Division of Revenue Bill [B4-2011]: public hearings with National Treasury, Financial & Fiscal Commission, Mtshezi Local Municipality & South African Local Government Association (SALGA)

NCOP Appropriations

21 March 2011
Chairperson: Mr T Chaane (ANC)
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Meeting Summary

The Financial and Fiscal Commission welcomed the Division of Revenue Bill [B4-2011], but indicated key strategic issues for the Commission and Government’s consideration, provincial and local government sectoral challenges, provincial and local equitable share, and commented on Government’s response to the Commission's recommendations. The overspend on the Health and Education Budgets was a grave concern. The vibrant built environment constituted a massive opportunity for fast tracking service delivery. The provincial and local equitable share comprehensive review constituted an ongoing work. The Commission appreciated robust engagements with all spheres of Government and the Commission would intensify its stakeholder engagement process in order to get to grips with the impact of the allocations made through the Division of Revenue Act. 

The Mtshezi Local Municipality submitted that it received an insufficient equitable share only R25 million and asked if this was really fair. Mtshezi rendered all municipal services. The unemployment rate had increased to 62%. Only 18% of the population could be asked to pay rates. The indigent register was very long.  It was a struggling and bleak situation. The municipality's recommendations were that there be an increase in equitable share allocation and an increase in allocation from the Department of Energy.

The South African Local Government Association gave its comments on local government grants as regards the Division of Revenue Bill with reference to the 2011 Medium Term Expenditure Framework, the local government equitable share, and infrastructure grants and capacity building and other operating grants–with general comments, followed by specific comments on different grants.  The Association's main concerns were that there should be a systematic review of baselines to ensure that revenue allocations to local government as a whole were congruent with its full range of developmental and service delivery responsibilities and its vertical share. This should be coupled with efforts to build the capacity of weaker municipalities to spend efficiently and effectively. Allocations to local government were not based on proper studies into the true, long term costs of municipal service delivery, which could vary substantially. The Association would continue to work with National Treasury to improve the local government equitable share formula.  Growth of 8.2% per annum in the local government equitable share formula over the next three years was less than the increase of 9.3% in infrastructure transfers. Since the local government equitable share formula was utilised for operating and maintaining infrastructure through which basic services were provided to the poor, its slower growth implied more pressure on municipalities to collect revenue from the poor to provide for repairs and maintenance. On infrastructure grants, the Association's main concerns were that there was an increase in capital spending, but municipalities faced severe challenges in collecting revenue from poor households to provide for operational and maintenance costs of infrastructure. The Association referred specifically to the Urban Settlements Development Grant, the Municipal Infrastructure Grant (Cities)  the Human Settlements Development Grant, the Rural Transport and Infrastructure Grant,  the  Rural Household Infrastructure Grant in which regard the Association alluded to the  Comprehensive Rural Development Programme, the Rural Household Infrastructure Grant, the Electricity Demand-Side Management Grant, the Neighbourhood Development Partnership Grant, the Municipal Systems Improvement Grant, and the Water Services Operating Subsidy Grant. 

Mr Paul Theron, a civil engineer involved in labour-intensive and job creation programmes since 1992 and investigating exit strategies for people on poverty alleviation programmes and receiving social grants,  commented on the Division of Revenue Bill [B4-2011] as to grants for infrastructure. He referred to the State of the Nation Address 2011 and emphasised that unless the employment of labour-intensive methodologies was highlighted, the officials concerned tended to ignore this requirement. On the frameworks, his comments included that to further entrench Expanded Public Works Programme principles and job creation, the framework for the Provincial Roads Maintenance Grant should include provisions to optimise job creation and skills development in terms of the Expanded Public Works Programme Guidelines, and that provinces must report all projects via the national Department of Public Work’s reporting system and comply with the Guidelines. He also proposed amendments in respect of the frameworks for the Education Infrastructure Grant, the Health Infrastructure Grant, and the Human Settlements Development Grant.  The reporting templates for the Format of Infrastructure Projects List for Provinces should provide for the number of Expanded Public Works Programme jobs opportunities and Full Time Equivalents  to be created and reported.

