Division of Revenue Bill: National Treasury, Financial & Fiscal Commission, SA Local Government Association submissions

Standing Committee on Appropriations

28 February 2012
Chairperson: Mr E Sogoni (ANC)
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Meeting Summary

National Treasury, the Financial and Fiscal Commission (FFC) and South African Local Government Association (SALGA) commented on the Division of Revenue Bill (DoRB). National Treasury outlined the changes from the 2011 Division of Revenue Act. Section 15 was amended to provide that Parliament would have two weeks to comment on any amendments to the conditional grants framework. National Treasury and labour unions should manage and structure salary increases. Two new grants were introduced to prioritise health infrastructure. For the Expanded Public Works Programme (EPWP), it was decided that incentive payments would now be calculated on jobs created in the previous year, and it was restructured as a Schedule 6 grant for greater certainty. The conditions for infrastructure grants were tightened. Changes to section 13 required that best practice principles were applied, and guidelines of the past were now formally included in the DoRB. R7.7 billion had been added to the Local Government fiscal framework over the 2012 Medium Term Expenditure Framework, including R2.2 billion for increased basic service costs, and allowances to permit municipalities to pay a stipend to ward members. A new Infrastructure Skills Development Grant (ISDG) would be administered by National Treasury and was intended to increase the pool of qualified engineers and scientists working in municipalities. The Electricity Demand Side Management grant would be extended for three years, and the Solar Water Heater programme would be implemented by Eskom. National Treasury indicated that government supported most of the recommendations of the FFC. The role of local government in relation to climate change still had to be determined. It was too early to analyse local government revenue and expenditure. National Treasury did not support recommendations on increasing performance in basic health and education.

Members asked about the meaning of a “grant in kind”, “direct and indirect transfers”, and how capacity issues would be tackled. They enquired as to the difference between the ISDG and Project Consolidate, asked about the “savings” of R279 million, who would decide on municipal councillor stipends, and the steps to be followed before interventions in terms of section 100 of the Constitution were made.
They queried how the consultative process would work, whether massive infrastructure development would be implemented, and questioned the degree of monitoring and evaluation and accreditation. These questions were largely unanswered, because the Committee engaged in debate on the fact that Section 32 provincial and national Reports had not been provided, which hindered the Committee in its work, and criticised National Treasury for its failure to attend to important issues. National Treasury conceded that the provincial reports would be sent by the end of the week, and the national reports by 10 March.
The FFC was critical of the amendment requiring Parliament to be consulted prior to amendments of conditional grants, saying this was indicative of poor grant design, and suggesting that Parliamentary intervention should be limited to chronic or serial failures. There should be more rigorous assessment of the grants before they were tabled. Interventions in terms of section 100 of the Constitution were very important. The FFC set out some comparative figures and noted that some provinces were still overspending, which had severe implications for the conditional grants. The Expanded Public Works Programme was not working, and there was insufficient reporting on it. FFC suggested that since R5.3 billion had gone on local government personnel costs, an audit was required to identify “ghost” or duplicate personnel. There was a need to rethink the funding framework, to address budget overruns and violations of legislation, and to assign responsibility for poor performance. The Municipal Infrastructure Support Agency (MISA) needed governance structures. FFC would track key fiscal indicators of distress to warn departments of possible failures, so that section 100 interventions could be avoided. Although infrastructure was being addressed, there was a lack of coordinated reporting. Members commented that there was insufficient spending on maintenance and repairs, noted that there was nothing said about agriculture and land reform, noted the lack of clarity over scholar transport and road maintenance obligations on some roads, and asked what suggestions were made to improve the EPWP, and MISA.  

