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

2. 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

3. 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

4. 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)

5. Fiscal framework

6. Division of revenue

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

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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

15. 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

16. 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

17. Provincial Allocations
Part 4 of Annexure E

18. 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

19. Total transfers to provinces 2002/03 to 2006/07

20. 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 %

21. 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

22. Local Government Allocations
Part 5 of Annexure E

23. 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

24. 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

25. 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

26. Clauses in the Bill

27. 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

28. 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

29. Analysis of transfers
National Treasury

30. 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

31. 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)