Local Government budgets & expenditure: SA Local Government Association, Department of Public Works briefing

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Cooperative Governance and Traditional Affairs

24 October 2011
Chairperson: Mr S Tsenoli (ANC)
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Meeting Summary

Members congratulated the Chairperson on his new appointment as Deputy Minister of Rural Development and Land Reform.

The South African Local Government Association (SALGA) briefed the Committee on the payment of property rates by Government and on its engagements with the Department of Public Works (DPW). The trends in the municipal revenue were characterised by an increase in Government grants and a decrease in own revenue. Changes to the government policy included separate billing of property and service bills, and the fact that property rates were seen as the responsibility of the national and provincial Departments of Public Works whereas service charges were to be paid by the tenant departments. The implications of these policy changes on the collection of revenue by municipalities were also described. At present, many municipalities had failed to split the bills, and this resulted in delays in payment. Other challenges arose through lack of coordination and alignment of national government to property valuation rolls. A summary of the resolutions reached by MinMEC on 27 of May 2010 were listed. The presentation also described some of the operational challenges that were identified among different cities, which included devolution, invoicing and payment schedules, land audits and issues of high interests. Some of the questions from the engagement between SALGA and DPW included the possible waiver of payment on interest charges, options for rating of schools and health facilities as essential services, and a suggestion that retrospective billing be limited to three years.

The Department of Public Works then dealt with its own position. The responsibilities of the national DPW included the overseeing of the transfer of the devolution of property rate and the provision of support and training necessary for provincial Departments of Public Works. Various challenges had been experienced from implementation of the process on 1 April 2008, including delays by municipalities in generating invoices. DPW had, to counter this, adopted several strategies to assist low capacity Municipals. The other challenges included municipalities’ inefficient billing system, lack of valuation rolls, and delays in issuing invoices on properties affected by demarcations of municipal boundaries.  A pilot project was being run at eThekwini and Port St Johns, to try to reduce the debt owed to municipalities, where the DPW would reconcile its payments against the claims of the municipalities, and this had resulted in the DPW providing proof of payment, already, of 3.5 million to the municipality at Port St Johns, which had been claiming R2.7 million.

The final presentation, by SALGA, briefly outlined the comments and observations on the Local Government Budgets and Expenditure Review. SALGA considered the review to be timely and relevant for the local government political leadership. There were some improvements in the reporting by municipalities. It also appreciated that the Review did not attempt to adopt a “one size fits all” approach. However, the point was made that all policies had to be supported by the restoration of the credibility of local government through relentless promotion of ethical behaviour and service delivery. Municipalities needed assistance and support for budgeting, supply-chain management and planning capacity in order to improve on infrastructure. The assignment of additional functions for public transport and housing was welcomed, but unfunded mandates must be addressed. It was suggested that the implementation of the Municipal Property Rates Act in rural areas had little benefit, and alternatives to taxes or revenue needed to be created for rural areas. SALGA suggested that empirical studies would need to be carried out to develop frameworks that could increase the effectiveness of municipalities. National Treasury, in addition to developing an annual report, should report net rather than gross debtors.

