Division of Revenue: Financial & Fiscal Commission recommendations & Departments of Sport & Recreation & Transport response

NCOP Finance

04 August 2009
Chairperson: Mr C de Beer (ANC; Northern Cape)
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Meeting Summary

The Financial and Fiscal Commission (FFC) reviewed the constitutional arrangement governing the FFC, specifically its structure and consultation process. Its new five-year strategic plan was heavily influenced by the challenges identified. These challenges included resolving the matter of powers and functions across the three spheres of government, fiscal capacity of provinces and municipalities and the impact of transfers on the delivery outcomes of government programmes. The FFC’s detailed recommendations for consideration in the development of the Division of Revenue Bill 2010/11 covered the review of the provincial equitable share formula, the efficiency and equity effects of expansion of the social grant system and the management and maintenance of public infrastructure. Recommendations for the improved performance of public hospitals, rental housing and the management and financing of roads infrastructure were made. The assessment of access to water and sanitation was discussed according to an evaluation of progress made on achieving targets and recommendations to address the areas of concern in the provision of these services. Institutional and fiscal capacity support mechanisms for local government were discussed and recommendations for improving local government capacity were made.

Members requested more detail on the role of the FFC in the budget process, its history, and institutional arrangements governing the FFC and what its interactions were with sub-national government. Members were particularly interested in the adoption rate of FFC recommendations. Further technical questions were aimed at obtaining clarity on what were referred to as revenue sharing, Technical Committee on Finance, and equalisation grants. Members queried the criteria the FFC used to determine allocations to provinces, the effectiveness of the equalisation with relation to infrastructure backlogs, and what was unfair about the qualifying income bands in the recommendations on rental housing. The FFC was also asked if it was sufficient for it to make recommendations based on anecdotal evidence and if members could be provided with a list of the funding windows in government.

Regarding the review of the provincial equitable share formula, the Committee asked what the envisaged timeframe was for completing the review of the formula and wondered what lessons were learnt from the 2004 review of the PES formula. A point that received much attention was the suggested revenue raising powers and use of borrowing by provinces. Generally members expressed concern about possible increases in the tax burden for citizen and increased debt burden on national government. Members noted that the FFC statements on social grants reducing poverty and promoting dependency and poverty in households seemed contradictory, and expressed the view that there was evidence in regard to the benefits of social grants to households. The time horizon for the use of social grants was also queried.

On local government capacity support, members asked if research had been conducted on the trend of migration of skilled people from the public to the private sector contributing to the lack of technical skills. It were also interested in whether capacity support programmes in municipalities were correctly targeted, as well as the impact of the Siyenza Manje project. Members disagreed, in relation to water and sanitation, with the view that a water crisis was less important than the electricity crisis and would have to be convinced on the need for a national water regulator. In relation to roads infrastructure, they questioned the recommendation to use tolls, in light of the general rejection of toll roads in the country and the trend toward hiring private sector contractors to do maintenance on roads. Other questions related to the expected impact of the envisaged National Health Insurance scheme. Members queried the comments on limited funding and the suggestion that the FFC was currently starved of funds. The FFC was also asked how it reconciled the recommendations amounting to increased expenditure with the recession.

National Treasury presented its response to the recommendations of the Financial and Fiscal Commission on the Division of Revenue 2010/11,and detailed the National Treasury’s role.  National Treasury specifically responded to the suggestion that the FFC was deliberately underfunded, and acknowledged the need for the budget process leading up to the 2010/11 budget to take account of the recession. Further specific responses were given to the FFC’s recommendations on infrastructure grants to provinces, borrowing by provinces, public hospital funding, local government capacity support and water and sanitation.

The Department of Sport and Recreation (SRSA) proposed the reallocation of the sport and recreation funds, currently forming part of the Municipal Infrastructure Grant, back to the National Department. It believed that this would aid the implementation of infrastructure development, targeted specifically at building and maintaining sport facilities. The SRSA highlighted the inefficiency of the current funding model and felt that it had the expertise to spend more efficiently and aid municipalities to co-ordinate these infrastructure projects.
Members asked why the SRSA programmes were not rolled out in smaller towns. They questioned whether the proposal to reallocate funds to the national department was not a ploy to have access to more funding and the power to award contracts. The Committee expressed the opinion that national departments should forward their plans to municipalities to ensure that these were incorporated into the Integrated Development Plans. Members also queried the proportion that municipalities currently spent on sport and recreation, the SRSA’s plan for funding sport and recreation facilities, the continued lack of emphasis on sport in schools and clubs, and whether the delivery of infrastructure would be done through the Expanded Public Works Programme (EPWP).

The Department of Transport (DoT) responded specifically to all the recommendations made pertaining to the DoT. The decline in the conditions of South Africa's surfaced road infrastructure was discussed, and great deal of emphasis was placed on the increasing use of trucks as the key mode for the transportation of goods in the economy, as these were the main culprit in the deterioration of roads. The DoT opined that a fiscal injection alone was not a panacea to problems and certain other policy interventions were necessary. The Department made recommendations on clauses 27, 28 and 29 of the Division Of Revenue Bill and provided the Committee with a detailed account of grants currently under its administration.
Members queried theuser pays” cost recovery system and asked if there was a way to target the specific companies that damaged the roads. Members disagreed that the South African National Roads Agency Limited (SANRAL) had the capacity to provide services at local level. They noted the damage done when trucks used secondary road networks to avoid paying tolls, and suggested alternatives. Further questions related to whether there had been studies done into the benefits of tarring dirt roads, how much the DoT had paid for litigation, and the effect of a return to rail transport on the economic activity of South Africa. Members believed that problems arose from poor co-ordination in provinces and noted concerns about the rigid approach to re-appropriating funds. They believed the Department must formulate a comprehensive plan based on the recommendations of the FFC and the Committee in response to the transport challenges, and the Committee resolved to call the DoT back to present a full report and written responses, within 60 days,  to the outstanding questions.


Meeting report

Financial and Fiscal Commission (FFC) Briefing on Division of Revenue
Dr Bethuel Setai, Chairperson, Financial and Fiscal Commission, reviewed the constitutional arrangement governing the FFC (as set out in Section 220 of Chapter 13), specifically its structure and consultation process. Its new five-year strategic plan was heavily influenced by the challenges it had identified. These challenges included resolving the matter of powers and functions across the three spheres of government, fiscal capacity of provinces and municipalities and the impact of transfers on the delivery outcomes of government programmes. A notable point in the recommendations for the review of the provincial equitable share (PES) formula was the need to look at revenue autonomy for provinces and the need for provinces to use borrowing as another avenue for obtaining funding, as distinct from the allocation made to them by national government through the PES.

Public Infrastructure and Social Grants
Mr Eddie Rakabe, Senior Researcher, FFC presented the FFC recommendations on public infrastructure spending. In relation to social spending, he stated that the current economic circumstances needed a social safety net. The FFC did note that social grants had succeeded in reaching the poorest households and there had been a reduction in poverty. The empirical evidence spoke to the success of the system up to this point. The FFC had to evaluate whether the additional costs would compromise the benefits. There was also the concern around discouraging labour market participation by economically active dependents. This was to be considered along with the possible creation of “perverse incentives”. For instance, an increase in childcare grant could incentivise teenage pregnancy, or an increase in the HIV/AIDS grant might incentivise people to forego treatment. There was also the concern that the educational system was not helping to lift people out of poverty, so that there was no long-term path to get households out of poverty and out of the social grant system. He presented the recommendations on social grants to the Committee (see attached document).

