Devolution of Property Rates Fund Grants: National Treasury, Department of Public Works, & Eastern Cape, Gauteng & Limpopo provincial departments of public works briefings

Meeting report

National Treasury: presentation
Mr Edgar Sishi, Director: Provincial Budget Analysis, National Treasury, presented the devolution of property rate funds expenditure as at 31 December 2010. A total of R1.9 billion was allocated to provinces and at that point R987 million was spent, which was a percentage of 49.7%. With projections as at 31 December 2010, it was predicted that three provinces would under-spend their allocated budget, namely the Eastern Cape, Gauteng and Limpopo, with the Free State and Mpumalanga predicted to over-spend their budgets. Year-on-year growth was 29.7%, with Western Cape significantly increasing its spending, based on the same time in the previous financial year. The two provinces that decreased their spending the most were Gauteng and the Northern Cape. At 31 December 2010, Limpopo had spent only 50% of its budget. These figures included previous roll-overs. Altogether, provinces had only spent 52.9% of transfers received.

Mr Sishi went on to present preliminary figures of expenditure as at 31 March 2011. At that point in time, provinces were expected to have spent 81.5% of their budget, with a 33.2% year-on-year growth. Mr Sishi explained issues affecting spending. This was attributed to the fact that municipalities were still experiencing challenges with the timely submission of invoices to provincial departments in the Eastern Cape, Gauteng, KwaZulu Natal, and the Northern Cape. Provincial asset registers in respect of immovable assets were still not finalised in most provinces. The two biggest contributors to poor expenditure were Gauteng and KwaZulu Natal. In both provinces, the two biggest issues raised were non- or late submission of invoices by municipalities and the non-finalisation of valuation rolls and property verification.

Some actions to address these challenges included the establishment of a task team by National Treasury and the national Department of Public Works to deal with the issue of registering and managing immovable Government properties. The progress made by certain provinces, such as the Western Cape and KwaZulu Natal, would be assessed and there should be a transfer of best practices and lessons learned. It would also be prudent for provinces to institute project plans, containing timeframes and augmented by progress reports, whereby the process of registering and valuing provincial properties was addressed.

Discussion
Mr M Makhubela (Limpopo, COPE) asked whether new mayors coming into the provinces would be educated about the processes involved with the devolution of properties.

Mr Sishi replied that there would be assistance to new authorities to provide them with information of the devolution of properties.

Mr C de Beer (Northern Cape, ANC) wanted to know whether National Treasury had a working relationship with the South African Local Government Association (SALGA) and the Department of Co-operative Governance.

Mr Sishi replied that there was a working relationship between the asset management section of National Treasury, the national Department of Public Works and SALGA.

Mr De Beer asked what the action plan from National Treasury included (slide 6).

Mr Sishi replied that the action plan fell under the municipal management unit section, which was to strengthen and educate municipal managers by paying for professionals to come in and assist municipalities.

Limpopo: presentation
Mr Madidimalo Chaamano, Head of Department, Public Works: Limpopo, gave a brief introduction to the Committee on the project description and the prevailing scenario. He explained that the national Department of Public Works devolved rates to provincial departments of Public Works in the 2008/09 financial year. Initially the number of devolved properties in Limpopo was 3 557 as per the submitted list and of these properties, the national department had previously paid bills for 869 properties while the balance of 2 688 properties had to be reconciled and verified.

Mr Chaamano further explained that the Devolution of Rates Fund had gone over three years now, and the local Department of Public Works took charge of the conditional grant on devolution of rates as opposed to other rates which were paid for by other provincial departments according to usage. However, this caused confusion to municipalities. There were provincial land parcels whose rates to municipalities were paid for by the national Department of Public Works, and there were provincial land parcels whose rates were paid for by the provincial Department of Public Works.