The National Treasury responded that the Commission's feedback was generally positive. National Treasury was working with all stakeholders, including the Commission, the Association, and the Department of Cooperative Governance, on the current formula for determining the local government equitable share. Such challenges as the availability of data were not so easy to overcome.  The only reliable source at this stage was the 2001 census. National Treasury would examine the costing of services, because the costs of individual municipalities were very different. There was not a uniform method of differentiating between individual municipalities. It was very important to ensure that municipalities received their fair share from the equitable share both from the vertical and the horizontal division. However, unlike the provinces, municipalities had quite substantial “own revenues”.  Even the smallest “own revenue” must be collected to develop links with the community and accountability. Mtshezi Local Municipality was just one of the municipalities complaining about its equitable share. In the Division of Revenue Bill there were actual clauses on the negotiation between the local municipality and the district municipality, and this was why the National Treasury particularly gazetted these amounts. Only the main purpose of the Expanded Public Works Programme grant was stipulated in the schedules and not the complementary purposes. It was necessary to read the two together. Infrastructure grants and the three conditional grants to the provinces were actually interlinked.

Members asked if the figure for poorer households on which National Treasury was working was the 2001 figure, about  the use of services by migrants and pressure on the budgets of municipalities on the border of Swaziland and Mozambique, what the income and expenditure for the municipalities were, what the Association's view and input were on capacity, what  the Association was doing to help municipalities to do their own oversight, in particular through their own public accounts committees, and noted that it was very important to have the correct figures in order to advance one's case to obtain more. Members asked the Commission to elaborate further on its view on the local equitable share as compared to the view of the National Treasury. The Select Committee was expecting to hear presentations from some Departments in due course and would take these into account before giving its final views on Mr Theron's proposals.

Meeting report

Financial and Fiscal Commission (FFC) Presentation
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission (FFC, the Commission), said that the FFC's submission was made in terms of Chapter 13, Section 214 (2) and Section 9 of the Intergovernmental Fiscal Review (IGFR) Act (1997). He indicated the layout of the submission: key strategic issues around the Division of Revenue Bill for the Commission and Government’s consideration, provincial and local government sectoral challenges, provincial and local equitable share, comment on Government’s response to FFC recommendations, and conclusion.

On sectoral changes in the provinces, FFC recommendations in the past had emphasised protection of soft targets in health and education budgets, improvements in quality of service and efficient management.
Overspending of health and education budgets constituted a major concern since this did not lead to better outputs and diverted resources away from other priorities. It was questionable that Special Purpose Vehicles (SPVs) were solutions to service delivery failure. There was a need to reinforce the basics of public service administration as a matter of urgency (paragraph 2.1, slide 3).

The aim of a vibrant built environment was a massive opportunity for urban development through infrastructure funding injections and reviewed conditional grants, for example, housing and basic services,
public transport and connectivity, jobs, investment and enterprise, alternative policy responses, a review of the urban transport funding model–own revenues, user payments and transfers, fast track accreditation, standards compliance and monitoring and land provision, and maintaining the  financial health of municipalities (paragraph 2.2, slide 4).

Mr Khumalo noted that quite a number of infrastructure grants had been restructured. A lack of coordination between basic infrastructure grants had been addressed. While there were massive opportunities for the development of our cities and urban areas, there needed to be a similar approach in the rural environment and to tailor these grants so they served their intended purpose.

Mr Khumalo added that the FFC had made recommendations on the funding of urban transport. User charges must be implemented, while setting tariffs that were reasonable. There was an issue on accreditation, but the process was ongoing. Obviously there were capacity issues that need to be addressed.

As to municipal own revenue and fiscal decentralisation, the Commission supported continued strengthening and increased taxation powers towards municipalities. However there was a need to maximise existing revenue instruments. The outcome of increasing the tax burden on communities should not compensate for poor debt recovery by municipalities. Where collection was satisfactory, new revenue sources like local business tax were encouraged. There was a need for Government to conduct a thorough impact assessment of all proposed amendments to the Municipal Property Rates Act (MPRA) prior to legislating any changes (paragraph 2.3, slide 5).

Mr Khumalo said that the Commission was aware that some municipalities had come together and introduced a business tax. This was legal. It was important the municipalities exploited the existing revenue sources, but there was need to have a balance. The FFC had made its position on proposed amendments to the MPRA clear to the Minister. It was not a good idea to introduce that amendment before assessing the fiscal implications for the municipalities.

A comprehensive review of the Provincial and Local Equitable Share (PES) commenced in 2007. The
2011 Division of Revenue Bill reflected Government’s intention to implement substantial changes to the PES formula for 2011 Medium Term Expenditure Framework (MTEF). Work done by Government on health component reform was very comprehensive and in the right direction. Other proposals made included education financing and changes to weights. The Commission would continue with its own research work on the formula to align with changed service delivery arrangements especially concurrent functions. The Commission welcomed that only formula weights were used when deciding additional allocations during the Adjustment of Estimates. Planned changes to the local equitable share (LES) formula and its medium term review were noted and the Commission would participate in technical reviews (paragraph 3, slide 6).

