OF THE REPUBLIC OF SOUTH AFRICApmg-assets.s3-website-eu-west-1.amazonaws.com/docs/...The Select...

No 106—2004] FIRST SESSION, THIRD PARLIAMENT

PARLIAMENTOF THE

REPUBLIC OF SOUTH AFRICA

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ANNOUNCEMENTS,TABLINGS AND

COMMITTEE REPORTS————————————————————

MONDAY, 15 NOVEMBER 2004

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TABLE OF CONTENTS

ANNOUNCEMENTSNational Council of Provinces

1. Membership of Committees ........................................................ 1295

TABLINGSNational Assembly

1. The Speaker—letters explaining delays in tablings .................... 1296

COMMITTEE REPORTSNational Council of Provinces

1. Security and Constitutional Affairs ............................................. 12962. Finance......................................................................................... 12973. Finance......................................................................................... 1311

ANNOUNCEMENTS

National Council of Provinces1. Membership of Committees

(1) Mr F Adams has been elected Chairperson of the Committee onMembers’ Legislative Proposals with effect from 15 November 2004.

ANNOUNCEMENTS, TABLINGS AND COMMITTEE REPORTS NO 106—2004

Monday, 15 November 2004] 1295

TABLINGS

National Assembly1. The Speaker

Letter from the Minister of Arts and Culture dated 29 October 2004 to theSpeaker of the National Assembly, in terms of section 65(2)(a) of the PublicFinance Management Act, 1999 (Act No 1 of 1999), explaining the delay inthe tabling of the Annual Reports of Arts, Culture and Heritage Institutionsfor 2003-2004:

Dear Madam Speaker

EXPLANATIONS FOR THE LATE TABLING OF ARTS, CUL-TURE AND HERITAGE INSTITUTIONS’ANNUAL REPORTSIN ACCORDANCE WITH SECTION 65(2)(a) OF THE PUBLICFINANCE MANAGEMENT ACT, NO 1 OF 1999: 2003/2004

In terms of section 65(1)(a) of the above-mentioned Act the annualreports and financial statements, and the audit reports on thosestatements, of the Arts, Culture and Heritage institutions listed belowwere tabled late or have been tabled.

The following are reasons for late tabling of reports or for reportswhich have not yet been submitted:

1. The completion of the Annual Report and Financial Statementsof the National Arts Council was delayed as a result of thesuspension of three memebrs of senior management, thecompletion of a forensic audit and the subsequent disciplinaryprocedure against the three persons.

2. The Reports of the Robben Island Museum were delayedbecause the Auditor-General insisted the a count of fixed assetsbe conducted and that the asset register be brought up to date. Afurther contributing factor is that a CEO for the museum has todate still not been appointed.

3. The Reports of the Windybrow Centre for the Arts were delayeddue to the fact that the printer commissioned to do the printingwent bankrupt and another printer had to be sourced to do theprinting.

Yours sincerely,

signedZ PALLO JORDAN, MPMINISTER

COMMITTEE REPORTS

National Council of Provinces1. Report of the Select Committee on Security and Constitutional

Affairs on Draft Notice for Declaration of Amnesty, dated 11November 2004:

1296 [Monday, 15 November 2004


The Select Committee on Security and Constitutional Affairs, havingconsidered the request for approval by Parliament of the Draft Noticefor Declaration of Amnesty in terms of the Firearms Control Act,2000 (Act No. 60 of 2000), referred to it, recommends that theCouncil, in terms of section 139(2)(a) of the Act, approve the saidDraft Notice.

The Committee further recommends that, in implementing thisdeclaration of amnesty, the Department assist illiterate people infilling in the application forms.

Report to be considered.

2. Report of the Select Committee on FInance on the MediumTerm Budget Policy Statement (MTBPS), dated 10 November2004:The Select Committee on Finance reports as follows:

1. Introduction

The Minister of Finance tabled the MTBPS in Parliament on 26 October2004. In a joint sitting on 27 October 2004, the Select Committee onFinance, the Portfolio Committee on Finance and the Joint BudgetCommittee were briefed on the MTBPS by the National Treasury, led bythe Minister of Finance.

Furthermore, two economists and a research organisation appeared beforethe Select and Portfolio Committees on Finance on 29 October 2004, vizProf Brian Kantor from Investec, Mandla Maleka from ESKOM andMs Penny Parensie from the Institute for Democracy in South Africa(IDASA).

2. Overview of MTBPS and Briefing by National Treasury

2.1. World Economic outlook

The National Treasury reiterated the sentiments expressed in the MTBPSregarding global developments and economic growth. The Minister ofFinance, Hon Trevor Manuel, indicated that the MTBPS is tabled at a timeof difficulty in the global economy, including high oil prices (which haverisen to $50 a barrel), and moderate global economic growth. There isgrowing recognition that this is not just a temporary occurrence, but couldimpact on long-term economic growth, both at domestic level and globally.However, the National Treasury continuously monitors developments inthis area, including the inflationary impact on the domestic economy, asthese affect the South African economy continuously.

South Africa’s continuous participation in global trade reform, economicdevelopment and transformation is crucial, as it will improve market accessof South Africa’s exports in the global economy.

2.2. Economic and fiscal policy reform and benefits in past 10 years

Economic growth is expected to rise steadily in the MTEF period, with theexception of the third year of the MTEF, in which it decreases marginally.This scenario will be informed by increased domestic demand, low interestrate, a strong Rand, improved consumer and business confidence, as well asstrengthened recovery of the global economy. Economic growth is alsoexpected to be strongly informed by the micro-economic reform strategy,with emphasis on infrastructure development, upgrading of transportinfrastructure, extension of energy capacity and strengthening human



resource skills and challenges. Both State-owned enterprises and theprivate sector will play a crucial role in this regard.

Low inflation, a stronger Rand and increased economic growth have had anet effect of pulling down interest rates. Inflation and interest rates areprojected to remain low, with the possibility of decreasing even further overthe MTEF period. CPIX inflation is expected to remain within the targetrange of 3-6% that it has maintained since September 20031.

In addition, the Government has made significant strides in terms of publicfinance and the budget transformation and reform process. Throughlegislation such as the Public Finance Management Act (PFMA), 1999,accountability and management of public resources continuously improve.

Table 1: Macroeconomic forecast2

Calendar Year 2004Estimate

2005 2006 2007

Household Consumption 4,3% 3,9% 3,5% 3,7%Government Consumption 5,4% 2,9% 3,1% 3,3%Gross Fixed Capital Formation 9,6% 8,2% 7,7% 8%Exports 2,3% 3,7% 4,9% 6,9%Imports 12,7% 5,9% 5,7% 7%Real GDP Growth 2,9% 3,9% 3,7% 4,2%CPIX Inflation 4,4% 5,1% 5,0% 5,1%Current Account Balance (% of GDP) -2,2% -2,7% -2,5% -2,7%

One of the most important strategies to improve economic growth is theGovernment’s plan to raise the overall rate of capital formation from itspresent level of about 15-16% of GDP to 25% by 2014. Currently, privatesector investment growth has been the main source growth, and willcontinue to be reinforced by rising public sector investment in transportinfrastructure and household services. Investment in transport infrastruc-ture, more efficient communications and information technologies andaccelerating the pace of investment in housing and community services willbe prioritised in line with the micro-economic reform strategy.

Important policy priorities for the MTEF period include reducing theregulatory burden on businesses, investing in skills and education, landreform and agricultural development, improved municipal developmentplanning and administration and a comprehensive response to HIV andAIDS and associated social development challenges. The Minister ofFinance and economists indicated that human resource constraints in theeconomy are cause for concern.

The growth in domestic output strengthened over the first part of 2004,supported by the global recovery, strong domestic demand and moderateinterest rates. Although all sectors indicate positive growth trends, theservices sectors were the main source of growth. Manufacturing andconstruction have also recorded more growth during the current year3.

1. CPIX Inflation was 3,7% in August 2004, and is forecast to average 4,4% during 2004. It is also expectedto remain within the target range, raising somewhat due to high demand pressures and exchangerate-related import costs to about 5% in 2005.

2. The values for he MTEF period areall forecast values (MTBPS: 9).3. Although the construction sector grew significantly, the latest Survey for employment and Earnings by

Statistics South Africa indicates that employment by the sector fell from 333 700 to 282 000 (-15,6%) jobsover the past 12 Months. The overall economy has shed 73 000 jobs over the same period, representing1,15 of the formal sector and a total of 6 497 jobs.



With regard to employment creation, the results of the Labour ForceSurvey, conducted from March 2003 to March 2004, have shown positiveresults4. In the short term, the government aims to accelerate investmentand job creation through targeted incentives and Extended Public WorksProgrammes (EPWP) for sustained longer-term growth. The EPWP,together with a strengthened focus on skills training and capacity building,will play a crucial role in narrowing the duality of the economy.

2.3. Fiscal Framework and Revenue issues

Tax policy considerations for the 2005 Budget include:� Tax reforms to amend the tax burden on small and medium-sized

enterprises, which is particularly important to the Government’s plans toeradicate poverty and inequality.

� Review of tax treatment of health care benefits, which has unintendedeffects and is not satisfactorily aligned with the objectives of healthpolicy.

� Review of deduction of business travel cost against the motor vehicleallowance.

� Review and reform of the tax aspects of the pension fund industry.� Review of mineral taxation.� Other taxes to be considered, relate to the FIFA World Cup 2010,

Value-Added Tax (VAT), environmental fiscal reform and taxes relatingto the lower spheres of government, particularly provinces.

National revenue estimates this year are expected to exceed the Februarybudget estimate, from R327 billion to R328,2 billion, as a result of gains inpersonal income tax and VAT receipts offsetting the anticipated shortfall incorporate tax proceeds5.

The budget framework presented in the 2004 MTBPS provides for growthin real non-interest expenditure of 4,3% in real terms over the MTEF periodand then by over 6,5% in 2005/06. The fiscal deficit is set to increase to3,5% of GDP in 2005, and then declines to 2,7% by 2007/08.

Total non-interest revenue to be divided between the three spheres ofgovernment is R357,5 billion for 2005/06, R387,5 billion for 2006/07 andR416,5 billion for 2007/08. This translates to a real growth rate of 5% in2005/06, 3% in 2006/07 and 2% in 2007/08 (IDASA: 2004)6. Allocationsto Provincial and Local Government spheres are expected to increase overthe MTEF, with Local Government increasing at the expense of NationalGovernment.

4. The survey results indicate an increase in total employment in the South African economy of 419 000 jobssince March 2003. The estimate of the unemployment rate declined from 31,2 per cent in March 2003 to27,8 percent in March 2004.

5. The main budget revenue is R1,2 billion higher than projected, mounting to R328,2 billion. Higher thanprojected increases in remuneration together with buoyant consumer spending are projected to offset thetax revenue impact of lower corporate tax revenue. Gross tax revenue in 2004/05 is estimated to be R1,9billion higher than estimated mainly due to higher than projected revenue of R3,8 billion from personalincome tax and R4 billion from value-added tax. Corporate income tax is expected to yield R6,2 billionless than budgeted this fiscal year. Over the MTEF period, rising corporate taxes and further tax basebroadening measures will contribute towards increased revenue buoyancy resulting in a slight increase inthe overall tax burden.

6. IDASA’s response to the MTBPS.



The bulk of resources will go to provinces, but National Government willget the bulk of resources, although the share to National Governmentwill increase in the third year of the MTEF7. The table below indicates thepercentage shares of additional resources among the three spheres ofgovernment.

TABLE 2: Division of additional resources between the three spheresover the MTEF8

Percentage share2004/05Estimate 2005/06 2006/07 2007/08 Total

NationalDepartments 27,4% 19,0% 24,2% 32,1% 27%Provinces 69,3% 75,5% 70,2% 62,3% 67,4%LocalGovernment 3,4% 5,5% 5,5% 5,7% 5,6%

In terms of the total resources, provincial government gets 58,3%, NationalGovernment 37,1% and Local Government 4,6%. The table belowindicates the division of total resources between the three spheres.