Public Hospitals and Roads Infrastructure
Mr Tebogo Makube, Programme Manager (Fiscal Policy), FFC, reported that the legislative and policy framework for public hospitals was in place but that implementation, integration and coordination was lacking. The FFC observed that the location of functions between provincial health departments and public hospitals did affect public hospitals, and that reporting on the public hospitals' budget structures was difficult. The FFC therefore recommended that that there be legislative provisions and norms and standards to ensure a well-functioning public hospital system. It also recommended that government standardise budget formats and processes for public hospital systems.

Mr Makube stated that a well-developed and modernised transport network was needed for the efficient functioning of any economy. There was under-investment in both the construction and maintenance of roads, especially at sub-national levels. A notable recommendation was that investment in roads infrastructure should be increased. The funding of provincial roads was contained in recommendations on including a road infrastructure component in the PES formula, and expanding the financing role of development finance institutions. Other recommendations were also presented.

Rental Housing
Mr Sabelo Mtantato, Senior Researcher, FFC, reported that the demand for rental housing was increasing in South Africa, specifically amongst those in lower income groups (earning below R2 500 per month). The formal sector had not kept up with this demand. He reviewed the factors hampering rental housing delivery as well as the FFC recommendations.

Water and Sanitation
Mr David Savage, Commissioner, FFC, opened his portion of the presentation by commenting on recent reports that South Africa might face a possible water crisis, similar to the electricity crisis. The FFC had found that the problems were not of the same nature, but certainly this sector faced some serious challenge. Notable points on the provision of water and sanitation in South Africa were the disparity between set targets and implementation, lack of qualified staff and the inability of many people to pay for services, especially expensive water borne sanitation systems. The FFC recommended that the free basic water and sanitation subsidy may require a review of the current free basic water and sanitation subsidy policy. FFC particularly noted the risks of rising block tariffs and the possible errors of inclusion and exclusion and potential for inefficiency in the medium to long term. The principles and practices guiding tariffs, subsidy structures and price levels should be made clear and routinely monitored.

FFC also recommended an expansion of access to sanitation services, and that any sanitation strategy should also target behavioural issues, to change household sanitation practices, and that government should further investigate appropriate sanitation technologies that met the needs of communities. He noted the preference for water-borne networked sanitation, which was extremely expensive to install, operate and maintain. Pursuing this type of sanitation may ultimately limit access to sanitation facilities. All these recommendations should also be balanced with ensuring that the environment was protected. He added that universalising access sanitation had a greater public health impact, as open defecation presented a significant public health hazard.

The incongruity between policy intentions and outcomes called for a closer look at who owned the targets and how they were set, based on performance. The FFC further recommended the establishment of a National Water Regulator, due to the current conflict of interest in the sector. National government's many conflicting roles created opportunity for slippage in its regulatory role and increased the inclination to renegotiate targets.

Municipalities faced capacity challenges and this had led national government to introduce capacity building programmes and grant funding. The programmes were too numerous and had various problems. They may lead to the creation of negative or perverse incentives, because only failing municipalities received this support, thus actually creating an incentive to be inefficient. In broad terms, the FFC recommended that the municipalities be central to setting the agenda for capacity building programmes, prior to the development of these programmes or implementation. The establishment of an intergovernmental wide framework, a clear separation of responsibilities between service authority and service providers and the elimination of the replication of roles was also proposed.

Discussion
Mr T Harris (DA; Western Cape) asked what the FFC's experience was on the adoption of its recommendations and how often recommendations recurred.

Mr Savage replied that the adoption of recommendations was fairly good. There was a need to distinguish between the FFC' s policy recommendations, and the actual implementation of those recommendations. Implementation may take a number of years to filter through the system. He said that the recommendations did not recur, but changed with the times. The FFC was forward thinking in assessing what the strategic issues would be. The National Treasury (NT) did focus on the FFC's recommendations and did engage robustly on them. The engagements with the Department had not always been good. For example FFC had on occasion “hit a wall of silence” regarding the housing recommendations. National Treasury could not move unilaterally on the FFC recommendations and the co-operation of the Department of Housing was crucial, but lacking. Overall, it had typically had very high levels of co-operation from government.

Mr E Sogoni (ANC), Chairperson: Standing Committee on Appropriations, asked if there were clear communication lines between the FFC and departments.

Mr Savage replied that they were in place, but were not working as effectively as they could. The FFC’s difficulty was that it was a small Commission with limited resources and did not have capacity to focus on every issue, every year. There may be gaps in addressing certain departments while problems in others received attention. The FFC was attempting to adjust itself to a changed environment and its new research strategy looked at how to engage more directly with a broader group of stakeholders, to make a contribution to shifting policy outcomes.

Dr Setai generally responded that the FFC was available to attend a workshop on the issues raised.

Mr Harris noted that increases in expenditure were recommended throughout the submission. He asked if the FFC had taken the decreases in revenue collection, due to the recession, into account.

Mr B Mnguni (ANC, Free State) asked how the FFC reconciled the recommendations amounting to increased expenditure with the recession.

Mr Savage responded that the FFC took the position that its recommendations were aimed at spending more wisely and that there were things that could be done to improve the effectiveness of every rand spent. In line with counter-cyclical spending and Keynesian economics, it was not unusual to increase government spending in a downturn, to keep domestic demand up and to speed up economic recovery. Government was already pursuing this line.

Mr Makube added that government had a role to play during the recession to bring the economy to equilibrium. If the recommended areas were targeted, this would assist South Africa to increase productivity and employment after the recession

Mr Harris asked for comment on the view that the FFC was non-existent in the budget process.

Mr Savage replied that, introspectively, there was more that the Commission could do to make its views more clearly understood and known, by engaging those forums to which the FFC had  access, such as the Budget Council and Budget Forum. In the past the budget process had been fairly restrictive and heavily controlled by the Executive. The legislature, through the Money Bills Amendment Procedure and Related Matters Act, now had a far greater role. The FFC too had a role to play in terms of this Act, and a broader mandate to advise Parliament on budget choices. The FFC was also very willing to assist as Parliament built its budget management capacity over time. However, he did not believe that the Commission was established to be a high profile body, as this was the role of elected representatives. The FFC was a committee of experts, intended to give advice, and the Commission had no desire to build a higher profile as this would not be a very effective way to fulfil its duties.

Mr Harris sought an explanation of the "revenue sharing" component of the PES formula, the "TCF", the equalisation grant, and what the envisaged timeframe was for completing the review of the PES formula. He also wondered what lessons were learnt from the 2004 review of the PES formula.

Mr Savage replied that “revenue sharing” was where a tax was collected nationally and distributed sub-nationally, proportionally and sharing the same administrative framework. The equalisation framework recognised the capacity differences between provinces, but also recognised that the expenditure needs were the same, and dealt with redistribution of revenue accordingly. The “TCF” was the Technical Committee on Finance, an administrative Committee staffed by government officials who reported to the Budget Council and the Budget Forum.

Mr Rakabe replied that this was a continuation of the 2004 review. The review was initiated because provinces complained that the provincial equitable share was biased toward urban provinces such as the Western Cape and Gauteng. Provinces also felt they did not have adequate discretion to spend outside typical social functions, such as education and health. The FFC had found that most provinces did not maximise revenue collection, hence its recommendation that provinces should be incentivised to borrow. The final stage of the review was nearing completion and the FFC was now prepared to present it to the Budget Council. The call for a National Health Insurance (NHI) scheme required further work and consideration as to how it would be included. This would be an addition to the current PES review report.

