 1 -minor rounding errors Schedule 3, p22 - division btw district and local munis uMgundgundlovu Schedule 3 - page 29, figures for NW and NC swopped, for National Tertiary Services Grant Changes in total per province allocations Corrections to clauses

Response of National Government to FFC Proposals Part 2 of Annexure E

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 municipalities 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

Fiscal Framework Part 3 of Annexure E

2004 Budget priorities Increasing investment in infrastructure, industrial capital (16 to 25% of GDP) Improving education, training and skills development to raise productivity Fighting poverty and inequality through work opportunities, income support and empowerment Improved regulation of markets & public entities, and efficient public service delivery

Fiscal policy 2003/04 deficit estimate of 2,6% Expansionary stance from in 2001 continues Strong real growth in non-interest spending, averaging 4,8% a year Stable tax burden at 24,7% Debt service costs decline from 3,9% of GDP in 2003/04 to 3,6% in 2006/07 Deficit of 3,1% in 2004/05 declining to 2,8% by 2006/07 Significant surpluses in social security funds

Summary of tax proposals Income tax on individuals reduced by R4 billion Provision made for share transfers Interest exemption raised to R11 000 for taxpayers under age 65 and to R16 000 for taxpayers age 65 and over Transfer duty threshold on property transactions increased to R150 000 Duties on some products abolished Increase in fuel levy (15c/l) and RAF (5c/l) Increase in exercise tax (tobacco, and alcohol)

Fiscal framework

Key MTEF priorities Renewed focus on employment creation Deepening the skills base Stepping up investment, esp. in infrastructure Strengthening the social security Reinforcing security and crime prevention Improving core admin services to citizens Land reform and post settlement support to farmers Promoting multilateral cooperation, incl. AU and NEPAD

Division of revenue

Provincial Allocations Part 4 of Annexure E

Provincial priorities Comprehensive HIV and Aids prevention and treatment plans Providing for social security expansion Non-personnel inputs into education Post-settlement support for farmers Infrastructure investment Special focus on labour-intensive projects Hospital revitalisation programme Provinces receive R19,7 billion extra over MTEF

Provincial Budget Reforms Uniform budget and programme structures extended to more depts Education, Health,Social Development, PW, Transport and Roads, Housing, Agriculture, Local Government, and Sports Uniform measurable objectives and outputs per programme or main division developed To develop performance indicators for each measurable objective

Provincial Budget Reforms Introduction of sectoral Quarterly performance reports – piloted in 2004/05 and mandatory in 2005/06 New economic reporting format New standard chart of accounts Migration to BAS to be completed Supply chain framework finalised

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

Provincial revenue:2004 MTEF

Equitable share allocation formula Jointly recommended by FFC and govt Adopted in 1998, full phase-in 2003/04 System takes into account fiscal imbalances Seven factors taken into account Dual approach to review of formula For 2004 Budget structure retained and education,basic and economic activity components updated for data Comprehensive review for 2005 MTEF National Treasury

Components of the formula Education share - 41 % Health share - 19 % Social security share - 18 % Basic share - 7 % Backlog component - 3 % Economic component - 7 % Institutional component - 5 % National Treasury

Summary of provincial ES formula

Actual allocations vs formula Social security share - 26,5% total budget (exc CSG) in 2003/04 29,3% total eq share (inc CSG) in 2003/04 Substantially more than original formula, will be even higher at end of MTEF Started at 17% three years ago Education share –38,7 per cent Almost 2,3 % less than formula Health share – 19,9 per cent Excludes all conditional grants worth R7,6 bn. Total health share is 22,3% Health CGs is 0,9% higher than formula National Treasury

ES transfers to provinces 2002/03 to 2006/07

Conditional grants Legally from the national equitable share National priority programmes Compliance with national norms and standards Cross-border spill-overs Two types: General or Assigned function Provincial infrastructure, health tertiary & training Specific purpose conditional grants Housing subsidy, Other health Total R21,2 bn in 2004/05 Total Health R7,7 bn, Housing R4,6 bn, infras R3,3 bn Child Support Extension R3,7bn HIV/Aids in health R782 million Formula differ for each grant (see App E1 & E2) National Treasury

