Local Government Budgets and Expenditure Review 2006-13: National Treasury briefing

Standing Committee on Appropriations

10 October 2011
Chairperson: Mr E Sogoni (ANC) and Mr L Tsenoli (ANC)
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Meeting Summary

The meeting was a joint sitting of the Portfolio Committee on Co-operative Governance and the Standing Committee on Appropriations. The National Treasury briefed the Committee on its Local Government Budgets and Expenditure Review. The purpose of the review was to track progress, performance and service delivery. It was a big improvement on previous ones as more informed decision making could take place thanks to more data being received from municipalities. It had been written to coincide with the Local Government elections and thus could be used by the incoming councillors.

Some of the key findings of the review were that:
There was slow rural growth and a huge migration to cities, consequently economic activity was occurring mainly there.
Trust in the Government to deliver services was dropping and therefore there was a need to increase infrastructure investment to improve and accelerate service delivery.
The rural economy was dependant on social grants and rural areas showed a greater need for water and sanitation services whereas urban areas had a greater need for housing. Thus municipalities needed to increase capital expenditure investment to keep up with the economic activity in their areas.
There had been a massive growth in national transfers to municipalities and there had been significant policy reform but municipalities still faced challenges. Municipalities were operating without plans and spending on non-core activities and not spending enough on maintenance and repairs.

Other challenges were that
billing systems were failing, indicative of poor revenue management
there were question marks over the adequateness of the targets of municipal initiatives and therefore the quality of municipal governance was critical.
there was also question marks over whether municipalitiesf budgets funding was realistic and there was still poor asset management reflected in the quality of maintenance of existing assets as well as in the under spending of the capital expenditure budgets.
municipalities had to develop standardised accounts.
municipalities had to improve their funding as most municipalities produced budgets that could not be implemented due to a lack of funding.

Staffing
Personnel expenditure had grown by 52.5% which was not reflected in the growth in staff numbers which was only 4%. This was indicative of the cost per employee rising. Municipalities were not getting value for money from the high personnel costs. The poor performance of staff was an indicator of poor governance. Vacancy levels were between 21-23%.

Service delivery
Access to water and sanitation had both increased by 7% while access to free basic services had dropped as some municipalities had withdrawn the benefit from those who could afford to pay. The challenges for municipalities were concerns over water scarcity, quality and availability. In addition, 36% of water was lost to leakage and theft and was thus lost revenue and represented a challenge namely, the maintenance of the existing water reticulation infrastructure.

Access to electricity had improved and capital expenditure had increased while revenues had also increased due to the 20% annual increases in electricity tariffs. There was concern however that budgeted capital expenditure was declining. Municipalities had greater certainty now that the decision not to continue with Regional Electricity Distributors  had been taken. Electricity revenue would be challenged as the cost of electricity would increase to over four times its current price in the coming years.

Roads
Municipalities tended to focus on new infrastructure instead of on maintenance. This was a big challenge as maintenance was seen as being discretionary expenditure. Another challenge was the loss of key skilled technical staff and the need to integrate housing developments with transport.

Municipal services
There had been increased access to sanitation services and there were employment opportunities in the waste removal and recycling fields. The majority of small towns and rural areas had backlogs of water and sanitation services. There was therefore a need to assist in the provision of municipal infrastructure and the Department of Performance Monitoring and Evaluation was working with institutions to develop catalytic partnerships. As national grants were not enough, there needed to be fiscal effort by municipalities to raise its own revenues.

Cities
A World Bank report estimated that 71% of the population were living in the cities, 7.8 million more than in 2007 and that 80% of economic activity took place in the 27 largest cities. There was a need to change the spatial development patterns of the past which was not only rooted in apartheid but also placed a strain on transport demand. The housing development policies aimed to build in the city centre where land was most expensive and therefore fewer houses could be built.  Challenges that needed to be addressed through policy were spatial planning integration. Communities could be built with economic activity close by. Responsibility for land zoning had to vest with the city. There was a need to look at the devolution of housing and transport down to city level and to expand the revenue base of municipalities and strengthen the collection of revenues.

