Devolution of Property Rates Conditional Grant: meeting with Department of Public Works, National Treasury & KwaZulu Natal Provincial Department of Public Works

Standing Committee on Appropriations

26 July 2010
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

The Committee met with representatives from the Department of Public Works, the National Treasury and the KwaZulu Natal Provincial Department of Public Works to discuss the Property Rates Conditional Grant.  The grant was introduced in the 2008/09 fiscal year as part of the process to devolve responsibility for the payment of municipal rates to the provincial government authorities.  The Committee was concerned that the grant had not been spent by certain provinces, while other provinces (such as KwaZulu Natal) experienced a significant shortfall.  An amount of R1.096 billion was made available for the 2010/11 fiscal year.

The MEC: Human Settlements and Public Works, KwaZulu Natal briefed the Committee on the current status of the Property Rates Conditional Grant in the province.  The province reported an accumulated shortfall of R410 million by the end of the 2010/11 fiscal year and had insufficient funds available to pay for municipal rates and services provided.  As a result, the province anticipated a repeat of the incidents where municipalities disconnected power supplies and other municipal services to State-owned properties.

The Chief Financial Officer of the Department of Public Works advised the Committee on the responsibilities of the national and provincial Government authorities and the action plan developed to address the problems with the devolution of the responsibility for the payment of municipal rates and services.  The Department did not receive the required reports on expenditure from the provincial Governments but anticipated that all the provinces would experience a shortfall in the grant allocation.

The Director of the National Treasury briefed the Committee on the background to the introduction of the Property Rates Conditional Grant and provided details of the spending outcomes for each province for 2009/10 and the first quarter of the 2010/11 fiscal year.  Factors impacting on the spending outcomes were identified as the disparity between the financial periods of the provincial and local Government entities and the different billing systems used by municipalities.  Provinces found it difficult to accurately budget for municipal rates and services and it was essential that accurate and complete property asset registers formed the basis for the calculation of the grant allocation.  The National Treasury would address the shortfalls during the 2010 Medium Term Expenditure Framework process.

Members of the Committee felt that the meeting should have been attended by representatives from all the provinces as well as the Department of Cooperative Governance and Traditional Affairs.  Concerns were raised regarding the negative impact of non-payment for services by Government entities on municipalities and the wasteful expenditure on penalties and interest incurred on unpaid invoices for services rendered.  The Departments of Public Works, Cooperative Governance and Traditional Affairs, the provincial authorities and the National Treasury were urged to work together to find solutions to the problems identified.

Meeting report

Opening Remarks by the Chairperson
The Chairperson said that the Property Rates Conditional Grant was introduced to allow for the devolution of the responsibility for the payment of municipal rates and services on State-owned property to the relevant provincial government authority.  The amount made available in terms of the 2010/11 Division of Revenue Act was R1,096,192,000.

It had come to the Committee’s attention that certain provinces had not spent the allocated grant in prior financial years, while other provinces (notably KwaZulu Natal) had experienced a shortfall.  Because of the failure of Government-owned entities to pay for municipal services, many municipalities were short of funds.

The purpose of the meeting was to discuss the problems experienced with the grant and to identify the action required to address the issues.

Briefing by KwaZulu Natal Provincial Government
Ms Maggie Govender, Member of Executive Council: Human Settlements and Public Works introduced Dr Fikisiwe Madlopha, Head of Department and Mr Jeremy Redfearn, Chief Financial Officer of the KwaZulu Natal Department of Public Works to the Committee.  The Committee was given a status report on the utilisation of the Property Rates Grant allocated to KwaZulu Natal (see attached document).

A shortfall of R36 million was carried over from the 2008/09 fiscal year.  An amount of R237.382 million was allocated for 2009/10, of which R237.204 million was spent.  The shortfall for 2009/10 was R221 million, reduced by R30 million after the provincial Government requested verification of the invoices submitted by various municipalities.  An analysis of the shortfall of R191 million for 2009/10 was provided.  The estimated shortfall for 2010/11 amounted to R410 million.

Due to insufficient funds available, the provincial Government was unable to pay for all services rendered, resulting in the eThekwini Municipality discontinuing the provision of the electricity supply to certain Government institutions.  The unpaid amounts attracted penalties and interest amounting to R15,692,597, which was considered to be wasteful expenditure.

Discussion
The Chairperson requested comment from the Department of Public Works (DPW).

Ms Cathy Motsisi, Chief Financial Officer, DPW explained that the basis for the grant allocation was not properly informed.  The grant was calculated according to the list of properties in existence in 2005.  State-owned properties were not reconciled to the list and an audit was required.

The Department had identified certain weaknesses in the devolution process and was aware that certain provinces had not spent the grant allocated for this purpose.  In an attempt to address the issue, the Department had held discussions with MINMEC, established forums and developed an action plan.  The Department planned to request additional funding from the National Treasury in its Medium Term Expenditure Framework (MTEF) submission.  The Department did not receive the required quarterly reports from all the provinces.  The Department had prepared a briefing document for the Committee, outlining the responsibilities of the national and provincial Departments of Public Works, the action plan developed and including details of the amounts allocated and transferred to provinces and paid to municipalities (see attached document).