Mr Khumalo commented that when the FFC made its submission in 2009, the Government reviewed the formula rather than the equitable share itself, but it did not take a holistic approach. FFC was looking at continuing the process and hoped for common ground with Government in the very near future. The formula was not very sensitive. There was a component in that formula which was for revenue raising. The FFC raised this last year and got legal advice, and the NT did the same, and there were diametrically opposed views.

Mr Khumalo commented on the provision in the Constitution that one could not take away money from a province or municipality if this was different from fiscal capacity. The Property rates base did not exist in some municipalities and it was necessary to do some equalisation. FFC had agreed with National Treasury that there was a need to limit the possibilities for litigation. The FFC was happy that the waiting had been reduced. Currently it was moving in the right direction.

On fiscal consolidation and independent expenditure reviews the Commission welcomed the Government’s response to the Commission’s recommendations. On the review of LES, the Commission reiterated that the Revenue-Raising Component (RRC) might expose Government to unwarranted litigation but the Commission supported Government’s prioritisation of reforming the component this year. The recommendation was not just about restructuring at the Electricity Distribution Industry Holdings ((EDI) but about the broader regionalisation of basic services delivery (e.g. water services), to which the Government’s response was inadequate (paragraph 4, slide 7).

In conclusion, the FFC welcomed the 2011 Division of Revenue Bill, but felt that the overspend on the Health and Education Budgets was a grave concern. The vibrant built environment constituted a massive opportunity for fast tracking service delivery. The PES and LES comprehensive review constituted an ongoing work. The Commission appreciated robust engagements with all spheres of Government and the Commission would intensify its stakeholder engagement process in order to get to grips with the impact of the allocations made through the Division of Revenue Act (DoRA) (paragraph 5, slide 8).

Mtshezi Local Municipality oral submission
Ms Nonhlanhla Njoko, Municipal Manager, Mtshezi Local Municipality (a very small, semi-rural municipality commonly known as Estcourt), requested a review of the equitable share allocation for KwaZulu-Natal 234,  Mtshezi Local Municipality, as proposed in the Division of Revenue Bill.

Ms Njoko complained that Mtshezi received an insufficient equitable share of only R25 million and asked if this was really fair. Mtshezi rendered all municipal services, including distribution of electricity; collected rates, collected refuse, and rendered the licensing and permit service. However, the distribution of water was a function of the District Municipality. This was a great challenge and its equitable share was not just enough.

Mtshezi’s own generated income was between R100 and 190 million rand per income. The service that yielded the biggest own generated income was electricity. The second highest yield of income was from rates. Transfers and grants yielded the third highest amount of income. Most of the income was used to buy electricity, since the municipality distributed it but did not produce it. The second share of income went to employee-related matters. The population of Mtshezi was about 84 000 people. Unemployment had increased from about 50% in 1996 to about 62% in 2004. Mtshezi found that only 18% of the population could be asked to pay rates because of the high unemployment figures. The indigent register was very long. It was a bleak situation of struggle.

However, Mtshezi had its success stories. These included unqualified audit opinions, and Mtshezi hoped to achieve a completely clean audit report in the next financial year or two. There was a slight increase in economic development, a new shopping mall, an interchange on the N3, housing developments, and a new taxi rank despite all these fiscal challenges. Ms Njoko appealed that Mtshezi’s equitable share be reviewed, especially since a neighbouring municipality, with only a slightly larger population, had a much larger share. 

Mtshezi would like to recommend that National Treasury update Mtshezi's statistics, and there be an increase in Mtshezi's equitable share allocation with an increase in allocation from Department Energy. For the past two years Mtshezi had no allocation from this Department. Also Mtshezi's indigent register was very long because of the economic conditions in the municipality.

South African Local Government Association Comments on local government grants
Mr Jonathan Patrick, South African Local Government Association (SALGA), on behalf of the Chief Executive Officer (CEO), SALGA, outlined his presentation: the 2011 Medium Term Expenditure Framework (MTEF); the local government equitable share; infrastructure grants and capacity building and other operating grants – general comments, followed by specific comments on different grants.

As to the 2011 MTEF, the budget of 2011 provided important support for local government to sustain service delivery, while SALGA understood that additional funding was made available for free basic services, expansion of city housing and public transport infrastructure, provision of regional bulk infrastructure for water and sanitation, and financial management support for municipalities.

SALGA's main concerns were that there should be a systematic review of baselines to ensure that revenue allocations to local government as a whole were congruent with its full range of developmental and service delivery responsibilities and its vertical share. This should be coupled with efforts to build the capacity of weaker municipalities to spend efficiently and effectively. Allocations to local government were not based on proper studies into the true, long term costs of municipal service delivery, which could vary substantially across municipalities in different service delivery contexts.  SALGA recommended to the Budget Forum for an independent commission to review the local government fiscal framework (slide [3]).