Mr Chaamano went on to present data trends in collection. 2011/12 marked the third year for the province to manage the payment of rates and taxes for devolved properties. The first two financial years were difficult because the Department had not received bills for all properties that were on the list from the national Department of Public Works. After extensive interactions with municipalities in the 2010/11 financial year, the Department received bills for more properties from municipalities that resulted in expenditure of R14.7 million (92.2%). Expenditure for the third quarter was slightly below the straight line projections at 74%, but there were bills that were being verified. The Department had in the previous financial years reported 55.74% expenditure in 2008/09 and 37.7% in 2009/10 respectively and in 2010/11 it had spent 97%. The Department had received bills that exceeded the allocated budget of R15.154 million and unpaid accounts were planned to be paid over in the first quarter of 2011/12 from the current allocation.

Mr Chaamano said that the turnaround strategy included a provision that the department developed a plan in the 2009/2010 financial year involving all stakeholders to improve payments to municipalities. The performance of the 2010/11 financial year indicated that the plan was working. The active role of the National Department of Public Works, Provincial Treasury, and SALGA had contributed to the improvement. He concluded by saying that he hoped that interaction with these stakeholders would continue to improve the relationships that would lead to better service delivery and enable partners to have a harmonious understanding to create a platform conducive to good governance. 

Discussion
The Chairperson asked why there was a discrepancy between the figures presented by the province and those by National Treasury.

Ms Julinda Gautana, Chief Director: Provincial Budget Analysis, National Treasury, replied that at the point when the figures were published, expenditure was at 50% for the province. An email was received from the province after publication but as 31 December 2010, expenditure was at 50%. Once figures were published, it was necessary to go through an entire process before it could be changed.

Mr De Beer commented that the information should have been communicated more effectively between the different levels of Government. A corrective step by the province should include an intergovernmental process whereby National Treasury should confirm with the provincial treasury as to whether the figures reported were correct.

Mr Makhubela said that the province consisted of many rural homeland areas. He wanted to know how assets would be registered where money was being spent wastefully.
 
Mr De Beer asked whether there was a timeframe for the asset register to be completed.

Mr Chaamano replied that a Service Provider (SP) was assigned in 2007 to deal with the compilation of the asset register, but this matter was under arbitration currently. A module was also being developed to assist with verification.

The Chairperson wanted to know more about why the SP had not fulfilled its purpose in assisting with the asset register.

Mr Chaamano explained that the SP was supposed to assist in the identification and verification of assets but there were some disputes with the service the SP was giving as it was not up to standard. The province was billed R13 million but had refused to pay this money. Subsequently, the matter had been sent to the state attorneys. This matter had delayed the Department as part of the money had to be used for valuations. 

Eastern Cape: presentation
Mr Eugene Jooste, Chief Financial Officer, Eastern Cape Department of Roads and Public Works, gave an overview of the presentation which included:
Conditional Grant Summary
Conditional Grant Expenditure to 31 December 2010
Factors Contributing to Increased Expenditure: Municipal Finance Unit
Factors Contributing to Increased Expenditure: Provincial Immovable Asset Register
Remaining Challenges
Outstanding Amounts Prior to 1 July 2008

With regards to the conditional grant, as at 31 December 2010, a total of 47% had been spent. A factor contributing to the increased expenditure was the municipal finance unit. This unit was established and three managers as well as eight assistant managers had been appointed. The managers were supported by nine administrative officials. This unit was dedicated to all activities relating to municipalities and was responsible for the payment and reconciliation of rates and taxes and utilities accounts. Another factor contributing to the increased expenditure was the provincial Immovable Asset Register (IAR). The IAR would facilitate the scientific calculation of the annual liability to municipalities, facilitate accurate cash flows projections and enable the department to apply for the correct annual appropriations, amongst other things. Remaining challenges were the outstanding debt relating to 2008/09 and 2009/10, although this had been vastly reduced. There was material discrepancies between amounts reported as outstanding by municipalities and by the department. Other challenges included that rates and taxes were charged on properties that were unregistered, properties on un-surveyed land, and those on municipal land.

Factors contributing to outstanding debt for 2008/09 and 2009/10 included incorrect invoicing by municipalities, invoicing by municipalities on properties not owned by the province, and invoicing outside of the computerised system. The financial management capacity at the municipalities in the Eastern Cape remained a challenge, as well as unallocated payments by municipalities. The department was being invoiced rates and taxes on private property, property owned by the national department and property owned by the municipality itself. These errors were not being corrected in the municipality and continued to reflect as owing by the department.