Mr G Mokgoro (ANC; Northern Cape) asked how the FFC envisioned revenue raising powers for the provinces without creating more burden on taxpayers. Furthermore, if provinces borrowed he asked how they would service their loans while still dependent on national government funding.

Mr Harris asked why provinces were not exploiting the potential for provincial revenue raising or borrowing. He also wondered how provinces could be encouraged to explore these options.

Dr Setai responded that provinces would levy extra taxes because they would raise money in order to perform certain defined functions.  He could not think of a tax that would not be a burden on taxpayers. Loans then became a big issue, as provinces were not in the business of raising money. Provinces needed to be able to secure the loans against revenue, and perhaps the only way to achieve this was for South Africans to be taxed further. The FFC had submitted advice to the Western Cape on the fuel levy but did not yet know what the province had decided.

Mr Savage replied that there was limited potential for provincial revenue raising. The bulk of provinces’ expenditure was on health and education, and this was appropriately funded off the national tax base to ensure universal access to these services. There were opportunities for user fees and other indirect forms. The Provincial Fiscal Powers Act and Provincial Borrowing Powers Act had not been extensively exploited in the past, and currently the largest provincial tax was levied on gambling, which was nonetheless very small as a percentage of total revenue. Approximately 96% of provincial revenue was derived from grants from national government. There was limited room for revenue raising, and provinces should not levy "nuisance taxes" as this could become an administrative burden.

Mr Savage added that provinces failed to borrow largely because this had become the convention, and they were not encouraged to do so. He reiterated that the Provincial Borrowing Powers Act did allow for it. A province's primary security for a loan would be transfers from national government. The liability was therefore imposed on the national balance sheet. There were two arguments on this matter: the first argued that it was not efficient for provinces to borrow when national government could do so at cheaper rates and pass the funds along to provincial government. The second argued that borrowing enforced a degree of discipline to the project design process, as lenders had provisions that had to be adhered to in order to obtain loans and maintain credit ratings on loans. The question then was whether the benefits of increased spending and planning discipline for provinces outweighed the increased cost of borrowing charged to sub-national entities. This debate seemed unresolved but it appeared that at the moment provinces had decided to let national government borrow on its behalf. The tax burden was contained in the fact that national government would forego some revenue. He noted that some proportion of income tax would levied by provincial government, and national government would drop its income tax accordingly. This had to be done off the same tax base as distributional impact had to be considered.

Mr Mokgoro queried the envisioned time horizon for the use of social grants, and at which point South Africans would be self-sufficient. He believed that greater emphasis should be placed on promoting self-sufficiency.

Dr Setai responded that this was a political decision. The FFC analysis had concluded that the social grants were acceptable in the areas where these made an impact, but the sustainability of continued social spending was a matter for the National Treasury to comment on.

Mr Mokgoro noted that there had previously been a dedicated government team to attend  to  repairing, upgrading and building of new roads. It seemed that there now was a trend towards hiring private sector contractors to perform these functions; often at exorbitant charges. He felt a return to the old system would be beneficial to the maintenance of roads and also would serve as a means for skills development.

Dr Setai responded that the FFC had met with the Minister of Public Works, Hon Geoff Doidge, to discuss these issues. When the Department of Public Works came before the Committee, it should be able to comment on that issue.

Mr Makube responded that the observation on the use of private sector contracting was accurate. The broader issue, however, was the accountability and oversight of spending and the monitoring of targets regarding spending on roads. There was no basis for this kind of evaluation. There was a role for Parliament in determining the model for accountability in the delivery of roads.

Mr Savage replied that most municipalities and provinces had made this decision on a cost benefit basis. They had found that contracting out was simply cheaper, when weighed up against the cost of having personnel permanently on the payroll although they essentially worked only at seasonal times. They saved money by paying part time contractor workforces, and by renting equipment when needed. This may not always be the best solution as these contracts need to be managed, and prices must be set.

Mr L Mashile (ANC; Mpumalanga) asked how the FFC was constituted and how long it had been in existence.

Mr Harris queried the validity of a statement he had heard that the FFC was non-existent in the budget process.

Dr Setai responded that the FFC was established in terms of Section 220 of the Constitution, and it provided independent advice on the division of nationally raised revenue to provincial and local government. This was very important as most of the taxes in South Africa were levied at national level, and this tax revenue then had to be distributed in an equitable way.
The FFC was as strong as the Parliament wanted it to be. Parliament would have to shield the FFC from unfair attack and could also ensure that the FFC was well funded, as its work would be impeded by insufficient funding. Parliament could also broaden its mandate. This might be an area for discussion in the workshops. Sections 214, 218, 228, 229 and 230 of the Constitution required consultation with the FFC on the Division Of Revenue Bill and this did happen annually.

Mr Savage added that, beyond the Constitution, the FFC Act and the Intergovernmental Fiscal Relations Act created an empowering framework within which the FFC could act. The model adopted in South Africa was different from that in international countries. The FFC was a permanent advisory structure. While the Indian model was less permanent, it did have a protocol in place that the recommendations were adopted wholesale by government. Its counterpart in Uganda not only determined the allocations to provinces but also transferred the money. South Africa's permanent structure was designed to attract and build research capacity, but was advisory in nature.

Mr Mashile queried how authoritative the recommendations of the FFC were.

Dr Setai replied that the recommendations were submitted to Parliament and National Treasury. Consultation with National Treasury on the recommendations was an ongoing process.

Mr Mashile stated that the statement in Slide 11, on social grants reducing poverty and promoting dependency and poverty in households was contradictory.

Mr Mashile wanted to know if the use of the word "independence" regarding public hospitals was suggestive of privatisation.

Mr Savage replied that what was meant by independence was managerial autonomy and clear framework of targets and standards. Nobody was currently really accountable for the outcomes in public hospitals. The managers in these hospitals did not have enough discretion to manage or make decisions on a day-to-day basis. This was part of the reason for the poor outcomes. As to privatisation, ownership was not the issue. There was no debate about public ownership. It was very difficult to hold managers accountable if they were restricted in the decisions they were permitted to make.

Mr Mashile asked if the FFC agreed that it was more appropriate to cascade housing subsidies down to local government. Currently, there was much inefficiency in the provincial government's administration of these subsidies, while local government had very little control.

Mr Savage replied that this was a recommendation the FFC had made two years ago, and that it appeared that this issue was now gathering momentum, and could be comprehensively addressed.

Mr Mashile noted that there was a general rejection of toll roads in the country. He asked how the recommendation to use tolls as means for roads funding would integrate with this trend.

Mr Makube replied that the FFC recommended a cost benefit analysis. Toll gates were appropriate in some instances, but not in others. This was a public choice issue. In an open economy, taxes and subsidies were symmetrical. In most cases there was a choice between people funding roads indirectly through taxes, or directly through a toll.

Mr Mashile noted that the FFC’s comments on the lack of technical skills did not talk to the migration of skilled people from the public to the private sector. He asked if the FFC had researched this trend and its relation to salary levels.

Mr Mashile stated that he would have to be convinced on the need for a national water regulator. There were many institutions and agencies tasked with water management, like catchment management agencies, and he wondered if the establishment of a national water regulator would necessitate the disestablishment of these other bodies.