Members were concerned that the challenges faced by poorer and smaller municipalities were not acknowledged by SALGA, and noted that one of its roles should be to alert municipalities to changes in policies. The DPW’s presentation had also not acknowledged the role played by this Committee. Members questioned the status of the land held by the Department of Rural Development and Land Reform (DRDLR), but were not satisfied with the response that budgets, not responsibility for payment of rates, were being devolved. Members expressed concerns at the slow pace of SALGA’s initiatives, asked how many municipalities had managed to successfully implement the split billing system, and how many had been paid, and called for a report on the process in eThekwini. Members pointed out that it was the responsibility of DPW to provide correct addresses for correct billing, and did not believe that the DPW should be allowed to write off the interest, as it should have raised objections during the valuation roll process. However, the DPW countered that it was not unwilling to pay, but was questioning the method used to calculate arrear interest, since in some cases municipalities had failed to bill, but when they did eventually bill, years later, they would automatically add interest, and said it would be impossible for it to check over 100 000 properties in only 30 days. The disjuncture between the billing systems was highlighted. Members asked if National Treasury had commented, asked what efforts were being made by the Department to resolve the issue of the previous homelands, and the current status of the Ingonyama Trust Board, and commented that there were still some inconsistencies in both reports. Members noted that the process for rates in the rural areas was sensitive, and said that the lack of communication had probably been the result of the entities’ failure to deal with matters properly under the Inter Governmental Relations Framework Act. SALGA claimed that it was not being kept abreast of matters, and the DPW claimed that SALGA had failed to respond to invitations to attend forums. Members noted that the major area of contestation related to the billing systems, but some thought that it might be premature to accept a new centralised model of billing, as the current system was claimed to be functional, and there was no guarantee that a new system would be any better. However, other Members asserted that the DPW itself had said that the system had major shortcomings. Members enquired about the total national and provincial property portfolio, and asked when current payments would be normalised. They were concerned that the National Council for Libraries and Information Services (NCLIS) also appeared to be at odds with SALGA, and suggested that it would be a useful to have a meeting at which all entities could set out their grievances and difficulties in alignment. SALGA should also draw a report highlighting instances where gazetted funds had not been allocated.


Meeting report

Members congratulated the Chairperson on his new appointment as Deputy Minister for Rural Development and Land Reform, and stressed that he would be sorely missed.

Property Rates briefing: South African Local Government Association
The Chairperson stated that the purpose of the meeting was to address challenges faced by municipalities in relation to rates and services. The meeting would also focus on outstanding debts owed to municipalities which, as stated in previous meetings, should decrease by 80% at the end of the financial year 2011/2012.

Mr Mayur Maganlal, Executive Director: Economic Development and Planning. South African Local Government Association, said that his presentation was part of a broader presentation made at the Budget Forum, which had focused on the challenges experienced by municipalities in collecting rates and revenue. He explained the composition of municipal revenue. This comprised of Government grants, and own revenue from consumers of municipal services. The current revenue trends were characterised by an increase in Government grants and decrease in own revenues, mainly as a result of the global economic crisis. This had placed an enormous burden on the financial viability of municipalities, and their financial performance.

Mr Maganlal noted the changes in Government policy in 2008, and the current policy treatment of Government-owned properties in respect of municipal bills. Some of these changes include property rates and service charges being billed separately. The changes have resulted in property rates being the responsibility of National and Provincial Departments of Public Works (DPW), while the service charges were the responsibility of the national or provincial line departments.

Mr Maganlal summarised the factors that had affected payments of rates and services. Key factors included the transformation of national and provincial Government structures, which in turn required the reconfiguration of the billing system into a more complex system. Ultimately the fragmented municipal policies in the treatment of national and provincial Government properties had resulted in limiting the rate ratios.

The presentation then went on to focus on the some of the resolutions between the South African Local Government Association (SALGA) and MinMEC, on 27 May 2010, to address these challenges. There were resolutions to reconcile municipal valuation rolls, a resolution that a land audit must be conducted by DPW, and that there should be an awareness campaign on the new billing and payment policy, indicating all the correct departmental contact details. Finally, there should be identification of the low capacity Municipalities, and development of action plans.

Mr Maganlal also listed some of the operational challenges identified among cities. These included devolution which involved the settling of debt prior to 2008. Challenges in invoicing and payment schedules were resolved through various strategies, including an agreement by municipalities to reflect advanced payments on their account, while the National and Provincial DPW were to suggest a one-stop delivery point to allow ease of delivery of invoices. In respect of the land audit, the main issue raised was that schools built on municipal land were not paying rates. This could be addressed by both the municipalities and provinces signing a deed of donation. In relation to high interest, it was resolved that this issue should be covered in the Municipal Credit Control Policy, but should remain reasonable.

In his conclusion, Mr Maganlal noted some key questions raised by DPW. These included the possible waiver of payments for interest charges, options for rating schools and health facilities as essential services, and the consideration that retrospective billing of municipalities should be limited to a three-year period.

