1. Division of Revenue Bill [B9-2003] 10 March 2003 Select Committee of Finance Maria Ramos, Ismail Momoniat and Vuyo Kahla

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. 2003 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 on statistical data for LG equitable share

4. DOR: Legislative Requirements Clauses 1-35 Schedules 1 to 7A –Equitable Share allocations (Schedules 1-3) Schedule 1 divides eq share between 3 spheres Schedules 2 divides provincial eq 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 and 7A) –Schedule 8 corrects one 2002 DoR allocation

5. Budget Review: Chap 7 and Annexure E Chapter 7 summarises fiscal framework –Provides equitable share and conditional grant allocations to provinces and local govt Annexure E provides greater detail –Explanatory memo required by IGFR Act Five parts to Annexure E –Part 1: Govt’s response to FFC proposals –Part 2 with how how 10 factors in s214(1) of Const taken into account Covered in detail in Budget Review, esp in ch 6 and 7 –Part 3 deals with fiscal framework, –Part 4 and 5 provide details on prov/local allocations

6. 2003 Budget Timeframes Tabling of Division of Revenue Bill with National Budget (DoR) 26 Feb 2003 Tabling of provincial budgets –27 Feb to 12 March in terms of PFMA Tabling of provincial department strategic plans 31 March 2003 –To precede portfolio committee hearings on departmental budget Publication of Intergovernmental Fiscal Review first week of April (2 or 3 April)

7. Dates of Provincial Budgets North West and Gauteng - 4 March 2003 Free State - 5 March 2003 E Cape, Mpumlanga & KZN - 6 March 2003 W Cape - 12 March 2003 Limpopo - 13 March 2003 Northern Cape - 17 or 18 March 2003 (granted an extension by Minister)

8. Provincial Budget Reforms Uniform budget and programme structures to enable comparability across provinces –Education, Health & Social Development Uniform measurable objectives and outputs per programme or main division To develop performance indicators for each measurable objective Sets performance reporting for 2003/04 annual report tabled Oct 2004 Uniform format for HoD performance contracts?

9. 2003 IG Fiscal Review (IGFR) Contains 2003 provincial budget info, and 2002 municipal budget info Timing changed to coincide with budget hearings Allows each department to benchmark itself against other provincial departments How does share of departmental budget to total budget compare with other provinces? How much money is dedicated for non-personnel expenditure? Assessment of 2001/02 Provincial Annual Reports and 2003 Strategic Plans

10. Role of legislatures Critical that Parliament and Provincial Legislatures use non-fin & budget info –Is non-financial info linked to budget? –Are there measurable objectives and performance targets end of year? In-year every quarter? –Is performance contract of head of dept linked to strat plan targets No oversight, No performance, No delivery – Budget hearings, quarterly reports, annual reports Delay portfolio hearings after IGFR (April) Challenge: How will national and provincial portfolio and select committees co-operate to get the full picture??????

11. 2003 Successes and Areas of Improvement Publication of all LG grants by formula Review of LG Fiscal System Areas of improvement –Current formula all based on Census 1996 –Census 2001 and review of all formula –Review of all conditional grants –Publication of all CG formulae –Better audits on conditional grants

12. 2003 Successes and Areas of Improvement All six of nine provinces tabling their budgets have 3 year allocations per municipality Expect 3 remaining provinces to do the same

13. Fiscal Framework Part 2 of Annexure E

14. Fiscal policy GDP growth in 2002 of 3% rising to 3,3% in 2003, and 4% by 2005 Deficit widened to 2,4% next year Real growth in non-interest spending of 4,5% a year over MTEF period Debt service costs decline from 4,2% in 2002/03 to 3,8% by 2005/06 Debt projected to drop to 36,8% by 2005/06 Buoyant tax revenue provides for Personal Income Tax relief of R13,3 billion Capital spending by gen govt rises strongly

15. Summary of tax proposals Personal income tax relief of R13,3 billion –Threshold rises to R30 000 Interest exemption raised to R10 000 Retirement Fund Tax reduced from 25% to 18% Tax allowances for investment in inner city areas Several business stimulus measures Transfer duties reduced further Excise duties on vehicles reduced and eliminated on computers Inflation-related adjustment to excises on alcohol and tobacco products

16. Division of Revenue Macroeconomic objectives –Tax-to-GDP, deficit etc First responsibilities –Debt servicing –Contingency reserve Total allocations –Divide between the 3 spheres of govt (national, provincial and local) –Take into account 10 criteria in section 214 of Constitution Fiscal capacity and functions of each sphere