Mr Savage responded that the catchment management agencies were created in legislation, but had still not been established. The water boards were largely ineffective and had somewhat ambiguous roles. This was a question of the roles of the many water services providers. No one other than the Department of Water and Environmental Affairs was exercising oversight. There was no particularly effective mechanism of oversight, and it was further unlikely to be mitigating risks in price setting - in other words, prices were being set too low, relative to the level of investment in the sector. There was a need for focussed capacity in oversight and this would distinguish the national water regulator from existing institutions.

Mr Mashile referred to capacity support to municipalities and noted the trend of people who were trained in these capacity building programmes joining the private sector. He asked if these programmes were correctly targeted.

Mr Mashile asked if the statement on slide 33, to the effect that there should be a clear separation of responsibilities, as well as coherent interface, between service authority and the service providers, was a blanket statement.

Mr Savage replied that there was a contradiction in roles between water service authorities and water service providers and this led to very little independent oversight. There should be a clear separation between the designers of policy and the implementers of policy. This was needed to aid accountability. A key issue was the notion of an autonomous national regulator who would referee the relationship between the designers and implementers to ensure that neither side was unfairly treated. The FFC had not done enough research on this trend to comment. This matter was not directly central to FFC mandate at present, but this may be reviewed in future.

Mr Mnguni recalled research that concluded that families who obtained grants had better chances to obtain employment and improve their lives. He felt that this information contradicted the FFC's findings.

Mr Mtantato responded that the FFC acknowledged that social grants played a role in reducing poverty, but raised concerns about anecdotal evidence that suggested that social grants created perverse incentives, such as people foregoing HIV treatment in order to continue colleting the HIV grant, or pension dependency. Consequently the FFC recommended that social grants should be tied to workfare programmes. This would manage the potential negative effects of social grants.

Mr Mnguni asked what the impact of the envisaged National Health Insurance (NHI) would be.

Mr Savage replied that the FFC had not completed its research on the topic. A process of rigorous investigation and research was required to look at the medium term impacts. Within its pre-planned research cycle, it had to think two years in advance to ensure that the recommendations remained current. It was very difficult for the FFC to move on the NHI, as there were no firm proposals on the table. The NHI was programmed into its current research cycle.

Mr Mnguni asked what was the likely impact of the R70 billion Transnet purchase of railway stock, in relation to the fact that the roads were proved to have deteriorated because of heavy truck use for the transport of goods.

 Mr Makube responded that over long distances transport by rail was preferred to transport by road, due to the inherent economies of scale. This would require planning and an institutional engagement around transportation.

Mr Mnguni asked what impact the Siyenza Manje project had had.

Mr Savage replied that National Treasury had agreed to do an independent evaluation in the short-term, and he recommended that the Committee support it. Upon completion of the evaluation, Members could see what lessons could be learned from the Siyenza Manje programme. It was unclear what the impact was, as there was a lack of transparency in reporting.

Mr Mnguni referred to the last statements on slide 32, that capacity development programmes should be comprehensive, and not only focus on training of personnel and deployment of experts within municipalities. He asked what other broader issues were envisaged that could further improve service delivery in municipalities.

Mr Savage replied that beyond training, the core concern was building basic public expenditure management systems for price setting, billing, credit control, budgeting and procurement. On capital projects there should be a multi-year pipeline for capital expenditure, on a predictable basis. There could not be effective training without having these systems in place and there was a need to guard against training on concepts.

The Chairperson said that in light of the lack of technical skills, the Committee should be advised by the Department of Transport, during its later presentation, whether it  gave bursaries to students hoping to study in the relevant engineering fields. Members should enquire whether the students at the high schools in its constituencies were aware of their options and bring them into contact with the institutions that gave bursaries. It was generally the Members' responsibility to connect the people with resources.

Mr Mashile asked when the FFC was constituted and when its life would come to an end. He also asked who the other nine members of the FFC were, was he understood that it was constituted of 18 members.

Dr Setai responded that the FFC started in 1994 or 1995. The Constitution created the FFC as a permanent institution. The FFC could only be closed down if six out of nine provinces agreed to do so. The number of commissioners had been reduced to nine, as the original number was unmanageable, through a constitutional amendment. The Chairperson and Deputy Chairperson were the two permanent members. The Chairperson was the Accounting Officer of the FFC. Appointments were made on a renewable five-year term. The FFC Act also stipulated the appointment procedure for two national appointees, three provincial appointees and two local appointees.

Mr R Lees (DA; Kwazulu-Natal) asked if Dr Setai's comments on limited funding and the suggestion that the FFC was currently starved of funds was a hypothetical statement on a way to restrict the operations of the FFC.

Dr Setai replied that the FFC had a very limited budget, and this was clear from the Annual Report.

Mr Savage added that limited resources were a challenge for all agencies in the public sector. The Commission looked very closely at how to improve its services within the current resource limitations. Although the identified opportunities were being aggressively pursued, they would eventually hit ceiling. FFC had already had to drop projects that it would have liked to take forward.

Mr Lees asked if it was sufficient for the FFC to make recommendations based on anecdotal evidence. He thought that "teenage pregnancy" was a more appropriate term for reporting rather than the somewhat obscure "teenage fertility" used in the presentation in the social grants section. He added a general appeal for use of simpler language in the presentation.

Mr Savage conceded that the FFC needed to work on expressing itself in clearer language during presentations. The researchers had been encouraged to use real-world examples in presentations, but there was no anecdotal evidence in the formal report.

Mr Lees noted the recommendations that amounted to additional spending by government. In his constituency there were some R15 million in unspent money sitting in a bank account, because there was no political will or managerial skills to spent on housing. This was not necessarily a question of just throwing money at problems. He thought that increasing the independence of hospital management was an excellent recommendation. He recounted his experience with Newcastle provincial hospital. This hospital had been designated as a mother and child hospital. Although it was centrally placed, it would only deal with limited cases, and anyone who was perhaps hurt in a traffic accident would not be referred to this, the closest hospital, but would be referred elsewhere. The trauma unit at the hospital had however started to treat trauma patients before referring them on, and this was an unfunded mandate. The management of the hospital had said that it could not run the hospital catering to the other functions on a mother and child hospital budget, and he had sympathy for the management.
He was in favour of the recommendation for managerial autonomy, but added that centralised planning should not hamstring hospitals with a limited mandate.

Mr Lees asked what was meant by the references to unfair regarding the qualifying income band in the recommendations on rental housing.

Mr Savage replied that any income band used to determine access to a benefit would disadvantage those who were on the cusp of the limit. The other effect was well known as creep, and it occurred when inflation reduced the real value of the band without affecting people's quality of life. This was chiefly an effect on salaries and the purchasing power of money. These two effects could lead to unfairness in the rental housing application bands, and the FFC recommended vigilance on the issue as the bands were introduced many years ago and now needed to be reviewed. There was a need to appreciate how the system was leading to errors of inclusion and exclusion.

Mr Lees noted the recommendation on the need for behavioural changes in water and sanitation issues, and said that this was probably more important than the facilities. He disagreed that a water crisis was less important than the electricity crisis. While there were other ways of generating electricity, water was finite. Though the crisis was not yet upon us, there was need to look at ways to address it.

Mr Savage replied that the challenges with water provision were different to those of electricity. These were not generation challenges, and the electricity crisis was triggered by problems on the generation side. South Africa was a water-scarce country, yet there was a history of exceptionally good management of a limited resource. The challenge facing water services was one of water quality. Water quality could be degraded by biological and chemical contamination and this had to be addressed. Though the challenges were different this should not be taken to mean that the problems were less important.