Members said that the report
did not go into sufficient detail on the responsibilities of other parts of Government because although it was a turnaround strategy for Local Government, other spheres of Government could not be ignored and that the report did not address the ggreennessh of sustainable services. Members felt that the cash flow of the taxpayer was affected by the steep increases in electricity tariffs and would thus affect the ability of Local Government to collect funds as this revenue was likely to deteriorate.  Did municipalities have the right to rescind free basic services? To what extent did the Department offer solutions? Was there a process where the Department sat down with the Department of Cooperative Governance and went through the review chapter by chapter? Members felt that the Siyenze Manje project appeared to provide intangible benefits. There had been no change in the condition of municipalities despite the huge investment (of R3 billion) in Siyenze Manje. At what level should municipalities go to the private sector banks to borrow money? What was INCA? How could the committee ensure that the ability to pay issue was addressed? Members conveyed a request from municipalities to consider a reduction on the over reporting that was taking place and whether this could be considered for non-financial reports as well.

Meeting report

Opening remarks
Mr L Tsenoli (ANC), Chairperson of the Portfolio Committee on Co-operative Governance and Traditional Affairs,  prefaced the briefing by noting that he would have preferred that his Committee be the first to have heard the presentation. He added that the former Department of Cooperative Governance and Traditional Affairs had been split into two departments, that of Co-operative Governance and that of Traditional Affairs,  
[under the Minister of Cooperative Governance and Traditional Affairs] although there would still be only one portfolio committee.

Briefing
Mr Kenneth Brown, Deputy Director-General: Intergovernmental Relations, National Treasury, acknowledged the concerns about the release of the report because in previous instances the reports had been workshopped over one to two days to empower members of the Committee. He said he would convey to the Minister the sentiment expressed around the release of the report. The review had been written to coincide with the Local Government elections and thus could be used by the incoming councillors. The purpose of the review was to track progress, performance and service delivery. The review looked at how the economy functioned within municipalities. The review was a big improvement on previous ones as more informed decision making could take place thanks to more data being received from municipalities.

Key findings
The key findings of the review were that there was slow rural growth and a huge migration to cities, consequently economic activity was occurring mainly in the cities. Trust in the Government to deliver services was dipping and therefore there was a need to increase infrastructure investment to improve and accelerate service delivery. The rural economy was dependant on social grants and rural areas showed a greater need for water and sanitation services whereas urban areas had a greater need for housing. Thus municipalities needed to increase capital expenditure investment to keep up with the economic activity in their area. There had been a massive growth in national transfers to municipalities and there had been significant policy reform but municipalities still faced challenges. Municipalities were operating without plans and spending on non-core activities and not spending enough on maintenance and repairs. Other challenges were that billing systems were failing, indicative of poor revenue management and there were question marks over the adequateness of the targets of municipal initiatives and therefore the quality of municipal governance was critical. There were also question marks over whether municipalities’ budgets funding was realistic and there was still poor asset management reflected in the quality of maintenance of existing assets as well as in the under spending of the capital expenditure budgets.

Managing finances to deliver core services
Mr Jan Hattingh, Chief Director: Local Government Budget Analysis, National Treasury, said Local Government was taking a larger share of national revenue. Municipalities were faced with a crisis in credibility. Only 30-34% of people had trust in them and this was reflected in the service delivery protests that had occurred. Municipalities needed to concentrate on their priority functions. The fiscal and financial framework of municipalities meant they did not only receive money from national but could also generate their own revenue. Rates and taxes were a large and important source of revenue and accounted for 75% of the budget. Surpluses could be used to fund capital expenditure budgets. The key issue was the management of finances to deliver core services. At municipal level revenue was being lost due to a lack of fiscal effort which was estimated to be around R100 million. In addition municipalities had underspent on  capital budgets by R17.8 billion. Municipalities were important role players in the economy and there was a need to get the 27 largest cities functioning efficiently as they contributed 80% of the gross domestic product (GDP). In addition, local government accounted for 15.9% of the public sector infrastructure expenditure. Challenges facing municipalities were their reliance on grants, the fact that municipalities were contributing less and less to capital expenditure, that some services were under-priced, and that old infrastructure posed a threat to municipal revenues, which would stop were they to break down.

