Financial & Fiscal Commission Report on Local Government & Housing Public Hearings & recommendations

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Cooperative Governance and Traditional Affairs

08 May 2012
Chairperson: Ms D Nlhengethwa (ANC)
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Meeting Summary

The Financial and Fiscal Commission (FFC) tabled and presented its Report on the hearings it had recently held on Local Government and on Housing. These hearings took submissions, and allowed for discussion with a number of stakeholders, and the FFC had then formulated recommendations that were to be discussed in further public hearings in June.

In respect of Local Government, the FFC had, amongst others, considered the Local Government Fiscal Framework, the
Local Government Equitable Share and Local Government Equitable Formula as key areas. It was emphasised that the LGFF had to be sensitive to the differing needs of rural and urban municipalities, and take account of the constant changes caused by migration patterns and other factors. Local Government should complement National Government’s wide initiatives to review the fiscal framework. The stakeholders who were invited were summarised, and key questions raised included whether the local formula and frameworks were adequate, what the hindrances to appropriate funding of municipalities were, and whether the current legislative framework was impacting negatively or positively on municipal performance. Views on the Local Equitable Share included the need for a review of vertical and horizontal division of revenue, a need to review all formula components, and to update data. It was also stressed that this should be seen as an unconditional equalisation grant that needed to be dynamic, and a number of research gaps were identified, including the costing of basic services, the poor understanding of fiscal capacity and fiscal effort, the impact of the demarcation process, the allocations and design of the fuel sharing levy, and the need to review the regulatory framework for municipal tariff setting, to understand the cost of reporting compliance, and the need to optimise property rates revenues.

The Housing public hearings had examined the challenges in the housing delivery system and financing model, and noted substantial mismatches between growing demand and supply capability. Concerns were expressed on the rising housing backlog, insufficient delivery, the barriers in the delivery chain, ranging from availability of land to the lack of registration of ownership at the Deeds Office. There were also concerns about quality, location, fairness, the challenges in obtaining finance and problems of informal settlements. Stakeholders agreed that although local and provincial government had the flexibility to adapt housing policy and plans they still perceived themselves as being bound to a “one size fits all” approach. Legislative and administrative barriers in the housing market included limited accreditation of municipalities to perform housing functions, metros not being permitted to use own revenues as bridging finance for low-income housing developments, and insufficient bridging finance being provided by the D
evelopment Finance Institutions. The needs of lower income households were not met, and this was worsened by non-availability of credit and the distortionary effect of the subsidy gap market.   Once again, poor data and understanding of the issues was a problem. More than 51% of subsidy houses were not registered at the Deeds Office and although there was 70 000 hectares of state-owned land identified for housing developments, none had been made available.

Members of the Committee asked why traditional leaders were not invited to give their input, which the FFC conceded seemed to have been an oversight, asked what was being done in the rural areas and noted the FFC’s insistence that they should receive more consideration, and questioned the comments on property rates. They also asked about the criteria on RDP houses, how the problem in the Deeds Office and with the Surveyor-General was to be addressed, called for further breakdowns on the state land and occupation of RDP houses, asked about devolution of powers and functions, and whether it was mandatory to use a set portion of the Municipal Infrastructure Grant for maintenance purposes.

The Committee adopted three sets of minutes.

Meeting report

Financial and Fiscal Commission Report on Local Government and Housing Public Hearings
Mr Bongani Khumalo, Chairperson, Financial and Fiscal Commission, noted that the Financial and Fiscal Commission (FFC or the Commission) had put together two reports arising from public hearings, detailing the topical issues with which Government was faced. He pointed out that, in the area of local government, the focus over the last five years had been on outcomes that spoke to service delivery. The FFC had taken note of several debates about service delivery, service delivery protests and discussions about what was wrong with the local government sphere and the local government fiscal framework. Questions were raised as to whether the local government equitable formula was appropriate, as also whether there should be a different formula for district municipalities, as opposed to the one for cities and metros.

