State of Local Government Finance Report; Ward Committees

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Cooperative Governance and Traditional Affairs

20 August 2012
Chairperson: Ms D Nlhengethwa (ANC)
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Meeting Summary

Local Government Fiscal Framework (LGFF) review
National Treasury briefed the Committee on the review of the Local Government Fiscal Framework (LGFF). Despite the grim report given three weeks before by the Auditor General on the audit outcomes of municipal finances,  where only 13 out of 343 municipalities had completely clean audits, National Treasury was upbeat about the state of local government finance. Municipalities were often portrayed in a very negative light, but their failures had to be put into context. Firstly, local government was the youngest sphere of government. It only officially came into being in December 2000 after the elections, which set off the process of restructuring each municipality. Secondly, there were many areas of governance within local government, but instead of dwelling on the negative, one had to see what could be done to rectify what was wrong in this sphere of government.

National Treasury reported that there had been an improvement in service delivery by municipalities. Some municipalities were still lagging behind, but some had improved significantly. The Blue Drop scores, which indicated water quality, had improved from 51% in 2009 to 88% in 2012. Municipal finances had stabilised according to the State of Local Government Finance Report of January 2012 and the quality of the budget documentation submitted to National Treasury was much better as well, especially when it came to the larger municipalities.

National Treasury explained that the Local Government Fiscal Framework referred to all the revenues municipalities had at their disposal to meet their expenditure obligations. Recently, in cooperation with the Department of Cooperative Governance and Traditional Affairs (CoGTA), it had done a historical analysis of where the system was in terms of the LGFF. The study found that the principles that informed the White Paper were as valid in 2012 as in 1998 when it was published, but the technical details and information which then informed the decisions had changed. For example people would say that the fiscal system was not appropriate, because it assumed that municipalities could collect 90% of their own revenue. This was the case in 1998, but it was not the case anymore, because the system had since changed and some municipalities received almost 100% of their funds from the fiscus.

Transfers had increased dramatically since 2005/6 and were still climbing steeply. Rural municipalities experienced the fastest growth in transfers. On the future of the LGFF, the equitable share formula was being reviewed. This formula determined what the size of the transfer to any particular municipality would be. Conditional grants would be reviewed based on progress in improving access to services as revealed in the Census 2011 results in October 2012.

National Treasury had circulated two discussion documents to all municipalities, which was an analysis of the current formula as well as a set of proposed principles and objectives for the new formula. It had undertaken as a first phase of consultation, six workshops around the country, which had been well attended by municipalities from all nine provinces. There were a lot of written comments submitted and for the past few months the working group had been working on a proposal for a revised equitable share formula. There were a lot of expectations from municipalities that the formula would be able to measure parameters that were determining the costs that municipalities faced. The challenge that the working group had was that it was not always possible to measure all those things or to measure them fairly. The working group had consulted with other departments and institutions to see what measures it could find and what it could use. It was currently busy finalising a proposal which it would take back to municipalities and consult on further in the months ahead, refining it, until there was a new formula which would be used with the new Census data to make the allocations to municipalities in the 2013 budget.

The presentation concluded that local government was young and dynamic. The LGFF had supported municipalities and given them a sound policy framework and more resources. It would continue to evolve in order to get municipalities to become more effective in service delivery.

Members asked why funds were given to district municipalities while local municipalities were providing the services; why funds were returned to Treasury while there were severe infrastructure shortages on the ground; who was responsible for spending the grants; why mines paid levies in Gauteng where their head office was and not in the Free State and North West where their mines were.

Ward Committees funding and training
The 2012 Division of Revenue Act included funding for ward committees. National Treasury allocated R162m for this purpose in the 2012/13 financial year. Every ward committee with up to 10 members, would get a R500 per month subsidy from this fund, but the actual amount was already R1000 in some municipalities, and there was no ceiling to the amount that could be paid to ward committee members.

Members asked if the stipend would attract people to the ward committee for the wrong reasons and if a reimbursement model would be better model. They requested the ward committee training material and the quarterly reports on the functioning of ward committees which the Director General promised to provide.

Meeting report

The Chairperson explained that National Treasury would give an overview of municipal finances, to check whether the revenue in municipalities had met their expenditure obligations and if municipalities got the best value for the money they spent. Three weeks ago the Auditor General had released his report on the financial statements of each municipality and the Portfolio Committee noted with regret that only thirteen had clean audits and 128 municipalities had unqualified reports but with matters of emphasis. However, compared to last year’s local government audit outcomes there was a great improvement. Yes, she admitted that the 81 municipalities which had qualified reports needed to be focussed on during the current financial year. Some had received disclaimers and some which had achieved clean audits previously, had unqualified reports. These municipalities would have to be vigorously engaged and supported with technical skills in order to reach the target of a universal clean audit by 2014. She handed over to the National Treasury delegation.

National Treasury briefing on Local Government Fiscal Framework
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said municipalities were often portrayed in a very negative light, but their failures had to be put into context. Firstly, local government was the youngest sphere of government. It only officially came into being in December 2000 after the elections, which set off the process of restructuring that municipality. Secondly, there were many areas of governance within local government, but instead of dwelling on the negative, one had to see, as the Chairperson said, what could be done to rectify what was wrong in this sphere of government.

