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

3. 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

4. 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

5. 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)

6. 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

7. 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?

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. Fiscal Framework
Part 3 of Annexure E

21. 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

22. 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

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

24. Fiscal framework

25. 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

26. Division of revenue

27. Provincial Allocations
Part 4 of Annexure E

28. 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

29. 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

30. 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

31. 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

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

33. 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 %

34. 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

35. Provincial revenue:2004 MTEF

36. 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

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

38. Summary of provincial ES formula

39. 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

40. ES transfers to provinces 2002/03 to 2006/07

41. 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

44. Local Government Allocations
Part 5 of Annexure E

45. 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

46. 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

47. 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

48. 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

49. 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

50. Analysis of Grants

51. 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

52. Clauses in the Division of Revenue Bill

53. 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

54. 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

55. 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

56. 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

57. 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

58. 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

59. 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