SALGA noted that there was still a funding gap for municipalities, because increases had been made to a very low baseline. In addition, ad hoc national policies and legislation, coupled with increased electricity tariffs and rates ratios, constrained revenue sustainability. Construction industry costs and bulk infrastructure had both risen out of proportion and there was little understanding of the adjustments to the local government grants. SALGA welcomed the introduction of the ISDG and the district management grants. There was a need for transparency in how the equitable share was calculated. It noted that SALGA’s interaction in the budget process occurred too late. Members commented that lack of maintenance on solar panel projects hindered their effectiveness and asked about SALGA’s role in maintenance, and its role in coordinating disaster funds. They questioned whether SALGA addressed the fact that national and provincial departments failed to pay some accounts and rates, asked what SALGA did to address uptake and use of the neighbourhood development grants, and what monitoring mechanisms were in place. Members also commented on the number of acting managers in municipalities, and questioned if the targets to achieve clean municipal audits by 2014 would be reached.

Meeting report

Opening remarks
The Chairperson expressed the Committee’s displeasure at the fact that Dr Keith Brown, Deputy Director General of National Treasury, was not at the meeting and had not tendered a formal apology. He also noted the absence of the Department of Cooperative Government and Traditional Affairs (COGTA) from the meeting.  
Division of Revenue Bill (DoRB): National Treasury briefing
Ms Wendy Fanoe, Chief Director: Inter-governmental Relations: National Treasury, noted that her presentation would include comments on the changes that had been effected from the 2011 Division of Revenue Act (DORA), responses to the Standing and Select Committees on Appropriations and to the proposals of the Finance and Fiscal Commission (FFC). She would also speak to provincial and local government allocations and some of the recommendations of the previous year which had an impact on the budget.
The Committee’s recommendation that 15% of the Municipal Infrastructure Grant (MIG) be ring fenced for Municipal Sport was now implemented in the conditional grant framework. It would be continued in 2012/13, and a possible new and separate grant for 2013 would be explored by the Department of Sport and Recreation.
The report on forensic pathology, which was being phased into the Provincial Equitable Share (PES) over a three year period, had been submitted to Parliament. This followed the Committee’s recommendation that National Treasury (NT) should provide a detailed report on all grants being phased out.
Section 15 had been amended to give Parliament two weeks to comment on any amendments to the conditional grants framework, in line with the Committee’s recommendation that Parliament needed to be consulted.
The Minister had noted and supported the recommendation that National Treasury and labour unions should manage and structure salary increases.
There had been two new grants introduced to prioritise Health Infrastructure, following the Committee’s recommendation, and these were The Nursing Colleges and Schools grant and a National Health Insurance (NHI) grant, for the commencement of a pilot project.
There had been three significant changes to the 2011 Division of Revenue Bill (DoRB). Firstly, because the Expanded Public Works Programme (EPWP) spending had been low, the in-year calculations would fall away and instead the incentive payments for jobs created would be calculated on jobs created the previous year.
Secondly, Parliament had to be consulted when changes to the conditional frameworks grant was considered. Thirdly, the conditions for infrastructure grants were tightened. New provisions for Section 13 would demand that best practice principles be applied, for instance, that sufficient staff must be made available, and some of the past guidelines were now included as a formal part of the Bill.

Ms Fanoe noted that some inclusions in the 2011 DoRB would fall away, because they were no longer necessary, such as the Gautrain-related grants.

Ms Fanoe then proceeded to outline some of the differences in the allocations. Local Government had received 7.8% in 2008/9, increasing to 9% in 2014/15. National Departments had decreased from 49.7% to 47.6% over the same period. An additional R19.4 billion was added to the provincial fiscal framework over the 2012 Medium Term Expenditure Framework (MTEF). The Provincial Equitable Share increased by R14.9 billion.
Mr Steven Kenyon, Senior Economist, National Treasury, expanded on the Local Government Fiscal Framework. R7.7 billion had been added to the Local Government fiscal framework over the 2012 MTEF framework. Of this, R2.2 billion related to increased basic services costs, which included R1.2 billion to allow lower grade municipalities to pay a stipend to ward members and subsidise their councillor’s salaries. This subsidy would increase from 80% in 2012/13 to 90% in 2014/15. R3.1 billion was added to direct conditional grants and R2.4 billion to indirect conditional grants. There had been a savings of R279 million in respect of conditional grants. There had been a growth in infrastructure spending from R20 billion to R34 billion.  
Mr Kenyon noted the changes to conditional grants.