She wanted to highlight the recent successes of local government. Firstly, there had been an improvement in service delivery. Some municipalities were still lagging behind, but some had improved significantly. The Blue Drop scores, which indicated water quality, had improved from 51% in 2009 to 88% in 2012. Municipal finances had stabilised according to the State of Local Government Finance Report and the quality of the budget documentation submitted to National Treasury was much better as well, especially when it came to the larger municipalities. As a result National Treasury could do more comprehensive analyses of municipal finances and could see more clearly where and how money was spent and where changes were needed. In many areas there had been major rollouts of infrastructure projects.

What was the Local Government Fiscal Framework (LGFF)?
The Local Government Fiscal Framework referred to all the revenues municipalities had at their disposal to meet their expenditure obligations. Ideally own revenue made up 75% and transfers 25%, but within the South African reality, depending on the location of the municipalities and the number of people and economic activity within its bounds, this proportional makeup could differ greatly from municipality to municipality.

Different types of municipalities and how they were funded
The larger municipalities mostly relied on their own revenue and borrowing to meet their obligations. Smaller municipalities and deep rural and traditional municipalities did not have this revenue base, and relied largely on government grants. District municipalities were largely funded out of grants. It was based on the former Regional Services Council (RSC) levies which they received, as well as on some of the changes made to the equitable share. There was also some injection in terms of the institutional component. Metros were the least reliant on transfers. Secondary towns and medium sized municipalities were more reliant on transfers.

Rural-traditional municipalities were found in places such as the Eastern Cape, Limpopo and KZN, where quite a lot of people were living, and the majority was poor, and they had limited access to services. A rural-agricultural municipality was also rural, but had an economic hub or CBD, supported by economic activity, agriculture, mining or something else. They relied less on transfers and but also had smaller populations. Rural-traditional towns had large populations. Some municipalities had half a million people of which the majority was poor. This explains why their allocations were so big. They had large infrastructure allocations and their equitable share allocation was based on poverty criteria.

How the local Government Fiscal framework supported different households
This was a new way of looking at the different households (HH) a municipality had to serve. There were households which could not pay for services at all like those in informal settlements, then there were HH in RDP houses and HH which were poor, but which had some resources and could pay in part for services. Then there were middle to upper-income HH who could pay in full for their user services such as water and sanitation as well as general services like property rates. These HH also cross-subsidised the poor HH through the property rates they were paying.

The question National Treasury was asking was: ‘To what extent did municipalities ensure that they successfully collected those revenues from the HH that were supposed to pay?’

Recently, National Treasury in cooperation with CoGTA did a historical analysis of where the system was in terms of the LGFF. The guidelines were the constitutional requirements for local government and the White Paper on Local Government published in 1998.

The study found that the principles that informed the White Paper were as valid in 2012 as in 1998 when it was published, but the technical details and information which then informed the decisions had changed. For example people would say that the fiscal system was not appropriate, because it assumed that municipalities could collect 90% of their own revenue. This was the case in 1998, but it was not the case anymore, because the system had since changed and some municipalities received almost 100% of their funds from the fiscus.

The performance of the LGFF against the principles set in the LG White Paper
The study found that in terms of the:
• principle of revenue adequacy and certainty, three year budgeting created certainty and adequacy and required a mix of own revenue, and transfers.
• principle of sustainability, many municipalities were not budgeting sustainably, but many were improving.
• principle of effective and efficient resource use, there was mixed performance, but significant wastage. Municipalities’ oversight of budgets was institutionalised and its efficacy was questionable.
• accountability, transparency and good governance, publishing budgets increased transparency, but audit outcomes reflected poorly on municipalities.
• equity and redistribution, the principle of cross-subsidisation was well established and transfer allocations were based on funding services for the poor.
• development and investment, infrastructure rollout had been disappointing despite the billions spent.
• macroeconomic management, the study found that municipalities had acted responsibly.
 
Own Revenues
Legislation which prescribed how municipalities could collect own revenue was the following three Acts:

• The Municipal Finance Management Act (2003) provided for sustainable financial management and budget structures that enabled effective financial planning.

• The Municipal Property Rates Act (2004) created a transparent and fair system of property rates. The critical issue here was how this Act applied to individual municipalities. Larger urban municipalities and even rural municipalities with an urban core had the potential to collect revenue from property rates. In rural areas like the former homelands, where there was very little development or economic activity, and the majority of the population was poor, there was very little potential to collect revenue in the form of property rates. Although the Act was there to exploit this source of revenue, the population was so poor that it was not a realistic source of revenue. This was a situation the fiscal system had to acknowledge. There need to be economic activity in the area to exploit both user charges and property rates. Municipalities had to exploit this revenue source to the full, but not abuse it. If abused, it could cripple businesses, which was counterproductive. Therefore it was important to have the legislation in place. RSC levies would be replaced with a transfer until powers and functions of district municipalities were resolved and fuel levy sharing with metros was introduced.