Property Rates Debt: Department of Public Works briefing
Ms Cathy Motsisi, Chief Financial Officer, Department of Public Works, gave a presentation that summarised the responsibility of the National Department of Public Works (DPW), noting that this included overseeing the transfer of the devolution of property rates, provision of support and training required by the Provincial Department of Public Works. The National Department was also responsible for monitoring the performance of the grant and payment of property rates to municipalities. It also worked with the Department of Rural Development and Land Reform (DRDLR) in vesting of relevant properties in the provinces’ name. There were also financial responsibilities, as it had to submit quarterly performance reports to National Treasury and facilitate requests for additional funding.

Ms Motsisi went on to explain the challenges that had been experienced from the time that the grant had been implemented on 1 April 2008, and some interim solutions. These challenges included delays by municipalities in generating invoices. DPW had adopted several strategies to assist low-capacity municipalities. The other challenges included municipalities’ inefficient billing systems, lack of valuation rolls, and delays in issuing invoices on properties affected by demarcation of boundaries by the Municipal Demarcation Board.

She then set out the initiatives being carried out by the Task Team, which comprised of representatives of the Departments of Public Works, Cooperative Governance, and Performance Monitoring and Evaluation, to reduce the debt owed to municipalities. An action plan was being rolled out through two pilot studies, at eThekwini in KwaZulu Natal, and at Port St Johns Municipality. Some successes had been achieved at Port St Johns. The DPW had been able, through proof of payment, to validate the claims on payment that had already been made. In the initial meetings on 12 and 13 September 2011, between COGTA, the municipalities, the Eastern Cape provincial department, and National DPW, Port St Johns claimed that the DPW owed it R 2.7 million. However, the DPW was able to produce proof that it had already paid R3.557 million. The Provincial DPW was able to prove that it had made a payment of R1.279 million, out of the R3.4 million that the municipality claimed was owed.

This initiative on debt reduction was also being assisted by the call by National Treasury for the submission of schedules of outstanding debts on property rates. This process was expected to be finalised by March 2012.

Discussion
The Chairperson stated that SALGA’s presentation did not acknowledge the challenges faced by the poorer and smaller municipalities in billing Government and individual consumers. He also noted that the presentation did not emphasis the primary role of SALGA, which was to alert municipalities to changes in policy that affected them. He explained that prior to the establishment of SALGA, the Major Cities Association took on the responsibility of informing municipalities of these changes. However, this did not mean that municipal managers could simply relinquish their responsibilities, and they also needed to be aware of changes that affected their revenue streams. This was, therefore, a joint responsibility.

The Chairperson also thought that the presentation by DPW was incomplete. It did not acknowledge the role played by the Committee in raising issues, and engaging with the DPW on them, in relation to the outstanding debts of municipalities. He believed that initiatives like the pilot studies being carried out in eThekwini and Port St Johns were a result of this dialogue. He thought, therefore, that it would have been appropriate to acknowledge the role played by the Committee and Parliament.

The Chairperson asked about the legislative basis of the land held by the Department of Rural Development and Land Reform (DRDLR). Furthermore, he asked why properties in the homelands were still part of this Department.

Ms Motsisi replied that according to the Constitution and Proclamations, all communal lands belonged to the DRDLR, while the rest fell under the custodianship of the DPW. She explained that it was not the payment of property rates that was being devolved, but the budget, so that the Department could take responsibility for the payment of the rates.

The Chairperson said he was not satisfied with this response.

Ms D Nlhengethwa (ANC) expressed concern at the slow pace at which SALGA was operating. She cited as one example the steps taken after the MinMEC resolution on the land audit.

Ms Motsisi replied that the DRDLR had, in previous years, undertaken a study on the land audit. However, on completion of the process, it was noted that the process had many shortcomings, and it had then begun another process of land audits.

Ms Nlhengethwa asked how many of the total of 280 municipalities had managed to successfully implement the splitting and sorting out of the billing system.