A new grant, the Infrastructure Skills Development Grant (ISDG), administered by NT, aimed to increase the pool of qualified engineers and scientists working in municipalities. After a two year internship, and after meeting board requirements, interns were sent to poorly capacitated municipalities to complete their internship.
The Expanded Public Works Programme (EPWP) was now included as Schedule 6 of MIG, which provided more certainty to allow municipalities to plan better. Allocations would be based on past performance, a reward incentive, the potential to create jobs and the rural factor.
The Electricity Demand Side Management grant would be extended for three years because of the importance of promoting energy efficiency. The Solar Water Heater (SWH) programme would now be implemented by Eskom.
Mr Kenyon noted that R281 million had been shifted from the Financial Management Grant to the ISDG.
Mr Kenyon then moved on to note that Government supported all but the last three recommendations of the Financial and Fiscal Commission (FFC). Recommendations on environmental sustainability and climate change in local government were still under consideration. NT believed that unless incentive grants were structured correctly, they would not work. NT suggested that there was still a need to determine the role of local government regarding climate change. Municipalities needed to attend to the basics in the correct way, and then create an incentive scheme around that.
He said that it was too early to undertake an analysis of local government revenue and expenditure. The benchmarking exercise was technical, and did not replace formal budget processes. This could be reviewed in the medium to long term.
NT did not support the FFC’s recommendation on exploring issues to increase performance in basic health and education. Personnel costs came through the Provincial Equitable Share, especially for health and education.
Mr Neels van Rooyen, Chairperson of the Public Accounts Committee, Free State Provincial Legislature, asked what was meant by a “grant in kind”.
Ms R Mashigo (ANC) asked what was meant by “direct and indirect transfers”.

Mr L Ramatlakane (COPE) asked what informed the decision to allocate R700m for mud schools.

Ms Fanoe replied that page 166 of DoRB gave a breakdown of each allocation for the energy grants, and that page 197 gave the municipal allocations. She outlined the differences between a grant-in-kind and a direct grant. When receiving a direct grant, the province or municipality was responsible for the actions to be undertaken, whereas a grant in kind was given where the national sphere was responsible for the establishment of the infrastructure or asset, and then transferred it to the municipality or province.
She said many grants had been made available, but that educational backlogs had not been addressed, so indirect grants were established to fast track historical imbalances. Government was seeking to eradicate the 395 mud schools, and address the 1 434 schools without electricity, the 536 schools without sanitation, and the 1 307 schools without water. The data was derived from a study undertaken by the Department of Basic Education (DBE). The allocation in 2012, which went mainly to the Eastern Cape, was for R1.5 billion and this would rise to R4.6 billion in 2014.

Mr M Mbili (ANC) asked what informed the figure of R235 million (in slide 7) and how would the capacity issues (mentioned in slide 8) be tackled.

Mr Mbili asked how ISDG differed from Project Consolidate, and asked if the new grant was running in parallel with Project Consolidate, or whether the latter was to be phased out.

Mr Mbili questioned the “savings” of R279 million, asking if this related to money allocated but not spent.

Mr Mbili asked who decided on municipal councillor stipends.
Ms L Yengeni (ANC) asked what intervention measures were taken by the departments to assist before Section 100 was implemented.
Ms Yengeni asked for a practical example of how the consultation period with Parliament would be put in place, and when the two-week period would begin and end.

Mr J Gelderblom (ANC) asked what guarantee of local government success there would be with respect to implementing the massive infrastructure developments, and whether there were monitoring and evaluation control mechanisms in place.