• The Municipal Fiscal Powers and Functions Act (2007) provided authorisation for municipal taxes and regulated surcharges. The same balance was needed as for property and user taxes. Municipal tariffs and surcharges had to be regulated. In the future, norms and standards would be introduced to regulate electricity and water tariffs.

Borrowing
Larger municipalities have succeeded in borrowing and issuing bonds. Borrowing had to be linked to economic infrastructure, because it had to be paid back with interest. It had to be done prudently and within the municipality’s means, but could advance service delivery. If they could borrow and did not, they retarded service delivery.

Transfers
The transfer system had changed quite a lot. The equitable share system was established in 1998 and its formula was reviewed and changed in 2005, but the principles remained the same.

The Municipal Infrastructure Grant (MIG) was introduced and it consolidated numerous smaller grants.

The system had become differentiated by creating separate urban and rural grants and there had been massive increases in all transfers.

A graph titled ‘Total transfers to local government which showed the transfers to local government from 1998/99 to 2014/15’ showed the dramatic increase in the total transfers from 2005/6 to 2014/15 and the trend was still steeply upwards. The reason for this dramatic increase was the realisation that LG played an important role in service delivery.

The graph showed RSC levies replacement as a downward trend while the general fuel levy sharing with metropolitan municipalities was a gradual upward trend. The graph showed that conditional grants increased sharply between 2006 and 2008 and after that more gradually. Equitable share showed a gradual upward trend.

This graph summed up what had happened to the local government system in terms of transfers. It did not happen to provincial or national government. It was a specific policy that was introduced in acknowledgement of the important role that local government played in the system.

Something to keep in mind was that the fiscal system as a whole was constrained due to the worldwide economic recession. It had been going on since 2008 and was projected to continue for another few more years. The key message was that there was a need to focus on what was in the system and to use it better. No sphere of government could expect large injections of funds, because it simply was not available.

A graph titled ‘Growth in transfers to different types of municipalities’, showed that, after the metros, the categories of municipalities that received the next largest allocations were rural-traditional municipalities and District Water and Sanitation (W&S). Within the Fiscal Framework, there was the principle of ‘funds follow function’. This was important because in rural–traditional municipalities, often the local municipalities were not authorised to provide the services of W&S, but the district municipalities were. If the local municipalities assisted the district municipalities to provide some of those services, the district had to hand over some of the funds to the local municipalities. Challenges in this regard were that district and local municipalities often could not agree on whom was providing what, and the money did not always follow the function.

Often the statement was made that “because the grant had grown to such an extent it would crowd out the collection of revenues by municipalities”. The graph entitled ‘Value of Total Municipalities’ Budgets’ showed that from 2006/7 to 2012/13, transfers grew by 18% and own revenue by 13%.

When looking at own revenue, municipalities needed to do a reconciliation. The municipalities bought water or electricity in bulk, and sold it to households. National Treasury still needed to do an analysis to see what impact the increase in bulk service charges had on the finances of municipalities.

National Treasury had to focus on how the system would be taken forward. Currently National Treasury had information on grant spending. If grants were not spent, municipalities as well as the National Department doing the transfer, which included CoGTA, had to report back to National Treasury on which funds were transferred and which were spent. The results were varying. Some infrastructure grants performed better than others, for example, the electrification grants, both the one that went to Eskom and the one that went to municipalities, were performing well. Spending was close to 100%. In contrast, with the electricity demand side management grant, the spending was very low.

There were trends that went along with certain grants and trends that went along with certain types of municipalities. The bigger the municipality, the better it spent its grants generally and vice versa. There were also exceptions to this rule. National Treasury wanted to understand the reasons for this. When it implemented remedies, it wanted to do it on the basis of actual information. National Treasury was waiting for what the 2011 Census results would reveal. It would look at where infrastructure progressed and where it declined. Changes to the infrastructure grant policy would be informed by this information.

The map titled ‘Population Density and Settlement Types in South Africa’ showed population growth linked with economic growth in certain centres in SA. The biggest concentration and highest spires were in Gauteng, followed by Cape Town and Ethekwini Municipalities and other smaller concentrations of people across the country. This picture was the argument National Treasury used to prove that there could not be a one-size-fits-all approach to revenue collection in all municipalities. The population densities and levels of economic activities differed too much. The areas with high population densities were the areas where people were migrating to, and most of these people were poor. This placed a huge responsibility on the municipalities in those areas.

Another issue about these densely populated areas was that there was development, but the country needed to ask itself whether it was the type of development it wanted and needed, because it was not helpful to place poor people at the periphery of the city, where they had to spend huge percentages of their income on transport costs, to get to places of work and municipalities had to spend a lot on public transport infrastructure.

The key focus was to look at integrated human settlements, where one had densification, where one could get and utilise economic growth. Then one could explore how to get economic growth throughout the metropolitan and secondary town areas, so that eventually everyone in that area could benefit.

The map showed a densely populated rural area between East London and the Mozambican border, but the rest of the country was sparsely populated. Municipalities in these areas had to provide services to these sparsely populated areas.