17. National budget framework

18. Fiscal capacity and functions Provinces –Raise 3.5% of own revenue –Social services (85%) and roads are public goods Local Government –Raise over 90% of own revenue –Only one third of functions are public goods –Two thirds of functions are user charge services National Government –Over half departmental spending on protection services –Other national functions: higher education, admin, policy or regulatory

19. Div of Rev (Table E3 Annex E) Revenue to be shared: –Revenue plus borrowing, exc RDP & social security funds National share –Declines, from 40,4% in 2002/03 to 38,9% in 2003/04 and 38,0% at end of MTEF Provincial share –Increases from 56,0% in 2003/04 to 56,8% in 2003/04 –Increases to 57,6% at end of MTEF –Increasing share driven by CSG extension Local share –Increases from 3,6% in 2002/03 to 4,3% in 2003/04 –Static over MTEF

20. 2003 Division of Revenue Starting point is 2002 Division of Revenue –Additions to year 2 (2003/04), year 3 (2004/05) Total additions to 2002 baseline of R105,4 bn 2003 Budget shifts resources towards provinces and local governments –Adjustments provide for higher inflation Provinces get R69,3 billion more over MTEF –6,1% annual average real growth in transfers –Policy adjustment of R50,3 billion LG gets R7,3 billion more over MTEF –12,2% growth in local government transfers –Policy adjustment of R6,7 billion

21. Division of additional amounts

22. Main policy additions

23. Policy priorities for 2003 MTEF –Reducing poverty and vulnerability –Extending the social security net –Reinforcing the fight against HIV/Aids –Providing free basic services –Increasing infrastructure spending –Accelerating land restitution –Higher education and skills development –Strengthening the fight against crime –NEPAD and peace support operations

24. Provincial priorities for 2003 Social Development –Further expansion of the social security net (CSG) –Real increases in values of social security grants Education –Increasing spending on non-personnel non-capital, especially LSM, ECD, classroom backlogs Health –Attracting personnel with scarce skills –Further bolstering HIV/Aids programmes –Refurbishing health infrastructure –Increasing spending on INP –Stepping up spending on medicines and other critical supplies taking Step-up support for other functions, esp.roads

25. Transfers to provinces National transfer to provinces: –Equitable share rises from R123 bn in 2002/03, to R142 bn in 2003/04 and to R168 bn in 2005/06 –Conditional grants which are R13 bn in 2002/03, R16,6 bn in 2003/04 and R24 bn in 2005/06 Increase in conditional grants largely due to introduction of child support extension grant which rises from R1,1bn in 2003/04 to R6,4bn in 2005/06 –Transfers to provinces grow by 6,1% a year in real terms

26. Local government priorities Extending provision of free basic services –R4,1bn extra over the MTEF (incl. R1,4bn for electricity) Investing in municipal infrastructure –R1,8 billion more, including R1bn for labour- based programmes infrastructure grants to be consolidated in future Reinforcing financial management reforms –R300m set aside for this purpose

27. Transfers to local government

28. Reconciliation with DoR Bill Schedule 1: legal vs economic/functional National share- –National allocation (appropriated and some direct charges) –Debt servicing and contingency reserve –Conditional grants (provincial and local) Provincial share –Equitable share only, excludes cond grants Local share –Equitable share only, excludes cond grants

29. Questions on Conditional Grants What does 2001/02 audit say about grant? What does national dept do on reporting and monitoring? Are monthly reports received on time? Were grants transferred on time? Was NT informed on any delays? –Were reasons anticipated at time of Budget? Municipalities do not have capacity etc Are all allocations per province and municipality in terms of DoR in 2001/02 and current year? Do allocations appear on budget of municipality?

30. Response of National Govt to FFC Proposals Part One of Annexure E

31. Key Proposals on DoR Census 2001 results out this year Review of formula for provincial and LG equitable share grants 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

32. Process to consider FFC proposals FFC Submission: DoR 2003/04 –6 provincial, 6 LG and 3 cross-cutting proposals –3 proposals are old (2001), and many others do not really deal with Division of Revenue –National government responds to all proposals NT suggests FFC separate DoR from non-DoR proposals Budget Council considered prov proposals Budget Forum considered LG proposal Premiers invited at Extended Cabinet Cabinet decides on div of revenue thereafter

33. FFC Provincial Recommendations Provincial Own Revenue Sources Provincial Tax Regulation Process Bill (2001) Early Childhood Development funding Implications of HIV/Aids for Health, Welfare and Education Sectors Primary Health Care Framework for Comprehensive Social Security Reform