Table 3: Division of total resources between the three spheresPercentage shares 2004/05 2005/6 2006/07 2007/8

National 38% 37,2% 36,9% 37,1%Provincial 57,5% 58,1% 58,4% 58,2%Local Government 4,5% 4,6% 4,6% 4,7%

Table 4: Percentage Growth between spheresPercentage growth 2004/05

Estimate2005/06 2006/07 2007/08

National 12,6% 8,9% 7,6% 8%Provincial 14,7% 12,2% 8,9% 7,1%Local Government 16,9% 14,3% 8,3% 8,1%

3. MTEF Allocations

The main budget revenue is R328,2 billion, which is R1,2 billion more thanthe budget estimate made in the 2004 budget review due to higher thanexpected revenue9. The deficit is projected to be 3,2% in the 2005/06financial year, 3,5% in 2006/07, and then reduced to 2,7% by 2007/08 forsustainability reasons.

The MTBPS projects growth of 4,3% in overall non-interest expenditure,representing additional expenditure of R50 billion over the MTEF. Most ofthe additional funds will be allocated to the social services sector.

Total non-interest revenue to be divided between the three spheres ofgovernment is R357,5 billion for 2005/06, R387,5 billion for 2006/07 andR416,5 billion for 2007/08. This translates to a real growth rate of 5% in2005/06, 3% in 2006/07 and 2% in 2007/08 (IDASA: 2004)10.

Table 1 indicates the real growth in consolidated National and Provincialexpenditure over the MTEF.

7. This is partly due to the shift of the social security function to the National Social Security Agency.8. The allocation from 2005/06 to 2007/08 are projections.9. This resulted from personal income tax of R3,8 billion higher than expected, VAT collections R4 billion

more than expected and transfer duties were R1,2 billion higher than expected. These were, however, offsetby lower than expected corporate taxes, resulting in an excess of R1,2 billion.

10. IDASA’s response to the MTBPS.



Table 1: Real increase in consolidated National and Provincialexpenditure by type of service

Service

2004/05RevisedEstimate

2005/06projection

2006/07Projection

2007/08Projection

AnnualAverage2004/05-2007/07

Protection Services 2,5 6,2 1,0 -0,4 2,3Defence -4,7 5,9 -2,8 -5,5 -1,8Justice, police andprisons 7,0 6,4 3,1 2,2 4,7Social Services 8,6 5,3 3,5 1,2 4,7Education 4,7 2,6 1,5 1,5 2,6Health 2,0 5,0 3,7 1,8 3,1Social Security andWelfare 17,9 11,5 6,0 0,4 8,9Other Social Services 12,0 -3,3 -2,3 1,2 3,0Economic Servicesand Infrastructure 8,3 2,9 3.8 7,7 5,7Water and relatedservices 6,4 1,0 -1,0 2,0 2,1Agriculture, forestryand fishing 4,9 4,7 4,8 2,7 4,3Transport andCommunication 5.9 0,0 4,4 8,1 4,6Other economic ser-vices 12,7 5,7 4,5 11,1 8,5Other 5,6 2,7 1,3 3,4 3.2Contingency Reserve 0,0 0,0 26,7 89,9 29,2Total 7,2 5,8 3,1 2,9 4,7

Source: IDASA Budget Information Service (MTBPS 2004, Table 5.2, Pg 57)

4. Provincial and Local Government Spending

Allocations to Provincial and Local Government spheres are expected toincrease by 4%. However, National Government will receive a bigger sharein the third year of the MTEF11. Provinces will receive the majority ofadditional resources (67,4%), while National Government receives 27%and Local Government receives 5,6% over the MTEF.

In terms of the 2005 financial year, provinces receive 75,5%, NationalGovernment receives 19% and Local Government receives 5,5%.

In terms of the total resources, Provincial Government receives 58,3%,National Government 37,1% and Local Government 4,6% in the 2005/06financial year. In addition, all three spheres reflect real growth inallocations.

Provincial Spending

In terms of provincial spending, the most important policy change will bethe shift of social security to the National Social Security Agency, as wellas the inclusion of the primary health care function, which was previouslyprovided by Local Government, in the provincial budget. The addition of anationally administered conditional grant for social security is the majorchange to the conditional grant framework for the 2005 Budget. The grantwill be effected from 1 April 2005 as an interim measure in preparation forthe shifting of the administration of this function to the Social SecurityAgency.

11. This is partly due to the shift of the social security function to the National Social Security Agency.



Other important shifts include the Integrated Nutrition Programmeadministered by the Department of Health, which will now be administeredby the Department of Education, and the housing subsidy programme.

Local Government Spending

The Local Government equitable share rises by R2,3 billion over theMTEF, which will mainly be utilised for providing basic municipalservices. Furthermore, additional infrastructure grants grow by R500million for the expansion of municipal infrastructure networks over thethree-year period. A smaller fraction of Local Government expenditure willbe utilised for capacity-building.

Committee Concerns and Comments

Most of the issues were raised within the context of trends and issues in theMTPBS 2004. The issues raised related to the following issues:

1. There was general satisfaction regarding the liberalisation of exchangecontrols and establishment of South Africa as a financial centre. However,a concern was raised regarding the move by Botswana to compete withSouth Africa, particularly as Botswana offers more attractive interest ratesthan South Africa (15% as opposed to the 25% offered by South Africa).

The Treasury indicated that South Africa is not far off the mark byinternational standards in terms of interest rates. In addition, the SADCtreaty and protocol advocates mutual support rather than competitionbetween SADC countries and thus Botswana violates this. The move by theRepublic of Botswana could have implications on regional SADCharmonisation challenges such as macro-economic policy, includingfinancial regulations.

2. The balance between current and capital expenditure was raised as apoint of concern in terms of the balance between the capital and currentaccounts being understated according to the PFMA12. This was also raisedin relation to the Ministry of Public Enterprises, where R165 billion isexpected in areas such transport, ports and electricity infrastructure.

The National Treasury indicated that the PFMA and related NationalTreasury Regulations provide guidance on these matters, and that the Actemphasises the responsibility of Accounting Officers in this regard.

The Treasury, however, also noted that challenges such as budgeting withinthe cluster system context, whilst ensuring accountability and oversight ofpublic resources, would still need to be addressed and improved on overtime. This is important in view of the government’s integrated approachtowards development, even though from a budgeting point view individualdepartments are still separately budgeted for.

3. A concern regarding whether Government has changed its policyregarding proceeds from the restructuring of state-owned enterprises wasraised. The concern emanated from the fact that the traditional approachhas been to use the proceeds to finance the debt deficits and not to channelthe proceeds into state owned enterprise capital projects.

The National Treasury indicated that there has not been a change in policyand that the present function has always been contained in the policypronouncements, even though infrastructure investment and developmentcould have been de-emphasised in the past.

12. Public Finance Management Act No. 1 of 1999, as amended.



4. A concern was raised regarding whether economic growth of 4% wassufficient and how this relates to the reduction of unemployment, povertyand addressing challenges of the two economies, and whether the countrywill be able to significantly reduce the level of unemployment by 2014. TheNational Treasury indicated that these are continuous challenges thatshould continuously be addressed by 2014 and beyond.

5. A concern was raised regarding whether stability and a positiveexploration of resources in the African continent would ease the oil priceburden. The National Treasury responded that supply and demand willalways determine the selling of some of these resources and that countrieswill always sell their resources to the highest bidder. The problem hasseveral complex dimensions such as refining and shipping. For example,Nigeria has much oil but no refining capacity; this function is carried out bythe private sector.

6. A need to review the Usury Act of 1968 to allow for moneylenders whoexceed a certain credit limit to be charged criminally was expressed.Further concerns were raised regarding moneylenders who are not banksand Mzanzi, as well as the macroeconomic implications of microlenderswho are not bound by interest rate decisions of the South African ReserveBank. Furthermore, the figures of indebtedness of South Africa that werepublished by the SARB and Stats SA do not include debts to micro lendersby mostly poor sectors of the society.

The Treasury responded by indicating that two Bills will be published in thenext two weeks13. A good benchmark in this regard is the establishedBrazilian Post Bank and establishment of little terminals across thatcountry, which successfully facilitates and promotes access to bankaccounts and credit. In addition, access to financial services should be dealtwith in a way that does not throw people to loan sharks, and themicro-lending industry should be further reformed and regulated to servepoor economic sectors.

7. Concerns were raised regarding challenges to the South African taxpolicy and revenue collection system, particularly the decrease in corporatetaxes and its implications on the future sustainability of the tax system. Inaddition, cutting taxes slowly reduces the tax base and the country runs therisk of increasing tax even more in future.

The National Treasury indicated that the tax system would be consolidatedwithin the context of core principles, i.e. efficiency and equity. In addition,tax cuts will not be the centerpiece of the next budget. Furthermore, it wassuggested that the Treasury should consider tax incentives, erosion of taxbase by increase of expenditure, using the budget for development, and theability to measure outputs and outcomes are also important.

8. Concerns regarding exchange rate policy appropriateness and thereliability of inflation targeting were raised. In this regard, it was noted thatstudies on inflation targeting in developing countries indicate that countrieseasily revert back to exchange rate influences and contractions. This runsthe risk of capital migration and further increase in inflation. The Treasuryresponded that the issue is continuously being debated globally. Forexample, New Zealand has introduced the concept and practice of inflationtargeting in the past.

13. The Dedicated Banks Bill and the Cooperatives Banks Bill. The Cooperatives Bank Bill will operate likea village bank. The Dedicated Banks Bill will operate within institutions such as supermarkets. Therecently launched MZANZI account will be an integral part of the two systems. This will hopefullyaddress some of the challenges relating to administering bank accounts for poor people, which is costly.



9. Concerns were raised regarding the lack of clear expenditure allocationfor land (page 52 to 53 of the MTBPS). The National Treasuryacknowledged that there is no allocation for land in the first two years.

10. The issue of different tax formulae for mineral resources such as Goldand Platinum was raised as a continuous point of concern. The concern inthis regard is that at the moment Platinum exceeds other minerals in valueand demand, but this might not always be the case.

The response was that gold mining is not weighted like mining for othermineral such as platinum; it has its own formula, which gives it preferenceover other forms of mining. The National Treasury is currently reviewingthe entire mining sector tax policy. Although they are continuously underpressure, mineral resources such as Gold are still critical contributors toemployment in the South African economy; and Platinum is fairly acapital-intensive mineral resource. Gold mining is an important employerand needs to be protected. In this case, a balance will need to be struck onany policy measures taken.

11. Concerns were raised regarding the increased uptake of social grants.The National Treasury responded that Government has a Constitutionalobligation in this regard and will have to pay the grants until someinvestigations or research have been made and the system has beenregulated. In this regard, administrative capacity; procedures and processesshould be improved to ensure that the right people benefit from grants.Regarding the child support grant, the means test is not followedadministratively. Regarding the disability grants, cabinet has to reach anagreement on the definition of disability. In terms of the foster care grant,there is a loose rational basis and policy state.

A further concern was raised regarding people who are unemployable. Inthis regard, the National Treasury responded that while the Governmentsympathises with unemployable people, it would not allow corruption toundermine administrative and governance systems.

12. A concern was raised regarding the nature of tax incentives for urbandevelopment as proposed in the policy statement. A particular concern inthis regard is that such off-budget expenditure could easily erode the taxbase, crowding our private sector investment or promoting the free-riderproblem. A further concern related to the upgrading of cities.

The Treasury responded by indicating that although the concerns arejustified, Government has a responsibility to discourage urban decay andassist redevelopment in investment in these areas, and that it does not makeeconomic sense to neglect them. Upgrading projects have so far beenapproved only for Cape Town and Johannesburg. Upgrading in Cape Towncovers the whole city.