Different municipalities faced different challenges and infrastructure needs. Urban municipalities had a huge need for housing. Rural-Traditional municipalities had a huge need for water, sanitation and electricity infrastructure. The grant system had to evolve to fulfill these needs. The 2011 Census results would inform the review of the effectiveness of grants.

Municipalities had to look at their administration and procedures in order to maximise their assets; for example, many municipalities have water losses in excess of 50% of their bulk purchases. Reducing those losses would reduce the money spent on bulk purchases and free up funds for other services.

Factors leading to the gap between delivery and needs
A diagram was shown that presented the conceptual thinking of how the budget and expenditure review system actually worked. The first question was: What did communities need? This included all communities within the municipal space. The needs and expectations of the communities were set out. The far right column was where actual service delivery happened. Every step in between was an opportunity for gains, but also for losses. Municipalities could fail to collect revenue, spend unnecessarily on non-priority wants or fail to mend leakages (financial, water, electricity), resulting in the failure to provide the necessary services as needed by the communities.

Equitable Share Formula Review
Mr Steven Kenyon, Senior Economist: Local Government Budget Process, National Treasury said the Local Government Equitable Share was the largest transfer from national government to local government. It was allocated through a formula to ensure that it was a fair and transparent transfer to all municipalities. The formula was based on Census 2001 data at the moment, and when Stats SA released the results of Census 2011 in October 2012, the formula would have to be updated and National Treasury wanted to use this opportunity to undertake a full review of the formula.

In addition to the updated data, there had been a lot of other criticisms that the municipalities, Members of Parliament, and other stakeholders in the system had raised, and so National Treasury had embarked on a review process this year. The review was designed to be as consultative as one could get. The review committee was inter-organisational. It consisted of National Treasury, SALGA, CoGTA and had support from the Financial and Fiscal Commission and Stats SA, which was the key data partner.

National Treasury had circulated to 278 municipalities two discussion documents, which outlined an analysis of the current formula as well as a set of proposed principles and objectives for the new formula. National Treasury had undertaken as a first phase of consultation, six workshops around the country, which had been well attended by municipalities from all nine provinces. They have bought into the concepts underpinning the principles and objectives. There were a lot of written comments submitted and for the past few months the working group had been working on a proposal for a revised equitable share formula. There were a lot of expectations from municipalities that the formula would be able to measure parameters that were determining the costs that municipalities faced. The challenge that the working group had was that it was not always possible to measure all those things or to measure them fairly. The working group had consulted with other departments and institutions to see what measures it could find and what it could use. It was currently busy finalising a proposal which it would take back to municipalities and consult on further in the months ahead, refining it, until there was a new formula which would be used with the new Census data to make the allocations to municipalities in the 2013 budget.

Funding for Ward Committees
In the 2012 Division of Revenue Act, R162m was allocated as funding for ward committees in 2012/13. It was allocated to all municipalities in Grades 1 to 3. It provided R500 per month to cover the expenses of each of 10 ward committee members in each ward. The amounts were transferred as part of the equitable share.

In addition the subsidy levels for councillor support for Grades 1 – 3 municipalities had been increased. It was a phased increase over the 2012 MTEF. For Grade 1 municipalities it increased from 80% in 2012/13 to 90% in 2013/14 and 2014/15. For Grade 2 municipalities it increased from 55% in 2012/13 to 70% in 2013/14 to 80% in 2014/15. For Grade 3 municipalities it increased from 50% in 2012.13 to 55% in 2013/14 to 70% in 2014/15. This money was allocated through a separate formula, but then transferred as an unconditional allocation together with the equitable share in the transfer the CoGTA made every year.

Discussion
The Chairperson asked that Treasury provide the Committee with a list of all the grants it disbursed. She appreciated the initiative of the inter-governmental and inter-organisational approach to the working group working on the new equitable share formula. When doing oversight and monitoring, Members noticed that the one-size-fits-all approach to funding did not work well with some municipalities. The former homelands were a case in point. In 90% of the former homelands there was no economic activity and municipalities could not collect property rates. Perhaps the revised equitable share formula would benefit those municipalities.

Mr Smith (IFP) asked if Treasury had a view on the financial viability of municipalities. The Demarcation Board had as one of its parameters, viability. Were there small municipalities that should be merged?

Ms Fanoe replied that one needed to look at the individual municipality. It was not based on NT’s own version. One had to look at the pool of revenue at the disposal of the municipality. The income of a municipality comprised of own revenue, grants and borrowing. There could be benefits by linking up small with large local municipalities. SA municipalities were quite large compared to municipalities internationally. Certain areas like Limpopo were rural areas and the whole region was poor. This was a South African reality. The focus had to be on how to get service delivery in those areas. Services and backlogs had to be planned for, backed up by revenue. Modern service delivery technologies had to be employed. Finances would not solve the problem if the capacity to roll out the services was not there. A lot of work needed to be done. Appropriate services had to be provided. Who would provide them? These were things to consider. Municipalities had to look for capacity within existing structures such as the Water Board and Eskom. If an adjacent municipality had the capacity to do something, that municipality had to be used to provide the service. There were no simple solutions. It was not just a viability issue. It was a broader issue and needed a holistic response.