On the local government equitable share (LGES), SALGA understood that the increased institutional support through the formula allocations for smaller municipalities would provide much needed support for governance and administration structures.  SALGA would continue to work with National Treasury and other stakeholders to improve the formula as part of the review of the local government fiscal framework.

SALGA's main concerns were that it was not yet certain whether the additional allocations for institutional capacity in smaller municipalities was enough to provide sufficient long term support. This should be investigated. Growth of 8.2% per annum in the LGES over the next three years was less than the increase of 9.3% in infrastructure transfers. Since LGES was utilised for operating and maintaining infrastructure through which basic services were provided to the poor, its slower growth implied more pressure on municipalities to collect revenue from the poor to provide for repairs and maintenance (slide [4]).

On infrastructure grants, SALGA's general comment was that an acceptable real growth of 4.5% in total infrastructure grants over the MTEF sustained the roll out of infrastructure for basic services and supported economic growth.

SALGA 's main concerns were that there was an increase in capital spending, but municipalities faced severe challenges in collecting revenue from poor households to provide for operational and maintenance costs of infrastructure. SALGA  wanted more technical support for rural municipalities for planning and execution of infrastructure projects. (Slide [5]).

SALGA commented specifically on the Urban Settlements Development Grant. It was noted that the Municipal Infrastructure Grant (Cities) was combined with a top slicing of the Human Settlements Development Grant to create a new grant for the metros. The consolidation and ring-fencing of the funding for cities was welcomed. It laid the foundation for the devolution of housing and public transport functions to the cities and the integration of other grants to form a proper fiscal instrument in support of city built environment projects. It was SALGA's understanding that metros would still be receiving housing allocations from the provinces and for that, SALGA would again stress the importance of timely publication in the Government Gazette and payment according to an agreed payment schedule in terms of the Division of Revenue Act (DoRA). (Slide [6]).

SALGA commented specifically on the Rural Transport and Infrastructure Grant. The additional funding to the grant would assist in improving planning for rural transport development projects. However, the grant should be aligned to a clear strategy of rural development.

The Rural Household Infrastructure Grant had been reduced because of poor spending. There was need for better coordination of interventions in rural areas. The specific roll out of the Comprehensive Rural Development Programme (CRDP) projects reviewed pilot sites for development of key wards in municipalities, for example, the projects in the Greater Giyani Local Municipality. Support, however, must be given to municipalities for infrastructure development in other wards. The Rural Household Infrastructure Grant should assist municipalities to achieve similar outputs (slide [7]).

The Electricity Demand-Side Management Grant (EEDSM) should be continued beyond 2011/112 and SALGA would work together with the Department of Energy (DoE) for motivation to extend it. This was following concern on how municipalities had been selected to receive the grant. SALGA had engagement with National Treasury on the allocations.

The Neighbourhood Development Partnership Grant had been continuously reduced because of underspending. There was need for a fairer basis for allocating the grant between municipalities. SALGA was specifically concerned that smaller municipalities were not provided support to access the grant (slide [8]).

SALGA 's general comments on Capacity-building and other operating grants was that these grew by only 2%. The increase in the financial management grant was good as it built the in-house capacity of municipalities. SALGA's main concerns were that there was still no information on the impact of capacity-building grants. Capacity-building programmes should be targeted at different levels of municipal needs. Capacity-building programmes should be comprehensive and not only focus on the training of personnel and the deployment of experts within municipalities (slide [9]).

SALGA commented specifically that the reduction in the Municipal Systems Improvement Grant, although small, was of concern as municipalities would need support for the implementation of the MPRA – second valuation rolls; for administrative systems to accommodate the increasing number of wards and councillors; for effective oversight, for example, the implementation of municipal public accounts committees (MPACs); and for their billing and revenue management systems.

SALGA commented specifically on the Water Services Operating Subsidy Grant, which was scheduled to end in the current financial year but had been extended for at least another. This extension was welcome. There was, however, a need to do an overall assessment of the grant. A sustainable solution was required to the challenges of municipalities which had inherited water schemes from national Government. It was not clear whether the municipalities had the financial capacity to fund and maintain the schemes. Revenue streams of the recipient municipalities were limited (slide [10]).

Mr Paul Theron: comment on the Division of Revenue Bill [B4-2011] as to infrastructure grants
Mr Theron indicated his background as a civil engineer involved in labour-intensive and job creation programmes since 1992. He was involved in the development of the Zibambele and Vukuzakhe (Emerging Contractor Development) Programmes in KwaZulu-Natal and the Eastern Cape, and had a developed labour intensive construction methods manual for KwaZulu-Natal. He was providing Expanded Public Works Programme (EPWP) technical support in the Eastern Cape and North West, and investigating exit strategies for people on poverty alleviation programmes and people receiving social grants (slide 2).