Mr Gelderblom asked whether NT foresaw any problems with the National Health Insurance.
The Chairperson asked what the situation was regarding the accreditation of municipalities, which municipalities had been graded, and what grades they had achieved. He was not happy that NT could withhold or stop funds.
The Chairperson then said that the Committee had not received the Section 32 reports to date, despite the fact that it was already the end of February, and this made it very difficult for the Committee to comment on grants for school infrastructure. He added that the rural infrastructure grant was being phased into the Municipal Infrastructure Grant (MIG). He did not agree with National Treasury on this issue, as it appeared that a focussed grant was not performing and was now being integrated somewhere else.
Ms Yengeni wanted to know what informed the R1.5 billion in-kind allocation to the Eastern Cape (set out on page 48 of DoRB).
Mr van Rooyen felt that the DoRB was very contradictory. The DoRB suggested that provinces had to have capacity yet, as was clear from the instances of under-spending, provinces did not in fact have capacity.

Ms Yengeni asked at what stage NT implemented Section 100.
The Chairperson added that there were challenges in the Eastern Cape, where an intervention in terms of Section 100 of the Constitution had been instituted. It was therefore all the more important that this Committee should get the Section 32 report from National Treasury, to enable the Committee to know how far the provinces were on their infrastructure expenditure, in order to approve the DoRB. No apologies had been tendered for the absence of the report.
Ms Yengeni agreed that the lack of a Section 32 report was undermining the Committee.
Mr Ramatlakane asked where the report was, when it would be received by the Committee, and for an indication of the capacity of the other provinces.
Ms Fanoe said that National Treasury did not prescribe whether a Department had capacity, but the Department itself decided on this issue. She mentioned that the Section 32 reports had been published on 30 January, and copies would be made available shortly.
The Chairperson said that he had followed up to try to get both the national and provincial Section 32 reports. He knew there was under-spending but he did not know how far this went.
Ms Fanoe noted that Departments were responsible for conditional grants, not National Treasury. It had been suggested that section 100 should be linked to section 10, so the national departments would monitor and evaluate.
Mr van Rooyen said that in terms of section 10, the Accounting Officer of the national department had to present a framework, within 14 days after the approval of the Division of Revenue Act. The Committee was now being asked to approve something that would only be finalised 14 days later.
Ms Fanoe noted that the grants were for a period of three years, and that the DoRB was approved only at the end of April.
Mr Ramatlakane felt that, in the absence of the Section 32 report, the Committee could not move beyond the current discussion.
The Chairperson said that the National Treasury’s responses were not helping the Committee. National Treasury itself had grants that it had not spent.
Ms Yengeni asked that a copy of the Section 32 report be made available to the Committee before the following day, when it was due to meet with other departments. She felt that National Treasury itself should come under closer scrutiny.
Division of Revenue Bill: Financial and Fiscal Commission (FFC) briefing
Mr Bongani Khumalo, Acting Chairperson,
Financial and Fiscal Commission, said his briefing would cover the Financial and Fiscal Commission (FFC) comments on DoRB in relation to both provincial and municipal fiscal frameworks, and government’s response to those recommendations.
The FFC believed that the fact that Parliament had to be consulted prior to amendments to conditional grants was indicative of poor grant design. Parliament’s intervention should only be necessary in cases of chronic or serial failures. There had to be more rigorous assessment of the grants before they were tabled. He said that the Section 100 interventions were a very important issue.
Ms Tanya Ajam, Researcher, FFC, repeated that the amendment that required Parliament to be consulted when changes were made to the conditional grants should relate only to major concerns like chronic serial failure, major deviations or material deviations. The FFC instead suggested a graduated approach, which included a threshold as to when Parliament needed to be consulted. She later added a comment that the terminology was unclear in relation to how the major issues should be handled, and the status of annexures had to be clarified.