Accounting
Mr Conrad Barberton, Director: Local Government Budget Analysis, National Treasury, said a challenge to municipalities was to develop standardised accounts. 46 municipalities had not handed in accounting reports due and the integrity of municipalities billing information was questionable. Another fiscal challenge was to improve municipalities funding as most municipalities produced budgets that could not be implemented due to a lack of funding.

Funding
Mr Tebogo Motsoane, Senior Economist, National Treasury, said it was important, therefore, to develop access to private funding as national grants alone would not be enough. Municipalities had been borrowing from the private sector since 2009. Borrowings had increased from R18.7 billion to R38.1 billion between 2005 and 2010. Secondary cities had borrowed R2.1 billion.  The Development Bank of Southern Africa (DBSA) had provided loans to municipalities but had driven out INCA  (which was the trading name
 of the Infrastructure Finance Corporation Limited),
 which had supplied private finance, so the role of the DBSA had to be revisited. Other sources of funding were for land developers to be billed for the development charges so that the cost of new infrastructure was paid by those who benefited from them. Land based funding strategies included land sales, leasing, land swops, private public partnerships and using land as a security. The Government had passed measures to provide the scope for municipalities to borrow because national and provincial governments could not loan to municipalities. Municipalities had no idea how much to borrow to address backlogs. The DBSA’s role had to be one of providing loans to municipalities who were not creditworthy while the rest could access the private sector to borrow.

Staffing
National Treasury said personnel expenditure had increased from R30 billion to R46.7 billion, a 52.5% growth which was not reflected in the growth in staff numbers amounting to only 4%. This was indicative of the cost per employee rising. Vacancies were around 21-23% which therefore necessitated the use of consultants. Municipalities were not getting value for money from the high personnel costs. The poor performance of staff was an indicator of poor governance. In 2009, 22% of municipal managers did not have performance agreements and where there were agreements, this was not properly evaluated.

Service delivery
National Treasury said access to water and sanitation had both increased by 7% while access to free basic services had dropped as some municipalities had withdrawn the benefit from those who could afford to pay. Water expenditure had increased from R8.4 billion to R35.8 billion between 2006/7 and 20012/13 while capital expenditure had increased by 114% between 2006/7 and 2009/10. The challenges for municipalities were concerns over water scarcity, quality and availability. Only 26 municipalities had been given Blue Drop status for the quality of its tap water while 75% of sewerage treatment plants did not receive Green Drop status. In addition, 36% of water was lost to leakage and theft and was thus lost revenue and represented a challenge namely, the maintenance of the existing water reticulation infrastructure.

Access to electricity had improved and capital expenditure had increased while revenues had also increased due to the 20% annual increases in electricity tariffs. There was concern however that budgeted capital expenditure was declining. Municipalities had greater certainty now that the decision not to continue with Regional Electricity Distributors (REDS) had been taken. Electricity revenue would be challenged as the cost of electricity would increase to over four times its current price in the coming years.

Roads
National Treasury said municipalities tended to focus on new infrastructure instead of on maintenance. The norm was for 60% of expenditure to be on maintenance and 40% on new infrastructure. This was a big challenge as maintenance was seen as being discretionary expenditure. Another challenge was the loss of key skilled technical staff and the need to integrate housing developments with transport. Between 2006 and 2009 there had been large increases in road investment expenditure because of the World Cup but since then only the Nelson Mandela Bay municipality had attempted to maintain roads expenditure, all others had declined.

Municipal services
Mr Motsoane said there had been increased access to sanitation services and there were employment opportunities in the waste removal and recycling fields. The majority of small towns and rural areas had backlogs of water and sanitation services. There was therefore a need to assist in the provision of municipal infrastructure and the Department of Performance, Monitoring and Evaluation was working with institutions to develop catalytic partnerships. As national grants were not enough, there needed to be fiscal effort by municipalities to raise its own revenues.