Mr Khumalo noted that the FFC, in trying to come up with solutions to those challenges, had embarked upon an initiative to engage with stakeholders and look at perceptions, views and facts on the ground. FFC had specifically chosen to look at the fiscal framework of Local Government because primarily that was where its mandate was grounded, and the Local Government Equitable Share and Local Government Equitable Formula were key areas of intervention in the system by the FFC. The context of the public hearings was to generate
research and recommendations, through comprehensive and extensive public hearing processes, and then develop recommendations through a process of partnerships and interactions with the role players in the system to complement the broader work and mandate of the Commission. The advantage of the public hearings was that it allowed for better interaction, and therefore a better understanding by FFC of the needs of key stakeholders, as well as allowing for all ideas and viewpoints to be debated, and to obtain a consensus from all stakeholders on policy and research issues.

Mr Khumalo outlined the findings on the Local Government Fiscal Framework (LGFF), emphasising that it was important to note that the Local Government (LG) sphere was continuously evolving, so the LGFF needed to be robust to cater for these changing needs. The LGFF had to be sensitive to various needs of municipalities, in both the urban and rural dimension, and had to balance urban built-environment needs with rural development needs of rural municipalities. It must also take account of increasing urbanisation, increasing devolution of powers and functions, poor municipal expenditure and revenue performance, an lack of coordination and support between and within the spheres of Government. The LG should complement National Government’s wide initiatives to review LGFF.

At the first public hearings, the FFC had compiled a problem statement discussion document and presented a retrospective overview of LGFF, which highlighted key issues for debate. All stakeholders were requested to present their own views on the LGFF, to suggest methods to improve it and to try to reach consensus on set of research questions and the general problem statement. The FFC had then undertaken research on issues raised, and a second set of public hearings were to be held
in 2012.

The first set of hearings was jointly hosted by the FFC and the Limpopo Provincial Government, and were held in Polokwane on 3 to 4 October 2011. On the first day, presentations were given that offered national, provincial and municipal views and laid out the funding constraints faced by different municipalities. On the second day of public hearings there were breakaway groups who engaged in discussions that focused on the Local Government Equitable Share (LES) and conditional grants, municipal own revenues, intergovernmental fiscal coordination, and differentiation of municipalities. The stakeholders had included national, provincial and local departments, National Treasury, South African Local Government Association (SALGA), Metros, district and smaller or rural municipalities, Members of Parliament, Members of Provincial Governments, Councillors, academics, World Bank representatives and the Public Service Commission.

Mr Khumalo noted some of the key questions that were asked, including whether the current LGFF was catering for the needs of all municipalities in the country, given their unique characteristics, what factors inherent in the current policy and fiscal environment hindered appropriate funding of municipalities, an whether the current legislative framework governing local government fiscal matters was impacting negatively or positively on municipal performance. Furthermore, there was discussion on what issues in LG and IGFR systems weakened the performance of municipalities, whether the fiscal framework achieved an appropriate balance between equity concerns and promotion of good governance, an whether the current revenue instruments afforded to municipalities were sufficient, well designed and appropriately implemented. Questions were also raised on whether the current LGFF was robust and dynamic to cater for evolving sphere, what other aspects should be catered for in LGFF; and what changes or improvements should be factored in LGFF.

The stakeholder response on issues around the LGFF was that they agreed upon principles of differentiation but the basis was contested. The views on the LES included a call for a review of the vertical and horizontal division of revenue, the need to conduct a transparent review of all LES formula components, an the need to update data for improved insight into demographic profile of municipalities.
The views on conditional grants highlighted challenges associated with a plethora of conditional grants, the need to find capacity and support to accompany conditional grant allocations where necessary, and the need for recognizing and rewarding performance. The views on municipal own revenues looked at a fair evaluation of financial constraints in both urban and rural areas, the need to review true own-revenue sources and their regulation, and the necessity to have a social compact over service delivery.

Mr Khumalo concluded by highlighting views of stakeholders on other issues. The LG challenges required a government-wide response. The LGFF review should be informed by a review of the institutional framework. It must be recognised that municipalities were facing increasing cost pressures.