Mr Vincent Makinta, Manager: Intergovernmental Fiscal Relations and Data, FFC, noted that the Division of Revenue would rise to R1 trillion by the end of the Medium Term Expenditure Framework (MTEF). For 2012/13, an additional amount of R8,6 billion had been allocated. The revenue estimates were slightly higher, a 10% increase. Provinces would receive an additional R19.4 billion. Personnel costs would account for 70% of the R3.3 billion set aside. There were still challenges around underspending by provinces; for example, the projects in the Eastern Cape would be overspent by R40 billion and raised a challenge to conditional grants. The EPWP was not working and there was no reporting on its achievements. The Further Education and Training grant had been moved to a national level, without consultation. An adjusted R5.3 billion of local government spending went on personnel. He suggested that government might have to run a complete audit to find “ghost” personnel and double payments.

Mr Mkhululi Ncube, Manager, FFC, said there was a need to rethink the funding framework. The Municipal Infrastructure Support Agency (MISA) needed governance structures and an oversight group.
Mr Khumalo summarised that areas of concern were personnel budget overruns, the numerous violations of the law, the fact that some grants were perennially underperforming, and no action was taken about these, even though the national departments had responsibilities. The FFC would be tracking key fiscal indicators of distress that provided an early warning system, in order to warn departments of potential areas of failure and prevent government having to resort to Section 100 interventions. Government had taken positive steps to improve the infrastructure of the country, but there was still lack of coordinated reporting.
Mr M Swart (DA) said that not enough was spent on maintenance and repairs.

Ms Ajam agreed that there was inadequate expenditure on day-to-day maintenance and that these deferments of maintenance eventually led to the need for rehabilitation that cost much more than the original repairs. There had to be intervention to ensure maintenance. The Municipal Financial Management Act (MFMA) had clauses to compel monitoring of indicators but the Public Financial Management Act (PFMA) did not have that detail.
Mr van Rooyen said that reports of unauthorised expenditure could not just simply be ignored.

Ms Ajam replied that personnel appointments were based on organograms, and too often, over-expenditure was being driven by appointments that were not funded, or salary increases like the Occupation Specific Dispensation (OSD) that had been badly handled. There were not sufficient good Human Resource (HR) information systems. The benchmark was the norms and standards for a service. The paradox of having vacancies while still showing over expenditure was prevalent, because most vacancies were for scarce skills, and it was more important to get the right mix than to simply fill posts.

Mr van Rooyen did not believe that municipalities would achieve clean audits by the targeted date of 2014.
Mr Mbili said the EPWP had not succeeded. The aim to create 5 million jobs by 2020 had been linked to the EPWP, and if it was not living up to its intended aim, then he questioned how that target would be reached. He asked what the FFC suggested by way of doing things differently. He also thought the Section 100 interventions had to be revisited.

Mr Khumalo replied that national legislation was needed around Section 100 interventions. Many shareholders had asked for the FFC’s views.

Mr Gelderblom commented that the presentation did not touch on agriculture and land reform.

Mr Khumalo acknowledged this point.

Ms Mashigo said there was still a lack of clarity over who was responsible for certain roads and transport in the country.

Mr Khumalo noted, in regard to scholar transport, that the Departments of Basic Education and Transport should be reporting back in a more direct manner. In regard to classification of roads, he said that FFC had long taken the stance that the roads must be classified, because the absence of this led to neither provincial nor municipal departments wanting to invest in road maintenance, because they were not sure if this was a funded mandate.

Mr Ramatlakane wanted to know why the FFC had given only a “cautious” welcome to the introduction of the MISA.  
Mr Khumalo said that the term “cautiously” was used as the Municipal Infrastructure Support Agency (MISA) was on an offshoot of Siyenza Manje. Siyenza Manje had a track record, and had been evaluated, and a number of issues needed to be resolved if MISA was to be the replacement programme. The focus of the programme was on capacity building, even though MISA was targeting the poorer municipalities. There were issue around how to coordinate municipalities via provincial bodies.