Mr Theron quoted from the State of the Nation Address 2011 (slide 3).

Mr Theron commented on infrastructure grants and proposed additions to the Division of Revenue Bill (B4-2011) in respect of the Conditional Grants, which were part of the Infrastructure Grant to Provinces before this grant was restructured. The purpose of these comments was to inculcate job creation and skills development in the use of these grants. These grants were the Education Infrastructure Grant, the Health Infrastructure Grant, and the Provincial Roads Maintenance Grant. The Urban Settlements Grant should also be included (slide 4).

Mr Theron commented on Schedule 4. He proposed, under the purpose of both Education and Health Infrastructure Grants, to include “...optimise job creation opportunities through the employment of labour-intensive methodologies.” Under purpose of the Provincial Roads Maintenance Grant, he proposed including  “...optimise job creation opportunities through the employment of labour-intensive methodologies.” Under purpose of the Human Settlements Development Grant, he proposed including “...optimise job creation opportunities through the employment of labour-intensive methodologies.”

Mr Theron noted that the EPWP Guidelines covered only low-volume roads (typically less than 500 vehicles per day), sidewalks and non-motorised transport infrastructure, stormwater drainage; and
trenching (slide 5).

On the Bill's explanatory memorandum, Mr Theron proposed inclusion, under changes to the conditional grant framework, the words “The grant also focuses on the application of labour-intensive construction methods in delivery to optimize job creation and skills development in terms of the EPWP Guidelines.” Experience had shown that unless this was highlighted, the officials tended to ignore this requirement. (Slide 6).

On the frameworks, Mr Theron commented that to further entrench EPWP principles and job creation, the following should be included in the framework for the Provincial Roads Maintenance Grant. Under Grant Purpose–“To optimise job creation and skills development in terms of the EPWP Guidelines”.
Under Output include as the seventh bullet – “Number of EPWP jobs created and Full Time Equivalents (FTE’s) reported on the national DPW EPWP reporting system”. This would then link with the EPWP Incentive Grant and performance could be compared and measured across the country.  As to priority outcomes of Government it should be noted that this grant contributed to “Outcome 4 : Decent employment through inclusive growth”.

Under Conditions, the following should be included – “Provinces must report all projects via national DPW’s EPWP reporting system” and, in the seventh bullet after ……..31 March 2011, “…. and have complied with the EPWP Guidelines…….”

Mr Theron suggested including under responsibilities of the transferring national officer and receiving officer, under the subheading responsibilities of the national department:  support provinces to apply the EPWP guidelines to project design; support provinces to report using the EPWP reporting systems; and monitor the performance of provinces and report on quarterly progress against targets. Responsibilities of the provincial department included reporting all projects to be taken into account when assessing performance into the EPWP reporting systems and updating progress quarterly. A similar amendment should be made in respect of the frameworks for the Education Infrastructure Grant, the Health Infrastructure Grant, and the Human Settlements Development Grant (slides 7-8).

Mr Theron commented on the reporting templates for the Format of Infrastructure Projects List for Provinces that received the Education Infrastructure Grant, the Health Infrastructure Grant and the Provincial Roads Maintenance Grant – Appendix W7. There was no EPWP budget but rather existing budgets were re-focused to create job opportunities. As such, the template should provide for the number of EPWP jobs opportunities and Full Time Equivalents(FTEs) to be created and reported on the EPWP Management Information System (MIS) reporting system (slide 9).

Mr Theron concluded by illustrating the choice of a heavily mechanised method of road construction, but using little labour, compared with a labour-intensive method that would create employment (slide 10).

National Treasury Responses
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that the FFC's feedback was “generally quite positive”. The FFC had emphasised that many issues were work in progress. With regard to the provincial equitable share formula, the health component had been amended for the 2011 budget. National Treasury would be taking the work forward to focus on the education component, since this was where reforms were needed. With regard to the local government equitable share, again National Treasury was working with all stakeholders, including the FFC, SALGA, and the Department of Cooperative Governance, on the current formula as well as on a comprehensive review of the equitable share with local government commencing 2011.   There were a number of particular challenges with regard to the local government equitable share formula. Such challenges were not so easy to overcome.  The first challenge was the availability of data. The only reliable source at this stage was the 2001 census. National Treasury had considered using the 2007 Community Survey. However, there were a number of reasons why it could not be used. One of these reasons was that the local government equitable share formula considered the number of households that were poor within a municipality. This was one of the primary parts of the basic services component. However, that data was erratic to say the least and was therefore not reliable, and made it very difficult to use. As part of the comprehensive review, National Treasury would be working with Statistics South Africa (Stats SA) to see if there were ways and means to overcome these challenges. National Treasury would also consider whether it could use the 2011 Census that was taking place this year; unfortunately, however, it would take two years for the data from this census to be released.  One of the advantages of the 2011 Census was that it was not just going to enumerate South Africans but everyone in South Africa at the time. Therefore the Census would provide data on questions arising in these committees very frequently, such as cross boundary issues. The issues that the FFC raised with regard to the restructuring of borders were important and should be taken forward.

