Hearings on 2013 Medium-Term Budget Policy Statement: input by Municipal Demarcation Board, South African Local Government Association & Financial and Fiscal Commission

Meeting report

Introduction by Chairperson
The Chairperson welcomed everyone to the meeting. He apologised for the late start and for the fact that there were only two Committee Members present. The Select Committee of Finance was also meeting at the same time and the issues being dealt by that Committee required a quorum unlike this Committee. Both Committees had agreed that the bulk of the Members would participate in the Select Committee on Finance meeting. The Chairperson also remarked that the Financial and Fiscal Commission (FFC) was supposed to be part of the meeting but it was also currently participating in the other meeting.

The Chairperson said that an invitation had been extended by the Committee to the Municipal Demarcation Board (MDB), South African Local Government Association (SALGA) and the FFC to get inputs from stakeholders on the Medium-Term Budget Policy Statement (MTBPS). The Chairperson urged Members to focus more on the content and recommendations in the presentations as the Committee was going to conduct further discussions and detailed engagements at a later stage. Lastly, he said that only clarity seeking questions were going to be asked and he hoped that the meeting was going to be short so that Members could join the meeting of the Select Committee on Finance.

Briefing by the Municipal Demarcation Board
Mr Landiwe Mahlangu, Chairperson, MDB, thanked the Committee for the opportunity. This was the first time that the MDB was briefing the Select Committee so it was important to give a brief background of the MDB. He then proceeded to outline the legislative mandate of the MDB. Section 4 of the Local Government: Municipal Demarcation Act 27 of 1998 provided that the Board must determine municipal boundaries in accordance with this Act and other appropriate legislation, enacted in terms of Chapter 7 of the Constitution and must render advisory services in respect of matters provided for in the Act and other appropriate legislation.

Municipal Boundary Re-determinations
Every five years, the MDB undertook municipal boundary re-determinations at its own initiative or through an application for a municipal boundary review by any interested party. During the current cycle of boundary redeterminations which ran from 2011 to 2016, the MDB had redetermined municipal boundaries throughout the country. Two major redeterminations were carried out in Gauteng and nine in KwaZulu–Natal.

In Gauteng, the two re-determinations involved the following areas”
Randfontein Local Municipality and Westonaria Local Municipality; and Emfuleni Local Municipality, Midvaal Local Municipality, Sedibeng District Municipality, Lesedi Local Municipality and Ehurhuleni Metropolitan Municipality.

In KwaZulu-Natal, the nine redeterminations involved the following areas;
The Big 5 False Bay Local Municipality and Hlabisa Local Municipality;
Ezinqoleni Local Municipality and Hibiscus Coast Local Municipality;
Imbabazane Local Municipality, Umtshezi Local Municipality and Uthukela District Municipality;
Indaka Local Municipality, Emnambithi/Ladysmith Local Municipality and Uthukela District Municipality;
Msinga Local Municipality, Umzinyathi Local Municipality, Umvoti Local Municipality and Umzinyathi District Municipality;
Kwa Sani Local Municipality and Ingwe Local Municipality;
Vulamehlo Local Municipality and Umdoni Local Municipality;
Ntambanana Local Municipality and Mthonjaneni Local Municipality; and
Ntambanana Local Municipality and Umhlatuze Local Municipality.

Implications of Board Decisions on the MTBPS
Mr Mahlangu told the Committee that where there were major challenges to municipal boundaries, the transition period was highly involved and required both financial and non-financial resources to support affected municipalities with amalgamations and restructuring.

Recommendation
The MDB advised the Committee of the need to consider allocating financial resources by way of a special grant to affected municipalities, which was going to assist with the preparatory work for restructuring of the aforementioned municipalities. Such resources should be made available for the financial years, 2014/15 and 2015/16, prior to the local elections.

Discussion
The Chairperson requested Members to ask any questions for clarity. He asked if his understanding was correct that the effects of the current demarcations were going to be effective from 2014 to 2016.

Mr Mahlangu replied that minor changes took effect immediately after a date set by the MEC’s and National Treasury but major changes which affected an entire municipality had to wait until the date of the local government elections. It was important to put the necessary processes in place now in preparation for 2016.