Mr Kenyon added that none of the three tiers of government could afford to waste money. Local municipalities had to be able to deliver services to non-poor residents with the money gathered through revenue collection. Transfers from government were used to provide services to poor households as well as administration costs. Municipality viability looked at the full picture. Municipalities with non-poor residents had to collect revenue from them. Poor municipalities had to service poor areas using the transfers from the fiscus. The growth of transfers over the last few years meant that there was enough money in the system, and part of what the equitable share review was doing was to make this process more transparent. He could not be specific about the new formula proposal, because it was still a work in progress.

As Ms Fanoe pointed out on the map with the high spires in Gauteng and Ethekwini. Outside of these areas, were poorly resourced municipalities often neighbouring each other. This meant that merging them was not a solution. A municipality had to use its resources to deliver services There were unnecessary losses along the value chain. The system was not going to work unless the gaps were closed. Municipalities had to take responsibility to close the gaps. Transfers had to provide for poor households.

Mr Smith said the aim was to optimise municipal resources. It could also be over-optimised. There was a Property Rates Act which ensured in the interest of equity, that all properties were rated at market value, but then municipalities came along and levied cents and rands. In Johannesburg it was half of what it was in Durban. What was the equity principle behind that? Did National Treasury ever have the view that it needed to be regulated?

Mr Smith referred to the challenge of unfunded mandates. Were there any regulatory elements in the Fiscal Framework that could be used to solve the problem?

Ms Fanoe replied there was a link between the legislative mandate and how the funding system worked. Municipalities, especially the metros, used their own resources in addition to the money they get from the province to provide houses. The accreditation issue had to be sorted out, and then the funding could follow. Otherwise Treasury was in for huge constitutional challenges. The province could argue that it had to provide the service and the situation could result in funny decisions.

Mr Smith said municipalities in Grades 1-3 were given subsidies of R500 per month per person in the ward committee. What happened in the grades of municipalities beyond that? Was the R500 pm a ceiling that every municipality had to pay, or were they free to do what they liked?

The Chairperson asked whether the R500 proposed subsidy would be added to the R1000 some municipalities were already paying.

Mr Matshoba asked what informed the R500pm to cover the expenses of the ward committee members.

Mr Kenyon replied that it was important to state as a starting point that it was not remuneration for ward committee members, because the Municipal Structures Act did not provide for the paying of salaries to ward committee members. It was a stipend to cover their costs.

As a principle, local communities had to contribute towards the remuneration of its office bearers. National Treasury did not fund councillors fully. It went up to 90%. In Grades 4-6 municipalities, National Treasury did not provide that funding, because they had to have enough funds to pay the ward committee members.

Mr Steenhuizen said Ms Fanoe talked about the ‘funds following the function’ principle, but he did not think that it would be right until there was a re-think of the structures. District municipalities competed with local municipalities. They stripped local municipalities of expertise and funds did not get down to local government level and there was little service delivery taking place.

Ms Segale-Diswai referred to giving grants to the district versus the local municipality. There were problems were the district municipality wanted to take over the functions of the local government. There was a conflict of interests. The district should be coordinating, not implementing, but the funds went to the district municipality.

Mr Matshoba said local municipalities were given R4m for sanitation via the district. Local municipalities knew nothing about this grant, because it never reached them. Local municipalities had to account for money it never saw.

Ms Fanoe replied that it was important that the functional division between the spheres was sorted out. With regards to metros and secondary cities to some extent, was the interface with the services they provided that was currently provincially assigned, such as housing, public transport and the like.

Municipalities had a two-tier system where one had district and local municipalities working in one space, the district versus local issue had been mentioned. Some district took full responsibility for housing or water provision, while in other areas district and local municipalities shared certain functions. What should district municipalities and local municipality do regarding functions? Local government was evolving. The decisions that were made were right for that time when they were made. The functions of the district and local municipalities needed to be redefined. The current system needed to be analysed and corrected. It could be decided that the current system was the system that the country wanted. Then it needed to be acknowledged that there were problems with the system that needed to be corrected. The roles of the different tiers needed to be decided upon. If the current system was the system that was wanted, service level agreements had to be enforced between the district and local governments and then the funding arrangement had to be sorted out.

The more radical approach would be to reconfigure the whole system and to redefine who did what. This was too controversial at this stage.

Mr Steenhuizen said conditional grants came back to National Treasury. OR Tambo municipality returned R500m to National Treasury. He did not believe that any municipality did this on purpose. He believed the problem was with supply chain management. Supply chain management required much detail, lead time, documentation and expertise. Did National Treasury have any supply chain capacitation interventions in these municipalities to prevent the monies from rolling back?

Mr Matshoba said there were more than 100 grants. National Treasury was giving money to officials with low capacity. Managers had to be capacitated to spend the grants wisely.

Ms Nelson asked who was responsible to see that MIG funding money was spent. She believed money was not spent because monitoring elements were not in place.