13. In terms of regulation of the financial services sector, South Africa doesnot have development finance institutions, especially for the poor. TheDBSA is inflexible in comparison with its German counterpart, and aquestion was raised regarding whether the DBSA will consider expansionof its services and decrease its rigidity in its current restructuring plan.

14. Concerns were raised regarding environmental taxes. However, theNational Treasury was cautious in its response, indicating that it was tooearly to tell whether environmental taxes would be included in the RevenueLaws Amendment Bill.



15. The National Treasury indicated that the Extended Public WorksProgramme is expected to create one million jobs in five years and will besupported by the capital expenditure programme. The EPWP will targetpeople with no skills. While capital expenditure is not part of the EPWP, itoffers an indirect benefit in terms of investment and economic growth.

5. Briefing by Economists and Research Groups

The economists expressed satisfaction with economic performance andoutlook, particularly with regard to fiscal policy (restrained expenditureand reasonably strong tax burden), which continues to successfullypromote productivity in the business sector. They also expressed apprecia-tion of the fact that the economic reform plan promotes transparency, andhas thereby gained credibility and encouraged Government to remainconsistent in this regard. In addition, growth is likely to remain strong overthe MTEF period and the Government’s investor-friendly policies arestarting to pay off. The challenge for Government is to attract and retaincapital to finance the boom. However, the economists expressed a generalapproval of fiscal policy and macroeconomic trends, particularly therelaxation of foreign exchange controls.

Monetary policy and inflation targeting trends

The economists emphasise the importance of consistency in managinginflation expectations and targets. Although this may sometimes be out ofmonetary policy authority’s control (e.g. the 1998 and 2001 exchange rateshock), low inflation pulls interest rates down. Conditions such as lownominal interest and interest rate stability are favourable. An additionalbenefit to the South African economy is the increased domestic demand.

Saving and investment strategy

The economists approved the Government’s commitment to raise invest-ment to 25% of GDP and regarded this target as practical and achievable.China, which has an investment rate of 40% to 45% of GDP, was cited asan example in this regard.

Achieving sufficient investment rate

The Government’s tax proposals were generally welcomed as they couldincrease the tax base and assist in decreasing the gap between the First andSecond economies.

Translating successful macroeconomic reform into eradicating povertyand unemployment

Although the economists differ on whether the current economic policystate of affair constitutes a stabilisation phase or a policy trap, there isconsensus that these successes should start yielding results in creating jobs,reduce unemployment and reduce inequality.

The economists contend that prudent use of limited public resources will goa long way in contributing to good governance and improving the lives ofordinary people. The economists also agree that retirement tax should bereviewed.



6. Personal Views of Economists

Prof. Brian Kantor — Investec

Prof Kantor felt that the MTBPS sets the correct context as it advocatesincreasing the pace of economic growth. Fiscal policy remains conserva-tive, and is focused on enhancing delivery through public-private partner-ships. Most importantly, the Government seems to be communicating asingle, well understood message to market participants, which is of greatvalue in diminishing the costs of policy-making by creating a greaterunderstanding, as well as managing expectations.

The crux of Prof Kantor’s presentation entailed the following views:� Although the increase in expenditure is positive for both the first and

second economies, the actual increase is not really as important as theconsequences of the increase to the macroeconomic environment.However, it is encouraging to see that expenditure is focused onmodernising and deepening South Africa’s infrastructure. It is importantthat delivery and efficiency is enhanced through improving managementcapacity.

� It is encouraging to observe that while resources are focused to servicedelivery to the poor, the delivery process itself is to be sharpened toensure that the right people receive relief.

� Government revenue is growing faster that GDP while expenditure isgrowing slower than GDP because of tight fiscal austerity. This ispresently being reviewed and relaxed a bit.

� A stable currency would ensure that Inflation stays down, leading tostable, predictable and low interest rates. Inflation can go lower to 3% ifthe Reserve Bank allows it to.

� Savings are important if the Government is to achieve the MTBPS targetrates of 25% investment, which would ensure economic growth of 5-6%per annum, thereby doubling every 15 years. However, the level ofhousehold savings is very low and is expected to remain low, except inpensions14. In order to ensure more savings, the Government needs tolower corporation taxes to improve company’s savings.The assumption is that this move will mostly benefit pension funds as90% of the shares on the JSE go to pension funds. Thus the consumers,who are also members of these pension funds, will benefit from this15.

� Corporate taxes constitute 27% of all taxes. During the financial yearcorporations invested R140 billion, of which R70 billion went to taxes.The Government should therefore consider taxing consumption higherand production lower. This would, however, affect poor people and thegovernment would therefore need well-targeted poverty reliefprogrammes such as a well-targeted Social Security System. Theassumption is that tax in consumption rather than income (production)

14. Households save only about 2% of GDP, while businesses and corporations are saving and investing at arate of 15% of GDP.

15. Owners of corporations are shareholders and members of pension funds. The assumption here is that themajority of ordinary people are shareholders and policyholders of pension funds. In this case, excessivetax burden on pension funds is a burden on ordinary people. It follows that by reducing corporate tax,corporate saving will be encouraged and therefore growth of pension funds. Tax policy on pension fund,is an area on which both economists including Mandla Maleka (ESKOM), concur that it seems unfair totax people whilst they make a tax contribution and at their retirement age. The MTBPS, however,indicates that tax reforms relating to retirement funding will be aligned with regulatory principles andreform. This is with the aim of promoting individual’s savings for their own retirement fund.



would encourage investment, saving and economic growth. In this way,lower corporate taxes would be traded off for more investment, whichwill benefit economic growth and retirement planning and smallerwelfare rolls, as well as lead to greater employment.The assumption in this regard is that Corporations will invest all theirafter-taxing if there is more growth, thereby generating more savings,more investment and thus more employment. More employment wouldensure more savings and revenue. In this regard, investment allowances(not less tax) will assist the economy. The focus should be on taxincentives, for example, the mining industry presently enjoys a 100%investment allowance.

� A major challenge for the economy relates to ensuring that theunemployed and underemployed sectors of the economy are utilisedmore effectively. Recipients of social grants should be absorbed into thelabour force to facilitate faster economic growth, generate more savingsand attract more capital and invest, thereby generating more economicgrowth.

� As a means of alleviating poverty, South Africa needs to allow employersfreedom from regulation of wages and employment conditions (as is thecase in China) and trade union restraints to hire and fire. An example ofChinese economic policies was detailed in this regard.

Mr Maleka — ESKOM

The presentation focused on assisting people who are trapped in the secondeconomy, and the fact that economic growth benefits the first economywhile the second economy remains trapped. In this regard, although fiscaland taxation policies are satisfactory, the Government has to do more tobridge the gap between the first and second economies as the gap iswidening.

The first economy because the first economy has the financial wherewithal,is articulate, vocal, educated and well resourced, and thus well-positionedto benefit from economic growth. In contrast, the second economy is weak,has no negotiation muscle and is therefore excluded from active economicparticipation. Although the Government has applied sound policies aimedat reducing the gap between the two economies, the gap still widens. If thebenefits of economic growth do not trickle down to the second economy,then they are of little benefit. The strain on social security reflects the realityof the desperation in South Africa.

For the first time in the history of the country, South Africa has awell-balanced fiscal policy. In order to revive the second economy, theGovernment needs several policy interjections, including skills acquisi-tions, better access to opportunities, and aligning the education system withthe requirements of the economy.

In order to facilitate economic activity within the second economy, skillsare important, as this would ensure better job prospects and improvedlivelihoods and thus serve as a link between the two economies. However,at the moment the economy has a number of structural deficiencies. Theseinclude a low return on education investment and a low savings rate (whichwill make it difficult to achieve investment of 25% by 2014). In this regard,it is recommended that the Government introduce compulsory savings.



Institutional savings should be increased to improve productive invest-ment, and compulsory savings on individuals should be empowered inorder to achieve the Government’s 25% investment target by 2014. It iscrucial to start immediately as the Government has the capacity to enforcesavings.

South Africa can afford to increase its fiscal deficit as this was handled wellin the past. Fiscal influence must be used to channel productive resourcesinto the economy.

Challenges to consider, include:� Attracting and sustaining Foreign Direct Investment.� Develop suitable interventions to reduce poverty and unemployment.

The social security net has done a lot in this regard.� The income that was availed to households through tax cuts in previous

years was consumed and not saved, thus the need to encourage moresavings.

� Public sector remuneration needs to be reviewed as it could impact onfiscal ratios.

� The sale of state assets could be used to retire state debt.� Statistics South Africa’s revision of GDP figures in November could

impose revision on revenue estimates.

Ms Parensie — IDASA Women’s Budget

The IDASA Women’s Budget approved of the Government’s approach toalleviating poverty and the recognition that assisting the unemployedshould be driven by measures to raise the potential of the unemployed toearn their own incomes. In terms of increasing the rate of investment, theemphasis is on economic investment rather than on investment that wouldpromote household-based production and reproduction. The latter (house-hold investment) is where the majority of poor women play a role.

Several strategies were identified in relation to the Government’s plan toincrease the rate of investment in order to facilitate economic activity.These include the Extended Public Works Programme and the NationalSkills Development Strategy. The argument presented was that althoughthe rules guiding the implementation of the EPWP advocate that 60% ofjobs created should be reserved for women, these rules are not alwaysadhered to. In addition, the EPWP jobs are low-pay jobs that require lowskills, which translates to very low income for households and thereby tosustained poverty.

Ms Parensie raised a concern regarding the possibility of the NationalSecurity Agency inheriting existing shortcomings of lack of capacity,inefficiency and corruption. This would mostly affect women, as they arethe majority of recipients of grants.

The gendered dimension of HIV and AIDS infection was also highlighted.This relates to the fact that women bear the burden not only of increasedchances of infection, mother to child transmission, but also as the maincare-givers — thus caring for other family members who are ill and caringfor grandchildren where the parents have died of HIV and AIDS. Thedecrease in the allocation to the HIV and AIDS grant by 0,2% in real termsbetween 2006/07 and 2007/08 was highlighted, as were the roll-overs inHIV and AIDS funds.



In relation to violence against women, IDASA focused on the need toimprove the efficiency of the courts, as well as the need to notice thatmagistrates’ courts are not the only courts that address women’s needs, butthat there are other specialised courts such as family courts and sexualoffences courts. Whether these courts are targeted in initiatives aimed atimproving efficiency will have a profound impact on women. Training ofpolice personnel so as to better understand and deal with issues relating toviolence against women is also important.

In conclusion, the IDASA Women’s Budget felt that, while Governmentrecognises that poverty and unemployment are critical challenges, theMTBPS does not give adequate consideration to the gendered dimensionsof these problems. In addition, the MTBPS ignores women’s contributionin the economy, such as unpaid work.

Committee concerns and comments

1. A concern was raised cutting corporate tax could increase the budgetdeficit and thus impact negatively on the economy in the long term. Inaddition, raising consumption tax has a potential of complicating the taxsystem, for example, through administrative burden, and encouraging taxavoidance if taxpayers could feel excessively taxed. However, thecontention is that these dangers could easily be avoided and that SouthAfrica’s VAT and Excise Tax duties are comparable by internationalstandards. The response was that it was not ideal to cut corporate tax rate,but rather to effect more generous investment allowances.

2. A concern was raised that state-owned enterprises (SOEs) could easilycrowd out investments in the capital market. The response was that thatSOEs operate like the private sector. In this regard, they invest in economicinfrastructure and also create conditions for less risk and a positiveinvestment environment for business.

3. Concerns were raised regarding the fact that the Current Account deficitpresently constitutes approximately 3,8% to the GDP. The response wasthat challenges on the current account deficit should not beoveremphasised. The basis of these should be sustainable growth,investment and increase in capital inflows, which should offset the negativeimpact of the current account deficit. In addition, South Africa has utilisedtrade opportunities favourably, especially with China.