Mr Lees (DA, KwaZulu-Natal) noted that his province, KZN, was the most affected and some changes appeared to make sense while some did not. The question was that if the demarcations and redeterminations were based on efficiency, then why were many of the municipalities in the Free State and in many other areas around the country bankrupt. It seemed strange that the process had not affected many other areas in the country.

Mr Mahlangu replied that indeed there were clear signs that many municipalities could be self-sustaining and this was a country-wide issue. His answer to the process was guided by priority particularly where the proposals came from the provinces themselves. With proposals from the provinces, there was guaranteed political sponsorship of the process. It was more of an issue of priority and the source of the application rather than the principle. In the Free State for instance, there had been an expansion of the current Mangaung Metro to actually incorporate other smaller areas nearby. In the Northern Cape, the province had actually mentioned that it would like to see to rationalization of certain municipalities. In Limpopo, the MDB had received a proposal that actually involved rationalizing the current municipalities from 25 to 21. Those were things which could be done but it was unwise to take all the redeterminations at one go as this could put the country in a restructuring mode and that in itself was not easy to manage. It had to be a matter of sequencing. The consideration was a structural one. Demarcation may not necessarily solve problems as sometimes big did not necessarily mean better. Bigger municipalities could even lead to bigger problems. There could be other interventions which could help.

The Chairperson thanked the MDB and requested the officials from SALGA to brief the Committee.

Briefing by the South African Local Government Association
Councillor Subesh Pillay, Chairperson: Municipal Finance National Working Group, SALGA, told the Committee that SALGA noted the economic outlook and prudent fiscal policy of the MTBPS. The subdued economy and unemployment continued to negatively impact revenue collection and service delivery in local government. SALGA agreed with the tone of the MTBPS in that government, including municipalities, should better use existing resources to gain more value for money. The 2013/14 adjustments budget allocations of R293 million for local government were welcomed and the proposed amendments to the medium term baseline allocations to local government were noted. The protection of the local government equitable share allocation was important and the focus on infrastructure for vulnerable communities and access to economic opportunities were critical.

Mr Pillay briefed the Committee on SALGA’s position with regards to equitable share and conditional grants. 

Mr Pillay explained that the recommendation of SALGA was that government must address unfunded and underfunded mandates. Cooperative governance was challenged by the weak compliance with legislative provisions for assigned functions.
The FFC submission for 2012/13 division of revenue estimated the extent of unfunded mandates in metros at R4 billion per annum.
Mr Pillay recommended that the positive development to improve funding of Library services must be replicated across other provincially assigned functions to local government. SALGA and National Treasury had to collaborate to develop alternative mechanisms to enhance revenue collection in municipalities. Government had to explore the possibility of a national collection agency with similar legal status and operational efficiency as SARS. He also recommended that national government must review its local government support and capacity building initiatives to ensure the creation of strong local authorities.

SALGA acknowledged the tight fiscal stance amid the national and global economic challenges. It would continue to impress upon its members to seek value for money in their operational budgets and to increase investment in infrastructure.

Discussion
The Chairperson said that the issue of unfunded and underfunded mandates had been coming up in several discussions and there seemed to be little knowledge about a solution for it. How did it all happen and did national or provincial governments just impose these mandates or did municipalities just accept these mandates at the mere suggestion from provinces and national government? He imagined that municipalities would have the option of either accepting or refusing functions based on the factors related to delivering on the mandate but in most instances it was as if everybody just dumped these functions on municipalities. How did the whole thing work?

Mr Lees said that the Chairperson had made a very valid point. In his opinion, the mandates were taken on board when they should not have been. It was not a question of funded or unfunded mandates. It was a question of implementation. He was concerned that SALGA was addressing the symptoms and not the cause.

