FFC Submission: Division of Revenue Bill 2007 Presentation to The Select Committee on Finance

1. FFC Submission: Division of Revenue Bill 2007 Presentation to The Select Committee on Finance National Council of Provinces _____________________ Cape Town, 28 February 2007

2. Presentation Contents • Part 1: Introduction • Part 2: General issues on DoR Bill 2007 • Part 3: FFC Comments on Government’s response to its Recommendations • Part 4: 2007 Division of Revenue Allocations – Spending Priorities and Performance

3. Introduction • Submission in terms of Chapter 13 of the Constitution and the IGFR Act – S 214 (1), (2) a-j, S220 (3) • Equitability of shares & other considerations • Consultation with National Treasury • Issues arising during the budget process • Observations on allocations

4. General Observations on the 2007 DoR Bill • Reallocation and stopping of funds • Commission supports the principle • Commission is of the view that principle’s application needs to be tightened • Ensure that no unintended consequences arise • Strengthen the role of the Treasuries and Budget Council • Accreditation of municipalities in housing • Commission is of the view that the clause should be kept and that the process be expedited through the HoD of Housing • Commission made this recommendation in 2004 and government supported it

5. Funding mega projects: Gautrain Rapid Rail Link • There are at least 2 ways of funding mega projects • Borrowing Powers Act • Request National Government to borrow on its behalf • Latter shifts immediate burden of debt servicing • The need to take into account s214 (2) a-j • No fears at this stage of debt unsustainability • But if viewed as precedent setting, this can threaten debt sustainability

6. 2010 FIFA World Cup • Huge commitment to hosting of World Cup • Via conditional grant and equitable share • Unlikely that normal services will be crowded out within the equitable share • Still a need for extra safeguard measures • Another threat is limited productive resources • Funding of “legacy effects” needs clarification

7. Comments on Government’s Response to FFC’s Recommendations • Submission covered • Conditional grants • Financing welfare services • Local government equitable share formula • Provincial own revenue and the PTRP Act • Supplementary Submissions • Western Cape Fuel Levy • The implications of the re-demarcation process • Municipal fiscal Powers and functions • This submission focuses primarily on areas of difference between FFC and areas of future work

8. Conditional grants • Generally, there is agreement with the two key principles that the Commission proposed with respect to the use of Conditional grants • Grants should be used to deal with spillovers and to fund new priorities that require institutionalisation in sub-national budget processes • Definition of norms and standards in areas of concurrent responsibility to enable monitoring of service delivery and ensure compliance with minimum requirements for the grants

9. Specific grants • Hospital revitalisation Grant • Government is exploring issues around the two grants (provincial infrastructure grant) and will report in the 2008 Budget • Commission will await the findings of government’s work • Land Care and Comprehensive agricultural Support Grants • Government is of the view that these two serve different objectives. • Commission was concerned with the administrative burden • National School Nutrition Program Grant • Government currently reviewing the grant and will consider Commission’s recommendations in the context • Commission will be making further recommendations on the grant for 2008 division of revenue • Currently finalising a report on this grant for the SCoF as requested last year • Municipal Infrastructure Grant • Government is of the view that municipalities are required (MFMA) to budget for maintenance and operation of infrastructure • Commission subscribes to this view as well but believes that for municipalities that do not have sufficient revenue raising capacity, the infrastructure that is rolled out may be deteriorating fast as there is no automatic link between the LES formula and the MIG

10. Grants Cont. • HIV/AIDS Life skills education grant • Government is of the view that the long-term approach should be to phase this grant into the equitable share formula • Commission agrees with government as this is consistent with its recommendation that in the long term programs funded by grants should be integrated into the budget processes of sub-national governments • Health professions training and development grant • Government highlights the challenges that are associated with implementing the Commission’s recommendations • Commission appreciates the challenges and will continue doing further work in order to address some of these • National Human Settlement Development Grant • Government does not agree that the formula should cater for differences in regional costs on grounds that this will be a difficult exercise that might complicate the formula • Commission notes the government’s response but also observes that these differences are quite significant • Commission is conducting further research on the matter as part of its long-term research agenda

11. 2007 D.o.R. Provincial Allocations: Spending Priorities & Performance A.S.G.I.S.A. and Other Policy Priorities & Performance • Implies cross-departmental emphasis on capital (infrastructure & machinery) and training (personnel & beneficiaries) over personnel; • Average real growth of provincial budgets over 2007 MTEF is 4.13% p.a. Capital budgets grow at 5.46%; training at 7.35% and personnel at 2.29%.

12. Provincial Infrastructure Services • A.S.G.I.S.A. and World Cup emphasize infrastructure services. For provinces, this is transport, housing and agriculture. • Transport no longer prioritized, despite rapid growth and low under-spending over past 3 years (growth drops from 11.2% to 2.1% p.a.). • Housing is being prioritized with real growth of 9.3% p.a. projected, after 3 years of stagnation.

13. Cont. • Agriculture continues to grow at above the provincial average but real growth rates halved to 4.31% p.a. • Growth path of infrastructure budgets and spending very volatile. This hampers effective planning and delivery. Provincial Social Services • Education & Health constitute 70% of provincial budgets but are personnel-intensive and exhibit more stable growth paths.

14. Cont. Provincial Social Services • Both education and health grow at below average rates and contribute to keep spending growth below revenue growth. Provincial Governance Services • After 3 years of higher than average growth of Premiers’ Offices and even higher growth of Provincial Legislature spending (7% & 13.7% respectively); both functions are projected to grow at negligible rates over the 2007 medium-term budget.

15. Cont. Provincial Governance Services • Within Premier’s Offices, the Policy & Governance programs have been growing fastest. Personnel spending has been and is projected to grow faster than average. Capital spending has generally been declining save for anomalously big capital spends in KZN & Limpopo in 2006. • Under-spending rates vary between 3 & 6% over past 3 years but much higher in capital budgets (11 to 23%).

16. Cont. Provincial Governance Services • Within Provincial Legislatures, the Policy & Governance programs have also been the fastest growing components. Personnel budgets have grown at below average rates, whilst capital spending has been declining, implying that transfers may have been the primary cost-drivers. Budgeted growth for all components in very moderate for the 2007 MTEF. • Overall under-spending rates varied between 4 and 7%, whilst on capital they have ranged between 25% and 55% over past 3 years.

17. Conclusion • Departmental policy performance against priorities, spending against budget performance and availability of data on service delivery will be further discussed at Select Committee of Finance’s Departmental Hearings on DoRB 2007 next week.