4. In terms of international trade and exports, the country relies heavily onits traditional trading partners, mainly Europe. There are concerns that theenlargement process from Eastern Europe will affect the trade balance. Thecountry should improve trade relations and benefits with emergingeconomies such as India, China, and the rest of Africa. A challenge,however, is that China produces similar products as South Africa, but at amore competitive level.

5. There was consensus that the increase in employment as reflected in theLabour Force Survey is real. However, the challenges of structuralunemployment (lack of skills and inadequate training) need to beaddressed. For example, the country’s education system should continu-ously produce skills that are aligned with the requirements of the economy.

6. Regarding labour market stability, South Africa’s labour market laws aremore flexible than those of most countries, including China. The responsewas that South Africa can still lower these more and that this would benefitthe economy.



7. Concerns were also raised regarding the fact that VAT already exceedscompany tax collection, and whether it is necessary to decrease companytax, as well as the percentage by which it should be decreased. In terms ofretirement tax, the government should give incentives cautiously.

8. There was general consensus that South Africa has done all it could toattract FDI, and that it now depends on investors.

9. Household savings are mostly constituted of pension funds. TheGovernment already contributes significantly to this and thus has limitedcapacity to effect compulsory savings.

10. The Committee concurred that non-economic labour on Women isignored and recommended that these issues be considered by the FFC.

11. In terms of odious debt, particularly Apartheid debt, it is worth notingthat South Africa’s debt is 80% domestic and thus scrapping it could causefinancial instability. The focus should be where this debt is invested ratherthan the size of it.

12. A concern was raised regarding the feasibility of taxing farmers at ahigher rate for vacant land. The response was that this was not acceptableand that in any case, it is not land that facilitates productivity rather than theavailability of appropriate skills and equipment.

13. In terms of child abuse and other offences against women and children,the cottage cheese industry system in Japan was recommended as a casestudy to IDASA.

In response to a concern regarding the effect of welfare on people’swillingness to work, the economists responded that the welfare grants haveplayed a crucial role in ensuring stability in the system. However, it’s nowbecoming too expensive to maintain.

Recommendations� Social Security remains one of the Government’s most effective poverty

alleviation measures. The system has worked well in the past andcontinues to support millions of destitute South Africans. The Govern-ment should therefore provide alternative poverty alleviation strategies.The Extended Public Works Programmes will fulfill this purpose. It isalso important to strike a balance between social security spending.Social Security, in conjunction with the EPWP and the commitment onskills development and capacity-building within the public sector, will bebeneficial to the economy in the medium to long term.

In addition, the improved economic activity in the domestic economycould be the initial economic activity that is starting to occur within thepreviously stagnant second economy. The Government should focus onencouraging responsibility among South Africans regarding SocialSecurity Grants. In addition, the second economy should be encouragedto move beyond social security in favour of more productive economicactivity.

� Policy-makers should further explore prominent issues emanating fromthe report, such as issues of investment and savings. Consumer’spreference to spend more rather than save is a concern and should beexplored in more detail. In this regard, Government should consider thefact that the majority of South Africans have no or negligible economicliteracy. Government should strive to educate South Africans in thisregard.



� Monitoring of policy implementation needs to be enhanced to ensure thatgender issues are taken into consideration.

� Fiscal and monetary policies are clearly on the right path and havegenerated positive macro-economic spin-offs. In view of this, theCommittee is satisfied of recent economic developments, but encouragespolicy-makers to continue researching and monitoring these issues.

Verslag oorweeg te word.

3. Report of the Select Committee on Finance on Trends in Inter-governmental Finances: 2000/01-2006/07, dated 10 November2004:1. IntroductionThe Constitutional recognition of three spheres of Government inSouth Africa introduces greater complexity into the arrangementsrequired for executive/administrative, legislative and financialIntergovernmental relations. This intensifies the need to fine-tunestructures governing Intergovernmental Relations and cooperativegovernance systems in the country. It is important to minimiseinefficiencies as these are bound to cause undue complexitiesbetween the three spheres of Government. Sub-national spheres ofGovernment play a pivotal role in the delivery of basic services,particularly to the poor.The Intergovernmental Fiscal Review report assesses the perfor-mance of the Provincial and Local spheres of government inservice delivery. To increase the efficacy of service delivery, theintergovernmental system is dependent on the proper coordinationof policy, budgeting, planning, implementation and reportingbetween all spheres of Government at technical, executive andlegislative levels. All spheres of government thus face thechallenge of aligning their policy and implementation processes.The National Treasury has outlined the key principles thatunderpin the intergovernmental system as being accountabilityand autonomy, good governance, redistribution, broadened accessto services, revenue sharing and the vertical division, andresponsibility over budgets.2. Summary of Provincial and Local Government SpendingProvincial spending takes up the largest share of total Governmentexpenditure, even though it decreased steadily. Provincial spend-ing showed a steady decrease between the 2000/01 financial yearand the 2002/03 financial year. The trend has changed though withthe total provincial budget being 57,3% of total governmentexpenditure in the 2004/5 financial year, and steadily increasing to58.0% in the 2006/07 financial year.With the imminent shift of the social security function to thenational sphere, a sizeable amount of expenditure is expected toshift form Provincial to National Government. Provinces willhowever, continue to play a role in the delivery of social servicesincluding education, health, roads, housing and other welfareservices. As these functions have limited potential for costrecovery, provinces are largely dependent on transfers fromnationally raised revenue.



3. Background

From 4-6 October 2004, the Select Committee on Finance and othercommittees in the National Council of Provinces (NCOP) invited theNational Treasury and all nine provinces to comment on the Trends inIntergovernmental Expenditure Report, 2004, which presents an update ofthe 2003 report. The National Treasury outlined the trends in provincialbudgets, local government finances and the spending trends for Provincialand Local Government functions from the 2000/01 to 2006/07 financialyears.

The National Treasury provided a broad presentation of all sectors andindicated the past and present expenditure trends of Departments. Treasuryalso emphasised the primary aim of the report, which was to present newpolitical office-bearers and other Members of Parliament (MPs) with a toolto utilise as a starting point when building on their oversight role. Treasuryindicated that after publishing the Medium Term Budget Policy Statement(MTBPS) and the subsequent Budget, the Minister drew from deliberationsin Cabinet, the Budget Council and the Extended Cabinet, to decide on thedivision of nationally raised revenues based on priorities and set objectives.These should be outlined in the spending patterns of provinces. Thus, theIGFR highlights the progress made on government’s stated objectiveswithin a seven-year period.

Discussions with the National Treasury

During discussions with the National Treasury, Chairpersons of SelectCommittees raised the following concerns:

� The significance of the Inter-government Fiscal Trends for parlia-mentary oversight.

� The discrepancy between social spending and spending on infra-structure.

� The decline in provincial capital spending, especially on socialgrants. The National Treasury responded that the presentationindicated that spending on education grew in real terms from R43billion in 2000 to R60 billion in 2003, even though its sharedropped from 39,6% to 35,3% as a percentage of the budget.Moreover, spending on other matters such as social grants grewfaster.

� The 15,2% rise in Local Government personnel costs.� Concerns regarding the teacher to learner rations, which are

presently 34:1, as well as the need to increase the number ofteachers in order to improve education. The National Treasury,however, indicated that there was a need to balance resources, assome areas needed more teachers whereas others had enoughteachers but needed infrastructure and other services. With regard toeducation, South Africa’s expenditure of 34% on educationcompared favourably with other countries. Yet this was just thestarting point as the more pertinent issues where what the fundswere spent on, and what was happening within the teaching andlearning environment.



� Provision of transport conditional grants to Local Municipalities,especially those that rely 100% on the equitable share. The NationalTreasury responded that municipalities presently receive fundingvia the Municipal Infrastructure Grant (MIG) for this, although ittended to focus more on water provisions etc.

� There were concerns regarding the decline in the health budget.� Whether funds should be directly allocated to provinces for road

maintenance and a portion of the fuel levy be paid back to theprovinces to take care of their own roads.

� If the allocations to the Department of Housing were sufficient toenable it to achieve its target within ten years.

� Acceleration of the Agricultural Support Programme for blackfarmers, and whether the target set by the president for the landrestitution is achievable.

Sectoral Breakdown

4. Land and Environmental Affairs

4.1 National Treasury Briefing

The National Treasury indicated that the agricultural sector, apart frombeing a significant contributor to employment, rural development and foodsecurity, also generated 3,5% of Gross Domestic Product (GDP) in 2002.

The combined national and provincial budget had increased from R3Billion to R4,4 Billion from 2000/01 to 2003/04, and was set to increase toR5,5 billion in 2006/07. The budget share allocated to the provinces hadincreased from 73% in 2003/04 to 78% in 2003/04. The provincial budgetswould increase to R4,2 billion in 2006/07. This amount includedconditional grants from the National Department of Agriculture for CASPand Land Care.

Expenditure growth rates varied among the provinces, averaging 9,5%.Limpopo, Eastern Cape, KwaZulu-Natal and North West accounted for75,4% of total provincial spending on agriculture in 2003/04. A largeportion of this expenditure was on personnel costs, rather than onagricultural activities. However, this trend is slowly changing.

The non-compensation of employees comprised an increase from 28% in2000/01 to 43% in 2006/07, as a proportion of total agricultural spending,and consisted mainly of the allocations for farmer support programmes.

The largest part of the budget was earmarked for Farmer Support andDevelopment, which would increase from R1,5 billion in 2003/04 to R1,8billion in 2006/07. The remainder would go toward administration,technology, research, and development and veterinary services. A large partof the Eastern Cape’s administration cost went towards the payment ofsupernumeries. The Farmer Support and Development Programmeamounted for 23,3% of the national agricultural budget in 2003/04,followed by regulatory series. These included controlling risks associatedwith plant and animal diseases, and the use of Genetically ModifiedOrganisms (GMO’s).

4.2 Land issues

The budget for Land Affairs included funding for redistribution andrestitution. Restitution grants would increase from R156,6 million in2000/01 to R614,4 million in 2006/07. Restitution funds would increasefrom R265,1 million to R1,5 billion over the same period. The Department



aimed to finalise restitution claims by December 2005. The funds forrestitution would then be redirected to the Land Redistribution forAgricultural Development (LRAD) programme, which is the keyprogramme through which redistribution occurred. This process of landreform aimed at the redistribution of 30% of agricultural land or 24,7million hectares by 2015. Over the last ten years, 3,3 million hectares hadbeen transferred, of which 1,5 million hectares was redistributed, 810 292hectares was transferred through restitution, and 773 000 hectares of stateland, mostly under long-terms leases was transferred to emerging farmers.

By February 2004, 48 463 claims had been settled at a cost of R1 billionand R1,7 billion had been paid out in financial compensation, mostly insettlement of urban claims. There are 31 231 outstanding claims, most ofthem being in urban areas, particularly in Cape Town and eThekwinimetropolitans. Funding would be available after December 2005 forpossibly untraceable claimants or highly disputed claims.

Challenges include:� The bottlenecks faced by Land and Agriculture in dealing with delivery.� Improved dissemination of technology and access to retail and wholesale

financial services for farmers were further challenges for the future.� The difficulty in comparing productivity among provinces because the

reporting systems were not standardised. Standardised reporting systemsfor effective monitoring and evaluation needed to be developed.

� Provincial expenditure needed to be redirected away from compensationof low-skilled staff to enhancing their skills base and increasing delivery.

� Co-operation was needed within provincial expenditure to be channelledinto training low-skilled staff.

Concerns raised during discussion included:

� The large number of unskilled staff in the Department of Agricul-ture.

� In view of the high percentage of budgets being spent on personnel,a suggestion was made in that an incentive programme could beimplemented, whereby the extent of the expenditure on personnelwould be more warranted, and less of a problem. The NationalTreasury was asked whether an indication of sustainability andspecific outcomes were measurable in terms of monies spent.