The Chairperson referred to the DPW’s briefing document and noted that the provinces had spent only 13% of the total amount available.  He explained that it was difficult for the Committee to approve requests for budget adjustments and needed a full understanding of the problems.  If necessary, funds could be transferred from under-spending provinces to provinces experiencing a shortfall.

Ms Motsisi agreed that there were problems with the grant.  The Department was concerned by the lack of response from provinces to submit the quarterly reports as this reflected negatively on the DPW’s ability to manage the provincial authorities and would attract adverse audit comment from the Auditor-General.

Ms Julinda Gantana, Chief Director: IGR, National Treasury advised that provinces submitted monthly reports on expenditure to the National Treasury and had to complete a form to provide details of the utilisation of the Property Rates Grant. The reports were forwarded to the national Department of Public Works by the National Treasury.

The Chairperson was under the impression that all the provincial Departments of Public Works and Treasury would be present at the meeting with the Committee to provide an explanation of the situation concerning the grant.  The Committee required input from all the provinces in order to determine what action needed to be taken to address the problems experienced.

Mr M Swart (DA) said that he had many questions after the previous presentation on the devolution roadmap to the Committee.  It would appear that only the KwaZulu Natal, the Eastern Cape and the Free State provinces had made payments to municipalities as at 30 June 2010.  He pointed out that the purpose of the grant was to make funds available to the provinces for the payment of services provided by municipalities.  The ability of municipalities to meet service delivery targets were severely hampered if they were not paid by Government entities for services rendered.  He asked if any purpose would be served in continuing with the meeting in the absence of representatives from the other provinces and proposed that the meeting was postponed until all the provinces could be present.

Ms R Mashigo (ANC) asked if the matter had been reported to and discussed in the National Council of Provinces (NCOP).  She agreed that all the provinces should have attended the meeting but suggested that the submissions from the Department of Public Works and the National Treasury were heard by the Committee in the interim.

The Chairperson remarked that the Committee focused on issues of wasteful spending as well as non-spending by Government entities.  He regretted that all the provincial authorities were not present to provide explanations for the failure to spend the grant and the failure to submit reports to the Department.

Briefing by the National Treasury
Mr Edgar Sishi, Director, National Treasury presented the submission to the Committee (see attached document).

The briefing covered the background to the Property Rates Conditional Grant and included tables depicting the provincial spending outcomes for the 2009/10 and the first quarter of the 2010/11 fiscal years.

Discussion
Mr Swart noted that the factors impacting on the spending outcomes included the different financial year-ends of Government entities (31 March) and municipalities (June).  Each municipality applied different formulae to determine the rates payable and invoices could be submitted on either a monthly, quarterly or annual basis.  Part of the problem was that municipalities used different billing systems.  Provinces were unable to budget accurately for rates as the amounts payable were usually known only when an invoice was received from the relevant municipality.  Many municipalities submitted an annual invoice for the rates due only at the end of the municipal financial year, which was received after the end of the provincial financial year.  He was of the opinion that most of the provinces experienced similar problems as those reported by KwaZulu Natal and suggested that the Committee made allowance for the expected shortfall in the grant in the October 2010 budget adjustments.

The Chairperson noted that one of the criteria for approving a budget adjustment was that the expense incurred was unforeseen.

Mr J Gelderblom (ANC) asked if the issue concerning the alignment of the municipal and provincial financial years was under consideration.

The Chairperson advised that the Minister of Cooperative Governance and Traditional Affairs (COGTA) had raised concerns about the disparity in financial periods between the Local and Provincial Government entities.

Mr Gelderblom remarked that accurate and complete provincial fixed property asset registers had to be in place in order for accurate data to be available.

The Chairperson summarised the challenges faced by the provincial authorities.  He was concerned over the discrepancy in the information on the expenditure during the first quarter of 2010/11 provided by the Department of Public Works and the National Treasury.  He asked if the provincial authorities were required to pay for rates and services on properties owned by the national Government.  He reiterated the need for accurate property asset registers.  He asked what steps could be taken to ensure that municipalities used one acceptable billing system.  He noted that both the Department of Public Works and the National treasury conceded that the grant allocated to KwaZulu Natal was inadequate and wanted to know what action had been taken to address the problem.  He was concerned over the R15 million in penalties and interest incurred as this was wasteful expenditure that increased the shortfall.

Mr Sishi agreed that accurate budgeting for rates and services was a challenge.  The Municipal Financial Management Act (MFMA) imposed limits on the percentage by which municipalities were allowed to increase rates.  Instances of unexpected expenditure incurred were not uncommon but more could be done to ensure that budgets accurately reflected anticipated expenditure.  The Department of Public Works was responsible for ensuring that accurate property asset registers were in place and could provide assistance to the provincial Departments in compiling the provincial registers.  The implementation of the relevant legislation had exposed the weaknesses inherent in municipal billing systems.  GOGTA had made personnel available and dispatched MFMA unities to provide assistance to municipalities.  Payment to municipalities was dependent on the size of the invoice and the number of properties involved.  The process of verifying the invoice submitted was time consuming.  He agreed that not only KwaZulu Natal was affected and all the other provinces were under funded.  The National Treasury was engaged in determining the estimated shortfall for the current fiscal year and would inform the Committee in due course.