The Chairperson reported that the Department of Agriculture, Forestry and Fisheries had produced a document on the bulk water supply outlook for the next 30 years. He urged Members to obtain the document and read the expectations for their provinces, to take up the issues in their respective provinces with the municipalities.

Mr Mokgoro queried the criteria the FFC used to determine allocations to provinces. He noted that the needs of provinces were not the same. Some provinces were very disadvantaged in terms of development, and also suffered from migration to the larger urban areas.

A Member queried the use of the equalisation with relation to infrastructure backlogs. Some provinces had serious backlogs and he was not convinced that South Africa was focused on infrastructure backlogs. He asked for the FFC’s comment.

Mr Rakabe responded that this was defined by the provincial equitable share (PES) formula. The formula was comprised of six components: education (number of school-going children), health (number of people with/without medical aid), basic (population), poverty, economic activity (contribution to GDP) and institutional component (shared equally by all provinces).
The current review looked at backlogs. The formula previously contained a backlog component but this was removed with the introduction of the infrastructure grants. The formula was updated annually using data from Statistics South Africa and this data accounted for the effects of inter-provincial migration. The FFC guarded against using the equitable share to solve all the problems affecting provinces, and remained focused.

Mr Mnguni voiced his fear that when provinces were incentivised to borrow, the debt burden would increase at national level. He asked how provinces would repay loans, and whether there was a risk of provinces waiting for national government to bail them out, resulting in less services being provided to citizens. .

Mr Savage replied that the conservative approach in the past had been that provinces should not borrow. Provinces might want to time-shift allocations in order to take on large capital expenditure in the long term. There was no reason that they should be constrained from doing so, provided that the investment was sensible. Borrowing was generally regarded as an efficient way to finance infrastructure investment. The trade off was that provinces would be incurring the debt at higher rates than those that would be charged to national government, but benefits could be realised in the form of the discipline acquired and the ability to time shift the investment. There was no ideology on borrowing. The recommendation acknowledged that it may be the appropriate instrument in certain instances, and provinces should be encouraged to use it in these instances, provided the trade off could be made favourably.

Mr Mashile asked if there was any legislation that was causing difficulty to the FFC's functioning, that it wanted Parliament to unblock or review to increase FFC’s efficiency.

Mr Savage replied that he had not come across any legislation that specifically blocked the work of the Commission.

Mr Mashile was curious as to the extent of the FFC's interactions with the provincial and local government. He noted that economic decisions may well be taken at these levels that were not in line with the recommendations of the FFC.

Dr Setai responded that the FFC was rolling out its stakeholder function in the provinces. This had not been done to a great extent in the past because it was so costly, but it was necessary now to explain the role of the FFC to provinces.

Mr Mashile asked whether the wholesale accreditation of municipalities as water service authorities had contributed to an unsustainable potable water supply.

Mr Savage stated this was a detailed and important question, and therefore hesitated to answer it as it opened up a big debate.

Mr Mashile asked if a list of the funding windows in government could be made available to Members. This would assist Members in their constituency work, as they could then advise municipalities on where to access funding.

Mr Savage replied that the FFC would be happy to assist in putting together such a document. Most of that information was captured in the Division Of Revenue Act, in respect of the design and intentions of grant programmes, and for individual municipalities and individual provinces over three years. There was quite a lot of information on the amounts to be allocated and the conditions under which they would be allocated. He encouraged the Committee to examine the extent to which programmes transferred to sub-national government were included in the Division Of Revenue Act. The Act intended to cover these to guard against large sums of money being unaccounted for. If the Committee became aware of amounts not distributed in accordance with the Act, the transfers should be governed by the principles outlined in the Division Of Revenue Act. The Committee had the right to monitor this and demand that the resources were allocated as stipulated.

National Treasury responses
Ms Wendy Fanoe, National Treasury, reported that the National Treasury was the co-ordinator of national government's response to the FFC recommendations. The issue around the appropriate funding of the FFC as an institution had been raised. Because the FFC was a constitutionally recognised body and was also invaluable as a contributor to the Division Of Revenue Bill, national Government and National Treasury supported the role it played. Through working groups and continuous interactions, National Treasury ensured that its work was complementary to that of the FFC.

She noted that the FFC had started with a much smaller budget than was currently the case, and did groundbreaking work at that time. As a result, National Treasury did not necessarily support the statement that the FFC was deliberately under funded, and would take this up with the FFC at future deliberations. She noted that Cabinet, after inputs from various committees and stakeholders, approved the budget. The budget process needed, when considering the 2010/11 budget,  to take account of the impacts of the recession. The recession had an  impact not only on national government but also on provinces and municipalities. Following on from the FFC's recommendations, it was important to prioritise the correct issues, and spending on infrastructure was very important.

Ms Fanoe said that the infrastructure grant to provinces (IGP) could be examined according what was added to the provinces’ baseline allocation over the medium term. R453 million had been added in 2009/10, R1.2 billion would be added by 2010/11 and another R2.5 billion by the 2011/12 financial year. This showed a large amount of money had been pushed into the system for infrastructure spending. At a municipal level, (excluding indirect transfers) R6.3 billion had been allocated by 2005/6. By 2009/10 this figure would increase to R16.9 billion. An increase to R 22.4 billion was projected for the 2011/12 financial year, showing substantial increases in the allocations.

National Treasury had recorded the first loan taken by a province this year. The Gautrain Loan Agreement transferred R 4.2 billion to Gauteng in April. This was a loan that national government took out, transferring the funds to Gauteng province. The fiscus would not repay this loan. The province had to repay the loan with interest. The official loan agreement between the premier of Gauteng and the Minister of Finance was captured in Section 33 of the Division Of Revenue Act. If Gauteng did not comply with conditions, the province would be subject to Section 48, and the loan could then be revoked. She agreed that borrowing should be done correctly and should focus on infrastructure development, and should not be used as a tool to obtain funding for spending not approved in the budget process.

Public hospital funding should be linked to the provincial equitable share (PES) review. The National Treasury would look at the broader issue of how to appropriately fund the health and education sectors. A key point would be an examination of what drove costs in these sectors. The mechanisms should be in place now to start the move toward a National Health Insurance (NHI) scheme, by having hospitals in place that would be able to provide an acceptable level of service. To this end government should explore Public Private Partnerships (PPP) with the private sector to get hospitals up to standard.

In respect of local government issues, Ms Fanoe confirmed that National Treasury was reviewing the Siyenza Manje project. The aim of the review was to extract the successful aspects of the project, strengthen them, and get rid of the aspects that were not working. There were three streams of capacity building: Governance and institutional, financial management and service delivery. As the FFC pointed out, there was a need for clear role division and this was not occurring in the system. Attention should be focused on the service delivery stream, particularly technical skills, to improve service delivery capacity.