Ms Yengeni noted that copies of second-quarter performance reports were circulated. She asked for an assurance that the Committee would receive the third quarter reports (to end December 2011) from NT for both the national and provincial departments. 
Division of Revenue Bill: South African Local Government Association (SALGA) briefing
Mr Subesh Pillay, Chairperson: Finance Working Group, SALGA, said there was still a funding gap for municipalities. There had been significant growth of 2% in the municipal budget but this was an increase from a low base. The estimated capital funding requirement for the period 2011 to 2020 was R800 billion.
Ad hoc national policies, and legislative amendments (such as the introduction of the Administrative
Adjudication of Road Traffic Offences Act), increased electricity tariffs and rates ratios placed constraints on revenue sustainability. In addition, construction industry costs had increased by 47% in five years, whilst bulk services costs had increased by 25%. The adjustments to the local government grants were not fully understood, as tables were complicated and no explanations were given why baseline grants were reduced. SALGA welcomed the introduction of the ISDG and the district management grants.  
There was a need for transparency in how the equitable share was calculated. There was a mismatch between local government increases and Eskom Bulk Tariff price increases, and there was no definition of “the indigent”.
The integrated EPWP grant for municipalities had changed from a Schedule 8 to a Schedule 6 grant, resulting in the allocation being based on the amount of jobs created in the previous year. If a municipality created more jobs, it would be constrained by cash flow. He pointed out that municipalities would have to fund programmes upfront. This would result in municipalities targeting only the same amount of jobs as they had in the previous year.

Finally, he complained that SALGA’s interaction in the budget process took place far too late. All municipalities needed to be made aware of what was available; even the larger metros were not accessing all the grants that were available.  
Mr Gelderblom said the solar panel projects were not working because there was no maintenance, and enquired what role SALGA played in regard to maintenance contracts.

Mr Pillay noted that the green economy, including the solar panels, had great potential to create jobs.

Mr Gelderblom asked what SALGA did to address coordination issues with Disaster Funds, and how it interacted with the relevant departments.

Mr Gelderblom wanted to know how SALGA was addressing the issue of national and provincial government’s failure to pay outstanding property rates.

Mr van Rooyen said the seven day credit policy of Eskom to municipalities were unfair.
Ms Mashigo asked what SALGA had done to address the uptake and usage of the neighbourhood grant.

Mr Pillay stated that SALGA published a comprehensive brochure on grants.
Mr Mbili asked what monitoring mechanism was in place to see that there was adherence to Municipal Finance Management Act (MFMA) controls.

Mr Mbili asked if Project Consolidate had delivered its intended output and whether there were gaps. He also enquired about the differences between the IDSP and Project Consolidate.

Mr Pillay outlined that SALGA was a partner in Siyenza Manje, but that this followed a rapid path, whereas the new programme was focusing on financial management, which would be a slow and gradual approach, and differed from Project Consolidate in its viability. He said National Treasury needed to consult with SALGA so get a better idea of municipalities’ capacity.
Mr Mbili noted that virtually all municipalities had “acting” managers in place, and asked what SALGA was doing to address this.

Mr Pillay said that SALGA relied on the Department of Cooperative Governance and Traditional Affairs and other departments, and that there was a lag in capacity building. He said staff turnover was relatively stable but that the real issues were deficit in key posts and staff fluidity.

Mr Mbili said that only three out of 61 KwaZulu-Natal municipalities received a clean audit report, and he asked if SALGA thought that “Operation Clean Audit” would be able to achieve its targets by 2014. He also asked where the major bottlenecks lay, pointing out that local government was the coalface of government delivery.
Mr Pillay agreed that the Operation Clean Audit outcome of clean audits by 2014 would not be met.

The Chairperson said that due to time constraints all other questions had to be answered in writing.
Ms Yengeni commented that the documentation received from National Treasury was not sufficient, and commented that it seemed that NT was not ready to make a full presentation.

Mr Kenyon acknowledged that the documents were not available, but assured her that the Section 32 provincial report would be given by the end of the week and the national report by 10 March.

The meeting was adjourned.


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