SALGA's plea for a review of the local government equitable share formula would be part of the comprehensive review. Some other parts of the review would be the funding of poorer resourced municipalities, including the issues that FFC and SALGA raised. Also the revenue raising component would be reviewed. Another issue that National Treasury would be examining was the costing of services, because the costs of individual municipalities were very different. The problem that National Treasury currently had was that there was not a uniform method of differentiating between individual municipalities. However, unless National Treasury did so, it was difficult to differentiate the costs as well. As FFC had noted, National Treasury also considered it very important to ensure that municipalities received their fair share from the equitable share both from the vertical and the horizontal division. However, unlike the provinces, municipalities had quite substantial “own revenues”.  These included property rates, user charges for service delivery, and, on top of these, service charges might also be levied. Considerable analysis had been done by the FFC and there was clear evidence that municipalities were under collecting their “own revenues”.  It was extremely important even for very small and very poor municipalities to collect even the smallest “own revenue” to develop “that link with the community and accountability”.  This accountability was not present if a municipality was 100% reliant on transfers. Also the Constitution stated that the fiscus was not responsible for funding anything for which a municipality had under collected.  The fiscus should fund only the gap between the service delivery responsibilities and what the municipality could collect itself. So there was still much to be done with regard to collection of “own revenue”. Another area to be considered was the potential wastage in the system. For example, a number of municipalities, when they set tariffs, did not know the true cost of providing a service, and thus under collected for that service. Moreover, many municipalities did not have proper billing systems. The same applied also to provinces. Specific grants addressed the focus, and one of them was the Rural Household Infrastructure Grant, but spending on this grant was quite slow in the financial year 2010/11. It happened quite frequently when a new grant was established that the national department concerned took time to organise itself and begin spending. National Treasury had been assured by the Department of Human Settlements that it had now addressed its capacity issues. There were a number of rural grants but these were situated with different departments. T

Mtshezi Local Municipality was just one of the municipalities complaining about its equitable share. This was discussed comprehensively in Annexure W1. Because the National Treasury could not maintain the substantial increases that had been given in the local government equitable share over the past few years, much higher than any of the other increases to provinces as well as to national Government, these increases could not be maintained indefinitely.  All municipalities were guaranteed to receive 100% of their 2010/11 allocation and 90% of the indicative amount for the 2011/12 that was published as part of the 2010 budget. Thus quite a number of larger urban municipalities received a cut in allocation. So therefore National Treasury was faced with quite a number of complaints.  It had been necessary to direct additional money to more poorly resourced municipalities. National Treasury needed to consider this in its longer term review of the formula. It was very much population based, so the larger municipalities tended to be allocated more resources. The formula considered the number of households that earned less than R800 per month, and whether the municipality had infrastructure in place or not.  If infrastructure was not in place, the municipality received a slightly smaller allocation. The reason for this was that if infrastructure was in place, it was assumed that the municipality could definitely provide free basic services to poor households. In cases where infrastructure was not in place, an alternative mode of service delivery must be employed.  In the Division of Revenue Bill there were actual clauses about the negotiation between the local municipality and the district municipality, and this was why the National Treasury particularly gazetted these amounts so that these were known upfront. If that process did not happen, the municipality could appeal to the National Treasury, which could then institute a process to ensure that this negotiation took place. If the local municipality provided services as well, it was important that the district shared those funds with the local municipality concerned, or if the local municipality did not provide these services that there was negotiation as to who should provide those services. 

In response to Mr Theron, only the main purpose of the EPWP programme grant was stipulated in the schedules and not the complementary purposes. It was necessary to read the two together.

In the conditional grant framework the infrastructure grants and the three conditional grants to the provinces were actually the basis and feedback into the EPWP conditional grant and so they were actually interlinked. However, National Treasury could review it and discuss with the national department concerned whether National Treasury could add some of the proposals that Mr Theron had made. However, that principle was already contained broadly in the EPWP with respect to the infrastructure grant.