� Questions on the measures taken to capacitate and train people inthe agricultural sector and the budget allocated for this purposewere raised.

� Are Land Care projects supported throughout all provinces, and ifso, were they sustainable?

� A question was raised on the source of this funding for the furtherredistribution of 21 million hectares over the next ten years.

� Agriculture was not receiving enough funding in view of itsimportance, and especially in aid of agrarian reform.

� There was a tendency to create elites through programmes such asAgriBee, rather than broadening participation and training theunskilled. This needed to be addressed.

� Was expropriation advisable, as opposed to buying the landoutright, considering the cost of expropriation?

� In the Eastern Cape, the same consultants and contractors oftenreceived work, and over the last two years, the same people hadbecome extremely wealthy. This was a cause for concern as theconsultants were paid upfront out of monies allocated for other



projects. This often resulted in projects being abandoned due to a lackof funds. The Department, in providing these opportunities, stalledcertain food production projects for the current year, which resulted inmaize being planted too late. This has led to the failure of the project.On the issue of infrastructure and irrigation schemes in the formerTranskei, mention was made of instances where 30 wheat combines,75 tractors, dairy turnstiles, and other farming equipment werestanding unused or had been vandalised. Another area of concern inthe Eastern Cape was the issue of the stopping of an agriculturalscheme, because the railway line that would be required to access thatscheme, as well as the main railway line between East London andQueenstown, had been destroyed. This scheme had 2 700 hectaresunder irrigation. The citrus area of Fort Beaufort also had a similarinfrastructure problem. Although the project was being resurrected,the railway line, which could have been effectively utilised, wasdestroyed.� A concern at the absence of the departments to answer questions

was noted throughout the hearings.� More detail was needed on the mechanisms used on rollovers.

Response

� With regard to the several requests for budgetary allocation, thetotal of R330 billion had been divided into R50 billion for servicingdebts, and the balance had to be split vertically among theprovinces. The nine provinces had to distribute the remaining R170billion on an equitable basis. Limpopo received an amount ofapproximately R15 million, which was split according to nationaland provincial priorities, as well as taking into consideration thePresident’s State of the Nation Address. National Treasury had nocontrol over these matters.

� The provincial growth development plan of Limpopo consisted ofagriculture, mining and tourism, of which agriculture first came.Considering that spending in Limpopo had increased from R656million in 2000/01 to about R1 billion. This was substantial incomparison to any of the other provinces. With regard to the powersgiven to Treasury to monitor and implement budget and expendi-ture, the Intergovernmental Relations Branch spoke to variousprovincial treasuries in questioning their effectiveness in spending,in terms of their own provincial legislatures. Based on thesestrategies and budget plans, Treasury would hold them accountable.Provincial legislatures should be using processes that were in place.Treasury had also encouraged provinces to look at their efficiencyof spending and not necessarily the impact of that spending, as ithad become obvious that in many cases, budgets were not spent oncore activities and objectives. The application of the funds allocatedwas key in solving the perceived insufficiency of funds, sinceresources would always be limited as opposed to being unlimited.

� The non-standardised method of reporting for non-financial infor-mation made it difficult to assess quality of expenditure. Forexample, in terms of veterinary services, there were discrepanciesin ways of reporting, and therefore, no standard for comparisoncould be attained. It would also require a significant investment intomonitoring and evaluation of what was happening in each province;something that would have to be established by the provinces



themselves.� Incentives could only become meaningful once the relevant

personnel had the skills to deliver the series on which they could bemeasured. Questions regarding the training of personnel wouldhave to be tackled by the provinces, especially in light of the factthat the bulk of the budget in all the provinces was directed towardthe compensation of employees.

� The Land Care programme was implemented through the Sustain-able Resource Management programme. Each of the provinces wasallocated an amount for this programme, and should therefore beimplementing the programme.

� Land claims still waiting to be settled consisted of claims forrestitution, and not redistribution. Of these, 80% were urban claims,and 20% were rural claims. The claims awaiting settlement weremostly urban. The LRAD programme was introduced in 2001, andreplaced the Settlement of Land for Agriculture Grant System(SLAG). The allocation for LRAD had increased significantly inthe past years, and had proven effective.

� Most rollovers were catered for by adjustment budgets, which wereusually passed around November of each year. Provinces wereusually quite strict about rollovers, and usually allocations ofconditional grants were intended for a specific purpose. Provincialtreasuries closely monitored the reasons behind rollovers, andwould allocate only to those departments that would need the fundsand this depended on priorities. In some cases, departments rolledover funds due to a lack of capacity to spend, and at times, theserollovers occurred over a number of years. It was the provinces’prerogative to decide whether to reallocate funds to where it couldbe spent. Whether or not money allocated for conditional grants notbeing spent, should be reallocated to provinces that were spendingit on conditional grants, was a question currently being addressed.

4.3 Provincial Inputs

4.3.1 Free State Province

Agriculture contributes an average of 9,3% to the Gross GeographicalProduct (GGP) of the Free State, compared to a national average of only4%. Increased focus on value adding and the processing of agriculturalproduce could, over the next few years, contribute towards the provincialeconomy in an even greater measure.

Programmes/projects undertaken by the Department include, amongstothers:� Regulatory function for animal health — The Free State Veterinary

Services has a budget of R42 million, which is insufficient to implementthe strategic plan. The province is struggling to control and prevent mostanimal diseases, due to budget constraints. Important activities, such asdipping are no longer funded by the government. It is therefore necessaryto review the veterinary services budget in order to fully implement theexpected service delivery.

� Special programme for food security and land care — The FoodSecurity Programme has been set up in the Department to address theimmediate need of people to obtain food for their families. The focus of



the Department is on individuals that are supported with food parcels bythe Department of Social Development. The Food Security programmecarries a first time budget of R3 845 000 for the current financial year.

Economic development — an overview� Actual spending on agriculture has increased from R118 million in

2000/01 to an audited amount of R183 million in 2003/04.� The Land Care programme contributes towards the alleviation of poverty

directly, and an amount of R2 298 000 was spent in 2003/04. Thenominal budget for 2004/05 stands at R2 million, later to be supple-mented by an amount of R1 375 million for carry-through cost.

� The relative percentage for personnel expenditure in the province hasbeen reduced from R75, 4% in 2000/01 to 61% in 2003/04. Theestimated expenditure for 2004/05 now stands at 63,6%.

� Capital spending started out from an almost insignificant 0,3% in2000/01. The audited figure for 2003/04 stands at 11,4%, and it isanticipated that a capital spending percentage of 12,2% can be reachedby the end of the current financial year. Spending the conditional grantsappropriated to the Department over the Medium Term ExpenditureFramework (MTEF) period could greatly enhance the trend of capitalspending in the Department.

� The budget for agricultural extension services comprises only 14,2% ofthe Departmental budget for 2004/05. This figure is said to increase to atleast 17,4% over the next three years is also indicative of the fact that theDepartment has other programmes of priority.

� 11,1% of the budget for the 2004/05 financial year will be taken up byanimal health services.

4.3.2 North West Province

The land reform process in the North West was on track, but more skillstraining and equipment were required. The need for agricultural andfinancial skills and support was also highlighted.

4.3.3 Western Cape Province

Most of South Africa’s milk, vegetables, fruit and wine came from theWestern Cape. The province exported 55% to 60% of all agriculturalexports in the country, and is thus faced with increasing demands fromimporters, which required research and skills to be transferred to farmers.This necessitates highly skilled technical people. The budget was aboutR223 million this year.

The province had been allocated R13,6 million for CASP and had receivedR200 million worth of applications. There were three sources of condi-tional grants, which had complicated matters. An internal audit had resultedin one single cycle process.

Currently, the programme supported approximately 109 projects, 28 foodsecurity projects, and the rest were mainly LRAD projects. These consistedof existing projects, which required further capacity and new projects. Thepresenter argued that the departments needed to remember that the farmerswere their clients, and they should remain accessible and thereforepersonnel had to deliver on their needs.



Discussions� According to the Free State report, the Department was not making

full use of the veterinary services available to it, while on the otherhand, stating that there was insufficient funding. The Departmentwas requested to explain the contradiction.

� In view of the demand for training, there did not appear to bespecific allocations earmarked for this purpose. Current curriculawas not conducive to encouraging youth to enter farming, andperhaps the Department of Education should be involved inchanging this.

Responses

Free State

� The Free State prpointed out that the fast tracking of 144outstanding rural claims was in progress. This was a difficult task,but 6 permanent staff, and nine interns from the Department wereseconded to the Land Claims Commission to assist with theprocess. The Department has set money aside for the settlement ofthese claims. An action plan was in place, and the MEC was part ofthe process.

� Previously, the Department of Agriculture in the Free StateProvince did not have the capital budget, but with the CASP and EUfunding, this has helped with land and agricultural issues.

� The Free State had received a conditional grant, which could onlybe used in certain towns, but this had been revised, and mostly thelivestock component of agriculture had benefited from the grant.

Western Cape

� The Western Cape has excellent veterinary services, and vets in theprovince had assisted other provinces with the accreditation of theirlaboratories. Approximately, R20 million had been spent onveterinary services.

� A three-year project was initiated between the Eastern Cape,Northern Cape and the Western Cape provinces. Together they hadapproached foreign donors and as a result would be receivingsubstantial funds from the European Union (EU) to upgradelaboratories, soil and water laboratories, and computerised deci-sion-making models to test policy options.

� The province had 60 agricultural claims that were not dispersed.The Department would only get involved once the negotiationswere complete. In terms of the restitution process, the validationand registration would be completed by December 2005.

� Most of the LRAD beneficiaries were female. Capturing of datarelating to female-headed households differed from province toprovince and department to department and therefore one had tolocate the context in which this information was forthcoming.



5. Water Affairs and Forestry

5.1 Important trends in expenditure and budgets� The total water services budget decreases from R2 608 million in

2003/04 to R1 334 million in 2004/05.� Capital expenditure on DWAF budget down from R1 102 million in

2003/04 to R160 million in 2004/05 and zero by 2006/07.� Municipal Infrastructure Grant (MIG) is R4 400 million in 2004/05.� MIG allocations are made in terms of a formula, based on backlogs,

powers and functions and poverty.� There are 4 Water Boards that seem to have problems with financial

viability, that is, where operating expenditure exceeds income.� Although there are significant allocations to water and sanitation, the

budget is still inadequate to erase backlogs on time, especially sanitation,and in light of demands on higher levels of sanitation.

� Corresponding operational grant (equitable share) to cover expenses fornew infrastructure is a growing concern.

5.2 Backlogs in Service Provision� 4,4 million people, representing 9% of the still have to be brought up to

the bare minimum in terms of water provision.� Approximately, 17 million people lack access to basic sanitation,

including 400 000 households.� 11,7% of schools have no access to adequate sanitation.� 15% of clinics lack access to basic sanitation.� 300 000 will be provided with sanitation this year.� Backlog to be cleared by 2010.

Discussions

� The issue of financial sustainability of basic water services wasraised. How would the Department assist municipalities in thisregard?

� What are some of the responsibilities of municipalities now thatwater was no longer a national priority, but budgeted for withinmunicipalities?

� Financial management was a major concern, particularly theweaknesses pointed out in the Auditor-General’s report. Onemunicipality had received authority from the National Treasury toborrow R22 million. How will this municipality borrow this moneyand what were the procedures in this regard?

� Financial Management and the borrowing capacity of Municipali-ties was highlighted as a major concern. ter being controlled bydistricts needed crucial intervention.

� The budget allocated to categories of municipalities to provideservices was also an important issue, as some municipalities did nothave the capacity to undertake this responsibility.

� How is the Department looking at balancing new infrastructure todeal with backlogs and how would access to water be sustained?

� Are there irrigation water boards at local and district levels?