Mr Jooste spoke around the outstanding amounts prior to 01 July 2008. The Devolution of Property Rates and Taxes Grant became effective on 01 April 2008 for rates and taxes charged in the municipal financial year 01July 2008 to 30 June 2009. The transition from national to provincial was not effectively managed by municipalities. Looking at the way forward, the department was waiting for legal opinion on whether it was liable for the payment of rates and taxes on un-surveyed land.

Discussion
The Chairperson said that he would have liked to see the figures of immovable assets shown in the presentations, not only for the Eastern Cape but for all provinces as well.

Mr Jooste said he would submit a report of the exact figures after the meeting but currently there were about 14 000 properties that were being analysed.

Mr De Beer wanted to know whether the province had interaction with SALGA.

Mr Jooste replied that the province did have interaction with SALGA on a regular basis as it was represented in meetings of the municipal mayors.

Gauteng: presentation
Ms Mapula Modipa, Head of Department, Department of Infrastructure Development: Gauteng, gave the presentation on a report regarding the spending patterns of the Devolution of Rates and Taxes Grant by the Department during the third quarter of the 2010/11 financial year, as well as spending as at year end, and also highlighted some of the challenges the department had experienced. The overall project was based on a list of devolved rates and taxes properties list provided from national department of Public Works. The national department had devolved 8 279 properties thus far and the number excluded residential properties. Gauteng provincial government had received a grant of R155 million to pay the devolved rates and taxes from the national Department of Public Works from 2008/2009 and R383 million for 2009/2010 financial year, and R294 million in 2010/2011 financial year.

Ms Modipa gave an outline of the third quarter expenditure. From an annual target of R294.457 million, the province had spent R180.639 million, with a variance of R107.025 million as 31 December 2010. The actual expenditure as at 31 March 2011 was 74% which amounted to R216.690 million. Spending was very slow until September 2010 due to late submission of claims by the municipalities to the department. As at 30 September 2010 an amount of R1.4 million was spent. An additional amount of R103 million was requested in August 2010 based on the information received from municipalities. A significant increase in spending patterns occurred from October 2010 after receipt of claims and processing of these claims. The current under-spending was due to claims received that were less than originally indicated by municipalities or claims received in February 2011.

Challenges included the non-submission of invoices by municipalities as well as the fact that often properties did not match the provinces asset register although municipalities were certain that these properties belong to the province. Remedial actions were that a “no invoice, no payment” approach was enforced. Furthermore, the department in conjunction with provincial treasury often reminded municipalities of the claims on a regular basis. The department was currently updating asset registers with all new properties recently found to belong to the department. In conclusion, the department was committed to resolve all unpaid claims during 2011/12 based on accurate information received by the municipalities. Intergovernmental relations would be enhanced between the spheres of government to enhance claim and payment processes.

Discussion
The Chairperson commented that the figures did not correspond with those presented by National Treasury. He suggested that in future, all provincial departments should liaise thoroughly with National Treasury to find agreement on what would be presented to the Committee.

Mr S Montshitsi (Gauteng, ANC) said that there were noticeable problems in the Gauteng department. He wanted to know what plan was put into place to deal with the late submission of invoices.

Ms Modipa replied that the Department of Infrastructure Development was the custodian of asset registers but the Gauteng Provincial Government should be the custodian. A “no invoice, no payment” approach had been enforced and the department in conjunction with Provincial Treasury would remind municipalities on weekly basis of claims that had to be submitted.

The Chairperson asked whether the provincial treasury had requested a rollover amount for this financial year due to the under-expenditure the previous financial year.  
 
Ms Modipa replied that the provincial treasury was interacting with National Treasury for a roll-over amount to be approved.

Mr Montshitsi asked whether the Premier of the province was called in to help deal with issues the department was experiencing.

Ms Modipa replied that the department tried not to involve the Premier or Member of the Executive Council (MEC) in usual issues but tried rather to solve these problems internally. However, if its own intervention strategies failed, then the department did call on the assistance of the Premier.