Commenting on the FFC’s remarks on water and sanitation, Ms Fanoe noted that it was not so much the availability of water, but the quality of water, that was the issue. Having water that was unsafe for use and consumption was not much better than having no water at all. There was a need for improved monitoring to achieve basic standards for water delivery. The National Treasury really needed to drill down to understand the issues surrounding water service authorities (WSA) and water service providers (WSP). Currently the Municipal Structures Act gave WSA status to either a district municipality (in rural areas) or the local municipality (in urban areas). In reality, the local municipalities actually provided the retail service while the district municipalities concentrated on infrastructure and bulk water supply. The upshot was that district and local municipalities spent similar amounts on water and sanitation. It was important to note this because the free basic services grant was given to the WSA. If the district municipality was authorised as a WSA, it would receive the funding, even though the service would be provided by the local municipality, and the latter would not, in effect, get any money for providing water and sanitation services to the poor. This problem was exacerbated by the fact that the district municipalities did not share the grant with the local municipalities. This was an area of extreme concern for National Treasury, as the local municipalities were cash-strapped and were making bad budget decisions (such as huge outstanding debt to water boards) to compensate, negatively affecting many poor communities. National Treasury had therefore strengthened Section 42 of the Division Of Revenue Act to facilitate the sharing of grant funding where this occurred. Broadly speaking,  service delivery needed to be appropriate for the area in which it was provided. This pointed to differences between the funding systems necessary to support urban versus rural municipalities.

Department of Sport and Recreation responses in relation to Division of Revenue Act
Discussion on delegation
The Chairperson reported that the Committee had received an apology from the Director -General of the Department of Sport and Recreation, stating that he was unable to attend the meeting. He had instead appointed the Mr Makoto Matlala, Chief Financial Officer and Mr Siphiwe Mncube, Director of Facilities Management in the Department, to present the Department's comments on the Division Of Revenue 2010/11.

The Chairperson noted that he had advised the Director General to take Parliament seriously. Departments were accountable to Parliament as a whole.

Mr L Mashile (ANC; Mpumalanga), said the Committee needed to hear the presentation from an official such as the Accounting Officer, so that the recommendations made by the Committee could be effected by that official. He asked how an interaction with junior officials would play out.

The Chairperson agreed that the recusal of the Director General  had irritated him, that the Director General was not released from responsibility, and the Committee did have the authority to instruct the D-G to appear before the Committee.

Mr G Mokgoro (ANC; Northern Cape) responded that the Committee must instill understanding in all top officials. Parliament had a new approach that entailed a higher level of seriousness, and it was necessary that officials had to account to Parliament as the final authority. A pattern seemed to be developing where subordinates were sent to represent the departments. The interactions should be with the highest employee in the department. He said that there should be more emphasis on this.

 Mr T Chaane (ANC; North West) thought it fair to allow the delegation to continue, but suggested that they must be asked to convey the Committee's disappointment to the Director General. The Committee could not tolerate this in the future. He felt that the Chief Financial Officer was senior enough to address the Committee, and that his views were relevant to proceeding on the inherently financial matter of the Division of Revenue.

The Chairperson requested the officials present to take this message back to the Director General and also suggested that the Committee should write a letter to him, expressing the Committee's displeasure.

Mr Makoto Matlala, Chief Financial Officer, Department of Sport and Recreation, stated that although no recommendations had been made specific to the Department of Sport and Recreation (SRSA), it welcomed the opportunity to lodge an general response to the FFC recommendations.

Mr Siphiwe Mncube, Director (Facilities Management), Department of Sport and Recreation, proposed the reallocation of funds for sport and recreation facilities, which were currently part of the Municipal Infrastructure Grant (MIG), back to the national SRSA. This was aimed at fast-tracking provision of sport and recreation facilities to enable the implementation of development programmes, and to promote participation in sport and recreation in support of government's transformation agenda. He noted that from 2001 to 2004 the SRSA received funds for construction and upgrading of sport and recreation facilities through the Building for Sport and Recreation Programme (BSRP). The funds were incorporated into the Municipal Infrastructure Grant during the 2004/2005 financial year.

The quantification of the challenge was illustrated by a table and graph showing the number of projects undertaken under the BSRP, compared to the number undertaken under MIG funding. This was indicated most strikingly by the five-year comparison between the 364 projects under BSRP (2001 - 2005) versus the 81 projects under MIG (end 2004 -2008). This move was in line with the policy imperatives of the ruling party, as determined at its 52nd National Conference, to the effect that “funding for sport and recreation under MIG, which is aimed at sport facilities, should be diverted to the Departments of Sport and Recreation and Education”.

SRSA’s programme focus was to target disadvantaged rural and disadvantaged urban areas. It identified government priority areas, basic and intermediate sport and recreation facilities, shared use facilities between communities and schools and cluster facilities with other community amenities.

The funding requirements were reported as R228 million for 2010/2011, R360 million for 2011/2012 and R426 million for 2012/2013. This medium term allocation would include a transfer grant to municipalities. The estimated number of projects for 2010/11 was 56.

Mr Mncube noted that the first step in sustainability planning was to establish the Community Sports Council (CSC), which would comprise all stakeholders including schools. Its ongoing would be to promote sport within the community and manage the facilities. The municipality, with input from the CSC, would formulate the sustainability plan, with the help of the Public Service Commission. This plan would focus on the ongoing sustainability (ownership, operation, management and maintenance) of the sports facility as well as the promotion of sport within the community, and would also schedule the procurement of sports equipment.

Mr Mncube said that it was the facilities infrastructure that supported sport and recreation development programmes. Investment in infrastructure was therefore crucial to supporting the existing investment in sporting activities. A balance should be struck between the two. It was further evident that the MIG programme had, since its inception, compromised the provision of sport and recreation infrastructure. He hoped the Committee would look favourably on SRSA’s proposals to allow it to promote sport and transform sport.

Discussion
The Chairperson said that the Department's work in sport played a very important role in the well-being of South Africans. He stated that the SRSA programmes in the Namakwa region of the Northern Cape were not rolled out to smaller towns. He wanted to register this with the SRSA, as it should deliver a service and work on getting money allocated to roll out this service, as stated in the Department’s performance plan.

Mr Mncube responded that this was the reason the Department had made this proposal. The SRSA felt that working “from the outside in” was the better approach and would have more impact in the smaller villages. Under the MIG formula, higher allocations were awarded to municipalities that were densely populated and had bigger backlogs. This meant that smaller, less populated towns were likely to receive a lower MIG allocation. In some cases it was not possible to build even one decent sport facility, and this meant that deep rural areas might never have certain facilities. The key lay in examining the sports that were already vibrant in an area and supporting them as a starting point to sport and recreation development. It was true that some of the programmes did not reach out to smaller areas because of how the funding models were constructed.

Mr Mashile asked how the SRSA planned to integrate the call for funding to be allocated to the Department directly with the need for maintenance of sport facilities. He noted that it was standard practice to spend 2% of the capital cost of infrastructure annually on maintenance if this was budgeted for. He also asked if this was not a ploy to have access to more funding and the power to award contracts.

Mr Matlala asked Members to remember that this would still be a conditional grant. This meant that it was allocated for a purpose and could not be used for activities that were not approved.. Municipalities would play a co-ordinating role, once the funds were transferred to the SRSA. The standard procedures would be followed and there was no risk of senior officials sitting on tender committees

Mr Mashile pointed out that there was a clear directive on municipalities to develop and implement Integrated Development Plans (IDPs). As all delivery of services must take place at local government level, national departments should forward their plans to municipalities to ensure that these were incorporated into the IDPs.

Mr Matlala responded that the plans of the SRSA were included in the IDPs of the relevant municipalities. In practice, municipalities favoured other avenues of spending due to the other pressing needs of communities, and this meant that other projects were implemented ahead of sport and recreation projects.

Mr Mashile noted that the graphics on slide 7 did not tally with the project costs presented. The projects costs increased over the financial years, while the graph indicated a downturn. He asked the Department to explain this.

Mr Mncube replied that the costs on slide 6 referred to the project costs, and the graph was based on the number of projects. It was used to illustrated the decline in projects under the MIG allocation.