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 priorities Increasing basic service provision Step up in infrastructure spending Complements EPWP Rolling out free basic services Municipal financial management reforms Implementation of Municipal Finance Management Act Local government receives R3,9 billion extra R2,2 billion for equitable share R1,7 billion for infrastructure

Local Government Reforms LG grant system is being rationalised to ensure simplicity, flexibility and certainty Three-year allocations for all grants are published per municipality to facilitate proper budget planning The next phase focus mainly on financial management reforms (MFMA) Modernisation of budgeting and reporting Accountability and good governance Consolidation of LG infrastructure spending (MIG) To improve coordination and integration at a local level in line with IDPs Restructuring of the electricity industry

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 92 per cent in some municipalities Increases by R2,9 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 54 per cent of allocations in 2004/05 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

Analysis of Grants

Analysis of Grants Table E21 provides provincial analysis ES is redistributive from Gauteng, W Cape and KZN to other provinces ES plus CG still redistributive, but less so Table E22 and E23 show LG grants redisrib Different budget per head, over R3000 in metros National allocations 13,7% of LG budgets 3 to 7% for metros and munis in Gauteng, WC Up to 92% in one rural municipality, but by province highest in Limpopo at 55%, btw 20-31% in most prov Note population nos include Cross-Boundary munis Highest allocations to OR Tambo and Amatole

Clauses in the Division of Revenue 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 ) & (3), 14(3), 16(3), 18(3) Revisions of clause 5 to enforce transparency in municipal budgets and expenditure monitoring 2 additional sub-clauses in section 8 to strengthen the regulation of provision of municipal services through public entities

Division of Revenue Bill, 2004 Substantive changes 4 new sub-clauses in section 11 to facilitate the phasing in on infrastructure grants to MIG and facilitate better planning and reporting on performance revisions in sections 23 and 26 to restrict reallocation of grants between municipalities additional sub-section in clause 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 clause 35 to deal with under-spending of capital grants

DOR Bill Chapter 1 and 2 Section 1 – new defns to align the Bill with the MFMA (I), (iii), (vi), (vii), (xiv) and (xvi) S1(2) and S1(3) – to deal with inconsistency bet the Bill &other related legislations ie MFM, FFC & Municipal Systems Acts New subsections – 5(7f), 5(8) and 5(9) – to require municipality to settle statutory payments and enforce transparency in their budgets and expenditure monitoring

DOR Bill: Chapter 3 Additional clauses and amendments ammended s8(2) –and added s8(3) to force conclusion of agreement btn munis and entities on provision of municipal services added s8(4) to ensure entities are paid for providing municipal service per agreeement s11(3,& 4) – added to require municipality to prepare capital plans for the MTEF, and state contents of the plans s11(5) added to ensure that district munis are transparent in allocations for capital grants they make to municipalities

DOR Bill: Chapter 3 Cont DOR Bill: Chapter 4 s11(6 & 7) added to enforce submission of capital plans, and MIG phasing in agreements with depts DOR Bill: Chapter 4 s14(3) and s16(3) added to enforce transfers of funds into primary bank accounts, and require munis to indicate primary bank A/C s18(3) aligns with MFMA for annual report s18(4) – provides for determination of quarterly repts to facilitate auditing of munis

DOR Bill: Chapter 5 Revisions of s19 DOR Bill: Chapter 6 Added s19(2) to ensure that NT informs depts on primary banks details Added s19(3 & 4) – provide for delegation fo functions entrusted to the Minister in line with PFMA DOR Bill: Chapter 6 Revisions of section 23 s23(1) to restrict reallocation of municipal grants – can only be within the district Added S23(2) make provision for the HIV and Aids grant for this budget

DOR Bill: Chapter 6 cont. Revised s26(1) to restrict reallocation of local govt grants to deal with weak capacity – only within destrict s28(2) ammended to restrict NT revisions of payment schedule deal with cashflow management & fin mismanagment s28 (4) added – to provide for payment schedules revised by NT take precendence over the revisions by national depts New clause 35 to deal with past roll overs of conditional grants, and to allow provinces to redirect funds to other capital programmes where underspending is projected