34. Response of N Govt to FFC provincial proposals NG agrees on first two proposals generally – note Prov Tax Reg Act is now enacted –Further consideration for specific tax proposals Agree on ECD funding thru equitable share Agree generally on cond grant of HIV/Aids, but difficult for total separation from dept budget Primary health proposals on further research Govt exploring sep agency for social grants –Establish cond grant CSG extension in interim

35. FFC proposals on LG Division of powers between category B and C municipalities (2001 proposal, no NG response) Restructuring of electricity distribution industry Municipal Borrowing and financial markets Municipal Finance Management Bill Remuneration of municipal councillors (2001) Measurement of Revenue-Raising Capacity

36. Response of NG to FFC on LG Two proposals of FFC are on restructuring –Comprehensive review of LG fiscal system –Div of 4 fncs (water, sanitation, elec, health) 3 Jan 2003 Gazette by Min of PLG Govt agrees with FFC, but local views taken into account, so functions (esp for water & sanitation) differ by region –Further work on electricity restructuring –Interim approach for 2003 MTEF further division of allocations between category B and C munis depending on function (DPLG) FBS window for electricity and water services Other proposals are old, research or dealt with in MFM Bill

37. FFC cross-cutting proposals Review of Intergovernmental System Centralised Contingency Reserve Assessment of Disaster Management Funding Response of NG –Agree on comprehensive review of grants and LG fiscal system, better data collection –Not clear what FFC means wrt its proposals on contingency reserve, as grants divided ito legal process, and see no need to divide into two pots. Agree to allow for emergency and adjustment provisions in MFM Bill –Similarly not clear to NG why it should change its approach on funding disasters

38. Provincial Allocations Part 4 of Annexure E

39. Provincial revenue:2003 MTEF

40. Provincial Allocations Total provincial share allocation increases from R136,9 bn in 2002/03 to R159,0 bn 2003/04 and to R191,6 bn at end of MTEF Biggest allocation to KZN at R32,2 bn in 2002/03 (compared to R27,5 bn 2002/03) –Next highest EC (R26,4 bn), Gtg (R25,8 bn) –Lowest to NC (R3,8 bn) Equitable share R142,4 bn, or 89,5% Conditional grant R16,6 bn

41. Total transfers to provinces 2001/02 to 2005/06

42. National transfers to provinces(1) National transfers make up 96,5% of total provincial revenue in 2003/04 Equitable share makes up 89,5% of national transfers to provinces –Rises from R123bn in 2002/03 to R142bn in 2003/04 and will peak at R167bn by 2005/06 –ES grows an average annual rate of 10,7% over MTEF or 5% in real terms

43. National transfers to provinces(2) Conditonal grants grow from R13,5bn in 2002/03 to R16,6bn in 2003/04, and will rise to R24bn by 2005/06 Growth in CGs largely linked to –Child support extension grant R1,1bn, 3,4bn and R6,4bn Food relief of R388m each MTEF year

44. Transfers to provinces: 2003/04

45. Equitable share 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 No change to formula this year –No update of data Comprehensive review this year for 2004 MTEF, using Census 2001

46. Components of the formula Education share -41 per cent Health share - 19 per cent Social security share - 18 per cent Basic share - 7 per cent Backlog component - 3 per cent Economic component - 7 per cent Institutional component - 5 per cent

47. Summary of provincial ES formula

48. Equitable shares 2001/02 to 2005/06

49. Actual allocations and formula Shares and formula beginning to diverge, compared to 2002/03 adjusted budget shares Social security share - 20,7 per cent –Excludes R2 billion arrear allocation –Three per cent more than original formula, and expected to RISE to 23% at end of MTEF –Started at 17% two years ago Education share -36,2 per cent –Almost 4 per cent less than formula Health share - 15,4 per cent –Excludes tertiary and training conditional grants worth R10,5 bn. Total health share is 22,8% –Health exc tertiary/training 3,6% less than formula

51. 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 (R7,9 bn) Provincial infrastructure, health tertiary & training –Specific purpose conditional grants Housing subsidy R4,2 bn, 5 other health R2,1 bn Total R16,6 bn in 2001/02 –Total Health R7,4 bn, Housing R4,4 bn, infras R2,5 bn –Significant new grant: Child Support Extension –HIV/Aids R520 mil Formula for each grant varies (see App E2)

52. Local Govt Allocations Part 5 of Annexure E

53. LG Allocations National transfers to Local government increase by R5,8 billion In line with this LG receives the following additional allocations: –R4,1 billion of for free basic services –R1,8 billion of infrastructure/ R1 billion of labour- based infrastructure –R300 million for capacity building The equitable share rises from R3,9 bn in 2002/03 to R7,7 bn in 2005/06 Equitable share grows from 45% to 53% of total transfers to LG from 2002/03 to 05/06

