14 March 2000

The Chairperson on the Finance and Economic Affairs Committee, Ms J L Fubbs, tabled a negotiating mandate on the Division of Revenue Bill [B8-2000] as follows.

1. Process followed

The Standing Committee on Finance and Economic Affairs deliberated on the Division of Revenue Bill [B8-2000], a Section 76 Bill, which was introduced in the National Council of Provinces.

· The Chairperson and Mr Mike Seloane attended a meeting and a briefing on the Bill, which was deliberated on by provincial delegates.

· Subsquently the Committee having received reports of the meetings and briefings at the NCOP, deliberated on the Bill. The Committee satisfied itself that the Bill addressed the constitutional requirements for an equitable division of revenue, taking cognisance of economic disparities and addressing the fiscal capacity and efficiency of provinces and municipalities.

· The consultative process generates the information on which a decision is made and involves local and provincial spheres of government and the Financial and Fiscal Commission (FFC).

· The role of the FFC, in particular, requires the provision of technical data and information to better inform the political process, including considerations of the Budget Council, the Budget Forum, MinMECs, cabinet and parliament.

2. Principle of the Bill

The principle of the Bill is informed by Section 214(1) of the Constitution and the Intergovernmental Fiscal Relations Act, 1997 to provide for the following:

· the equitable division of revenue raised nationally among the national, provincial and local spheres of government;

· the determination of each province’s equitable share of the provincial share of that revenue;

· any other allocations to provinces, local governments or municipalities from the national government’s share of that revenue, and any conditions on which those allocations may be made and

· section 214(2) of the Constitution requires that the Bill may only be enacted after the provincial and local spheres of government and the FFC have been consulted, and after any recommendations of the FFC have been considered.

2.1 Position on revenue shortfalls and excess

With respect to shortfalls and excess revenue, it is clear that the national sphere of government is more capacitated to manage risks arising from shortfalls. There also seems to be no reason why provincial governments and local government should not benefit from the excess of revenue that may arise.

· There may be a need to consider a review of the existing fiscal framework, which takes into account revenue escalation arising from increases in inflationary forces which also impact on expenditure. This view is informed by the principle of co-operative governance, equity, efficiency and effectiveness

2.2 Fiscal equity

The cost of servicing all grants impacts directly on the vertical allocation of nationally raised revenue, and further distorts the horizontal equitable division of revenue.

· Given that provinces have limited revenue raising capacity, attempts to incorporate such costs into equalisation formulas would contribute to the fiscal equity and efficiency of the three sphere system of governance.

· The differences in demography and geography as evidenced in the 1996 census has added a further complexity and has opened the way to diluting fiscal integrity which is evident in the infrastructural backlogs and in the incapacity in some areas within provinces to utilise the allocated financial resources. There is a need for norms and costs to be factored into the allocation of grants to provinces.

3. Provisions

The Constitution sets out the essential pre-requisites for an equitable Division of Revenue based on broad intergovernmental fiscal arrangements within the principles of co-operative governance.

The Bill requires that the following issues be taken into account:

· the national interest;

· any provision that must be made in respect of the national debt and other national obligations;

· the needs and interests of the national government, determined by objective criteria;

· the need to ensure that the provinces and municipalities are able to provide basic services and perform the functions allocated to them;

· the fiscal capacity and efficiency of the provinces and municipalities;

· developmental and other needs of provinces, local governments and municipalities;

· economic disparities within and among the provinces;

· obligations of the provinces and municipalities in terms of national legislation;

· the desirability of stable and predictable allocations of revenue share and

· the need for flexibility in responding to emergencies or other temporary needs, and other factors based on similar objective criteria.

In terms of Section 10 of the Intergovernmental Fiscal Relations Act, 1997 (Act No 97 of 1997) ("the Act"), each year when the annual budget is introduced, the Minister of Finance must introduce in the National Assembly a Division of Revenue Bill for the financial year to which that budget relates.

3.1 Concerns raised by the Committee

· The Committee remains concerned about the timing of the Division of Revenue Bill, after the tabling of the National and Provincial Budget. It is suggested that the timing of the Division of Revenue be reviewed so that it occurs prior to the Medium Term Expenditure Statement which occurs in the September preceding the new financial year.

· Economically active people generally stay close to employment opportunities, so it is not surprising that Gauteng attracts large numbers of people seeking work from other provinces and also from beyond our borders. The Committee was concerned that this exerted an intolerable pressure on existing infrastructure and budgeted services in the short term. The Intergovernmental Fiscal Review of September 1999 indicates that this province has proportionally fewer school aged children and elderly people, but that given the size of its population social spending is still high in absolute terms.

· The Committee supports conditional grants being used as a fiscal instrument to ensure that general principles of non-discrimination, equal access and mobility rights are guaranteed, or put another way that conditional grants attempt to harmonise the design of programmes that have implications for inter-provincial exchange.

· However when conditional grants are used to achieve objectives of equity they begin to distort the effects of the horizontal implementation of the equitable division of revenue between provinces.

· With respect to the change of Housing from an agency payment to a conditional grant, the Committee supports this in the interests of improving transparency and accountability.

· The Committee further supports the use of conditional grants for building administrative capacity as the development of capacity has been identified as a critical component of delivery.

· The time has come for a review in the both the vertical and horizontal division of revenue informed by the six years of experience in government and comparative analysis of the principle of equitable division of revenue as applied elsewhere in the world. The Committee believes that the costed norms approach study developed by the Finance and Fiscal Commission and recently published offers a platform for more robust allocations and should be considered in the future.

3.2 Comment

The Committee accepted the Principle of the Bill, but would like to place on record:

· that The Committee remains concerned about the timing of the Division of Revenue Bill, after the tabling of the National and Provincial Budget.

· There is a need to retain the integrity of the Conditional Grants paid by National.

Negotiating positions adopted by the Committee

The Committee had the following recommendations:

· With reference to Clause 8(3) the Committee would appreciate a confirmation that if costs rise above 2% that negotiations are timeously held to avoid payments being made to Provinces in the last three months.

Principle of the Bill

In terms of section 65 of the Constitution, the Finance and Economic Affairs Committee recommends that the House confer authority on the Gauteng Provincial Delegates to the NCOP to negotiate on the Division of Revenue Bill [B8-2000]

J L Fubbs

Chairperson: Finance and Economic Affairs Committee