Discussion
Mr C De Beer (Northern Cape, ANC) noted Ms Fanoe’s comments about poorer households. In addition, he asked if the figure on which Ms Fanoe was working was the 2001 figure. This was why the Committee would continue hearing complaints from municipalities. It was the same in the Northern Cape. This was something that the Committee would have to address. When one looked at the Mpumalanga municipalities for 2009, the municipalities on the border of Swaziland and Mozambique, one saw people moving across the border and using services but the municipalities did not get their allocation from National Treasury; this was understandable but this caused a pressure on the budget of that specific municipality. Mr De Beer did not have a quick solution for this problem. However, it needed to be looked at seriously.

Mr De Beer asked what the income and expenditure for the municipalities were.

Mr De Beer asked SALGA, which had referred to the local government fiscal framework, what its view and input were, and what it was bringing to the table. Also, with regard to the issues of the capacity, in which SALGA was involved both with the provinces and municipalities, and the Select Committee witnessed when it made visits, he asked what SALGA was doing in this regard. It was not enough to talk about it. One needed to know that SALGA was doing. Mr De Beer also asked SALGA in what way it gave technical support to the infrastructure projects, and technical support, and how SALGA was helping municipalities to do their own oversight, in particular through their own public accounts committees.   What was SALGA view on how to help municipalities create such a structure?

The Chairperson asked Mr Khumalo to give the Committee a copy of his submission to the National Treasury and to the Minister, since it was important that the Select Committee be aware of the contents. 

The Chairperson asked Mr Khumalo to elaborate further on FFC's view on the local equitable share as compared to the view of the National Treasury, since it appeared that there was a greater distribution to rich municipalities at the expense of the poor ones and that there was a contradiction between the views of the two entities. 

The Chairperson asked SALGA, in terms of its mandate, what its role on capacity building was. 

The Chairperson said that the Committee was expecting to hear presentations from some Departments in due course to which Mr Theron's views would be relevant. The Select Committee would take these into account before giving its final views on Mr Theron's proposals.

Mr Patrick replied that SALGA's mandate was basically to identify with municipalities what the challenges were and together with stakeholders and external partnerships to try to support municipalities and local government in addressing those challenges. With respect to the fiscal framework, SALGA in the 2010 Budget Forum had submitted a position paper on the different aspects of the fiscal framework that SALGA had identified as needing solutions and had made proposals on the equitable share formula and worked with the National Treasury, even for this budget, and with the Department of Cooperative Governance, where the actual capacity was situated to do most of the review of the fiscal framework. So SALGA engaged with the departments that had the actual capacity and formed partnerships for the funding of research on these matters. SALGA would continue to work with National Treasury, the FFC, the Department of Cooperative Governance, and other stakeholders to review the fiscal framework going forward. On the matter of capacity-building, SALGA felt that a comprehensive capacity-building plan was needed for local government, as municipalities needed to be developed to a stage at which the struggling municipalities especially were enabled to function as viable organisations that delivered services on a sustainable basis. SALGA recognised a need to cooperate with the various stakeholders. Current fiscal support instruments formed some of the work to be done with municipalities and stakeholders to discuss exactly what to do in different areas around capacity-building. With regard to management, it had to be asked what exactly the needs were at the moment, and how in the current fiscal support there were instruments or grants aligned to what was needed at that municipal level. SALGA would continue that work with municipalities and stakeholders. SALGA had been closely involved; together with the Department of Cooperative Governance, in the establishment of municipal public accounts committees (MPACs). The Department had undertaken various road shows to raise awareness amongst the different municipalities and implement MPACs. SALGA, together with the Department and the Auditor-General, was currently working on training for councillors. This programme would be rolled out after the municipal elections. The programme would indicate links to other oversight committees, such as those on internal audit.

Ms Njoko said that the Mtshezi Local Municipality had been able to reach only the point of breaking even and had not been able to make any surplus, and still did not have all the money needed to deliver services. Just to reach the point of breaking even left the municipality with gaps. Also the municipality had a very high level of debt which it was trying to collect. The council had allowed the appointment of a debt collector, who had been operating since January 2011.  In the first month the collector had collected about R500 000, which the municipality had not been able to do previously. Last month, the collection rate had improved to about R800 000. So the municipality was making an effort since it recognised that it needed to collect its own income. At the same time the municipality was trying to generate its own income, for example, by means of a recycling project. However, this process would take time, and therefore the municipality appealed to the National Treasury to consider the municipality's figures and give it a justified equitable share. 