Ms Fanoe replied that National Treasury was the custodian of government money. Its mandate was to ensure that the money was used appropriately. It had to monitor spending. If funds were not spent, it had to be returned to Treasury. If a municipality or province had already planned to spend the money, a rollover process was followed and the money was given back to the municipality or province concerned.

Conditional grants were established when national department identified specific national needs that required priority. Very specific responsibilities were placed on the department responsible for the conditional grant. That department was referred to as the national transferring department and specific requirements were placed on it. Before the Division of Revenue Act kicked in, the national transferring officer, which was the Director General of that department, had to confirm to Treasury that there was a system in place to manage and administer the conditional grant. The ultimate responsibility rested with the national transferring officer, the DG of the department involved, in this case the DG of the Department of CoGTA.

Ms Nelson asked what National Treasury’s role was in monitoring? No municipality wanted money to go back to Treasury. Had the supply chain legislation and regulations ever been scrutinised to see whether it was a help or a hindrance. Was it implemented properly? In the Auditor General report, supply chain management was a problem area.

Ms Fanoe replied that the Division of Revenue contained three-year allocations, which was important because infrastructure development did not happen overnight and supply chain management was but one of the processes that needed to take place. There were various issues to deal with before one could get the contractors in, or contract oneself in order to get the infrastructure developed.

One had to determine whether the service was needed. How was it going to be done? Who was fit to render the service? Supply chain management was part of the process. Surveys had to be done. There was a long delivery and planning stage with infrastructure and it needed a lead time. There was a period of three years allocated for longer term planning. Very few municipalities could do this. Especially with infrastructure, they struggled with the longer term vision.

Municipalities had to implement certain processes to ensure value for money. Supply chain management was critical in this process as well. Long term contracts that municipalities signed with service providers had negative consequences for the municipalities if it did not get value for money. This was why there had to be controls in the system.

Ms Segale-Diswai requested that National Treasury give a presentation on grants. Treasury reported that some performed well and others not. If grants were not performing well, were the officials capacitated in order to get them to perform better? If the grants did not perform well, it meant money was sent back to Treasury yearly.

Ms Fanoe said the national transferring officer, which was the DG of CoGTA, was responsible for MIG funding as well. She said Treasury would give the Committee a full briefing on grants.

Mr Steenhuizen referred to subsidies for remuneration. Referring to the dismal audit outcomes of municipal finances, he asked whether it was not time to link salary increases for senior management and councillors in municipalities to performance. If the audit opinion of the municipality was a disclaimer, the management did not deserve raises or salary at the top level or it should result in a reduction in salary.

Ms Ditshetelo asked how small rural municipalities benefitted from the fuel levy. Why did they not benefit in the past?

Ms Nelson asked if the fuel levy went out in 2005 when other transfers went to district municipalities in place of the fuel levy. Before, district municipalities relied on the fuel levy. Why had it not been finalised six years later? Did it go to national fiscus and was it part of the big cake that was being distributed, or was it shared between the district and the metro?

Ms Fanoe replied that in the past, metro municipalities and district municipalities had access to Regional Services Council (RSC) levies. It had been abolished for administrative and constitutional reasons and instead a two-pronged process had been put in place to replace RSC levies. Government agreed to replace RSC levies with another source. The agreement also said that the revenue source that would replace it would not necessarily be the same for metro municipalities and district municipalities. In the case of metro municipalities, RSC levies had been replaced by the sharing of the national fuel levy. It was collected nationally and sent to the area, based on the number of litres of fuel sold in that area. It took into account economic activity.

The RSC levies replacement grant which was paid to the district municipalities was based on the former RSC levies collected. There were two kinds of district municipalities, namely district municipalities with powers and functions and those without, which was a great anomaly in the system. District municipalities in poorly resourced provinces, collected small levies.

In Western Cape, the district municipalities collected huge RSC levies due to lots of economic activity, while the local municipalities were responsible for service delivery. The system could not be reformed. The question needed to be asked: ’What was the exact role for district municipalities?’ Once this had been decided, it could be costed. Then the RSC levies replacement grant would be redesigned to be linked up with the service delivery responsibilities placed on districts going forward.

Ms Ditshetelo asked how the payback happened after the municipality borrowed the money.

The Chairperson asked whether the presenter had any example of a municipal which borrowed. Did they borrow to pay salaries? Did they borrow for development according to their Integrated Development Plan (IDP) needs? Mention was made of urban areas where there was an influx of people and the municipality ended up borrowing in order to provide services to the increased population. What influenced borrowing?

Ms Fanoe said in 2011, National Treasury published a Local Government Expenditure Review and review of municipal finances. It contained information on municipal borrowing. It was available and the Committee had to get copies of it.

There were two types of borrowing. There was long-term borrowing and this was for capital expenditure for infrastructure development. Then there was short term borrowing for expenses, which had to be refunded within the same financial year. This was to ensure stability in municipal finances.