55. Equitable share Equitable share (formula) grows from 45% to 53% of total transfers in MTEF The equitable share rises from R3,9 bn in 2002/03 to R7,7 bn in 2005/06 An additional window of R4,1 bn for free basic services

56. Type of transfers

57. Local Govt Equitable Share Excludes Water operating and sanitation grant which is not allocated by formula, but to water schemes Six windows in LG equitable share –Historic: R293 personnel allocation (last year) –Current: Institutional I, Basic Services S, nodal allocation –New: FBS (general) and free electricity –Guarantee of 70% of previous year’s allocation Further division between category B and C municipalities based on 2 Jan 2003 Gazette by Minister of PLG

58. Equitable share cont Equitable share allocation : R6 343m –Less: R293 allocation : R 381m Amount available : R5 962m –S-grant : R4 178m –I-grant : R 450m –Nodal allocation : R 212m –Free basic water,sanitation, refuse: R822m –Free basic electricity : R 300m

59. Equitable share cont R293 grant –Window will be phased out in 2004/05, whereafter the 70% guarantee principle apply S-grant –S-grant is divided between category B and C municipalities in line with functions performed –S-grant split up: Water (23%), electricity (41,9%), Sanitation (11,6%), refuse (23,3%) I-grant –Grant allocations for district are now determined by the same formula as category B municipalities Free basic services –Allocations determined by the S-grant formula and 1996 Census data on municipal infrastructure for poor households

60. Equitable share cont No major changes introduced in 2003/04 except –Reconfiguration with powers and functions –Introduction of windows for free basic services –Incorporation of transition grant Formula will be reviewed in 2003/04, to take account of –2001 Census results –Revenue raising powers and future of RSC levies –Feasibility of levies on electricity and water

61. Infrastructure Grants Grows from R4,1 bn to R4,9 bn over the MTEF –R1,8 bn additional for new and rehabilitation –R1 bn for labour-based infrastructure Beneficiaries: –Category A: 16% –Category B: 16% –Category C: 68% (subject to further distribution to B’s) Allocation criteria or formulae in Appendix E2 –Need for greater transparency for future budgets Rationalisation of grants over the MTEF into new MIG (Municipal Infrastructure Grant)

62. Infrastructure cont Nodal areas receives priority 49% of the total infrastructure grants goes to nodes 84% of metropolitan munis allocations goes to urban development nodes 51% of district munis allocations goes to rural development nodes

63. Infrastructure cont Big grants such as CMIP and Water Capital allocate the bulk of their allocations to Category C municipalities In the case of CMIP allocations may be further distributed to category B munis These programmes are also prone to slow spending with huge transfers occurring at the end of the financial year Payment schedules are not honoured and amended without Treasury’s knowledge

64. Phased introduction of MIG Infrastructure grants will be rationalised over MTEF into a single Municipal Infrastructure Grant (MIG) Commence with phased transition to a formula driven infrastructure grant Existing commitments will be honoured Inclusion of poverty relief grants subject to Cabinet review Electricity grant will be incorporated when there is more clarity on the restructuring of electricity industry

65. Metropolitan LG Allocations (2003-04 mun year) eThekweni (DBN) R506,2 mil JHBR364,0 mil Cape TownR291,6 mil EkurhuleniR275,5 mil TshwaneR251,3 mil Nelson MandelaR210,6 mil National TotalR11,5 bn –Metros R1,9 bn or 16.5%

66. District Council and Local Allocations (2003-04 mun year) Amatole munis (DC+Bs)R656,6 mil –District Council R268,2 mil –Buffalo City (EL)R234,9 mil uMgungundlovu munisR314,0 mil –Msunduzi (PMB)R134,0 mil –District Council R134,5 mil O.R. Tambo munisR708,1 mil VhembemunisR395,6 mil

67. 2003/04 Transfers to Category A, B and C Municipalities

68. 2003/04 Allocations to Selected Municipalities (refer to Appendix E4-E6 of Annexure E)

69. Capacity Building Grants R300 mil additional allocation over MTEF Further R233 mil shifted from provinces to national Schedule 2 Recurrent allocations and Schedule 4 (page 30) on DPLG vote –DPLG: Municipal Systems Improvement Grant –NT: LG Fin Mgt Grant and Restructuring –Provinces: CMIP and MSIP Little info on outputs for capacity grants