Mr Pillay said that the points raised were very important and SALGA had taken up this discussion with municipalities. The problem was that these were often services such a library services, emergency services, ambulance services, etc and were historic functions which had come even pre-1994. The issue was that if local government ceased to undertake these functions, there were going to be massive implications for the communities that ought to be serviced. The system of intergovernmental relations provided that there had to be a cordial way in which spheres of government interacted in the discharge of their respective functions. SALGA was nearing the point where it would advise member municipalities to terminate the services. It was not the services of the municipalities and thus had to be handed over to the relevant government department. This was however going to leave the totality of government with a bigger problem. The obvious way of dealing with the problem at local government level was to suggest that they be handed back but it was important to note that these services were essential to the communities involved. SALGA was making the point that the development of service level agreements was going to go a long way in helping with an understanding of where the problem was in terms of establishing whether the service was being underfunded or if it was simply not being funded at all. However, the concern raised was very important and had to be addressed.

The Chairperson said that Mr Pillay had not answered the first part of the question which referred to how it all happened before it reached a point where the municipality now had to give back the function. Was it just handed to them? It looked that at the mere mention of a proposed function from a department with an amount attached to it, the municipalities did not even check the sustainability of the provision of the service but all it did was accept the function. It seemed like it was only after the municipality had received it that they realised that they had taken a function that they could not sustain. While SALGA was now advising and assisting the municipalities which were battling with the issue, other municipalities were still receiving such functions and getting into the same kind of problem.

Mr Pillay replied that the main issue was that these were inherited services so it was essentially a legacy problem. Indeed, it was a conscious decision by a municipality to receive any function so it was not like they were innocent. Mr Pillay suspected that no proper due diligence was done in many of the instances as to the implications. The second dimension was a legislative issue. He gave the example of the Administrative Adjudication of Road Traffic Offences (AARTO). AARTO was brought about as a result of national legislation but its impact was very severe on local government. It reduced the income from traffic fines and it absorbed a local government function. In this instance, there was need for a legislative requirement for things to happen in a particular way. SALGA had made many submissions on the impact of AARTO on local government. The principle was that many of the issues and problems came about as a result of what was provided in legislation.

Mr Lees said that he agreed with Mr Pillay but it did not mean that municipalities did not take responsibility for the problems of accepting functions that it knew it could not deliver sustainably. He excused himself from the meeting as there was an urgent matter he had to deal with.

The Chairperson thanked SALGA for the presentation and noted that the Committee had to wait for the FFC which was briefing the Select Committee on Finance. He called for a break while waiting for the Chairperson of the FFC. He told the officials from the MDB and SALGA that they were free to go as he was not sure for how long he was going to have to wait for the FFC.

Briefing by the Financial and Fiscal Commission
Mr Bongani Khumalo, Chairperson, FFC, started the presentation by apologising to the Chairperson for the delay. He explained that he was busy with a presentation to the Select Committee on Finance.

By way of background, Mr Khumalo outlined the main theme to draw from the 2013 MTBPS and 3-year expenditure framework. Government had done a commendable job in beginning to implement the National Development Plan (NDP). Government was looking towards infrastructural investment as a principal driver of whatever upturn in economic growth was anticipated. Corollary to relatively high growth in gross fixed capital formation forecast was that the current account deficit was projected to remain at levels above 6% of Gross Domestic Product (GDP).

Mr Khumalo presented the Committee with a general economic outlook, growth in consolidated budget, risks to economic and fiscal outlook and domestic challenges.

In terms of the MTEF Division of Revenue (DoR), the 2013 DoR had increased by R17 billion and this was mainly due to R1.3 billion injection to provincial equitable share for inflation-related salary adjustments. The 2014 MTEF was going to be characterised by moderate growth with real annual average growth of 1.02% projected. Mr Khumalo outlined the medium term spending priorities which ranged from job creation and education, health and social development, adjustments to provincial government conditional grants, local government equitable share and conditional grants and local infrastructure.

In conclusion, Mr Khumalo said that the FFC welcomed government’s fiscal stance as highlighted in the 2013 MTBPS. The FFC emphasised that shifting organisational local of grants from sphere to sphere or department to department was not going to necessarily improve grant performance. From an aggregate fiscal policy perspective, government had done enough to prevent the downgrades from rating agencies.  

There were no questions from the Committee as the Chairperson was the only Member left.

The Chairperson thanked the FFC for the presentation.

The meeting was adjourned.