Mr Kenyon replied that borrowing was meant to fund investment and assets. One would borrow to buy a house because of its long term value, but not to buy groceries. Municipalities were allowed to borrow as long as it was investing in capital projects. In the transfers system, National Treasury did not fund water provision in rich areas because those areas paid for it themselves. The MIG and Urban Settlement Development Fund funded capital expenditure in areas where the residents could not pay for those services so that the municipalities did not have to borrow for those services.

Ms Nelson thought that there would be a maintenance grant in the near future, but was not sure. Municipalities were not viable in rural areas because there was no revenue base. How did one expect them to maintain infrastructure. Could Treasury please explain the maintenance grant? How maintenance was currently funded? How would the reformed Local Government Equitable Share deal with maintenance?

Ms Fanoe replied that the non-financial part of the process was to have credible administrative institutional systems in place. Municipalities had to know where its assets were. Very few municipalities had credible asset registers. It needed to have a maintenance plan, because maintenance was a continuous issue.

Mr Keyon replied that the implementation of maintenance was not a once-off event, but a continuous practice. Conditional grants were good for once-off events like building houses or a school. Once-off grants required a heavy reporting process accompanying it. It was like the difference between owning and renting a house. A tenant would not look after a house meticulously, but an owner would maintain it well. In the same way, national government could not look after every washer. Maintenance had to be done by local municipalities and municipalities had to plan for maintenance, but it did not mean that every municipality could afford to pay for maintenance. In the transfers, National Treasury had to provide for maintenance, but where it provided for maintenance was important. The LG Equitable Share would provide money to pay for the operating cost of providing water to poor households. It was important in the way that it was funded, that there was money not only to buy the bulk water, but also money to run and maintain the reticulation system in the municipality. The money had to be there and the job of the working group working on the new equitable share formula was to make it more clear and explicit that the money was there, but that it was the municipality’s responsibility to plan for the maintenance and to even do it.

The Chairperson said tariffs needed to be regulated. The Minister of Finance had to come up with norms and standards for these tariffs. How far were these discussions? She wondered whether the fact that tariffs were not regulated, did not reflect negatively in those municipal financial reports on which the Auditor General commented.

Ms Fanoe replied that electricity was the most advanced. The National Energy Regulator of South Africa (NERSA) had a regulatory manual in place. It was a work in progress. Quality was at stake. NERSA was strict with the regulation of those tariffs.

The National Department of Water Affairs had guidelines for water price determination. Most municipalities under-costed their service. Water and electricity provision had to be run as profitable businesses within municipalities.

Ms Fanoe replied that ethical revenues were critical with regards to the balance of revenues. High level analysis showed that municipalities with high surcharges sometimes had low property charges and vice versa. This did not preclude the possibility that some get too much from one source.

The Chairperson noted that the presenter stated that the fiscal system was constrained. All SA citizens were paying tax. Why were there fiscal constraints?

Ms Fanoe replied that when the economy was down, tax revenue went down proportionally. This was a reality.

Mr Kenyon added to demonstrate the drop in tax revenue when the recession started, in 2009/10, National Treasury collected R68 billion less than planned, but still transferred R51billion to local government. The amount grew over the next few years. This showed how National Treasury tried to protect local municipalities from the impacts of the recession.

Ms Nelson asked whether the new equitable share formula would take into account the fact that the Northern Cape was vast and sparsely populated. Levies for mines in the Free State and North West provinces were paid in Gauteng, because the head offices were in Gauteng. What was the legislation governing that process?

Ms Fanoe was not sure what was meant by ‘levies’. The only levies payable were RSC levies, which had fallen away. Mines brought in money for metros and locals, not districts, because there was a link with the property rates system. Mines were not required to pay RSC levies anymore. The RSC levy replacement grant was funded through the fiscus.

The Chairperson asked whether the presenter could supply information on the performance of the district municipalities which had been accredited by the Department of Human Settlements to build houses.

The Chairperson thanked the delegation for delivering their presentation. It proved there was stability in municipalities on financial reports.

Department of Cooperative Governance and Traditional Affairs (CoGTA) presentation
Mr Muthotho Sigidi, CoGTA Acting Director General, said the National Framework made provision for criteria for determining out of pocket expenses for ward committee members in 2009. The framework determined the indicators for ward committee functionality, criteria for calculating out of pocket expenses, budgeting guidelines and funding mechanisms for ward development and ward committee operations.

The objectives of the framework were to:
• Improve ward committee functionality by ensuring that ward committee members are more active and able to effectively support their elected ward councillors to serve the community
• Reimburse ward committee members with any 'out of pocket' expenses that they may have reasonably incurred in undertaking their duties
• Provide guidelines for provinces to develop provincial specific frameworks.

Municipalities had to ensure that ward committees were effectively supported in the form of access to office space and equipment, technical and administrative assistance through dedicated municipal staff, communication material and community interaction systems and campaigns and out of pocket expenses for ward committee members.

Factors taken into account when determining out of pocket expenses were ward size, population density, financial viability, and ward committee functionality.

The most important indicators for ward committee functionality was ward committee management meetings held and their attendance, community meetings held and their attendance and the submission of reports and plans to the council and feedback to the communities from the councils.