National Department of Public Works: presentation
Ms Cathy Motsisi, Chief Financial Officer, Department of Public Works, presented the performance of the Property Rates and Taxes Grant. Prior to 1994, the Department of Public Works was deemed the custodian of most state-owned properties and therefore took responsibility for payment of some property rates. During the year 2006, the Department together with National Treasury devolved the budgets to the provinces as a grant effective from 01 April 2008. The reason for the devolution was to facilitate the transfer of property rates expenditure responsibility to provinces. The national Department of Public Works had the responsibility to oversee the transfer of the function to the provincial departments, and together with regional offices, provide support and training as needed to the provincial departments. The responsibility of the provincial departments was to report to the relevant Provincial Treasury, the National Treasury and the national Department of Public Works to report on spending and the financial performance of the grant.

Ms Motsisi presented the expenditure growth trend over a three year period. Overall, the budget increased by 33% from 2009/2010 to 2010/2011 while expenditure increased by approximately 48%. Some provinces under-spent their budget and the reasons thereof varied. The Eastern Cape had a 78% expenditure on its budget, with unspent funds amounting to R63 million. This was due to various complex matters such as the timing difference between the financial years of the municipalities and provinces, and incomplete asset registers. The province started an asset verification process last year which enabled it to improve spending from 52% in 2009/2010 to 78% in 2010/2011.

Gauteng had an overall expenditure of 73%, and the 27% under spending was attributable to four municipalities which did not submit claims in the fourth quarter of the 2010/2011 financial year. The other contributing factor was the municipal valuation rolls for some of the municipalities which were still incomplete. KwaZulu-Natal had an overall expenditure of 63%, and the under spending was attributed to some municipalities submitting invoices late, and the verification of Public Sector Infrastructure properties was still underway before payment could be processed. The Northern Cape had an expenditure of 93.6% and the R2.5 million (6.4%) under-spent was due to the late submission of invoices. The provincial department was working very closely with these municipalities to speed up the invoicing. The Western Cape had a 94% spending and the 6% (R18.3 million) under-spent amount was due to the uncertainty regarding the liability for the payment of rates related to isolated cases. A roll-over request would be submitted.

Ms Motsisi explained that there were many challenges at municipal as well as provincial levels. Most common challenges in municipalities included:
Delays by municipalities in generating invoices or property rates schedules.
Municipalities with inefficient billing systems.
No valuation rolls.
Delay in issuing invoices on properties affected by Municipal Demarcation of boundaries.
Inaccurate verification and reconciliation of invoices from other municipalities.
Municipalities billing the Department of Public Works for properties which were not registered either in national or provincial competency.

The challenge that provinces experienced was the under/over allocation of budget devolved. There was also an expectation by the provinces the national Department of Public Works would have additional funding to sort out under allocation and that the department would pay arrears of provincial properties that were not on the asset register. There was a lack of cooperation with regard to reporting according to the conditional grants framework.

Some intervention strategies included establishing a credible asset register for the asset verification projects. An improved billing system was needed by municipalities and the department was working closely with SALGA to assist low capacity municipalities. Getting provinces to declare over allocations was an ongoing process, as well as the active participation from the department in provincial and municipal debt management forums. Although a notable improvement had been made with regards to the performance of the grant, significant results would only be visible when the asset verification and vesting processes were complete.

Discussion
The Chairperson said that there was a 0.5% difference in the figures reported by National Treasury and the department for the province of Gauteng.

Ms Motsisi noted the difference and said that there were problems with the reporting of figures which would be attended to for future presentations.

Mr De Beer commented that there was something seriously wrong in the whole system that needed to be corrected. He wanted to know what the department was doing to achieve its objectives.

Ms Motsisi replied that there was a need to create more capacity at a national level. In terms of work that still needed to be done, the department would create a chief directorate for each problem area, such as asset registers, and they were planning to appoint a Chief Director as well as a Director for this directorate. 

Mr Montshitsi wanted to know whether there was good cooperation between provinces.

Ms Motsisi replied that there was indeed huge cooperation between provinces and her department also called in for property managers to assist if needed.

The meeting was adjourned.