Ms Motsisi noted that the process was currently being implemented in two pilot studies at Port St Johns and eThekwini. However, she highlighted that the provision of support by the DPW on the generation of billing and capacitating had resulted in several successes, including the Limpopo municipality, which had been able to spend 100% of its grant allocation.

Ms Nlhengethwa asked for the percentage of Municipalities that had recently been paid.

Ms Motsisi noted that the process was still ongoing, with only two municipalities having being paid.

Ms NIhengethwa asked about the outcomes of the pilot project currently underway in eThekwini.

Ms Motsisi noted that she could provide a written report highlighting the process in eThekwini to the Committee. In addition, the Department was also working on a report commissioned by Cabinet concerning the two pilot studies, and this could soon be made available.

Ms M Wenger (DA) stated that, contrary to the assertion made by DPW, it was the Department’s responsibility, and not that of the Municipalities, to provide correct addresses that would allow for correct billing.

Ms Motsisi replied that there was no attempt to push any responsibility on to the Municipalities. In fact, the DPW had conducted several forums at national and provincial level, with the assistance of SALGA, and the Municipal Line Managers, to try to assist municipalities with information sharing and to decide which would be the correct department to bill.

Ms Wenger noted that the Department should not be allowed to write off interest, but must be made to pay, just like individual consumers. Furthermore she commented that the issue raised by DPW that it was paying exorbitant interest rates should not be entertained. The Department should have objected during the valuation roll process. In future, in order to maintain consistency, a separate method of billing and payments could not be an option.

Ms Motsisi replied that the main point was not that the DPW did not want to pay money owed to municipalities, but it contested the manner in which some of the arrear interest had accrued. For example, some municipalities were backdating their invoices to when the charges should have been raised, and were claiming interest on those backdated amounts. Some other receipts were sent to the wrong departments. In such instances, it was only fair that interest claimed should not be paid. She further emphasised that the disputes over interest rates were peculiar to specific districts. For example, in the Free State, Maliyafume was being charged very high property rates compared to other districts.

Ms Motsisi added that the National DPW was custodian of over 108 000 properties. The DPW had only been given thirty days to go through the list, and this would be an impossible task.  DPW, in consultation with SALGA and National Treasury, would try to come up with a different dispensation for the Department to submit its objections. The discussions could also include proposals to waive interest payments in respect of schools and clinics, or a different dispensation for rates.

Mr Cebekhulu reiterated that over charging of Government was unfair and therefore the rates needed to be reasonable.

Mr Johann Mettler, Executive Director, SALGA, commented that there was a disjuncture in the systems allowed under the Municipal Systems Act. Section 81 of this Act allowed for the consolidation of bills. At individual level, this meant that the landowner was held accountable for bills incurred on his property, even if he did not reside on it. He added that the irony was that when it came to public property, DPW acted as if it was not bound by the same principle of consolidated billing.

The Chairperson asked what had been the response of National Treasury, in terms of the costs implications of implementing this policy.

Mr Maganlal replied that unfortunately SALGA had not discussed this dynamic with National Treasury as it was a policy decision made prior to 2008 which had been approved at the Budget Forum. Furthermore, when he raised the issue with Ms Motsisi, she also mentioned that this was something she had already found in place.

Mr Mettler added that when it came to the implementation of the Municipal Systems Act there was a serious oversight on costs. No costs analysis had been done on how much it could cost municipalities to implement the policy. SALGA had raised these concerns with COGTA at a technical level, but expected the Committee to raise the issue further.

Mr P Smith (IFP) expressed satisfaction that there was a concerted effort being made by DPW to resolve the problem of rates and debt owed to municipalities. He asked for the percentage of arrears that were being contested.

Ms Motsisi responded that the she could not provide the Committee with specific figures at the moment. The Department had just received 45 boxes of invoices from all municipalities. Only after DPW had gone through all the invoices would it be able to give an accurate response. In the case of eThekweni and Port St Johns, where this exercise had already taken place, DPW was to prepare a written report to the Committee highlighting the amounts that were contested.