R428 760 million (MTEF) had been made available to municipalities to provide stipends for ward committees. As part of the allocation, municipalities in Grades 1-3 were subsidised by a stipend of R500 per month per ward committee member and this was for 10 members per ward committee. These funds were transferred as part of an equitable share for these municipalities.

Training for Ward Committee Members
An eight module LGSETA accredited skills programme for ward committees at NQF level 2 had been developed. The Department had updated, translated (into all SA official languages), printed and distributed 40 000 copies of each 11 ward committee capacity building material (i.e. 8 x LGSETA accredited modules; Ward Committee Handbook; Ward Committee Resource Book and Community-based Planning Guide).

Phase 1 of accredited training had been completed in four provinces, the North West, Northern Cape, Eastern Cape and Mpumalanga.

Discussion
Mr Steenhuizen said he would like to look at the guidelines for the funding of ward committees. The members of the Committee needed copies. Before the functionality of ward committees could be considered, they needed to be legitimate. In the Ethekwini municipality there were ward committee elections on Sunday 19 August 2012. Only two days notice were given by putting posters on the poles, and the elections coincided with the Muslim Religious celebration of Eid. There was marginalisation of certain groups in the community. A municipality could not spend five years with ward committees without the community’s support. Was there a function in the department that could measure the legitimacy of ward committees?

The Chairperson asked how ward committees were formulated. How many were not recognised? How did the department correct it?

The DG replied that the department had to go back to those illegitimate ward committees and tell them to constitute themselves properly. Buffalo City was such an example. Ward committees also had to be representative and had to have representation from women’s organisations, youth and business.

The DG said that ward committees which had not been constituted according to the prescribed legislation and procedures, would not be recognised by the department. The department would indicate to the municipality to rectify the situation. He did not have information regarding the elections in the Ethikwini municipality. Regarding ward committees not forming a quorum, this had become a programme issue on the FOSAD (
Forum of South African Directors General) Action Plan.

Mr Steenhuizen said ward committee members received a R1000 stipend a month (R500 subsidy). He was a ward councillor. He knew that many ward committees never met. There had to be a reimbursement system rather than paying the stipend routinely. When money was involved, people joined these bodies for the money and not for their concern for their communities. This needed monitoring, to see whether the state received value for the money it was spending in this case.

Mr Smith asked whether R1000 was the ceiling. Did the amount go to R1000 automatically? Did the amount vary depending on the size of the ward? The Department was saying that out of pocket expenses would vary. The political system was that everybody would get R1000. The out of pocket expenses had to determine reimbursement according to a simple matrix.

The Chairperson asked how ward committee members accounted for the money they were given.

The DG replied that in terms of the framework. The framework did not propose a R1000 ceiling. The Framework said R1000. The mere fact that it was R1000 was to avoid having to administer reimbursement claims. They did not have to bring in receipts. It was a small amount of money. In some municipalities, they did not pay the stipend to the ward committee members. They provided transport.

Mr Smith said the DG said there was no ceiling to the amount paid to ward committee members. He asked whether there were any regulation guidelines.

The DG replied that the proposed out of pocket expenses was R1000. The framework did not indicate that it was the ceiling. In Joburg, ward committees were not subsidised.

Mr Smith said when the ward committees system was developed there was a big debate in this Committee. The debate was about whether this was a form of voluntarism. Now there was an out-of-pocket stipend without a ceiling. How resolute was the Portfolio Committee to prevent it from becoming a salaried position? Was this a way of doing it by stealth? He asked the DG to explain the relationship between ward committee members and Community Development Workers (CDWs).

The DG replied that in some areas ward committees were competing for space with community development workers. Community development workers were public servants. The department consulted with Department of Public Service and Admisitration in order to find a model which would define how the relationship would pan out. Community development workers had resources. They could act as researchers for the ward committees. Community development workers wanted to become ward councillors. This could not be regulated.

The Chairperson said she acted as a catalyst in her ward to get the ward committee, the councillor and the CDWs to work together, because they competed and hid information from each other. She convinced them to form a management team. She had met with them two weeks previously to check. The structures reported to the Speaker’s office. They shared the constituency office. They were sharing to replicate the process at constituency level.

The Chairperson asked whether the Committee could get the details on the training of ward committees members. She wanted the syllabus and course content so that the Committee knew what the ward committees members were trained on.

The DG replied that the training material would be provided to the Committee.

Mr Steenhuizen encouraged the department to monitor ward committees on a quarterly basis. He wanted the department to share information regarding the monitoring process.

The DG explained that COGTA was expected to report on a quarterly basis what ward committees were doing, while the ward committee members received a stipend. They had to report on the community work they did, such as assisting community members to acquire IDs.

The DG said that he would get quarterly reports on the functioning of ward committees. When those reports became available, he would provide it to Committee.

The Chairperson asked what format the report took. Was it standardised or did each municipality have its own format?

The DG replied that there was a prescribed format.

The Chairperson said the Committee would bring irregularities to light when doing oversight and monitoring.

The meeting was adjourned.

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