Cities
Mr Barberton said a World Bank report estimated that 71% of the population were living in the cities, 7.8 million more than in 2007 and that 80% of economic activity took place in the 27 largest cities. There was a need to change the spatial development patterns of the past which was not only rooted in apartheid but also placed a strain on transport demand. The housing development policies aimed to build in the city centre where land was most expensive and therefore fewer houses could be built.  Challenges that needed to be addressed through policy were spatial planning integration. Communities could be built with economic activity close by. Responsibility for land zoning had to vest with the city. There was a need to look at the devolution of housing and transport down to city level and to expand the revenue base of municipalities and strengthen the collection of revenues.

Uses of the review
Mr Hattingh said that the review contained data and analysis which provided the basis for legislative oversight and thus could be a useful tool to the Committee.

Discussion
Co-Chairperson Tsenoli said that there was something missing in the report, that it did not go into sufficient detail on the responsibilities of other parts of Government because, although it was a turnaround strategy for Local Government, other spheres of Government could not be ignored. He said the historical underfunding of Local Government was the reason for the problems it had today. He added that the report did not address the “greenness” of sustainable services.

Mr Brown replied that the criticism was valid and that maybe a chapter in Inter Governmental Relations should have been included. He said the former homelands’ level of capital expenditure had increased by 39%. It was not just about increasing the funding but also of targeting the funding. In rural areas there was economic activity but the problem was that revenue was not being collected. They were working with the Department of Co-operative Governance and the Department of Traditional Affairs. He said the Department of Performance, Monitoring and Evaluation could schedule another meeting with the Portfolio Committee on Co-operative Governance to go into more detail. He said the recent tornadoes on the East Rand had mostly affected the poor. The houses were not sustainable and there had been inefficient spatial development. Provinces were rendering the same kinds of services as municipalities. He said they had tried to address the “greening” of solid waste.
 
Mr M Swart (DA) said that the cash flow of the taxpayer was affected by the steep increases in electricity tariffs and would thus affect the ability of Local Government to collect funds as this revenue was likely to deteriorate. Did municipalities have the right to rescind free basic services?

Mr Brown replied that he was not sure whether municipalities were legally allowed to stop the free basic services but that it was up to municipalities to decide to do so.

Mr P Smith (IFP) said there had been massive electricity tariff increases. To what extent did the Department offer solutions? Was there a process where the Department sat down with the Department of Co-operative Governance and went through the review chapter by chapter?

Mr Brown replied that there had been general failures in the billing systems of municipalities.

Ms R Mashigo (ANC) said that the Siyenze Manje project appeared to provide intangible benefits. There had been no change in the condition of municipalities despite the huge investment (of R3 billion) in Siyenze Manje. At what level should municipalities go to the private sector banks to borrow money?

Ms W Nelson (ANC) asked what a healthy situation regarding the utilization of reserves was.

Mr Brown replied that there needed to be a right balance.  Around four to five months reserves were fine but 12 months would not be acceptable in the current economic climate.

Co-Chairperson Sogoni asked what INCA was. How could the Committees ensure that the ability-to-pay issue was addressed?

Mr Motsoane said that INCA was the Infrastructure Finance Corporation which issued bonds and lent to municipalities since 2009. But that it could not compete with the DBSA which had a competitive advantage. It had stopped trading and this had resulted in a shrinking market for borrowing funds and thus increased the price of funds. The DSBA advantage was that it could access funds for cheaper while banks were obligated by regulations to hold reserves for loans. The question was at what level municipalities should go to banks for funds. Current funding would not be enough to meet their targets. Other sources for funds were borrowing for creditworthy metros and secondary cities, private public partnerships and commercial banks.

Mr Barberton said that the tariff increases would have an impact but it was just a question of managing the impact.

Mr Brown said that urbanisation was a worldwide phenomenon and that there was a need for cities to be prepared and to manage this influx, but at the same time to be careful not to impose artificial barriers in place.

Co-Chairperson
Tsenoli said there had been a request from municipalities to consider a reduction on the over reporting that was taking place. He asked whether this could be considered for non-financial reports as well.

Mr Hattingh replied that there was an element of truth to this. The treasury would only be collecting financial management reports.

The meeting was adjourned.

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