Ms Govender noted that the DPW had included the issue of the rating applied to schools and health facilities in the action plan.  She felt that the matter should be resolved as soon as possible as many schools and health facilities could not afford to pay standard municipal rates.

Mr Swart remarked that the Committee was forced to approve the budget adjustments to avoid the problem of Government authorities not being able to pay for municipal services.  He was concerned that certain provinces had returned the funds made available as this indicated that the provinces were not paying for services rendered, which would attract penalties and interest charges.

The Chairperson said that other problems with non-payment for services were caused by the practice of certain municipalities to credit suspense accounts with the payments received.  The problem of municipalities disconnecting the power supply to hospitals must be resolved.  Many municipalities were in debt because of non-payment for services and the President had stated that Government entities must pay for municipal services.  Pro-active action was required and he deplored the fact that representatives of GOGTA were not present at the meeting.  He remarked on the substantial invoices submitted by the Johannesburg municipality, amounting to many millions of Rands.  He was concerned that external service providers were being paid to address the issue of the property asset registers but the registers remained inaccurate and incomplete.

Mr Sishi agreed that COGTA should have been present at the meeting.  He pointed out that the matter concerning the rating of schools and health facilities were governed by other applicable legislation.  Municipalities levied rates in accordance with the legislation.

Ms Gantana advised that GOGTA was in the process of reviewing the Municipal Property Rates Act and had approached the National Treasury for comment.

Mr Sishi commented that there would be an opportunity for the Committee to comment on the proposed amendments to the legislation as the current Act allowed municipalities to disconnect the supply of electricity for non-payment.

The Chairperson recalled that the Committee had approved the Intergovernmental Relations Act.  The intention was not to encourage various Governmental entities to sue each other and it was important for all spheres of Government to work together and found pro-active solutions.

Mr George Tembo, Director: Public Finance, National Treasury said that another problem was that municipalities claimed back rates on State-Owned properties for any number of years.  He felt that a cut-off date should be imposed.

The Chairperson pointed out that Municipalities claimed back payments because they were legally entitled to do so.  He recognised that the National Treasury was unable to respond in this meeting to the request from KwaZulu Natal to make provision for the rates shortfall.  The matter had to be decided in another forum.

Ms Gantana advised that the matter would be considered during the MTEF process.

The Chairperson noted that the National Treasury recommended that the Property Rates Grant eventually became an unconditional grant and asked when this change would be implemented.  He felt that the change in the nature of the grant should be discussed with the Committee as it was important that the objectives of the grant were achieved.

Mr Sishi gave the assurance that the nature of the grant would not be changed in the near future as there were a number of issues that had to be resolved.

Ms Motsisi advised that the task team appointed to oversee the implementation of the devolution of rates payment responsibility was making progress.  There were some issues concerning the vesting of property ownership and the waiving of interest charges levied on retrospective rates payable on properties that were never billed before.  The Department was meeting with the other provinces to discuss the billing problems.  She agreed that the other provinces were likely to have shortfalls as well.  She emphasised the importance of all affected Government entities (such as the National Treasury and GOGTA) working together to address the problems identified.

The Chairperson remarked that the Department of Public Works, as the custodian of State-owned property, should initiate and co-ordinate inter-departmental initiatives to address the issue.  If the problems were not addressed, the Department would continue to receive qualified audit reports from the Auditor-General.

Ms Motsisi advised that meeting had been held with the South African Local Government Association (SALGA) and with provinces at the MINMEC level.

The Chairperson requested a report on the under- or over funding provided to provinces.  He asked if the causes for the under-utilisation of the grant by provinces could be determined.


Ms Motsisi replied that the Department had requested the provincial DPW’s to verify the property lists and conducted audits to reconcile the properties on the asset registers.  However, the Department required additional funds to conduct the audits.  The discrepancy between the funds allocated and the amounts spent was apparent and it was necessary to ensure that the basis for the allocation was accurately determined.

Ms Govender warned that the KwaZulu Natal Provincial Government faced the disconnection of electricity and other municipal services because there were insufficient funds available to pay the outstanding municipal accounts.  She was pleased that the National Treasury would be addressing the shortfall in the funding provided.  She agreed that the DPW, COGTA and the National Treasury should work together to reach a common position and agree on the reports submitted by provinces.  She was concerned that the proposed timeframes would have a negative impact on municipalities as they would not receive the revenue due to them in time.

The Chairperson reiterated the importance of the Departments involved meeting as soon as possible and ensured that the goals were clearly defined and solutions to the problems were found before the following Division of Revenue Bill.  The applicable legislation had to be reviewed as some laws were passed with good intentions but had undesirable consequences.

Ms Gillian Wilson, Chief Director: Public Finance, National Treasury agreed that the Department of Public Works should coordinate the various entities involved and gave the assurance of the full cooperation of the National Treasury.

The meeting was adjourned.


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