Ms Wenger asked what efforts were being made by the Department to resolve the issue of the previous homelands, and what actions were being put in place to ensure that the billing of property was done to the DPW, instead of the DRDLR.

 Mr Smith asked, as a follow up to this last question, about the current status of the Ingonyama Trust Board and its challenges.

Ms Motsisi replied that the Ingonyama issue was under review at the moment. The Trust’s main challenge was that the land being reviewed fell under the custodianship of the DRDLR, so there was a question as to who must pay the rates.
The Chairperson asked if the review was being done by the court.

Ms Motsisi replied that it was being done by DRDLR. Again, she stressed that DPW was not saying it did not want to pay the property rates. However, there would be negative audit implications if DPW paid for property that was not under its own custodianship.

Ms Nelson was glad to hear that strides had been made but felt that “too little had been done, too late”. She asked for a summary report of the status of all projects at present. She felt there were inconsistencies in the reports given by the Department, in relation to the success and challenges in the Provinces.

Mr Cebekhulu indicated that slide 6 incorrectly referred to Port St Johns as being in Mthatha, which was part of his constituency.

Mr Cebekhulu asked about the rates fixing process in the rural areas, and for the basis on which they could be billed. This was a sensitive issue, as evidenced by the fact that there was caution in prescribing rates for these areas.  

Mr Smith reiterated the point made by Mr Cebekhulu. He also noted that the presentations dwelt on the DPW, and neglected to focus on how the DRDLR was to bill the rural areas, which constituted the greatest percentage of the population.

The Chairperson reiterated that the billing of communal land was a sensitive subject, and it raised strong emotions in some Members.

Mr Cebekhulu stated that the lack of strong intergovernmental relations (IGR) between the two Departments had resulted from the fact that they had not invoked the IGR Framework Act to ease the tensions.

Mr Willie Johnson, Member of National Executive Committee, SALGA, replied that the significant problem in intergovernmental relations was the lack of communication between SALGA and its counterparts, the Department of Cooperative Governance and Traditional Affairs (COGTA) and the DPW. Several forums had been established to discuss the implementation of programs without seeking SALGA’s input.

Ms Motsisi replied that SALGA had been invited to the forum hosted by COGTA in June, but it had not attended. Therefore, the DPW could not take responsibility for strengthening ties.

The Chairperson mentioned that it was obvious that there were tensions between the entities, mainly triggered by failure of each entity to take into consideration the evidence and arguments presented by the others.

Mr Maganlal added that the major point of contestation between the two Departments related to the over-burdening of the municipalities. The process of finding the right Department, the right address and splitting the bill was proving to be complex for the already over-burdened municipalities. He added that whilst, on paper, the model was simple, it was, from the point of practical implementation, riddled with challenges. He suggested that there should be mainstreaming of the billing system, to be carried out by a single department.

Mr Mettler reiterated that the splitting of the bills to DPW required the reconfiguration of the current billing system, which would be costly and complex.

Mr Smith thought that it might be premature to accept a new centralised model of billing as suggested by Mr Mayur. DPW had submitted that the current system was functional, although it did have some technical shortcomings around arrears. There was no guarantee that the proposed model would not have similar or far worse problems than the present system.

The Chairperson replied that Mr Smith seemed to have interpreted the DPW’s presentation in a favourable light. DPW itself had in fact said that the system had some major shortcomings.

Ms Motsisi reiterated the point that the current system did have some major flaws. She emphasised to the Members that the splitting of the bill into the appropriate departments at National and Provincial level was essential to guaranteeing payment. Each department handled its own payment. It was inappropriate to put all the rates on a single invoice.

Mr J Matchbox (ANC) asked for the number of national and provincial properties handled by DPW.

The Chairperson noted that some of the questions asked by the Members had already been responded to in the presentation.

Ms Motsisi stated that she appreciated the positive response given by some of the Members regarding the presentation.

Mr Smith asked when the Committee could expect normalisation of current payments, not arrears.