Mr Jugal Mahabir, Researcher, FFC, noted that the guiding principles behind FFC research were based on reaching a better understanding of dynamics between fiscal capacity and fiscal effort needs to inform any revision of the fiscal framework. The LGFF should ensure that incentives created in the IGFR system were compatible with policy intent. The fiscal criteria for re-demarcation should be clarified. The design of a new LGFF should be predicated on a clear understanding of redistributive and growth enhancing roles of local government.

Mr Mahabir noted that the core dimension of LES as an unconditional equalisation grant needed to be dynamic, that allocations needed to be adequate and sensitive to powers and functions, expenditure needs, revenue adequacy and cost disabilities. LES should be aligned with developmental role of LG in addition to the Constitutional requirements. The backlogs should be taken into account explicitly when determining the LGFF.

Mr Mahabir noted that the gaps that were identified in the research included costing of basic services, understanding fiscal capacity and fiscal effort, optimal allocations and design of fuel levy sharing mechanism. Further gaps were found around the impact of demarcation process on municipal fiscal capacity and sustainability, understanding municipal allocations and technical efficiency and reviewing of regulatory framework for municipal tariff setting. There was a need for a better understanding of the cost of reporting compliance, and a need to optimise property rates revenues. There were challenges in the processing of effectively differentiating municipalities, municipal borrowing principles, maintenance and rehabilitation of municipal infrastructure, funding models and incentives, how to define, measure and reward municipal performance, and how to identify data gaps at municipal level.

Mr Mahabir concluded that further research would be done to inform the Commission’s options analysis, which would be based on the principles and recommendations made. This options analysis report and FFC recommendations would inform the second public hearings, which were scheduled for 4 to 5 June 2012.

Presentation on Housing Finance Public Hearings
Ms Tania Ajam, Commissioner, FFC, noted that housing finance was constrained by evidence of real challenges in housing delivery systems and the financing model, because there was a mismatch between the growing demand and the supply capability. The housing sector was also characterised by protests related to delays, and questions around quality, location, fairness, and a growing fiscal burden in a period of austerity. The FFC had focused its work on housing finance, had deepened its analysis of human settlements challenges, and developed special recommendations that provided a platform for constructive interaction between stakeholders.

The first round of public hearings was held on 13 to 14 October 2011 in Ekurhuleni, where stakeholders made extensive submissions focusing on an analysis of the problems and challenges, rather than trying to come up with solutions at this stage.

Ms Ajam noted that the perspective of stakeholders on housing challenges ranged from insufficient scale relative to demand, the fiscal and physical sustainability of settlements, household affordability, informal settlements, and barriers in the delivery chain, which included land, infrastructure, zoning, and deeds registration. Generally, stakeholders agreed with the FFC starting points. Stakeholders emphasised that while national policy gave provincial and local governments the flexibility to adapt housing policy and plans according to their context, they nonetheless had perceived national government as dictating a “one size fits all” approach. There were legislative and administrative barriers in the housing market, which included limited accreditation of municipalities to perform housing functions in terms of the Housing Act, regulatory constraints posed by the Municipal Finance Management Act (MFMA), which prevented metros using own revenues as bridging finance for low-income housing developments, and the fact that D
evelopment Finance Institutions (DFIs) did not provide significant bridging finance to metros, which required legislative change.

Ms Ajam noted that the i
mpressive progress since 1994 unfortunately was no longer sufficient. There were nearly 3 million fully subsidised houses provided since 1994 – an average of 167 000 houses per year. However, insufficient delivery of houses led to a rising backlog, and more than 2 million households were currently presumed homeless in South Africa. The housing waiting lists were “exploding”. The needs of lower income households were not met, and this was exacerbated by historical issues of size of subsidy, availability of credit and distortionary effects of the subsidy gap market. Stakeholders also agreed that there was generally poor data and understanding of housing demand, which was certainly high, but it was difficult to ascertain its extent accurately. Good data was needed and could be used to improve understanding of the current situation and to inform housing policy.

Ms Ajam noted that the barriers in the delivery chain included the supply and access to well-located land and bulk infrastructure, as well as housing delivery chain inefficiencies. Further barriers were identified as poor targeting of the subsidy, the fact that more than 51% of subsidy houses were not registered at Deeds Office, and the fact that although up to 70 000 hectares of state-owned land had been identified for housing developments, none had been made available for that purpose.