Responses

� The Department does not place water pipes in various communitiesanymore. This is now the responsibility of the municipal budget.

� Sanitation was not fully prioritised at municipal level.



� Free basic water is managed through equitable share and crosssubsidisation.

� Municipalities could appoint service providers to assist withcapacity in delivery of water and sanitation.

� The portions of money allocated to categories of municipalities alsodepended on their own revenue base.

6. Department of Housing

Since 1994, more than 1,6 million houses have been built or are underconstruction, and 2,4 million subsidies have been approved. The Depart-ment of Housing administers two conditional grants. These are:

� The Housing Subsidy grant: the Housing Subsidy grant financeshousing development under the national housing programme. Subsidiesapproved in the last 4 years average 305 000 per annum, allowing forlead times to improve spending trends. Housing units delivered in the last4 years average 182 782 per annum, and it is expected to accelerate asprojects reach full implementation stage.

Between 1994 and 2004, the Housing Subsidy Grant programme hasmade an investment and creation of assets of R27,6 billion intolow-income communities.

� Human Settlement Redevelopment Grant (HSRG): the grant fundsprojects that are meant to improve the quality of urban environment byaddressing dysfunctionalities caused by apartheid settlements. In termsof the new Development Plan, the HSRG is to be upscaled to deal withthe delivery of housing. In the past, capacity building was another grantthat was managed by the Department of Housing, which has now beenmoved to another department.

Expenditure on housing is expected to increase due to the Departmentdealing with human settlement in an integrated way. Although expenditurewas initially slow, it picked up when the National Department of Housinginvestigated the causes and the Department began to assist provinces.However, capacity problems continue to be a challenge experienced bymany provincial departments.

In terms of actual delivery, trends indicate that completed or underconstruction housing projects reflected a slowdown in delivery in 2001/02,which then increased in 2002/03, and stabilised in 2003/04.

Discussions

The major concerns raised related to:

� The lack of institutional subsidies for some of the provinces, such asLimpopo.

� The cost implications of the delays experienced in housing delivery.� Whether the department would assist in the maintaining of

settlements upgraded in the context of People’s Housing Project/Programme?

� Rollovers of funds, even though there is a huge backlog and needfor housing.

� The number and categories of municipalities that have beenaccredited.



� The current value of housing subsidies, and whether this is equalacross all provinces.

� Regarding rollovers and underspending, has the department calcu-lated opportunity costs lost?

� Should monitoring and evaluation be left with municipalities, eventhough some do not have capacity?

Department’s Responses:

� Regarding subsidies, Institutional Subsidies are usually paid tohousing institutions, but Limpopo might not have one. Mostinstitutions are placed in urban areas and there are very few inpredominantly rural areas.

Costs of delays

� On the costs of delays in delivery, the department can monitor coststhrough various mechanisms, including monthly reports by provin-cial departments, all approved projects (including business planswith timeframes) that are submitted at the beginning of the financialyear. Thereafter, the department can work out cash flows. However,credibility of cash flows is always in doubt. Depending on theimplementation of projects, the department can see deviations andproposes ways of improvement.

� In some cases delays in the delivery of housing are caused bycommunity issues, which take time to resolve. Inflation and risingcosts of materials, as well as other factors, contribute to theescalation of costs, which also a contributory factor to delays inimplementation and speedy delivery of housing.

� Where developers had left incomplete projects and costs have beenincurred, the department has developed a plan to unblock theseprojects in order to complete them.

Spending and rollovers

� The North West and Western Cape Departments are currentlyunderspending on their budgets.

� Regarding conditional grants, provincial departments deal withdetailed monitoring of housing delivery, but this is done in line withthe Division of Revenue Act.

The Accreditation of municipalities:

� On the accreditation of municipalities, no municipality is currentlyaccredited as housing service provider. Only one municipality hasrequested for accreditation, that is eThekwini Metro. The depart-ment is currently in discussion with the Metro on the technicalities,and if these are addressed, the department is confident thateThekwini will be accredited.

Value of subsidies:

� The current value of subsidies is R25 800. All households earningless than R3 500 will be entitled to access subsidy, which willincrease on an annual basis and in line with inflation.



� There will be variation in the subsidies, which will take into accountof specific conditions, such as disabilities of beneficiaries, geo-graphic area, etc.

Human Settlement Redevelopment Grant:

� Business Plans for 2004/05 have not been completed. Given the factthat a number of provinces have not submitted their business plans,much of the funds allocated would not be spent in the currentfinancial year.

� In some provinces there are continuity problems, such as staffturnovers, particularly that of project managers.

� In some cases, consultants submit business plans on behalf ofprovinces or municipalities.

� Underperformance of projects is one of the reasons why HSRG isbeing redirected in April 2005. It will now have four elements:— Cost/funds to acquire more landl— Preparation of Housing Sector Plans. Should not ask munici-

palities to act as developers.— Social facilities in existing RDP, new and in informal settle-

ments. Facilities such as community halls, sport facilities,clinics, taxi ranks in order to develop small business centres inthe area.

— Upgrading of informal settlements, if money is found fromTreasury.

Communal Land:

The delays in the approval of housing subsidies and projects dependon the releasing of land by the Department of Land Affairs. Theprocess regarding the acquiring and release of land is long andtedious. There is a need to fast track this process.

Input by the Eastern Cape Provincial Housing Department:

In response to some of the questions directed at the DOH, but alsopertains to the provincial departments, the provincial housingdepartment in the Eastern Cape indicated the following:

� On the issue of short-changing of beneficiaries; in the Eastern Capethere is costing of past ills without double subsidies.

� There are issues regarding capacity of both the municipality andprovincial levels in the delivery of housing,

� There is high turnover of officials within the provincial housingdepartment.

� Quality housing and delivery is also affected by the lack ofcommitment to assist municipalities.

� There are issues regarding the availability of land. This is furtheraffected by delays with the release of land in the rural areas becauseof conflict between municipalities and chiefs.

� Regarding Hostel Redevelopment Subsidies: in the Eastern Capethere are 5 projects. The grant is given to municipalities (as capitalgrants) and not as subsidies to beneficiaries.



7. Transport

7.1 Briefing by the National Department of Transport

Rail Funding

The MTEF framework for Rail Funding is as follows:

2004/05‘000

2005/06‘000

2006/07‘000

Operational 1 873 550 1 973 843 2 092 274Capital 655 000 688 300 729 598Total 2 528 550 2 662 143 2 821 872Operational Shortfall — 162 491 196 631

The Department submitted that it has resorted to refurbishing its rollingstock, rather than buy new coaches at high costs. The age of coaches is 45years rather than 12 years.

Bus Subsidisation

With regard to Bus subsidy distribution:� approximately 1,8% of the population was subsidised in the 2001/02

financial year.� On average, passengers received R198 in subsidies per month equal to

6,7% of the average household income.� Currently, provinces that receive large portion of subsidies are Gauteng,

KwaZulu-Natal, Western Cape and Mpumalanga, whereas the Free State,Eastern Cape, Limpopo, North West and Northern Cape provincesreceived the least amount of bus subsidies.

� The subsidies have grown steadily since 2001/02 when the total budgetwas R1,7 billion and is expected to reach R2,1 billion in 2004/05financial year.

7.2 Land Transport Management

The Transport Safety and Security forms part of the Land TransportManagement programme. The two objectives set are: the implementationof the Road to Safety Strategy by the Provincial and Local Governments,and the overseeing of safe railway operations and promotion of rail safety.The output set for the programme are to:� Facilitate the Road to Safety Strategy through the Arrive Alive

Campaign.� Ensure that Road Traffic Management Corporations (RTMC) becomes

operational.� Establish the Road Traffic Infringements Agency (RTIA) and ensure that

it becomes operational.� And, on rail safety, ensure that the Railway Safety Regulator becomes

operational.

7.3. Provincial Inputs

7.3.1. Limpopo� Provincial and Local governments face serious resource/capacity chal-

lenges.� National Government manages or controls a small portion of the road

network, compared to Provincial and Local Governments.� Roads are currently being maintained and rehabilitated, but no new

infrastructure is being built.



� Environmental impact, especially with respect to gravel, which is usedextensively to cover provincial and local roads. How does one manageenvironmental impact resulting from extensive use of gravel? What isbeing done to fill places where gravel has been earthed?

Suggestions/Proposals:� There is a need to create a conditional grant to focus on road

infrastructure.� Ring-fencing funds or resources earmarked for roads infrastructure

(primarily because when funds are not found for other pressing issues,e.g. social development, money is then taken away from non-socialservices areas like roads and transport).

� When roads are handed over to SANRAL, there is a need for discussionsbetween the agency and provinces since some of these roads are key toeconomic growth and development strategies of provinces.

� Classification process should be speeded up. Currently there is uncer-tainty regarding ownership of roads, leading to protracted legal issues,especially when provinces have to enforce their regulatory powers.

� There are roads that may need to be declassified as they may not becontributing to the economic development.

Questions:

� Does the expenditure on provincial and national road infrastructurerelate to new roads or maintenance?

� Municipalities are required to establish transport entities, what isthe progress?

� Finalisation of the taxi recapitalisation is welcomed, especially thetendering process. However, when is this going to be rolled-out? Ifnot, what is going to be done? What is the criteria for selectingprovincial roads earmarked for classification?

� What is being done to address bus subsidies that are biased towardsurban areas and not rural?

Response by the national Department of Transport:

� Under Public Transport, the following major challenges areconfronting the department:— Regarding buses: there are historical factors that needs to be

taken into account. Operators were granted life-long licenses,therefore the department had to engage into negotiations withthese operators

— The department introduced competitive tendering processes— The New Public Transport Framework that emphasises roads

needs, and the department is currently engaging all thestakeholders.

� Provinces have a latitude to design their transport priorities, butengagements are at the political levels (MinMecs and other forums)and do not necessarily involve national department.

� Rail transport: funding for the corridor between Gauteng andKwaZulu-Natal comes from other entity of government and not theDepartment.

� Regarding funding, there is a need to involve provinces in all theprocesses, including classification of roads.



� Regarding the establishment of Transport Authorities, onlyKwaZulu-Natal has done so, Mangaung in the Free State is busydetermining what will work for them and Ekurhuleni/TshwaneMetro are also being considered.

� On the subsidisation of taxis, the tendering process still has to befinalised before the department can comment publicly.

� Government is still committed to the process of taxi recapitalisationand subsidisation.

� It is clear that operations should be based on the needs on theground.

� Regarding the opening of marginal rail lines, it is important to havecriteria that takes into account the impact this line will have on thelivelihoods of local communities. Another aspect is the need tobalance between the goods the are favourable or efficient in themode of transport used.

� There is a need for an increase in the budget that will be directedtowards maintenance and upgrading at all government levels.


� Bus subsidies are a complex issue as they are linked to the settlement ofpeople.

� Cape Town is being considered for a Transport Authority.� There are backlogs, and there is a need for prioritisation looking at the

economic activity of the area and then prioritise maintenance orupgrading of the roads in the area.

7.3.3 Eastern Cape Province

� The Eastern Cape provincial government inherited a poor road networkfrom the former homelands.

� Regarding the taxi recapitalisation process, any delays in finalising thisprocess may be affecting communities negatively.

� The subsidies approach continues to be favouring urban/metros thanrural areas, whereas the latter may be in dire need for such services.

� Regarding road network, there is a need for proper intervention byprovincial government into SANRAL’s activities and its priorities,especially relating to management of road network falling withinprovinces.

� Projects that are going to be undertaken will be economically active andbeneficial to communities.

7.3.4 Kwa-Zulu-Natal

� There is under-funding of road infrastructure, especially with respect tomaintenance of road network.

� There is a problem with the 85/15 split in funds, because social servicesreceives the largest portion of funds and non-social services must becontent with the remainder.

7.3.5 Free State

� There is a need for the finalisation of the establishment of Road TrafficManagement Corporation — there are problems with the collection ofrevenue.



