FINANCIAL AND FISCAL COMMISSION

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

2. 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

3. 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

4. Strategic Issues • 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)

5. 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

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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.

12. 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