Nkosi Z Mandela (ANC) was concerned that public hearings were held in Polokwane and Ekhuruleni – both areas that were more urban than rural – whereas the rural people under the leadership of Traditional Leaders areas accounted for 60% of the population. He was concerned also that various stakeholders were invited to the hearings, but he did not see any mention of the National or Provincial House of Traditional Leaders, so there was a concern about bias.

Ms C Ditshetelo (UCDP) repeated Nkosi Mandela’s question on why Traditional Leaders were not invited, since they played an important role in rural communities and in lives of rural people.

Mr Khumalo responded that it was correct that the House of Traditional Leaders was not a primary stakeholder of the FFC but the FFC would consult with them. He could not answer why they had apparently been excluded from the public hearings but conceded that this was incorrect, and that the methodology in relation to the rural areas had to be re-examined

Mr J Steenkamp (DA) noted it was very disturbing to see figures around title deeds because it was internationally recognised that deeds were the ideal mechanisms to leverage collateral for small businesses and other financial requirements. He asked if FFC had been able to isolate where the backlogs were in relation to the issuing of title deeds, what the main problems were, and whether they lay with the municipalities or the Deeds Registry Office. He wondered if FFC had any recommendations on how those backlogs could be addressed.

Mr M Matshoba (ANC) asked if the FFC had visited the Surveyor-General (SG), since it seemed that there were challenges with this office.

Nkosi Mandela added that the report talked about backlogs and title deeds, but pointed out that the majority of people living in rural areas on communal land would not have access to title deeds. He asked whether the backlogs were most prevalent in rural or urban areas, and also asked if, in rural areas, there was indefinite development and opportunities for the rural population. He asked the FFC to explain how it had arrived at the backlog figures.

Mr Khumalo assured Mr Matshoba that the Commission would definitely contact the Surveyor-General for discussion around some of the issues, including the question of title deeds.

Ms Ajam also responded on the question of title deeds, by noting that one of the problems was the inefficiency of the deeds office and the conditionality of grants. Prior to 2004 contractors would only receive payments after they had provided the title deed registering the transfer. She suggested that it would be useful to revert to this method.

Nkosi Mandela remained concerned that not enough attention was being paid to rural communities.

Ms Ajam responded that the FFC’s view of rural communities and rural municipalities was very clear. FFC believed that there was a need to focus more on rural communities; currently there was too much focus on cities, since they were able to organise pressure groups to influence municipalities’ direction. FFC had projects directed at rural municipalities and empathised with the issue raised by Nkosi Mandela. The FFC would like to see the trend of migration from rural areas to cities, in the hope of better opportunities, being reversed, but this would require a substantive shift in the structure of the South African economy. If the rural economy was not resuscitated it would be difficult to prevent migration to the cities.

Nkosi Mandela asked the Commission to explain the breakdown of the 70 000 hectares of state land that had been identified, by rural and urban allocation.

Ms Ajam said that FFC had no figures on the breakdown of the 70 000 hectares of state land that had been identified, but would try to provide the Committee with that information.

Mr P Smith (IFP) noted that the report raised several issues as to why the LGFF was so important. One issue related to the increase in the devolution of powers and functions, and he asked if FFC could quantify the extent of that problem. Government had completed a review of powers and functions in 2009, and he asked if the FFC had been involved at that process.

Mr Khumalo said that the FFC had received a request to make a submission around that process, an it seemed that the Department of Cooperative Governance and Traditional Affairs (COGTA) had carried out one similar process, although another had been abandoned. He would be meeting shortly with COGTA to discuss issues affecting the FFC.

Mr Smith referred to the property rates, and asked what the FFC meant by “optimise” property rates revenues, why this did not refer to “maximise" and said there was general feeling that more consistency was needed.

Mr Khumalo said that the idea in government was that the main concern was around raising resources at the margin. The use of the word “optimise” was used to convey the point that all the potential should be used. For instance, if one municipality was getting in 97% of income in this way, and another only 40%, then the latter was not operating at an optimal level.