70. Areas of Improvement for 2003 Division of Revenue Bill

71. Improving Management of Conditional Grants Financial reporting on transfers is weakest part of accountability system DoR grants management improving since 2000 First problem is simply to confirm all transfers made ito of DoR Bill –2001/02 financial statements too general –2002/03 financial statements will be more detailed, showing per grant per province and per municipality

72. Improving Management of Conditional Grants Second Issue is that all grants are budgeted for by the receiving province/municipality –responsibility of transferring depart to confirm Third Issue is whether monthly reports are submitted (on time) –Role of transferring dept to withhold if do not receive monthly report Forth issue is that grants tranferred if spending level is as planned –No spending no transfer

73. Improving Management of Conditional Grants Fifth Issue is that annual report provides detailed info on outputs and performance –no point to a conditional grant if a national dept unable to provide this detailed analysis Agree with Auditor-General that internal audit and audit committee must be improved to report on DoR compliance Should AG not issue a compliance report against DoR Act, even if this is merely to confirm all allocations?

74. NT capacity and restructuring grants NT financial management grant –Municipal Financial Management Reform Programme initiated in 2000/1 –39 pilot municipalities in 2002 –Expanding programme to 62 municipalities in 2003 –Financial Management Grant disbursed WB programme –First phase - International advisors placed in 9 munis –Second phase – further 10 to be placed in next three months –Aligned to capacity building strategy and leveraging donor support Restructuring grant supports larger budget munis (R300 mil) –Jhb and seed funding to 16 munis in 2002

75. 2003 Division of Revenue Bill

76. DIVISION OF REVENUE BILL, 2003 Bill largely same as 2002 Division of Revenue Act –Clause nos are identical, and refer to same issue Substantive changes –New section 5 to deal with earlier publication of LG allocations Section 5(7) a new approach to ensure LG more transparent –Section 8 on national public entities performing municipal service functions Largely affects ESKOM and Water Boards Must become external mechanisms ito Mun Systems Act –Sections 15 and 17 to obligate provincial publication of LG grants per municipality Changes due to earlier per municipal allocations

77. DoR Bill: Parts I and II Definitions and Equitable Share S5- S5(1), (2), (3), (4), (5) and (6) –Revised to recognise early publication of LG equitable share by municipality in Sched 3 –Formula published in Annexure E, so need for consultation process that has already happened –No change to quarterly payments Substantive addition s5(7) will force municipalities to be more transparent whilst MFM Bill not applicable

78. DoR Bill: Parts I and II S4 removes “weekly” before instalments, in recognition of better cash management –new reforms to transfer in line with actual expenditure trends No other changes to sections 3,4 and 6 Deletions of unnecessary definitions and objectives in section 1 and 2 –definition of SALGA, municipal public entity –change to “next financial year” –removal of fin management objective

79. DoR: Part III (Other allocations) Section 8 has been substantially changed –To get municipalities to take responsibility in line with Constitution –Better accountability and reporting to municipality by national public entities that are effectively external mechanisms ito Systems Act S7- allocation to the provinces and those to municipalities are dealt with separately because of earlier publication of LG allocations by muni (hence addition of s7(6)) –S7(3) and (7) direct charges

80. DoR: Part III (Other allocations) S9, 10, 11, 12 are essentially the same –section 9 made shorter in light of s6(3) –New s11(3) should be removed to be in line with 2002 DoR Act –New section 12(2) to make provision for reporting on s12(1) Revision of section 13 –Takes account of international assistance programme with World Bank for NT’s financial management grant –Widens scope of framework to cover IDP and performance management training –Better reporting on outputs (to ensure LG’s benefit, rather than consultants!)

81. DoR: Part IV and V (Duties) No significant changes in Part IV Most imp change to s15 and 17 (read together) –Relates to provinces also publishing municipal allocations per municipality with their budgets –Need to allow for new allocations after prov budget through a new sub-clause s17(3) S18 refers to financial statements rather than annual report to ensure auditing by AG S20 on duty of AG –Issue of how to audit for all transfers, to ensure they are in accordance with DoR Act Issue of special report by AG in section 20(1) AG view taken into account: “must” changed into “may” New addition s20(2) to get better internal audit process

82. DoR Bill: Part VI Standard, no change –Obvious changes to reference to Schedule nos –Recognise section 5(7) on withholding of LG equitable share in section 21 and 22(1)(b) Reallocations in s23 only allowed between municipalities in same district Section 24(1) adjusted to recognise earlier publication of LG allocations Section 34 has new (1) and (2) to take account of mistakes to 2002 DoR Act on DWAF allocation (corrected in Schedule 8 in this Bill)