FINANCIAL AND FISCAL COMMISSION Submission for the Division of Revenue Bill 2009/10 Select Committee on Finance 24 February 2009

Outline Submission in terms of Chapter 13 S 214 (2) and Section 9 of the IGFR Act 1997 Addresses issues pertaining to the division of revenue for 2009/10 fiscal year and organised as follows: Strategic issues General observations on the Bill Comments on allocation to sub national government Introduction of new conditional grants to sub national government Comments on government’s response to FFC recommendations Conclusion

Key Strategic Issues Complexity of the Division of Revenue Bill and size of document DORA becoming complex, voluminous and too broad Commission calls for a comprehensive review of the DoRA Conditional Grant Proliferation Strong pressure to proliferate conditional grants this year All new grants should be subjected to rigorous analysis before introduction Capacity grants not channelled through DORA There must be transparency in the appropriation of capacity development grants Capacity Building programmes should be coordinated and evaluated together Implementation of boundary re-demarcations Commission re-iterate its proposal for a full account of the fiscal capacity implications associated with the transition phase of demarcation Norms and standards differ across provinces and municipalities

Strategic Issues Intergovernmental Loan Agreements Delays in key policy implementation Delays in implementing REDs and accreditation of municipalities Stalling may be partly due to uncertainty associated with ongoing DPLG Policy Review on the System of Provincial and Local Government. Leads to uncertainty and poor service delivery (poor maintenance, unfunded mandates and poor housing delivery) Fixing timelines to DPLG process can bring certainty and movement on the policy implementation Intergovernmental Loan Agreements Government extended a loan to fund Gautrain Rapid Rail Link Decision consistent with Borrowing Powers of Provincial Government Act (1996) Commission pointed out in 2007 the potential risks for the IGFR system and principles of no bail-outs Commission recently received documentation on the loan Recommendations to be submitted to Minister of Finance in line with the BPoPG Act 1996 and Section 230 of the Constitution (1996)

General Observations on the Bill Section 15, Municipal Infrastructure Grant (Cities) Replace “other investment” by “support of” as this would tie down the objective towards investment in the built environment. Section 23, Expanded Public Works Programme Incentive Attempts at addressing employment through Government expenditure programs welcomed Adopt cautious approach, monitor and evaluate skills developed Section 24 (c), Conversion of Schedule 7 to Schedule 6 allocation Welcomed because it builds flexibility and spending Section 42, Duties relating to Category C Municipal Budgets Welcomed as it improves transparency and certainty of funding and allow better planning for expenditure. Section 38, Approval of expenditure for emergencies Welcomed as changes speed up the flow of funding

Conditional Grants to Provinces 9 conditional grants valued at R18 billion added to provincial fiscal framework. (1)Agriculture Disaster grant R60 million, (2)Housing Disaster Grant R150 million and (3)Health Disaster Grant R50 million (4)Public Transport Operations Grant with R11.5 billion, (5)Expanded Public Works Programme at R1.4 billion, (6)Agriculture’s ILima Letsema at R650 million, (7) Technical secondary Schools Re-capitalisation grant at R280 million, (8) Sani Pass at R34 million and (9)Overload Control grant at R21 million Carry out in-depth study of disaster management framework Move towards increased conditional grants not encouraged unless such grants are deemed entirely necessary

Local Government Conditional Grants Rural Transport Services and Infrastructure Grant This grant is in Pilot Phase DOT to give feedback before this eventually is rolled out The Commission will be evaluating the effectiveness of this grant Capacity Development Grants (LGFMG:NT) and MSIG:DPLG) Assess impact of these grants against improvements suggested in Auditor-General’s report for municipalities Give priority to expand these grants to poorer and weaker municipalities with need. National Energy Efficiency and Demand Side Management The Commission submits that the grant framework should be further developed.

Comments on Government’s response to 2009 MTEF Recommendations Generally Commission welcomes the in-depth response to all its recommendations by government There is an agreement between the Commission and Government on most of the Commission’s recommendations However, caution made in respect of other recommendations Commission is of the view that Government should in future provide details around implementation of recommendations and progress over the medium term expenditure period

Specific issues and Commission Comments Education Commission recommended that the location for learner transport function needed to be defined and government agreed Whilst Government response that the department of education is responsible for the function of Learner Transport and the department of transport is responsible for regulatory function for Learner Transport However there are provincial departments of education that do not agree

Cont.. Augmenting Local Government Revenue The Commission recommended the criteria of a good local tax to replace RSC levies and Government agreed Government has been utilising VAT zero-rating of municipal property rates and a replacement grant as transition measure since the abolition of the RSC levy In 2009 government is proposing the sharing of fuel levy amongst Metropolitan cities as replacement While the Commission welcomes this measure which improves revenue adequacy, the submission is that it still falls far short of the criteria of a good local tax: Municipalities have no discretion over the base and rate of the tax Link between agents who bear the incidence of the fuel levy and the beneficiaries of the services funded by fuel levy revenue sharing is tenuous – accountability at the margin is not thereby enhanced Municipalities should continue searching for appropriate taxes

Cont.. Electricity Investments and Pricing Government agreed with recommendation to promote greater efficiency of resource allocation, technological innovation and increased investment in renewable energy sources Government has in the 2008 Budget Review proposed the imposition of a 2c/kWh tax on the sale of electricity generated from non-renewable sources Commission encourages these measures aimed at diversifying electricity supply towards sustainable development However, further fiscal and regulatory instruments should be developed to allow renewable energy technologies to compete with fossil based technologies. The Commission is investigating some of these matters.

Conclusion Commission notes and welcomes changes introduced through the 2009 Division of Revenue Bill Commission invites the Committee to note the strategic issues that have been highlighted and the work that it will be carrying out in this regard Submission makes observations on certain clauses of the Bill with a view at enhancing clarity and transparency The Commission reiterates its position that government should address the reasons behind the proliferation of conditional grants and move towards more consolidation The Commission supports the basic principles behind most of the new conditional grants Cautious approach in respect of issues of implementation and how the grants will be rolled out Commission welcomes the in-depth response to recommendations Government should in future provide details around implementation of recommendations and progress