� The province support calls that SANRAL and other agencies should beheld accountable to provinces.

� Regarding road maintenance and backlogs, the province is experiencingproblems with roads that are left to deteriorate, as becomes expensive torehabilitate these.

� There is a need to look at the definition of what current and capitalexpenditure as these are causing problems, including when auditing.

8. Social Development

8.1 Briefing by National Treasury

8.1.1 Overall expenditure and budget trends

The share of Social Development spending in provinces grew from 18,9 percent in 2000/01 to 24,8 per cent in 2003/04, and is expected to grow to28,0% by 2006/07, to R61,2 billion. Total spending on social securitygrants increased from R37,1 billion in 2003/04 to R41,4 billion in 2004/05.

From 2000/01-2003/04, social spending increased by an average nominalgrowth rate of 26,6%. Overall spending by provincial Social Developmentdepartments is expected to grow by an average of 13,4% annually between2003/04 and 2006/07. This rapid growth in expenditure is due mainly to theexpansion of the social safety net, particularly the extension of the childsupport grant.

Social spending has overtaken Health as the second biggest expenditureitem after Education.

Social grants increased over the period 2000/01 to 2003/04, to 87,4% ofSocial Development expenditure. This is projected to stay stable as aproportion of expenditure over the medium term, thus limiting its impact onother line items. The child support extension grant increases from R1,2billion in 2003/04 to R9,3 billion for 2006/07, by which time the expectedphasing will be complete.

8.1.2 Social grants spending

There has been a continued dominance of social grants within socialdevelopment budgets as a result of the continuing expansion of socialgrants and welfare services to the poor.

Social grants spending grew strongly from R18,0 billion in 2000/01 toR37,1 billion in 2003/04, an increase of approximately R19 billion overthis period. This spending grows to R54,4 billion in 2006/07.

There has been a slight upward trend since 2000/01 regarding social grantsspending in relation to provincial social development expenditure. Socialgrant spending is at an annual average of around 87,4% within allprovinces. Proportions are particularly high in poorer provinces, whereapproximately 90% of social development budgets go toward the socialgrant programme. The extent to which grants absorb provincial socialdevelopment budgets tend to crowd out other critical welfare services.

8.2 Social grant beneficiaries

Social grants beneficiaries have grown rapidly from around 2,9 millionbeneficiaries in April 2000 to more than 7,9 million beneficiaries in April2004, an increase of more than 5,0 million over 5 years. The major impact



was from the child support grant (with beneficiaries growing by nearly 4,3million over the period 2000 to 2004), and the disability grant (just morethan 650 000 additional beneficiaries).

8.2.1 Disability Grants:

Spending on disability grants has increased from R4,0 billion to anestimated R10,3 billion from 2000/01-2003/04, an overall increase of morethan R6,3 billion over the period. In all provinces, except the NorthernCape where coverage was already exceptionally high at the beginning ofthe period, disability spending more than or nearly doubled between2000/01 and 2003/04. Spending grew particularly rapidly in the Free Stateand KwaZulu-Natal.

8.2.2 Child Related Social Grants:

This includes:

� The care dependency grant. Child support grant beneficiaries increasedfrom 352 617 in 2000 to more than 4,3 million in 2004. Numbers areexpected to increase to around 6,8 million at the end of 2006/07, whenthe extension to 13-year olds will be implemented.

� The foster care grant.

Between 2000/01 and 2003/04, spending on the foster care grant grew byR889 million from R276 million to R1,2 billion. Foster care grantspending is estimated to grow by a further R1,0 billion to more than R2,1billion in 2006/07. Growth in foster care beneficiaries between 2000 and2004 is particularly high in rural and poor provinces, indicating that morebeneficiaries are now able to foster vulnerable children in theseprovinces.

� The child support grant.

Spending on care dependency grants grew from R249 million in 2000/01to R659 million in 2003/04, an increase of R410 million. Spending isexpected to grow further, by R262 million, to an estimated R921 millionin 2006/07. Growth in care dependency beneficiaries between 2000 and2004 is particularly high in provinces, such as the Eastern Cape,Gauteng, KwaZulu-Natal, Limpopo and North West.

8.3 Social welfare services

This is primarily provided by social workers employed by provincialdepartments.

Overall spending on social welfare services grew by more than R500million over the period to about R1,8 billion. Social welfare services as apercentage of total social development spending remained low between2000/01 and 2003/04 (average: 13%). This is expected to continue over themedium term. In most provinces, welfare services expenditure is 10 percent or more of social development spending, except in the Eastern Capeand Limpopo.



Discussions

� National Treasury raised a concern relating to the increase in thenumber of beneficiaries. These include:— The sustainability of the high annual percentage growth of

beneficiaries (this range from 20% to 87%).— Whether adequate measures are in place to determine if

beneficiaries are eligible.— Where such measures are in place, are they effectively

implemented.

� The following reasons were given for under spending of the socialgrants budget within a few provinces:

—Systems differ from province to province, for example North Westsystem does not allow them to overspend.

— The criterion used by provinces to determine their budgets differs.— The phenomenal increase in the uptake of beneficiaries within the

year.

8.4 Provincial Inputs

8.4.1 Eastern Cape

In the past decade, the focus for funding has been on the social securitygrants payments to the disadvantaged, and as a result the developmentalsocial services were neglected. This has created huge backlogs in theprovision of social services and created a dependency that has culminatedin the geometric growth of beneficiaries for social security grants. TheEastern Cape has taken the initiative to develop a community developmentstrategy needed for the transformation of welfare services. However, amajor challenge in terms of capacity, in both material and human resources,to achieve this goal, is an ongoing issue.

Issues for consideration

� Policies that require alternative placement of children in conflict with thelaw in places of safety or secure care centres, require massive investmentin capital infrastructure. In addition, social workers that have toimplement these policies are leaving the Department for better opportu-nities.

� The transfer of funds for HIV and AIDS from the conditional grant hasnot been particularly regular, and at times the Department was forced toutilise funds from the equitable share.

� The conditional grant for HIV and AIDS comes with strict conditionsand, at times, much red tape. The Standing Committee in the Legislaturehas raised concerns regarding the Department’s inability to raise fundsfrom the equitable share.

� There is some concern regarding the future sustainability of the NationalFood Emergency Programme.

� The funding of non-governmental organisations (NGOs) is challengedby the lack of flexibility in what can be funded. In addition, funding is notprogrammatic (or outcomes) based, but is based on the number ofpersons served by the NGO.



Discussions

� Due to the extensive focus on social security in provincialDepartments, less attention is given to social welfare services, andthe province faces considerable challenges in retaining the numberof social workers.

� Inter-provincial migration has an impact on service delivery in theprovince, since mostly sick and elderly people either remain orreturn to the Eastern Cape.

� Not all provinces have the infrastructure to pay out grants tobeneficiaries, and the services delivery agencies in provincesprovide a service that gives value for money.

9. Local Government

9.1 Overview

Since 1996, the total municipal budget has nearly doubled. Over the past 10years, Local Government has been receiving an increasing percentage ofnational revenue at an average annual growth rate of 15%.

The six Metropolitan Municipalities continue to dominate allocationsmaking up 58,8% of the combined budget of Municipalities. Johannesburgis allocated R12,2 billion, followed by Cape Town at R10,3 billion andeThekwini (Durban) at R9,8 billion. The average budget per capita for theMetros is R3 444. Johannesburg is higher than the average, at R3 774,followed by Tshwane (Pretoria) at R3 565 and Cape Town at R3 543.Although eThekwini has the third-highest budget of the six Metros, it hasthe lowest budget per capita at R3 172.

The most significant Local Municipality Budgets are Buffalo City (EastLondon), Mangaung (Bloemfontein) and Msunduzi (Pietermaritzburg),which are all over R1,0 billion. Stellenbosch has the highest budget percapita at R3 297, close to the average for Metros.

The proportion of the total budget spent on operating capital budget forboth Local and District Municipalities was affected by the division ofpowers and functions announced by National Government in 2003, whichtook effect in the 2003/04 budget.

In 2003/04 District Municipalities budgeted to spend 48,2% on capital, anincrease from 20,7% in 2002/03. In contrast, Local Municipalities reducedthe proportion to be spent on capital from 22,3% in 2002/03 to 20,8% in2003/04.

The major shift in capital expenditure from Local to District Municipalitieswas in the water and sanitation functions, especially for Municipalities inKwaZulu-Natal, Northern Cape and Limpopo.

Expenditure trends between 1996/97 and 2002/03 demonstrated that theoperating budget grew faster than the capital budget. This trend reversed in2003/04, with the capital budget growing by 27,5% compared to a 12,7%rise in the operating budget. This appears to reflect a shift towards greatermunicipal infrastructure development.

9.2 Allocations to Municipalities

Total municipal budgets were at R86 billion with R16,17 billion budgetedfor capital expenditure. Municipalities displayed varying dependence ongrants, ranging from 3% to 92% in the poorer Municipalities. Nationaltransfers have increased significantly as a source of revenue for localgovernment.



9.3 Expenditure trends

Operating expenditure makes up a significant proportion of total expendi-ture of Municipalities. Furthermore, a concern was expressed that capitalexpenditure has not necessarily kept pace with the increase in capitalbudgets.

Personnel expenditure constitutes 33% of Municipalities’ operating expen-diture. In 2002/03, personnel expenditure grew by 15%1. Personnel costshad increased by 15,2% since 2002-2003. It was noted that it is likely thatthese figures had, in fact, been understated. The scale of municipalemployees’ salaries and benefits is of concern.

9.4 Variance between Municipalities

There is a marked difference in per capita expenditure between large urbanmunicipalities and smaller (poor), largely rural municipalities. The focuson increasing capital expenditure places pressure on operating budgets andoperating costs are not adequately provided for in many Municipalities.While the cost of service provision was greater in more sparsely populatedareas, customers were less able to pay. Equitable share transfers were notbased on the cost of service provision and operating impact had beeninadequately provided for.

9.5 Municipal Infrastructure Grant (MIG)

Implementation of the Municipal Infrastructure Grant (MIG) began on 1April 2004. The roll out process of the MIG programme was therefore fasttracked by the DPLG and other sector Departments. This might placepressure on Municipalities to implement the MIG as Municipalities arerequired to have business plans, processes and procedures in place.

The MIG unit management and establishment costs were funded from theMIG2. The development of the MIG budget should be accompanied byprovision for shortfalls in operating funding in poorer municipalities. Italso appears that further expenditure on infrastructure for the delivery ofbasic services is needed.

9.6 Revenue raising abilities

� Regional Services Council (RSC) levies were an important source ofrevenue, but had been found to be an inequitable and poorly administeredtax base, and were under review. The Local Government equitable sharehad progressively formed a greater proportion of overall transfers, andwas under review to ensure equalisation between municipalities with arevenue base and those solely dependent on national grants.

� Profit on electricity sales was a critical component of municipal financialviability. The second fundamental issue is debt collection.

� Outstanding consumer debt has increased to R28 billion. The Masakhanecampaign had tried to encourage a culture of payment.

1. It may be that increases in personnel costs mirror the impact of the new system of local government.Following the amalgamation process, there was some duplication of staff and this has resulted in a bloatedmunicipal staff structure. If the increase in personnel costs was an unintended consequence ofamalgamation, the National Treasury report needs to look at the reasons for this.However, the 15% growth in personnel expenditure cannot be sustained. Measures have to be found toreverse the trend. Government is a service delivery vehicle, not an employment agency.

2. The 2004/05 MIG allocation amounted to R4,45 billion.



9.7 Governance Reform

The Western Cape Department of Local Government indicated that therewas a need for strategic and financial management at municipal level.

The work that the Department was doing on Project Consolidate wouldstart to address some of the challenges in the Intergovernmental FiscalFramework. The challenge was to ensure that the various pieces oflegislation and programmes were consolidated so that the system wasstabilised.