Ms Motsisi replied that the normalisation of payment was currently under way, but it must be remembered that interest had been accumulated even prior to 2008. Any interest incurred on current invoices at national and provincial level would be regarded as fruitless expenditure, and the individuals responsible for these would be dealt with sternly. The only acceptable excuse would be if a department had not received an invoice. At national level, the DPW was promoting the use of IE Works to pay property rates, and this system had to date been rolled out in six of the Provinces. This was the reason why the DPW could, in the case of Port St Johns, provide proof of payment. The municipality had failed to allocate the payments that had been made.

Mr Smith asked if there was an agreed cut off date from which the municipalities could backdate their payments.

Ms Motsisi replied that municipalities could have bills running back as far as ten years, and the DPW had suggested a cut-off point of three years. The rationale was that all the municipalities had been afforded an opportunity to submit their unpaid invoices before the devolution on the 1 April 2008. They had not done so, but in 2009 another opportunity was given to them again. The 45 boxes of invoices she had mentioned resulted from an intervention by National Treasury, which ruled that non submission of invoices could result in non payment of debt.

SALGA comments on the Local Government Budgets and Expenditure Review
Mr Maganlal tabled another presentation on the comments by SALGA on the Local Government Budgets and Expenditure Review. Mr Maganlal said he would only highlight the critical points in the presentation, as the other issues had already been addressed in the discussion.

He then highlighted that SALGA considered the review to be timely and relevant for the local government political leadership. Relevant data in the report revealed an improvement in the municipalities’ reporting, which could also be attributable to the frequent briefings given to the Committee. It was of the view that the review highlighted the importance of local government as a sphere at the fore front of service delivery to communities.

SALGA then turned to Chapter 2 of the review, which dealt with the socio-economic and fiscal context of local government. There had been satisfaction with the fact that differences in geographical, economic and social contexts in which municipalities operated was acknowledged, and that a “one size fits all” approach was not adopted. All these policies had to be supported by the restoration of the credibility of local government through relentless promotion of ethical behaviour and service delivery. He also stressed that municipalities needed assistance and support for budgeting, supply-chain management and planning capacity in order to improve on infrastructure.

Under Chapter 3, Intergovernmental Relations and the Local Government Fiscal Framework, the assignment of additional functions of public transport and housing was welcomed. However, Mr Maganlal emphasised the need for government to start addressing issues of unfunded mandates, which was undermining performance. Funds should be made readily made available to the municipalities when they were carrying out projects. Mr Maganlal added that the implementation of the Municipal Property Rates Act in rural areas had little benefit, due to the complexities around traditional land and a generally low tax base. Therefore alternatives to taxes or revenue needed to be created for rural areas.

SALGA felt that empirical studies must be carried out in order to develop frameworks that could increase the effectiveness of municipalities.

Under Chapter 4, which dealt with revenue and expenditure trends in local government, the key observations was that National Treasury was to develop an annual report on conditional grant spending and non financial achievements. In addition to that report, SALGA recommended, at the Budget Forum in 2010, that National Treasury should report net debtors rather than gross debtors to differentiate between the recoverable and irrecoverable debts.

The following chapters of the Review were more sectoral, and for this reason SALGA would not comment on them now.

Discussion
The Chairperson asked if the Members had received hard copies of the Review and if they had managed to read through it.

Most Members responded that they had received and read through the review.

The Chairperson expressed concern at what seemed to be a problem between SALGA and the National Council for Libraries and Information Services (NCLIS). Mr Amos Masonde, former Chairperson of SALGA, had commented that the NCLIS was not taking them seriously. He suggested that it would be useful to have a meeting at which all entities could set out their grievances and difficulties in alignment.

The Chairperson asked about the observation made by SALGA on the non allocation of gazetted funds. He suggested that SALGA should carry out an assessment report in which it should highlight the magnitude of the problem, provide case studies and reasons as to why this was happening. This report could then be discussed in the Committee, before being taken up to Parliament.

The Chairperson also reminded SALGA and DPW to take on the recommendations from the meeting, and try to achieve greater dialogue.

Finally, the Chairperson thanked Members for their congratulations on his new appointment, and said that he too would miss the Committee and Members.

The meeting was adjourned.



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