Mr Smith also wanted to know what FFC proposed as a solution to the data gaps. He pointed out that country-wide surveys were carried out in October 2011, and how this, and other information, could be brought to bear on fiscal decisions.

Mr Khumalo agreed that the data gaps were a serious issue. The FFC had to use “official” data, being that compiled by Statistics South Africa (SSA). FFC had made submissions and persuaded government to collect more types of data than in the past. Prior to 1994, SSA was collecting data from different levels to those where it would be required. Currently, it was requesting data from school level and hospital level, and was collecting the type of information that would be required for the purposes of the Division of Revenue Act.

Mr Smith enquired if there was a mandatory component of the Municipal Infrastructure Grant (MIG) for maintenance purposes.

Ms W Nelson (ANC) noted that there was no link between MIG and the LES with regard to infrastructure maintenance. She asked how FFC regarded municipalities that were not financially viable in terms of maintenance and infrastructure.

In relation to MIG, Mr Khumalo confirmed that there had been discussions as to whether particular amounts should be released only for maintenance, but currently there was only a guideline, and not a hard and fast rule, as to the percentage of the budget that should be allocated for maintenance. This had serious implications for backlogs and it was something that FFC believed had to be examined.

Ms Ajam added that if maintenance costs were paid from the operational budget, this had serious consequences on backlogs.

Ms Ditshetelo asked what was going be the outcome of the second public hearings and if FFC was going to deal with the rejections received from previous years.

Mr Khumalo explained that the document that highlighted the recommendations of the FFC since 1995, specifically focusing on local government, was not related to the current public hearings nor to the results that he had just outlined.

Ms Nelson said that it was necessary not only to look at occupation of houses, but who was occupying them, pointing out that often the registered owners did not live there, having rented out or sold their houses on to other beneficiaries.

Ms Ajam said that although the FFC had not done any research into who was currently occupying the RDP houses, it would request the Department of Human Settlements (DHS) to provide figures, and come back to the Committee. She emphasised, again, that when there were no title deeds, which mentioned ID numbers, this made it difficult to know who exactly occupied the RDP house.

Ms Nelson asked if the FFC had looked at the Greenfields approach and whether it considered it viable.
She also asked what recommendations the FFC had for rural housing.

Ms Ajam responded to Ms Ditshetelo that FFC was looking at the Greenfields approach, but there was a report indicating that the grounds approach was being neglected where there were places with infrastructure that could be rehabilitated or revitalized.

The Chairperson asked for a breakdown of the specifications of a complete “human settlement” house, noting that the report stated that some reticulations were paid for by the end user. She also asked what the FFC regarded as a “quality” house, since some service delivery protests were instigated by the allegedly poor quality of houses.

Mr G Boinamo (DA) asked how FFC determined whether a person qualified for an RDP house, and how it had regulated the allocation of the houses. It had been discovered that some people owned more than one house. Mr Boinamo also asked how foreigners could qualify for RDP houses.

The Chairperson interjected that some of the questions asked by Mr Boinamo did not reside with the mandate of the FFC and it was not obliged to answer them.

Ms Ajam responded that her understanding for the eligibility of foreigners to qualify for RDP houses was that they’ve got to be permanent residents of South Africa. There were instances were houses were occupied by wrong beneficiaries, the question would have to ensure how they made sure that the subsidy got to the right beneficiary.

Ms M Segale-Diswai (ANC) asked what FFC recommended in respect of the poor data on past housing delivery trends and needs. She confirmed that what was reported was often not what was happening on the ground.

Mr Steenhuizen noted that the FFC had noted some research gaps, and asked if the FFC had examined the phenomenon of redlining used by financial institutions, where they would not grant finance in depressed or poor areas, which made mobility between housing modes more difficult for people.

The Chairperson asked whether the FFC had done any research on how informal settlements could be turned into formal settlements, perhaps looking at what other developing countries had done, to come up with recommendations to address the growth of informal settlements.

The Chairperson thanked the delegation from FFC for the presentation, and confirmed that the Committee would promote the recommendations of the FFC where appropriate.

Consideration and Adoption of Minutes
The Committee adopted minutes of 28 February, and 6 March 2012.

he meeting was adjourned.


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