Mr Mashile expressed concern about the graph, stating that it did not support the Department's argument.

The Chairperson asked the SRSA to reorganise the graph accordingly.

The Department agreed.

Mr B Mnguni asked how many of the 283 municipalities in South Africa were able to spend their allocation and what percentage of this was used for sport and recreation spending.

Mr Matlala responded that there was an integrated approach in place where municipalities needed to take the initiative. The Department implored municipalities to make inputs to inform the SRSA of the needs of communities and it would then in turn advise on the type of facilities where spending was needed.

Mr Mncube said that he assumed that the question related to spending of sport facilities as a proportion of the MIG allocation. He had information on the number of projects completed per province up to December 2008: Eastern Cape 6, Free State 5, Gauteng 4, Kwazulu-Natal 7, Limpopo 9, Mpumalanga 6, Northern Cape 1, North West 19, and Western Cape 24. The SRSA could provide more details on the figures per municipality to the Committee.

Mr Mnguni asked how the SRSA envisaged funding sport and recreation facilities.

Mr Mncube replied that there was no single answer to this question. Municipalities were the custodians of facilities. One problem SRSA had encountered had been that a municipality had built a grass-based facility in a water-scarce areas, whereas a better alternative would have been to use artificial turf, which had a higher capital outlay, but required less maintenance.  SRSA also had an initiative in place to help municipalities to set up better water-management for appropriate grass-based facilities. Another project was a roving maintenance team that conducted maintenance on facilities located within close distance of each other. The anecdotal evidence was that these initiatives were working and SRSA planned to expand them to other areas, but of course would need increased funding. This type of expertise could assist municipalities in their planning, budgeting and keeping facilities in good shape.

Mr Lees stated that he had heard nothing about sport in schools, which, to his thinking, was  an essential element of promoting sport in the country. There was also no mention made of clubs, which were, in his experience, the best administrators of sport facilities, and asked if there was a move to involve clubs in the administration.

Mr Matomela (ANC; Eastern Cape), asked for clarity on the role of the Community Sport Council (CSC).

Mr Mncube responded that the CSC would include the sports clubs in the areas. The SRSA aimed to revive clubs. The CSC would also comprise other stakeholders, including schools (as set out in slide 12). The SRSA recognised that schools were the key for developing sport and already had a school support programme. This programme was divided into two components: competitive sport and mass participation. SRSA had also introduced a scientific support programme at the level of community sports teams. This took account of the physiological developmental stages of children as they grew, and aimed to prepare them, from an early age, for participation in competitive sport when they were older.

Mr Matomela asked if he was correct in stating that this was not an attempt to take funding away from municipalities, but merely to separate funding for sport facilities from the general MIG allocation, and that the projects would be implemented through the municipalities.

Mr Matomela asked if the actual delivery of the infrastructure would be done through the Expanded Public Works Programme (EPWP).

Mr Mncube responded that all the projects should be implemented in line with the EPWP guidelines.

Department of Transport (DoT) responses to Division of Revenue
Mr Collins Letsoalo, Deputy Director-General: Financial Services, Department of Transport, reported that the Department of Transport responded specifically to all the recommendations made pertaining to that Department. With one exception, the Department of Transport (DoT) agreed with the recommendations made on public infrastructure investment. It only partially agreed with the recommendation on improving long-term planning, stating that the common methodologies could not be used for calculating the costs of roads, due to different conditions. These methodologies did not account for the physical factors (mainly weather related), traffic volumes and the location and size of population inherent in transportation analysis, and thus could not always determine the social and economic benefits.

As to the management and financing of road infrastructure, graphs were used to illustrate the alarming decline on the conditions of South Africa's surfaced road infrastructure. Excluding the Western Cape and Gauteng, more than 30% of all roads in the other seven provinces were classified as being in poor condition. Several examples of these roads were mentioned. A great deal of emphasis was placed on the increasing use of trucks as the key mode for the transportation of goods in the economy, and these were the main culprits in the deterioration of roads. He noted that, partly due to the poor state of roads, South Africa had one of the highest road accident fatality rates worldwide. As a result the DoT had faced a slew of litigation, the cost of which were escalating. A worrying precedent had been set by previous judgments against the DoT for negligence in maintaining road infrastructure, necessitating the payment of damages. This also increased the likelihood that future judgments would not be in its favour.

He noted that a fiscal injection alone was not a panacea to problems. Given this, certain policy interventions were necessary, such as axle weight limits, targeted rail investments and interventions to move non-time sensitive goods and commodities to rail, and finally law enforcement to prevent trucks from using the secondary road network to avoid weighbridges on primary roads.

The DoT's recommendations on clauses 27, 28 and 29 of the Division Of Revenue Bill were that the National transferring officers should be provided with more powers to withhold, stop and re-allocate an allocation. It should be made possible to re-allocate transfers that were stopped to other spheres of government and for other purposes that were related to the original purpose of the allocation. The scheduling of grants should be flexible and not sphere-specific, and provinces should be more involved in municipal priorities.

The DoT also provided the Committee with a detailed account of grants currently under its administration. This covered the Gautrain Rapid Rail Link, Public Transport Infrastructure and Systems (PTIS), Public Transport Operations, Sani Pass Roads grant, Overload Control and Rural Transport Grants for Services and Infrastructure.

Discussion
Mr Mashile referred to the “user pays” cost recovery system. He felt that toll roads would be very problematic. He wondered if the DoT had more innovative systems than toll roads. The result of tolls would be that those who did not damage the road would end up paying. He wondered, therefore, if there was some way to target the specific companies that damaged the roads and develop service level agreements for the specific roads they would use, to avoid hurting the wrong people.

Mr Letsoalo replied that the Department had considered electronic tolling and other innovative approaches. He felt that this came down to law enforcement, and the dilemma created when penalties were not targeted correctly. It was clear that the trucks were at fault and ordinary users did not cause the damage to roads. However, targeting companies was not simple, as they often contracted their transportation out to trucking companies.

Mr Themba Malahleha, Director (Infrastructure), Department of Transport, added that those damaging the roads should pay for the damage caused. The DoT was experimenting with a system that would require every truck to have a transponder and a GPS against which it would be monitored. The truck owners would have to pay according to a formula comprising components for weight, distance and the kind of road used, with a view to reinvesting the money to maintain roads. This had worked in Germany and Australia, and South Africa had done studies around this. It was important to get enforcement rights so that if people did violate the law, penalties would be enforced.

Mr Mashile disagreed with the notion that the South African National Roads Agency Limited (SANRAL) had the capacity to provide services at local level. SANRAL was able to function in cities because it had no trouble obtaining the allocation for which it applied. At municipal level, the community's word must be heeded, and this determined priorities. These priorities did not necessarily include roads. SANRAL did not have similar competing needs and had autonomy in decision making.

Mr Letsoalo responded that Mr Mashile was partly correct. Although SANRAL had no competing priorities, it had to be acknowledged that it had good systems. Provinces did not have this level of co-ordination and Parliament would have to assist in arriving at a more co-ordinated system. The DoT could not instruct provincial departments to spend. As a part of the equitable share the DoT never saw the funds earmarked by provinces for roads and had suggested to National Treasury that funds should be ring-fenced for roads.

Mr Malahlela replied that SANRAL had grown significantly and now had a credit rating that allowed it to spend R 20 billion, based on the R 5 billion allocation it received from the DoT. It had found innovative ways to increase funding through PPPs and open market investment. This, along with its groundbreaking technological work, meant that there were many lessons to be learnt from SANRAL.