9.8 Submission by SALGA

The financial sustainability of Municipalities was imperative and was theresponsibility of all spheres of government. Functions referred to asnational or provincial responsibilities (e.g. education, roads, housing andhealth) were all delivered within municipal areas and affected municipalfinances in some way. Many municipalities had assumed responsibility forhousing with financial consequences.

Transfers of water services posed financial challenges, including adequacyof provision for ‘manpower’, operation and maintenance costs, and theadequacy of equitable share transfers to cover irrecoverable costs of basicservice provision in largely indigent areas when the Department of WaterAffairs and Forestry transfers stop. In respect of electricity, SALGAbelieved the solution was intergovernmental co-operation, which waspolitically driven at all levels, with the outcome to be regulated bycomprehensive agreements, and not legislation.

Discussions

Issues raised during discussions included:

� The need to regulate salaries of Local Government officials.� Municipal structures had only been in place for four years, and

many were still experiencing problems with an intergovernmentalapproach to issues.

� The MIG does not address backlogs at all, and it might therefore benecessary to analyse backlogs by districts.

� Gauteng had conducted a study that revealed that it would takeR45bn to address the backlogs in the Province. All provinces shouldbe looking at municipalities and identifying critical areas. Aframework should also be developed as a tool to monitormunicipalities across the country.

� Project Consolidate, which is a set of data that extrapolates trendsfor a defined period, was created to address backlogs in LocalGovernment service delivery, and entails the identification ofcritical shortages by analysis and reference to shortages in servicedelivery, and then applying joint resources to address the problem.

9.9 Provincial Input

9.9.1 Eastern Cape� The Eastern Cape province has a shortage of skilled personnel and there

is also a significant backlog in respect of the delivery of free basicservices.



� Poor financial management in some municipalities was highlighted. Aturnaround strategy was being worked on, and billing was beingconsidered as well.

� The MIG was an internal problem in the Eastern Cape, and the provincialand municipal infrastructure task team had not yet been set up.

9.9.2 Free State

� The Free State reported serious capacity problems as well. In mostmunicipalities, budgets were close to 50% of operating costs. Theamalgamation of municipalities absorbed staff on different salary scales,which increased the personnel budget.

� A concern was raised that the amount of money allocated was decreasingannually.

9.9.3 Western Cape

� The Western Cape reported backlogs in basic services that would take anumber of years to alleviate.

� There were no foreseeable problems with MIG and a number of smallermunicipalities had received assistance. Problems had been experiencedwith the flow of funds from the National Government.


Salary costs in the Department amounted to an average of 35% of thebudget in Municipalities in the province. This is a serious concern, as arethe high salary levels of municipal managers.

There is a 43% backlog in the provision of free water services that resultedfrom the lack of basic infrastructure, as well as a 61% backlog forelectricity. It is anticipated that the MIG will address the infrastructureproblem. As yet, no municipalities offered free basic sanitation.

Regarding the Municipal Infrastructure Grant, all District and MetroMunicipalities have established Project Management Units. However,although the province is ready for the implementation of MIG, no MIGapprovals have been received to date.

10. Education

10.1 Overview

Although education comprised the largest share of provincial socialspending, at 34,7% of the total, Province’s allocations have decreased overthe last three years and is projected to decrease over the next Medium TermExpenditure Framework (MTEF).

Expenditure on capital and supplies had increased, while annual expendi-ture per learner was approximately R5 000. The challenge that is still facingthe country’s provinces is aligning their budgets with their projectedspending. Three of the nine provinces had overspent on education over theyears and some, like the Eastern Cape are projected to overspendenormously.

10.2 National Treasury

The National Department of Education indicated that proper budgeting isstill a major challenge to Provinces, and also expressed concern at thedecrease in provinces’ allocations to education. This is due to the fact thatalthough the education budget increases marginally in all Provinces, theincrease is lower than the population growth.



10.3 Input by Provinces

10.3.1 Limpopo Province

The Provincial Department has initiated several programmes aimed at therealisation of its priorities. These programmes are broadly aimed at pushingback the frontiers of poverty as well as equipping people, through qualitylife long education and training, with the values, skills and knowledge thatwill enable them to fulfil a productive role in society. These are:

Infrastructure Provisioning Programme — The department has reduced itsclassroom backlog from 35 000 in 1994 to 11 000, at a cost of over R84,7billion over the last nine years. The Province is presently in the process ofconstructing a further 1 850 new classrooms, renovating dilapidatedstructures, provide water supply and improve sanitation facilities at a costof R360,579 million.

Water, Electricity and Sanitation — The Department, in conjunction withthe Independent Electoral Commission (IEC), will be electrifying 269schools and providing ablution facilities to 165 schools in the presentfinancial year. These are schools identified as voting stations for theupcoming local government elections. The Department would be erecting940 toilets at all schools where the new classrooms alluded to supra shall bebuilt.

Provision of Learner and Teacher Support Materials [LTSM] — Anamount of R443,603 million has been allocated for LTSM in this financialyear. Stationery will be provided in all grades as well as materials requiredto phase in outcomes based education in Grades 4, 5 and 6. Top ups will beprovided to the other grades.

National Primary School Nutrition Programme [NPSNP] — An amount ofR158,125 million has been allocated to this programme. 2 700 schools aresupplied with nutritional food and 1,1 million learners are benefiting fromthis programme. 144 service providers, mainly SMMEs, have beenappointed to implement the PSNP.

Provision of ECD — In this financial year, ECD services will be extendedto 1 008 sites at a cost of R20 315 million. A corresponding number of1 008 ECD practitioners (mostly in rural areas) have been appointed. Allmerged FET institutions in the Province are up and running. The Provincehas allocated R102 881 million to this sector.

Provision of ABET — The Department has recruited and retrained a numberof unemployed qualified educators to be responsible for its ABET Centres.This include the appointment of 2 010 ABET practitioners. The Provincehas set aside an amount of R475 940 in this programme.

10.3.2 Eastern Cape Province

The Eastern Cape Province is one of the Provinces facing major backlogsin service delivery in South Africa. The Province has a history of poorbudget planning which as resulted in incorrect budget allocations and underfunding. As of April 1, 2004, the Province had a bank overdraft of R602million.

Financial Year Overall over- or under ex-penditure

Personnel over- or underexpenditure

2000/01 248 282 -109 2742001/02 254 989 -256 1152002/03 -337 339 -582 4382003/04 -243 300 -220 556

Table 1: Spending over four financial yearsNotes: The Province projects an overspending of R602 million for this current financial year.



The Province has identified the following reasons for overspending:

a) Incorrect budget allocations.

b) Backlogs in payments, especially in retirement packages ofteachers.

c) Issuing and filling of unfounded bulletins.

The Province was included in the Joint National and Provincial Initiativeunder the Interim Management Team (IMT) during 2003-2004. The IMTreported that the progress of the Department was not satisfactory andrecommended a further intervention to improve financial and managementperformance.

Personnel and non-personnel expenditure in the Department

The split between personnel and non-personnel expenditure in the Provinceis as follows:

National Norm Provincial normPersonnel Non-personnel Personnel Non-personnel85% 15% 84,94% 15,06

Table 2: Personnel and non-personnel expenditure

The split between educators and non-educators expenditure in the Provinceis as follows:

National Norm Provincial norm85% 15% 92,8% 7,2%

Table 3: Split between educators and non-educators

10.3.3 Free State Province

The free State Province is involved in speeding up programmes to providewater, sanitation, electricity and telephone services. In order to meet thePresidential targets, the Department of Local Government and Housingwill provide R2 million for toilets. The Department of Water Affairs andForestry will provide boreholes to 53 schools and Randwater will providewater to 20 schools in the Province.

10.3.4 Gauteng Province

The Department’s budget has increased from R6,3 billion in the 1999/2000financial year to R10,5 billion in the 2007/08 financial year. The increaseranges from 6,6% to 12%. The increase in the 2004/05 budget in relation tothe 2003/04 budget is 4,68%.

The Department spends 75% of its budget on personnel. However, thistrend has been projected to decrease marginally in the MTEF period. On theother hand, the non-personnel expenditure decreases by over R49 millionin 2004/5. Personnel costs have been projected at an annual increase of6,42% as of 2004/5.

The analysis of the education budget excluding grants projects thefollowing:

� A 4,68% increase in over the 2003/4 budget, which will be whollyconsumed by personnel costs.

� The personnel: non-personnel split for 2004/5 is 88:12.� Policy Targets — the School Funding Norms set a macro target of 85:15

split between personnel and non-personnel in the education allocationexcluding conditional grants. From the above the department achievedthe required 85-15 split in 2001/2.




� The Province suffers from a shortage of teachers with scarce skills insubjects such as mathematics, physical science, economics, accounting,business management, agricultural science, shorthand and computers. Asa result, teacher-learner ratios have reached unbearable levels andteachers cannot cope under the pressure.

� Due to financial constraints the province also suffered from a shortage oflearner support material, such as books.

10.3.6 Northern Cape Province

� One of the Department’s priority areas is to strengthen FinancialManagement and Resource Allocation by proper control of budgetaryexpenditure, continued implementation of strict control measures toeliminate corruption and maladministration, expanding pro-poor fundingand seeking a better balance between personnel and non-personnelexpenditure.

� For 2004/05, 126 projects were identified for rehabilitation and newconstructions through the Extended Public Works Programme at a budgetof R56,000 million.

� The current budget for the school Nutrition Programme is R7,400 millionand R14,800 million required over the next 2 years.

10.3.7 Mpumalanga Province

The Department has budgeted R63,5 million for the National PrimarySchool Nutrition Programme (NPSNP). This amount includes volunteerworker payments of R4,8 million. The budget is distributed in the threeregions of the Province as follows:

� Total budget for Ekangala Region received R24 million.� Ehlanzeni Region received R20 million.� Gert Sibande Region received R18 million.

Scholar transport

The budget for scholar transport has increased from R8, 8 million in the1999 financial year to R63,4 million in the current financial year. Thenumber of scholars who benefit from this programme has grownsignificantly from 4 613 in 1999 to 26 337 to date, and are mostly fromhistorically disadvantaged people.

The Department is presently in possession of 256 applications for scholartransport for 7 852 learners in the various regions, who are presently notincluded in the routes that are presently being serviced. This will require anadditional R20 million.

For the financial year 2004/2005, scholar transport was allocated R63,4million. R59 million was earmarked for the current running routes, whileR4,4 million was earmarked for addressing the backlog. Due to theenormous increase in the number of learners on the current running routes,the Department reached an agreement with the service providers to paythem R0,10 per learner per day per kilometre. This put a further strain onthe already inadequate budget. The estimate amount to cover thisexpenditure will be R4 million.




Challenges faced by the Western Cape Department of Education include:

� Decrease in equity share by 2% over the MTEFT period.� Decrease in the personnel budget, especially at school level.� Real decrease in per capita spending per learner.� The introduction of the proposed policy for Norms and Standards for

School Funding, which requires funding at a minimum R515 per learnerfor Quintile 1.

Conclusion

The Provinces outlined the current challenges and achievements in theirsectors and, as well as challenges and successes in expenditure spendingand key strategic priorities. They also outlined their budget allocations andexpenditure trends in the last years, their priorities for 2005, and themeasures they are taking to reduce poverty and improve the quality ofservice delivery. However, the committee was concerned about thenon-availability of provincial representatives in most of the sectors, withthe exception of the education sector.

References

Trends in Intergovernmental Finances: 2000/01-2006/07, National Trea-sury, Republic of South Africa.

Minutes of proceedings of the meeting, captured by the ParliamentaryMonitoring Group (PMG) at http://www.pmg.org.za, 6 October 2004.

Power Point presentation, Department of Water Affairs and Forestry(DWAF), 6 October 2004.

Report to be considered.



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