The Chairperson said that it was encouraging, to receive for the first time, a submission from a municipality on the Division of Revenue Bill. However, Ms Njoko was not direct in her answer. Mr De Beer wanted figures for Mtshezi Local Municipality's own revenues. The Select Committee was aware that Mtshezi Local Municipality would be receiving R25 million as its equitable share which Ms Njoko said was insufficient.  In her earlier submission, Ms Njoko had given an indication of the municipality's own revenue (between R100 and 190 million) and expenditure. The Chairperson asked what the difference between the two would be.  

Ms Njoko did not have the total, but did have certain figures, such as rates income – about R29 million,  services – about  R96 million, and other small sources of income. The municipality could perhaps calculate it and provide the figure to the Select Committee, together with the figure for expenditure, for which the municipality had the figure in percentages, for example, services such as electricity, on which the municipality was spending 40%, and salaries, on which the municipality was spending 26%. However, the municipality did not have concrete figures, but it would provide the figures subsequently.    

Mr De Beer said that it was very important to have the correct figures in order to advance one's case to obtain more. This was why Ms Njoko was present.  This was why Members of the Select Committee asked questions. One must have the exact figures for one's own advantage.

The Chairperson referred Mr De Beer to the draft annual report of the municipality, from which he thought the information might be obtained.

Mr Khumalo understood that the Select Committee wanted a copy of the FFC's submission on the property rates. He had believed that this had already been circulated, but he had now requested it by email, and expected the Chairperson to have received a copy by the end of the meeting. The National Treasury had corrected the problem of the issue of the local government equitable share. The FFC did simulations across the components. Over time the equitable share to local government from the vertical division was increasing, but one would expect the share of those increases, if one really wanted to achieve what one intended to achieve, namely, to redistribute to the poorer municipalities to be higher. However, the bulk of it was accumulating to the metropolitan municipalities and big cities. It was obvious because of the way the institutional component was structured, and also the way in which the basic component worked its numbers of poor people and the share of the numbers of poor households. This made a big difference and needed to be corrected. However, even if corrected now, there was for the future a need to use a different formula to achieve a differentiated approach to resolve that problem. It was a technical issue of the numbers that constituted the different components, which used different variables.  The variables assumed that there was a uniform set of municipalities. One had to be sensitive to that. Therefore the preference now was to consider a differentiated approach which took a different view with various categories and groups. That should be part of the broader review. Mr Khumalo agreed with Mr Patrick that the review of the local government equitable share on its own could not resolve some of the problems in the municipalities. It was therefore necessary to take a broader view that considered the fiscal framework for local government and the review should be focused on that. There was no difference between the FFC's view and National Treasury's view, as expressed by Ms Fanoe, who had said that National Treasury had addressed that problem. That was the short term exercise. It was really about redistribution of the extra money that was available as one grew the local government equitable share. One wanted to target the poor municipalities without prejudicing the richer municipalities.

Ms Fanoe added to what the FFC and SALGA had said on the review of the local government equitable share. The vertical share, or the overall amount that went to municipalities, and whether this was unfair, was one of the important issues. The second was the equitable share that went to individual municipalities, the horizontal division, and whether that was unfair. Also there was the issue of how to measure horizontal equity. For municipalities that had the same characteristics, for example, the same number of poor households, it was easier to make a comparison. That process that Government had followed was put in Annexure W1. National Treasury had made considerable redistribution in that formula to benefit the poorer resourced municipalities, for example, a poverty weighting which was not present in the past. If one considered the 2001 Census data and compared the 2007 Community Survey data, an increased population did not mean an increased equitable share allocation. It was necessary to compare oneself as a municipality with another municipality and how one performed in terms of that average both in terms of population growth and also in terms of the number of poor households within a municipality. The 2007 Community Survey data would not necessarily be of benefit, but rather exactly the opposite: it would rather penalise a poorer resourced municipalities. What National Treasury had found was that population might have increased but in comparison with the average it had grown at a smaller rate than the average growth rate, for example, the population of municipalities in the Western Cape had, between 2001 and 2007, increased by 17%. In Gauteng the percentage increase was similar. If you made a comparison with all other municipalities there was a range of 2% and 7%. With regard to the number of poor households within such a municipality earning less than R800 per month, there was just one province with a positive figure - the Western Cape. All the others, including Gauteng, had a negative figure. This meant that because of the social grants, inflation and the like, the poverty levels had actually decreased.  These were some of the challenges that the National Treasury had faced and why a comprehensive review was needed in the formula. Otherwise there would continue to be a distortion towards larger municipalities in the allocations.

The Chairperson thanked Ms Fanoe and all who had come from their different provinces to honour the Committee with their attendance and participation.  

The Chairperson adjourned the meeting until the next morning.



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