Mr Lees noted that emphasis had been placed on the damage that truck transport did to roads. In Kwazulu-Natal, trucks avoided having to pay the tolls on national roads by using the secondary road network, causing damage to these roads. He asked if research had been done on railing full trucks. He realised that height restrictions might limit this option and that the costs would be high, but the costs of damage were already high. This system was in use in the USA, Austria, Switzerland and Germany, and may reduce the burden on roads.

Mr Letsoalo responded that the central issue here was the existing infrastructure in South Africa. The Department had examined this option, and it was not currently possible. Transnet had now decided to invest but the question was whether it intended to invest in the existing infrastructure system, or whether it would it build new infrastructure in line with changes to South Africa's infrastructure, to accommodate the system the member suggested.

Mr Malahlela replied that the best alternative was to attempt to police the secondary road network to catch the truckers and enforce penalties. As had been stated, this could also prove challenging.

Mr Matomela referred to a meeting in 2006 when an official in the DoT told the Committee that it was possible to save money by tarring existing dirt roads, as maintenance of dirt roads was very expensive. He asked if the DoT had done a study and if it could verify whether this was correct or not.

Mr Letsoalo responded that the price of bitumen had spiked, as it was an oil byproduct. Issues of maintenance here revolved around the fact that even though tarred roads were more expensive, they required less maintenance in the long-term than gravel roads. The DoT also needed to investigate alternative materials, given the continued rises in oil prices.

Mr Malahlela replied that even though it had been proven that a gravel road that took in excess of 500 vehicles a day must be tarred, there had not been the funding to do so.

Mr Matomela referred to the Roads Agency Limpopo (RAL) regarding the lack of provincial capacity. Limpopo had claimed that this was effective. He wondered if a study had been conducted on the comparative merits of putting a provincial agency in charge of roads, as opposed to the function being centralised with the national Department of Transport.

Mr Letsoalo responded that the monitoring mechanism for agencies was a problem generally across all sectors of government in South Africa. It was important to deal with the issues of accountability critically.

Mr Mnguni asked how much the DoT had paid for litigation.

Mr Letsoalo replied that the DoT had spent about R 11 million on litigation to date. Kwazulu-Natal had paid R 34 million. Free State and Eastern Cape were currently engaged in court proceedings. More litigation was envisaged due to the precedent that had been set, compelling the transport departments to pay damages. The Road Accident Fund also had to be considered here.

Mr Mnguni asked how much economic activity in terms of gross domestic product would be lost if South Africa returned to rail transportation of goods.

Mr Letsoalo responded that if the road network was correctly priced, then trucks would be paying massive amounts, in direct relation to the damage they caused on the roads. He said the question was where the economic benefit of these businesses went, and whether this economic activity had had the desired distributive effect in South Africa. His personal view was that it had not done so, and companies should simply pay for the costs incurred in the course of business.

Mr Mnguni asked if a study had been conducted into a cheaper alternative to tar to surface roads.

Mr Malahlela responded that there was a sub-committee in charge of road materials testing and the DoT did do continuous work with the Council for Scientific and Industrial Research (CSIR) , SANRAL and provincial authorities on materials testing.

Mr Mokgoro accepted the report that road conditions were at crisis levels and asked what the DoT had been doing while the deterioration took place. Economic activity still increased and more trucks and cars were on the road. Deterioration of roads was a process that occurred over time.

Mr Letsoalo agreed with this statement. He recalled the process of requesting more funding from the National Treasury a decade back, to improve the secondary road network. The issue had been raised repeatedly. Similarly all networked services had suffered. This could be seen with Eskom and the water sector.

Mr Malahlela responded that the trucking had been deregulated, and the economy grew far beyond what it had expected. These were two contributors to the problem.

Mr Chaane asked what the DoT had done to ensure the enforcement of the existing laws.

Mr Chaane noted an anomaly in the fact that the newer roads in South Africa seemed to deteriorate faster than the older roads and asked if this was the result of shoddy construction.

Mr Malahlela pointed out that if a road failed within a two year period, clearly that road was under-engineered, and under-costed. If this occurred then it warranted investigation.

Mr Sogoni pointed to the inefficiencies in Roads Agency Limpopo and said that the output was not commensurate with the inputs. It was clear that problems arose from poor co-ordination in provinces. In terms of budgeting, it did not appear that transport was taken seriously, as there was a lot of under spending. Matters should be coordinated across all of South African sectors. He felt that Parliament and the DoT was not doing enough in terms of co-ordination.

Mr Malahlela was of the view that there was clearly a problem here and a need for the DoT to intervene.

Mr Mashile stated that, from his experiences as a Member of the Portfolio Committee on Transport in the Third Parliament, he was aware that the DoT had many agencies and had been unable to control them in the past. This was an internal capacity problem in the DoT.

The Chairperson queried the systems the DoT had in place to monitor its agencies.

Mr Letsoalo responded that the budgeting framework was a key priority for this Department, being a strategic service and he was pleased that the Committee had raised this point.

Mr Dan Pretorius, Chief Financial Officer: Department of Transport, responded that this was linked to capacity constraints. Approximately two years ago the DoT created a programme called Public Entity Oversight to monitor the public entities under the DoT. It received quarterly reports from the agencies and had a duty to submit quarterly performance reports to the Minister. When reports were not received on time, the DoT did withhold transfer payments.

Mr Sogoni remarked that the DoT submission did not refer to school transport subsidies or public transport subsidies. He asked if these issues would feature in its 2010/2011 budget.

Mr Letsoalo said that this was detailed, and would be covered in the full report it would present to the Committee.

The Chairperson added that if the DoT could not respond to all the questions now, it could do so in writing and the response would be forwarded to Members.

Mr Mokgoro queried the rigidity that led to the DoT being unable to re-appropriate funds that had not been used for the original allocated purposes.

Mr Pretorius responded that a transferring national department could withhold a grant for 30 days. National Treasury could extend that period to 120 days, and could eventually stop a grant. If a grant is stopped one of three things could happen. The grant recipient could apply for a roll-over of the grant in the following financial year. Alternatively, the funds could be reallocated to another municipality or another province for the same purpose. The final alternative would be that the money could be returned to the National Revenue Fund (NRF). Following a route via National Treasury, the DoT could stop a grant, but could not reallocate the grant to a different sphere of government or to a different purpose. The DoT recommended more flexibility around the options that the DoT could exercise for reallocation if a grant was stopped.

Mr Mashile responded that the President had made it clear, in the State of the Nation Address, that no roll-overs should be used. Departments must apply the policy articulated by the President.

Mr Mokgoro agreed.

Mr Matomela observed that the DoT seemed to deal with transport matters in an ad hoc manner. He did not get the sense that it was on top of the situation. He proposed that the Department should formulate a comprehensive plan, based on the recommendations of the FFC and the Committee, in response to the transport challenges faced in South Africa. This should then be tabled before this Committee and other relevant committees in Parliament.

Mr Letsoalo did not agree that there was no comprehensive plan, saying that a plan did indeed exist, and the DoT would present this to the Committee as requested.

The Chairperson responded that the Committee would call the DoT back, and the plan proposed by Mr Matomela could form part of the written response to the outstanding questions. The Committee would also deal with the quarterly reports. He suggested a 60-day timeframe for the DoT to come back with the report and answers requested.


The meeting was adjourned. 

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